The last days of summer are dwindling down…to a precious few. It is the best time of year here in France.
The sun has cooled. The days are shorter; the nights are still and clear. The leaves turn yellow and drift to the ground, a few at first…and then, many. Stirred to life by the occasional breeze, they gather in corners and cover the drains.
And over everything hangs an air of languid grace…like a beautiful corpse awaiting an undertaker.
Over the weekend, we painted more shutters…and doctored up some old windows, hoping they will last a few more years before they need to be replaced.
The old wood is dried out and rotten in places. We put on linseed oil and let it soak in. Then, we sealed it up with caulk and paint.
The windows in the attic date from about 1860, when the house was completely rebuilt. Protected by shutters, they appeared to have never been touched again…until we went to work on them on Saturday.
‘Tout casse, tout passe,’ say the French. Without inputs of new energy, things degenerate and degrade. Everything breaks…and is gone.
And it always happens the same way. Wine, leaves, women, stock markets — they are at their best just before the first whiff of decay. Then, when they are at their finest, they give way.
Speaking of things giving way…
Recently, we wondered about corporate earnings. When will they give way? Or have they already?
Widely reported is that earnings are booming. Also widely reported is that real wages are falling.
And yet, corporations sell to wage earners. How could businesses make more money when their customers are making less?
The whole thing seems fishy.
But let us begin our tour of the fish market by going south of the Río de la Plata…where we find the highest interest rates in the world.
What the Argentines don’t know about financial fishiness isn’t worth knowing.
Last week, for example, the central bank of Argentina fixed its key rate at 60% — after its previous fix of 45% failed to fix the problem of the failing Argentine peso — leaving the pampas in the same fix they were in before.
The real problem is that they borrow too much money. Then, they’re far from being reliable payers. They default punctiliously — about once every 10 years. Then, they start again, usually with the help of the International Monetary Fund — which lends, of course, other people’s money…and doesn’t worry too much about getting it back.
(We will be going back to Argentina in a couple of weeks, where our dollars are worth about three times as much as they were a year ago. We’ll give you a fuller report then.)
In the meantime, part of the reason Argentina is so desperate is that it has a government deficit of 6% of GDP; by comparison, Italy has a deficit of only 2% of GDP.
But wait. What about the US? Over the last 12 months, government debt rose by about $1.2 trillion.
This is not exactly the same thing as the ‘deficit’…but it’s a more honest measure of how fast the feds are going into debt. US GDP is about $20.5 trillion. So the US has about the same shortfall as Argentina — about 6%.
We’re ‘not some banana republic,’ claimed Senator Ben Sasse yesterday. But what’s the difference?
Ah…we like banana republics. The weather is often nice. Prices are generally low. Politics and finances are fairly straightforward. And we like bananas.
But the main difference between the US and Argentina is that the US doesn’t have to borrow money in a currency it doesn’t control. Both borrow in dollars. But the US can create more dollars at will. Argentina can’t.
So Argentina borrows too much and defaults. That’s what banana republics do.
What does the US do when it borrows too much? That, of course, is what we’re going to find out.
Business expansions have their seasons, too. In theory, a new president wants to take the pain of correction early in the election cycle, so it can be blamed on the previous administration.
Then, the new POTUS will want to loosen up both monetary and fiscal policy, so the economy is running hot when the next election comes.
The Trump team is trying something different.
It cut taxes and increased spending, giving the nation a fiscal stimulus and bringing forward a little boom-let early in the election cycle.
That is the source of those corporate earnings that seem so strong. After-tax earnings are up because taxes are down. Take away the effect of the tax cut, and business earnings are where they should be — flat.
Fully 96% of increased post-tax earnings in this latest quarter can be traced to tax cuts. If you look at before-tax earnings, you see little improvement at all.
From an investor’s point of view, so what if the extra money comes from tax cuts? A dollar saved from taxes is as good as a dollar earned, right?
Well, yes — but it has different consequences. In this case, the feds were already running a deficit. Cutting taxes has caused a larger, banana republic-style deficit — soon to be $1 trillion, which will have to be reckoned with in the future.
How? Higher taxes? Spending cuts? Default?
All of those options are open. All are, more or less, honest.
But our guess is that the US will choose none of them. Congress will not be able to cut taxes or spending.
As for defaulting…what do you think we are, some banana republic?
Instead, the feds will choose something worse…something even fishier…
More to come…