Money Flow Trading Method along with Risk Management

https://www.gata.org/node/20325

Very good thread here....and very under-rated.

Thank you very much. Your comments are most appreciated.


Bruce

http://traderfeed.blogspot.com/2017/...sychology.html

https://economicprism.com/the-dollar...ing/#more-7168

https://economicprism.com/wp-content...rnmentDebt.jpgThis week, while perusing the Federal Reserve’s balance sheet figures, we came across a rather curious note. We don’t know how long the Fed’s had this note posted to its website. But we can’t recall ever seeing it. The note reads as follows:
“The Federal Reserve’s balance sheet has expanded and contracted over time. During the 2007-08 financial crisis and subsequent recession, total assets increased significantly from $870 billion in August 2007 to $4.5 trillion in early 2015. Then, reflecting the FOMC’s balance sheet normalization program that took place between October 2017 and August 2019, total assets declined to under $3.8 trillion. Beginning in September 2019, total assets started to increase.”
Directly below this note is the following chart:
https://economicprism.com/wp-content...hart202008.jpg
Does this look like a balance sheet that expands and contracts over time?
Quite frankly, the Fed’s balance sheet chart, and the extreme dollar debasement that it illustrates, is a disgrace. The fact that the Fed had to add this flagrantly false note as preface to its disgraceful chart is an insult.
This is a direct offense to anyone that’s built a modest savings account by exchanging their time for dollars. The time and effort put to obtaining these dollars is being stolen by the insidious process of central bank engineered money supply inflation. Year in and year out, these earned dollars will be worth less and less.
Moreover, normalization is a Fed lie. It never happened. Yes, $700 billion was contracted from the Fed’s Balance sheet between October 2017 and August 2019. But that was in the wake of a $3.5 trillion expansion. And it was quickly followed by another $3 trillion balance sheet expansion this spring.
The Fed’s real priority was never to reduce its balance sheet. The Fed’s real priority is to keep the Treasury and the big banks flush with cash.
Money Printer Go BRRR
A secondary effect – for now – of the Fed’s balance sheet expansion is a booming stock market. This, like the Presidential election, is a distraction.
The real noteworthy thing taking place, that’ll have a real impact on your life, has less to do with the stock market or who will be the next President. Rather, the real noteworthy thing taking place today – at this very moment – has everything to do with the Fed’s attempt to suspend the credit cycle.
What we’re talking about here are interest rates. If you haven’t noticed, they’ve been going down as of late. In fact, they have been going down a lot. The yield on the 10-Year Treasury note dropped to nearly 0.5 percent earlier in the week.
Modern era Treasury rate data has been continuously recorded since 1871. The lowest yield on the 10-Year Treasury on record dating back 149-years was reached this week. What’s going on?
Attaining this remarkable milestone took decades of lies, propaganda, and relentless intervention by central planners. A good portion of the Fed’s balance sheet assets, shown on the chart above, are U.S. Treasuries.
The Fed expands its balance sheet, via digital ledger notations, and buys Treasuries. This is called monetizing the debt. This, in essence, is printing press money – as in, money printer go BRRR. Washington then spends this fake brrr money via government contracts, government programs, CARES Act stimulus, and whatever other spending bills Congress passes.
The vertical jump on the right side of the chart, for year 2020, is composed of Treasury notes that were bought with fake brrr money to fund the CARES Act. This coordinated attack on your dollars by the Fed and the U.S. Treasury is what makes the $26.6 trillion national debt possible.
The Dollar Is Dying
This fake brrr money functions just like Federal Reserve Notes (i.e. dollars) that were obtained through honest labor. Yet, as the fake brrr money’s spent, the wealth of savers – including your wealth – is debased. The dollar becomes worth less and less.
One of life’s unspoken delights is the rich satisfaction that comes with bearing witness to the spectacular failure of an offensive and unjust system. We just wish it wasn’t so damaging to so many good and honest people.
The dollar is being destroyed before us. This destruction has been going on for 107 years; since the passage of the Federal Reserve Act in 1913. And it has been going on in earnest since President Richard Nixon closed the gold window in 1971.
But with the Fed’s and U.S. Treasury’s attempt to paper over the economic consequences of government lockdown orders by running a $4 trillion budget deficit, something special is going on. The dollar is dying. Yet the clowns in Congress are the last to see it.
The art of plundering and the increasing corruption of public officials is on full display in the next stimulus bill that’s making its way through Congress. The general premise is that the ordinary needs of people, including housing and living expenses, may be legitimately met by the means of fake brrr money. Then there’s all the pork, stuff like a new FBI building, that’s larded into the bill. All the while, the increase in the money supply grows every day more appalling.
Such vigorous and persistent attempts to substitute natural laws in finance for the wishes of legislatures are doomed. We’re headed to complete financial, moral, and political collapse. The rush to exit dollars is gaining momentum…
NASDAQ: 11,000. Nvidia: 453. Tesla: 1,500. Shopify: 1,000. Apple: 450. Amazon: 3,200. Microsoft: 215. S&P 500: 3,350. And many, many more…
There’s also: Gold: $2,000. Silver: $28. Bitcoin: $12,000.
Choose your dollar escape vehicle wisely.
Sincerely,
MN Gordon
for Economic Prism
Return from The Dollar Is Dying to Economic Prism

