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Jumping the Stimulus Turnstile

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Another very informative article from my good friend and strong contributor to the blog, Greg Maresca. To add to his great discussion, let me remind everyone that consumer spending makes up 70% of our country’s GDP. There many other ways to stimulate the economy and increase consumer spending at the same time i.e., tax cuts, which do not increase the deficit, but always bring in more revenue. Remember Reagan and his “Trickle Down Economics”?

 

 

 

By: G. Maresca

The COVID stimulus train has added another $1.9 trillion to its ever-growing caboose. Uncle Sam is running the nation’s treasury like a Parker Brothers’ board game. Through continuous stimulus spending, Congress, who controls the nation’s purse strings, has dismissed the burgeoning federal deficit outright.

The numbers throughout this COVID cash craze are astonishing: In just 16 months, the Federal Reserve has pumped over $9 trillion into the economy. According to Forbes, last June the U.S. accumulated more debt than in the 200-plus years from America’s founding in 1776 through 1979.

The stimulus bills have provided temporary relief but are toxic over the long-term. Nearly half of the unemployed will be paid more to stay home, while keeping unemployment artificially higher which will result in calls for more stimulus.

Economic incentives matter but handouts?

History will look back on this COVID era with disbelief that so many were bamboozled into believing that freebees were a good idea or even sustainable.

There is no real stimulus. Such semantics masks (pun intended) what is happening to the economy that resembles a Bowery wino. Government giveaways and money-printing have their inevitable effects. Stimulus checks will not grow the economy, but it will stimulate the federal debt and cause inflation.

Chetan Ahya, chief economist at Morgan Stanley, “The driving forces of inflation are already aligned, and a regime shift is underway.” Perhaps forgotten is that inflation is the most universal tax of all.

Bestowing money on those who work is scandalous because it steals from their children and grandchildren. Such fiscal policy only grows government and restricts liberty, while handcuffing small businesses – the economy’s driving force. Future generations will face burdensome taxation and cut services thanks to this intergenerational redistribution of wealth.

Stimulus spending has resulted in a higher national debt percentage of GDP than at the end of WWII and both political parties are to blame. They seem to believe that zero interest rates will last forever.

Politicians have not missed a paycheck, nor have they read the 5,600 pages of latest bill that is the handiwork of an army of aides acting on behalf of lobbyists and interest groups.

Some highlights have $750 million for border walls in Jordan, Syria, Lebanon, Egypt, Oman and Tunisia. Apparently, the only country that Congress feels should have open orders is our own. Other pork chops include $1.3 billion for the Egyptian military, $130 million for Nepal; $135 million for Burma, $34 million and $85 million for Cambodia, and $231 million to pay down the national debt of Sudan, where apparently Sudan’s debt matters more than our own.

Ten million has been allocated for gender programs in Pakistan. Rather than cash, we should send the Pakistanis the annual army of leftist gender studies graduates. Don’t forget $600 to non-American citizens and the $40 million to the closed Kennedy Center in Washington, D.C. In an insult to fiscally responsible states, $350 billion is allotted to bail out states like New York and Illinois, who run yearly deficits.

For all their self-aggrandizing rhetoric about helping those in need with additional stimulus spending, the reality is that both parties are helping themselves to excess at the expense of future Americans.

Considering what has taken place over the course of less than a year, it begs the question: Will there ever be a time when politicians won’t be “stimulating” the economy? Tax, spend, regulate, then “stimulate,” which is just another synonym for more spending.

You cannot spend yourself into prosperity.

If history tells us anything the forgotten 1920-21 economic crisis taught that sometimes the best stimulus is none at all.

Rather than expanding government, a true fiscal “stimulus” initiative would promote and support the private sector. One of the best ways of doing that would be to reduce the regulatory and tax burden on U.S. corporations and small businesses.

Paying customers are the best stimulus for any enterprise, while allowing them to keep more of the money they earn would also underscore that it is their money, not Uncle Sam’s.

Instead of forcing businesses and schools to close, while restricting our civil liberties and bribing the masses through federal handouts, open up the economy, tax less and invest our taxes into America.

Watch inflation, it’s like Murphy, always waiting for a misstep, which Trader Joe will certainly provide..

 

 

Originally posted 2021-01-30 10:50:45.

