What exactly is “transitory?” You and your wife may disagree on its meaning when your old friend asks if he can stay with you while he “Sorts things out.” The term is virtually worthless without some guiding context, as in “Honey, he’ll be out of here by Monday. Tuesday the latest.”
It’s dawning on many investors that our post-Covid financial problems may not be as easily solved as Washington claims.
The latest clue that trouble is brewing has come from the sudden and dramatic arrival of inflation. On May 12, it was revealed that the Consumer Price Index (CPI) had risen 4.2% year-over-year, the fastest pace since 2008.
Some tried to downplay concern by pointing out that the gains resulted from the “base effect” of comparing current prices with the artificially depressed “Covid lockdown” prices of March and April of last year. But that ignores the more alarming trend of near-term price acceleration.
Recently, a piece of collage art entitled “Everydays: The First 5000 Days,” by an artist known as Beeple, sold at a Christie’s auction for $69 million. The Wall Street Journal noted that the price was higher than any that has ever been paid for works of Frida Kahlo, Paul Gaugin, or Salvador Dali. But, before the auction, few outside the digital art world had ever heard of Beeple, which may explain why the bidding started at just $100. But the sale does not suggest a sudden re-evaluation of his talents. Instead, it is a stunning statement about the medium of the art itself or, more precisely, the lack of it. In fact, “Everdays: The First 5000 Days” isn’t made out of anything you can touch. It is entirely virtual.
The tale of GameStop has much more to say about the current state of investing.”
The central idea in the classic Mel Brooks comedy “The Producers” is that unscrupulous Broadway impresarios could succeed fabulously by creating a play so uniquely awful that it would close on its first day. Their idea was to oversubscribe shares to investors, to the point where hundreds of percentages of ownership could be claimed. But if the show failed spectacularly, there would be no proceeds to fight over, all the investors would accept that their shares were worthless, and no one would know that they had been conned. The producers could pocket the excess money. The only way they could fail would be by producing a hit.
While most people generally understand that the stock market and the economy do not move in lockstep, there is still an underlying belief that a strong market reflects a strong economy. But according to that logic, our current economy must be historically strong. If this strikes you as strange, given that we are in the midst of a destabilizing and polarizing pandemic, and a period of political risk that threatens the foundations of the Republic, that’s just because you don’t understand how the fundamental relationship between the stock market and the economy has changed. Believe it or not, strength on Wall Street is now driven by weakness in the broader economy.
For years, I have been warning that during the age of permanent stimulus (which began in earnest with the Federal Reserve’s reaction to the dotcom crash of 2000), each successive economic contraction would have to be met with ever larger, increasingly ineffective, doses of monetary and fiscal stimulus to keep the economy from spiraling into depression. I have also said that the enormity of the asset price gains over the last 10 years had increased the danger because reflating the bloated stock, real estate, and public and private debt markets would bring on doses of stimulus that could prove lethal for the economy. But even though I expected that the next financial crisis would be catastrophic, I thought that it would come into the world in the usual way, as a credit crisis triggered by over-leverage. But the Coronavirus ripped up those stage notes, and instead ushered in a threat that is faster and deeper than I imagined, and I imagined a lot. It’s a perfect storm, a black swan with teeth.
Rene Magritte’s 1929 painting “The Treachery of Images,” depicts a tobacco pipe with a caption that reads “Ceci n’est pas une pipe,” (French for “This is not a pipe”). Everyone who has taken a course in modern art knows that Magritte’s exercise in contradiction was meant to draw a distinction between a real thing and a representation of that thing. Perhaps we should send Federal Reserve Chairman Jerome Powell a beret and an easel as he is attempting a similarly surrealistic take on monetary policy.
After claiming to be the greatest at just about everything, Donald Trump has finally found an area where he can stake a credible claim. By negotiating a disastrous budget deal with Democrats, the President could become the greatest creator of government debt in the history of the country.
While Trump is selling the two-year deal as a major victory because it increases military spending and removes the possibility of a government shutdown for two years, in reality, the agreement to suspend the debt ceiling and push annual deficits even further above the trillion-dollar mark may only succeed in destroying the Republican Party as we know it.
General George Custer met his doom charging into a battle he thought he could win, against an opponent he did not understand. Based on his views about the fast-emerging trade war with China, it looks to me that Donald Trump, another blonde with a very high opinion of himself, is charging into an economic version of the Little Bighorn.
By mistaking the real nature of international trade, the costs of tariffs, the effects of currency movements, and the supposed ease with which the United States could quickly re-establish itself as a low-cost manufacturer, Trump risks shredding the safety nets that have undergirded the US economy for decades and plunging us into a war we are ill-equipped to fight.
Recently, Jamie Diamond of Citibank made headlines by labeling Bitcoin a fraud. Whether those comments played any part in Bitcoin’s recent sell off is hard to say, but the true believers reacted with predictable outrage given that the comments came from the ultimate Wall Street insider whose financial supremacy is supposedly threatened by crypto currencies like Bitcoin.
Although my critical comments on Bitcoin over the years have not received nearly as much attention, they have been just as summarily dismissed by the crypto currency crowd. But I am a well know libertarian and follower of the Austrian School of economics. I am not a member of the banking establishment, nor am I a fan of fiat money. I should be one of the good guys. But since I happen to own a company that sells gold, a metal that supposedly Bitcoin will soon make obsolete, the crypto crowd looks at me like a stubborn old buggy whip salesmen who refuses to acknowledge that the future resides in horseless transportation.
Well Bitcoin is not the automobile and gold is not a buggy whip. While Diamond’s comments were not 100% on the money, he is right about Bitcoin’s ultimate demise, just wrong about how it will meet its fate and why. While most fear that government will simply look to make Bitcoin illegal (which could be a possibility if Bitcoin could actually deliver on its promises), it is much more likely to die of natural causes.