Insider-Outers

A major change in the primary trends, from politics to finance to society at large...

(Source: Getty Images)

Bill Bonner, reckoning today from Youghal, Ireland...

Today is the first day of winter. The sun, now barely clearing the roof of our garage, at midday, can begin to rise again. One season gives way to another.  Darkness (it gets dark here at 4 in the afternoon) gives way to light. Things change.

In Japan, the deciders have finally decided to let savers earn a little interest.  Bloomberg: 

Global Era of Negative Yields Is Ending as Japan Note Tops Zero

Japan’s two-year yield rose above zero for the first time since 2015, bringing the global era of negative yields closer to an end.

The rate added as much as two basis points to 0.01% on Wednesday, according to Japan Bond Trading Co. data, as the country’s debt extended declines after the central bank doubled its cap on 10-year yields on Tuesday. All other benchmark tenors have yields above zero and Bloomberg’s gauge of global negative-yielding debt only contains short-term Japanese bonds.

And in the US, higher interest rates are beginning to sting. Bloomberg again:

US Housing Starts, Permits Fall on Slide in Single-Family Homes

New US home construction continued to decline in November and permits plunged as high borrowing costs paired with widespread inflation eroded housing affordability and demand.

Outside Insiders

Central banks are not letting interest rates rise because they want to, but because they have to. Otherwise, inflation will get out of control and bad things will happen.

But wait. Inflation is bad for the economy. It is bad for almost everyone in the economy. So, the feds, who represent almost everyone in the economy will stop it, right?

Don’t count on it. Over the last few days, we’ve been ruminating on why what is best for the deciders is not necessarily best for everybody else. The ‘government’ is not the same as ‘The People.’ And the people who run the government do not have the same interests as the citizens they rule over. Unlike in 1776, when the elite who started the revolution were outsiders…who valued the right to free speech and a free economy…and needed The People with them in their fight with George III, today, the deciders are insiders. Free speech threatens their narratives…their ideas and their programs. A free economy threatens their status and their wealth.

For the moment, the deciders have decided to let interest rates rise. But push comes to shove…what will they decide next?

Here’s the situation now.

Two big milestones were passed in the last 2+ years. First, a 38-year run of lower and lower interest rates ended in July 2020. The 10-year US note hit a record low yield below 0.6%...and bounced. Now, the 10-year yield is over 3.5%.   

The other milestone came 18 months later, when the stock market hit an all-time high over 36,000 on the Dow. It too reversed. Now the Dow is below 33,000.

Passing these two milestones tells us that the primary trend has changed. What was going up is now going down. What was going down is now going up. Light gives way to darkness.

And if we’re right, that this is not just ‘noise’ or ‘random motion,’ but a real change of the primary trend, both stocks and bonds will continue going down for many years. First, they will regress to the mean (go back to normal). Then they will overshoot…with price levels we haven’t seen in the last 30 years.  

More to the Story

If that were all there were to the story, it wouldn’t be much of a story. But there is a lot more going on.

One of those things is the effort by the elite (who run the government) to control the economy and its markets. This is a major departure from the ‘free market’ philosophy embedded in the US Constitution. The Constitution is the highest law of the land. There is no mention of stimmie checks in it.  

“You’re going to take from some citizens to give to others,” James Madison might have asked?

“You’re going to tax future generations – with inflation – in order to pay off the present generation,” Thomas Jefferson might have wondered?

“You’re going to manipulate interest rates,” Ben Franklin might have raised the query; “I don’t see where the federal government is given that power.”

Nor does the Constitution make any provision for the Fed, the SEC, FTC, Fannie Mae, FDA, BAFT, the Advisory Council on Historic Preservation, the Appalachian Regional Commission or any of the 2,000 agencies and offices that ‘regulate’ our lives. Nor is there any provision for trade sanctions, proxy wars, overseas military bases, destroying gas lines that belong to others, assassinating foreign military officials or any other foreign misadventures. The founding fathers specifically advised against them.

But these boondoggles and fantasies expanded…almost from the founding of the Republic right up to today. And they are our suspect Number 1 for why US economic growth rates and wealth levels have declined. At home, output is stifled.  Regulations, edicts, rules – multiplying like rabbits on viagra – cut off innovation and output. As Joel showed on the weekend, if regulations had remained at the level they were when we were born – 1948 – we would all have more than 3 times as much wealth as we have today.

Abroad, trillions of dollars are squandered on senseless wars, with the current ‘empire budget’ – the Pentagon, foreign aid, diplomatic missions etc – approximately equal to the entire nation’s savings.

“Show Us the Money!”