Current Events

$1.00 = $0.95

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This post may be too hard for some to swallow without some Economics background, but I consider it important enough for my followers to be prepared. I received the following from a trusted Marine brother who runs an investment business in NC. Rik and I are usually on the same page on everything “Economic” because we are both “supply siders” and also “Monetarists.” Won’t get into any Economics BS to explain what that means in layman’s terms as it would only confuse the issue more than it already is. Having said that I totally agree with the article; we are already seeing the start of it. As of this instant, my total portfolio has lost 3.56% in the last month, and I firmly believe it will continue, while inflation is sits and waits for the right time to make itself known to every American. Keep it up Joey  and we will be a bankrupt country while the FED, most of whom are not supply siders fiddle.

 

 

 

 

Your cash will lose at least 5% of its purchasing power in the next year

Posted: 24 Sep 2021 05:03 PM PDT

Earlier this week, Fed Chair Jerome Powell announced that the real yield on dollar cash and cash equivalents is likely to be -5% or less over the next 12 months. Yes, your cash balances will lose at least 5% of their purchasing power over the next year, and that’s virtually guaranteed. So what are you—and others—going to do about it?

Assumptions: This forecast of mine optimistically assumes that 1) the first Fed rate hike of 25 bps comes, as the market now expects, about a year from now, and 2) the rate of inflation slows over the next 12 months to 5% from its year-to-date rate of 5.9%. Personally, I think inflation next year likely will be higher, if only because of the delayed effect of soaring home prices on Owner’s Equivalent Rent (about one-third of the CPI), the recent end of the eviction moratorium on rents, and the continued, unprecedented expansion of the M2 money supply.

I’m a supply-sider, and that means I believe in the power of incentives. Tax something less and you will get more of it. Tax something more and you will get less of it. Erode the value of the dollar at a 5% annual rate and people will almost certainly want to hold fewer dollars than they do today.

I’m also a monetarist, and that means I believe that if the supply of dollars (e.g., M2) increases by more than the demand for dollars, higher inflation will be the result. We’ve already seen this play out over the past year: the M2 money supply has grown by more than 25% (by far an all-time record) and inflation has accelerated from less than 2% to 6-8%. Massive fiscal deficits have played an important role in this, but so has an accommodative Fed. Between the Fed and the banking system, 3 to 4 trillion dollars of extra cash were created over the past 18 months. At first that was necessary to supply the huge demand for cash the followed in the wake of the Covid shutdowns. But now that things are returning to normal, people don’t need or want that much cash. Yet the Fed continues to expand its balance sheet, and they won’t finish “tapering” their purchases of notes and bonds until the middle of next year. That means that there will be trillions of dollars of cash sitting in retail bank accounts (checking, demand deposits and savings accounts) that people will be trying to unload.

If we’re lucky, the inept and feckless Biden administration will be unable to pass its $1.5 trillion infrastructure and $3.5 trillion reconciliation bills in the next several weeks. This will lessen the pressure on the Fed to remain accommodative, but it’s not clear at all whether it will encourage the Fed to reverse course before we have a huge inflation problem on our hands. Non-supply-siders (like Powell) view an additional $5 trillion of deficit-financed spending as an unalloyed stimulus for the economy. Supply-siders view it as a virtually guaranteed way to increase government control over the economy and thereby destroy growth incentives and productivity.

Amidst all this potential gloom, there are some very encouraging signs, believe it or not. Chief among them: household net worth has soared to a new high in nominal, real, and per capita terms. Also, believe it or not, the soaring federal debt has not outpaced the rise in the wealth of the private sector.

Today’s interest rates are relative to inflation. Terribly low! In normal times, a 4-5% inflation rate would call for 5-yr Treasury yields to be at least 4-5%. yet today they are not even 1%. The incentives this creates are pernicious: holding cash and/or Treasuries implies steep losses in terms of purchasing power. That in turn erodes the demand for cash and that fuels more spending and higher inflation.

