Federal Reserve Chairperson Powell said that the country is on a war footing – noting that after World War Two, the economy transitioned from wartime and needed to absorb millions of returning soldiers into the labor force. The Employment Act of 1946 committed the government “to use all practicable means to see that anyone willing and able to work can find useful employment. At present, we are a long way from such a labor market.“
Treasury Secretary Janet Yellen said the US could see full employment next year if Congress passes President Joe Biden’s proposed stimulus package but warned the country’s unemployment rate would remain elevated over the next few years without the additional $1.9 trillion in federal support. Who is right – Yellen or Powell?
Powel goes on to say, “Given the number of people who have lost their jobs and the likelihood that some will struggle to find work in the post-pandemic economy, achieving and sustaining maximum employment will require more than supportive monetary policy, It will require a society-wide commitment, with contributions from across government and the private sector.”
Basically, Powell says that the Fed can do little from here on to help the economy – it is up to government. Hence, the call for government stimulus packages. The latest is a Biden $1.9 trillion Covid relief plan. Though it has met resistance, it will likely pass – and most likely will not be the last. It is just the beginning – there is talk of an even bigger $3 trillion stimulus plan in the future.
So how is the job market in America? After the initial shock of COVID19 and the reception of stimulus checks, many have not had jobs on their mind. This will soon change as America, and other economies worldwide will need to get back to work. The job market saw a big shock initially after COVID19 and has come back somewhat. But a new normal is setting in, and the true effects for a COVID19 feeble economy will set in. Unemployment could start to rise again – as recent Initial Jobs Claims are showing.
The other point that should be made on jobs is the effect immigration will have on jobs, especially those on the economy’s bottom rung. Biden has introduced legislation that includes a provision that would create a pathway to citizenship for the country’s 11 million undocumented immigrants living in the United States. Not only will these folks crowd out existing Americans from jobs but put upward pressure on wage inflation overall – both from a sudden increase in the wage force, but as well, legal workers can demand higher wages than illegal workers.
Is higher inflation in the cards? With the Trump, Biden, and Fed stimuli, along with the ongoing deficit spending embedded into the government’s budget – it means currency debasement is accelerating. With currency debasement, it means inflation is for sure to follow – see more here. In review, Currency Value is defined as:
Currency Value = GDP / Money Supply.
Money supply growth is off the charts – see chart below. In contrast, GDP growth is feeble – 1.90% in 2020. Some will say that this alarming growth in the Money Supply is transient. Some for sure, but simple math can tell us that in the past year, at least a 10% currency debase has already occurred, with more to come.
Global stock markets fell for the first time recently over potential inflation concerns, with investors worried about high-flying share prices and the potential for inflation to spiral. Inflation is always difficult to track as it is different for each person depending on their position in the economy (e.g., owners vs. renters).
The CPI inflation is still low at 1.4%, but food prices are soaring near 3.7% – see here. Another way to look at “street” inflation is to look at the CRB Commodity Index – see below. After the initial COVID19 shock downwards, it is now skyrocketing, giving rise to the beginning of what some believe will be a hyper commodity supercycle – see here a nice visualization of this phenomenon.
The CRB Index is calculated using an arithmetic average of commodity futures prices with monthly rebalancing. The index consists of 19 commodities: Aluminum, Cocoa, Coffee, Copper, Corn, Cotton, Crude Oil, Gold, Heating Oil, Lean Hogs, Live Cattle, Natural Gas, Nickel, Orange Juice, RBOB Gasoline, Silver, Soybeans, Sugar, and Wheat. Those commodities are sorted into 4 groups, with different weightings: Energy: 39%, Agriculture: 41%, Precious Metals: 7%, Base/Industrial Metals: 13%.
Stocks are a one-way bet nowadays. The Fed will see to that. Many look at the stock market as a barometer of how the economy is doing. But “Wall Street” has long been disconnected from “main street.” What else can high-valued investors do with all this money? Buy stocks – after all, stocks historically have been a good hedge against inflation. That being said, if more socialism (higher taxes and spending) becomes economic policy in the U.S., earnings may come under pressure, and PE ratios may need to contract, leading to a stagnant stock market – something the Japanese suffered for decades – see here.
Perhaps one should look at the Bond market to better measure what is happening in the financial markets. The U.S. 30-year Treasury Bonds has just recently crossed the 2% mark, while the 2-year Treasury Note is near zero. To get more stimulus into the economy from the Fed, it would require rates to go negative – an option the Fed may have to consider as some European countries already have. In any case, the yield curve is widening.
