Every year, friend-of-the-site David Collum writes a detailed “Year in Review” synopsis full of keen perspective and plenty of wit. This year’s is no exception. As with past years, he has graciously selected PeakProsperity.com as the site where it will be published in full. It’s quite longer than our usual posts, but worth the time to read in full. A downloadable pdf of the full article is available here, for those who prefer to do their power-reading offline. — cheers, Adam
David B. Collum
Betty R. Miller Professor of Chemistry and Chemical Biology – Cornell University
Email: [email protected] – Twitter: @DavidBCollum
David Collum is willfully ignorant.
~ Mountain Man (@Pjas77)
Imagine, if you will, a man wakes up from a year-long induced coma—a long hauler of a higher order—to a world gone mad. During his slumber, the President of the United States was impeached for colluding with the Russians using a dossier prepared by his political opponents, themselves colluding with the FBI, intelligence agencies, and the Russians. A pandemic that may have emanated from a Chinese virology laboratory swept the globe killing millions and is still on the loose. A controlled demolition of the global economy forced hundreds of millions into unemployment in a matter of weeks. Metropolitan hotels plummeted to 10% occupancy. The 10% of the global economy corresponding to hospitality and tourism had been smashed on the shoals and was foundering. The Federal Reserve has been buying junk corporate bonds in total desperation. A social movement of monumental proportions swept the US and the world, triggering months of rioting and looting while mayors, frozen in the headlights, were unable to fathom an appropriate response. The rise of neo-Marxism on college campuses and beyond had become palpable. The most contentious election in US history pitted the undeniably polarizing and irascible Donald Trump against the DNC A-Team including a 76-year-old showing early signs of dementia paired with a sassy neo-Marxist grifter with an undetectable moral compass. Many have lost faith in the fairness of the election as challenges hit the courts. Peering through the virus-induced brain fog the man sees CNBC playing on the TV with the scrolling Chiron stating, “S&P up 12% year to date. Nasdaq soars 36%.” The man has entered The Twilight Zone.
A nutty Chem prof from Cornell
Has interesting stories to tell
The year 2020
T’was a year that was crafted in hell
Figure 1. The one graphic that rules them all.
Figure 2. “Largely peaceful protest” meme at its inception.
Putting ideas on paper is the best way to organize them in one place, and getting everything in one place is essential to understanding ideas as more than the gut reactions they often hide as.
~ Morgan Housel (@morganhousel), columnist on why we write
Every year I ponder not writing a review. One of the voices in my head was pleading with me, “Don’t write it. There is nothing to be gained.” A much louder voice that chimes in seconds before every major decision that I make, however, was saying, “Fuck it. Let’s do it.” Someday I may drop the mic but not yet. I personally benefit because my life’s experiences and observations—those wild moments and funny-assed one-liners—don’t get shoved down (or up) the memory hole. I get boluses of serotonin. Mike “Mish” Shedlock referred to 2019’s version as “Satirical, Comedic, Insulting…” as part of a thorough Collumoscopy.ref 1 To the guy who keeps emailing me urging me to clean it up so his daughters can read it, save your breath. They are either too young, which means they should be reading the Harry Potter series written by that transgender-bashing cis white billionaire, or probably have long since rounded the bases and are getting kinky with their boyfriends in ways that would curdle your blood. I also write this for Gerry (and his kids)…
Collum is a whiny moron…You would interview someone like that, a Trump-supporting climate denier…he’s a total idiot who needs to FOAD [fuck off and die]. He simply refuses to acknowledge facts…
~ Gerry Muller, my most audacious hate mailer, responding to Jim Kunstler for his audacity.
The title is a takeoff on the website entitled, “WTF Happened in 1971”, which uses 50 graphics to document that the world changed abruptly in 1971.ref 2 (The gold bugs know why.) It is undeniable that 2020 will be a year of abrupt change as well—a phase change so to speak—but to what future is unclear. We all squandered inordinate kilos of ATP trying to understand events in ways that would not make us happier people and for which an answer key eventually would be forthcoming.
We have to be very careful about how we spend our time…be very careful about not being manipulated into narrative after narrative….The Eye of Sauron is focused on climate, covid, and race. I’m not going to get caught up in it…Everything we get distracted onto we don’t make better.
~ Douglas Murray (@DouglasKMurray), author of The Madness of Crowds
This year posed challenges writing the damned thing, some common and others unique. Of course, I don’t have the luxury of casually surveying a year. Ya can’t be Toobin’ all day and patch it together in your spare time. Ya gotta Stephen-King the mother. Why not write it quarterly? Simple: it takes my beautiful mind that long to spot patterns in random noise and deconvolute the chorus of voices in my head. Also, nobody—and I mean nobody—in their right mind wants to rehash the events of 2020. The annual YIR is always about human folly, but how much folly is there when we’re all living in our basements (Joe)?
I tease Dave about his “Technical Analysis Wizardry,” because I want him to write a children’s book on charting. Still, I can’t deny that he often captures the market zeitgeist in one tweet.
~ Tony Greer (@TGMacro), TGMacro
Keeping it light was a Herculean task. I kept getting pulled by Lord Vader toward a revenge mindset, which I have curbed with only partial success. Epithet-rich allusions to baseball bats kept getting smuggled into the prose stemming from undiagnosed coprolalia, the acute swearing component of Tourette’s Syndrome. Some commenter after a podcast said (paraphrased), “This guy sure wants to put a hurt on a lot of people.” Indeed. The sense of frontier justice runs deep in the entire Collum clan. Horse thieves beware. I don’t need anger management; I need people to stop pissing me off. Ad hominem attacks are reserved for the total douche bags.
Writers are desperate people, and when they stop being desperate they stop being writers.
~ Charles Bukowski, American Poet
I was inadvertently ready for the pandemic in some odd ways. I love medieval history, had just finished a book on the Black Death in the fall of 2019, and was pondering immunology when Covid-19 struck. Ah, the first contention: I refuse to capitalize the whole thing because COVID-19 makes no sense linguistically—it’s not correct for an acronym or proper name—and using all caps is shouting and distracts from other attempts at emphasis. SHOULD I TYPE LIKE THIS? I don’t care what everybody else on the planet does. They are wrong. Screw ‘em. I appear to have gotten Covid-19 at birth; I have been tasteless and urged by friends and family to social distance since childhood. Obviously I should wax philosophically about the Covid-19, right? But what do you say to 350 million basement-dwelling bunker monkeys who are now expert epidemiologists and virologists with rock-solid opinions of what parts of the pandemic sucked the saltiest balls? I dedicate far less page space to the pandemic or the elections than you might expect.
It is so much better to tell the truth than to just shut up.
~ Douglas Murray (@DouglasKMurray), author of The Madness of Crowds
The YIR poses risk—possibly considerable risk—every year, but this year is special. No guff no glory I guess. There are a ton of social justice crazies (SJCs) out there. In the 65th year of my personal sitcom, the writers keep hurling absurdities to keep the series running, but I got canceled anyway. No, not by Covid-19 (unless this is The Sixth Sense) but by the diversity-industrial complex otherwise known as the Klan of the Kancel Kulture (KKK), virtuously broadcasting to the world that I am a seriously twisted bastard. It is hard to argue with that. However, if people in visible positions feel they cannot speak up right now, when will they speak up? On their deathbeds? If a 65-year-old tenured professor can’t express unpopular ideas, who can? A 9-to-5-er who could be fired in a heartbeat has no voice. I will keep spewing drivel because somebody has to do it.
Factoid: You cannot breathe with your tongue sticking out of your mouth.
Stuff your tongues back in your mouths you idiots. Of course you can. I have become increasingly aware that we are all looking through our own lens with an emerging plotline that is self-consistent with our own unique narrative. As described in The Social Dilemma, the narrative is shaped nefariously by ideologically dubious weasels in Silicon Valley running their MK-Ultra experiments on us through mass and social media. As I jam more pixelated pseudo-factoids into my noggin, doubts about their veracities are debilitating. How is it that smart blokes can peer at the same data and draw diametrically opposite conclusions? If I offered you $1000 to convince just one person—one person—that they were wrong about Russia collusion, the Biden laptop, election fraud, or the merits of sheltering, could you do it? Didn’t think so. Some of us must be, as Gerry would say, whiny morons who should simply FOAD, but we all have our truths that we will defend, Goddammit! This annual tome is, necessarily, the World According to Dave. At times it will sound narcissistic, but it’s not. [Editor’s note: yes it is.] It wanders through a range of topics in no way statistically weighted to their global importance but presented in a Michael-Lewis way sniffing out the story beneath the story. What my four regular readers would tell you is that I try to write about what others are not pondering. I don’t always find the rotting corpse, but I am attracted to foul odors.
Sturgeon’s Law: 90% of everything is crap
The Year in Review (YIR) is broken into two parts with individual sections hot-linked in the contents below. The whole beast can be downloaded as a single PDF here. The references are in files listed by Chapter titles Part 1 and Part 2.
- My Personal Year
- Conspiracy Theories
- Decade in Review
- Wealth Creation
- Broken Markets
- Link in Part 1
- Epilogue-Climate Change
- Rise of the Cancel Culture
- The Tweet and Cancel
- The Buffalo Shove: The Real Story
- College Life
- Political Correctness—Adult Division
- Group Statements and Identity Science
- Anatomy of the Riots
- The Death of George Floyd
- Covid-19: Just Opinions
- Where to from Here?
- Links in Part 2
How about ‘Batshit political views and how to succeed despite them?’
~ a colleague, when asked what topic I should present in a guest lecture
We all suffered from suffocating acedia—a melancholy specifically resulting from monastic isolation known only to ye olde linguists.ref 1 All things considered, I personally had it as good as you could ever hope, and none of us were sleeping in the London Tube at night to avoid the Luftwaffe. We sheltered with my 30-year-old youngest son Thomas and his main squeeze, got a lot of sun enjoying casual dinners and great chats, followed by a ritualistic dragging our asses through the grass after running out of toilet paper. But by mid-year there was a notable pall over the Shire, and orcs were spotted in the woods. One prays this is not a trilogy.
