More Debt, No Problem…For Now!

Adding perspective to the sustainability of the market upswing we’ve seen over the last year, it is a sobering reminder provided by a Financial Times report on margin debt. They report the following:

Data collected by the Financial Industry Regulatory Authority shows that total margin debt across Wall Street hit $822bn by the end of March — after Archegos had failed. That was almost double the $479bn level of this time last year and far more than the around $400bn peak that margin debt reached in 2007, just before the financial crisis.

To put these numbers in context, ABP Invest, a London-based fund, calculates that during the 2000 dotcom and 2007 credit booms, US margin debt topped out at roughly 3 per cent of gross domestic product. Now it is nearly 4 per cent.

 For the medium term (1 – 3 months) we are going to continue to witness a relative upward move in financial markets thanks to the continuing loosening of restrictive government policy (lockdowns). Let us not forget that the economic issue we experienced since March 2020 had nothing to with the virus, but rather all of it the result of government policy. The virus did not shut down economies, governments did.

Yet, the upswing we’ve seen in equity markets has been the result of massive liquidity injections by the government institutions – a purely Keynesian policy. This is not sustainable. To believe this is sustainable is to believe that the Brooklyn Bridge is for sale. Leverage cuts both ways. Be careful to catch a knife as it is falling off your table.

Money Multiplier: Another Down Month...A Warning?

I have previously noted about the recent changes to the M1 metric published by the FRB. Although this change caused the M1 to balloon, it did not materially impact how it is use in our proxy assessment for the money multiplier. The money multiplier, as you may remember, is an estimate in relation as to how fast the money is moving and being created in an economy.

The more money moves, the more money is being multiplied – which means more of it is created. This ultimately puts pressure in inflation, which impacts all markets. The reverse is also true: a slowing down of the multiplier means money creation is slowing. In a debt-ridden market that we are currently witnessing, a slowing down of the money multiplier is not particularly sanguine.

Based on the M1 reported by the FRB yesterday, the overall money multiplier declined month-over-month, and the trend appears to be solidifying. That said, the Biden Administration continues its spending spree, as there is talk that more “stimy” money may make its way into the market. This should be read somewhat bullish by those who believe that the economy is improving.

But make no mistake, this economy is being propped up by government money. Any growth seen is fictions. The money multiplier, while slowing and giving an ominous warning sign, will not be received by the market in the manner that it should. As it is common to bubbles, they do crazy things that extend beyond reason or logic.

As you can see for yourself, the money multiplier trend is down.     

How to Lie with Statistics - Part 6: The One-Dimensional Picture

Continuing with my previous post, here I summarize Chapter 5 of the book How to Lie with Statistics. This chapter is titled, The One-Dimensional Picture.

The deceptive practice described in this chapter can be succinctly summarized as follows: The danger of “varying the size of the objects in a chart.” What this means in practice is that – depending on what the aspirant is aiming to accomplish – he is trying to show a disproportionate picture to give an impression that may not necessarily be accurate.

For example, take a graph that may represent yearly car sale, put on that graph a large car to represent a high car sales and a small car for low car sales. Simply eye-balling the large and small car picture will leave you thinking exactly what the author intends – the author will simply point to the picture to show you how right he is. In other words, size proportions of picture charts matter as much as the metric being reported (e.g. average, etc.)

Bill Bonner: Confessions of a Doomsayer

Today's post is courtesy of Bill Bonner. The original can be read here.

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A dear reader writes to say we are wrong.

“What these doomsday prophets like Bonner fail to explain is the efficiency of today’s supply chain that can quickly produce goods and services to meet demand. The market continues to roar in the face of his daily diatribes. If we were keeping score, we would say Fed: 40; Bonner: 0. I do enjoy reading the columns as I find them highly entertaining.”

– Mike C.

And yes, of course, we are wrong about a great number of things. This is partly because the odds are so heavily against us.

If we say “The bond market topped out on August 4, 2020” (which we think it did), we are guessing that it won’t go higher and finally top out on any of the 365 days in this year.

