- By The Notorious CFP®
By now, I think we all know - but it bears repeating - that COVID will be the singular American inflection point of the first quarter of the 21st century. It should have been 9/11, but we 'solved' that problem in true American style- namely, by cranking up financial repression for a decade (i.e. printing money and forcing artificially low interest rates- while taking credit for 'the fastest economic recovery in history...") while ramping up the Military Industrial Complex (MIC) to flatten a couple of countries - one of which we're still not sure why and the other we're still not sure where (or whom). We do know that both are worse off and less stable today than they were in 2000, at great cost to American lives and treasure. With financial mismanagement, moral debauchery, currency debasement and military expansion, it was like our leadership was cribbing notes from the last days of Rome and saying, "Gee, this sounds like a great roadmap to follow!"
Humans... we're an interesting species, are we not?
America's second potential inflection point was the Great Financial Crisis (GFC) of 2008-2009. But also true to the Yankee script, we punted that problem down the road with - you guessed it- more money printing and zero actual reflection or lasting change to our behavior. The curse of the global reserve currency is our unfortunate predilection to print our way out of trouble. Instead of prosecuting bankers, both Presidential administrations and legislatures diverted their gaze from our true problems, fell in line with their masters at the Fed and the WEF, and orchestrated a vast fifteen-year infusion of cash into the banks and financial institutions called Quantitative Easing. (At least it wasn't the military contractors). This allowed us to once again kick the proverbial can down the road yet again. Shocking that the problem only got worse. Who could have predicted?
One administration caused it, the next refused to acknowledge or address it. Both are equally to blame, sorry to crush your political biases. The banks got bigger, wealthier and more powerful - which should have been our first clue that there is really only one political party left in America, one that answers to a much higher (unelected) power and our leaders are uninterested in addressing any of the roots of our dysfunction. The response and results of the two twin crisis of the 21st century should make it abundantly clear to all that our federal leaders have zero desire in solving our problems. Otherwise, they would be solved. Their role is to perpetuate our problems, because you don't bite the hand that feeds you.
I touch upon both the 9/11-Dot com and Great Financial Crisis in more detail in a recent post titled Lessons From the Past, which provide a little more context about this remarkable era.
Money Does Not Equal Wealth
I know that we could solve the majority of the world's problems by dragging at most 100 people out into the middle of the street. But no one asks me. In America, we prefer to apply Band-Aids and opioids to our problems, and hope for the best.
Because the majority of my clients are approaching or already in retirement, almost all have experienced plenty of longer and/or deeper market declines than our current one in the past. For instance, in February 2020, the market dropped over 35% in less than two months in response to the outbreak of the COVID pandemic. (As of this writing, the S&P 500 is down about half as much.)
That always surprises clients, a 'solution' due in large part to the rapid response of the Trump administration and the Federal Reserve to inject unprecedented and historic levels of liquidity into the economy via large checks sent to virtually every American and small businesses in spring of that year. That free money was like a shot of Mountain Dew into the bloodstream of millions of American household budgets and caused the market to immediately rally. Hell, even Hunter's Biden's favorite prostitute got $20K for her "female owned sole proprietorship,"
However, free money printed out of thin air did nothing for the actual economy...
In fact, like all unearned money, the stimulus was a curse that numbed and neutered large swaths of our society. Helicopter money dropped from the sky by the Trump Administration and then doubled down on by his predecessor (i.e. "hold my beer..") conditioned many Americans to believe - for the first time in the history of humanity- that productivity could be replaced with government benevolence, that work was unnecessary to survival, that incentivizing sloth and blind obedience to the state was not personally debilitating for many... and that increasing the currency in circulation by 40% in less than two years would have no repercussions.
Even more problematic, the money was spent. Rich people put it into their bank accounts because they didn't need it (red flag #87). A lot of middle-income Americans invested it into the financial markets but into speculative ventures (translation: slot machines) like crypto stocks, Non-Fungible Tokens (NFTs) and dumb stocks like AMC and GameStop. Annnnnd it's gone.
