Friday, September 04, 2020

Are we on the verge of economic hurt?

I had this one stored "for later," but maybe I'd better rush it out, given the latest market news. Economists keep reminding us that Wall Street and Main Street are different and equity markets have little to do with supermarkets. All the more so as liquidity gets pumped into the rentier caste, first by two generations of Supply Side voodoo and recently by a “stimulus” whose main beneficiaries are banks and aristocracies. 

Oh, some companies’ values are still someone tied to their vigorous profitability. Over the last 7 years, the total market cap of Facebook, Apple, Amazon, Microsoft and Google has grown from$1.2 trillion to near $4 trillion in mid-2018 to $6.5 trillion today. These 5 stocks now represent 23.3% of the S&P 500. Can anyone smell a bubble? With terrified investor caste folks seeking safe places to stash their trillions in stimulus liquidity pumped by Congress and the Fed – far more than sent to workers(?) -  P/E (Price to Earnings) ratios are heading toward levels not seen since the 90s tech bubble.
Does this look un-sustainable? Of course it is. Yet, according to Phil’s Stock World, you may not want to short immediately. See this chart showing how “animal spirits” can propel P/E all the way to 50. In both cases, this boom/bust cycle - fitting projections made by both Adam Smith and Karl Marx - was propelled by Supply Side voodoo and deliberately GOP-arranged ripoffs by an insatiable cheater oligarchy who seem bent on wrecking the value and reputation of capital economics.

It wasn’t like this under the Rooseveltean social contract. Chastened by the bungled, greed economics of the 1920s, many of America’s rich cooperated with FDR in emphasizing the working class, if only for their own survival. Joe Kennedy was said to have quipped: “I’d rather lose half my great wealth to help a healthy middle class than lose it all to revolution.” And let’s be clear, the Marxist theoreticians were boggle and blown away to see ‘capitalists’ cooperate in such an effort, to bring the working class into the middle class.

But let’s get cold-blooded practical about this. There is one economic metric that almost never gets mentioned, that is the absolutely vital measure of our health. It has been driven down near zero by today’s short-sighted mavens of capitalism. But if we bring it back up, a flat-fair-free-creative market economy that inludes us all may yet be saved.

== Money Velocity ==

The covid crisis has many dire repercussions. But there’s "another pitfall: a decrease in the velocity of money. Out-of-work citizens around the globe cannot afford to spend on extraneous purchases, particularly if/when individual stimulus paychecks run out. From vacation spending to new car sales, this is already increasingly apparent for a variety of obvious reasons. Long-term, however, what happens when demand for real estate and goods begins to drop out?

The smartest money people… no anti-capitalism ravers, they! … are discussing this with deep worry. So let’s focus on “the velocity of money, at its lowest level since the 4th quarter of 1971, roughly 50 years ago. The velocity of M2 (another MV metric) is even worse, at its lowest level since measurements began.”

“These are longer-term trends, based on the ratio of nominal GDP to the money stocks, but they will need to be bucked if healthy economies are to be revived. The faster drops during the dot-com burst and the '08 financial crisis help to show why the current precipitous drop is not favorable for revenue outlooks."

Money Velocity is about how many times a dollar passes from an employer to a worker to the grocery store to the cashier, to the barber, to the janitor, to the janitor’s car payments… each such dollar doing huge amounts of work.

Meanwhile each dollar that goes to a rich person? A few do what Supply Side predicted, investing it in new factories and new products (‘supply’). Yet a few did that. Very few.

In fact, Adam Smith himself wrote in 1776 that most of the rich don’t do that!  Instead, they pour any new money into rent-seeking or “rentier” assets or into gambling dens like real estate and commodities and stock markets, following – and helping pump – the latest bubble. Sure, a few yacht-makers pay some workers, not enough to hike money velocity…

… nowhere near as much as, say, the “infrastructure Investments” that both parties have talked about for decades, that would send MV rising, at last. See below.

== How to get money flowing? Just print more? ==

Both Congress and the Fed have lately poured trillions into the economy, to prevent a covid-triggered depression. And yes, those dollars slosh around. Liquidity, right? Only when money velocity is near zero and most of the money goes to banks who don’t lend and aristos who don’t spend, what’s the result?

Stocks skyrocket. For a while. 

