This depression/recession is unlike any we have experienced. Parts of our economy are doing well, parts are in recession, and a significant portion is already in a depression. As government guarantees wane in the future, more and more companies and people will slip into the depression category.
Today we will explore what some smart minds are saying about the current economic environment. I'll also aim to help you navigate through its complexity.
As I file this letter Friday morning, people are reacting to the July jobs report. My own reaction: The headline report is absurd.
Big things have been brewing in Europe. The same continent that two years ago I said was going through “monetary drug withdrawal,” is now set to outpace US growth by a wide margin. And US growth, which had led the world for years, now looks likely to lag it.
We’ll start with a dozen or so charts showing the market is either very highly valued, or extremely overvalued, or merely stretched. But in general, you will see markets are indeed at the upper end of historical valuations. Then we’ll consider some reasons why this is so, and why stocks could even go higher.
Politicians love saying small businesses are important to the economy. In this case, it isn’t just rhetoric. The millions of little companies with a handful of workers are, collectively, more important than the few hundred large enterprises we see in the news.
Today we’ll look at the data, including some non-government sources. As you will see, millions of workers will stumble through this period, and they may be the lucky ones.
I read The Black Swan shortly after it came out. The financial crisis and Great Recession were brewing, and I was already beginning to predict a recession. We sensed something big was coming but didn’t know the details. Rereading my September 2007 review of Taleb’s book is an eerie glimpse into the past. It’s also a good reminder that more big events lie ahead.
In short, a demand-driven recession can’t end until demand returns. It doesn’t necessarily need to be the same kind of demand. Indeed, it probably won’t be. But something must restore consumer spending. A lot of entrepreneurs are spending late nights (and days) trying to figure out how to restore consumer spending.
Today I’ll defy the proverb, consider what we know and don’t know, and try to tell you where I think we’re going. In the long run (after The Great Reset in the late 2020s), I still foresee a wonderful new world. But we have to get there first.
In their effort to improve things/prevent pain, Fed officials past and present financialized the economy. That, along with more unintended consequences from government debt and regulatory interventions (all well-intentioned, you understand) brought us to where we are today. We can’t walk it back without a great deal of pain no one wants to take, including your humble analyst.
Today, we’re going to look at some actual data, both medical and economic. Spoiler alert: The unintended consequences of our response may be more threatening than the actual virus, unless we begin changing some things soon.
Today I’ll share some more insights from the Virtual Strategic Investment Conference. Frankly, I could go on for weeks like this, but this is going to be my last letter on the SIC. We had so much expertise and wisdom beamed in from all over the world. I’ll give you a few more highlights and then offer my own personal takeaway.
We finished the Virtual Strategic Investment Conference yesterday. I shared some highlights in last week’s letter, will tell you more today.
I knew this letter’s topic months ago. It was going to be a review of the Strategic Investment Conference, which would have just concluded fabulously in sunny Scottsdale.
Last week I ran across a powerful essay by Morgan Housel, whom I knew when he wrote for The Motley Fool. He is now a partner at The Collaborative Fund and still writing. His article looks at five lessons from history that, on the surface, have nothing to do with coronavirus, Trump, China, the Fed, or any of our other usual topics.
Some are greatly overestimating how fast the economy can recover. Entire industries, no longer viable in their current forms, must now figure out new ways to do business.
Today’s letter will be another hop-around review of the crisis landscape. I’ll touch on several topics instead of going deep into a single theme. So much is going on, it’s really hard to know where to start. There will be something to annoy everybody.
We don’t know how this will develop, or how quickly, but I think it is far more likely to bring asset price deflation than inflation. We are going to reprice the world. Probably including your part of it.
The first and most important question that we will deal with is prediction of significant inflation/hyperinflation coming from many quarters because of the massive amount of Federal Reserve intervention. This is wrong-headed fearmongering.
The new coronavirus is touching us all, one way or another. The virus is infectious but so are the preventative measures. Today I’ll continue last week’s “postcard” format and at the end give you a lightening round of things I have come across, some good and some not. I hope some of what I tell you makes you as angry as it does me.
With the economic and market situation changing by the day, I decided to approach this letter a little differently. Rather than go deep on one topic, I’ll share brief bullets on the many points swirling in my mind. Think of it as Postcards from the Frontline. These will be in no particular order and may generate even more questions.
Today in the real world, we also face a dark, implacable, powerful foe. It is a microscopic virus that we now know is a threat, a very serious one. We in the United States have just seen the beacons. The warning travelled not just a few hundred miles but around the world: from China and Korea, to Italy and Spain, and now here.
This is a short midweek note, something I haven’t done for years. But as we all know, these are very special and difficult times. I’ll give you two links. They describe the nature of the new coronavirus pandemic and its potential consequences. I have run this past the best medical professionals I know, and they agree.
The coronavirus could take us all someplace we really don’t want to go.
There are things we can do to help. I’ll mention one big idea at the end of this letter. But first, we’ll take a closer look at what happened in China and how it affects the world economy.
First, this is going to be a long slog. The virus will spread slowly but widely. The containment measures are simply buying time. There’s no need to panic, but we should all take common-sense protective measures. Second, as usual, I am the “Muddle Through guy.”
