How Hot Money Put America in Hot Water

Two newsworthy things happened on Friday.

As to the first, we were right after all. Mr Trump isn’t going ‘Full Retard’ in his trade war. At least, not with Mexico. His dramatic declaration of an escalating tariff…until the flow of illegal immigrants ‘STOPS’…must have been just another of the showman’s stunts.

Stir up a fake fight…make a fake ‘deal’…and declare a fake victory.

A great deal

Here’s The New York Times:

The deal to avert tariffs that President Trump announced with great fanfare on Friday night consists largely of actions that Mexico had already promised to take in discussions with the United States over the past several months, according to officials from both countries who are familiar with the negotiations.

Friday’s joint declaration says Mexico agreed to the “deployment of its National Guard throughout Mexico, giving priority to its southern border.” But the Mexican government had already pledged to do that in March during secret talks in Miami between Kirstjen Nielsen, then the secretary of homeland security, and Olga Sanchez, the Mexican secretary of the interior, the officials said.

Over the weekend, Mr Trump also tweeted — twice — that the deal included large food purchases:

MEXICO HAS AGREED TO IMMEDIATELY BEGIN BUYING LARGE QUANTITIES OF AGRICULTURAL PRODUCT FROM OUR GREAT PATRIOT FARMERS!

Neither Mexicans nor Americans could find any trace of this in the deal they negotiated. Nor is it obvious how Mexicans buying US farm output would reduce illegal immigration…or why, if it made economic sense, they weren’t already buying food from the USA.

Countries don’t generally buy food anyway; companies buy food to sell at a profit. And farmers don’t grow corn as a patriotic act; they grow it to earn a living.

Apart from that, it was a great deal!

[Donald Trump and Elizabeth Warren both have the same idea: that the economy is meant to serve the politicians and whatever cockamamie election strategy they come up with. More tomorrow…]

So, south of the Rio Grande, things are going back to the way they were, with the illegals still making their way across the border while Mexico ‘works really hard’ to do what the US has been unable to do — stop them.

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Great fake-out

Meanwhile, north of the river, things are bumbling along in the same direction — towards another great fake-out.

The employment numbers came out on Friday…and they were miserable. The ‘greatest economy ever’ added only 75,000 jobs last month, well below the expected 185,000.

So far, the Trump economy has added an average of 25,000 fewer jobs every month than were added during the previous administration.

But the labour report was not at all surprising. For weeks, a recession has been stalking the economy. New housing construction, house prices, debt delinquencies, final consumer sales, bond yields — all point to a slowdown.

Nobody lives forever. And no expansion is eternal. And when you’re the world’s oldest person, it is probably just a matter of weeks until the hearse shows up.

The punky employment numbers are a sign of normal aging. They are nothing to be alarmed about. But what happened after the numbers came out was ghastly.

Hot money

Last week, we looked at the growing gap between Main Street and Wall Street. We looked at several indicators — household wealth/GDP, Wilshire 5000/GDP, labour/Dow — and saw that there has never been so much distance between the two.

How did it happen? The feds created fake money and lent it out at fake rates. This money went overwhelmingly into Wall Street — the financial economy — not into the Main Street economy.

The federal funds rate is for overnight loans. It supports the short end of the yield curve — including call money and short-term bills and notes.

But you can’t build a factory or a house, start a business, or develop a new technology with hot money. Because real output takes time…and long-term finance.

Hot money is only useful for speculators. They can use it to take leveraged positions in stocks and bonds — where they know they can unload them and get out at a moment’s notice.

For them, the most important thing is the cost of ‘carry’ — the interest rate on their borrowed money. And as the economy weakens, they become bolder, betting that the Fed will cut interest rates again, making their cost of carry negative.

So, instead of selling stocks because a recession will make Main Street businesses less profitable, they bought them. The Dow closed up 260 points.

It may all be fake, they reason — Wall Street prices, trade wars, interest rates, employment numbers, and inflation rates.

But it’s getting even fakier. So, Party On!

Regards,

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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