Predictions for 2014: We’ve Got A Turd In The Punch Bowl
In my last blog post, Echo Bubbles in 2014, I discussed how responding to popped bubbles with a loose monetary policy only serves to reflate more bubbles. The more liquidity injected into the system, the more intense the ballooning.
Since 2008, the Federal Reserve has injected around 4 Trillion of liquidity into the U.S. market. 2.3 Trillion has gone towards Treasuries, to keep demand high and interest rates low. 1.6 Trillion has gone to banks in the form of asset purchases. The Fed has been offloading Mortgage-Backed Securities from banks in order to provide liquidity, and eliminate exposure to housing volatility.
What happens when 1.6 Trillion is injected into our fractional-reserve banking system and real interest rates are negative? Incentivized speculation leading to all-time asset highs, stock market highs, Emerging Market (EM) liquidity, price inflation, etc.
In late 2013, The Fed recognized that it’s balance sheet was growing monstrous, it’s policy was only enriching Wall Street, and unemployment was moving towards 6.5%. The Fed reacted by tapering it’s QE program from 85 billion, to 75 billion, and now 65 billion. With these events in mind, here are my predictions for 2014:
These will largely begin this year and continue out into 2015.
- Lack of Participation: Unemployment missed target in January and was largely attributed to cold weather (even though outdoorsy construction jobs gained). In the unemployment rate calculation, The Bureau of Labor Statistics doesn’t include people who are no longer looking for work. Isn’t that amazing? So if someone gave up searching for a job, and now lives off of the public dime, they are not factored into the unemployment rate. So the really unemployed aren’t counted as unemployed. That’s like not including people over 400 lbs as obese because they are morbidly obese. A better economic indicator is Labor Participation, which hit 35-year lows with a reported 91.8 million people not in the labor market as of January, 2014. My Prediction: That number will grow to over 108 million by January, 2015.
- Labor Statistic Obfuscation: and yet, when the government doesn’t count non-participants as unemployed, they are able to pad the employment rate dramatically. Even with around a third of the entire population removed from the Labor market, by the miracle of statistical conflation, we’ll see unemployment rates around or below 6.5% for all of 2014.
- Food Stamp-ede: But you can’t have it both ways. The Administration will suffer from record Food Stamp Participation when they conflate unemployment rates with lack-of labor participation. Last reported near 47 million partipants, food stamp participation will hit all times highs with over 60 Million Americans buying government-subsidized high fructose corn syrup products. Don’t worry, Obamacare’s got ‘em covered. I mean do worry, because you’ll be paying indirectly for mandated health services you didn’t need, never wanted, and were forced to buy.
- Retail Slides, Moves Online: What hasn’t QE propped up? The middle class. Who buys cheap chinese goods that keep the consumer-economy going? The middle class. With wages and wealth being eroded by an inflationary monetary policy, we can see why retail has recently slid so hard. As if retail didn’t have enough problems getting customers in the door, they’re getting squeezed even harder by government-caused inflation and government-mandated wages. On one end there’s rising cost of goods, rising energy costs, and rising price per square foot in rental space. On the other end, they’re getting rising health care premiums and a populace-driven minimum wage hike. Retail is usually a first rung for youth entering the job market. The minimum wage hike will move the overall pay-scale upwards (if new person makes $10.10, an experienced person now has to make more than that). Good thing they can just increase the price tag… Wait, the middle class loosing jobs and having it’s purchasing power transferred to the politically well-connected might undermine that plan. Maybe that’s why JCP, Sears, Abercrombie, Aeropostale, Best Buy, Radioshack, Target, and the like have all undertaken major downsizing. In 2014 and 2015, we’ll see massive retail misses, closings, major bankruptcies (JCP), and buy-outs. Labor substitution methods, like the robotic warehouses of Amazon, will see wider adoption as retail looks to cut their overhead.