Is it possible to admit the money has flowed into the wrong places?

Again, Adam Smith said oligarchs who get more money simply dump it into rentier properties or into acquiring political power and monopolies, or into gambling of various forms... all of which spend almost nothing in the real economy and zero out money velocity.

The GOP gave lip service to infrastructure investment which would have done the opposite. Indeed, that's the only (Keynsian) way out of this mess. International investment expert Evan Anderson puts it:

Indeed. I think spending on infrastructure would have been great, rather than channeling extra money into equities (indirectly, by buying up bonds, even junk bonds) and supporting banks with low interest loans that they tack a rate on and offer to the public. I find it insane that banks are making loans of our own money back to us in a crisis, all at a "highly advantageous 3% interest rate" when it's the taxpayer's damn money.

“Meanwhile, businesses will automate, landlords will evict, etc. So inequality will skyrocket and the smart investors will be able to pull out of a healthy new market high richer having missed the original March drop? Then retail investors will eat the next market collapse? It's a dirty game, and at the end of each thread of possibility its always the same people catching the hot potato.”

Phil - of Phil's StockWorld - is more aggressive: Marching Headlong into Earnings Season: 

"You would think this is all some kind of plot to destroy America that was set into motion by a foreign Government, setting up a puppet leader who would send America spiraling down a path of division and destruction. Nah….

"The only good news here is the same good news I predicted back when Trump was first elected – this may be the end of the Republican Party – just like Herbert Hoover in 1929-1933 led to over 20 years of Democratic rule. When Hoover was elected, the Senate had 56 Republicans and just 39 Democrats and the House had a 267-163 Republican majority and, just like they did 100 years later, they raped and looted the land and destroyed the economy and, just 4 years later, there were 59 Democratic Senators and just 36 Republicans and, in the House, there were 313 Democrats and just 117 Republicans and, by 1937, Republicans almost qualified for endangered species protection with only 17 remaining GOP Senators and just 89 House Members."

Especially if Biden & co. Are able to communicate:

-- that the “Green Energy and Buy American and Infrastructure” combo he announced is exactly the way to address several problems at the same time, in overlapping ways.

-- That getting money velocity back up and saving Main Street is the only way the rich will save themselves, by making equity bubble values actually real… and forestalling/preventing revolution.

-- That only Democrats are ever fiscally responsible, almost never Republicans… and I will take wagers on that.

-- That once the treason and cheating are finished, wiped out, we can get back to being a dynamic, scientific, honest, adult society that argues fairly, based on facts, and encourages both cooperation and flat-fair-creative competition. But that will only happen if…

== Sorry, it will take one thing ==

The Putin-Treason Party must be rendered extinct, like the Whigs and Confederacy. The Blue Coalition must hold together, to do that. Long enough to accomplish the 31 tremendously important things that I list here.  

Don't worry about single party rule, after that. The Dems will then split in two. They never stick together longer than two years! The Bernie-AOC wing will do their thing and while the other half of the dems will welcome any of today's Republicans who can shake off their Foxite hallucinatory fever. That new party will be all about science and justice and wiping out prejudice while fostering competitive-transparent markets.

So you RASRs out there… there will be a home for you, someday, if you shake off this confederate fever. And if you don’t? Then in the words of our former governor Arnold, who has chosen to stand up for us all: “to hell with you.”

== And now… this ==

Because it is now legal for banks to engage in gambling with depositors’ money, we get this travesty: “Using Bank Deposits, JPMorgan Chase Lost $3.2 Billion Trading Stocks and Credit Derivatives in First Quarter.”

And MAGAs actually think they should hate smart people instead of such oligarchic ripoff artists.


scidata said...

Response to MAGA from 1776:

By means of glasses, hotbeds, and hotwalls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and burgundy in Scotland? - The Wealth of Nations

Larry Hart said...

I posted a response to Darrell E about racism under the last comments before noticing the "onward". Check it out if you'd like.

Larry Hart said...

Trump apparently tweeted that he "won't allow" Stars and Stripes to be shut down, so we'll see how that turns out.

Tony Fisk said...

I think Trump's flailing: having realised he picked on the wrong guys...

Ever since I read Flannery's planetary history "Here on Earth", I've been fascinated by the analogy he drew between mammoths and the rich sub-arctic ecosystem they enabled, and bankers controlling the velocity of money.