We are all biodegradable and progress through three stages of life: stud, dud, and thud. I thought getting old would take a while. I was wrong. You start life trying not to wet yourself and end life trying not to wet yourself. The middle is the fun part. The final days—pretty much gruel and drool I figure—will probably suck. While trying to avoid stage three, I put on 6 lbs sheltering but ripped off 26 lbs in the last 10 weeks (within 40 lbs of my crack weight.) You’ve gotta touch that bag before leading off again. I didn’t make it to the gym this year. That makes 15 in a row. I had a hernia fixed before the lockdown, still piss bladder stones every week or two (trying not to wet myself), came up negative on prostate cancer, make sound effects simply getting out of a chair, and learned how to cut my own hair. (The ears are easy, the back is quite a reach, and manscaping is unnerving.) We started with five dogs in the house and ended with six. The two visiting Boston Terriers inspired us to get Charlie. (Check out this video.ref 2) Charlie is great. It is nothing but Boston Terriers (and turtles) from here on.
I intend to retire at 70; the runway lights are in view. Much of the sand in the hourglass has fallen. It’s a little weird when you realize you are no longer building a career but trying not to crash land it. As a depreciating asset, your bucket list grows short as your fuck-it list expands. I occasionally read death-bed regrets: nobody ever worries about the bloat of their in-box.
Dave is the man who can rant better than anybody I’ve ever met.
~ Marty Bent (@MartyBent), Tales from the Crypt podcast
I did a lot of podcasts—some with encore performances—since my last Year in Review. They are listed unceremoniously as follows:
Chris Martenson (Peak Prosperity, @chrismartenson)ref 3
Jim Kunstler (Kunstlercast; @Jhkunstler)ref 4
Rick Sanchez (RT; @RickSanchezTV)ref 5
Chris Irons (Quoth the Raven; @QTRResearch)ref 6
Marty “Hodler King” Bent (Tales from the Crypt; @MartyBent)ref 7
Sam McCullough (end of Chain; @traders_insight)ref 8
Jason Burack (Wall St for Main St, @JasonEBurack)ref 9
Zach Abraham (KYR Radio; @KYRRadio)ref 10
Elijah Wood (Silver Doctors; @SilverDoctors)ref 11
Justin O’Connell (Gold Silver Bitcoin Podcast; @GldSlvBtc)ref 12
Anthony “Pomp” Pompliano (Morgan Creek Digital; @APompliano)ref 13
Ryan Ortega (Jelly Donut, @JellyDonutPod)ref 14
Thomas George (Grizzle; @thomasg_grizzle)ref 15
Kenneth Ameduri (Crush the Street)ref 16
Dan Ferris (Stansberry Research; @dferris1961)ref 17
Max Keiser and Stacey Herbert (Keiser Report; @staceyherbert and @maxkeiser)ref 18
Fergus Hodgson and Brien Lundin (Gold Newsletter Podcast; @GoldNewsletter)ref 19
Phil Kennedy (Kennedy Financial)ref 20
Phil Bak, CIO at Signal Advisors (@philbak1)ref 21
A bucket-list interview with Tony Greer (@TGMacro) on RealVision that had disappeared for months was found last year and officially posted this year.ref 22 (I actually suspect it had been censored by a former employee to protect their reputation.) I had a ball serving on a panel discussion at the 2020 New Orleans Investment Conference with Adam Taggart, Chris Martenson, and Dominic Frisby.ref 23 A quick search of Zerohedge shows 61 mentions over the years. That officially makes me a Tool of the Kremlin. (I haven’t run into The Donald nor Tulsi there yet). I found a webpage that professed to help you “Find out what the best investors are reading, writing, and saying” and was shocked to find my name on it. That ten minutes of fame has now rolled off the page to the Dark Web. My Keiser Report interview got translated to Spanish and was real haga clic en cebo.ref 24 I had a tweet make it into an elite medical journal, Stats:ref 25
A feature in Business Insider is too funny and too plot thickening to blow by here. (See “Broken Markets”.) The biggest downer in a year full of downers was being “canceled” by neo-Marxist SJCs. (See “Douche Bags”…no…sorry…“The Tweet”.) It was world-view changing and not pretty. The hinge-free left is a fountain of spew and vitriol. I usually put in a “Trigger Warning,” but if you are still reading you are either a bit of a perv or already building a case against me.
Are Conspiracy Theorists Epistemically Vicious?
Charles R. Pigden, sophist-douche bag
Hanlon’s razor says that you should never assume malice where incompetence will suffice. OK, but oftentimes it does not suffice. Collum’s razor says never be so narrow-minded that you refuse to believe men and women of wealth and power conspire. Those who do are probably happy not to swat those flies. Years ago I served on a PhD committee of Jim Rankin, a successful businessman from Dallas, who wrote a pretty damned interesting thesis on conspiracy theories.ref 1 There is scholarly work out there, and then there is Charles Pigden, Cass Sunstein (whose wife, Samantha Power, is a neocon), and Michael Shermer, all writing embarrassingly biased tripe that pays their mortgages. I say this every year: Stop declaring, “I am not a conspiracy theorist but…” and grow a pair. Embrace the label that horrifies you. Admit that the world is filled with sociopaths trying to screw us with complex plans. Use your fookin’ head and your gonads to stand up to the scoundrels.
A University of Chicago study estimated in 2014 that half of the American public consistently endorses at least one conspiracy theory. When they repeated the survey last November, the proportion had risen to 61%. The startling finding was echoed by a recent study from the University of Cambridge that found 60% of Britons are wedded to a false narrative.
A chemist at Cornell reports that a disturbing 39% of the American public are mushrooms—in the dark and fed horse manure.
I love metaphors and similes. A particularly instructive one is Parker Brothers, Monopoly. The players all start with reasonable amounts of money. As the game proceeds, players collect $200 by simply passing Go and use this money to speculate on real estate. By the end of the game, only $500 bills are worth anything, the whole thing blows up, and most of the players end up destitute. I wonder why the originator of the game (Elizabeth Magie, not Charles Darrow) didn’t name it Inflation. In a twist of irony, an original game board sells for about $50,000.
~ Year in Review, 2010
I took a little time to thumb through a decade of YIRs to find sections that I am still proud of and seem to have withstood the test of time. Few have read all ten—Hi Mom!—but I know of fintwit legends who have. In some ways, I think the earlier YIRs were better because I was working at lower levels of the intellectual strata. To minimize repetition, I bypass ideas worth talking about. For example, I was writing about a disturbing change in the mood of society by 2011. Some of these sections are wiggy topics that stayed off radars and were stuffed down memory holes, but I still stand by them and think they retain appeal to the open-minded. In chronological order:
I finished 2020 with my total assets distributed 23% gold, 2% silver, 54% cash-like entities, 12% in real estate (my house, no mortgage), and 9% in a smattering of equities. The large cash prevents my returns from ever moving abruptly. I hope to put it to work someday. This year gold and silver returned a respectable 20% and 32%, respectively, although the fairly standard early-season rally began looking like a dead-ingot bounce by November. My overall accrual of wealth (ex-house appreciation) came in at 10.9% following 5.7% last year. Of course, it failed to keep up with Tesla, Moderna, and Bitcoin, but my crystal ball and Ouija board remain in the shop. (Note to self: pick up laptop.)
My best decade of the past four was from 01/01/00 through 12/31/09 with 13% annualized returns while the S&P made nothin’ (dividends included). Hold your applause. There is plenty of schadenfreude to go around. I missed the equity ramp from ’09–present. I am also not stupid; I sure wish I had caught that ramp. My reasoning behind the decision to sit it out (delineated in “Valuations”) was based on far superior reasoning to the completely vacuous reasoning in the 1990s that lavished me with wild returns including one year >100%. All you have is reasoning and luck. Those unsatisfied with decent returns are doomed to lose it all. “Easy come easy go” but Nick Carnot would disagree. I have enough to retire with inflation-adjusted zero-percent returns. I do, however, wish to leave some money to my kids, who are in a generation that will struggle to accrue wealth. I worked hard to bestow such privilege.
Figure 3. Two decades of gold versus equities (ex-dividends, taxes, fees, and inflation).
I’ve been a gold bug since 1999, chasing it down from 290 to 270, chasing it up from 300 to 450, and topping off the stash in 2016 in the 1200s after the swaffling by a cyclical bear market seemed to subside. It has served me well with a position that now is equivalent to six gross annual salaries. While the equity wankers thump their chests, the gold bugs quietly whooped their asses for two decades (Figure 3). JPM showed that gold beat the total returns of the S&P by 2% annualized. Gold even beat Buffett by a nose over the two decades.
Figure 4. Gold vs S&P capital gains for 2020 (ex-dividends, taxes, fees, and inflation).
I am waaay more comfortable holding gold than the S&P 500, which has great momentum and horrid fundamentals (see “Valuations”). I’d love to replace the gold with productive assets someday but not yet. Graphics from a useful website Macrotrendsref 1 shows gold cannot win in the long term (Figure 5) but has returned a credible 8.4% since it started trading in the open market in 1973 after a half-century hiatus. You can win in the shorter term as shown by the S&P-to-gold ratio (Figure 6). The buy-of-the-century in 1999 was terrifying at the time but crystal clear in hindsight. It was that same S&P-gold ratio that kept me white-knuckling gold from 2013 forward; it never plumbed serious lows, leaving potentially more multiples of relative gains prospectively. I’m still waiting. I own no gold equities because the CEOs don’t seem to know how to make money, but you can see in Figure 7 why serious analysts are salivating.
Figure 5. Price of gold (yellow) relative to Dow (blue)
Figure 6. S&P-to-gold ratio
Figure 7. Philadelphia Gold and Silver Index (XAU) versus gold
People act like it’s a choice. Returning to the gold standard is the answer to a problem that leaves you no choice.
