Weekly Comment - March 11, 2019

Mar 11, 2019 | Nick Foglietta


The central bankers are still using the same tools to fight the present bout of economic weakness.

Summary of January/February 2019 Looking Forward

The old expression goes, “when the facts change, I change my opinion. What do you do, sir?” That quote is often attributed to John Menard Keynes, but I can’t confirm he ever used it.

The past three months have been extraordinary from the perspective of the financial markets. The sharp decline of late 2018 has been erased by the “melt up” of 2019.

What changed?

January 2019 was one of the most historic months ever.

In particular, I'm referring to the first two weeks of the year when the Peoples Bank of China, the European Central Bank, and the US Federal Reserve all sharply changed direction in monetary policy (back to “Easy Money”).

The weekly comments since January have endeavoured to share my real-time observations about what is driving this “financial” shift. 

Most of the observations have been market based, but what about “real life” change?

Today I am going to try and take the thoughts of the last few comments out of the “monetary realm” and share them in “real world” terms.

Before I begin I would like to share with you one of the best responses I have ever received to a weekly comment.  It was replying to the first section of the comment where the televised testimonies were mentioned and, more importantly, the loss of respect for democracy was graphed: (emphasis is mine)

Hi Nick.

I guess I’d be the last person you thought you might hear from regarding your weekly comments. A couple of things:

I thought Jody Wilson Rayboud’s comments and testimony, if you want to call it that, was superb. I thought I would have a listen to see how it went and ended up fascinated with her Opening statement and response to questions put to her by the various panel members. She did not try to gloss over any of her answers with politically correct statements although she said she could not answer some things. As you say, Trudeau in his comments on her testimony obviously the politician, with the correct answer for everything. She was telling it as it was in relation to her role as Minister with notes to back a lot of it up.

Cohen I wasn’t as interested in as to date, nothing has happened to do anything to stop the fiasco taking place a lot of the time in the White House. Yes I am cynical about it ever happening, just hopeful.

The scary part about today’s youth and Democracy is that Fascism is a real possibility. Not many really remember how that all came about or if they do, can’t remember how terrible it became for many people. Just think of all the protests taking part in every little thing and how things change sometimes because the protest is loud.

Sorry I got on kind of a soapbox of sort. In amongst all that is the Financial world, which is your particular expertise. I try, but I probably should have started much sooner. However my thoughts are from experience gained over my years and the years when I was a small child born just as we were starting to come out of the Depression.

Thanks Nick I enjoyed this week’s read.

Nick comment: Consider what this reader has seen throughout her lifetime. 

We need to respect the thoughts and opinions of those who actually lived through some very different and dark times of history as we plot our path forward.

Back to the weekly comment…the real world.

The monetary policies of the past 20 years have led to two powerful trends in the socio-economic lives of our global citizens:

  1. The largest proportion ever of the human population has escaped abject poverty. Living conditions have improved for billions of people.
  2. Wealth and Income inequality are at all-time highs around the world.

Two examples:

  1. In 2018, the 26 wealthiest people on earth own as much as the bottom 3.8 billion people. That number was 43 in 2017.
  2. The top 1% of American asset owners was equal to (1) the bottom 34% in 2001, (2) the bottom 40% in 2007, (3) the bottom 48% in 2018, (4) is projected to equal the bottom 64% in 2030.

My argument is point number one would have likely happened over time due to technological growth regardless of whether the central banks took over the global economy via monetary policy. 

So much of the financial troubles we witness today stems from “taking the easy way out in times of difficultly.” Specifically, this has meant depending on lowering interest rates and printing money, instead of letting the economy heal in a more natural way.

The response to the recession in 2000/2001, was the first truly “unconventional monetary policy attempt” to right the economy after a normal recession took hold. 

The great recession of 2008/2009, saw a deeper dive into “unconventional monetary policy,” both in terms of magnitude and breadth. Way more money got poured into the system by most of the developed world. 

Which brings us to 2019, and the ideas of the Green New Deal. A global stimulus packages and the new concept of NEVER paying back the money being borrowed to make all this happen. 

Rather than admitting that “unconventional monetary policy” is the source of the continued problems, our leaders continue to up the dose and hope for a different result.

But Nick, what does that mean for the world around us?

My belief based on the reading and research done to date is this means the world is much more likely to face an INFLATIONARY shock due to the anticipated amounts of monetary stimulus in the future than a DEFLATIONARY shock.

Let’s chat about that for a moment. 

Both the 2000/2001 and the 2008/2009 recessions were deflationary shocks, which is why the solutions of printing money and lowering interest rates were chosen. 

It appears to me, however, the next battle will be fought on a totally different battle field.

An INFLATIONARY shock will have to be viewed from a completely new investment lens than the DEFLATIONARY recessions in 2001 and 2008. 

Before I move on…think about this for a moment too.

The central bankers are still using the same tools to fight the present bout of economic weakness. What happens if my thesis turns out to be correct and the next battlefield really is INFLATIONARY? Then the central banks are likely to exacerbate the inflationary pressures by lowering interest rates and printing more money!

That may end up being akin to treating a person for cancer when they have heart problems; the prescription may end up doing no good for the patient, and causing other serious problems.

Please, hear me out. These are early days and preliminary thoughts on my part, but there is more and more evidence mounting that I may be onto something here.

Axel Merk of Merk Investments made a comment saying, “every time you hear an economist use the word INFLATION insert the words COST OF LIVING in its place.”

If the sentence still makes sense to you fine, but most of the time it will show the huge lie that has been inflicted upon the world about the low inflation that exist.

Ask any person if their cost of living has gone up or down in the past 10 years. My guess is that you will get 100 per cent consensus on the “up” answer.

It makes you realize how much BS the economists sell us when using their “hedonically revised, seasonally adjusted, smart consumer basket based inflation data.”

If you “hedonically revise, seasonally adjust, smart consumer basket” my Facebook profile picture, you’ll get George Clooney and not an accurate representation of me!

Same thing happens to inflation data; it looks much better than the real life.

Understand, the central banks MUST understate inflation in order to keep interest rates low, in order to print more money, in order to keep asset prices high, which requires low inflation so interest rates stay low….wait, what?

The point being the past 19 years have been based on a DEFLATIONARY narrative even though the average person has not experienced anything remotely resembling deflation in real life. 

They have bought the narrative for two reasons:

  1. The inflation in their cost of living coincided with the inflation of their real assets…mainly real estate.
  2. The narrative was built upon easy access to money and allowed a far broader range of socio-economic classes to access credit and live beyond their means.

In summary, if the INFLATIONARY runs hotter than the DEFLATIONARY spin-masters are able to spin to the people a whole lot of things change. The solutions used to keep assets afloat may actually work to hurt asset prices in the long run via interest rates that rise or currency values that fall. 

Let’s watch and see what comes in the next few months.