The Alignment of Asset Reflation and a Collapsed Economy

Abandoned Roller CoasterIf all the highly informed people who’ve been waging a war the past six months against rising stock prices would just step back for a moment, they would perhaps understand better that their macro views are supported, not negated, by asset reflation. For it’s this asset reflation that hints at the singular and doomed strategy of our monetary policy, and its overlay on our collapsed economy. Just so that I’m clear: there is no macroeconomic recovery occurring in the United States. What’s unfolding currently is snap-back from last year’s crash, which led us to the bottom of a spider-hole. The positive bits of macro data, dribbling out here and there, are really just about getting us back to zero. A kind of steady-state, expected to carry on for some time to come. And that’s a best-case scenario.

Amusement ParkYou can think of the US economy as a kind of defunct amusement park, over which the FED has poured trillions of dollars of syrupy goo. The caramel candy is there for tasting, but it doesn’t turn the machines back on. The ferris wheel is silent. Since WW2, Washington has always been able to call upon Housing and Autos as the two areas to stimulate, to pull the country out of recessions. Of course, we just did that in super-sized fashion 6-7 years ago, to extract ourselves from the last recession. So, it’s kind of sad to see policy makers trying this again. Failed thinkers promote failed playbooks.

Our society’s hierarchy rests in part upon the following assumption: that the intellectual capacity of the chairman of the Federal Reserve, with his PhD and his white papers, is superior to that of a mortgage broker from Orange County, California. I think we need an adjustment to this type of assumption. Because the spread I see opening up everywhere in the US economy is what I call the Prestige-Performance gap, whereby the assertions of our elite no longer comport with observable reality. If the chairman of the Federal Reserve will not allow that the greatest credit bubble ever has now burst, or that it ever existed, then this partially explains why he would think stuffing the banking system with fresh capital would revive the economy.

Asset reflation therefore, in equities and especially in gold, should be seen not as exuberance but merely as part of the same chaos in pricing unleashed by The Federal Reserve, starting earlier this decade. As so clearly outlined in the recent data on employment, credit demand, consumer spending, and our (in)ability to save there is little to no prospect for a sustained economic recovery for one simple reason: Americans are now trapped by their debt.

For those who recognize a rising stock market as evidence of disarray, what we should anticipate now is the recognition phase where the wider public finally comes to understand the nature of our inflationary depression. My marker has been 100 dollar oil and 15% unemployment in California. That should finally get the message across. But other combinations will do: 1300 dollar gold, 1300 on the SPX, and more problems with Commercial Real Estate will also suffice. Like the prestige-performance gap, the divergence between the economy and asset prices apparently has to become even more grotesque before people will understand.

-Gregor

  • Insightful analysis. In support of your analysis, I would like to add that the Middle East and the Far East are the place to be right now. We are in the talent assessment business, and we have noticed a surge in hiring. Places like Saudi, Singapore and Philippines top our list.

    Saleem Qureshi
    HireLabs

  • spamless

    Appreciate the thoughtful and well-written treatise. Very well said.

  • oh man thats just goodness.

    'failed thinkers promote failed playbooks'

    'americans are trapped by their debt'

    great stuff.

  • first, perfect, perfect, photo ..

    pretty soon we are going to have to be talking about collective consciousness, just because there seems no other way to talk about the disconnect between the economy and the market … what the heck is going on in people's minds?

  • Henry Flanagan

    Great article.

    I am beginning to see reality setting in amongst the professionals I know.

    I give the market until mid-November. Once the holidays are too close to ignore, people will panic knowing that they cannot finance the holidays by taking on the usual seasonal debt. Then it will hit home that we're in a depression.

  • not sure why I feel compelled to use this particular phrase, but smashing stuff gregor. the debt burden many Americans feel is something we've been focused on for a long while and was a large part of why we went short COF back in 2007 and covered amidst the panic in 2008. I think I'd also toss in the notion that even insiders of companies are worried about personal balance sheets and liquidity as they approach retirement as you've been seeing stock sales en masse. While some of this surely can be attributed to the negative economic environment and their particular company's tepid outlook, we feel a large driver of this is the destruction of wealth that was seen over the past 1.5 years.

    We've been saying all along that a) savings rates have to rise (they did, at least temporarily… has become a bit suspect recently) and the consumer needs to shore up their personal balance sheet by a combination of saving and paying down debt, b) housing prices need to stabilize, c) mortgages need to be sorted out, and d) leverage needs to come down.

    Many will argue that the American consumer is the American economy, symbolically at least. While some figures have drifted down, the vast majority of Americans still are levered up to some extent. And I truly wonder if the Fed has just started a new leverage cycle with all their actions as there are still true fundamental problems within the system that need to be sorted out. Went off on a bit of a tangent there, but keep up the great insight gregor.