And now, in our constant rehearsal of the “sky is falling” forecast, we will be wrong again… until it finally hits us in the head.

When might that be? Well, we don’t know. It could begin any day now… or not.

In the meantime, the Federal Reserve will be right… and we will look like an idiot.

Lesson Learned

Today, we enter the confessional. And let’s begin by warning new readers that they should never pay attention to our stock market suggestions.

Publicly traded stocks don’t interest us; we don’t do any serious research on them.

And on the rare occasions when we comment on any particular company, we are as likely to be wrong as right.

(Full disclosure: We do own stocks! They’re managed for us by our trusted old friend, Chris Mayer.)

Just this week, we were reminded that, some months ago, in this space, we laughed at investors who were buying Hertz (HTZGQ).

The company had gone bankrupt. But somehow, it had found favor with the young traders who spend their time chatting about such things. They were so eager to buy the stock that the company – then in bankruptcy – decided to issue new shares.

It would have been a first in the history of finance… had not the U.S. Securities and Exchange Commission (SEC) put a stop to it.

“When you’re young… in love… at war… or in a bubble…” we concluded, “there’s no time to think straight, or even think at all.”

Well, wouldn’t you know… we’re in a bubble. The used car market turned up… and Hertz – like a sleeping beauty, kissed by its Reddit suitors – came back to life. The company is back in business.

The whippersnappers turned out to be right. We turned out to be wrong.

We take no lesson from the Hertz story but that there are a lot of things you can be wrong about. We’re working our way through them, slowly.

A Costly Lesson

Take Amazon (AMZN), for example… please.

One of the most spectacular things we were wrong about was Jeff Bezos’ creation. When it came out – this was more than 20 years ago – we called it “The River of No Returns.” The title was clever. But the prediction was poor.

Amazon’s business strategy was a classic formula for failure. The company cut its margins so thin, it lost money on every sale. Then, it aimed to make up for the losses by increasing volume.

That was never going to work, we opined.

And it never really did. Amazon’s retailing business has never made enough money to justify the huge “investment” (losses) necessary to reach its present scale.

So its core business is still a river of no returns – not worth a fraction of its current market price.

But how were we supposed to know that a virus would come along… so that people would stay home and be almost forced to order from amazon.com?

Boom! Amazon’s net sales rose by more than $100 billion last year.

And how were we to know that its huge data processing needs would get it into a whole new line of business that would be so profitable?

Yes, the cloud computing business. That’s where the money is. Amazon Web Services (AWS) accounts for a bit more than 10% of the company’s sales… but more than 60% of its profits.

AMZN gave our dear readers their first big opportunity to get rich. Those who were smart enough to ignore our advice could have bought the stock for under $50. Today, split adjusted, it is over $3,000, giving the company a market value of about $1.7 trillion.

Jeff Bezos got so rich, he could go through the most expensive divorce in history and still have a net worth estimated at almost $200 billion.

Mechanistic Approach

So let’s turn back to the Federal Reserve, which is clearly ahead of us – as our dear reader tells us – on points.

There – on the big picture, the macro view – we do pay attention. And maybe there, we are less of an idiot than we appear.

Ours is a “moralistic” view. That is, we assume that if we leave the dishes unwashed, sooner or later, they’ll attract cockroaches. But, of course, that could happen any time.

Almost all other observers today use a more mechanistic approach.

They believe you can understand an economy – and are able to predict its next moves – by looking at dials and instruments, as if you were flying an airplane.

Losing altitude? Give the machine more throttle!

The trouble with the mechanistic approach is that an economy is not a machine. It is more like a living thing… infinitely complex, with purposes and prejudices we can’t possibly know.

As for adjusting the throttle, forget about it. You can’t plot a course… or determine the correct speed or altitude… because you never know where you’re going. You won’t know until you get there.

And you don’t know how to fly a plane, anyway.

Moralistic Approach

But the “moralist” is always wrong… before he is right. He notices when things seem out-of-whack. But he has no way of knowing when or how they will go back into whack.