Far too many lower-income people (i.e. 'stimmy ballers') leveraged their temporarily "enhanced incomes" to qualify for Ford Mustangs, Dodge Challenges and Chargers (the preferred cars of 'the working poor') and cover their first-year's $1,000 payments.
The result is that the money ended up where it was originally intended, back in the banks and large corporations (and temporarily, their shareholders.) Some money still technically still sits in crypto 'tokens' but trust me, that money is gone, literally evaporated into the ether, yet another capital infusion from government (i.e. our money) to their financiers. Hard to blame them for something we did to ourselves. But it's critical that one understand why the wealth divide is widening: government.
I ask two questions every day:
- Where is all this damn money coming from?
- Where did all the damn employees go?
Perhaps you can relate. We've addressed the first one, now let's answer the second..
Now we're paying the piper for this false, delusional and destructive narrative- that printed money equals wealth. This is false, a philosophy that has wounded a significant portion of our labor force (the Great Resignation) and future prosperity more than JFK's New Deal and LBJ's Great Society combined.
Humans are creatures of habit (which is one reason that most of us gain a couple pounds of weight a year every year of our entire lives.) We do the same thing over and over again and expect different results (also called 'insanity.') Naturally, when we disincentivize work for the better part of two years, it slows. Which shrinks the labor pool. Which increases unemployment. Which increases demand of labor. Which increases wages for those still working. Which raises the cost of goods and services for everyone. Which makes the country poorer AND causes inflation. I'm shocked, you're shocked, we're all shocked.
This is why the Clinton White House and Gingrich House deemed it necessary to doctor the official unemployment rates in the 90's to under-report true unemployment. Today, the MSM reports U-3 "headline" unemployment (in grey below), which is usually a less-useful (except to the President) measurement than U-6 unemployment, includes those marginally-employed as well as those working part-time because they cannot find full-time work. How convenient...
I bet you didn't know that if our federal government (The Bureau of Labor Statistics or BLS) still counted unemployment they same way they did before they changed in in 1995 - thereby counting "long-term discouraged workers" who've been unemployed so long that they've given up hope of ever working - it would be higher than the Great Depression?
How would American politics change if we knew the true (20th century) unemployment rate was 25%? I bet there'd be some nervous public sector unelected and elected leaders.
Increasing currency (as opposed to money) is not prosperity and the real economy has never truly recovered from the government response to the pandemic, a series of missteps that fatally disconnected the natural link between the work and wealth that had existed for centuries. Most people are familiar with this dynamic from their study of Adam Smith's The Wealth of Nations in college (LOL,not!)
For the rest of us, we now understand that a diminishment in labor output and quality is the primary reason why virtually every large organization in America is fractionally as effective as it was in 2019. If you don't believe me then call your mobile phone carrier, national bank, 401k custodian or the IRS and let me know how that goes. Doris and I spend half our working hours on hold with these 'characters' and can confirm that almost no one picks up the phone there these days. Many are still blaming "abnormally large call volumes" on the pandemic... yes, in 2022. And for some reason that no one seems to be able to diagnose, car manufacturers worldwide suddenly forgot how to manufacture a freakin' car anymore.
Japanese auto executives would be jumping off buildings before they would tell consumers to park outside. Fortunately, South Korea is far more Americanized.
Our current economic disorder is completely and fundamentally related to the severing of the link between work and life success, what I call the Hunter Biden Effect (patent pending). If you subsidize sloth and/or incompetence, then you get more of it, in addition to some new surprises. If you give out free money with minimal accountability, much of it will be wasted and don't be shocked if diabolic levels of fraud ensues. If you terminate people for refusing to abide by your mandates - many whom were barely working for the money and mostly for a sense of purpose - then some of them will exit the work force and never return. They will become terminally unemployed and you also fatally wound the recipient and remove their self-dignity.
Condoning sloth is not compassion, it's abuse. And pointing this out doesn't make me a cold, heartless monster. Ignoring or denying it doesn't make you virtuous. If you've been frustrated by the drop in quality and quantity of customer service anywhere in the last three years, you now understand that most long-term welfare disables a human, which is a big part of why your wealth is significantly less than it was a year ago. If that offends you, I consider that a compliment.