  • good post. confirms my thesis that equity prices != economy

    nice to meet you this weekend, hopefully will make it up to MA sometime in spring

  • uff the fluff

    The Federal Reserve bankers certainly don't expect all this liquidity to “revive” the economy.

    It's more likely that there's a final transfer of wealth to those with “prestige” underway.

    We'll just have to wait and see when the people realize that they are in a Depression. What will they do about it?

  • aimeebarnes

    Brilliant post! How are we best able to move towards an adjustment on the assumption that those granted powers via lineage and PhDs are the only ones qualified to shape our economic policies? This is a question that I wrestle with daily and you've summarized the problem beautifully…Now, what about the solutions (if there are any?)

  • gregor.us

    I have some personal regret at not having moved to Australasia, in the past 2-3 years, when it would have been a slightly easier move for me. However, the upside is that my decision to stay in the States gives me alot to write about, as I am closer to the problem. I like being able to spend time in Boston (1.5 hours away) and New York (3.5 hours away) as a way to get a read on things.

    But yes, I am not surprised to read your remarks. Alot of the world is flush with cash, and has many things to accomplish. For example, I have to imagine that working on Solar projects in the M.E. has got to be very exciting.

    G

  • gregor.us

    Jung IIRC was interested in the make-up of various cultures, and noted the characteristics that were exposed and open in each, and repressed in each. So Jung might say “Well, in German society X is repressed and Y is allowed to roam openly, but in the France Y is repressed and X is given free reign.”

    In a crisis, Jung would say you become trapped and hobbled by what you've been repressing. As I live in the US its harder for me to analyze the society. I'm not sure what people are thinking. I'll venture one guess however: the most repugnant idea to American culture is the idea that things don't get better, that life doesn't improve. That's my best shot. I just think a no-growth period in the US would be very hard on our psyche.

    G

  • gregor.us

    I too will be interested to see whether this Holiday season is as bad as 2008. I wonder that it will be worse, when you combine people's reduced capacity to consume with perhaps a new behavioral change–to choose not to consume.

    G

  • gregor.us

    Cheers, MF. Thanks for the kind words. One open question I have is how far do we have to travel down the dollar devaluation path before we at least trigger a “US export story.” The rest of the world is making a decent attempt to recover. While there's no question our economy is too big to recover fully on exports alone, I do wonder that we could get a small 6 month lift, in that regard.

    G

  • gregor.us

    Nice to meet you too Steven. While I did not get a chance to talk to you much, I had fun briefly talking with your spouse. She seemed unable to explain why you are such a naturally talented broadcaster. We agreed perhaps there was no explanation. That you simply have the right stuff.

    G

  • gregor.us

    It's been such a long time since Americans have known hardship, I truly have no idea what this society will do assuming no sustained recovery in jobs over the next 9 months. I'm not even sure we can look to behavior in the previous Depression, for a clue.

    G

  • Pretty sad state of affairs. But Americans have only themselves to blame. Americans continue to turn a blind eye towards systemic fraud and a throughly corrupt and fraudulent system, and they continue in their support for the same corrupt and fraudulent political parties, politicians, and economic arrangements. Nothing will change until Americans change.

  • gregor.us

    Apparently we will have to go through the painful process of ruined reputations to force society to select more for performance, and less for authority.

    Thanks for the kind words.

    It might also help if something entrepreneurial happened in US education, such that a new group of graduates were coming out of schools with new models. Perhaps these models could combine faster academic phases with intense work-experience phases. Not sure.

    G

  • $1,300 gold, $100 oil and a falling dollar. With the world's best banks to boot, it sounds like Americans should be looking at Canada as their safe haven.

    Regards,
    George

  • gregor.us

    Thanks George. This is why for several years I have made the following joke: “An additional investment strategy that all Americans should consider is to make friends with Canadians, and keep them close.” 🙂 And yes, I have followed my own advice in this regard.

    BTW, saw your new Gold and Silver pages today. They look good.

    G

  • Gnoll110

    I'm sure we can look to behaviour in the previous Depression for idea. There are lots of differences for sure: peak oil & global warming for starter. Just let me abuse your americanism and say that I'm sure that fresh thinkers will produce fresh playbooks.

    http://en.wikipedia.org/wiki/How_Buildings_Learn

    How Building Learn has some interesting stuff about the Depression and less developed economies. Thing like when cash can't be trusted for hold value. You 'save' be converting to building materials asap, then build as you can.

    Noel
    PS Still lots of room left on the West Island

  • Our elites' response to the crisis was incoherent on its face, until you examined the real motivation behind the decisions. For those of us with careers ahead of us, or at least a sense of civic duty, we assume that the goal is to fix the problem and to make things better for the future.

