The facts just get curiouser and curiouser. Yesterday, the Fed continued its “taper” of QE – knocking $10 billion off its monthly bond buying. Thus does the biggest investor in the world – one with bottomless pockets – continue to exit the market.
Meanwhile, yesterday’s US GDP report showed that Thomas Piketty’s g is almost dead, just as he predicted. Last quarter, the US economy grew, in inflation-adjusted terms, at an annualized rate of just 0.1%.
You can blame the weather. Or whatever you want. But you’d think this combination of news events would give investors pause… or fright. Instead, they seem to be emboldened. Or driven mad. Stocks rose. Bond yields fell (and the bond market rallied). Gold did nothing.
What gives?
As Chris pointed out on Tuesday, if the US economy were really improving, you would expect bond yields (and interest rates) to be moving higher. Instead, they’re going down… even as the Fed withdraws its support for bonds.
And if the economy really were improving, g would be bigger than one tenth of one percent. And if the Fed’s QE program is propping up the stock market (as we believe it is), you’d think it would shrink along with QE itself. Instead, US stocks moved up to a new record.
But we have not heard the last word on the taper. Our guess is the bull market on Wall Street will end before the QE does. And when it does we’ll be looking at a new – and less curious – set of facts: the weakest “recovery” in postwar history… a collapsing stock market… and the end of QE.
The Fed will cease looking to “normalize” the economy and begin looking for new ways to distort it.
Twists and Turns
In the meantime, let’s turn to other things…
“Señor Bonner?”
“Sí…”
“Mi hermana necesita una casa cerca de la escuela.”
Life is full of unexpected twists and turns. We bought a remote ranch in the Argentine Andes expecting to enjoy ranch life and learn the cattle business. Instead, we find ourselves running a welfare program.
“Yes, the valley has changed a lot in the last 10 years,” Jorge, our ranch foreman, explained.
“In my generation everybody had to work. If you couldn’t work on the ranch… or support yourself with your own goats and your own garden… you had to leave. Now the government has ruined these people. They expect to live here without working.”
Jorge is exaggerating. People here work. But the government is in the process of destroying work culture and family culture… just as the US feds did in America’s inner cities half a century ago. All it takes is a program that gives money to people who don’t work… and to women who don’t get married.
Wealthy, well-established people are immune. It’s not that they can’t be bought. It’s that the price is not high enough. The 450 Argentine pesos ($56.24) a woman in these parts gets for having a child hardly tempts the chic women of Buenos Aires. But up here in the Calchaquí Valley, 450 pesos is good money. Have five children, and you get almost as much cash as a full-time worker.
Our farm supports five full-time gauchos. But there are 22 families living here.
What do the others do?
In the past, they did subsistence farming and little else. But over time, with the assistance of the government in Buenos Aires, the ties that bound began to chafe. Families came apart. Unmarried women wanted houses of their own. Their parents, frequently, wanted to get rid of them too. They turn to us.
Learning to Say “No”
“My sister lives up in the mountains. It’s a two-hour walk to school. And it’s very cold in the mornings. If you could build her a house near the school… or just a room… she could come on Sunday night, drop the children off at the school in the morning on Monday… and then go back to the mountains.”
It sounded reasonable enough. Houses here are cheap. They are built of adobe bricks, which we produce on the farm. The roofs are made of logs covered with cane sticks, which we then cover with mud. Plumbing and electricity, as you can imagine, are rudimentary.
But there’s more to the story… We’re toughening up. We’re learning to just say “no.”
“You have to tell them ‘no,'” Jorge insisted.
“We’ve seen what happened on other farms. You say ‘yes’ to one… you’ve got to say ‘yes’ to all of them. Then you have a whole community next to the school. And then someone’s dog bit someone else… and kids break windows in the school… and things begin to disappear. It’s a nightmare.”
What Jorge is describing is the Baltimore we lived in the 1980s. Living in the ghetto, we got to see the effect of government welfare programs first hand. It was not a pretty sight.
“You get what you pay for,” was one of Milton Friedman’s dicta. You pay people to be poor, unemployed and in single-mom households – and that’s what you get.
And in Baltimore’s inner city, we got it good and hard. In the 21217 ZIP code in the early 1980s, there were almost no married couples – other than the few “pioneers” like ourselves who were trying to restore the handsome old buildings.
Almost no one had a real job. And almost no one had any real idea how the world worked. They thought everybody lived on government handouts; the rich, they thought, just got more handouts than the poor.
It was obvious to us then that welfare programs were a disaster for the people they were supposed to help. And now, here in the faraway Calchaquí Valley of Argentina, we find ourselves with a welfare program of our own.
Three women have already asked for new houses. Two families have asked for running water. And today, we took a group of 10 people crowded into and onto our pickup truck – old, young, children, mothers – into town (a three-hour drive).
Three children got sick on the windy, rocky road – each threw up in the truck. Why were they going into town? So they could register for… welfare programs!
Regards,
Bill
Editor’s Note: Don’t forget that you can still pick up a FREE hardcover copy of Bill’s book on the US debt bubble, The New Empire of Debt, which he wrote with co-author Addison Wiggin. It reveals just how distorted the US economy – and the US empire – has become through its addiction to debt. Claim your free copy here.
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners
When I wrote yesterday morning about the trend toward slower economic growth in the US, I hadn’t yet seen the first-quarter GDP release.
But as Bill reports, the world’s No. 1 economy grew at an annualized rate of just 0.1% in the first quarter, when adjusted for inflation.
The unusually cold winter has been held out as a reason for the flat growth in the first three months of the year.
But the effects of a polar vortex weren’t all bad for US GDP growth. Fewer people headed to the mall. (Spending on goods fell from 2.9% to 0.4%, quarter over quarter.) But utility bills went up, as people cranked up the heat at home. (Spending on housing and utilities rose 6%, quarter over quarter.)
The extreme cold perhaps had most effect on the housing market.
Real final sales (which takes account of inventory growth) rose just 0.7%, quarter over quarter. And residential investment – stuff like homebuilding and renovations – fell an annualized -5.7%.
But these are minor details. What you want to keep an eye on is the big trend. And it doesn’t take a PhD in economics to look at the chart above and see that the trend is for lower real annual economic growth.
This doesn’t look like the kind of environment that is going to be kind to corporate profits. Strip out the tailwinds of QE and ZIRP… and it could prompt a major rethink by US stock market bulls.
