Friday, May 1, 2020

The Lord Of The Flies

America's social safety net is non-existent. I predict that extreme deflation will implode ALL asset values. Before we hit rock bottom...

The massive economic lie known as Globalization could only persist this long due to the pernicious will and ability to overlook the relentless exploitation of global poverty. 

As we know this blog is U.S.-centric. Therefore when I discuss deflation I am referring to dollar-based deflation. I have no doubt that Bitcoins, gold and other assets may rise relative to other currencies during this period of extreme deflation.

Among those discussing deflation versus inflation in recent days are Peter Schiff, Mike Shedlock, and Ed Yardeni. Schiff as always presumes hyper-inflation is imminent. Shedlock and Yardeni lean towards deflation although their level of conviction is unconvincing at best.

Not one of them mentioned the RECORD 30 million job losses to date, on the way to who knows how many by the end of this year. Today's pundits are still focused on the demand collapse from the lockdown and social distancing while ignoring the crater that has been created in the real economy. Which is why Shedlock lays down his standard challenge to anyone who can prove why low prices are bad for the economy:

"Of all the widely believed but patently false economic beliefs is the absurd notion that falling consumer prices are bad for the economy and something must be done about them"

Shedlock and most other people are of the well-conditioned belief that collapsing prices of everything are a good thing. However understanding the downsides of extreme deflation are not nearly as complicated as some people make it. If you are someone whose income is  going up while prices are going down, then deflation is good. For you. If on the other hand you are someone whose income is non-existent due to job loss during a period of collapsing prices then deflation is bad. For example, negative oil prices arriving during a nascent economic depression are bad for oil companies and oil workers. However, they are good for independently wealthy "consumers". The kind of which can be found living with the Sasquatch. If however collapsed oil prices arrive during a time when the neighbourhood kids are dumpster diving your trash cans, then they could be viewed as a net negative.

I think we're all on the same page now. One's views of the benefits of deflation are entirely a matter of perspective. Ignoring the plight of others is the best way to understand the joys of deflation.

Getting back to the problem at hand, when a decade worth of job creation evaporates in a mere four weeks and the Monetary and Fiscal policy tools are already maxed out on an historically unprecedented basis, then it's a recipe for unmitigated disaster. Until we cross the Rubicon from socialism for the rich to socialism for everyone else, EVERYTHING will go down in dollar value. These bailouts so far have had zero effect on the real economy . Most of the bailout money is going towards debt service, which means it will have ZERO impact on GDP. 

One of the things Congress did with their recent stimulus bill was to make it easier for people to withdraw money from their 401k retirement plans to pay bills. Which is one of the reasons why they didn't shut down the stock market during the March crash. Apparently so people could use it like an ATM machine. JP Morgan estimates that stock buybacks will be down 70% in 2020. Wall Street analysts have zero visibility on earnings for this year and next. Which is why despite the declines to date, the overall stock market remains massively overvalued.

This COVID fiasco is the most deflationary event in human history without any comparison. No amount of fire hose liquidity will offset the ever growing black hole of demand. Until our politicians acknowledge that global capitalism has failed, the destruction of asset values via deflation will continue. These people and their true believers are caught between a rock and a hard place now: Allow deflation to ravage their wealth, OR allow inflation to implode their wealth. This moment is the crucible for global capitalism.

As always, the burden of this ordeal is falling on the same working class people, which is why there is no political will to make the paradigm shift to a reflationary regime change. That will require far more pain both economically and financially. And it will arrive at the nadir of extreme deflation. At which point everyone will be on the same page as to why collapsed prices are bad for a massively debt laden economy.

In summary, every low price for a consumer is an equally low price for a debt-strapped producer. The Shedlock "challenge" to prove why low consumer prices are bad, is now being put to the ultimate test:

"It’s game-over for most of the U.S. oil industry.

Prices have collapsed and storage is nearly full. The only option for many producers is to shut in their wells. That means no income. Most have considerable debt so bankruptcy is next."

Energy is the economy and oil is the most important and productive portion of energy. U.S. oil consumption is at its lowest level since 1971 when production was only about 78% of what it was in 2019. As goes oil, so goes the economy…down."

The best leading indicator we have for S&P profits, is oil: