“Coming Soon: A Counterfeit Economy”
By Bill Bonner
SAN MARTIN, ARGENTINA – “Do you see what is happening, Dear Reader? We’re entering a new phase. Up until now, the Federal Reserve was backstopping Wall Street. This created a huge shift in wealth from average people – with few financial assets – to the “rich,” who own most of them. But it was fake wealth. That is, the U.S. stock market could easily be cut in half. In a flash, about $17.5 trillion of “wealth” would disappear.
A few short sellers – who bet on lower prices – would make money. But most of the $17.5 trillion would simply vanish. Poof! It would be gone. Because it was never real… never an honest reflection of what America’s companies are really worth.
“Rout” on Wall Street: Yesterday, there was a modest selloff on Wall Street. Here’s Bloomberg with the news: “Stocks Post Biggest Rout Since June as Tech Sinks: Markets Wrap.” “U.S. equities tumbled by the most in almost three months as the rotation away from high-flying tech stocks gained steam, with investors questioning the sustainability of lofty valuations. The S&P 500 Index retreated from a record high and fell more than 3.5%, its biggest drop since early June, amid declines in Apple, Microsoft, Amazon and Facebook. The Nasdaq 100 sank 5%, its largest decline since March. European stocks erased gains and finished more than 1% lower.”
Why the “rout?” Between the first of March and the first of June, the Federal Reserve added $3 trillion to Wall Street’s play money. Bouncing off this trampoline of fake money, stock prices rebounded… and went higher than ever. This was despite falling GDP growth… and falling Earnings/Share growth, too. In other words, there was no reason for it – except the flush of the Fed’s new money.
But then, beginning in June, the Fed eased off. Its balance sheet – which measures the amount of cash it feeds to Wall Street – went down. And if the selloff on the U.S. stock market continues, the Fed will react as it has for the last 30 years – it will increase the ration, putting more fake money into the trough… fattening the market averages again.
(There’s a whole ’nuther story about the stock market, too. The averages are heavily weighted towards the leading stocks – which are those that make the headlines and attract the interest of the “Robinhood” traders.
The top four stocks, for example – Apple, Amazon, Google, and Microsoft – are now worth more than the GDPs of every country in the world, except the U.S. and China. Apple is worth more than the entire Russell 2000. Most stocks, however, are still down for the year.)
Counterfeit Recovery: But now… a new phase begins. The feds are going to be forced to do for Main Street what they’ve been doing for Wall Street all along. That is, they can’t permit a substantial recession – especially not one that they caused themselves. They’ll have to fix it.And what do they have to work with? Just the same thing they used to trick up Wall Street – the printing press. And it will produce the same result: a counterfeit “recovery.”
But we’re getting ahead of ourselves… Along with sliding stocks, yesterday, came more evidence that the Main Street “recovery” is not happening. No V. No U. It’s more like an L. “The nation’s trade deficit widened by nearly 19% in July,” Barron’s reported. And “On Wednesday, the Federal Reserve’s Beige Book showed that many layoffs related to the pandemic are becoming permanent.”
Why no quick recovery? The quick answer is that the next round of giveaways got held up in a fight between Democrats and Republicans. And as more evidence of an L-shaped, non-recovery comes in, they’ll quickly get together on another round of “stimulus.” This free money will give the appearance of a “recovery.” But a real recovery will not happen. Things are not going back to “normal.” Not any time soon.
Because an economy is made up of millions of delicate connections, habits, preferences… and price-sensitive decisions. You stop on the way to work, for example, and buy a cup of coffee and a donut. Then, your boss tells you to work remotely. You stop buying the donut… The donut shop closes… It stops buying sugar and flour… And on… and on… all the way to the cane fields of Brazil.
Plot Change: The feds thought they could turn off, and then turn back on, the economy – like putting a movie on “pause.” They thought they could just pick up where they left off. But it doesn’t work that way. Sales, wages, and profits are lost forever…
And then, when they push the “play” button, they find that the plot has changed. Attitudes, as well as the illusions and connections that made the “greatest economy ever,” are no longer the same.
People don’t want to eat donuts. They don’t want to go to the office… to restaurants… on cruises… or on vacations to Europe. Unlike the pre-crisis period, now, they don’t want to spend money.
Savings rates soared from only about 7% in February to over 30% in April. Now, they’ve fallen back down, but are still running about 3 times what they were last year. Part of this is probably because there are fewer opportunities to spend money – especially among the wealthy. Much of their spending was on entertainment, vacations, restaurants, and other diversions and status symbols. Now, they don’t want to – or aren’t allowed to – do those things.
For many, saving – not spending – is the new status symbol. It is “socially responsible,” they tell themselves. It prevents them, and others, from getting sick. It helps “the environment.” And it makes them look less like greedy SOBs, while the rest of “the people” suffer. Besides, along with the money the feds showered upon them from helicopters, it leaves them with more cash… and a feeling of well-being and safety.
New Chapter: Alas, the money the wealthy don’t spend is the money the non-wealthy don’t earn… so they don’t spend it, either. And it’s also the money that doesn’t show up in GDP statistics. During the Trump years, the U.S. saw the slowest real GDP growth since World War II – less than 2% per annum, on average. That leaves a very small margin for error. Depress the Main Street economy by just 2%… and you are in recession.
That’s the error the feds have made. And now, they try to correct it… to go back to “normal”… to “make America great again” – with fake money. But we’re watching a new movie now. And we don’t think it has a happy ending. Stay tuned!”
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