Good Morning


Bruce

http://charleshughsmith.blogspot.com...8oftwominds%29

FRIDAY, AUGUST 14, 2020
Here's Why the "Impossible" Economic Collapse Is Unavoidable

This is why denormalization is an extinction event for much of our high-cost, high-complexity, heavily regulated economy.

A collapse of major chunks of the economy is widely viewed as "impossible" because the federal government can borrow and spend unlimited amounts of money because the Federal Reserve can create unlimited amounts of money: the government borrows $1 trillion by selling $1 trillion in Treasury bonds, the Fed prints $1 trillion dollars to buy the bonds. Rinse and repeat to near-infinity.

With this cheery wind at their backs, conventional pundits are predicting super-rebounds in auto sales and other consumption as consumers weary of Covid-19 and anxious to blow their recent savings borrow and spend like no tomorrow.

As for the 30+ million unemployed--they don't matter. Conventional analysts write them off because they weren't big drivers of "growth" anyways--they didn't have big, secure salaries and ample wealth/credit lines.

What this happy confidence in near-infinite money-printing and V-shaped spending orgies overlooks is what I've termed denormalization, an implosion of the Old Normal so complete that the expected minor adjustment to a New Normal is no longer possible.


The "New Normal" Is De-Normalization
We're already in a post-normal world because the expansion of globalization and financialization needed to fuel the Old Normal has reversed into contraction. This reversal is an extinction event for all sectors and institutions with high fixed costs: air travel, resort tourism, healthcare, higher education, local government services, etc. because their fixed cost structures are so high they are no longer financially viable if they're operating at less than full capacity.

Only getting back to 70% of previous capacity, revenues, tax receipts, etc. dooms them to collapse.

And there's no way to cut their fixed costs without fatally disrupting all the sectors that are dependent on them.

Most operational costs are mandated and cannot be reduced: union contracts, property taxes, regulatory burdens, tax accounting, debt service, employee healthcare costs, minimum wages, etc. Other essential expenses such as commercial rent are difficult to renegotiate lower, as the landlord also has the same high fixed costs and any reduction comes directly out of his pocket.

A good example of this collapse dynamic is a restaurant with high fixed costs. It can't survive financially at 50% of capacity because it can't reduce its expenses by 50%. The owners can reduce staff but there are operational limits on this: even if there are only 10 customers rather than 100, you still need a kitchen and wait staff. Stripped to the bone, the owners might be able to reduce costs by 15% to 20%. In other words, if business rebounds to 80% of pre-pandemic levels, the restaurant can survive but not generate any profit.

It might survive at 70% if the owners do double shifts, but that isn't sustainable. Eventually the overworked owners burn out and collapse.