Neolithic invaders make good stand-ins for corporate raiders.

I think there's a good clifi story to be made of this.

TCB said...

"Trump apparently tweeted that he "won't allow" Stars and Stripes to be shut down, so we'll see how that turns out."

Yeah, right. It was only his idea in the first place (unless it was Putin's).

Alfred Differ said...

This topic comes around now and then and I usually prefer to leave it alone. Not the money velocity thing. I largely agree that low money velocity is a problem. I worry a bit that everything might not be counted correctly since the nature of the economy has changed over the decades. In principle, though, higher money velocity (up to a point) is healthy. Up to a point. If it's too high, I worry people aren't saving for their future needs when they can't generate the income they could at their prime. Still... very low is bad.

Because of the equity market gyration in the last couple days and the frenzy of the last few weeks, though, I think I should say something.

1. Any person managing where their IRA or 401(K) money goes that pays attention to individual stocks knows the FANNG stocks are far from being secure places to stash your cash. They do NOT qualify, therefore, for rentier-class purchase. For example, AAPL right now has a market cap of $2.1T, easily trades 100M shares daily, has quarterly revenues that usually clear the $50B hurdle, but has a 5-year Beta of 1.3. A beta of 1.0 means the stock is about as volatile as the market is, so AAPL is noticeably more volatile. To make matters worse, its annual dividend is 0.68%. That is NOT what rentier-class investor buy. Far from it. They want principle preserving assets that deliver a decent return with near zero risk of that return changing.

All the star equities on the NASDAQ are like this to some degree. High beta means higher chance of principle growth… and principle loss. These are the casino bets people make if they don't understand anything about the underlying company. For example, consider SKWS with a tiny market cap of $23.2B, beta of 1.2, dividend yield recently increased to 1.43%, quarterly revenues that cleared $1B a couple times in the last five years, but have been trending down the last few years, and a price curve that matches many other tech companies. Worth the risk? Kinda depends on what they do, right? (Not so if you are a casino player.) Turns out they depend heavily on AAPL for revenue. If you own an iPhone, you probably have something they made. If you are a foolish rentier, you'll put your money here for the dividend, but your children might not inherit much of anything if you do. Still… the forard P/E is around 20. Not bad by comparison.

Alfred Differ said...


2. What exactly are rent seekers seeking? Ask Piketty. He nails it. Low volatility income returns that beat inflation+GDP growth. Pretty simple. Where are those assets? They are NOT in the equity markets. The $2.1T market cap for AAPL seems gigantic, but that is just grains of sand on the beach compared to what goes on in the bond market. How does the US fund its deficits? By selling 'bonds' on the bond market. How does your electric power utility fund a new generation facility? Bonds. How do mortgage companies keep securing mortgages year after year? They sell the revenues from older ones as bonds… or sell the mortgages to people who do.

Bonds are where the largest piles of money are found.

2a) Where did the market meltdown a decade ago start? In the derivative assets people constructed as bonds.
2b) Where is money raised by lenders for borrowers? Go home if your first thought was savings accounts.

3. Bonds promise a relatively small (generally) fixed return. Give me $X now and I'll give you $X+ in three years. There are many kinds of bonds that alter many expectations, but the general idea is fixed-return and fixed-time frame. While the bond lives, though, it can be traded at a different price than the original buyer paid. In general, though, they return a small amount + principle in the future in return for a large principle now. If you want to make a lot of money, you have to risk a lot of money. Way more money than you'll earn usually. WAY more. [If you own a house you already know how this works. Just imagine being on the other side of the mortgage.]

Now… think about what a disaster the last meltdown was and the fact that it started in the bond market where the rentiers actually show up. They got crushed when their principle evaporated in illiquid assets. They HATE that, but they deserved it. Creditors is what they actually are and they lent their money stupidly. They got eaten alive by the sharks running the financial companies who had nothing to lose of their own.

Bubbles certainly do happen in the equity markets. They are really painful when they pop. However, most rentiers get by largely untouched. Bond markets will gyrate when equity markets do, but not as much. They simply have a different beta. The bond market isn't for the casino players. It is for the casino owners.

TCB said...

