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On Labor Day We Ask What Is The Truth Of The Economy When Things Are So Strange? – Mike Swanson (09/07/2020)

Happy Labor Day! Although this Labor Day there are tens of millions of less people working than there was a year ago so maybe things aren’t so happy. Let’s just say they are strange. Twenty-five millions Americans are officially unemployed. When you strip out all of the government adjustments made to the unemployment rate (what is reported as the unemployment rate now is different than what it was before 1990) you get this figure from the Federal Reserve showing the worst unemployment situation in the country since the Great Depression.

But you wouldn’t know the economy is that dire if you talked to a stock market bull excited about the gains he has seen in the market the past few months and it could be that you personally are not feeling any negative economic impacts from the mass unemployment now inflicting the country.

Maybe things aren’t that bad?

Or are they?

There are signs of strength in the economy if you go outside of some of the big cities and into pockets of the country where the real estate market is turning red hot. While most companies are just trying to survive many real estate agents are now seeing their commissions grow. So what is happening?

I got this email question last week that sums up how things are indeed so strange and confusing now:

“Hi Mike, 
“Sorry for another email but I just listened to three economists on the radio(NPR On Point) talk about Fed spending and inflation. Their premise is that deficits do not matter, since the Fed controls the flow of money the only risk to huge deficits and money flow is inflation and that there is no real inflation currently because people simply are not spending the money that has been pumped into the economy and if we get massive inflation we can start to raise taxes to pull the money out of the economy. Trump’s tax cut was for the rich and they did not spend the money and since the recent stimulus packages savings rates have gone from 3% to 25%. They said inflation was at least 18-24 months out from where we are at currently. My skeptical side says then why don’t we just get rid of taxes, have a GBI, free health care and huge infrastructure spending then. Something has to give I use to think but this has been going on for 12 years perhaps deficits simply don’t matter. If they spent the money on the poor, middle class and infrastructure that they have spent buying up cooperate bonds that would seem to me like it would really stimulate the economy but what do I know.
Myself I have seen a massive run ups in vacation property here in Michigan in the past few months but I’m not sure of the dynamics that are driving that( lifestyle change or people investing).”

“I was wondering your take, do you think without big inflation that gold will continue to go up and the dollar will continue its decline. On paper I like the FXF call but is the dollar really doomed??? I have never felt so lost on the economy and where it is going.”

It sounds like the people you heard on NPR are advocates of so called “Modern Monetary Theory.” The argument is essentially as you say the Federal Reserve can do anything as “deficits don’t matter.” Really they haven’t mattered YET. I would also suggest that the economy has a major structural problem with zombie companies that will hamper future productivity and competitiveness until they fade away and higher taxes would wipe them out.

I subscribe to the quarterly Foreign Affairs Journal which goes out to elite policy makers and people like the NPR reporters. It’s last issue had an article laying out exactly what you are saying they said. It claims that these policies are working, are needed, but will have to end when inflation does begin one day. If actions aren’t then taken inflation would get out of control so it said that some great leader will have to raise taxes and/or raise interest rates to put the brakes on things. However, a problem with that idea is since the 1990’s we have not yet seen policy makers able to do that successfully once.

In fact every time they tried to raise rates to stop the bubbles in the financial markets from growing out of control they reversed course only to make the situation get even worse until it turned into an even worse bubble bust the next time. Just witness 2018 when Jerome Powell announced that September that he expected to slowly raise interest rates up over the next few years to “normalize” things. The stock market then fell 20% and he went into panic and completely abandoned that idea.

The same thing happened with Ben Bernanke in 2007 and Alan Greenspan in 2000. So I have no confidence that when the time comes that the policy makers and Federal Reserve officials will be able to raise rates or raise taxes and make a harmless soft landing.

I think we are in a confusing economic situation where it is really impossible to figure every single thing out or predict the future except in the most general terms. So I don’t think the NPR people know exactly what is going to happen and I don’t pretend to know everything either. When it comes to investing and trading decisions I think it’s just best to stick with the charts and only make big changes if the trends change.

Gold and silver have been going up and outperforming the stock market now since 2018. The dollar is now trading below its 200-day moving average and several major world currencies are close to breaking out of resistance points that go back for five years. If that happens the dollar is going to go down and that will eventually be inflationary even if the US economy sits stagnate much like what happened in the 1970’s.

But even if that doesn’t happen I think gold and precious metals now still play a critical role in people’s portfolios for diversification purposes as bonds now yield nothing. So has gold and silver been going up simply because of this for the past two years or is it going up anticipating inflation down the road? Or is it simply both? There is no way to answer such questions definitely, but we know that gold and silver are outperforming the stock market and that’s a fact that we do know is happening.

Here is a fascinating chart from the Federal Reserve that shows what you are describing – that I don’t think people know is happening.

The blue line represents the growth in money generated by the Federal Reserve and the red line is the amount of actual money circulating in the real economy. That line has collapsed because the velocity of money has collapsed – less money is circulating in the real economy, because people are spending less money. This is why people are saying there is little inflation at the moment, but what happens when the red line bottoms? The last time it happened in 2003 oil price ended up going over $150 a barrel by 2008.

This decline in the velocity of money is happening because the demand for goods and services in the real economy has collapsed – because most people have less money and those that do have money are saving it or putting it into stocks or real estate. Some are now evening buying baseball cards which are going up in value in a booming market of their own that involves card rigging

So those things are going up while the economy is dead. That blue line is shooting up as the Federal Reserve buys bonds from the US Treasury to fund the deficits and from zombie corporations to keep them alive – but is having no real impact on the real economy. The closer to the point of creation someone is to the point of the money creation of the blue line the more they are benefiting from it and understand how it works. There is a big difference between being someone looking at a Robinhood app screen and a person on a trading floor or working on the bond desk at Goldman Sachs much less being one of the few having the direct line to a PPP bailout and pocketing money like Monty Bennett.

The problem question is when the economy does begin to grow for real (and it probably will next year) and the red line starts to go up how much inflation will there be?

We crossed the rubicon on March 15, 2020 when Donald Trump announced on that Sunday that the Federal Reserve was dropping rates to zero and beginning unlimited QE at this press conference. With all of the things that have happened since then it’s easy to forget about this historic day.

In my view the NPR people have no idea when the inflation will start or how bad it will get, because no one can predict everything. Watch commodities. When you start to see them go through their 200-day moving averages than you know that inflation of some sorts is beginning. How fast it grows no one can really predict ahead of time. All you can do is understand the general trends and recognize when they change. The problem with the officials is that they have these theories that they can control the situation, but to do it they need to basically predict everything and they can’t.

The chart of the blue and red line portrays the sad situation the economy now is in. It is completely split with a mass of have not’s experiencing the red line and a smaller class of people benefiting from the blue line. As long as 20% of public companies are zombie companies I still believe gold and silver are among the best investments to make.