Extraordinary Measures

Despite much speculation and wishful thinking, the Fed is determined to get real rates back in positive territory. That will mean more ‘tightening’ and even lower asset prices.

(Train crash at Montparnasse Station in Paris, 1895)

Monday, January 16th, 2023

Paris, France

It’s Martin Luther King Jr. Day.  A holiday in America, but not for the Bonner Private Research team, spread out between Laramie, London, Buenos Aires and Paris. 

Rain or shine, we’re on the job.  

Here in France, a big storm is blowing in from the north.  Temperatures are falling.  Snow is expected tonight.   

Yes, dear reader, winter follows summer, just as it always did.  And so do markets, economies and politics have their moods and seasons.   

The Fed, hoping to redeem itself, is back on the job, too, trying to wring inflation out of the system without causing a meltdown.   Despite much speculation and wishful thinking, the Fed is determined to get real rates back in positive territory.  That will mean more ‘tightening’ and even lower asset prices.    

Investors betting on a quick Fed ‘pivot’ may be disappointed.  Says Fed governor Neel Kashkari: 

“They’re going to lose…I can tell you that.”  

The S&P fell about 20% last year.  The Dow, almost 10%.  And the Nasdaq dropped a third of its value.  More to come. 

Real estate transactions are falling, too.  Prices should follow soon enough.   

In Wednesday’s update, investment director Tom Dyson, explained that buyers of commercial properties often only put up 10% of the purchase price out of their own pockets.  They borrow the rest.  So, when the price goes down more than 10%, the buyer’s equity gets wiped out.  And he still owes the lender.   

Last year, the Greenstreet Commercial Property Index went down 13%. And that bright shooting star – the crypto market – was once worth $3 trillion.  It’s fading fast; it’s now rallied to $939 billion; nearly a 70% loss.   

Meanwhile, comes a blast of cold air from Janet Yellen.  She sent a note to Congress last week, warning that the debt ceiling would begin to crack as soon as this Thursday.  Not to worry, said she, the feds can delay some expenses, kite some checks…and move money from one pocket to another to keep the bullets flying and the heat on in the Senate dining room.  “Extraordinary measures” they are called.  Our guess is that they will become commonplace.   

So far, so good. 

But where’s the surprise?   Things got too expensive…thanks to the Fed’s money.  Now they’re getting cheaper (assets) again, thanks to the Fed. 

Federal debt is still going up…with Congress ducking and dodging the issue, as normal. 

So, what’s new?  If that were all there were to the story, it wouldn’t be much of a story.  But wait…there’s more.  We are working our way through a list of things that are going bad.  Big things.   

The World Economic Forum (WEF) calls it a “polycrisis.”  We’ll stick with our half-word “cluster;” it’s what happens when several trains…their brakes shot…come into the station at once. 

Yes, there are some big locomotives rumbling and trundling down the tracks.  

Which brings us to #3 on our Cluster List: Abandoning free trade, free enterprise, free speech, and equal protection under the law – the things that made America so successful in the first place.    

Why are growth rates so low?  Why is productivity falling?  Why have real wages fallen for 21 months in a row?  Why are consumer prices rising at more than 6% per year?  (A report out on the news yesterday said food prices in the Midwest were up 13% over last year.)  Why is the US government going deeper into debt, even though it already owes more than it can pay; why doesn’t it stop? 

Why?  Why?  Why? 

We learned a new word this weekend that helps explain it.  Enantiodromia.  Joel says it’s a word from Greek philosophers describing how “everything is in the process of becoming its opposite.” 

How neat. Summer becomes winter. A sharp knife becomes a dull one.  A young man gets old. 

How far you can go with this idea, we don’t know, but it describes what is happening to America.  Once young, bright and dynamic, it is now dominated by geriatric hacks – Biden, Pelosi, McConnell et. al.  And the ideas that made it great have long since been replaced by ideas that will never make anywhere great.   And here, we paint the picture with a brush a mile wide…slapping a coat of paint over the many details and nuances that might distract us.   

“Stuff” is how we measure wealth.  The more stuff we have, the richer we are.  Of course, stuff is not everything.  People go fishing…or loaf about the house.  They enjoy a kind of wealth that is not necessary to measure; they get what they want.   

When it comes to making stuff (including providing people with leisure time) – nothing beats a free market.  Stuff (and even time) has no inherent value in itself, it’s given value only when people willingly trade their own time and stuff for it.  That free trade is what gives us our economy and our wealth.  Anything that gets in the way of it reduces the total output of goods and services that people want.   

Which is where the deciders come in.  Sometimes they want to dress up in uniforms and march to Moscow.  Or inflate the currency in order to fund some cockamamie bamboozle.  Or, simply enjoy the superior feeling that comes from ordering other people around.   

Right now, in America circa 2023, free enterprise is a thing of the past.  The deciders want un-free enterprise, un-free speech, un-free trade…and unequal protection under the law (depending on which group you are a part of).     

They want to tangle us all up in red tape and regulations… rules, laws, restrictions…boondoggles, sanctions, subsidies, wars, debts, special grants and privileges, censorship, prohibitions, inflation, interdictions -- thousands of them.  Each of these meddles may bring them what they want…but they slow the rest of us down…and ultimately reduce the output of the stuff we want.   

We get poorer.