Thursday, September 2, 2021

Private Economy is the Real Economy


Government economists define GNP to include government spending.   This way the more government spending, the higher the GNP.   So if they need to "grow the economy" all they have to do is increase government spending.  The more the government is spending, the more power they have. 

The reality is that government is a leach on the real productive economy.  They are taking resources from the productive parts by taxation and money creation (inflation).   Government does not add to the economy, it sucks life out of the economy.   

If we subtract government spending from the official GNP and scale for inflation, we get the following graph which gives a better idea of the Real Economy.

First, looking at this graph it is crazy for the stock market to be up by about a factor of 7 in the last 12 years.   The real economy is not doing anything close to that kind of growth.

Next, the idea that government spending fixed the recession last year so it was only 2 months is silly.   Sure they got the "official GNP" back up, but the real economy is still way down.

Saturday, August 21, 2021

Graveyard of Empires


Biden and others have called Afghanistan the Graveyard of Empires.  There are a number of definitions of "empire" but here we will use:

   Empire:  A government that collects taxes from other countries.

By this definition I believe the USA is an empire, though using a tax very few recognize.   As Keynes put it:

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.

After world war 2 the US dollar became the world reserve currency.   Since then Central Banks, businesses, and people all over the world have been using the US dollar and holding US bonds.   As the US prints more dollars, they are really collecting a hidden tax on dollar holders all over the world.   This is a most diabolical tax, as it is so secret and unobserved.   This "inflation tax" has gone on for more than 70 years.

Recently the pace of money printing has increased to trillions per year.   This may be getting to the "evil empire" stage, where there is a tax revolt

The fraction of US debt held by foreigners has been dropping recently:

Source:  Fred

If enough people realize that holding dollars makes them subject to this tax, and so decide to no longer use the dollar, we could easily get hyperinflation.

The rest of the world could leave the dollar for something else.  For example, other central banks could use gold as reserves to back their own currencies.  Gold is what was used before the dollar and could work again.  A number of central banks do seem to be buying gold faster recently.   For international settlement, Bitcoin could work.    No doubt such a major change will be chaotic for awhile.  After the change most of the world could be better off, as they would no longer pay the US dollar inflation tax.   However, the USA will be much worse off, as they will no longer collect this huge inflation tax from the rest of the world.

Like other empires that failed after failing in Afghanistan, probably the American Empire is coming to an end.  


Saturday, August 7, 2021

Devil in the Details

 The low on the S&P 500 in 2009 crash was 666.   If we multiply that by 6.66 and round off just a bit we get 4444.    A factor of 6.66 in 11 years should qualify as "frothy".  Seems like 4444 is a good number for a high. 

Friday, August 6, 2021

Extreme Valuation and Crash Warning Charts


They say "no one rings a bell at the market top".   But there are signs that things are higher than normal or getting shaky.  I am collecting links that show charts indicating extreme stock, bond, or real estate valuations or things that often come before crashes.  If you know of other such links that you like, please comment and I will add them to the original post.  Thanks.

  1. How to Spot a Bubble, March 2021, Hussman
  2. Crescat Capital March Research Letter
  3. Shiller PE, gurufocus
  4. Buffett Indicator, gurufocus
  5. Goldmen Sachs Non-Profitable Technology Index, Robeco 
  6. Is the Market Still Overvalued?, Advisor Perspectives, 8/21 
  8. P/E and inflation, Advisor Perspectives, 8/21 
  9. 14 Warning Signs That a Stock Market Crash Is Coming, 
  10. Stock Market Crash, Fragility And Silence, 
  11. This one signal says a stock market correction may be on the way,
  12. Whole Lotta Love: Sentiment’s Potential Warning, 
  13.  What Triggered the Crash?, John Hussman, 7/20/21 
  14. Alice’s Adventures in Equilibrium, John Hussman, 6/21
  15. Grantham:  This is a bubble, this is serious 
  16. Warnings about a stock market crash are growing louder, 
  17. These 23 Charts Prove That Stocks Are Heading For A Devastating Crash,  July 2014
  18. The Folly of Ruling Out a Collapse, Hussman Aug, 2021
  19. Recession Alert! Morgan Stanley, Rabobank, Normura, & BofA Warn Investors a Crash is Coming Aug 25, 2021
  20. Four Reasons the Next Recession Will Be Worse Than the Last One 9/10/21

From the above, I think one of the most important charts is:


At the current inflation level we have never had such a high P/E before (yellow box).   If inflation gets higher this P/E will be even more extreme.

Sunday, August 1, 2021

Inflation Expectations are Never "Well Anchored"


Jerome Powell keeps saying, "inflation expectations are well anchored".   This "well anchored" makes it sound like they can't easily change.

 The reality is people expect inflation about like the current inflation.  As seen in the graph below, if the CPI (green line) goes up, as it has the last 4 months, people's expectations goes up too (blue line).   For Powell to think it it safe to print money because people are not expecting much inflation at this moment is foolish.   People's expectations can change in a month but the "long and variable delays" from policy change to inflation change  can take years.

Inflation can get into positive feedback loops that are very hard or impossible to control.  The central banker needs to take a long term view, because inflation responds so slowly to their policy changes.   It is irresponsible to make decisions about money creation based on a short term and fickle measure like people's expectations.  

The reality is that people's expectations are never "well anchored".  If we get CPI numbers of 6% or 7% then inflation expectations will move to that range also.   Maybe then Powell will stop saying, "inflation expectations are well anchored".