That is what happened in 2000 and again in 2008.

Each time, the stock market was in a boom and the mechanics were proclaiming a New Era.

The moralists denied it. “How could investors make money from unprofitable companies?” they wondered in 1999.

Eight years later, they wanted to know how people could get rich by “taking out equity” from their own homes.

Both times, the doomsayers (including us) were way too early, anticipating crashes years before they ever happened.

Then, when the crises came, the Fed gave the plane full throttle – “printing” record amounts of new money. The mechanics saw a recovery. The moralists saw more trouble ahead.

And now, in the greatest bout of money-printing in U.S. history, we doomsayers see another calamity coming – the third major crisis of the 21st century.

Will we be right or wrong?

Bad Ending

The Fed has set off a boom. Everything is flying through the air. The mechanic sees sales increasing… unemployment going down… stocks near record highs.

Even things with no apparent value – NFTs, money-losing businesses, Dogecoin – can be worth billions. Dogecoin, created as a joke in 2013, is now said to be worth $42 billion… or just slightly less than Hewlett-Packard, for example.

We try not to pretend to know things we don’t know. And we have no idea why Dogecoin is worth more than HP.

But we believe this boom is going to end badly… like the other two. Only worse.

Boom… boom… Ka-boom!

Regards,

Bill

High Savings Mean High Risk Aversion

The FT reported this astonishing statistic:

Households around the globe accumulated the excess — defined as the additional savings compared with the 2019 spending pattern and equating to more than 6 per cent of global gross domestic product — by the end of the first quarter of this year, according to estimates by credit rating agency Moody’s.

The article goes on to argue that some of this “additional savings” will be spent because it is assumed that savers are beginning to be optimistic about the future and therefore will be more inclined to spend. Yet this assumption is problematic because nowhere in the article does it hint of the impact that such spending will have in the general price level: higher demand will lead to higher prices, all things being equal. And higher inflation lead to higher risk premiums in market prices. Should inflationary pressures show up, that will lead to a disorderly unwinding of financial transactions because of the risk of runaway inflation. It is a mistake by the FT to simply look at one side of the equation and come up with half-baked conclusions and not fully considering the implications.  

That being said, I think what the FT describes is too optimistic. Savers are savings because they are not as sanguine about the future as we are led to believe. Additionally, as the article goes on to mention, some believe that in the US “excess savings were held by the richest 40 per cent of the population and suggested this could hold back the scale of the economic boost because ‘high-income households will hold [rather than spend] the bulk of excess savings’”

Record Breaking Amount of Cash Flowing into Exchange-Traded Funds (ETFs)

The Financial Times reported some eye-popping metrics surrounding exchange-traded funds (ETFs). As I have mentioned repeatedly, we are witnessing the proverbial high tide raises all boats, as the massive amounts of money injections by the Federal Reserve and the spending by the Federal Government, have lifted the ETFs balances like we’ve never seen before. Here are a few notable reporting values:

·         Global net investor inflows into exchange traded funds and products reached $359.2bn in the first three months of 2021, the busiest quarter on record, according to the data provider ETFGI. That lifted net global ETF inflows since the end of March 2020 to just over $1tn.

·         Net inflows into US and Canadian equity ETFs reached $143bn in the first quarter of 2021, up from $30.4bn in the same period last year. Global equity ETFs gathered $46.7bn, more than four times the inflows of $10.5bn registered in the first quarter of 2020. Asia-Pacific equity ETF flows almost doubled to $19.3bn from $9.9bn, according to ETFGI.

·         Vanguard attracted ETF inflows of $96.2bn in the first three months of 2021, up from $50bn in the first quarter of last year when financial markets were retreating due to coronavirus fears…BlackRock’s iShares ETF unit gathered inflows of $71.4bn in the first quarter, compared with just $13.6bn registered in the first three months of 2020. State Street, the third-largest ETF manager globally, gathered first quarter inflows of $23.9bn after seeing net outflows of $2.8bn in the first three months of 2020.