- Housing Tanks: Instead of letting housing prices deflate and become affordable to the masses, The Federal Reserve policy has been to purchase them from banks at around 40 Billion per month. This takes the toxic asset off of the bank balance sheet and puts it on The Fed balance sheet. If they can’t unload them at the overvalued purchase price (if it wasn’t too high, the banks would have sold them), then who do you think will be on the hook to cover the losses? Congratulations American taxpayer, you now own 1/6th of a dilapidated house. What happens to housing when it sits empty? It deteriorates. 10.3% of U.S. housing is vacant because the government didn’t want housing to find it’s bottom after the crash. Too Big To Fail Banks would have failed and we can’t have that for our best campaign donors. Unfortunately, when the middle class’s purchasing power gets eroded, and student-loan debt becomes a lifetime burden, people can’t afford housing prices that are propped up by Fed policy. The same policy that enriches Hedge Fund Managers and Bank CEOs. Too bad they only need a few houses each (one for vacation, one for the mistress, etc). As a perverse side effect of QE stimulus, Investment Funds like Blackstone were able to get housing deals while borrow at record low rates. Say hello to the new Fund Lords for the upcoming rental-economy. My prediction: housing will miss month after month with the polar vortex no longer to blame.
- Tuition Forgiveness Gets Serious: Tuition forgiveness gets serious legislation proposals in the form of tuition freezes and debt-to income repayment plans. Nevermind that the near infinite supply of government loans is what drove up the price in the first place. Loans that are given without risk analysis or repayment analysis. With youth unemployment on the rise, college has become the new first “job rung” in order to delay actual joblessness. What would happen if government got out of the student loan business? Probably the same thing that happened with car ownership, computer ownership, cell phone ownership, and tuition before the government got involved: it becomes affordable. Sure, rich kids will still drive daddy’s BMW but at least poor kids will have a Ford. There’s something to be said for graduating without a life-time of student debt.
- Channel-Stuffed Automakers Get In A Wreck: With channel-stuffing at an all-time high, car dealerships will be looking to store their inventory in the Denny’s parking lot next door. For consumers, this will be great as rock-bottom prices will go even lower. For the auto industry, the silver lining will turn red as margins are crunched in order to move two-year old inventory. In Q2 of 2014, look for insane car deals and even lower auto manufacturer evaluations after channel-stuffing turns into BOGO for the dwindling middle class.
- Emerging Market (EM) Crises Goes Full Blown: The new Fed Chair, Janet Yellen recently indicated that they will continue with the taper for QE. They have already reduced it from 85 to 65 billion per month in the last few months. When you take an economy off it’s life support, the first thing to go are the extraneous limbs. The Fed-pumped liquidity that has found it’s way into the riskier emerging economies (Asia, Eastern Euro Block, South America) will be running for the door when future liquidity begins to dry up. You can’t throw no money after bad money and expect growth or to sell out to some greater fool. Besides the taper, giant retail closings will slowly narrow our 500 billion year-over-year trade deficits with China, drying up their cash reserves even more. Expect a full-scale bailout in Asia during 2014. A few of them. The Eastern Block and sections of South America are already imploding. Risk off.
- China vs. Japan Heats Up: That’s not Fukushima radiation they’re getting all hot and bothered over, it’s a series of uninhabited islands that offer relatively little in terms of natural resources. The Senkakus battle between China and Japan is steeped in history and represents a proxy power-match more than a real threat. In bad economic times, superfluous threats can escalate very quickly. Unfortunately, both Japan and China are about to face some very real economic turmoil. The former has adopted a bulked-up QE program that has been causing price inflation. Meanwhile, China has been experiencing a liquidity problem that was referenced above. In addition, they have a massive amount of shadow-banking debt that is just about to dry up. The entire world is about to find out how much China has over-expanded. My Prediction: These two will be fighting over these islands (and others) in a game of escalated war posturing throughout 2014. NBD. The IMF should just come in and buy the islands to pay off both sides.
- Tapered Taper: When the conflated labor statistics and lack of growth “catch up” to the taper timeline (even though they were already horrid during last round of QE), the QE taper will be reversed. If they’re stupid, they’ll call it QE again and everyone will know that it is a failed policy. If they’re smart, they’ll figure out a better euphemism for government inflationary stimulus. How about “trickle-down inflation.” No, that doesn’t sound appealing. Wait a second. Obama’s new MyRA plan can keep demand high for Treasuries while the government starts a New, New Deal to “create” jobs. That’s more like it. Since The Fed can’t come out and directly say that QE is a huge failure that robs the middle class, and since the U.S. economy is propped up on it, the government will do what is politically expedient: keep over-stimulating while blaming the 1% and capitalism. They’ll need to hide it a bit better so expect to see more bond buying out of Brussels and London. They buy our bonds, we’ll buy their bonds, everybody lends a hand, arm, and foot—of the proletariat—in order to keep the game going.
