That’s creativity for you. Love the story.
I’m reading and observing a lot, trying to keep an open mind on things. Most important, trying to keep my bearish confirmation bias out of the picture. The obvious and my thoughts:
There has been an enormous worldwide printing event, nothing of this magnitude has ever been seen. However, it will be insufficient to quick-start stalled economies. There will be too many permanent dislocations and negative changes in consumption patterns that are simply unknown unknowables, but which point to a reduction in consumption and thus overall demand. Accordingly, it seems that all this printing will ultimately be only partially successful.
Inflation or deflation? That one is easy, no inflation, no way. Inflation takes place when too much money chases too few goods. Overall demand is down. And as the consumer returns, his spending habits are likely going to be tempered by the debt he’s incurred and the economic horse-whipping he has experienced. He’s going to be in no mood to re-start the party. Thus, overall prices are likely to fall. Deflation seems to have the upper hand here.
In the US, consumption typically accounts for 65-70% of GDP. In the second half of 2019, as the economy began to falter, it accounted for as much as 90%. There’s no way that kind of percentage will be seen again.
Production is now very efficient thanks to technology and relatively low labor rates in the Third World. Goods can be cranked out very easily. But without consumption driving the engine post-virus, it’s unlikely that the impetus to increase production will exist for a very long time. Prices will fall, but consumption will not be what it once was. It will be the Era of New Frugality.
Bottom line: The virus in some ways will ironically be beneficial. It will focus consumers attention on their debt and the need to save. Because the USA’s GDP is consumption-driven, GDP will fall. A recession, for sure, and perhaps worse. Because a lot of that consumption is frivolous, i.e., Peloton bikes, dog walkers, razor blades with 5 blades, expensive entertainment, electronic games, gee-whiz this and gee-whiz the other, ad nauseam, the debt-ridden consumer is likely to permanently end his easy-money frivolity. He will learn that debt-driven fake ‘wealth’ is far more dangerous than fake news. This, I think, will be a very good development because it will have the effect of ending to some degree the awful misallocation of capital that we’ve seen. In a decade or so, this should bear fruit. Provided policy makers act responsibly, we might see an era of new, rational prosperity.
But there will still be the overhang of a huge debt. If interest rates rise, the US I’ll be devoting an increasing amount of revenues to pay interest. This will cause problems for government operations. The USG will be forced to shrink its operations across the board just like the consumer will be forced to cut his consumption. That will also be a factor in GDP reduction.
In short, hard times are coming, but that’s not a bad thing in the long run. The poor get screwed, there’ll be social unrest, and there is the danger that demagogues will take control of any of the five or so most important countries and wreak global havoc. Another unknown unknowable.
Gold?
Who knows. You tell me.
My top-of-the-envelope guess is that it will do well provided the USD falls. I can only guess whether that will happen, but I don’t see the USD going too much further to the upside. At a minimum, we’ll see gold stay at more or less present levels. If the USD falls, it will of course go up.
Stock markets?
Down from these levels, almost certainly. No recovery for a long time. I think we’ve just seen wave one of two or three downdrafts we’re likely to see. If the FED acts to prop it up again like it did after 2008, another shorter party but one with the direst of ultimate consequences because it would be the worst misallocation of capital imaginable.
The Austrians get it and got it. |