~ Grant Williams (@ttmygh), author of Things That Make You Go Hmmm…
There is a growing institutional bullishness for gold. Bank of America analysts noted that “as central banks and governments double their balance sheets and fiscal deficits, we up our 18-month gold target from $2000 to $3000/oz.” Goldman went bullish on gold while questioning the dollar’s reserve currency status, which is a sell signal to those who think they lie a lot. Buffett raised eyebrows when he sold his airline stocks, half of his Wells Fargo, and all of his Goldman shares (grabbed up on fire sale in ’09) while snarfing up a stake in Barrick Gold.ref 2 He has thrown more feces on the bugs over the years than a rhesus monkey.
The energy sector which has never, in nearly 100 years of data, performed so poorly relative to the index as it has over the past 12 months. These rubber bands are all about as stretched as they have ever been…it is time to get greedy on energy.
~ Jesse Felder (@jessefelder), author of The Felder Report
A bullish case can be made for various value sectors that include emerging markets, tobacco, and energy (see “Broken Markets”), but I am still thinking. Once I decide to enter one or more of these lurking opportunities, it will be quick and bold on a one-decision trade—I will marry it—and probably ride it till death do us part. I am not a trader, but stock toshingTM is risky in these crazy markets. [Note added in proof: I said, “Fuck it; let’s do it” and have started buying energy and precious metal equities.]
One of the smartest people I follow thinks the stock market is going to drop by 50%. I like David Collum a lot but this time he’s dead wrong. Another very bright financial investor named John Hussman believes not only that the Fed is powerless, he says the stock market is going to collapse by 67%. Both predictions are interesting but basically absurd. Those guys are way too optimistic.
~ Bob Moriarty, Founder of 321 Gold
I have been making and will continue to make (see below) my annual case for a vicious secular bear market in equities and, quite possibly, bonds. But Dave (says one of the voices in my head): won’t investors sell anything not locked down, selling what they can not what they want? Yes, but look at gold in previous equity bear markets:
A tsunami of $8.5 trillion of Treasuries will be maturing by the end of 2021! Monetary stimulus will have to be astronomic to cover this. What a time to be a precious metals investor.
~ Otavio (Tavi) Costa (@TaviCosta), Crescat Capital
Chaos in the Comex. There was unusual turbulence underneath the surface of the gold market this year. Debates have raged for years about whether demand for physical gold would someday overwhelm the paper gold (futures) market. Many suspect the paper gold market is used to suppress the price of and demand for physical gold. GLD was introduced in 2004 as a convenient way to buy gold, but claims in the prospectus that HSBC actually holds physical gold seemed like a rehypothecated Leprachaun story to me. HSBC’s compiled rap sheet is also disquieting.ref 1 (I think HSBC is the reconstitution of BCCI.ref 2) The Comex trading platform where you roll contracts forward stipulates that you can take possession provided not too many others try to do so as well; they are 1% fractionally reserved of the metal.ref 3 Nooo problem! On a more humorous note, former Facebook founders and current bitcoin hodlers—the Winkelvoss twins—assured us that Elon Musk would soon swamp the globe with physical metal by mining it on the moon. There are many issues with this moonbat theory, not the least of which being that you are more likely to find swiss cheese than gold on the moon.ref 4
There is no price discovery in the market right now. If you need to borrow gold in the over-the-counter markets right now, you are going to pay a king’s ransom…There is plenty of gold in the market, but it’s not in the right places. Nobody can deliver the gold because we are forced to stay home.
~ Ole Hansen (@Ole_S_Hansen), Saxo Bank’s head of commodity strategy
Welp. The Comex started breaking records for demands of physical delivery while Covid-19 created sourcing problems.ref 5 Approximately 550 tons bled from the Comex, causing the price of gold futures and the spot price of gold to part ways pronto. HSBC is said to have been gutted for $200 million in one day by the “spreads” blowing out.ref 6 One could imagine, in the limit, the futures going to zero as traders realize they are unbacked promises. Not possible? Oil futures hit –$37 per barrel albeit for different reasons,ref 7 but that sure as hell wasn’t supposed to happen either. The futures-spot spread on the London Bullion Metals Exchange (LBMA) blew out with an ensuing mad scramble to change the rules as to what form of gold (bars versus bling) the delivery could be in.ref 8 The Comex and LBMA were joining forces to supply the metals by digging into their 400-ounce bars in the Bank of England that had not seen the light of day for decades.ref 9 Some may recall that the quality of those bars was questioned several years ago when somebody noticed they were “flaking”.ref 9 (Real gold doesn’t flake.) The LBMA publically stated that it “offered its support to CME Group to facilitate physical delivery in New York”, while the big banks were stepping on Comex trading limits. Retail buyers in Germany formed lines at gold stores after authorities dropped the amount they could purchase.ref 10 Some banks like ABN Amro said screw it and exited the whole game with big losses, which also forced their customers to liquidate their gold right when the banks needed it.ref 11 That was lucky for the banks, eh? Others profited through arbitrage by buying low abroad and selling high in the US. Some drew analogies to the 1968 gold rush when the London Gold Pool lost control of their price-fixing scheme.ref 12
The Central Banks are going to go into a new, non-conventional toolkit called debt monetization. They will lose control of the monetary base, and then we will go into a situation where, even with technology and with aging demographics in the industrialized world, we will be talking about inflation again. That might come in the next 18 to 24 months, and gold is going to skyrocket.
~ David “Rosie” Rosenberg (@EconguyRosie), Rosenberg Research & Assoc
Bank of America’s Global Commodities Research team suggested that maybe paper gold is no longer as important as it used to be,ref 13 which is synonymous with “nobody wants that paper crap anymore.” Seems that taking delivery plays the same role in commodities as a $500 cap on a $2 blackjack table. It precludes unlimited doubling-down speculation. That game may be over sooner than many thought possible. Meanwhile, the Russian central bank’s gold reserves grew by >5% in one month, becoming >20% of their total reserves.
The Fed may be forced to buy gold to maintain the appearance of responsibility for the world’s reserve currency….Global consumers are more familiar with gold than the banking system. Thus, this avenue of monetary expansion might finally lift the anchor on inflationary expectations and their associated spending habits.
~ Scott Minerd (@ScottMinerd), Global Chief Investment Officer, Guggenheim Partners
Fraud. What would the gold markets be without criminal activity? The Potemkin regulators are building a racketeering case against JPM for “spoofing” the markets, hoping to pry loose some hush money. Somebody may have duped the Chinese with 83 tons of fake gold.ref 14 Bank of Nova Scotia got fined for $127 million for metal price manipulation.ref 15 Based on the Collum Three Percent Rule, that means they made upwards of $4 billion en route to this surcharge. As usual, paying a big fine with no admission of criminal wrongdoing is paradoxical. Nobody went to jail. Nobody ever does.
Fiat money will be a passing fad in the long-term history of money…I’ve always found many commodities difficult to recommend on a buy and hold basis as most underperform inflation over the long run…Gold is definitely a fiat money hedge.
~ Jim Reid, Credit Strategist, Deutsche Bank
WTF Happened in 1971? A website with this title blew into view this year.ref 16 It shows over 50 financial plots of all shapes and sizes showing marked discontinuities in 1971. Several are shown below. Wow. WTF did happen in 1971? Nixon took us off the last vestiges of the gold standard.
Figure 1. WTF Happened in 1971?ref 16
We have gold because we cannot trust governments.
~ Herbert Hoover, President of the United States, 1928–32
Silver. A 32% gain in silver since my last YIR has more than a few sitting up and taking notice. It got entertaining when a rag-tag bunch of loons called the Robin Hodlers (see “Broken Markets”) put the silver ETF, SLV, on their buy list.ref 17 It rallied briefly but then gave that gain all back as is always the case when the amateurs get in the game. Silver dropped >15% in one day as the Robin Hodlers got chased back to the forest by the Sheriff of Price Discovery.ref 18 The Chaos at the Comex also included silver, causing some seriously upward movement. Goldman became overtly bullish silver citing solar panels as their motivation.ref 19 Beware: this is an old and possibly lame argument. Some say the enormous gold-silver ratio is bullish for silver, but this is only so if traders act on it. Others suggest the price is determined by investor preference for the stock (above ground supply) and flow (mined).ref 20 It leaves me feeling like a speculator. I have about two annual salaries committed to this hybrid precious-industrial metal but am not as convinced I understand it as I used to be. The inflation-adjusted price of silver is also not that inspiring in historical context (Figure 2).
A quick scan of the uncontestably retail silver market on Ebay shows what the retail crowd is doing. High (30%) premiums on silver eagles suggest froth. Recently released Apmex silver eagles were said to be a limited edition. They sold for a nearly 200% premium. Lacking mint marks, the claim is that they can be identified by the notations on the unopened box. Let me get this right: we know what’s in the boxes only if we don’t open the boxes? Sounds like the refrigerator light paradox or beanie babies retaining value with the original tag.
Figure 3. Limited-edition silver eagles.
The more people who own little businesses of their own, the safer our country will be, and the better off its cities and towns; for the people who have a stake in their country and their community are its best citizens.
~ John Hancock, 1st and 3rd Governor of Massachusetts
I have been Toobin’ along for several years trying to understand the distinction between wealth creation, aggregation, and transfer. The shutdown of the much-ballyhooed service economy has inspired me to stroke the keyboard. What follows is a compilation of thoughts that are loosely stitched together in an attempt to drive economists completely nuts. It wanders a bit but serves as a preface to understanding post-modern markets.
During the Covid-19 shutdown, the Fed replaced lost wealth creation with wads of cash—an inflationary wealth redistribution. Meanwhile, the populace lived less ostentatiously akin to their ancestors of a century ago. We needed food, shelter, clothing, healthcare, and the internet (email, Zoom, and porn). Restaurant meals were replaced with the Joy of Cooking. Homemade bread was boss, resulting in a yeast and flour shortage. We cut our own hair and replaced excursions to Aruba with camping and hiking. Couples walked, jogged, and biked together. One can imagine younger couples may experience a baby boomlet in 2021. I ate meals on my deck and chatted deep into the evening with family.