Reducing costs is even more difficult for institutions such as hospitals, colleges and government agencies. Most of these institutions are unable to cut more than a few percent of expenses; a 10% reduction in expenses would require the closure of entire departments and eliminating core services.

Denormalization is an interlocking series of self-reinforcing feedbacks. People have less money and more insecurity, so they spend less. Those living off the fixed costs paid by the private sector (landlords, local government, insurers, etc.) can't survive on less than their full measure, and this inability to absorb massive cuts causes everyone in the food chain above them to collapse, which eventually triggers their own collapse.

The restaurant can't cut any of the big-ticket expenses: rent, taxes, wages, benefits, healthcare, tax accounting, insurance, etc. It can only lay off some staff and reduce its purchase of ingredients. Those variable costs are too small a percentage of total expenses to be consequential.

The restaurants collapse first, and since there's no way anyone can afford to pay current rents and survive on a shrinking customer base, the landlord goes bust next. These collapses cut local government tax revenues. Each of these reductions means everyone down the food chain-- enterprises that depended on restaurants, landlords and local government contracts--lose a critical chunk of their own revenues. Since there are no replacement sources of revenues, these collapse as the line of dominoes topple.

Few sectors or institutions have any buffers. They've been running at full capacity or higher and burning every dollar to keep from imploding. As a result, any deep cuts are extinction events: no income from college football means eliminating entire sports down the food chain. There is no stair-step down, there's only binary triage: save this program as is or eliminate it entirely.

Federal/Fed subsidies don't fully replace what's been lost. Giving the restaurant owner a subsidy to pay rent and stay open doesn't mean the restaurant has enough customers to keep staffing and purchases at pre-crisis levels, and giving consumers subsidies such as Universal Basic Income (UBI) doesn't mean these households won't decide to save some of that subsidy rather than spend every dime, as the zeitgeist has shifted from complacent confidence to uncertainty: any subsidy is subject to change, as it is ultimately a political decision that can be amended or cancelled.

The production of goods and services stagnates as demand declines. When money-printing expands while goods and services contract, the result is inflation--the purchasing power of the newly issued money declines as too much money starts chasing a pool of goods and services that's shrinking as small businesses dry up and blow away and the dominoes fall down the supply chain of dependent industries.

As the newly issued subsidy-money buys fewer goods and services, demands for increased subsidies rise. The Universal Basic Income (UBI) payment doubles from $1,000 to $2,000 a month, but it still only buys $750 of goods and services as the declining purchasing power of the newly printed money accelerates.

This expansion of money as the pool of goods and services contracts further accelerates the loss of purchasing power in a self-reinforcing feedback.

I have long admired John Michael Greer's concept of catabolic collapse, a dynamic in which the institution is forced to downsize some of its costly complexity but it restabilizes at a lower energy state. I now think this might be overly optimistic.

How Civilizations Fall: A Theory of Catabolic Collapse (John Michael Greer)
A stair-step down to consequentially lower complexity and cost structures is simply not practical in much of the real world as fixed costs are mandated by regulations or impossible to cut for operational reasons. (For example, reducing a fleet of airliners by half doesn't necessarily translate into an ability to reduce aircraft maintenance facilities and staff by the same percentage.)

Airports, airlines, cruise ships, sport franchises, resorts, malls, local government services, venues, theaters, hospitals, universities and so on can't reconfigure at 50% of previous complexity and capacity. Their fixed costs and mandates simply don't allow for a 50% reduction in complexity and revenues.

This is why denormalization is an extinction event for much of our high-cost, high-complexity, heavily regulated economy. Subsidizing high costs doesn't stop the dominoes from falling, as subsidies are not a substitute for the virtuous cycle of re-investment.

The Fed's project of lowering the cost of capital to zero doesn't generate this virtuous cycle; all it does is encourage socially useless speculative predation as Tim Cook et al. sell Apple bonds in order to buy back more shares of Apple, further enriching Tim Cook et al. This is not a virtuous cycle, it is the denormalization of what remains of free markets, which require capital be priced by markets, not central banks.

