The Credit Dollar

The government of the world’s most prosperous nation — the US — cannot pay its own way; it finances nearly a third of its spending — on credit.

Roaring Kitten, Source: Getty Images

Wednesday, May 22, 2024

Bill Bonner, writing today from Dublin, Ireland

A bird in the hand is worth two in the bush 

CNN: 

The Dow Jones Industrial Average closed above the 40,000 mark Friday for the first time in its 139-year history. Wall Street has been boosted in recent days by renewed hopes of rate cuts from the Federal Reserve that would loosen monetary conditions for consumers and businesses. 

We sing the praises of the US economy. It has made millions of people very rich. It has accommodated millions of immigrants, who still pour over the border looking for a better life. It built shopping malls coast to coast. 

And, for excitement, the Kitty roars...  

You probably have better things to do than to think about the strange world of ‘meme’ stocks. But they — along with dot.coms... cryptos... NFTs... Nvidia... and campaign speeches — show us how weird and wonderful our economy can be.  

Earlier this year, meme stocks — stocks that seem to have little real value but still exert some magic appeal — had fallen from the headlines. Then, suddenly, “Roaring Kitty,” an influencer with 1.3 million followers, sent forth a picture of a gamer leaning forward in his chair.  

That was all it took. Aficionados interpreted it as telling them that it was time to buy. AMC, a chain of movie theaters, rose 308%. GameStop, an electronic game retailer, rose 271%.  

And then, easy come, easy go. By the end of last week, the stocks had crashed again. 

This kind of market action has little to do with capitalism. Meme speculators were not guided by an ‘invisible hand’ to make others’ lives better. They were not funding more theaters at AMC or creating more games at GameStop. They were just having some fun — with money.  

Henry Ford showed how real capitalism used to work — on cash, not credit. In 1914, he doubled the wages of his workers in his Piquette Street auto plant. At $5 a day they were now among the best paid of America’s working class. And with a price tag of about $700, they could buy one of Ford’s Model Ts for the equivalent of about 140 days on the job. 

The common working man bought his two main assets — his house and his auto — with his savings and remained largely debt free.  

Today, Ford’s best-selling vehicle is the F-150 pickup with a base price of $36,000. Three out of four buyers pay “on credit.” And without credit — car loans and mortgages — few people could afford either a house or a car. 

Last year, Newsweek reported on a new wage settlement for Ford workers: 

New recruits at Ford are in line for a 68 percent hike in their starting salaries, positioning their hourly rate at more than $28 ($58,240 annually). However, the crown jewel of the agreement is the change planned for Ford's lowest wage earners. Throughout the contract's span, low-wage employees can expect their compensation to soar by 150 percent. 

According to these numbers, it now takes longer (more hours spent on the job) for the autoworker to buy his ride than it did 110 years ago. Why? Despite the achievements of Alan Greenspan, Mark Zuckerberg, Roaring Kitty et al, is there something wrong? 

The government of the world’s most prosperous nation — the US — cannot pay its own way; it finances nearly a third of its spending — on credit.  

And the public bought everything from autos to cheeseburgers on credit. Now, who’s going to pay its $65 trillion in debt? Tomorrow’s public? 

With what?  More credit? 

The answers to these questions are at the heart of our hypothesis. We’re wondering how come the US has run up so much debt... how come its economy seems to serve the rich, very well, but not the rest of the population... and how come it now seems to be headed for at least a crisis, and probably a catastrophe. Looking ahead, what we’ll see is that when the US switched from cash to credit it mistook the new credit dollar for a bird-in-hand dollar.   

But credit is not cash.  And what we will find out, eventually, is how much the credit dollar, in the bush, is actually worth.    

More to come. 

Regards,  

Bill Bonner 

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Research Note, by Tom Dyson

(Below is a short excerpt from Investment Director Tom Dyson’s most recent Weekly Update. Tom will publish his next Monthly Strategy Report on Wednesday, May 29th)

The big picture is simple. The US government is broke. To stay in business, it must keep credit conditions LOOSE. But loose for the government means “too loose” for the private sector… which causes the economy to run hot and the markets to be overbought.

Some people use the term “fiscal dominance” to describe this situation. It’s a wonky term but all it means is that out-of-control government borrowing prevents the Fed from controlling inflation by raising interest rates. And so as long as the government keeps borrowing and spending, we’re going to be stuck with the apparition of high growth and high inflation. It's a form of stagflation. Growth in the government economy, struggles in the real economy, inflation in both.

Here’s the thing, everyone understands this. It’s obvious. Let’s just say the “government is broke, must hold real assets” trade is being widely discussed on the internet and in the mainstream press right now.

Here at Bonner Private Research, we have plenty of exposure to this trade through our gold, silver, platinum, bitcoin, uranium, shipping and energy plays. They’ve all performed well and I have no intention of changing course now. (We’ll continue monitoring our stops, of course.)

I’m an investment strategist, not a reporter or a commentator. It’s my job to build and maintain a strategy for beating the market. One way to do this is to anticipate future investor sentiments before they’re a thing… and bet on them before anyone else has even considered them. 

What isn’t popular right now is the “slowdown” or “recession” trade. Our Doom Index says we've been in moderate contraction in the real economy in real terms for some time. But official stats don’t show it. They have some catching up to do. And market fear gauges, volatility and credit spreads, are both at their lows for the year, indicating complacency among investors.   

I’m not saying a recession is coming. I am saying that investments that benefit from recessions appear to offer far more value than the “fiscal dominance” trades that are popular now. The chief of these “recession” plays is, of course, holding cash. 

This is why we have 40% of our asset pie allocated to cash. I’m anticipating sentiment swinging away from “fiscal dominance” to “hard landing ahead.” We’ll see. In the meantime, we make a 5.4% annualized yield in ultra-short-term government bills or money market funds, which is probably about what the dollar loses in purchasing power each year.

Otherwise, we’re sitting on our hands right now, waiting for the next opportunity, holding a large hedge in the form of cash, while letting our profits run on our shipping and energy stocks.