What good was the consumer economy that tanked in our absence? What the hell is a “consumer” or “service” economy anyway? You eat what you kill. You have to produce it to consume it, no matter how much money lines your pantaloons. (Come on, man. Pantaloons?) If we provide services abroad, we pocket a few IOUs for later consumption. Trade deficits mean those other guys are pocketing the IOUs. If our trading partners are producing and we are consuming, we are getting poorer by pulling consumption forward via vender financing, and they are getting richer accruing chits. We will be working for them someday. Big trade deficits steer the US toward the Trouble with Triffin—Triffin’s Dilemma —which is the ultimate and supposedly unavoidable collapse of the reserve currency as delineated by Robert Triffin.ref 1
I was reading in the paper today that Congress wants to replace the dollar bill with a coin. They’ve already done it. It’s called a nickel.
~ Jay Leno
Inflation. What happened in the past when money creation substituted for wealth? The Romans hit the goldmines hard and discovered that increasing the gold supply inflated prices. Aggressive debasement of the metal content of their coins made it even worse. Unlike dicking around with their currency, building the Appian Way and aqueducts with an army of engineers masquerading as soldiers was real wealth creation; parts still exist to this day. The rise of the Renaissance and a massive rise in the Wealth of Nations following the Black Death is often ascribed to the increasingly sought-after peasants—the new middle class shaking off serfdom—being paid more. Maybe so, but there must have been a concurrent rise in per-capita productivity, which likely arose from the emergence of more free and open markets. Hundreds of millions of peasants, when left to their own devices, will innovate and create a lot more wealth than a few Kings busily molesting wenches and attacking their neighbors. It was, however, good to be King.
The Great Bullion Famineref 2 (whatever that is) of the 15th century was replaced by a pan-European boom when a 16th-century silver mine in Bohemia afforded oodles of silver and resulted in the introduction of the silver Thaler (from whence the term “dollar” derives).ref 3 Modern dogma suggesting the creation of money created wealth obscures the story of a temporary inflationary boom and the increasing divisibility of the currency promoting commerce. (We all know how hard it is to buy a fowl or a tankard of ale with a gold guilder.) While the discovery of the New World ultimately led to some serious wealth creation, the gold shipped to Spain by the conquistadors created nothing more than inflation, with the Spanish enjoying the perks of the Cantillon Effect—the benefit of being first in line before inflation appears in earnest. Discussions of the Cantillon Effect also underscore the aftershocks when the Spaniards failed to develop independent industry.ref 4 Modern era lottery winners are new-era Spaniards.
Lottery winners are more likely to go bankrupt within 3–5 years than the average American.
Robert Gordon argues a rise in real (inflation-adjusted) wages owing to fantastic gains in per-capita productivity actually caused (rather than was caused by) the great 20th-century expansion. (There’s more on Bob below.) Again, hundreds of millions of workers will revolutionize the world compared to a handful of robber barons with hot flappers in tow doing hostile takeovers of their competitors. Now we are witnessing a massive and growing wealth divide that is tearing the social fabric and undermining the statistically overwhelming contribution of 7.5 billion people who could innovate. The workers are once again filling the coffers of a few Kings (and Queens) with hot chicks in tow who are richer than Croesus in the Valley of Silicon. Mind you, I am not arguing for a wealth redistribution but instead that the Cantillon Effect is causing the distribution mechanisms to fail. Labor is battling capital for its share of the pie. Meanwhile, the capital keeps propagating like gerbils as if some asset mangling central bankers sequestered in the bowels of the system are printing the damned stuff without brrrreaks. This iatrogenic Monetary Munchhausen-by-Proxy Syndrome is also WTF Happened in 1971.ref 5
Capital needs to cost something for a dynamic economy to work.
~ Sheila Bair, former FDIC Chair
Just now, America is producing almost nothing except money, money in quantities that stupefy the imagination — trillions here, there, and everywhere.
~ Jim Kunstler
Increased per-capita productivity correlates with real wealth creation. All boats rise, some more than others. Keynes predicted that technology would shorten our work weeks to 15 hours—another one of his dubious theories kaput? (Sorry for the dig, Maynard. Shake it off.) Author David Graeber argues Keynes was correct and that the void is filled with what Dave called “bullshit jobs.”ref 6 Are we paying people to dig and then fill holes? I will try to pull this all together, but not yet.
If your lost job and income can be replaced by simply giving you government-issued checks, what were you doing that was so important?
GDP versus NDP. I once swapped emails with a prominent economist and Great Depression expert, Professor David Kennedy of Stanford.ref 7 (I have a point coming so hold your horses.) I submitted that the Great Depression was not ended by WWII but rather continued to the end of the war. The highly constrained personal consumption (rationing) was the blowoff bottom—the last drops of excess created in the 1920s wrung out of the system—that set us up for a surreal post-war boom. He suggested I was full of shit (paraphrased) by noting a 15% growth in GDP during the war and that the war-time hardship stories are overstated. With ten years of reflection, I am not yet giving up. To understand my point, I am going to offer an alternative metric for wealth creation.
Everybody’s favorite measure of wealth creation, of course, is GDP (or GDP per capita), which is defined as
GDP = C + I + G + NX
C is personal consumption,
I is gross private domestic investment,
G is government purchases,
NX is net exports (exports minus imports)
We must use real (inflation-adjusted) GDP. Most agree that the inflation correction got all garbled up (juiced) by the Boskin Commission’s fudge factors that are necessary in theory but corrupted in practice.ref 8 Those weak-minded who think inflation is too damned low and are cooking their breakfast in a teaspoon over an open flame should pull themselves out of that pool of vomit and check out the Chapwood Index. It is a highly transparent measure of inflation in the 50 largest cities.ref 9
Figure 1. Chapwood inflation index.
Best I can tell, the creation of debt has not been subtracted from the GDP numbers either and, certainly, the correction for inflation is not at Chapwood-levels. According to the internet, if you subtract debt from GDP, we have had negative GDP for years. (We amassed gargantuan debt during WWII, which will be a component of my argument.)
Fun fact: My BHAG (estimate) of the global GDP at the time of Christ in 2020 dollars is $90 billion—a subsistence-level $300 per capita—compared with $80 trillion today ($10,000 per capita). Ergo, global per-capita GDP grew <0.2% per annum over two of the coolest millennia to date. Buying a global equity index fund spanning the growth of civilization would not have been that profitable.
Let me introduce what I think is a better metric of wealth creation called the Net Domestic Product, or NDP, defined as…
NDP = GDP – depreciation
NDP is one of the key gauges of economic growth reported by the Bureau of Economic Analysis (BEA).ref 10 If depreciation is low, NDP is high and vice versa. Investopedia says that a large GDP is good news whereas a high NDP indicates “economic stagnation.” As the macroprudential reasoning goes, it is during good times that you witness the replacement of the old with the new—balls-to-the-wall creative destruction. Failure to upgrade production facilities eventually decreases the country’s GDP. (Just ask those who lived through the 1970s in Pittsburgh.) Maybe so, but replacement cycles are expensive and can be fast. The really frothy ones smack of Bastiat’s Broken Window Fallacy: smashing and replacing windows juices the GDP without creating any wealth.
Let’s look at the underbelly of NDP. When those Romans constructed bridges, roads, and dwellings they created some serious wealth owing to profoundly slow depreciation. That is serious NDP because depreciation was near zero (NDP = GDP). At the micro-level, rapidly depreciating consumer goods stifle wealth accumulation (savings). Your house is full of crap with the life expectancy of a Clinton email server, none of which can be repaired. Replace your iPhone with each new model and watch what that does to your savings. Better yet, bulldoze your house every 20 years, build a better one, and tell me how that works out. In fact, the enormity of CSFs (Crap Storage Facilities) known as McMansions built with Chinese sheetrock and chincy hardware decay like scenes from Inception. I have previously called this accelerated replacement cycle—the high cost-per-use—a massive hidden inflation.ref 11
What does the service economy look like through the lens of NDP? The GDP contribution of a family night at the movies is equivalent to several Black & Decker power tools. The latter are labor-saving devices that last at least a few years (although not like those made 50 years ago). The family movie night depreciates in <3 hours (although the popcorn slathered with WD40 stays with you longer.) Two haircuts may last you two months whereas one pair of hair clippers can shave many heads, crotches, ears, backs, eyebrows, armpits, and dogs. A bioengineering degree from MIT depreciates considerably more slowly than a degree in grievance studies at Evergreen State College. The latter is a resume-destroying educational timeshare with a negative net worth in a job interview, which you will never get.
If you overuse one of the factors of production, such as debt capital, initially GDP will rise. You continue to overuse that factor of production, GDP flattens out; and if you continue to overuse that factor, GDP declines. More is not more — more is less.
~ Lacy Hunt, the legend from Hoisington Investment Management
Back to the debate about whether WWII ended the Great Depression. Admittedly, the war machine had lasting effects as new methods of mass production—Ford’s assembly line on steroids—evolved to crank one bomber per hour in a single plant. We also constructed transcontinental oil pipelines. Nonetheless, there is an offset because the War Machine was financed with debt, which is consumption pulled forward from subsequent decades. The product of the War Machine itself—bombs, planes, ships, and bullets—contributed massively to GDP but had inordinate depreciation rates (fractions of seconds in some cases). The utility of a bomb is truly ephemeral. The NDP on most of those armaments was a rounding error from zero. Let’s drive this home using a contemporary example: the $6 trillion spent on wars in the Middle East also contributed greatly to GDP but almost nothing to NDP. It would be nice to have that cash (or should I say productive labor) back, wouldn’t it? Accounting for debt pulled forward and rapid depreciation, did the WWII really bring us out of the Great Depression? In part yes, but only in part, and only in my opinion.