The growth of the non-currency portion of M2 (currency today is about 10% of M2). Currency in circulation—currently about $2.1 trillion—is not an inflation threat, because no one holds currency that they don’t want. The rest of M2, just over $18 trillion, is held by the public (not institutions) in banks, in the form of checking, savings, and various types of demand deposits. For many, many years M2 has grown at an annual rate of 6-7%. But beginning in March of last year, M2 growth broke all prior growth records. The non-currency portion of M2 is about 25% higher than it would have been had historical trends persisted. That means there is almost $4 trillion of “extra” money in the nation’s banks. This extra money has been created by the same banks that are holding it: banks, it should be noted, are the only ones that can create cash money. The Fed can only create bank reserves, which banks must hold to collateralize their deposits. Today banks hold far more reserves than they need, so that means they have a virtually unlimited ability to create more deposits. And they have been very busy doing this over the past 18 months.

For most of the past year I have been predicting that this huge expansion of the money supply would result in rising inflation, and so far that looks exactly like what has happened. People don’t need to hold so much of their wealth in the form of cash, so they are trying to spend it. But if the Fed and the banks don’t take steps to reduce the amount of cash, then the public’s attempts to get rid of unwanted cash can only result in higher prices, and perhaps some extra spending-related growth. It’s a classic case of too much money chasing too few goods and services. And Fed Chair Powell has just added some incentives for people to try to reduce their cash balances. He’s fanning the flames of inflation at a time when there is plenty of dry fuel lying around.

Now for some good news. The evolution of household balance sheets in the form of four major categories. The one thing that is not soaring is debt, which has increased by a mere 20% since just prior to the 2008-09 Great Recession.

With private sector debt having grown far less than total assets, households’ leverage has declined by 45% from its all-time peak in mid-2008. The public hasn’t had such a healthy balance sheet since the early 1970s (which was about the time that inflation started accelerating). Hmmm….

In inflation-adjusted terms, household net worth is at another all-time high: $142 trillion.

On a per capita and inflation-adjusted basis, the story is the same. We’ve never been richer as a society.

Total federal debt owed to the public is now about $22 trillion, or about the same as annual GDP. It hasn’t been that high since WWII. So it’s amazing that federal debt has not exploded relative to the net worth of the private sector. As I’ve shown in previous posts, the burden of all that debt is historically quite low, thanks to extraordinarily low interest rates.

Gold prices are weak today because the market is anticipating higher short-term interest rates. Gold peaked when forward interest rate expectations were at an all-time low. Why? Because super-low interest rates pose the risk of higher inflation. With the Fed now talking about raising rates (albeit sometime next year, and very slowly thereafter), gold doesn’t make as much sense because forward-looking investors are judging the risk of future inflation to be somewhat less than it was a few years ago.

 

S/F

Rik
Current Events

Making America 1979 Again

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Good Morning Gang, it’s Saturday, the day before the traditional Memorial Day, initially referred to as Decorations Day by MajGen Logan after the Civil War. Personally, I celebrate on the traditional Day, 30 May. So, I will lower my flag tomorrow morning and raise it back up at noon. Changing the day so federal workers could get another day off with pay didn’t impress me since my experience with those snakes in the grass (in the Corps, we called them “Sand Crabs”) has been  most don’t earn a day’s pay anyway. But then that’s my personal opinion and preference.

So what are the swamp creatures up to as they begin their long weekend cook out? Well, the big talking point this week has been inflation. What is that? Well simply, it is the rising cost of goods and services.  There is cost-push inflation where the cost of goods is caused by a rise in the cost of production e.g., gas. Then there is demand-pull inflation where the rise in prices is caused by an increasing demand and firms push up prices due to the shortage of goods e.g., toilet paper. LOL.

The swamp doesn’t fear inflation, just like Peanut Jimmy didn’t in the 70s, but beware folks, the signs are there, they are just being ignored.

By: G. Maresca

You do not have to be a scholar with a dollar to notice how prices are increasing. The Consumer Price Index that measures costs for goods and services increased 4.2% in April. Gas jumped 9%, while housing prices rose 17%.

The Powerball Lottery jackpot is now a tank of gas, a bag of groceries and a sheet of plywood.

A late seventies ambiance has returned with the cyber-attack on the Colonial pipeline cyber-attack and its resulting gas lines. Add to it emboldened Iranian Ayatollahs in a cooking Middle East; an increasing U.S. crime rate; a refugee crisis at the southern border, and a simmering Cold War II. The recent visit Joe and Jill Biden had with Jimmy and Roslyn Carter makes it official that the torch has been finally passed. Their photo op, if you have not seen it, is one for Ripley’s Believe it or Not.