Bill Bonner: The Feds’ Economic Hypotheses Are Empty

Note: Today's article is from Bill Bonner. You can read the original here.

Enjoy!

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Civilization Is Restraint

Whenever and wherever there is great inflation, so is there great trouble.

The French Revolution and the inflation of the assignats and land warrants, for example…

Hyperinflation in Russia and the Bolshevik Revolution…

Germany’s Weimar Republic inflation and the rise of the Nazis…

Yugoslavia, 1994-1996… inflation of 62% PER DAY… and the end of the country.

Civilization is restraint, as Sigmund Freud put it. It requires rules… discipline. Weeds must be pulled up. Trees must be pruned. Property must be protected. Roofs must be fixed. Contracts must be respected. Two plus two must equal four.

And money must be neither dear nor cheap, but true.

Order must be maintained. And order requires energy… expense… and time.

Slack off… or squander your time and energy – How many women are on your board? Sanction the Russians? More stimmy money for everyone! – and things fall apart…

…and then blow up.

Empty Gestures

At least, that’s our hypothesis.

To which we add… that by our count, in the U.S., the nitro and the glycerin have been edging towards each other for two decades.

People still go about their business, more or less as before. Congress still meets and pretends to govern. People still vote, pretending to select worthy representatives.

Wall Street still pretends to allocate precious capital to productive businesses. Prices still pretend to reflect the real value of stocks and bonds. The press still pretends to report the news. The Federal Reserve still pretends to offer real money.

But the gestures are empty… the facts are fake… and the numbers don’t add up.

Outgo > Income

Forty years ago, in the month of March, the federal government collected $44 billion in tax revenue and spent $53 billion. Even then, the feds were $9 billion in the hole.

But they could borrow the money honestly; no big deal.

In March 2021, the feds collected some $267 billion in tax receipts. But they spent $927 billion – a new record. And a record monthly deficit of $660 billion, approximately equal to the entire U.S. annual budget during the Ronald Reagan administration.

Not only do income and outgo not match… they’re never going to get together.

Losing money at this rate implies a loss for the year of about $8 trillion… More likely, March was an outlier, and the loss will be “only” about $3-$4 trillion, still far more than can plausibly be borrowed.

And this is on top of other big numbers that don’t add up, either.

Trouble Ahead

And here is where it leads. Here’s Business Insider:

“…In our view, the risk is investors are going to experience an acceleration in economic growth and inflation of a magnitude economists and the Fed are totally unprepared for,” said Hans Mikkelsen, head of high-grade credit strategy at Bank of America.

And here’s economist Nouriel Roubini:

Over the next few years, loose monetary and fiscal policies will start to trigger persistent inflationary – and eventually stagflationary – pressure, owing to the emergence of any number of persistent negative supply shocks.

Make no mistake: Inflation’s return would have severe economic and financial consequences. We would have gone from the “Great Moderation” to a new period of macro instability.

Even Larry Summers, former director of the National Economic Council, who is rarely right about anything, sees trouble coming. Speaking on Bloomberg TV, he said:

This is the least responsible fiscal macroeconomic policy we’ve had for the last 40 years.

Nothing to Worry About

But wait… What are we worried about?

The Biden team “modeled” various scenarios. It found that inflation will not be a problem. Here’s The New York Times:

A monthslong effort to monitor and model economic trends inside the White House and the Treasury Department found little risk of prices spiraling upward faster than the Fed can manage.

What a relief! No cause for concern, sayeth the feds’ models.

Of course, Rudolf von Havenstein, who ran the German central bank from 1908 to 1923, had models, too. So did Gideon Gono, jefe of the Reserve Bank of Zimbabwe from 2003 to 2013.

And Ben Bernanke, in charge at the Federal Reserve from 2006 to 2014, had models that told him that the mortgage finance crisis was nothing to worry about, either.

On Thursday, May 17, 2007 said the great man:

We believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.

The models sound scientific. But they are nothing more than voodoo guesswork.

Regards,

Bill