Collapse isn't "impossible," it's unavoidable.

https://www.oftwominds.com/photos2020/rising-wedge.gif

There was no New Normal for the dinosaurs. A few winged species survived and evolved into the birds of today, but that is by no stretch of the imagination a New Normal that included all the other dinosaur species. For them, denormalization meant extinction.

De-Normalization: everything that was normal is gone and will not be replaced with some new normal.

https://www.oftwominds.com/photos202...rs-meteor3.jpg
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Posted by Charles Hugh Smith at 11:12 AM

Hello Folks

My corporate Webite is now almost 40% completed. Once done will post here much less. It will be mainly to direct people to my corporation website. URL to be announced soon.


Bruce

https://www.armstrongeconomics.com/i...m_campaign=RSS

https://www.peakprosperity.com/one-s...e103-144567129

Millions of people are about to enter a financial purgatory, becoming little more than modern-day slaves.

While they’ll be reported by the media as those “evicted” or “foreclosed on”, if we define a slave as someone forced to work for another by existing legal circumstances or approved cultural norms, then that’s exactly what these people should actually be called: slaves.

Too harsh?

Allow me to make my case.

Being ‘One Step Removed’ Is All Evil Needs

Slavery can exist when there’s a system that allows it. It’s a combination of morals (or, rather, lack thereof) and laws that allow one human to control the daily actions of another. Neither a slave’s time nor personal freedom belong to them.

I learned a long time ago that most humans, at best, have what we might call ‘shallow’ morals. There are chemical engineers who would never dump a toxin directly into a child’s cereal bowl, because that would be immoral; but they’ll casually and routinely inject toxins into groundwater tables (which may eventually end up in the local milk supply) because they have an EPA permit to do so.

If questioned, these same engineers know that there’s a chance, maybe even a very good chance, that the injected chemicals could end up somewhere unintended. But because their actions today are one step removed from the consequences of tomorrow, that’s enough to get them off of a moral hook.

In other words, their morals don’t extend past that first action — they stop right there. They are therefore ‘shallow’ morals.

‘Deeper’ morals would include a sense of responsibility for the entire lifespan of the chemicals in question.

Similarly, mortgage companies are staffed to the gills with people who could never themselves forcibly eject an elderly person and all of their possessions onto the curb outside the home they’d lived in for 50 years. It would be morally upsetting.

But they routinely submit the paperwork that causes these things to happen nonetheless.

Luckily for the mortgage company workers it’s the sheriffs deputies who actually handle the evictions. Luckily for the sheriffs involved, somebody else’s decision was responsible for the eviction. Both the sheriffs and the mortgage company employees are similarly insulated from any moral qualms because neither was directly responsible for Granny or Grampa’s plight. They’re just “following orders”.

One step removed. That’s all it takes.

The point here is that as long as people have just one degree of separation from their actions, that’s sufficient to dodge any moral qualms that may arise. What we cannot stomach to do ourselves can be more easily overlooked if someone else is performing the deed.


The Immoral Fed
The largest and most obvious one step removed ‘dodge’ in play right now is the US Federal Reserve’s evasion of moral responsibility for making the wealth gap explode wider, destroying the financial futures of tens of millions of American households.

After printing up a bubble that ruined many in the 1990’s, eventually bursting in the year 2000, the Fed set about blowing an even larger bubble. That burst in 2008. And now they are back at it again.

Every step of the way, the Fed policies resulted in the rich getting richer, the middle classes and the poor being financially eviscerated, and future generations getting hosed.

How do the Fed’s staffers sleep at night?


By delusional thinking like this:
https://media.peakprosperity.com/ima...ealth-gap2.jpg

(Source)

The necessary one degree of separation for Jay “pants on fire” Powell to say such obviously flawed things is provided by “the markets”, which is where the trillions of dollars freshly printed by the FEd quickly end up.

That goosed markets then benefit the already-rich is simple to deduce. Those who own lots of stocks and bonds as well as those who operate the most intimate details of the financial machinery are rewarded instantly by higher prices. They become instantly richer. Which means they can afford to buy more ‘real’ things like land, buildings, businesses, factories, gold, fine art — you name it.