    Of course, when you realize that the goal of leaders has been *to keep things from collapsing on their watch*, it all makes more sense. The point of this insane charade has been to get our elites, protected by their golden parachutes, a bit closer to retirement, away from reproach for this revolting systemic failure.

    Yet we should keep doing what we're doing, looking for reality and guiding principles to make things functional. We will inherit this mess, and it will not matter just how badly some high-ranking bureaucrat didn't want to feel confused or ashamed; it will still be our world.

  • gregor.us

    I wish I could disagree with you, and at one time in the not so distant past, I would have. Sadly, I have come to conclude that what's common to most of them–including the guy who just got elected–is to obscure as much as possible the line that would lead to any policy decision, and responsibility. It all makes sense now as to why, for example, the first StimPak was ceded almost completely to Congress. Because it's ultimate failure will point outward, in wide dispersion.

    Yours in enlightened cynicism,

    G

  • Thanks, G. Feel free to use them at will.

    In the meantime, you and I should explore the idea of producing a Canadian themed piece or episode on StockTwits TV talking about investment opportunities in Canada. I get the feeling this is going to become important to many US investors.

    Regards,
    George

  • TJGodel8

    I like to read actual business stories and related information to form my opinions about the economy. Yes you are absolutely correct their are no signs of a sustainable economic recovery, because the economy as a whole is trapped by a mountain of debt. The economy will limp along much longer than the 6-7 it took to build up this bubble. I believe we should be setting the stage for a very different economy, not based on consumer consumption, or financial wizardry, while capital flows to other parts of the world.

  • diveranne

    Agree totally with Gregor and your response.

  • Chubbz the Delinquent

    Excellent piece. It is perhaps tragic but I don't think most of us in the US can even comprehend the world of hurt we are about to enter.

    The “we send you green pieces of paper – you send us everything we want” economic model for dealing with the rest of the world is unwinding fast — say good-bye to the “Carrier Strike Group” standard (the successor to Bretton Woods).

    Even assuming we could maintain the current ponzi scheme and get everyone on the planet to buy treasuries with both hands, there just simply ISN'T enough wealth in the entire world to finance the USA's unfunded liabilities.

    Keep up the good work.

  • Since we have to speak to the lowest common demoninator in US society to push the points across in 30 second sound bites, I believe the amusement park example (and photo) hit the spot so those among us who refuse to spend 30 minutes to learn about the thievery going on, can “get it”.

  • moegamble

    Love the caramel-covered amusement park, Gregor. Dead on.

  • gregor.us

    That one was just for you Moe.

    G

  • Ron John

    Very astute analysis. I wonder if you and any of your subscribers have read the book “The Bilderberg Group” – The North American Union Edition – by Daniel Estulin. If not, suggest you purchase a copy quickly. It will answer your questions as to where we are, why, and where we're headed!

  • J. Ganja

    Good call Ron. For what its worth, check out the following films: “The Obama Deception” and “The Money Changers.”

  • I am glad you are stating the obvious.Will it make people wakeup & make changes, doubt it.
    I would like Real Estate Prices to get back to what it was in 1970.Wages have from that time stagnated/depreciated and should asset values too in the U.S.

  • orth1557

    I enjoyed reading your article. Soimetimes I wonder if maybe myself and others bearish on the economy are wrong, as the economists talk so nonchalantly about green shoots and the recession being over. How come these smart people do not see what is going on? I remeber being short some dot com social networking stock that doesn't even exist anymore. As much as I knew I was right, I had to cover as the stock raced to $350.00 with no earnings or revenues, just a plan. A plan, and a bad one is all we have now, in fact there seems to be no good plan.Yet the market just keeps chugging higher. The economy has to suffer in order to start getting better several years down the road.I have set my stops a little tighter this time around as I wait for the fat tail of the black swan to arrive.

  • Great piece as always. Is that picture from the Russian town near Chernobyl that they evacuated and just recently were able to go back into? If it is, don't tell me, I am a supporter of more nuclear power and would rather not have that image in the front of my brain.

  • moegamble

    Gregor, did you see at upstreamonline that work at Chicontepec may be halted?

  • World may take punch bowl away from US economy. Interesting that daytraders @smbcapital recommended your asset reflation insights. Comments and your replies are great too. I'll plan to watch your MacroTwits show.

  • World may take punch bowl away from US economy. Interesting that daytraders @smbcapital recommended your asset reflation insights. Comments and your replies are great too. I'll plan to watch your MacroTwits show.

  • World may take punch bowl away from US economy. Interesting that daytraders @smbcapital recommended your asset reflation insights. Comments and your replies are great too. I'll plan to watch your MacroTwits show.

  • World may take punch bowl away from US economy. Interesting that daytraders @smbcapital recommended your asset reflation insights. Comments and your replies are great too. I'll plan to watch your MacroTwits show.