July 7, 2019 | Stimulate This

Deutsche Bank is slashing 18,000 jobs. Big hedge fund manager Jeffrey Epstein was arrested and charged with sex trafficking of minors. Iran is making nukes again thanks to the orange guy. And earthquakes rock SoCal. Hey, just another summer weekend…

Actually the big news is likely to come mid-week, as the Fed boss testifies in Washington on the direction of monetary policy. I know, who ever thought this stuff could be sexy? But what Jay Powell has to say will certainly move markets, influence the 2020 presidential election race, affect your mortgage and probably your portfolio, too. These days everything’s connected.

As you may have read, every analyst and his dog was pricing in three rate cuts by the end of the year including a sure-thing haircut in July. But after Friday, maybe not. The US economy turned out 224,000 jobs last month. Unemployment has turned into full employment. There are more openings than applicants. And now Trump says he’ll be negotiating with China, looking for an end to the trade war.

US inflation is low, consumer spending is robust and weak manufacturing data may be an aberration. So, why would the Fed cut rates and throw gas on a fire that needs none?

Maybe because the yield curve has inverted (short-term deposits are paying more than long-term bonds, often the harbinger of a recession). Perhaps because it’s the 120th month of an unprecedented economic expansion which, unlike me, cannot stay awesome forever. Or just because the president has been thumping on the Fed for months to cut rates, goose economic growth further, make the stock market melt up and deliver him a second term.

So Powell’s in a tight spot. Stimulate too much and the result could be inflation, a wage-price romp, bloated asset values (like stocks) and four more years of Trump. But doing nothing and misreading the signals could hasten recession and (at least temporarily) tank the markets.

Whazzit all mean?

Good job numbers helped inflate bond yields on Friday, while prices dropped. Mr. Bond Market is suggesting those cheapo Canadian mortgage rates may soon be a thing of the past. The advice stands – lock in now. The Bank of Canada’s rate is already seriously below that of the US, so any cut there won’t make home loans here any more affordable. As for the Fed boss, look for him to talk convincingly out of both sides of his mouth this week,then cut rates a little at the end of the month, strictly as insurance. The cost of money falling enough to rekindle real estate? Not a chance.

Those commies from below deck, Jeff and Jake, sure pushed a lot of buttons here Friday as they argued for less capitalism and more taxes. They were the latest Blog Dogs to be given a platform, so it’s only fitting we start today’s Vox Canibus (look it up – nothing to do with weed or people with tats) with a reply.

Derek was seriously triggered by all that socialism. Here’s why.

In his post, Jeff eludes to how capitalists want to lower costs or raise prices. Agreed – that is the underpinning of capitalism. The VERY IMPORTANT factor he fails to see is that all the actors (workers, owners, consumers) focus on their own self – interest.

If you have 3 gas stations on a busy road, and one raises prices by 3 cents/litre, consumers choose the competitors. The owners have no pricing power here. If the owner keeps his prices high, he goes out of business! The market keeps prices in check.

Similarly, in Jeff’s other example where one employer “cheats” and pays his workers a little less to reduce costs…what happens? The workers say, “Chuck you Farley” and go to another employer who is willing to pay market rates. The owner who tries to pay below market rates goes out of business because he has no workers! The market keeps wages in check – up and down.

Since 1980…life expectancy has risen, we live healthier lives, houses are bigger, we have a MUCH larger choice of foods,…the list goes on. In 1980, you used to have to wait until after 6pm to make a long distance call, so it would cost you $1 instead of $2. Now you can call anyone globally for virtually nothing! You used to have to wait for you TV to “warm up” and you would only get a few fuzzy channels – now you have access to hundreds of channels (and streaming) – anywhere, anytime! Life has gotten better on so many fronts.

Some workers have had to accept reduced wages as a lot of manufacturing has been moved to lower cost jurisdictions – but hundreds of millions of workers there have been lifted out of poverty! Overall, globally, we are wealthier than we have ever been. And rich stable countries make the world a much safer place.

A real-life test case to compare socialism to capitalism….oh yeah, Korea offers a great example. North and South Korea split in the early 1950s – the North adopting socialism while the South followed capitalism. Millions have starved to death in the socialist North since then, while South Korea has income levels similar to many western countries. The DMZ (de-militarized zone) keeps prisoners of socialism in the North – is DOES NOT keep South Korean capitalists from trying to escape to the north!

Or China….a poverty-stricken backwater with millions starving prior to 1980 under socialism to the soon to be largest economy in the world under capitalism.

Yes, machines replace workers – which is why we have gone from having over 80% of the population engaged in subsistence farming to having 2% of the population feeding everyone. This has been a boon to everyone. Middle class people today live better, healthier lives than aristocrats did only a few short generations ago. Governments can smooth the rough edges of capitalism (displaced workers, externalities, etc), but overall CAPITALISM ROCKS!!!

In 65 days aircraft technician Michael, 33, gets married in Hamilton. “I am so glad that you opened up your blog to your loyal fans to see if I can get the honourable distinction of becoming one of Garth Turner’s roadie bloggers,” he says. “I am truly thankful for you keeping me entertained and knowledgable about finances and life on a daily basis.  You truly are the Jordan Peterson of the financial world.” For that noble suck-up, he gets to write this…

  Your reality is whatever your perception of life is at the time, and it seems like lately the reality of the life situation is grim. Uranium-crazed fanatics to the east and an over competitive leader to the west of us that wants to be “the biggest player” in the market.

It seems that we very rarely look at our own place in the grand scheme of things to see where we sit. Everyone has a different set of social beliefs – whether it’s equality or human rights. For some, it is the financial stability of our country. If the financial stability of our country is intact- then everything else can be dealt with in time. I do believe that our social issues and financial system are going to finally cross roads at the next recession.

Every recession that has occurred in the past 125 years or so have manipulated and forced change within certain industries. At a point in time, GM was the most successful company in the world until they needed a government bailout to help stop the ship from sinking.

The next recession which some are predicting will be here in a year or so (cough cough Garth) is going to cause tidal waves both socially and financially. The social impact being automation. The normal course of a company during a recession is to lay off workers to ensure the company is stable, and then rehire as the profits start to come back. The problem with the next recession is that businesses won’t need to hire back some of those workers. Why should I hire back that truck driver when I am able to move my product from point A to point B with no one at the wheel? It makes sense in the business world.

Here’s the problem. Canada employs roughly 285,000 truckers from coast to coast, roughly earning $70,000 a year. For arguments sake – let’s say Mr. Musk has perfected the autopilot system on his overpriced Tesla and pushes it towards the trucking industry. Loblaws, Best Buy, The Bay, Tim Hortons, Suncor, Atlas Van Lines etc. will not have to pay for drivers nor will they have to abide by the rest laws for these drivers. These trucks are able to drive all night and all day with only a refuel/recharge stop. What happens to the truck driver? Why they go back to school and get re-trained. Sounds easy, right? I would bet that the readers of this blog that are over the age of 40 would have two very strong words if this scenario would happen to them.

Every generation has had their set of problems, both in the social world and the financial world. Some would say that someone like myself (an early millennial) is quick to blame the last generation of all their wrongdoings. No generation in the history of this lovely planet has been perfect. We are creatures of response and are not very proactive. The next 15 years is going to drastically change the entire landscape both socially and economically. What is here today may not be here tomorrow.

Garth Turner July 7th, 2019

Posted In: The Greater Fool

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