Every day for the past two years, I drive past this bus and am reminded that wasn't just someone's thankless job, that was their livelihood- taken from them by people who knew the truth but got paid no matter how much damage they inflict on others.
This post - and this crisis- is a masterclass on what happens when you allow people to speak - must less lead and dictate - who have zero skin in the game. If they keep their job and their income is unaffected even if they're wrong, then to me their opinion and their authority should not only be carefully filtered but largely ignored. At least, that was the original premise of this country as I remember. Only those who sacrifice are fit to lead and rule.
The COVID pandemic was the third inflection point of the 21st century, the most recent in a century of flawed and deeply misguided political responses and resulting misallocation of resources. First, the wars in Iraq and Afghanistan accomplished little and damaged many. Then, Quantitative Easing not only failed to solve the problem of predatory behavior and moral hazard but actually exacerbated it. Now, forcing people to a.) inject an experimental vaccine that makes them more susceptible to contracting the original disease, b.) wear paper cloth over their faces that our leaders have known from Day 1 were ineffective and c.) shut down the economy- all succeeded in making the country more vulnerable (to financial and geopolitical risk).
You have to give China credit, their virus not only made America lazier and stupider, but also much weaker...
Your obvious first takeaway from the above table is (hopefully) that with almost a quarter to a third of Americans claiming we're currently heading in the right direction, we need (and deserve) a reset! Their are still people left to 'enlighten' (good and hard.) And that's what this economic and market environment is providing. Translation: Don't despair! There is only one way to cure stupid, and that is a metaphorical wrapping of knuckles. At least that was my experience being disciplined in Catholic schools. Apparently, some people weren't raised by nuns and priests. (Or exceptional parents.) And so we must learn the hard way.
As a result, it will take years to dig out of this hole that we've dug ourselves in order to move forward and prosper. There's simply too much stupid in our country that still has yet to be teased out, even after three pristine examples of government incompetence in just 20 years. An astute investor recognizes that this will provide incredible opportunity for profit. Indeed, this is the point of my entire series. Unfortunately, the inevitable collapse of a top-down command economy run by a power-obsessed political class in Washington DC and the re-education of a nation will temporarily hurt many in the process, namely the lower- and middle-income demographics and other vulnerable demographics. Unfortunately, there's little that we as individual investors can do to stop people intent on entering the slaughterhouse of financial ruin. Furthermore, the best we can do is to adhere to and manifest financial best practices and habits, offering an alternative path when these mentally-challenged or ideologically-blinded individuals are ready to change.
"When the student is ready to learn, the teacher will appear." - Buddha
And no, it's not the fault of the humans implementing this failed system because it's the philosophy itself that is diseased. It's critical to understand that the debilitating ideology that precipitated and informed our response to the Wuhan virus is the same as that which led to both the GFC and 9/11. Within each crisis contains lies that have sustained a very long time and for good reason. But they also contain lessons. In the modern era, lies cannot sustain indefinitely and can only be ignored for so long before the truth asserts herself. This strain of modern politics is coming to its inevitable conclusion because the consequences are now a national issue that can no longer be ignored by moving to the suburbs, installing a security system or mindlessly lapping up your favorite propaganda news outlet. It can't be masked through a global reserve currency, petrodollar hegemony supported by a partnership with the House of Saud or more fake money. CNN and MSNBC can only peddle so much fiction before their own audience starts to cry foul. It's in our face every day and impacts us all.
Despite attempts to argue the contrary, the field of economics still exists in reality, and - like gravity- can only be suspended for so long. And thank goodness, because the time for the re-establishment of a sound financial system and markets is nigh. We had our chances in 2000 and 2009, but we blew them. The problem is the solutions came from top-down, when lasting change only rises from the bottom-up I'm personally quite enthusiastic for this new era, and ready to take advantage of the myriad opportunities that only present themselves in times of stress and crisis. I hope you are, too. Let's plot a strategy together.