- The New, New Deal: Obama will announce a massive government spending program on infrastructure. This is geared more towards the elections in November 2014 or might even be towards the end of 2015 (for the 2016 elections). Nevermind that doing so transfers wealth from the middle class to the politically-well connected (Big Labor) through inflation and future taxation. And nevermind that government doesn’t know how to value a project because it doesn’t run on a voluntary market system with profits (consumer value) and losses (consumer doesn’t value). With the help of QE, government spending has been at an all-time high and yet, we’ve seen the widest gap in wealth inequality. The New Deal? For the middle-class, it will continue to be the New Steal.
- Bitcoin: Is tough to predict. It’s been widely speculated that the U.S. government will eventually try to prohibit, hijack, or regulate bitcoin. If they regulate it to death or ban it, then obviously the evaluation will be much lower than what I predict. I don’t think they’ll do that because Bitcoin is providing an opportunity for wealth creation, in an economy that will soon be lacking in both wealth and opportunity. Bitcoin cuts costs when governmental policies are creating more. Innovation in logistics, automation, and globalization have been driven by entrepreneurs responding competition and governmental regulatory policies. Customers always want the most value for their money, that’s why Wal-Mart exists. Whether a consumer is purchasing Chinese crap from Wal-Mart or a company is purchasing Chinese labor from Guangdong, economizing value is part of the human genome. This is a good thing because it leads to more efficiency. Bitcoin adds to this efficiency by lowering fees by cutting out the middleman: the bank. Bitcoin also replaces the financial sector with an open platform that entrepreneurs can compete in. After the Goxing that just took place, I predict that Bitcoin will rebound off of $580 and end up around $800 on average for 2014. I predict that it will see turmoil throughout the year but no major governmental policy against it (besides uninformed grandstanding). As a result, it will shoot up in Q3 and Q4 as adoption spreads in the e-commerce sector. It will be a few overnight booms from big-box announcements that will drive the price up over $1200, which will raise the mean for the year to $800. This should be multiples higher, but governments around the world have cut bitoin off at the knees by segmenting it from financial institutions, or outright banning it. They don’t want a currency that they can’t control. You can’t inject 4 trillion in liquidity if you don’t own the printing presses. You also have to tax the people to pay for budget-deficits, rather than inflate.
- Silver and Gold: A steady climb until beginning of Q3 when the economic turd rises to the top of the punchbowl. Fixed statistics, hedonics-based CPI, and conflated labor can only fool for so long. Silver will go from $20 to at least $28. Gold will go from $1330 to at least $1550. This comes on the heels of the discovery of massive manipulation in the gold price. If the Fed tapers the taper, inflation concerns will become mainstream and precious metals will be purchased as the usual hedge. If the Fed continues to taper, the faux economy will collapse from lack of QE and money will shoot to safe assets. Since historically-safe Treasuries will have real negative rates (thanks to the Fed, ECB, and London keeping demand artificially high), investors will look to gold and silver as an inflation-protected asset during economic turmoil.
Boom and Gloom
If it looks like doom and gloom, it pretty much is. But that’s a good thing. Since we’ve gone completely off the gold standard in 1971, we’ve seen an ever-expanding monetary policy (chart below) and the gradual erosion of the middle class. In the past few years, more wealth than ever has been transferred to the government and politically well-connected (banks) through the creation of new money via debt instruments. In an attempt to deficit spend while avoiding taxation, the government has gutted the middle class through inflationary policies.
Savings is the delayment of present consumption for future consumption. Deficit spending borrows our future would-be consumption so we can consume now. Deficits add interest, which curtails future consumption even more. All of the fractional-reserve monetary expansion in the world cannot change the mathematics. New money only serves to erode old money, temporarily prop up markets, and transfer wealth.
We need a contraction, it’s the medicine to overexpansion. We need to deleverage and clear out the waste and asset over-evaluations so we can figure out what really has value instead of following the new money. We need to stop inflating away the middle class’s fixed savings and wages. There’s a difference between earning money in a free market, and getting money in a crony capitalist system. We need to get back to the free market.
In 1920s, the US faced a horrible recession. In response, the government cut spending and did very little to interfere. The recession abated in six months and was altogether over in a year. Today, we’re drunk on monetary punch and we keep drinking more to delay the massive hangover that awaits us. Pretty soon, we’ll be at the bottom of the punch bowl and we’ll find out that there was a turd in it the entire time.