The Carter’s even gifted to Hunter Biden their home-brewing recipe to Billy Beer.

It is time travel Democrat style and for those 41 and younger, welcome to 1979.

At least back then the music was better, and you didn’t need a second mortgage to attend a major league baseball game. Kids went to school and actually played outside, and mask wearing was strictly for Halloween.

It was also in the summer of ‘79 that Carter gave his infamous “malaise speech” about “the erosion of our confidence.” Today, Biden successfully dismantles the myth of white privilege and primacy every time he comes in contact with a microphone.

The Labor Department’s latest jobs report had employers adding only one-quarter of an anticipated one million jobs, while unemployment claims actually increased. Many are choosing not to work since being paid to stay home is now an option. Such a major disincentive to work is unprecedented and brings with it the predictable consequence of labor’s availability. With jobs plentiful combined with escalating unemployment benefits only serves to grease the rails for socialism.

Former Treasury Secretary under Bill Clinton and former head of the National Economic Council for Barack Obama, Larry Summers spoke truth to power when he warned against too much stimulus.

There is no true stimulus, only irrational leftist reasoning that justifies increased deficit spending that is endorsed by bogus good intentions that leads down a path to fiscal ruin.

No one on either side of the aisle gave Summer’s reasoning a second thought.

Biden and his Treasury Secretary Janet Yellen actually claimed, “there is no significant inflation.” Record-low interest rates coupled with a rise in prices is what happens when central banks have a surplus of money that outstrips demand. As we stifle the supply side with handouts, while printing dollars by the trillions the result is Inflation. Prudent advice to any weather forecaster is to look out the window first. Perhaps this dynamic economic duo needs to go grocery shopping and fill the gas tank before making their next inflation forecast.

In a recent press conference, Vice President Kamala Harris ignored a question about inflation with her infamous laughing crackle as she quickly walked away. Perhaps she was on her way to the southern border?

The fear of inflation is why the 10-year U.S. Treasury yield is up 80%, and the 5-year U.S. Treasury yield is up 123%.  Spending and printing comes with consequences as you cannot print your way to prosperity.

Perhaps Biden should consider surrounding the White House with an orchard since he and his economic team believe money grows on trees. The only problem would be when Biden ends up chopping down all the trees for the paper to print even more money.

When the Federal Reserve finally admits that there is too much inflation, interest rates will rise and polarize the economy followed by a toxic bout of stagflation. Such economic malaise hurts the same people that the spend and tax Biden Democrats say they want to help.

Moreover, any stock market gains will be deceiving thanks to inflation where any capital gains taxes will be a direct result of the dollar’s decline.

In 1979, the Carter coast-to-coast malaise paved the way for Ronald Reagan’s conservative reform.

History would do well to not only rhyme but repeat itself.

 

Happy Memorial Day everyone. While cooking steaks, burgers, dogs, and drinking your favorite libation, please remember the nearly 1.1 million Americans who gave their lives  so we could celebrate this day! And remember to lower you flag to half mast on which ever day you traditionally celebrate and raise it back to full staff at noon.. Semper Fi, Jim

 

 

Current Events

All Dollars and Little Sense

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Good day fellow patriots and conservatives. Haven’t posted in a few days as I have been overwhelmed with tales from the swamp creatures and their devious ways. The trial is over, and as we expected he was was found guilty, albeit with Joe and the b**ch from california ( I refuse to capitalize the name of that foreign land) spouting off at the mouth there is lots of ammo for an appeal. Let’s keep praying for it to happen..

And of course the House voted to make DC a state. Oh isn’t that great two more leftist senators and one congressman for the swamp. I don’t hold out much hope from the senate to strike it down; too many leftist republicans in there. So, how will we arrange the stars in the flag?  That will be fun to watch.

From my tone you may wonder what is going on. Well at my ripe age, I refuse to get excited about what happens. Oh, don’t get me wrong. When the war comes, I shall man the lines as I have done before, and if anyone offers me a billet such as a battalion commander, I shall rise to the occasion, as I am sure you will as well.

Had lunch today with two old fellow retired colonels with whom I have served several times, but not seen them in a while — I really don’t know why since we are all retired.  Joining us was another local retired colonel and a retired captain. Of course the items of discussion was a few war stories and lots about the swamp. It’s always a good time when Marine brothers can get together — I miss that.

