How $30 Trillion Disappears…

Stocks went up on Tuesday and Wednesday — a total gain of 207 points for the Dow. Futures markets are predicting another up day today.

But the economy continues to sink. The longest expansion in US history seems to be approaching its end. Here’s CNBC:

Job creation skidded to a near-halt in May in another sign that the US economic momentum is slowing.

Companies added just 27,000 new positions during the month, according to a report Wednesday from payroll processing firm ADP and Moody’s Analytics that was well below Dow Jones estimates of 173,000.

The reading was the worst since around the time the economic expansion began and the jobs market bottomed in March 2010 with a loss of 113,000. Since then, the private payrolls count has increased by 21.3 million.

Another key indicator is the decline in bond yields (yields decline as demand drives bond prices higher). Economist Richard Duncan explains:

The flight to quality out of stocks and into bonds occurred because the outlook for corporate earnings is deteriorating rapidly due to the US-China trade war. The earnings outlook is deteriorating for two main reasons. First, there is a real possibility that China will take steps that sharply reduce the earnings of US corporations doing business in China. And second, the global economy is slowing quickly and may soon be in recession. […]

China’s economy would have slowed significantly even had there been no trade war. Now, facing 25% tariffs in its most important market, China’s economy may soon begin to contract. Its imports already have. The rest of the world will suffer as Chinese demand recedes.

Why, then, would investors buy stocks now? A recession will cut into sales and profits. Stocks should be worth less, not more.

Give a man a fish

But Wall Street and Main Street haven’t seen eye to eye for a long time. Now, they practically no longer talk to each other.

Remember the old saying: Give a man a fish and he’ll eat for a day. But give him a fishing rod and he’ll have food forever.

That is the difference between earnings and capital. The rod is a capital asset. With it, you can catch not just one fish, one time…but many fish, over a long period of time. Naturally, a rod is worth more than a fish. But its value goes down sharply when the fish disappear.

Taking the economy as a whole, we measure the rods (capital assets) by net household wealth. The fish are, very roughly, GDP.

Normally, household net assets are worth about 3.8 times GDP. This is not an arbitrary figure. It’s the natural relationship between rods and fish.

That was the ratio that prevailed in the US from the end of World War II all the way up to about 1995. The Main Street economy grew. And Wall Street assets grew along with it. The ratio remained about the same.

But then, fake money and the Fed’s EZ money policies began to work their mischief. First, the ratio of household net worth to GDP went up to 4.5 in 1999, then to 4.8 in 2007…and now, it’s at 5.35.

‘Financialisation’ it is called. It’s what happens when fish and rod part company. And now, pushing them further apart is the slimiest Fed the nation has ever seen.

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Taking away the punchbowl

In the Eisenhower era, then-Fed head William McChesney Martin saw his job as being to prevent bankers and speculators from doing anything too dumb. He ‘took the punchbowl away’ when the party started to get out of control.

Later, when the politicians did something dumb, spending more than they could afford on the War on Poverty at home and the War on Vietnam abroad, another Fed chief, Paul Volcker, took the punchbowl away again — putting interest rates up to 20% to stifle inflation.

Alan Greenspan brought the punchbowl back. He filled it with hard liquor in the heat of a crisis — first, in the Crash of 1987, and later, after the dotcom blowup of 2000. (He also let investors know that he had plenty more booze where that came from.)

His successor, Ben Bernanke, responded to the debt crisis of 2008-2009 more absurdly — with even more debt…a bigger bowl and far more alcohol. But even he was reacting to a perceived crisis.

And now, with no crisis in sight…with full employment and inflation almost right on the 2% target…the Fed has made it known that it will never, ever take the punchbowl away again.

That is, it is no longer going to even pretend to act as a responsible guardian of the nation’s money system.

Nor will it make any effort to pop bubbles…or to prevent politicians, bankers, and speculators from doing dumb things. On the contrary, it will goad them on with free money!

Tidal forces

The present federal funds rate — the rate at which member banks lend to each other — is only 0.18 percent over the inflation rate. The first rate cut, widely expected before the end of the year, will push the rate into negative territory again, where it spent most of the last 10 years.

Will that be enough to stop the tidal forces of the business cycle? Will that (perhaps along with an announcement from the White House that the trade war is over) set off another big runup in stocks?

We don’t know. But when the 21st century began, GDP was about $10 trillion (in current US dollars). Then, US households had a net worth that was already way beyond the normal level…but still less than $50 trillion.

Today, total household net worth is about $105 trillion — in stocks, bonds, and real estate. And when the traditional relationship reasserts itself, household net worth will go back to about 3.8 times GDP, or about $75 trillion. That means that about $30 trillion in asset values will go ‘poof.’

If any of your money is counted in that $30 trillion of fake wealth, we suggest you move it while you still can.


Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance.

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