Generally speaking, the higher-risk a bond or asset class is, the higher its yield spread. There’s a simple reason for this: Investors need to be compensated for trickier propositions. If an investment is seen as low risk, market participants don’t require a huge incentive or yield to devote their money. But if an investment is seen as being higher risk, people naturally will demand adequate compensation – a higher yield spread – to take the chance that their principal could decline. The Bond market is signaling danger signs are on the horizon.
But the Fed can not let these rates get out of hand. They will have no choice but to continue to expand their balance sheet and buy these Bonds to keep rates low as an ever-present economic stimulus. The alternative would be to free float interest rates, whereupon governments would need to pay higher rates – and face state bankruptcies. This is not an option to stay elected. The following chart will continue to rise and even go exponential. To be clear, this phenomenon is just more currency debasement – it will end one day, and it won’t be pretty.
Are economies drowning in debt? The short answer is … yes. A new report from the Institute of International Finance finds the world’s debt-to-GDP ratio rose to 356% in 2020. It is up 35% from where it stood in 2019, as countries saw their economies shrink and issued an ocean of debt to stay afloat. The increase brings numerous countries, including the U.S., to extreme debt levels, well beyond what economists have called untenable in the past. If one can not service this debt, one risks reaching that “Minsky Moment.”
The point here is that government and private organizations will find it difficult to expand their credit to resolve their financial problems. They, in a sense, have spent this ticket already – they are out of ammo. Many of these organizations’ only choices will be to focus on cost reductions and other contraction of services.
As we see with endless stimulus during the COVID19 pandemic, it does keep the economy somewhat afloat. But paying people to shelter in place or producing government make-work projects via increasing debt is problematic for the economy. Sitting in your basement playing Xbox does nothing for economic productivity.
In economics, productivity measures output per unit of input, such as labor, capital, or any other resource – and is typically calculated for the economy as a whole, as a ratio of GDP to hours worked and financial resource inputs.
Looking at a historical productivity chart through the stimulus feed Obama area, the policies did little for productivity improvements. These are the effects of the socialistic policies implemented and the constant stimulus. Though somewhat improving through the Trump era, if Biden puts us back into these more socialistic policies, productivity will continue to suffer.
This has a direct correlation to our standards of living. In the past, each generation tended to do better than the previous. This assumption may no longer be true. Unfortunately, the decline in economic expectations often leads to more socialism, as people turn to government for solutions. It also leads to social conflict – which may explain much of the political divisions we see today.
The Minsky Moment mentioned before refers to the onset of a market collapse brought on by reckless speculative activity. Often thought to come after an unrealistic economic expansion, but it can also come after a catastrophic event. COVID19 and years of problematic monetary policy have placed us in a situation where debt is such that society’s ability to repay it is unrealistic. It becomes a Ponzi scheme until it collapses. The Minsky Moment is the point of collapse.
If this is in the cards, all bets are off. Many are calling for a global reset to put the world back on a sound footing. Our leaders and elites are not idle. They are listening to the sounds of the people. Many leaders and elites call for a restart or a reboot, as they too are fully aware of the storm clouds building – see more on the Great Reset being telegraphed by our elites. Some say it is a “fait accompli.”
Putting on our crystal ball, what are the key takeaways on this data for the near future?
- The job market will become challenging, especially for those on the bottom rung of the economic ladder.
- Currency debasement will become real. Cash and fixed income (e.g., retirees) will lose 20 to 50% in purchasing power over the next 2 to 5 years. Inflation will become the state of play one will need to consider in our financial planning – something we have largely ignored for the past few decades.
- Socialism is creeping and looks to expand under the Biden era. This American generation may be the first generation for a long while, which will do worse economically than previous generations. This has lead to political divisions and social conflict we see today.
- Stock prices could become stagnant (perhaps even slightly rising) if socialism becomes the economic policy. Some could consider this a crash when considering the currency debasement – you just won’t see it in the headline index prices. But there are few liquid alternative investments.
- The risk of a Minsky Moment ushering in what many are calling the Great Reset is becoming a reality. Some feel we are just at the beginning of this and will occur as a process over the next 2 to 5 years. One gives this at least a 50% or higher chance of occurring. Thinking the unthinkable – no one will escape its effects, positively but for most, negatively.
Remember the “Misery Index” from the days of Jimmy Carter? This has gone by the wayside as it has not been a recent problem. But this is changing. In the UK, the misery hits a 19-year high – on mainland Europe we similar statistics. In review, the Misery Index is defined as:
The Misery Index = Unemployment Rate + Inflation Rate
(a lower number is better).
The Miser Index under Jimmy Carter was about 7.0. Though perhaps the current situation is transient, the current Biden Misery Index is about 7.4. It can go a lot higher. We will be tracking this over time (check for the hashtag: #MiseryIndex) to see if this transient statistic becomes the new normal.
Welcome to the Biden economy.