Saturday, April 23, 2016

北京麻雀 - New York - 6


Yesterday stocks took off with a bang, the Dow got back to 10,800, and the NASDAQ saw healthy gains. On the other side of the Atlantic, Germany's DAX is, at this moment crossing 5,500, and the other three important indexes - the FTSE for London, the CAC40 for Paris, and the SSMI for Switzerland - are making solid gains. The Nikkei is climbing out of a 12 year long bear market. While it partially inverted, the treasury yield curve hasn't gotten to that dread fully inverted status. Greenspan's Fed says that rates aren't going to rise much more, with perhaps as few as 2 .25 point basis hikes - to 4.75% - in the works. One of these is priced in for January.

It seems like all over the world it is time for prosperity, prosperity, prosperity.

Oh yeah, gold's up a bit, by why worry? Well economists are professional worriers. But the good ones know what to worry about, and what to take advantage of. This was to be taken advantage of.

Recently we passed through an economic channel, a narrow point where there were dangers of both recession and inflation. Central banks had to cut a narrow swath to avoid it. They didn't - Japan suffered a slowdown and Europe got hammered - Germany unemployment just dropped down to 11.2%. The US avoided the recession side by allowing a very sharp burst of inflation, a burst that is largely unmeasured, as it was in houses, or discounted as "volatile" energy prices. As one trader noted "it's not volatility if it all goes in one direction".

That channel widened early last year as the US entered the boom phase of this economic cycle - economies go in cycles - from giddy boom, to ugly bust, to dry trough, to recovery - and if you are lucky, expansion and boom. This US economic cycle is entering the back half of its boom - growth isn't as giddy, but there are jobs as business grab people to take advantage of the good conditions.

What's driving this in the US is that Bush's tax policies have made the rich a lot richer. They aren't just richer now, they are liquid. What's the difference? You can be rich by living in a big house, having lots of bonds, living comfortably on the interest enough to travel well, eat well and send your kids to Phillips Exeter. You are liquid when you can write a million dollar check and not feel it. After the Crash of 2000-2002, business were not liquid. They had all kinds of nonperforming assets on the books. Many venture capital funds had no new money, as they were simply keeping alive ventures that they started in 1999. Job creation was lousy, because there wasn't any money to create jobs with here in the US. Only housing, health care and homeland security really created jobs.

But you know, anyone looks smart in business with 2.7 trillion dollars dumped on them. Bush and his cabal were worried about one thing: that if business wasn't bailed out, that some liberal would get in power, and be able to force concessions in return for bailing them out. Instead, it was imperative that the business world get lots and lots of no strings attached money, so that the public, not the privileged, had one foot off the economic cliff. The American people, idiotically - foolishly is a word you use for when you kid plays baseball with the french doors as the left field wall - allowed this in 2000, 2002 and 2004. We aren't really sure if they voted for it, but they were willing to believe that they voted for it, because enough of them did, and the "Fourth Estate" was rabidly in favor of it.

So here we are, and there is a vast amount of money sloshing around at the top of the economic system. A trillion dollars on corporate balance sheets. The Federal government is scheduled to spend vast sums of money on Iraq, Katrina reconstruction, the prescription drug benefit and another round of revenue reductions. Europe's economy is waking up a bit, and Japan is in a full scale recovery.

But the problem is if that money goes down to us at the bottom, there is inflation the Fed can't ignore. The people who rent us the money will notice, and they will dump it. That will hurt, a lot. So the Fed's job is to make it so that your wages go nowhere. Smile, Ben Bernanke's job is to screw you. He's going to enjoy his work.

So the paradox is how to produce growth - that is more money sloshing around - in an environment where less and less of it can be invested. This problem is what Cousin Ben calls "the savings glut" but is really "a lack of investment supply". Really there are only two things that can be done with money at this point - invest in industrializing and mechanizing and electrifying China and India, and finding hydrocarbon based energy. Everything else, is inflationary.

