“Arrogance is the camouflage of insecurity.” Tim Fargo
Welcome back to Bygone Relics, I’m C Thomas Printer and I suddenly remembered my Charlemagne and my Ilsa Schneider. Last week we speculated recklessly that China might be playing possum and appearing weaker than they are to lull us into a sense of comfort. I get the feeling that the bond market is doing the same thing. I consume a lot of financial television, podcasts, and reading to become more educated, and quite frankly I am appalled at the level of arrogance out there right now. Everybody is convinced that the Fed will pivot, and they are mocking people that think things could be different. Here we go again…I am going to speculate recklessly about what might happen but hear me out.
Veteran analysts are yakking about the credit cycle and how this time isn’t different. I believe in cycles as much as everyone, but I think our time frames are overlapping. They are looking at the last 40 years, the Fed always bails out the banks or the consumers or the market. Well, we have gone into enough historical detail about the crashes and depression of the 1800s to know that America used to really suffer before the Fed came along. What they have done in the last 40 years is kick the can down the road and create a potential for something bigger. WE continue to spend like nothing bad can happen to the ole U S of A. We have become arrogant and social media is the proof. Analysts are laughing at anyone saying this time is different right now. Ok, let me ask you what happens when a country has a 130% debt to GDP ratio?
One person I follow is Lyn Alden who writes, “Over the past two centuries, 51 out of 52 countries that reached the sovereign debt levels of 130% of GDP ended up “defaulting” [within 0-15 years], either through devaluation, inflation, restructuring, or outright nominal default.” We have a slightly worse economic situation than the Republic of Congo. What happens when the US government plans on selling $1.9 trillion of bonds in the 2nd half of this year? Has that ever happened before? Who is going to buy the bonds, and at what price? I’ve been hearing more and more people ask that question lately as well. The answer is I still don’t know. China- out and possible sellers, Japan- selling theirs, the banks- maybe but they are stuck with their own bonds that are an anchor on their margins right now. Remember that it was the FED that was buying half the bonds for the last couple of years, and they are quantitative tightening and also selling bonds. Now normally when a country is about to go into recession and many people are speculating that the USA is about to enter recession, the bond market rallies which mean yields go down. People like the safety of bonds when the economic times are tough. They are the rush to safety recipient. My anticipation is that this time is different. Ooh I went there.
I learned about ceteris paribus which is Latin for all else being equal or all other conditions are the same. What about our economy is ever the same? We had 4 banks fail this spring and the Federal government just bailed out every depositor during a press conference. If they hadn’t done that the banking crisis would have dwarfed the Great financial crisis. The run on banks in America, stop it C Thomas that can’t happen, except it did. Silicon Valley Bank had a bank run withdrawing over $40 billion in an afternoon through their cell phones. When has the market been able to react that quickly? Bank runs used to take weeks, then the telegraph made it quicker, then the newspaper, then the telephone, and finally social media. A bank can wake up and have breakfast and see clear skies and by dinner, it can be finished like Maui. That is how fast markets can move today, like a wildfire, and that can leave destruction that is unseen and mostly unexpected.
Speaking of unsuspected, the one thing I forgot to mention last week is that China’s strategy of laying low and appearing weak and being underestimated works best against an unsuspecting arrogant enemy. I give you the United States as the most arrogant nation since the tea bagging British. We just print dollars and think we don’t need to produce anything here except social media influencers and more genders to choose from. Our industrial base has been hollowed and went to China and the rest of Asia or just over the Mexican border where the average worker makes less than the increase in wages that the United Auto Worker is about to request in its latest negotiations. Where are those next plants going to be built? Not in the USA unless you want a $100k Chevrolet Impala. This arrogance has Americans watching football, and cat videos on You tube, and watching the mailman for when the next welfare check comes, cause the government is my source of income. I think we qualify as unsuspecting all right. So China might be playing the perfect opponent but unsuspecting might work against us in the bond market as well. The bond market has signaled Fed pivot for so long it is almost a year the 2 year bond yield has been above the 10 year bond yield. That isn’t a good sign, but what if the rest of the world is telling us something like Fitch did a couple weeks ago when they downgraded our credit from AAA to AA+? What if the rest of the world reads Lyn Alden and says, 51 out of 52 no thank you America. Not even remotely interested because if you can’t figure out your gender then you certainly can’t figure out how to balance the budget when interest on the debt, Social Security and Medicare are only going to be eating a bigger piece of your financial pie.
Luke Gromen of Forest for the Trees was interviewed by Wealthion this week and he said it best. Oil and bonds. That is what you need to know. We are done with cheap oil now that interest rates are too high for shale oil to work, and no one will buy our bonds, so the yields go up until there is a buyer. He is right because there is no buyer, the Fed has hidden this or revealed this to us since Covid. We are broke. Very few people have figured this out yet. Oil prices will continue to rise, which makes producing countries very happy and importers very unhappy, think Europe last year. Now who are the people that have all the oil? Russia, Saudi Arabia, Iran and our relationship with them is awful, hell we are still on terrible terms with Venezuela as well.