Sunday, July 25, 2021

How Fed Fights or Encourages Inflation


When Paul Volcker fought inflation, the way he did it was letting interest rates go higher than the inflation rate.   The graph below has 10 year interest rate (blue), the inflation rate (red), and then the difference between these (green).   When the green line was far below zero Volcker was fighting inflation hard.

However, when the green line is near zero or above zero, the Fed is encouraging inflation.   In the 1970s the green line was near zero or spiking above zero.  This was encouraged the inflation of the 70s. 

As Milton Friedman taught, inflation is always and everywhere a monetary phenomenon, but there are long and variable delays between Fed policy inputs and the inflation result.   It can take years for inflation to show up, or go away, after a Fed policy change. 

For the last few years the green line has been near zero and above, similar to the 1970s.   Having interest rates below the inflation rate is once again encouraging inflation.    Inflation is starting to show in measures like the CPI.

Intuitively this makes sense.   If it is possible to borrow money at rates below the inflation rate then lots of companies and people are going to borrow money, which will cause the banks/fed to increase the money supply, which will cause more inflation. 

Sunday, July 18, 2021

Debt to GDP

 If we add up government debt, corporate debt, and household debt and divide by GPD we get a the following graph:

The total debt/GDP ratio is almost 3 times what it was in 1980.   In 1980 it was possible to survive with high interest rates but today high interest rates with these high debt levels would be horrible. 



Tuesday, July 13, 2021

Last Call for Punch Bowl?


The grey areas in the graph below are recessions.  Note how whenever inflation is above 3% and going up fast it suddenly goes down and there is a recession?   The Fed has to take away the punch bowl as part of its mandate is to control inflation.  When it does this there is a recession.   Note we are above 3% and going up fast.   People think the Fed can keep the same easy money policy for the next two years.  Inflation would be way too high if they do that.  This should be last call for the punch bowl.


Fred Graph of CPI:

 You can also see this in a graph of the PPI:

These two graphs make it look like there should soon be a recession.

However, this time it may not be possible to take away the punch bowl.   The Federal government is spending twice what they get in taxes and has huge debt.  They need the Fed to keep buying their bonds and to keep interest rates low.  If not for the Fed the interest rates would be much higher.  If interest rates on the debt were 5% it would take about half the taxes just to pay the interest.  In this case the Federal spending would be about 4 times the income left after paying interest.    They would be clearly insolvent and nobody would want to buy their bonds.  They really need the Fed to keep buying.   But if the Fed keeps buying then inflation will get out of control.   Probably inflation will get out of control.

It is strange that people can see the government making trillions of new dollars and then be surprised when inflation comes.   If you survey your friends, I bet your Libertarian friends are less surprised than your Democrat friends.

Saturday, July 10, 2021

Shortages and Supply Chain Problems

First, the money creation is much faster than normal as seen in this M1 Money Stock graph.  Does not seem transitory.


If banks pays no interest on money and the prices of things are going up fast, it is  rational to buy stuff needed ahead of time, before prices go up further.  In these conditions, storing real goods is better than storing cash.   Of course this only works for things that you can store for some period of time.   So diapers, cans of tuna, cement blocks, and computer chips, work well, but not bananas.



When money is no longer a good store of value, it is better to store extra value in extra physical things that you know you will use eventually.   This is called a flight into real goods (Flucht in die Sachwerte) or crack-up boomIt is part of "how fiat dies".  We are probably seeing some of this now.

Once public opinion is convinced that the increase in the quantity of money will continue and never come to an end, and that consequently the prices of all commodities and services will not cease to rise, everybody becomes eager to buy as much as possible and to restrict his cash holding to a minimum size. 

You have to look at it from a Game Theory point of view.  The government is printing way too much money.  The value of the money is dropping.  So each player is better off holding real goods than money.   So as each player has extra money, they buy extra stuff, even if they don't need it right away.   Also, if there are shortages and they might not be able to get all they want in the future it is better to order extra stuff now.

If people spend their extra money right away, this has the effect of increasing the velocity of money.   From the Equation of Exchange, we can see that increasing the velocity of money makes prices go up even more. 

You can also see it as an increased demand with no matching increase in supply, so prices should go up.   The supply was enough for regular use but not enough for goods to be used as a store of value.  So it can show up as "shortages".

If many people are ordering extra real good we could expect to see increased demand for shipping.  Sure enough, there is:

Drewry’s composite World Container index:

The above container price index does not look like a "transitory" problem.

Politicians will try to divert blame for the inflation from their money printing to "hoarding" or "panic buying".  The only reason people are buying extra stuff is that the prices are going up fast.  If the government/central-bank stopped printing money the prices would stop going up fast.   The hoarding is a symptom of the inflation (and part of the natural process) and not the core cause of the inflation.

That money is no longer a good store of value is probably the core problem causing the "shortages" and "supply chain" problems.  In the coming months it will become more clear if this is in fact what is going on. 

Tuesday, July 6, 2021

Transitory Hyperinflation



 Bank of America is reported to have said:

On an absolute basis, [inflation] mentions skyrocketed to near record highs from 2011, pointing to at the very least, “transitory” hyper-inflation ahead.


The article also says:

      Because if there is one thing hyperinflation is, it's "transitory."


This was in a phone call and probably B of A wanted to say "high inflation" and not "hyper-inflation".  However, this could be a freudian slip, showing what they really think.
Normal money is both a store of value and a medium of exchange. Hyperinflation is the transitional stage where a money no longer acts as a good store of value but it is so far still being used as a medium of exchange.  Eventually it fails as a medium of exchange also,  and is no longer money.   So fundamentally hyperinflation is the transition period between half dead money and dead money.  It is the process of "How fiat dies".   So as the article says, "if there is one thing hyperinflation is, it's transitory".  :-)