Douglas Rushkoff says The Privileged Have Entered Their Escape Pods

I can’t help but see the dismantling of the Post Office as a last-ditch attempt to keep the majority from piercing the bubbles of digital privilege through something as simple as voting. Climb to safety and then pull the ladder up after ourselves. No more voting, no more subsidized delivery of alternative journalism (that was the original constitutional purpose for a fully funded post office). So much the better for the algorithms streaming us the picture of the world we want to see, uncorrupted by imagery of what’s really happening out there. (And if it does come through, just swipe left, and the algorithms will know never to interrupt your dream state with such real news again.)

Alfred Differ said...

My final comment has to do with a shift of perspective. Instead of looking at asset bubbles strictly in terms of particular assets, one should also be looking at the impact they have on the investment accounts of individual investors. It's one thing for an asset to go parabolic. It's quite another for our accounts to do it.

1. If your account's trend line tracks like a typical asset bubble, you are certainly caught up in the hype somewhere with too much invested in high volatility stuff. Smack yourself a few times, sell most everything, and then buy back in using index funds run by people who understand better than you.

2. If you want to take a risk on a potential bubble, plan on losing it all. Seriously. You probably will. The House usually wins. It's a sucker bet. You're gonna do it anyway? Okay. Don't risk much. Don't punish yourself later for not risking more just because you got lucky this time.

3. Watch your equity account trend line. If it shows a general drift upward, then your approach probably matches the ground truth out there. In the US, there is more money flowing into equity markets than there is stuff to buy most of the time. Sometimes the difference is large. When Supply < Demand... prices go up. Don't expect it to be steady, though. If you go with index investing, your beta should be near 1.0.

4. Don't be afraid to get out occasionally. You might miss an uptrend, but you might miss the stampede for the door. Don't watch the news channels to detect the stampede though. It's already too late by the time they report it. Watch your friends and neighbors. If they seem to behave stupidly, maybe they are behaving stupidly.

I posted on my own blog a trend line for about half my retirement money over the last couple years after removing $ amounts so you can see what I'm trying to say. I occasionally buy into potential asset bubbles and then get out again. Sometimes I win, sometimes I loose, but the trend is mostly the general curve of the market. I'm happy enough with it as it is.

Anonymous said...

Big YES to all. I know my (trivial, but perhaps representative) contribution to Money Velocity has collapsed since March, when I went into fairly strong Isolation. But the big Bubbles were in place well before that; I've been smelling them for years. Even more to the point, I strongly agree that Infrastructure investment is the best (if not only) way for the USA to get out of this hole. I prefer to call it "Green New Deal", but the name doesn't matter, the action does. But whatever rump GOP remains after the elections (yeah, I'm kinda faking optimism there) will squeal "how are we going to pay for it"; I just hope Biden can just tell them to STFU.

- elkern

david morris said...

"Don't worry about single party rule"

In the words of a spoiled tennis brat, you can not be serious".

Russell Osterlund said...

Here is an idea:

A way that Biden can "troll" Unobama the AHole would be to wear a dark blue suit, white shirt, and red tie for the debates - a nice visual contrast.

I wonder how this would play to voters.

Larry Hart said...

TCB quoting:

The Privileged Have Entered Their Escape Pods

Maybe that's the way to get them into the Golgafrinchan B-Ark. Sort of a self-Rapture.

Lorraine said...

We're on the verge of a world of hurt, easily a lost decade, probably a lost generation, in terms of career opportunities and therefore dignity in life.

We're already in a state of Depression. President Biden has two choices, he can be the next Hoover by governing in a way consistent with his political career so far, basically as a DLC Democrat, or he can be the next F. Roosevelt, and tell the deficit hawks to go <strike>f</strike>get bent.

David Brin said...

Very passionate, Lorraine. Alas, your position is utterly, utterly contrary to historical fact in all ways. "DLC Democrat" is a term used by our enemies to split our coalition and I defy you to support it with a scintilla of fact.

Before you even try, may I suggest actually knowing something? Yopu might start here.

Tim H. said...

From my perspective "DLC Democrat" merely describes the over reaction the 1972 election, but that seems to be relaxing somewhat, quite unlike the (Taxidermied!) GOP's "FDR derangement".
Just read an old essay by the late David Graeber:

Capitalism & the managerial class need some tweaking so they may continue to serve us.