What happens when you are broke is often you don’t realize it and then you suddenly realize it and panic sets in. The retail companies reported their earnings last week and Dollar General and the lowest retailers are predicting terrible numbers and it is because they are seeing people being too broke to go to the dollar store. People are choosing to not make car payments as they have to eat. People are starting to realize that the government gravy train and chuckwagon are little specks disappearing over the horizon and they are expecting another pilgrim to show up and give them free stuff. I have news for you pilgrim, if you don’t work you don’t eat. That lesson was taught very well along the Oregon Trail and believe me that is a lesson that needs to be taught in Portland today.
The lesson we need to learn is to stop being arrogant. Walking around with a $1000 cell phone is arrogant. Posting pictures of your salad is ego filled arrogance. Thinking that the government should pay you to stay home and play video games is arrogance. And here is my favorite, thinking the stock market goes up forever and that nothing bad can ever happen to you is arrogance. I will just buy more Airbnb’s and get rich, so I don’t have to work. Someone has to work to occupy them. People claim that there is a housing shortage, but that inventory that would be glutting the market right now is sitting vacant 26 days a month as an AirBnb. It is a second home for a baby boomer that bought it and has watched their Microsoft stock that they bought in 1984 go up and up. They don’t need to sell their extra house because it is going up and up in value and they are making money everywhere they look and what a great retirement time they are having now. Cruises and going to Europe and learning Salsa cha cha cha! It is no wonder that the senior community is the fastest spreader of STDS. They are having a blow off inter-galactic kegger. That’s arrogant.
This will be what happens. The market will start to crash as all the buyers have been buying Nvidia because AI will save the day, and their portfolios will be the first to drop and they will feel less wealthy, like last year. Then their second home prices will start to fall and they will think that they should probably list it, but interest rates will be so high that there will be no buyers for that as well. Everyone that can afford a house is stuck in a house with a low mortgage and not able to move and no one else can afford the new mortgages so they are renting, and it will be an air pocket or as they like to say a little bit of a gully. No one wants to sell because that revalues all the homes down and that’s where we are now, so when it starts it snowballs as well. No cheap money investors paying cash, because they can’t get any dollars because either, banks aren’t lending. Their bonds continue to lose value as rates go higher so that 60/40 portfolio continues to leak water everywhere. The US bond market is on pace to lose money for the 3rd year in a row and that hasn’t happened in 250 years. Please tell me how it isn’t different this time.
Oil is now at $85 a barrel and America, one of the few places on earth lucky enough to have its own oil just makes it more difficult and more difficult to pump oil. The state of Montana requires the energy industry to consult children’s climate concerns before deciding on whether to pump oil. That key delay allows the rest of the world to get the jump on us and you know, not be idiots about an energy policy. But wait, America is turning into a green country as well. We are turning out EV cars , but as Richard Rawlings from Gas Monkey Garage says, “ the whole EV thing is being shoved down our throats by political people. And we don’t know what it’s going to look like when there are 200 million [dead or dying] lithium battery packs lying around.” I don’t know what it will look like either Richard, but I know it will be expensive. The reason these cars are getting so cheap is like bonds, there are lots of them. When our broke government stops giving tax credits away for these cars they are done. These companies have the same problem as the banks and the cha cha cha seniors. Everyone that wants an EV car will have one and not want to get a new one because they are expensive and they are getting pinched. They can’t finance them because interest is going to be too high, so they will have massive inventory builds until they lay off people or just go bankrupt.
“Arrogance is ever accompanied by folly.” Plato
Now C Thomas you are a real killjoy today. All the Fed has to do is pivot and the whole thing goes back to how it was, and nothing is different. That is the problem right there, something is different, we have inflation. IF the Fed pivots, or restarts QE, or Congress prints another batch of helicopter money the world will realize that the US is done. Inflation will make last year look like a pond ripple. Countries will give up the dollar like young sailors in port their coin and virtue. The arrogance is that we deserve to continue this lifestyle. We simply don’t, that privilege was earned and spent long ago. We are simply holding on before last call.
Homeowners, seniors with great retirement plans ahead, seniors on Social Security and a not great future ahead, AirBnb real estate barons, bondholders, stockholders, hell dollar hodlers which is frankly most of the world will also get destroyed, not affected destroyed. A market going this parabolic requires more and more money to sustain its rise, and that is the one thing that is constricting, the money supply. Quantitative tightening has gotten very few headlines, but it is starting to become the bull in a China shop that it usually is. Broken things will be left in its wake. If I was a Bitcoin maxi or hodler this is where I would be tooting my horn. I’m still unsure of Bitcoin, but if it is indeed limited in supply and our government is printing dollars then it will also go up.
Look on the bright side people we can avoid hyperinflation is we get a really severe recession or depression, but the spending must stop now. Vegas must become a ghost town, NBA arenas need to be empty enough to hear the squeaks of the sneakers, and the door dash phone lines need to be turned off forever, only then can we work our way out of this mess. I’m writing this on Labor Day and it reminds me that we used to do real productive labor in this country and we built great big things and we weren’t arrogant about it, but proud of our accomplishments. We need to take that spirit into facing this economic predicament because it will take all of our country’s ingenuity to get out of this one with our britches on.
Sincerely Yours,
C Thomas Printer
On this date in history…122 years ago to be exact, William McKinley was shot and later died in Buffalo, New York.
This week’s financial tip of the week- shop at the Dollar Store. Target is way too expensive and woke.
Also born on this date a man for all ages, William Rosencrans, inventor, executive, diplomat, politician, and US Army officer as well as the grandfather of the first Governor of Montana.