Time will prove that the US eventually makes a fool of itself.
– People’s Daily, official newspaper of the Chinese Communist Party
POITOU, FRANCE – We’ve made two bold, perhaps reckless, predictions.
As to one of them, we’re beginning to have doubts.
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Peculiar Rates
Our first prediction was that the Fed will never normalize interest rates. It claims to have begun the normalization process more than three years ago, in June 2015, taking tiny steps toward higher rates – increasing them by 25 basis points each quarter.
But consumer price inflation is walking faster… and now – 10 years after its emergency rate cuts – the Fed’s key lending rate is only 2%, nearly 100 basis points below the rate of inflation.
In other words, the Fed is still lending money at a very abnormal rate.
The Fed will never normalize its rates because it has created an economy that depends on peculiar ones. Normal rates, discovered by cooperating parties in a free market, would now sink both the economy and the stock market.
Most likely, stocks will fall and the economy will go into a vicious recession long before the Fed gets anywhere close to normal.
Then, it will repeat Mistake #3, dropping rates again in a panic. We have high confidence that that is what will happen – especially with the self-described “king of debt,” Donald J. Trump, egging it on.
It’s our second prediction that we’re beginning to wonder about. We predicted that the president would back off from his trade war. But after his latest tweets, we’re not so sure.
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Local Update
Let us get to that in a moment. First, a local update:
Europe has been suffering from a heat wave – a canicule, as they call it here in France. Lawns dry up. Retirees drop dead. The young and old stay indoors during the heat of the day.
Few people have air conditioning. It is rarely needed. And even today, with temperatures in the 90s, it isn’t as uncomfortable as you might think. Humidity is low.
The old houses – with their thick, stone walls – never heat up completely. Windows are thrown open at night to cool the houses down. In the morning, outside shutters, windows, indoor shutters, and curtains are closed to keep the heat out.
And in the evening, we enjoy a long, slow dinner outside… as the light and heat fade away.
Oh… and we have a new project!
Big doors – 14 feet high – are meant to block the passageway to the inner farmyard. Alas, they have been falling down ever since we got here 23 years ago.
Now, it’s time to do something about them. But what? How?
Stay tuned.
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Bill’s newest project: A set of old doors at his home in the French countryside
Buck Stops
Meanwhile, we leave the real world of real things, real problems, and real solutions… and return to the make-believe world of Donald J. Trump.
Not that we have anything against America’s chief executive… But he sits at the desk where the buck stops and bravely takes responsibility for all that happens during his watch. And he seems like the perfect person for the job.
Thrown up by malicious fate… carefully chosen by the mischievous gods… and groomed for catastrophe, like Custer for the Battle of the Little Bighorn… or Edward John Smith for the Titanic…
…Mr. Trump is a phenomenon; generations will sing his praises or curse his name, depending on how it turns out.
How it will turn out is, of course, beyond our ken. We can only try to understand what is going on and guess about how it ought to turn out.
And our guess is that China’s People’s Daily is right… The U.S. will make a fool of itself.
Mr. Trump has nothing to be ashamed of. At least, insofar as macroeconomics is concerned; Barack Obama didn’t know anything about it, either. It’s not a job requirement.
And few politicians have the time or motivation to think very deeply about it. Instead, they bring on advisors who inevitably come with their own bad ideas and hidden agendas.
Readers remind us that Donald Trump is a rich guy – a seasoned businessman who was trained at Wharton, the prestigious business school of the University of Pennsylvania.
But this only makes us suspicious of Wharton; what do they teach there?
Do they mention that, as a general rule, as trade expands, people grow richer? More trade means more transactions, more competition, more choices, more learning, and more specialization.
That’s how an economy moves ahead. It’s also why some groups are rich and others are poor. A poor economy is one in which everyone has about the same knowledge.
It’s a bit like the life we see up in the mountains of Argentina. All the locals know the same things – how to plant corn, how to cure hides, how to protect the sheep from the pumas, and how to build mud roofs.
In a rich society, people know very different things. One knows how to program a computer… another knows how to fix the toilet… and still another knows how to bake bread.
The rich guy is not the jack-of-all-trades, but the one who figures out one métier better than others. Then, this dispersed, specialized knowledge is brought together through trade.
Usually, the larger the free-trade area, the richer the people in it. As the trade zone shrinks, so does its wealth.
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Fight to the End
But along comes the Wharton graduate, Donald J. Trump, building walls with razor wire on top… between the U.S. and China, Europe, Iran, Mexico, and Canada.
The press reports that some Canadians have begun boycotting U.S. products.
According to People’s Daily, China vows it will “never surrender to blackmail.” Instead, it will “fight to the end.” China also stepped up its purchases of Iranian oil… in defiance of Trump’s new sanctions.
Europe passed a law making it illegal to comply with Trump’s sanctions against Iran.
And that’s just today’s news!
As the walls go up, Mr. Trump thinks he is “winning” because China’s stock market is down.