Well-connected entities like BlackRock are actually in bed with the Fed, getting richly rewarded merely for helping it spend its vast gobs of newly-created currency :
BlackRock Is Bailing Out Its ETFs with Fed Money and Taxpayers Eating Losses; It’s Also the Sole Manager for $335 Billion of Federal Employees’ Retirement Funds

June 4, 2020
Today [June 4, 2020], BlackRock has been selected in more no-bid contracts to be the sole buyer of corporate bonds and corporate bond ETFs for the Fed’s unprecedented $750 billion corporate bond buying program which will include both investment grade and junk-rated bonds. (The Fed has said it may add more investment managers to the program eventually.)


BlackRock is being allowed by the Fed to buy its own corporate bond ETFs as part of the Fed program to prop up the corporate bond market. According to a report in Institutional Investor on Monday, BlackRock, on behalf of the Fed, “bought $1.58 billion in investment-grade and high-yield ETFs from May 12 to May 19, with BlackRock’s iShares funds representing 48 percent of the $1.307 billion market value at the end of that period, ETFGI said in a May 30 report.”

No bid contracts and buying up your own products, what could possibly be wrong with that? To make matters even more egregious, the stimulus bill known as the CARES Act set aside $454 billion of taxpayers’ money to eat the losses in the bail out programs set up by the Fed. A total of $75 billion has been allocated to eat losses in the corporate bond-buying programs being managed by BlackRock. Since BlackRock is allowed to buy up its own ETFs, this means that taxpayers will be eating losses that might otherwise accrue to billionaire Larry Fink’s company and investors.

(Source)

On the one hand, BlackRock is busy buying all sorts of things to stuff on the Fed’s balance sheet.
On the other hand, BlackRock has access to unlimited capital at the most favorable terms/prices in the world.
On a third hand, BlackRock is busy buying up distressed properties from recently foreclosed Americans who couldn’t manage to stretch a $1,200 stimulus check across 8 months of being out of work.

Add it all up and these recently dispossessed Americans will find themselves no longer owning a home. Instead, they’ll rent one from the no-bid contract winners like BlackRock, who were literally hand-picked by the Fed.

When there’s no money to be found to help working-class families, you can be certain there are still unlimited billions available to keep outfits like BlackRock supremely well incentivized to… uh, keep doing what they already were doing anyways: Getting obscenely rich.

Now, instead of working for themselves to pay off their own homes, these newly dispossessed Americans will still have to live somewhere. Many of them will end up renting from Wall Street entities like BlackRock.

How do I know this? Because that playbook page already exists. It’s an observed reality. It’s been done before and it will happen again.
We saw this in the aftermath of the housing crash/Great Financial Crisis:

When Wall Street Is Your Landlord
Feb 2019

[T[he government incentivized Wall Street to step in. In early 2012, it launched a pilot program that allowed private investors to easily purchase foreclosed homes by the hundreds from the government agency Fannie Mae. These new owners would then rent out the homes, creating more housing in areas heavily hit by foreclosures.

Between 2011 and 2017, some of the world’s largest private-equity groups and hedge funds, as well as other large investors, spent a combined $36 billion on more than 200,000 homes in ailing markets across the country. In one Atlanta zip code, they bought almost 90 percent of the 7,500 homes sold between January 2011 and June 2012; today, institutional investors own at least one in five single-family rentals in some parts of the metro area.

I talked with tenants from 24 households who lived or still live in homes owned by single-family rental companies. I also reviewed 21 lawsuits against three such companies in Gwinnett County, a suburb of Atlanta devastated by the housing crash. The tenants claim that, far from bringing efficiency and ease to the rental market, their corporate landlords are focusing on short-term profits in order to please shareholders, at the expense of tenant happiness and even safety. Many of the families I spoke with feel stuck in homes they don’t own, while pleading with faraway companies to complete much-needed repairs—and wondering how they once again ended up on the losing end of a Wall Street real estate gamble.

