C Thomas believes that it was the Corporate America who benefited from the low interest rate environment. The losers in that case were mom and pop businesses, our neighbours, small towns, and cities. Therefore, our word of the week is urban blight.
Good morning, I’m Austerity Jones and I am back with C Thomas who is ready to talk finance on the eve of the Federal Reserve meeting Wednesday.
I am finally starting to hear some positive news this week regarding the economy Austerity. People are thinking we might slip into a recession and prices might start falling. I’m confused though, they make it sound like a bad thing. Gas prices are dropping, well gas was $2.50 and then it was over $5 a gallon but it is still over $4 so I don’t see it dropping anywhere near where I want it to be which is back at $2.50. Please tell me how these are bad things for anyone except the investors that drove these prices parabolic in the first place? They are not, is the answer. Low prices can be celebrated a long while before they become a problem in this country, Europe, Argentina, Turkey, should I go on?
The Fed is set to meet this week and expectations are they will raise interest rates by 75 basis points. This week Jeffrey Gundlach came out and said we need a rate hike slowdown to a 25 basis point hike, Elon Musk said we need a negative 25 basis point hike, and Cathie Wood from the Ark Innovation Fund was warning about deflation. What is it 85-90 % of the S&P 500 is owned by the top 10% and even that is probably very heavily weighted to the top 1%. Of course these people want the Federal Reserve to stop raising interest rates, its their money at risk. An average person spends a large percentage of their income on food and energy, while someone like the Bond King Gundlach or Elon Musk spends an infinitesimally small amount of their income on the same things. So when gas prices fall, Elon and Jeffrey aren’t going to care, but it is a really good deal for the average American. How good a deal? Well, politically it’s a big enough deal for Joe Biden to have drained half of our Strategic Petroleum Reserves to do so. Deflation isn’t the enemy yet for the average American, they would welcome lower prices because they haven’t benefited from this huge wealth transfer from the working class to asset rich and debt laden business owners like Aunt Cathie and Uncle Elon. Aunt Cathie’s largest holding is Tesla and so she shares the same need for interest rates to remain low. Their companies need low interest rates because the stock shares they own are valued (value is a stretch in considering Tesla but roll with me) using a discounted cash flow valuation that decreases the value of future cash flows when interest rates rise. The higher the rate used, the smaller the present value of those future cash flows. Besides, there are other options in which to put your money. Short term bonds are offering almost 4% and that is also putting pressure on stocks that have future dreams of grandeur. I think watching Billionaires bitch and moan has been and will continue to be comical for a while. I will welcome lower prices as long as the average worker can remain as employed as they want to be and if billionaires squirm, Boo hoo!
Matthew Piepenburg was interviewed this week on Kitco news and he reminded me of one of my favorite quotes from Andrew Jackson who closed America’s first national bank. “A private central bank is effectively a prostitution of the government at the expense of the many to benefit the few.” This is what our Federal Reserve has done for 40 years now. They have driven interest rates down making people that save their money the losers and benefitting the spenders. This has allowed easy financing to prop up unprofitable companies like Tesla and many of the innovation funds in Cathie’s Innovation Fund. Tax credits and cheap financing allowed Tesla to limp along and remain in business until now it might have achieved enough scale to last for a while on its own merits and profits. A higher interest rate would have driven Tesla out of business long ago. Although selling $60,000 base price cars seems to have a limited audience here in the United States much less the world. At least Tesla has finally achieved profitability so it might finally benefit the states that have given it such enormous tax breaks. However, for every Tesla there are over 20% of the Russell 3000 companies that are in the same position as Tesla was and they might not make it to profitability before interest rates rise and crush their companies under rolled over debt burdens at higher interest rates. Keep in mind that inflation penalizes the saver so the saver still isn’t out of the woods yet. They haven’t had their day in the sun. There are simply whispers of potential clouds and that is all it is at this point.
Austerity: Do you think this low interest rate environment has been good C Thomas?
C Thomas: It’s been good for big business, its been good for shareholders, but I think it hasn’t been good for neighborhoods, small towns, and cities in general, I think it has caused urban blight. Which brings us to the word of the week even though its two words.
Urban blight- consisting of the deterioration of part of a town or city due to ageing, neglect, and lack of financial support for maintenance.
Poor sections of cities have been decimated, but I think it has been equally devastating in the rural areas. I actually want to create a word called rural blight or at least I don’t think it exists. When I think of Wal-Mart did and what Amazon is doing to rural America, it makes me sad. Empty main streets abound, and business owners are being replaced by low wage workers that are obviously quiet quitting. The pride of ownership has been replaced by a disinterested employee or a self-checkout aisle. The money that used to be invested and spent in the community is now being exported out of the communities to the yacht owning owners like Stan Kroenke and Jeff Bezos. But Stan Kroenke and Wal-Mart can buy another sports team and move it across the country to take advantage of more tax breaks.
Actually, I often think of the damage that the low interest rate environment has had on this country. I think of a company like Amazon which lost over 90% of its value in the 2000 dot com stock market crash. The interest rates were quickly lowered by the Fed and allowed Bezos a lifeline to financing while he was losing money every year on paper but building his infrastructure that would develop into the consumer behemoth that is Amazon. This company was able to buy enough time to grow and prosper because interest rates were kept so low for so long especially after the great financial crisis when interest rates were basically 0 for a decade. This along with their ability to pay no income tax over that time and still today has allowed them to bankrupt most booksellers, retailers, and all of the neighborhood mom and pop businesses that couldn’t compete along the way. It was basically the internet version of what Wal-Mart did in the last half of the 20 th century to small towns all over the Midwest. They hollowed out the backbone of the country which was the entrepreneurs and Americans in exchange got cheap imported consumer goods made by companies that hollowed out American manufacturing that wouldn’t have survived had they stayed and built their products in America. So when I drive through America and I see the same few names in town after town selling the same cheap crappy products at always low prices or serving the same crappy food at half the prices of the local diner I realize that if the stock market should crash I will not feel sorry for these companies for one second. Not one second. Americans have sold their soul to corporate America by not buying local and supporting their neighbors but some faceless behemoth with good marketing and a penchant for not paying the same taxes nor playing on the same field by the same rules as their neighborhood pharmacist or grocer or retailer. Now we wait in line because these behemoths have cut labor and reduced the jobs or we have to check out ourselves because it’s a rounding error on a bottom line to have another cashier. So you will have to excuse me while I go to my favorite diner and have a cup of coffee and gaze across the street at the drive thru line at Starbucks circle the building and back up into the street.
Sincerely yours,
C Thomas Printer
Also born on this date:
Ben Carson,
the original Ronaldo,
Mr. Tony Soprano James Gandolfini,
Fred Willard,
Aisha Tyler,
the iconic Greta Garbo,
and the disgraced cyclist with one testicle whose name we will not mention.