POTUS tweeted:
So if you have faith in Mr. Trump, getting rich is a piece of cake. Just buy stocks. The market will go up “dramatically,” he says, as he puts the world economy in order.
If you lack faith, on the other hand, you may want to sell short. Walls surely increase the risk of a crash on Wall Street and a global depression.
Which brings us back to our second prediction: Since the Deep State depends on the survival of the present, EZ-money financial regime, and since the system heavily depends on China to provide low-priced goods (keeping inflation at bay in the U.S.) and to recycle its Main Street earnings into Wall Street assets (mostly U.S. Treasuries), we forecast that The Donald would never follow through on his trade threats… especially with China.
The Deep State itself would be the biggest loser.
We assumed that someone would explain the risk… and he would back down.
But as of last weekend, it still appeared that he had slept through his key Wharton classes and wasn’t taking calls from Deep State insiders.
Instead, he may be serious about disrupting the world economy and stifling world trade. If foreigners want to do business in the U.S., he says, they can damned well pay a tax… or make stuff in the USA.
Presidents say dumb things all the time. Most mumble and hedge… on this hand, this… on that hand, that…
One of Mr. Trump’s charms is that he says what he thinks and does what he wants, no matter how ignorant, mendacious, or moronic.
The walls go up… and the ground beneath them trembles.
Regards,
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Bill
MARKET INSIGHT: THE FED’S PATH TO “NORMAL”
By Joe Withrow, Head of Research, Bonner & Partners
Today, we take a step back to take a big-picture view of the Federal Reserve’s long path to “normal.”
As Bill outlined above, the Fed has been in the process of “normalizing” rates with incremental rate hikes since 2015.
But a second step in the Fed’s path of normalization is “winding down” its balance sheet as part of its tighter monetary policy.
Today’s chart tracks the Federal Reserve’s balance sheet from 2003 through today to illustrate this dynamic.
If you recall, the Fed actively purchased U.S. Treasury bonds and mortgage-backed securities from 2008 through 2014 to inject liquidity into the financial system and force down yields. This, in turn, helped support U.S. stock prices.
You can clearly see that the Fed injected $3.6 trillion into the financial system during this time… with money created from nothing.
But this so-called quantitative easing also ballooned the Fed’s balance sheet from $870 billion in 2008 to a peak of $4.5 trillion in early 2015.
The Fed has now reversed course and reduced its balance sheet by $211 billion over the past 12 months, withdrawing liquidity from the system. At this rate, it would take the Fed nearly two decades to return to pre-crisis levels.
If Bill is right, a recession and market crash will hit long before the Fed ever gets back to “normal”… forcing it to reverse course again.
– Joe Withrow
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MAILBAG
After scathing comments in yesterday’s mailbag, some dear readers connect a few dots of their own…
It appears that after all these years, your readers do not know you! They think you might be an “under-the-cover liberal” or a “never-Trumper, Democrat, socialist (all the same thing).”
But the truth is even worse!
You are none of these things, nor are you a conservative or a fascist. Instead, you are in favor of win-win over win-lose and believe that politicians of all stripes only create problems but never fix them. The truth about you was always plain to see, but your criticism of the head of their tribe has made it impossible to ignore.
– Brian G.
In a perfect world, Bill, what you espouse would be correct. I’ve argued the same for eight decades. It’s taken me that long to recognize that in an imperfect world, “things” don’t always go as planned – or as expected. Hence, in the Trump world, we’re learning new things and new ways every day.
After being bamboozled by the Democrats most of my life, I enjoy and relish the Trump breath of fresh air. No, I don’t always agree with what he says or the way he does things. What I do like is that for the first time in my life, he is standing up for my rights and telling it like it is. I want the swamp drained, and frankly, I don’t care how he does it.
– Tex N.
It’s sad that more people do not agree with you. It boggles my mind that they must choose to ignore logic in hopes that some wise guy will actually do something to benefit them… The facts show a poor or illusory financial track record, plus a history of egocentricity, bald-faced lying, not paying contractors… and so much more.
– Maia B.
Thank God that we finally got a president who cares for America and knows the negotiating business. He didn’t get those millions by cheating people or by backing down on tough deals. Drain the swamp!
– Charlie S.
Meanwhile, Bill’s recent carpentry project has readers talking…
As an Aussie (mostly), it looked like you weren’t using treated pine for your barn roof! Although in Ireland, you might not have the termites we have here. I remember deathwatch beetles, plus other wood-boring insects, tapping in one old house I lived in in the UK.
So please have the wood that looks like pine treated. It can be painted in situ, but the best is the green pine that has anti-termite poison injected under heat and pressure. I prefer steel myself, but I hope your roof holds up for a few hundred years!
– Pete W.
As a lifelong builder (both a licensed engineer and general contractor for more than 50 years), I admire your construction escapades and generally disagree with the criticism from so many “experts” whose experience is so shallow.
But… your reference to cement really gets to me. Cement is grey powder that, when mixed with water, makes a paste that can be mixed with sand to produce mortar or with sand and stone to make concrete.
– James W.
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