Monday, May 4, 2020

Welcome To 1930

Depressionary economy, 30+ million unemployed, Herbert Hoover lying constantly, escalating trade war, record wealth inequality, fiscal multiplier of zero, record low interest rates, fake retracement rally...what's not to like?

It's important to note that all of the above has been tried before, the year was 1930 and what followed was a 90% decline in stocks over the next two years. Meaning that a lot of Trump supporters are going to have to go under the bus to get him re-elected. And that's ok with him...

Speaking of 1930, the world's greatest investor, Warren Buffett, turns 90 this year. Meaning that his entire lifetime bookended the most prosperous period in world history. How is that for sheer luck?

Trump's virtual town hall meeting last night was a showcase of exceptional lying. On the economy he said that going into this fiasco he had the best economy in U.S. history, the best economy in the world, and the best economy in the history of the world. None of which is true.

In the modern era, the U.S. economy peaked twenty years ago with respect to labor share of GDP, GDP growth, quality of jobs, and fiscal surplus. At any other time in history, Trump's 2019 Ponzi economy consisting of 4% of GDP deficit and 2% growth, would have been called a recession. That's before liars took over the White House. 

Now of course, Herbert Hoover has an even bigger hole to dig himself out of ahead of the election, which is why the lying has been ratcheted up to FULL BURIAL mode. As in, believe these lies at your own peril. The political impasse surrounding the next round of failed stimulus continues into this week. As I've pointed out, the fiscal multiplier due to social distancing mode, is the limit approaching zero. Meaning these bailouts have zero impact on GDP - all of the money is going to pay utility bills and credit cards. No one is out there spending, and all indications are that this "re-opening" will be a clusterfuck. Warren Buffett collapsed airline stocks today with his comments over the weekend indicating that air travel will not return to 2019 levels any time in the foreseeable future. 

He also warned that the Fed has done a marvelous job of manipulating the stock market to a level that is entirely outside the realm of reality. Which is why stocks are now inversely correlated with GDP for the first time in U.S. history, as Hugh Hendry warned so eloquently in late 2014:

"The worse the reality of the economy becomes, the more we take on the reflexive belief in further and dramatic monetary expansion and the more attractive the stock market looks."

Which is where this all gets interesting, because the U.S. is now going where other central banks have already gone before. As to the all-important question of whether or not extreme QE can generate reflation, we only have 30 years of Japan's failed experience as a guide. JGBs have been glued to the zero bound for over a DECADE straight. AND as for this newfound Idiocratic belief that the Fed will buy stocks and keep markets levitated, both Japan and China have tried that gambit and watched it fail disastrously.

Which gets us back to Hugh Hendry's ill-fated gamble on imagined realities 2015 which cost him his hedge fund, and which is eerily reminiscent to the magical thinking in the U.S. today:

"China is set to record its weakest growth in GDP in 25 years. Yet it seems to have entered a bull market and may be where we deploy much more of our risk capital next year. That's because the recent exuberant run up in onshore Chinese equities seems to me to amply demonstrate the power of imagined realities. "

Per imagined realities 2020, the U.S. is set to record its weakest growth in 90 years. And yet the recent exuberant run up in stocks amply demonstrates the power of imagined realities.

The circled area is where the Chinese government started buying stocks. Which took place just before the Chinese meltdown blew up the global asset markets. What I call "Smash Crash":

As I've said before, we must never under-estimate how dumb today's pundits, leaders and sheeple will become. There is NO LIMIT to the magical buffoonery they MUST believe.

Whereas fake optimism worked for over a decade straight, now it is LETHAL for health AND wealth.

Today's economists are looking at stale data that is weeks and months old to predict the future. The White House is lying constantly. Wall Street is conjuring up fake-believe earnings estimates even as the majority of companies provide no forward guidance.

I believe that gasoline demand at the service station pump level is a good proxy for true economic activity.

Here we see gasoline demand going back 28 years:

If Herbert Hoover drops the hammer on China, this gong show will explode in every direction.

“In my personal opinion, we should drop the fucking hammer on them. Stop being such pussies,” a senior White House official told me, speaking on condition of anonymity because they weren’t authorized to disclose internal deliberations"

The ideas reportedly under consideration include stripping China of its “sovereign immunity” status under US law — and cancelling some or all of the interest payments on the more than $1 trillion in debt the US owes to China (the senior White House official I spoke to said they favor the latter option)."

Can you imagine if the U.S. defaults on $1 trillion of debt? That is the thermonuclear option for global credit markets.