Mar 26, 23 | Standing on the shoulders of giants

“A bull market is like sex, it feels best right before it ends.”  Warren Buffett 

After the quarter-point hike from FED this week, it appears that we have come to a crossroad. Are the savers or spenders going to be rewarded?

We got a quarter point hike this week, and some rather insightful and sexy comparisons from Warren Buffett to start out our day so off we go… We have discussed the concept of sitting on the shoulders of giants.  I have described that I believe Americans are standing on the shoulders of their predecessors and getting the spoils of the victory of World War II as well as resetting the world reserve currency in their favor after the Bretton Woods Agreement.  It was deserved in 1944.  We had defeated evil, we had the world’s  most dynamic economy, technology, oil production, and we were the world’s largest creditor.  We carried with us a trident of powers: military, economy, and morality.  We were the shining city on the hill that became the envy of the world, the savior to the world, and the example to the world. As I see Chinese President Xi Jinping travel to Russia to broker peace, make trade agreements with the rest of the world, and create the world’s largest production system I see an imperfect remix of an American 1945.  

Sitting on the shoulders of giants is certainly not my idea or concept although I am looking at it through a particular lens.  Isaac Newton used it to describe his achievements in 1675:

“If I have seen further, it is by standing on the shoulders of giants.”  Isaac Newton 

But Newton, a hall of famer intellectually compared to little ole me also was just building on the idea from Bernard of Chartres, who according to John of Salisbury in 1159:

“Bernard of Chartres used to compare us to dwarfs perched on the shoulders of giants. He pointed out that we see more and farther than our predecessors, not because we have keener vision or greater height, but because we are lifted up and borne aloft on their gigantic stature.”  John of Salisbury

What does this historical journey have to do with us today?  It seems like we are dwarfish in comparison to our leaders of yesteryear, and if we analyze closely the consequences of kicking the can down the road, we have now reached the conclusion that we are at an introduction of sorts.  End of the road?  Meet the can.  We have taken a bad idea of seemingly unlimited credit expansion and ran with it until its logical end.  It’s time to pay the piper.  We have banks failing, top 20 US banks, Switzerland’s second biggest bank, and the easy answer is to just lower interest rates and we can kick the can down the road again.  However, there is one problem that stands in the way of that idea.  Inflation.  Inflation will not allow it to happen because if we, by we I mean Jerome Powell, retreat the inflation will accelerate again and stagflation or worse could appear.  So we are at a crossroads and the fate of the economy rests on the shoulders of one man, Mr Jerome Powell.  We have compared him to our last hope, our very own Jedi here at the CTPC and his job is just now beginning to be difficult because the pressure he is applying is much like a boa constrictor.  He has warned of pain but now the economy is having a difficult time catching its breath yet the squeeze is tighter and tighter.  Many with debt are not prepared, many are believing all they have seen and ever known in their lifetimes, but we at the CTPC are open to the possibility of learning our history and how it is possible that he could save us from an inflationary destruction.  That doesn’t mean there won’t be other destruction but most people don’t realize that it is the inflationary destruction that should always be considered first.  That is the dilemma that people haven’t thought through completely.  He has a choice and it is not an easy one, it is not a choice for a dwarf but for a giant intellectually.  Do you choose to destroy the credit excess and wreck the over financialized economy OR do you choose to inflate away debts by allowing the currency to do the dirty work?  Do you reward the people who took the easy path of overextending their credit and living above their means or do you reward the savers and the people that tried to do the right thing which was to live within their means?  This is a moral choice.  

The Federal Reserve has not had a good first century and frankly I am not a good supporter of the Fed in general, but in this particular window of history I believe they can do something where other people have been too little to do the right thing.  Donald Trump, Joe Biden, Bene Bernanke all have extended and kicked the can down the road winning elections and Nobel prizes along the way, but rest assured if Powell decides to reward the deserving, he will be reviled.  His hero, Paul Volcker, received death threats as Congress and the nation bemoaned the terrible recessions he caused in the early 80’s.  He nodded and listened and smoked his cigars and his response was in effect:

“I’m here to bail out your own profligate spending, your terrible decisions, and your poor policies.”  Paul Volcker

He is only remembered fondly after the fact.  I think Powell has a chance to share the Economic Mount Rushmore with Volcker if he chooses wisely, and frankly it will be more difficult for him to do so than Volcker because the pain will be greater, the consequences more severe, and the nation of bedwetters will cry louder.  I hope Powell will have the courage of his convictions and do what history has shown to be the correct thing, not the popular thing.  That is often how you get to be a giant, doing the right thing that is unpopular.  Easy is over, which brings us to the word of the week.  

Easy: achieved without great effort, presenting few difficulties.

Will he reward the savers or the spenders?  The easy life or the hard?  The tried and true versus Yolo?  These are the questions on the table that he must deal with.  “A penny saved is a penny earned.”  Is attributed to Ben Franklin who is another giant, but it is hard to save.  It requires discipline to save.  It requires not spending on sugary coffees, vacations, and levering your financial situation to 10 Airbnb’s.  The rest of the world doesn’t have to make these choices because they can’t, they aren’t sitting on the shoulders of giants.  They are simply why they must look up to us now?  Americans have shown that they do not have discipline- in their eating, in their homework, in their morality.  This will not be a choice that most Americans make for themselves.  It will be forced upon them.  It will be impossible to order a $7 coffee regularly because people won’t be able to afford it, they won’t be able to take vacations because they can’t afford it, and without people taking those vacations those Airbnb’s cash flow models don’t look so good.  The banks lending against those Airbnb’s or investors buying asset backed securities, which are a whole bunch of these loans to Airbnb’s which have fragile business models, are going to fail.  They will fail in droves.  The credit crunch is here already as Powell has slowly squeezed the lending facilities.  If Americans can’t help themselves, then Powell will help them by not allowing them to borrow.  Zombie companies living on the easy credit/money/fraud of the bullshit Covid spending plans approved by Trump and Biden will start to fail.  Malinvestment in start-ups with no revenues or revenues that don’t turn a profit will start to fail.  Established companies like Credit Suisse that have been around for 167 years are failing due to bad malinvestment and poor discipline in their risk management departments.  This will shift from banks, to businesses, to individuals.  The air is coming out of the bubble.  This is just a glance of what to expect.  The tough decisions that were kicked down the road in order to win elections, win popularity, and to avoid temporary hardship have all landed on the shoulders of one man.  I hope he is strong enough to bear the load.  I know America isn’t so he will have to bear the load for them.  Americans will only feel the results which is how most generations of Americans have felt and the rest of the world feels all the time.  It’s called unentitled.  The giant has just shrugged us off his shoulders and we will have to stand on our own two feet for a change.  I don’t think many will enjoy the view.  

“Inflation is the price we pay for those government benefits everybody thought were free.”  Ronald Reagan

Sincerely Yours,

C Thomas Printer

This week’s financial tip

Save your money as you are going to need it.  

On this date in history

23 years ago to be exact Vladimir Putin was elected president of Russia.  

Also born on this date

The only person more dis-agreeable than C Thomas Printer this week, Strother Martin, famous for playing the ornery man that owned the raft in John Wayne’s Rooster Cogburn.