(Source)

In today’s reality, the Federal Reserve is deciding, unilaterally and without any effective oversight or requiring a single vote from a single American, who should be the winners and who should be the losers.

Should we be surprised that the big institutions are the winners and ‘we the people’ the losers?

To be fair, this isn’t BlackRock’s fault, right? It’s simply how the system is currently set up. It’s just the prevailing legal and moral framework, right?

What do they say on Wall Street to point out the one step removed angle: “Don’t hate the player, hate the game”? Well, maybe that works in pro basketball. But in finance, where the players have a strong say in writing the rules, I don’t think that saying provides much air cover.

Here in August 2020 after the coronavirus (combined with a desperately poor series of managerial decisions by politicians and career health ‘authorities’) laid waste to the economy, it’s perfectly clear that much actually was learned from the 2008 crisis.

The wealthy learned that you can pretty much get away with anything you want. And so they’re at it again.

Corporations learned to hoover up the free money as fast as possible.

Speculators learned that the Fed would always cover their losses and to ‘buy the dip.’

Nowhere along the way did anybody seem to learn the importance of community, watching out for your fellow citizens, having integrity, or caring about the future. Savers and the prudent alike have been literally punished for being responsible.

Finding The Way Out
Once you see through the ‘one step removed’ lens, you’ll begin to see it everywhere.

Too many people do things that aren’t even remotely justifiable (let alone moral) once the totality of the actions are taken into account.

A corollary to this is that the measure of a person can be observed in their actions when nobody is looking.

Far more impressive than the thousands YouTube clips showing a supposed samaritan help an unfortunate soul (while a camera just happens to be recording from a perfect angle followed by a quick upload to 8 different social media channels) is the person who helps another when no one else is there to watch.


“The system” is providing the necessary legal and moral cover for BlackRock and other similarly fabulously wealthy parties to sweep in and take advantage of current circumstances to make a few billion extra bucks.


When the dust settles after the pandemic subsides, we’ll find that another large fraction of the assets of our nation – it’s houses, soil and productive enterprises – will have been transferred (again!) to the tiny minority already at the top of the wealth pyramid.


The process used will continue to be simply this: the Fed prints new currency out of thin air, hands it to Wall Street, which in turn buys up the productive assets of the country. If challenged, each party has its own ‘one step removed’ cover story ready to go.

Once upon a time, our cultural and legal principles sadly allowed the productive output of people called slaves to belong to people we called slave owners.
Today ,there’s a codified system of financial rules and a supporting legal framework that assigns the productive output of the poor and middle classes to corporate owners.


The former process was direct. The latter process has the same outcome; it’s just simply one step removed.

So how do we free ourselves from the shackles the system is trying so hard to place us in?

In Part 2: The Way Out, I share the strategies I’m implementing in my personal life/homestead/community to build wealth that can’t be easily stolen by the printing press or over-reaching authorities.

The truth is we live in an exceptionally challenging time: for our wealth, our civil liberties, and our ability to pursue happiness.

There are no guarantees except this: to do nothing is to walk willingly into the trap being set for you.

Click here to read Part 2 of this report (free executive summary, enrollment required for full access).

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CTA ProgramJune 2020
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https://realinvestmentadvice.com/the...y-part-1-debt/

The Decade Long Path Ahead To Recovery – Part 1 Debt


This article is the first of a four-part series on the vectors driving future economic growth. Forthcoming articles will tackle Depression, Demographics, and De-globalization.


The discussions about economic recovery and the path ahead are ongoing. The shape it will take will defy the simplistic “V”, “W”, and “L” expressions being used by forecasters. One thing, however, is certain. Every bazooka, tank, and A-bomb of stimulus is being used to combat the downturn.


The question, so few seem to ask, is at what cost?


“Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery,” 5/29/2020 Jerome Powell Peterson Institute of International Economics.


As we will explain, what is best for economic growth and prosperity is not what Powell’s Fed is doing. Power, influence, and intellectual elitism may be winning today’s battle, but they are losing the war. The evidence is compelling.