Okay, what’s the post? Well , as many of you know, I am an Economist by education and full time hobby. I enjoy playing in the market. Today’s post came from my old friend and contributor , Eric Maresca. As a market player I found the article interesting and a dire warning to those who do as I do. Read and learn

By Eric Maresca

The stock market bull rally that got underway after a giant fall last February and ushered in the COVID era has been relentless. Who would believe record highs were even possible after such a swift drop during a pandemic, followed by political turmoil and civil chaos.

After the Federal Reserve cut interest rates again and went on a printing spree pumping trillions into the economy through three stimulus packages, the benchmark S&P 500 and the Dow Jones Industrial Average were catapulted to virgin territory. Likewise, we are in the midst of a cryptocurrency revolution where their hourly values run like an amusement park roller coaster.

With the M1 Money supply – the amount of liquidity available for spending – also at an all-time high at $18.4 trillion, the potential for one of the biggest economic booms in U.S. history is primed.

This optimism has predicted a strong 2021 second half.

The larger concern is 2022 and beyond.

Historically, long periods of low interest rates combined with a growing federal debt is no yellow brick road to Oz. You cannot ignore the laws of physics, gravity, or economics, as the government is spending itself into oblivion. From 2010 to 2019, the aggregate GDP growth was nearly the same Uncle Sam spent in COVID stimulus.

With so much stimulus finding their way to Wall Street, stock prices have been inflated. To underscore how pricey stocks are all you have to do is to juxtapose the price-to-earnings multiple at 31.5 and the price-to-sales at 2.9. At the peak of the dot-com bubble in March 2000, the price-to-earnings ratio was 29 and the price-to-sales ratio at 2.3. In addition, the stock market capitalization-to-GDP ratio that measures markets relative to the economy that peaked in 2000 at 140%, stands today at 190%.

Can you whisper bubble? Such a pop would result in a fiscal 9/11 and catch many nascent investors napping. Many were too young to recall the dot-com bubble burst over a generation ago and will pay dearly.

As the stock market rolls along, so does the national deficit. In fact, it seems to be about the only thing that is mushrooming faster. This should concern plenty, but along the D.C. Beltway such matters are dismissed.

 Stock trading has drawn plenty of new players armed with their “stimmy.” Rather, than paying bills, buying necessities, or paying down their debts, these emerging investors have turned day trading into gamification. With success they gain confidence and buy more shares, but the market’s present trajectory won’t last. When it drops many will see it as a fire-sale opportunity.

The stock app at center stage is aptly named Robinhood having taken its namesake from the English Democrat who robbed from the rich and redistributed their wealth. In this stimulus era of Robinhood fever and GameStop, why waste time researching good companies at reasonable prices, and then waiting years for returns to compound?

Apps like Robinhood, SoFi, Webull, and Public.com can be fun, but addictive, and a bookkeeping nightmare.

Such internet trading platforms make basic tax-abating strategies difficult to implement. Buying and selling stocks by the lot can lower your tax bill by choosing which shares to sell. However, selling specific lots are difficult or impossible to do online as sales are based on a first-in-first-out (FIFO) basis, where the oldest shares are sold first.

These time-honored tactics may be the least of their concerns when the market turns because it will. Once the public buys in, time is short and the potential for disaster gains momentum. When the melt down commences, nearly everyone will lose more on the way down than they made on the way up. Melt Downs do not end quickly, but over time. If the market is one thing – it is unforgiving.

Market peaks are clear in retrospection, but not in the moment, but the warning signs are there.

Do not confuse a bull market for brains.

As the timeworn adage rings: “Markets can remain irrational longer than you can remain solvent.” That applies for booms, too.

Mot people do not have an exit plan like trailing stops that protects your gains and prevents you from losing more money. A diversified portfolio and fixed selling points is always your friend.

In my ECON 101 class the professor told a story that I have found over the years to an absolute. “Put five Economists in a room and ask them a simple question and you will always get at least six answers.” I have been trimming my portfolios for the last two months. I have more cash than I have ever had, upwards of 30% cash, and I keep building it. I have good stocks e.g., DOW down over 300 points today and my portfolio was up 1.9%. But I keep taking some profits and paring down. I believe it is coming folks; somone has to pay the bills the swamp is piling up.  Greg is talking common sense.