Kal Kallevig said...

@Tim H

Tweaking may not be enough.

Take it From Us Survivors of Authoritarianism — Trump is Preparing to End Democracy For Good

TCB said...

How the CIA used Fake News to install a fascist government in Guatemala in 1954. And how the Russians are using that playbook here, today. A VERY detailed 7 part article with amazing quantities of surviving documentation.

The United States was not at war with Guatemala in 1954. But the Boston-based conglomerate known as the United Fruit Company was at war with President Árbenz.

United Fruit (also known as UFCO) had been cheating on its taxes for years, lying to the Guatemalan government about the value of its banana plantations and the hundreds of thousands of acres of unused land the company was sitting on. Now that Árbenz had passed an agrarian reform bill (similar to those that had in decades past allowed countries like Ireland, Colombia and Canada to break agricultural monopolies and create more competition), Guatemala was buying back untilled land for the value that companies like UFCO had reported on its tax bill. UFCO was being forced to sleep in the bed they’d made, and they were pissed.

If only someone could get rid of Árbenz.

The most powerful pair of brothers in the United States, Secretary of State John Foster Dulles and CIA Director Allen Dulles, were not legally allowed to do that sort of thing. But they wanted to. Both were UFCO shareholders and advocates, having worked for the firm for many years. But in a time of peace, well, doing anything more aggressive than writing angry letters would be illegal.

Sometimes, I say sometimes, in the middle of the night, I think the world is some sort of psychic arena in which karma is as real as gravity, and eventually our sins are carved upon us in the most exquisite detail.

TCB said...

I really like the Joe Biden who yells at George Schultz for making excuses about apartheid.

David Brin said...

TCB thanks for that. Tell those who ask "What happened to this Joe Biden?"that the first black president of the United States chose him to be at his side. Then ask: Will you bet me whether you have, across all the last 30 years, done as much for justice as he did in any random week?

gregory byshenk said...

Lorraine said...
President Biden has two choices, he can be the next Hoover by governing in a way consistent with his political career so far, basically as a DLC Democrat, or he can be the next F. Roosevelt, and tell the deficit hawks to go [...] get bent.

To anyone who thinks like this I would say - just as I do to my other American friends: focus on the Congress. What Biden would do as president is dependent upon the Congress. The Obama administration was hampered partly by their own caution, but much more so by what they could hope to get through Congress.

If Congress sends a 'Green New Deal' to Biden's desk, do you think he will veto it? Medicare expansion? Minimum wage increase? Expansion in public housing? Voting Rights Act? I would put money on 'no' in all these cases.

But any such promises from a candidate are worthless if they are things that won't get through Congress.

If you are worried about how many of the Democrats' plans will be enacted, then find a Congressional - or better yet Senate - race to work for. Because that is what will make the difference.

Larry Hart said...

On Stonekettle's Twitter feed:

I often wonder why they try so hard to avoid the charge of racism. After all, wasn’t Trump elected to end the age of political correctness and “tell it like it is”? Why not just own their white supremacism?

How did I never notice this before? You can't spell "supremacism" without "racism"

Larry Hart said...

gregory byshenk:

To anyone who thinks like this I would say - just as I do to my other American friends: focus on the Congress. What Biden would do as president is dependent upon the Congress. The Obama administration was hampered partly by their own caution, but much more so by what they could hope to get through Congress.

I've been singing that song for years now. Every time progressive Senators give up their seats to run for president, I cringe, because we need them in the Senate more than we need them in the White House. At least Bernie Sanders didn't leave the Senate when he ran.

Newt Gingrich was being a dick, but he was strategically correct when he was asked in 2012 why he supported Mitt Romney with whom he disagreed on many issues. Gingrich retorted that what they needed from Romney was that he had four fingers and a thumb with which he'd sign legislation. The same goes for Democrats.

A.F. Rey said...

There is an idea I've been kicking around for a few weeks now, but haven't figured out a way to test it.

Is it possible that Russia is bouying the stock market for Trump? Would a nation-state be able to use it ability to print money to buy stocks in order to keep the stock market from falling? Might it take a while before anyone noticed the excess in cash to cause a loss in the value of the ruble, especially if they kept selling the stocks when they could? If a state decided to keep the stock market of another state artificially high, and concealed it through front companies, would it be apparent?