I think the technology answer has been provided to us by Dr. Robert Gordon at Northwestern. He said in our period of great growth from 1870 to 1970, we had transformative, revolutionary inventions…The technological changes today are more evolutionary, not revolutionary. The production function is one of the most fundamental relationships in all of economics, and it’s telling us we’re facing a period of difficult growth.
~ Lacy Hunt, the legend from Hoisington Investment Management
Inventions Past and Present. In a fabulous book, The Rise and Fall of Growth in America (see “Books”), Robert Gordon argues that the industrial revolution from 1870–1940 was a unique and not-to-be-repeated period of wealth creation. The period from 1940–1970 was OK, whereas the modern era is a mediocre stretch that was briefly interrupted by a technological spike from 1995–2005. (That’s when the porn showed up bigly.) Before you technophiles soil your thongs, Gordon is not alone. Robert Solow, winner of the Nobel Prize for Total Factor Productivity, TFP,ref 12 quipped that you can see the influence of computers everywhere but in the productivity numbers.ref 13 Admittedly, this was a few years back, but I am not alone in my frustration with the downsides of tech innovation. The Solow Paradox is defined as the “discrepancy between measures of investment in information technology and measures of output at the national level.” Tyler Cowen, in an essay The Great Stagnation, argues we are on a plateau.ref 14 Michael Hanlon makes the case that innovation has stalled since 1970 by surveying what we still can’t do.ref 15 Hey! We finally got a Dick Tracy watch! With 1970 as the approximate cut-off, the question should be repeated: “WTF Happened in 1971?”
We wanted flying cars; we got 140 characters.
~ Peter Thiel, venture capitalist
As a preamble to a discussion of transformational versus incremental wealth creation, let me resurrect a concept first presented to you in elementary school—the non-zero intercept. The utility of this construct came to me during an organic chemistry seminar in which somebody showed a fivefold influence on a cell wall property. It clicked: “That’s jack squat.” Fivefold to an organic chemist is <1.0 kcal/mol, the energetic cost of separating two water molecules from each other, and the dude was gonna build a fancy model around that? Now imagine a plot of the unitless and obtuse concept of technological change versus time (Figure 2). It would be noisy and should curve upward due to compounding, so let’s simplify it to a fault by linearizing everything. (I feel like an economist already.) The slope is the rate of technological change, and you want that puppy steep. Oh, yeah: Tesla baby! However, no advance is built on zero foundations. The non-zero intercept is the technology you creatively destroyed. The Gutenberg press was preceded by the quill. The quill would be a minuscule non-zero intercept best represented by curve b. The overall change represents unimaginable multiples off the original technology. Now imagine replacing manual typewriters with electric typewriters. That’s an incremental change—a BIG intercept, rendering the slope a rounding error (curve a at best). You may now have surmised that the seminar about cell walls had a non-trivial basal behavior without the additive—a large intercept—that left me underwhelmed. Biochemists, which I fondly refer to as “biowankers”, screw this pooch often, but we should still follow the science.
Figure 2. Technological change (slope) and creative destruction (y-intercept).
OK. I’m back. Not every invention is a Gutenberg press or electricity. New appliances riding on the backs of electrification—so-called “subsidiary” inventions—can be consequential. Most boomers probably have no idea that an enormous number of labor-saving devices became regular fixtures within the household just as their parents were creating the demon seed, you (pronounced “eewe”). Yay boomers! Now this will blow your circuits: Gordon says that the greatest decade for such subsidiary inventions was the 1930s—smack dab in the middle of the Great Depression. Bob argues that part of the Depression was labor getting pistol-whipped by capex (capital expenditures). Are we seeing a déjà vu as the Fed-funded digital world replaces people? Let’s ponder a few technological changes from the near and distant past to understand wealth creation. Ponder the slopes relative to the intercepts.
Ground transportation. We went from horse-drawn carriages to combustion-engine-powered vehicles, accruing hundreds of horse powers per vehicle in short order. Think cars, tractors, trucks, and bulldozers. In forty years, a horse had been replaced with a 1940s vintage Jaguar XK120 with a top end of 120 mph. Now I ask: 80 years later, what can you do with a Tesla that you couldn’t do with that vintage Jaguar XK120? Admittedly, a Tesla can do 250 mph on no road anywhere in the US. (Breedlove did 407 mph on the Bonneville Salt Flats in 1963.) A Tesla can go 300 miles on a single charge, but how far can it drive using the most efficient fuel source of them all, gas? I’m told Teslas are sooo cool to drive, but now I’ve gotta ask: Would you rather have sex, which is free or $20 on a bad day, or drive a Tesla? Thought so. I’m not done hammering Tesla by any means (see “Broken Markets”). How about replacing two horses with those 1912 hogs ridden by Mr. Harley and Mr. Davidson:
Communication. When the mail was replaced with telegraphs and eventually telephones, the time required to send a message across the country or around the world dropped from months to minutes and eventually to seconds. The Rothschilds had a fabulous currier system allowing them to trade assets on news from distant lands. “Quick. Sell those Waterloo munis.” The telegraph was a black swan that blew their business model out of the water. Now we have cell phones, which were brilliantly foreshadowed in 1960 by a must-see Arthur C. Clark videoref 16 and in 1926 by Tesla—the original Tesla:
When wireless is perfectly applied the whole earth will be a huge brain. We shall be able to communicate with one another instantly, irrespective of distance.
~ Nikola Tesla (@NickyT), 1926
Food Preservation. In prehistoric times, food preservation was via tribe members; you shared the kill. Drying meat to the point of inedibility and salting and pickling in clay crocks allowed for long-term storage. (The book Salt is a comprehensive treatise on the importance of salt to civilization that lives up to its sexy title.) Refrigerators, even as subsidiary inventions, were transformational for both shipping and storage. The next hundred years witnessed automatic ice makers. We recently put to pasture a 70-year-old Philco refrigerator that still worked. NDP was high the day they cranked out that beast. In 70 years, nobody will own a 70-year-old refrigerator that still works. Depreciation rates are very high.
Air Travel. The Wright brothers took us from commercially useless balloon-based flight (tiny intercept in Figure 2) to planes that were used militarily within a decade and crossing oceans within another. Orville Wright lived long enough to see jets in flight. Orville’s children witnessed jet-based commercial travel with the introduction of the Boeing 707 in the 1950s. Orville’s grandchildren now pay $50 bucks to get their bags looted of all valuables by TSA handlers. They do, however, get a free reach around at the security gate if their fake hip sets off the metal detector. (Hint to the old geezers with prosthetics: Identify as an old woman.) You can watch movies peering through your knees while you think about how nice a hot meal would be delivered by the stewardesses of yore.
Visual Arts. Photographs were the visual equivalents of the Gutenberg press and tape recorders the audio analogs. Movies and TV allowed you to see movements of tornadoes, elephants, and porn. (OK. That is the last porn allusion.) Decades later, you can watch anything you want on Netflix, but you can still only watch one show at a time. We had a rabbit-eared TV (in the cabin with the fridge) that got a single channel from Montreal. We were remarkably content, and those Club Super Sex commercials appearing after midnight were quite a treat. (That one doesn’t count.) Netflix is an incremental gain. I’ll give the internet serious transformational credit. It may be the Gutenberg Press 2.0 and is the source of Robert Gordon’s spike in wealth creation from 1995–2005. Google, despite its authoritarian leanings, is still seriously cool for looking up something in seconds that required weeks or months (if even possible) in the past. The subsidiary inventions are less inspired, just ask anybody who has wrestled with a website that is not Amazon’s.
True, social media is impressive. The internet gives us instant access to global knowledge. We are a more tolerant society, at least in theory. But Facebook is not the Hoover Dam, and Twitter is not the Panama Canal.
~ Victor Davis Hanson (@VDHanson), historian
Social Media. Facebook is unique. Given their business model of selling scraped data to corporate America, it seems to be a replacement for TV commercials and billboards. They may get me to buy a Saatva rather than a Tempurpedic mattress, but I am only buying one. To the extent they scrape data for nefarious reasons (as delineated in the books Surveillance Capitalism or Deleted), it is trivial to argue the modest intercept in Figure 2 is dwarfed by a steeply negative slope. Would society lose anything if Facebook disappeared? (Please take Mark with you.) And let us not forget the Solow Paradox.
Retail. OK, Professor Smarty Pants: what about Amazon? You can get anything from a single website in a day or two. Gordon reminds us that 100 years ago the Sears catalog let our great grandparents expand their purchasing beyond flour, beans, and nails from barrels in the general store to buying almost anything they wanted (including pre-fab houses). It took a few weeks, but, by comparison and over a century later, Amazon is incremental.
Highways. The movies give the Romans a bad rap. The Appian Way created by Roman engineers brought civilization to Europe (admittedly at the tips of Roman swords.) Lincoln initiated the Transcontinental Railway during the Civil War. Germany created the Autobahn, which inspired Eisenhower to create our interstate highway systems. These were government programs that created huge wealth. The last half of the 20th century witnessed the Big Dig, the Bridge to Nowhere, California’s unfinished rail systems, and interstate highways in Hawaii.
Plumbing. Running water via plumbing was developed millennia ago, but routine indoor plumbing in the early 20th century allowed homemakers to stop hauling 50–100 gallons of water a day in and out of the house. Throw in wiring and a phone, you have a modern household albeit 100 years ago.
Government. Herbert Hoover introduced the National Bureau of Standards (NBS), which allowed huge progress through interchangeable parts and mass production. (Hoover was a great president with a bad rep.) The boomer generation, by contrast, created the National Security Agency (NSA), which ushered in 50,000 bullshit TSA jobs in the US alone. Wouldn’t you like to get some of your civil liberties back?