Yardeni et al.
In a recent Grant’s Current Yield podcast, guest Ed Yardeni, said: “I find too many investors…act like preachers. They judge the Fed, good or bad, a moralistic approach. My approach, as an investment strategist is bullish or bearish.”

Yardeni’s only concern appears to be whether Fed actions are good or bad for his portfolio. Specifically, good or bad for his career.

Like all investors, we also need to understand whether Fed actions are bullish or bearish. However, we have a conscience and care about what is best and right. Yardeni’s comments remind us of the Niemoller prose, “First they came…”.


Yardeni’s view represents the epitome of expedience over principle. His perspective is not a one-off, in fact, far from it. It is a consensus among financial and political insiders. It runs through the veins of Wall Street, Congress, and the White House.


Planning Ahead
The United States is in the midst of an unprecedented third asset bubble in twenty years. The recent crisis is being blamed on COVID.

We disagree, COVID is the pin that pricked the bubble.

To help visualize this, we quote from our article The COVID 19 Tripwire:
“There is a popular game called Jenga in which a tower of rectangular blocks is arranged to form a sturdy tower. The objective of the game is to take turns removing blocks without causing the tower to fall. At first, the task is as easy as the structure is stable. However, as more blocks are removed, the structure weakens. At some point, a key block is pulled, and the tower collapses. Yes, the collapse is a direct cause of the last block being removed, but piece by piece the structure became increasingly unstable. The last block was the catalyst, but the turns played leading up to that point had just as much to do with the collapse. It was bound to happen; the only question was, which block would cause the tower to give way?”

The real catalysts include the following:

1. Accumulated leverage
2. Poor use of cash for stock buybacks
3. Fragile financial infrastructure
4. Lack of productive investment
5. Overzealous speculation
6. Unfettered government spending
7. Preference for consumption over savings

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In sum, capital has been grossly misallocated towards speculation and away from productive investment. These outcomes are, in large part, a result of prior and current Fed policy.


Like households and corporations, the government also reacts to the “signals” being sent through the market. When interest rates are manipulated, strange things happen and ripple throughout an economy. When that currency is the global reserve currency, the word “strange” takes on a new definition.


Past Experience
In the current set of circumstances, the economy and markets are experiencing a confluence of shocks that are both extreme and unique. Regardless, we can still reflect on past episodes that caused great turmoil and anxiety. Although the analysis does not provide explicit answers, the rigor offers insight and direction.

As James Grant once said, “My goal is to have everyone agree with me, later.”

Foresight with confidence offers early, cheap entry into opportunities that everyone else sees “tomorrow”.


A New Trajectory for U.S. Growth
The chart below offers a substantive context for what has transpired over the past 40 years. The colored lines show what economic activity would have been had the growth rate of the prior expansion held true in the following expansion.

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As shown, after each successive bubble, the trajectory of growth, GDP shifts lower. Slow economic growth implies that the time to full recovery is elongated.

To predict a post-COVID growth trajectory we need only look at the ratio of Federal debt to GDP. As shown below, the trend lines of that ratio to trend economic growth are negatively correlated. Since 1990 the relationship has a very high r-square of .928. Simply, as the ratio of Federal debt to GDP rises, economic growth declines.

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The next graph projects GDP based on the expected ratio of Federal Debt to GDP. For this exercise, we conservatively assume the ratio will be 115% when the economic recovery begins. That compares to 82% in 2009 and 55% in 2002. We also assume economic growth falls by 10% in the second quarter and 1% in the third quarter. GDP then grows at our projected growth rate of 1.07%.

https://realinvestmentadvice.com/wp-...20/06/3-12.png

Based on this analysis, the economy will not regain pre-COVID economic levels this decade.

The Culprit
The new paradigm of weak recoveries is due to the Fed’s policy prescription for recessions; debt-fueled consumption. Through lower interest rates they incentivize people, corporations, and the government to borrow. The benefits are here and now as economic recovery ensues. The cost is paid tomorrow.