Alas, my one quarter of macro-economics at U.C. Santa Cruz is not enough to analyze this idea and make an educated guess at it's feasibility. Can anyone provide a good critique?

scidata said...

This Friday evening at 8pm Eastern, at my local chapter of the Royal Astronomical Society of Canada (RASC), Robert J. Sawyer will be appearing via Zoom.

David Brin said...

AFR... maybe here or there... but I doubtthe Kremlin has that kind of cash reserves. China does. But someone oughta notice. Yeah, Sheldon Adelson launders hundreds of millions through his Macao casinos. But this is lots more.

TCB said...

I was just thinking, nothing Cohen Barr Dejoy I will feel when Trump is in like Flynn behind prison Gates, surrounded by armored Carson guards like you'd Manafort, sentenced for Melania to breaking one Stone after another until you can hear his hernia go Papadopoulos. In fact, most of Trump's family should be Putin Pence for one reason or another, eating Broidy water, sleeping on the floor with no Kushner, dreaming of green Meadows they will never see again. The whole Republican Party deserves a Bannon on its Chaos and the whole Cruz should be hurled off a Ratcliffe McConnell constantly Mnuchin off the taxpayers, DeVos amounts of malfeasance, and their countless Sessions of racism and treason.

David Brin said...

TCB har. (Tho it also hertz.)



Unknown said...

Mr. Brin,

The Russian collusion has been proven false. In fact it is fact that Hillary Clinton and the majority of Obama's staff signed off on the sale of uranium to the Russians.

It is a fact Obama used several bureaucratic departments of the government as weapons against political enemies, spied on allies like Germany, listened to private citizens phone calls without any court supervision.The IRS, the NSA, The US Military, are just a few examples

Obama and the left wing blatantly lied to pass the ACA, against the will of the majority.

Caused rampant race division using false narratives much like you are using. Every race has been slaves, every race has owned slaves, no one is responsible for what their ancestors did. Not one minority in this country is not over privileged, able to buy , go, do, receive anything by the same rules the majority follows. hint the rules are the same for all Americans.

Oligarchies? Really? You do realize that is rule by military around a central leader? That is not happening now anywhere in our country. What is happening is a rise of socialists minorities who want government control of every facet of our lives.

You are simply a misled follower or maybe just a common liar.

I suggest you read : The Gulag Archipelago 1918–1956 (Abridged)
by Aleksandr Solzhenitsyn.

and possibly

The God That Failed
by Richard Crossman (Editor), Richard Wright, Arthur Koestler (contributor), Ignazio Silone (contributor), Louis Fischer (contributor), Stephen Spender

I would have thought with your imagination, as well as education you would be more intelligent, it seems you are more indoctrinated.

I enjoyed your stories, I repurchased Sun diver yesterday for my kindle, deleted it today after reading the insanity in the foreword.

Seek help, your kind are killing people across the country, it is sickening.

David Brin said...

Dear Unknown troll. You still yammer about Clinton not vetoing Russian private investment in a Canadian company that owned some unranium ores in Canada? Oh you are so desperate. As you desperately try to pretend Putin - who called the fall of the USSR 'history's worst tragedy" is NOT still the same commissar KGB agent he always was.

Standard demand: show the guts to offer real stakes for wagers on any of these foxite-putin-KGB talking points. Like which party fosters entrepreneurship or fiscal responsibility. Or any of the drivel you just posted If you haven't the cojones to back them up, all they are is hot air amid your cult's all-out war against every fact-using profession, from science, teaching, medicine and law to the men & women you now curse as "deep state" in intel, the FBI, and military officer corps, who saved us from Hitler, Stalin, Mao and bin Laden.
Blowhards. Escrow real stakes with a reputable attorney and actually BET on all the proved things that you call "hoaxes," like ocean acidification. Let’s pick a dozen (randomly!) of Trump’s 24000 registered lies and bet over them!

Or all the hoaxes you claim to be true, like the Soros thing. Or 25 years of absolutely fruitless "clinton investigations". If you're so sure of your Hannity incantations, offer bets and take my money!

Oh, but you won't. You know facts are the enemy of your cult.
But every time you chicken out from offering cash wagers, look in a mirror and hear the whispered word... "coward."