As kids we were taught that if we didn't get the fundamentals correct, we would fail when it came time to perform. If we spent the summer at the pool instead of practicing left-handed layups, or fielding grounders at the hot corner, that kid across town would eat our lunch come time for the District Championships. John Wooden, Pete Rose, and Carli Lloyd have taught us that without strong fundamentals, when the pressure is on, we will eventually fail.
Today our focus on identify politics, socialism, and how many Instagram followers we can build has caused us to take our eye off the economic fundamentals. Remember JAM VIEWS members, when the money doesn't work nothing else matters. The scary part today is that momentum, kinetic energy, just seems to keep this reality TV show going until one day it doesn't. Let's take a current inventory of broken fundamentals:
1. Negative interest rates in Europe are such a "no big deal" now that the European Central Bank is moving to cut interest rates even further and to reinitiate quantitative easing (flooding more money into the system). As a reminder, 40% of global bonds yield less than 1% and over $13 trillion (yes, trillion) of bonds have negative interest rates (you pay them to hold your money!). I frequently get the question, "Why would anyone do that?" The paradoxical answer is that U.S. and global pensions, insurers, and financial institutions have so much money (especially with the extra $12 trillion printed out of thin air by the U.S. in 2008) that they have to put it somewhere. Their legal, regulatory, and liquidity constraints, along with their own Investment Policy Statements, mandate that a significant percentage of their portfolio be allocated in government and corporate AA and AAA-rated securities. Therefore, it is mandated that they make irrational investment decisions because of previous irrational decisions against the fundamentals - technocrats and corporate lemmings all going with the flow, rationalizing to a farmer in Iowa that this is how it has to be.
2. The U.S. Federal Reserve just lowered interest rates in fear of the U.S. economy beginning to stall, trade war impacts, and the dollar strengthening against other currencies "because they are lowering rates also." Whatever happened to the U.S. Federal Reserve's self-imposed mandate to focus on stable currency and 2% inflation (as wrong as that may be)? Why did the Federal Reserve raise interest rates last December when the stock market was tanking, credit markets were seizing up, and inflation expectations were falling, only to now lower rates this week while equities are at record new highs and wages in June grew at 5.5% year over year according to the Bureau of Economic Analysis (BEA)? Remember another JAM VIEWS message - the government technocrats have no idea what they are doing and never have. This is why, in relation to currency, we should follow the advice of Steve Forbes and likely new Fed board nominee, Judy Shelton, and return to a gold standard - or some fixed standard - to take control out of the hands of ivy-league elitists who have mucked it up for decades.
3. Speaking of the gold standard, always discard Washington's rationales for leaving the standard, and know that it simply was about printing more money. If we had fixed weights and measures, we could not print more money and just pray that the rest of the world keeps following the full faith and credit of the U.S. dollar. The current Administration has done a Herculean job of implementing fiscal changes back in the direction of Adam Smith and free markets. Not only are wages up significantly for the 99%, but the personal savings rate was also revised upward to 8.1%, meaning that we all are not over-leveraging ourselves as in other bubble economies. Employee compensation has increased 42% more during the last two years than in 2015 and 2016 (those are huge numbers for real people). EMPLOYEE compensation grew by nearly $1 trillion between 2016 and 2018. Wow.
Yet, remember in your business fundamentals course on income and liabilities when they explained that all of the income growth in the world won't help if you are spending even more? Remember when your parents fought all night about the checkbook and claimed they could never get ahead even with three jobs unless they cut the spending? With all "thy getting" we are now getting, we are still spending even more. Why can't we make politicians stop spending our money? Why do we allow them to just print more debt out of thin air to fund their "compromises?" Are we that distracted and apathetic to try to understand, to try and stop them? Because of the tax cuts and regulation cuts, Federal tax revenue is up (don't let the misinformed tell you otherwise), yet spending is also way up. Who will cut entitlements? The rest is down in the noise. Understand the fundamentals.
4. Finally, there are so many signs that, unless we get back to economic fundamentals, that kid across town is about ready to embarrass us in the District Championships. This year, gold has risen 10% against the U.S. dollar, and alternative currencies like bitcoin are up 160% against the dollar. Are the increases in these alternative stores of wealth signaling a crisis in confidence in fiat currencies (paper money)? When will the punch bowl be taken away?
When it happens, as it always has and always will, let's hope everyone has studied the last seventy JAM VIEWS posts and are prepared for the next Black Swan. With tens of trillions of more dollars in the system (M1, M2 & that stuff) ready to ignite at the first hint of inflation, as well as over a quadrillion dollars (yes, quadrillion) of derivatives now trading in the financial markets (both tremendously more than in 2008), the "impact" from a hiccup will make 2008 look like a rounding error. And, wait until we add in free college for everyone, free medical for everyone in the Western Hemisphere, and turn all corporations into government agencies. Check please!
May we stay diligent this week, seek education and understanding, and find our own truths. Have a great week!
"Give me a lever long enough, and I'll move the world." - Archimedes
** For more information on Jeff's Books, Blog, and Legal Challenge, please visit www.jeffmartinovich.com.
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