Thanks to these public policies, the wealth of the nation has slumped. But the relative wealth of the elite – who get most of the money – has soared. Over the past 20 years, in nominal terms, the average wealth of Americans has risen about 2.4% per year. But the income of the top 1% has gone up at a 3.4% rate. Also, the Fed tilted the playing field in favor of the rich by funneling trillions of dollars to Wall Street, thus lifting the values of assets owned by the elite…while leaving wages untouched.

The health of the nation has declined, too.

According to the latest survey numbers, US life expectancy has fallen to 46th place in the world – below Cuba and French Guiana.  

In terms of GDP/capita (a rough measure of wealth), the US has now dropped to 7th place…way behind Ireland. Here in Ireland, the GDP/capita is over $100,000. In the US, it is barely over $75,000. What a difference a couple hundred years makes.  Ireland was the poorest country in Europe at the beginning of the 19th century. By mid-century, it lost a million people to starvation and another million to emigration. Where did they go? To America, where a relatively free economy allowed them to support themselves…and then to prosper. By the 1960s, Irish Catholics in the US were the second richest group, after Jews.

The world turns. Ireland is no longer dreadfully poor (it is the second richest country in the world) and the US is no longer undeniably rich. And the descendants of the free speech, free market outsiders of 1776 became the Deep State insiders of 2022…eager to suppress free speech and control every aspect of the economy. 

And so we wonder…when push comes to shove…what will they do?

That is, when recession/stagflation settles over the country like a thick blanket of snow. Electric lines bend and break under the weight and the power goes out. And poor people, cold…and hungry, demand succor.  

Rich people will be looking for relief too. Their stocks, now trading at a P/E of around 20, will fall 20% more to get to a more average P/E. Then, they will ‘overshoot’ by another 20%, putting the Dow below 20,000. The inflation rate by then could have dropped to 5% or 4%. It hardly matters. Because that is when, rich and poor alike, all cry and howl…scream and whimper….

“Forget inflation. Forget the Constitution. We want the damned money!”

What will the deciders do then?

Regards,

Bill Bonner

Joel’s Note: A quick correction to yesterday’s missive. Darwin’s On the Origin of Species was not published in 1776, as many of you wrote to observe, but rather in 1859. Thanks for calling us out! (Bill penned the words… but it’s up to a good editor – who was, ahem… apparently out to lunch – to catch any oversights. Mea culpa!)

Some dear readers kindly offered up a few examples of other works from 1776 that could stand in to make the point, such as Thomas Paine’s Common Sense or Edward Gibbons' The Decline and Fall of the Roman Empire (Volume 1), both instructive in their own ways.

One wonders, when reviewing these great thinkers of the past, what Messrs. Paine or Gibbons or the authors of that other pivotal political document of the year, the Declaration of Independence (ratified by the Continental Congress on the 5th of July… we jest, we jest!) would think about the current state of the nation, almost two and a half centuries on?

Take, for instance, the $1.7 trillion omnibus spending bill free-for-all extravaganza that hit the Senate floor (predictably with a grand thud!) yesterday. Actually, as Senator Rand Paul pointed out, the 4,155 page bill actually landed at 1:30am, in the dead of the night, when visions of greasy earmarks were still dancing in politicians’ sleeping heads.

The bill, equal to about 3.5 times the length of Leo Tolstoy’s War & Peace (1869), is to be voted on by the end of the week… or else! As the hyperventilating Washington Post couldn’t wait to remind us:

Senate begins debate on $1.7 trillion deal to fund government, avert shutdown

Lawmakers must act swiftly to approve the measure, known as an omnibus, before a temporary spending agreement lapses at the end of this week

According to the story, “Democrats and Republicans raced to avert a shutdown in the final days of the year.”

And yet, lawmakers had until September 30 (almost ten months) to draft their spending plan for the new year… a deadline that lapsed without much hoopla and which the responsible parties voted to extend anyway. That second deadline lapsed last week and, similarly, dawdling politicos were unready…

But now… now, in the fading twilight of the year, all of a sudden the urgency is upon our great leaders. They must race to “get the job done”… to loot the coffers… to spend, spend, spend until the barman rings the bell for last call!

$858 billion in “defense” spending, including an additional $44.9 billion for the Ukraine (apparently now a semi-permanent line item in any federal budget)…?

Sure!

How about $772.5 billion in non-defense discretionary spending? Why the heck not?

What’s another $1.7 trillion in total spending, anyway?

Senator Paul convened a news conference to voice his dismay at both the process itself and the impact the bulging bill will have on working Americans, already struggling under persistently high inflation.

“The American people don’t want this,” said Paul. “They are sick and tired of it. They are paying for it through the nose with inflation. We’re standing up, and we’re going to say no.”

Alas, the senator from Kentucky seems not to have received the message. To paraphrase George Orwell’s 1984 (published in 1949):

War is Peace
Freedom is Slavery
Ignorance is Strength…

…and Spending is Saving.

Oh yeah, and nobody likes a grinch.