Healthcare. Penicillin and its offspring introduced in the 1930s saved millions of lives. Most modern medicines are welcome additions but are more about maintenance than cure. (NB-Give a damned Nobel prize to the guy who invented Imodium in the 1960s.) Even cancer survival rates are rising slowly: you can see the non-zero intercepts.ref 17
Food Preparation. Gas and electric ranges at the turn of the century were big improvements over wood stoves and the hearth. Microwave ovens are incremental: you can make popcorn on a stovetop. Interesting factoid: possible kitchen applications of microwaves were discovered when some guy melted the chocolate bar in his pocket while whipping up a couple of Rocky Mountain oysters in his shorts.
Banking. The FDIC banking insurance in the 1930s represents the high-water mark for modern banking. You will have trouble convincing me that the bloated multinational banks of the present are anything but a monumental downward slide to the Gates of Hell. Banks used to be about matching lenders and borrowers—savings and loans—but are now systemically risky bucket shops with customers as prey. We’ll return to them in a bit.
Role of Energy. Maybe the perennial optimists will be right again, but those expecting that the 21st century’s growth will match or top that of the 20th century may be disappointed. Economists have noted that the ebbs and flows of modern economies correlate with energy consumption.ref 18 It is easy to see how tapping new and better energy sources have created profound changes through the millennia. Fire brought us out of the caves. Charcoal ushered in the Bronze and Iron age. In the ancient civilized world, the west was still on the cellulose standard while the Chinese were pumping natural gas out of the ground using bamboo pipes to boil seawater to get salt. The Highlanders started burning peat laced with dead Druid priests. The industrial revolution rode the back of the whaling industry for light—coal, and eventually oil…black gold…Texas tea. (Leviathan is a great treatise on the history of whaling on the growth of New England.) Each stage was powered by a better, more efficient fuel than its predecessor.
If stupid hippies hadn’t killed nuclear power, we’d have nuclear power plants, safer and cheaper than coal-fired plants, all over, and electric cars really would be zero emissions.
~ Penn Jillette, comedian
I once had dinner with Penn Jillette. Of course, the next push forward will be based on nuclear energy. Oh, but nooooo! We can’t do that! Although deaths in the US nuclear power industry are almost undetectable,ref 19 we are told, “one life is too many.” Forget about the death toll on Friday nights in the bars near the Texas oil fields. No siree, we are doing it with solar, wind, geothermal, and biomass, all displaying energy densities that are no match for a barrel of Saudi crude let alone a single nuclear reactor. Hey: maybe you could recycle that cooking oil from McDonalds to charge your Tesla. Alternative energies are unevenly generated, and they are also destabilizing to power grids when imported beyond a critical, and rather low, threshold.ref 20 Meanwhile, I’m told that second-generation nukes are so efficient as to leave essentially no toxic waste. We should rethink our aversion to nukes and do so fast.
The notion of wealth creation is foundational to the section on “Broken Markets.” Are the new era silicon-based industrial Goliaths really capable of creating wealth akin to their carbon-based predecessors? One last truly random and haunting thought: Civilization is, by definition, sandwiched between two ice ages. If nature ever shook the Etch-A-Sketch and zeroed out civilization, the post-apocalypse survivors would never regenerate modern society because they wouldn’t have the fossil fuels. We had one shot at building a sustainable industrial civilization. Let’s not blow it.
[Investors] do not care about the movements in the price of the stock. Since their interest lies not in the sale of the stock but in the revenues secured through the dividends; the higher value of the shares forms only an imaginary enjoyment for them, arising from the reflection…that they could in truth obtain a high price if they were to sell their shares.
~ Joseph de la Vega, 17th-century businessman
The price you pay determines your rate of return.
~ Warren Buffett
Buffett noted in an iconic 1999 Fortune article that dropping interest rates are bullish.ref 1 The equity run starting in 1981 overlays perfectly with a four-decade bull market in bonds in which dropping rates were accompanied by greater profits and rising valuations. In a 60:40 portfolio, the rising price of bonds in the denominator drives the numerator and shifts enthusiastic investors to raise the percentage of equity exposure. (See Cash on the Sidelines.)ref 2 Treasuries are so overpriced now as to yield <2% nominal return per annum for thirty years. The only decision for a bond investor is how long you wish to get no yield. Jacking up the denominator of the 60:40 portfolio is nearing an end and the return from that denominator is a disastrous inflation-adjusted negative yield. The Fed, by contrast, starting with Alan Greenspan, missed that dropping part of Buffett’s thesis, often suggesting that low rates justify high equity valuations. This is called the ”Fed Model” and is tantamount to saying that the largest bond bubble in history justifies the largest equity bubble in history. Great model guys. I expect nothing less.
To say that low interest rates justify high valuations in stocks is also to say low interest rates justify low future returns in stocks. If one wishes to protect overvalued prices, one also has to accept meager long-term returns.
~ John Hussman (@hussmanjp), Hussman Funds
Historical Valuations. In 2018 I hit the valuation story as hard as I could, laying out 20 metrics all suggesting that the S&P 500 was at least twofold over historical valuations.ref 3 Figures 1–4 are just a few updates and new views. The Buffett Model—the S&P’s price-to-GDP ratio—is popular owing to its namesake. Figure 1 shows the stats of a market that is clearly muffin topping. Figure 2 is the more broadly-based Wilshire 5000 analog of the Buffett Indicator. You can see in all of them that the markets at the ’09 low were not deeply undervalued just because they had hurdled Earthward so dramatically, and the markets spent about a month below historical fair value. Pure greed kept my buying in check. There had to be more to go, but the Fed had other plans.
Figure 1. “Are markets priced for Destruction?” —Bloomberg
Figure 2. Wilshire 5000 versus GDP c/o Stephanie Pomboy of Market Mavens.
Figure 3. Market valuation versus GDP measured in trillions of dollars of market cap c/o Stephanie Pomboy of Market Mavens.
Valuation, I find, is a useless tool. If you base your investment decisions on valuation, you are never going to make money.
~ Mark Schmehl, Fidelity
Traders warn not to trade off valuations as a timing vehicle. As the risk soars new-era momentum traders are confident they can dine on Fibonacos and dips and be John Elway (leave at the top). They may skedaddle out the keyhole just in time, but somebody must own those assets all the way to the next secular bottom. Do ya feel lucky? Investors, by contrast, warn that price matters: the more you pay for a given asset the lower your returns. If you buy a Toyota Camry—a good, solid car—for $100,000 you’ll get hurt at the trade-in. The best investments are good assets in which low prices have wrung out the risk.ref 4 The great risk is scooping up assets of dubious quality when the party is raging. Investors should take note that Buffett has been paring his equity exposure including airlines, half of his Wells Fargo, all of his Goldman shares, and $5 billion of Apple, apparently turning Berkshire into a social conscience fund.ref 5
Figure 4. If we are more efficient technologically, why do we work so hard to buy the S&P?
Figures 1–4 show the markets have been above historical valuations since the mid-90s. To reiterate: there are many more.ref 2 One group of enterprising analysts treat rising valuations as a trendline and correct for it.ref 6 How novel. This is a long time to be above any mean. Must be a new paradigm. Maybe this is the demographics of the boomers pushing the markets up the Wall of Worry propelled by a Wall of Liquidity. I see the liquidity but not the worry. Years ago, Kudlow suggested social security should be put in the markets. That would have driven valuations up even higher, but Larry seemed to miss the niggling detail that it would not in any way create wealth or even generate GDP, only slice the pie into more pieces. Sounds fair to those who have no pie, but the collective gain would be zero. Ominously as the boomers liquidate their assets there is sparse evidence that the next generation will have the resources to put a bid under anything. We could witness 25 years of downward pressure provided Covid-19 doesn’t compress that timescale the hard way.
I understand people who bet on moral hazard. I understand people who bet on the Fed backstop. I don’t do it. I don’t think that’s a good way to invest…This notion that it doesn’t matter what happens to fundamentals…It doesn’t matter what happens to corporate earnings… It doesn’t matter what happens to economic growth… because The Fed will buy what I want to buy… that’s the mindset of the market right now….Why has the fed continuously conditioned markets to expect them to step in and repress any volatility? Isn’t it time to stop doing that because you end up not only undermining the system itself but you undermine the credibility of an institution that is critical to the well-being of this and future generations?
~ Mohamed El-Erian (@elerianm), former manager of Pimco
Current Valuations. OK. I documented the lofty valuations in 2018 but what about now? Equities have risen a smart 35% in the intervening two years. Even if we took a pass on the Covid-19 disaster, which I believe has exacted serious long-term damage, Buffett’s GDP denominator would have grown 5-6% at best. Let’s look at some granular details:
- Growth stocks are considered bottom-decile cheap when they are priced at six times sales and top-decile expensive at fifteen times sales. They were 23 times sales as of September without factoring in contributions from the Covid-19 recession.ref 7 A 75% price correction, provided it does no economic damage, will make them cheap again.
- In 2019 over 1500 CEOs took their booty and exited to “spend more time with their families.”ref 8 In January 2020, another 219 decided to cash in their chips. Insider selling was running high. What did they know?
- The FAANGs have ridiculous valuations. These market Sherpas—Facebook, APPL, AMZN, NFLX, GOOG, with MSFT thrown in—have a combined market cap of >$8 trillion. They are the market. The S&P 500 is now the S&P 5. We’ll bang this drum hard in “Broken Markets.” I’m partial to using just MSFT, Apple, Google, and Amazon (MAGA).
- More companies are trading at over ten-times revenues than during the dot-com mania.ref 9
- Forty percent of publicly traded companies have negative net worths.ref 10 The percentage of zombie companies in the S&P—companies that are at least 10 years old and unable to pay interest on their debt without taking on more debt—is 14–18% depending on who you ask.ref 11 If your cash flow can’t cover the interest payments with rates at 5,000-year lows—I am not exaggerating—you are totally screwed. (I am exaggerating on that either.) In 1990, with interest rates near 10%, only 2% of the S&P were zombies.ref 10
- David Stockman notes the market’s “price-to-earnings ratio ranges between 52.1 times the earnings CEOs and CFOs certify on penalty of jail time ($65 per share) or 27 times the Wall Street brush-stroked and curated version ($125 per share), from which all asset write-offs, restructuring charges, and other one-timers/mistakes have been finessed out.”ref 13 (Notice how David specifies the importance of earnings that aren’t completely fabricated.)