I don’t believe they really want socialism. Few even understand what it is. What they want is change. They see little hope for improvement in their situations, no matter how hard they work and sacrifice. They don’t see anyone in authority trying to help them. So, when someone offers what sound like easy answers, they jump aboard.
Today we’ll extend the GDP discussion, looking at where these numbers originate, what they miss, and what the Fed in particular does with them. As you’ll see, we need better data… but it’s not at all clear Fed officials would use such data correctly, even if they had it.
Today I want to look at some aspects of GDP we rarely consider, thinking about how they affect our analysis and choices. But first, let’s talk about where GDP is now and where it may go in the near future.
As you will see today, sometimes I get it really, badly, completely wrong. Thankfully, not too often.
The Federal Reserve doesn’t see the inflation others notice. Their data says inflation isn’t a problem, so they ignore indications otherwise. We see this in their policy decisions. And it’s not just the Fed; other central banks, Wall Street analysts, economists, and politicians have the same affliction.
Good things are happening, too, and will keep happening as we move through the 2020s. Occasionally I like to note them, and that’s what we will do today.
In Part 1 of this forecast I described my relatively benign outlook for the next 12 months. The calm may last into 2021 and even beyond. But beneath the surface, pressure will still be increasing. It will grow slowly, almost imperceptibly, but eventually explode.
Welcome to the 2020s. Some weren’t sure we would make it this far, but we did. Now we face a new decade and new challenges. How we handle them will determine what kind of conversation we have in 2030.
There is almost no willingness to face our top problems, specifically our rising debt. The economic challenges we face can’t continue, which is why I expect the Great Reset, a kind of worldwide do-over. It’s not the best choice but we are slowly ruling out all others.
Much of the reaction to last week’s Inflationary Angst letter boiled down to, “Get government out of the way and the free market will work.” Others said the opposite: Government must help people even more than it already does. I wish it were that easy. Neither of those options are what we need, and today I will explain why.
We don’t have much time to get our house in order, either in the US or globally. Everything I’ve said today applies, to various degrees, throughout the developed world. Thinking that 2% inflation or zero interest rates coupled with massive deficits will somehow help is beyond wishful thinking.
I have some time-honored advice that may help. Both Dennis Gartman and Bob Farrell are legendary traders, and they kindly shared the rules they’ve found most helpful. I know they help me. So read these, and I’ll have a few more words below.
Should just being “employed” make people/workers happy? On one level, any job is better than no job. But we also derive much of our identities and self-esteem from our work. If you aren’t happy with it, you’re probably not happy generally. Unhappy people can still vote and are often easy marks for shameless politicians to manipulate. Their spending patterns change, too. So it ends up affecting everyone, even those who are happy.
We will spend the latter part of the 2020s going through a kind of worldwide bankruptcy. We won’t call it that, and it will take a lot of argument because we won’t have a court to take charge. But we will collectively realize the situation can’t go on and find a way to end it. I’ve taken to calling this “the Great Reset.”
Today I want to focus on that “entering a rough period” part. The signs are growing clearer and the bumps bigger.
When the US and ultimately the rest of the Western world began to engage China, resulting in China finally being allowed into the World Trade Organization in the early 2000s, no one really expected the outcomes we see today. There is no simple disengagement path, given the scope of economic and legal entanglements. This isn’t a “trade” we can simply walk away from. But it is also one that, if allowed to continue in its current form, could lead to a loss of personal freedom for Western civilization. It really is that much of an existential question.
But surely, we can work a trade deal? One that protects intellectual property and opens up the Chinese market to American companies? That seems to be the narrative that markets are looking for. But it may not be the narrative we get…
In less than 12 months we have seen the Fed raise rates, cut rates, shrink its balance sheet, expand its balance sheet, inject liquidity, withdraw liquidity, and do who knows what else behind the scenes. Either Fed officials are confused or we are at some kind of economic turning point. Or possibly both—there is no playbook. At a minimum, I think we are at a turning point and the Fed is having to improvise policy as events dictate.
Economic changes have made future planning increasingly difficult for government retirement systems, private pension plans, and individual investors. How do you generate a reliable income stream for an uncertain but potentially lengthy lifespan in a world where interest rates are barely above zero and possibly below it?
Unfortunately, my good news is also bad news for younger Americans, who won’t get nearly as much as my age cohort is collecting. Worse, they could actually see negative real returns despite having paid proportionally more into the system. In investment terms, they are getting screwed.
Last week’s That Time Keynes Had a Point letter brought many more comments than usual. Apparently Keynes is still provocative 73 years after his death, no matter what you say about him. But my real point was about the twisted economic thought that is having dangerous effects on us all. And we can’t blame it just on Keynes.
The whole debt bubble, the income and wealth inequality angst, a growing deficit which will get worse after the next recession, and lack of economic understanding among voters is all coming home to roost. Better to think about that now, while we can still act and maybe even change things.
At the economic event horizon, we all need to become black hole investors. Relying on past performance as the tectonic plates shift underneath us, as the central bank black holes begin to suck historical performance into their maws, we must look forward rather than backwards to design our portfolios.