One answer is the creation of a super luxury economy. Let me take one example. Why is it that the major airlines were bailed out before, over and over again, and aren't now? It's simple, once upon a time, no legacy carriers, no first class cabin. Now that microjets are getting to the point were a first class cabin doesn't need to be attached to the rest of the plane, and can go from point to point over large areas - there is less and less need for legacy metal. The rest of us will travel cattle class and like it.

This is a general pattern - the privileged don't need you any more, so they aren't willing to buy peace. They don't need you to fight a big war against the Nazis. The don't need you to fight a big war against the USSR. They don't need you to fight the GWOT - in fact, the defense outlook is for less and less hardware and more and more spyware. As far as the privileged are concerned, you make too much money, have too much freedom, and are far too close for comfort. A guy in China who makes a third of what you do, can't even run a web page with out Microsoft censoring it, and doesn't even know the name of the companies that his goods end up in - is a much better deal than a voter in Detroit who knows where Flint Michigan is.

This is the year where we see whether the theory of having the privileged take off into their own bubble, and the rest of us get the right to pay more for entertainment on bigger and smaller screens - works or not. If it does, which I am inclined to doubt, you children will be like the people of 1600 - on the outside of the castle looking in. Sure, some of the peasants will be let in if they make enough money, but the odds will get farther and farther against them. Cinderella comes from a time when the distance between top and bottom was unimaginably huge, we could be creating more stories like that very soon.
But this year, let me focus on this year. You see, if all that money at the top gets down to the bottom too fast, then we get inflation. Energy supplies are growing slowly, and anything that settles down to the bottom will become energy inflation - that's what us poor people to, we use energy to amuse themselves. However, if not enough settles to the bottom, then there will be a political revolt, the Republicans will lose control of Congress, and a new direction will be taken. One that involves a change of priorities.

So the upshot of this is that Bush can't create that many jobs. His executive branch has to shear some sheep to save others. Housing construction is about to take a big stiff hit of pain, the fundamentals of the economy - that's the mesoeconomic outlook - is terrible. Even as the macro-economic outlook is fine. But then, remember the macro-economic outlook, had it been known about, looked great in 1928 as well. And the jobs he does create have to be very much tied to energy and offshoring. That's where the new jobs are going to be - in drilling for dead energy, and in shipping jobs offshore, plus the inevitable health care inflation from the drug benefit.

Will they make it? For a while, yes. People should expect to see the economy grow, jobs grow, and Bush to peel himself rapidly off of the floor of his unpopularity. Last year's burst of inflation won't continue into early this year. But this isn't destined to go that far. Barry Ritholtz - who just started his own research firm - is predicting a crash late in the year. I'm not going to believe that, in that it isn't stocks that are overinflated, or overleveraged - its housing. I'm expecting a housing crash this year in many markets, and with it a crash of buying power in the bicoastal areas.

What this is going to do this year is something very interesting. You see, markets adjust in different ways. Since we have pretended that housing inflation isn't inflation, people who don't want to pay it have had an option - sit tight. If they move it costs them huge amounts of equity. Consider the person who bought a 150K house that is now worth 400K. Unless they move to someplace much cheaper - which is cheaper because it has fewer jobs, natch - if they sell the house, they have to buy another one, and suddenly 250K of paper equity disappears. Moving one door down can cost you 250K. That means that if a region can't generate jobs, the home owner is better staying put, or driving long distances, to avoid selling. The person retiring can cash out, but other people have more difficulty doing so.

This means that the US labor force is less flexible, and that companies are going to have a harder time finding top talent. People will be moving out of economically vibrant areas, and staying put in areas that are no longer economically vibrant. Until there is a complete housing crash, and all that paper equity gets blown away. Some people will cash out - those about to retire should consider accelerating their retirement - but most will have nothing left from their days as a paper real estate millionaire except big tax bills.

This year that effect is going to hamper real economic growth in the United States significantly. Combined with energy inflation, which will be easing because we won't be generating jobs with housing construction, which is horribly energy inefficient - it means that the end of the year is likely to see the grinchiest Christmas in a long time. That is not to say recession is inevitable, but Americans have been waiting 5 years to feel the boom, and they aren't going feel much this year. Job growth will be better, stocks will go up, but houses and the underlying economy most of us live in, won't see most of it. This is a key reason why job growth is poor, moving to where there is job creation is a very large risk.