The stock market has returned more than 125% since the 2007 peak, which is roughly 3x the growth in corporate sales and 5x more than GDP.
~ Lance Roberts (@LanceRoberts), chief Strategist RIA Advisors
From the legendary Jeremy Grantham…ref 12
This will end badly….I have been completely amazed. It is a rally without precedent…the only one in the history books that takes place against a background of undeniable economic problems…the market and the economy have never been more disconnected…the current P/E on the U.S. market is in the top 10% of its history… the U.S. economy, in contrast, is in its worst 10%, perhaps even the worst 1%…. This is apparently one of the most impressive mismatches in history…after a 10-year economic recovery, this would have been a perfectly normal time historically for a setback….And then the virus hit…bankruptcies have already started and by year-end thousands of them will arrive into a peak of already existing corporate debt…the history books are going to be very unkind to the bulls.
Realistic Expectations? What’s a reasonable guesstimate for investment returns over the long term? A gander at historical returns without accounting for valuation changes reveals that Wall Street hasn’t been completely truthful with us. The average nominal (non-inflation-adjusted) return for US stocks is about 5.5% annualized for 120 years and >6% in the post-war period.ref 14 Typical retirement plans assume a 7.5% nominal return. Polls show investors expect an outlandish 15% return on their equities over the next five years,ref 15 suggesting profound recency bias from the total return of 17% annualized ‘roid rage off the ’09 lows. They seem unaware that the last decade’s returns are trough-to-peak, a ridiculous one at that. Suze Orman spouts off about a Gen Z-ers putting $100 bucks a month into a Roth IRA and retiring as millionaires. Such a real return would require >11% return per annum—year after year—for 40 years.ref 16
Lowered Expectations. Earnings for a reconstructed inflation-adjusted S&P from 1870 to the present using Shiller’s numbers show a 15-fold gain (about 2.0% annualized). Funny how that is the same as the growth in the GDP over that same period. Go figure. Let’s tease out a few gems from Buffett’s iconic 1999 analysis, shall we?
Let’s say that GDP gets 3% real growth, which is pretty darn good…If you think the American public is going to make 12% a year in stocks, I think you have to say, for example, “Well, that’s because I expect GDP to grow at 10% a year, dividends to add two percentage points to returns, and interest rates to stay at a constant level.”…The absolute most that the owners of a business, in aggregate, can get out of it in the end—between now and Judgment Day—is what that business earns over time…[There are] frictional costs…the market maker’s spread, and commissions, and sales loads, and 12b-1 fees, and management fees, and custodial fees, and wrap fees, and even subscriptions to financial publications…investors are dissipating almost a third of everything that the FORTUNE 500 is earning for them …If I had to pick the most probable return, from appreciation and dividends combined, that investors in aggregate—repeat, aggregate—would earn in a world of constant interest rates, 2% inflation, and those ever hurtful frictional costs, it would be 6%. If you strip out the inflation component from this nominal return (which you would need to do however inflation fluctuates), that’s 4% in real terms. And if 4% is wrong, I believe that the percentage is just as likely to be less as more.
~ Warren Buffett, 1999 Fortune articleref 1
Thus, the Orifice of Omaha says 4% real return is it. Rob Arnot puts it at 3.1%.ref 17 Neither analysis appears to include taxes on the dividends and on nominal capital gains. (The authorities love inflation because they get to tax it.)
The Buffett Indicator…now yields a forecast of an average annual loss of nearly 8%, including dividends, over the coming decade.
~ Jesse Felder (@jessefelder), former hedge fund manager and author of the Felder Report
Expectations from Current Valuations. OK, Bub. We are way overvalued. I get it, but how do we get out of this metastable mess without having to put our affairs in order? It seems unavoidable that the mean regression will live up to its name. It will occur on no set timescale, but it is a gravitational pull—a force of nature. (Middle school arithmetic reminds us that you have to go through and spend time below the mean, but that is too ugly to ponder.)
We’re in the craziest monetary and fiscal mix in history. It’s so explosive, it defies imagination.
~ Paul Tudor Jones (@ptj_official), January 2020
Two years ago I created a graphic showing how long it takes markets to regain their secular highs for the last (not first) time (Figure 5). Those arrows are 40–75 years long. From the old Bill Cosby comedy skit with God talking to Noah resisting building the ark: “Noah. How long can you tread water?”
Figure 5. I made this in 2018 and will keep posting it. (Background plot by Ron Greiss.) That longest blue arrow (1906–1981) is 75 years long. Howbowdah?
Regression to the Mean. I’ve tried to conceptualize a model for overvaluation and the unavoidable return to normal in Figure 6. Don’t get hung up on the units; it’s a spherical cow. The 2.0% real GDP growth compounded over the 20th centuryref 18 is approximated by the noiseless blue curve (y = 1.02x where x = 0–100 years). The red curve is the market tracking the GDP Buffett style but then departing into a mania—2x overvalued—by year 45. The math is identical for any metric of valuation. The choices for regression to the mean are illustrated with green arrows.
Figure 6. 2% growth in GDP (blue). Equity multiple expansion to 2x-overvalued occurs by year 45 (red). Regression to the mean (green) occurs by four paths: (a) crash (0 years, 50% correction); (b) secular bear (25 years, 16% correction); (c) treading water (35 years; 0% correction); (d) slow appreciation (50 years; 25% total gain).
- A market crash approximated by the vertical red arrow is optimal for a cash-rich bear looking for an entry point. That would be me. It would also turn the highly leveraged financial system into pink mist.
- Alternatively, curve c shows the markets treading water—moving horizontally—until they intersect with the GDP curve, which is monotonically growing at an uninterrupted 2% annualized rate. Investors will be treading water with zero real capital gains for 35 years, which is a rounding error the same as for your treasury portfolio. There are, however, dividends, but they are offset by taxes and fees.
- More realistically, markets will serve up a price–time combo platter and slowly drift lower while the GDP slowly grinds higher. Curve b, for example, shows a net 16% loss spread over 25 years. The inflation-adjusted 66% loss in S&P from 1967–81 was spread over the 14 years (see Figure 5).
- The Fed seems determined to follow the last path (curve d) in which the real capital gains angle upwards for eons. The boomers will have long-since gone to the light waiting 50 years for the regression to mean valuations accompanied by a 25% total gain (0.5% annualized). The Fed is charting this course by artificially and rather explicitly supporting asset prices. Unfortunately, they will fail because they actually suck at their jobs. This strategy in reality is simply generating loftier levels of overvaluation through a series of bubbles that become progressively more shock-sensitive and dangerous. It feels like the Fed is in the final stages of Tetris.
You can replace lost capital – but you can’t replace lost time.
~ Lance Roberts, batting 500
Once the markets are way overvalued, there is no escape for the collective market participants. This is not Sandra Bullock in Gravity. There is no magical way back to Earth. The John Elways might escape and the David Teppers pile drive it, but for most investors it will be a curb stomping. If you wish to assume the markets can just keep expanding valuations without bound because of some bullshit argument about liquidity or Fed support, have a ball. In turn, I will gladly crank out another chart like that in Figure 6 from 200% overvaluation that will produce even more dire projections. When you are at 35,000 feet with engine trouble, take the plane higher if you wish. The only thing guaranteed is that you will have enough fuel to get to the crash site.
Everything is not OK, and then you look at the S&P 500—it keeps going up. The market doesn’t care about valuations. With the Fed continuing to step in, the right bet has been to bet with the Fed. The trends are your friends right now, just keep riding it higher, and it’s almost a little bit like stick your head in the sand.
~ Jerry Braakman, chief investment officer of First American Trust
Stock Toshing and Value Traps. In earlier centuries, fishing through the sewers for valuables—so-called “toshing”—was a career choice. You can try to do it in equity markets too, but unlike toshers of old, stock toshers have risk capital in play. At bubble levels the bulls are in autoerotic asphyxiation while the grizzled veterans start waffling about “stock pickers market”, implying that when the market goes full-Antifa on your ass you picked the wrong stocks. Are there good buys out there? I own traces of a few close-ended Russian mutual funds (Browder-Biden-Clinton Roosky Value Fund), but cheap stocks in countries with poorly developed capitalism are a fool’s errand. Some say Japan is OK after three decades on a donut cushion but then criticize them for not being able to get their shit together. Smart guys like Jim O’Shaughnessy see value in emerging markets. Eric Cinnamond is a small-cap guru and sees opportunities in small caps.ref 19 Eric will get some money outta me at some point.
So like around March I could feel it coming. I just – I had to play. I couldn’t help myself. And three times during the same week I pick up a – don’t do it. Don’t do it. Anyway, I pick up the phone finally. I think I missed the top by an hour. I bought $6 billion worth of tech stocks… and in six weeks I had left Soros, and I had lost $3 billion in that one play.
~ Stan Druckenmiller, on the deadly tractor beam of the tech mania in 2000
Fools rush in.
Felder and a few others are salivating over the energy sector—Dogs of the Doha—as unpopular as hell, deeply undervalued, inflation hedging, and dividend cranking opportunities. Also, the peak oil discussion has resurfaced with the failures of fracking.ref 20 I am looking at the dividends of the big caps like Chevron (5.7%), Conoco Phillips (4.0%), BP (5.8%), and the recently Dow-Exiled Exxon (8.2%) and wondering if they are steals or dividend traps. Some are borrowing to pay dividends to appease their investors. Even if the energy dividends are at risk of some pruning because of low payout ratios, won’t they be more generous than treasuries? Over a hundred companies including GM, Ford, and various mortgage REITs took their generous dividends down to the studs (zero) to preserve cash during the crunch this spring.ref 21 There’ll be more if the post-Covid-19 world proves problematic. The world record dividend slash ‘n’ burn was in 2009, but that was sooo long ago. Once the dividend is gone, dividend-harvesting funds sell, causing organ-harvesting price drops. Nonetheless, the ridiculously low 2% energy occupancy in the S&P suggests there is more room up than down. Won’t alternative energies also put the fossil fuel companies out of business? If you believe that I have a wind farm in Nigeria to sell you.