The debt is increasingly put to unproductive uses, and the obligations grow exponentially larger than income. As we discussed in Why the Recovery Will Fall Short of Forecasts, given the issues facing productivity and demography, this is a troubling outlook.

Recessions are a normal part of the economic cycle. They are a healthy reset that purges weak businesses and encourages productive capital investment for the future, not speculation. The resumption of growth takes time in a recession left to its course. However, improved productivity and prudent use of resources sets the economy on a sustainable path to healthy growth.


The New Order
Modern-day Fed policy encourages speculation over productivity growth. The result is sustained unemployment and low wage growth. The longer people are out of work, the less likely they are to re-assimilate into the productive workforce. This means they require and expect more government assistance, which further raises the debt obligation on the dwindling taxpayer.

Revisiting one of our cornerstone concepts, economic growth hinges upon two key elements:

1. Growth in the labor force
2. Productivity gains

The regressive trajectory of GDP growth reflects that those factors of growth are diminishing.


A Fine Mess
Even after the surprisingly positive payroll report for May 2020, the chart below illustrates the magnitude of our predicament. It also reflects the mischaracterizations being used to discuss the post-COVID19 economic circumstance.

Note that the last four recessions required longer periods consecutively for jobs to recover fully.https://realinvestmentadvice.com/wp-...020/06/4-9.png

The amount of non-productive debt used to combat downturns compounds the pre-existing debt problem. It ensures that the economy will continue to struggle for years to get back to pre-COVID levels of economic activity.

“Much higher public debt levels will become a permanent feature of our economies and will be accompanied by private debt cancellation.” – Mario Draghi, March 2020, FT


At $6 trillion in December 2001, then $11.5 trillion in June 2009, U.S. government debt has now ballooned to $26 trillion. Tragically, debt continued to pile up over the last decade despite economic recovery. It, in fact, was the economic recovery. Without that expansion of debt, there would have been little to no economic growth.


To characterize it otherwise as Fed and government officials have done is intellectually dishonest. When the debt-to-GDP graph below updates next, the ratio will be close to 120%. The pattern since 1980 is clear.

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The Fed is extraordinarily accommodative in both their interest rate posture and their willingness to fund massive federal deficits.

They deliberately encourage everyone to borrow. That occurs with lower rates and expansion of the Fed balance sheet (QE) as shown in the chart below. They have also promised near-zero rates and QE for the foreseeable future. This is, indeed, a fine mess.

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Evidence
Despite the information we present, the same talking points justify the same actions. The actions do not serve the best long-term interests of the public. The tools the Fed is employing destroys wealth for all but the top 1%.


The policies incite inflation, much of which is hidden by faulty government reporting. As detailed in a previous article, Two Percent for the One Percent, inflation erodes living standards for the broad population.


Even after years of botched policies that damage the organic economy, no one in Congress challenges the Fed’s counter-factual. Given the evidence from their inability to forecast even one or two quarters ahead, how do they know what they are doing works? How do they know the long-term implications of their policies will not be disastrous? The answer, of course, is they do not know.

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Summary
As mentioned, based on this analysis using the trends of the past 40 years, the economy will not regain pre-COVID output levels until sometime in the 2030s. The implications of that scenario are weak GDP growth, poor labor market growth, and high market volatility, among many other unknowns. It might also imply continuing civil unrest and potentially war.


All of those in power appear to be complicit in advancing this agenda. Why not? They are rewarded handsomely for their compliance.

That is how politicians and the corporate elite get wealthy from their positions of power.

Meanwhile, the rest of us watch and wait, hoping that someone will show up to represent the community in this injustice.

What the Fed is doing to save today will cause problems tomorrow. We have two choices; we can recognize the problem and force change by electing like-minded legislators. Or, we can stand aside. The latter, of course, only furthers behavior detrimental to our country.


Instead of cheering Fed actions today, consider what they are doing to the future.

If nothing changes, then the problem will eventually take care of itself. It will not be peaceful or pleasant, but it will come to a resolution. The outcome will not be favorable for investors or what was once the greatest economy in history.