So what does this economy need? A big tax increase. The theory of Reaganomics is that business investment would always produce more non-inflationary growth than government spending. This theory has been shown to be wrong, if there really was any question about it. While government services produce inflation, government investment in infrastructure does not. As long as fiscal policy is responsible enough to reduce costs with investment by as much as it increases them with services, government can generate more growth than business does for most people. Afterall, churning bits in bank accounts only keeps a few people happy and employed. And the super luxury economy, while it is very energy efficient per dollar, doesn't make most people any happier. Unhappy people don't stay unhappy for long.

A tax increase that would be funneled, not into services, but into investment in the future, into getting various technologies which are currently slowed universally adopted. There should be broadband for everyone, wifi umbrellas over every city, and a big push to get nano-technology rolling, since these would remove the barriers to the next tech boom. There needs to be exploitation of the internet economy - state colleges should all go online, allowing anyone to get a degree quickly and more cheaply. There needs to be a shift of the energy and transportation infrastructure. There isn't a savings glut - because there is plenty to do.

It isn't offshoring that is costing us jobs - we are losing jobs at precisely the same rate we did under Clinton - it is that new jobs aren't being created. It is this lack of forward motion here, not the presence of forward motion elsewhere, that is the problem. The lack of forward motion here is happening because businesses aren't spending, since they can't be sure they will get the money back. The dotcom hang over has taught them not to invest just because someone will do well. Only the government can be sure to get its money back. The wealthy don't have the balls to put money on the table, unless they think the wheel is rigged. Right now, there is a very short list of sure things, and a very long list of things that are just about sure losers.

So while what we need is a tax increase and a visionary program of restoring America, this isn't happening this year. In fact, it isn't going to happen period. By the time power shifts in Washington DC, it will be 2009. That means this golden moment, which would have arrived for Gore or Kerry - is wasted. The easy way off of the Cold War economy treadmill isn't going to happen.

Instead the first option is the aristocratic economy actually working - which it will for a while, that is, until people realize that energy supplies are going to grow slowly, and technology isn't going to pick up the slack. That point arrives sooner than you think. In fact, it arrives late this year. If the Fed is forced to start another tightening cycle, then look out below - the current flat to slightly inverted yield curve will go fully inverted. The employment S-Number (the seasonal bottom of unemployment insurance payouts) will show a sharp year on year rise, and we will get a real recession in 2007. But even without a full blown recession, simply another year of the average American treading water will be enough to convince people that happy saudi princes, chinese central apparatchniks and forbes 400 used care salesman, isn't the reason they are breaking their backs at McDonald's every day.

So what to do now? Get rid of debt - interest rates are headed higher. Start with the highest rate first. If necessary do the zig-zag of taking intro APR offers and rolling over. You'd be amazed at what dodging 6 months of interest will do for your ability to pay down principal. Be prepared to lock in rates - long term rates will head higher if the economy firms. Be prepared to shift jobs – a lot of the new employment of the last four years is going to evaporate. Work. Work. Work. Work - this is going to be the best job market since 2000, and there is no assurance that it will continue. Diversify your retirement accounts - the dollar is going to head lower, and european and emerging markets are going to see far more of the growth than US markets, since more of the money is going to be flowing overseas.

And you should consider moving your longer bond holdings to iBonds - because almost assuredly, there is going to be more inflation than bonds are currently pricing in.

 Because with consumer balance sheets looking the worst they have in 70 years, when the downturn hits, it is going to last a long time. Don't treat this boom as a go go period where it is safe to consume - on the contrary, treat it as a time when whatever fat years we have, will be followed by just as many lean years.

The picts on Google adwords with Shakespeare

top - Julius Caeser | Romeo and Juliet | The Tempest | The Scots Play
bottom - Hamlet | Otello | Any one of a number of plays, but King Lear most of all | Midsummer's Dream