…enthusiasm and exuberance took hold over the summer…it hit a fever pitch that I have not seen in the five years that I’ve been managing my fund.
~ Justin White, a portfolio manager at T. Rowe Price
Justin’s five years battling the markets? A fevered pitch unlike any since 2015? Wow. Raging bulls that turn into manias make smart people look bad and newly minted Wharton Whack Jobs look like geniuses. If you were a veteran, you probably missed some of the rise off the ’09 bottom you had too many shark bites. Meanwhile, the cubicle farms are stuffed full of twenty-something, dip-buying prairie dogs (occasionally poking their heads up) who think markets only go up. Veteran John Hussman’s analyses have been brilliant and useless for investors from 2009 forward. With that said, John showed that if you follow the fate of the markets for each of the ten deciles of valuation during secular bear markets, the lower valuation stocks do not protect you from the bear laying waste to your portfolio.ref 22 Everything sells. When it’s over, and the markets look like a late-afternoon yard sale (shit strewn everywhere), the bookies at Goldman will claim nobody saw it coming—they certainly did—whereas the clueless will profess to have seen the risks all along—they certainly did not.
I have no clue where the market is gonna go in the near term. I don’t know whether it’s going to go up 10%; I don’t know whether it’s going to go down 10%. But I would say the next three-to-five years are going to be very, very challenging.
~ Stan Druckenmiller, legend
Stan Druckenmiller is very smart. He is right that the market is high, but he did not catch this amazing run…The stock split bashing is unfair and keeps regular people out of the market. You can’t get in without making errors. Why not help people instead of scaring them?
~ Jim Cramer (@jimcramer)
We’ve abandoned the idea that stupidity has any natural limit.
~ John Hussman (@hussmanjp), Hussman Funds
A mania first carries out those that bet against it and then those that bet with it.
~ Jim Rogers
Don’t Be Left Behind – This Stock Market’s Rise Is Going To Speed Up
~ Forbes Headline
Excessive valuations are, by definition, broken markets, and an annual return on the S&P of 12% during the Year of the Zombie Apocalypse reinforces that claim. As usual, the devil’s in the details. Figure 1 shows the 2020 S&P with a few mile markers mentioned below.
Figure 1. S&P 500 timeline for 2020.
I re-read Devil Take the Hindmost this year to revisit bubbles of the past. Embedded in the narrative was Chancellor’s most poignant reminder: the big bubbles were implicitly or explicitly endorsed or supported by promoters with strong sovereign ties. We would never have state-sponsored markets, would we? Beware of magazine-cover indicators.
Pre-Covid-19 Markets. We entered 2020 having escaped severe turbulence in the leveraged loan markets causing equities to tank in late 2019 requiring abrupt Fed intervention. Well, it didn’t actually require them, but they intervened because that is what they do. These guys would debase their sisters. The bullet had been dodged, but you could hear the sounds of locking and loading. Deloitte reported that 97% of CEOs believed we would be in a recession in 2020.ref 1 When 97% of CEOs are preparing for a recession you are in a recession. Manufacturing production was below pre-crisis levels of November 2007 and dropping. Total industrial production, having risen a whopping 4% total in 12 years, was also dropping. Railcar usage, trucking revenues, and auto and truck sales were on a luge run.ref 2 Germany, Japan, China, and the US were witnessing dropping exports and reduced consumer demand.ref 3 The large bucket shops including JPM, Barclays, HSBC, and Deutsche Bank were slashing jobs.ref 4 Andrew Lapthorne of SocGen noted the earnings for the bottom five deciles by market cap were putrid.ref 5 Legendary intellect Lacy Hunt had been warning of the fragile consumer and slowing global growth and suggested that the ineffectual Fed would remain ineffectual.ref 6 BMO Capital Markets noted that “given the backdrop of a ‘relatively’ strong domestic economic profile coming into 2020, the rapidly deteriorating outlook is remarkable.” Record consumer and corporate debt suggested a bad moon was rising.
For sale. Hedge. Never used.
~ 2020 Bubble of Everything, The Shortest Story
And then somebody ate a God-damned bat. A bat? Really? Anybody who says one man can’t make a difference never ate a bat. The pandemic that started its journey in Wuhan, China at some hotly debated date in December (or earlier) began circumnavigating the globe…but the markets kept going up. Wuhan, a major industrial region supplying goods and parts to the world, was locked down tight on January 23rd…but the markets kept going up. Employment completely collapsed across the globe…and the markets kept going up. I reached out to the likes of Roach, Einhorn, Bianco, Warburton, and Martenson to understand the damage being done to the global supply chains.
On January 24th I did a Jelly Donut podcast (posted on February 7th)ref 7 ranting about the delusional markets. On February 18th, I did a 21-Tweet salute to the idiocracy. Here are just two:
On February 29th Business Insider tweeted serious confirmation bias by noting that some Ivy League Professor who called the subprime crisis has now called for a 50% market dislocation.ref 8 For Christ’s sake: they were citing me (Figure 2). It was like one of those spams at the bottom of the Yahoo Finance page that I spoofed last year (Figure 3). I don’t subscribe to Business Insider but found a rough translation of the article in…wait for it…the “Latest Nigerian News”, the go-to source for all princely Nigerian money managers.ref 9 The Business Insider article obviously was pulled straight from my Jelly Donut podcast.
Figure 2. Business insider article about impending doom.
Figure 3. 2019 Year in Review spoof.
Finally—finally—these crazy markets seemed about to crack. Meanwhile, I was fuming that the bad actors—the Fed, rabid speculators, and horrible corporate managers accruing globs of debt—would have the global pandemic as the perfect cover story to hide their sociopathy, and they would surely get bailed out.
The US economy could slip into a recession if the coronavirus contagion lasts for an extended period of time.
~ Dave Kostin, Goldman Sachs on March 3, 2020 (bold call, eh?)
Ever so quietly, on February 24th the markets made an all-time high en route to “the fastest 30 percent drop in history”ref 10 riding on the heels of the steepest economic downturn in US historyref 11 and the largest collapse of US employment in US history. I would be heralded as 2020’s Roger Babson, the dude who called the 1929 crash.ref 12 Of course, both Roger and I had been wandering subway stations for years proclaiming doom sounding like a perverse mix of Gail Dudek and Crazy Eddie. I was writing myself a nomination letter for the 2020 MacArthur Genius Award when the markets said “hold my beer” and pulled off a decidedly premature blow-off bottom—premature based on any metric of valuation (see above). After hitting an S&P low of 2,174.00 on both March 21 and 22—seems weird—an immaculate intervention guided equities on “the strongest 50-day rally in history”ref 13 and “the best second quarter in 22 years.”ref 14 Jeepers. It was like Independence Day; the mother ship got hit with a Covidian nuclear warhead and not a fuck was given.
Having long regarded [the technology] sector as dominated by cyclical stocks masquerading as ‘growth’ stocks, I expected their inflated valuations would be blown apart by the recession. How wrong I was.
~ Albert Edwards (@albertedwards99), global strategist at Societe Generale
U.S. Stocks Don’t Need to Fall on Economic Damage, Goldman Says
~ Bloomberg Headline, April 20, 2020
I never knew that, but apparently it’s true. It must be a new paradigm. The yodlers-turned-hodlers known as the Gnomes of Zurich or the Swiss National Bank, no doubt with a few phone calls by the Fed, were busily buying FAANGs with freshly minted Swiss francs.ref 15 Meanwhile, the Fed was furiously undermining price discovery by having metaphorical sex with every beast of burden in the barnyard (snorting cocaine off their backs) using both legal and arguably illegal tools.ref 16 Recall that Bernanke warned us there was an unusual number of tools at the Fed. Now let’s focus on the sorcery wrought by the biggest bubble and craziest markets in US history.
Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.
~ Bob Farrell’s Investing Rule #7
The FAANGs. The heavy lifting was done by the FAANGs (Facebook, Amazon, Apple, Netflix, and Google along with the likes of Microsoft and Nvidia that totally screw up the acronym) shown in Figure 4. Apple, Amazon, and Microsoft together are now valued collectively at over $5 trillion, representing 23% of the S&P 500 ($23 trillion). They are on a scale of the economies of Germany and Japan. Half the gains in the S&P market cap since June 2014 were the FAANGs, elevating a bloated PE multiple of >20 for the group to >40. We know what Scott McNeally must be thinking. Stock splits and share rallies by Tesla (5-for-1) and Apple (4-for-1) brought back nostalgic memories of the dot-com era. Let’s look at these new-era industrial juggernauts one at a time to see where we are.
Figure 4. FAANGM index versus S&P 500.
AAPL keeps pumping their stock with relentless buybacks and increasing leverage to facilitate it. TSLA has been insane for so long it seems to have developed a bullet proof cult.
~ Mr. Skin, anonymous pundit summoned by Bill Fleckenstein on occasion
Figure 5. The great bubbles of the last 40 years.
Apple. After hitting the almost unimaginable $1 trillion market cap in 2018, Apple romped past the $2 trillion mark less than a year later, exceeding the market cap of the entire Russell 2000.ref 17 It was jacked by $400 billion in ten trading days.ref 18 Apple’s p/e ratio doubled since the start of 2019 (16 to 32), attaining its highest valuation in history.ref 19 Over the preceding five years earnings had increased 16% total—2.9% per annum—on revenue growth of <25% total (<4% per annum). Apple’s five-year sales growth rate was just 4.1%.ref 20 Their product line suggests that they replaced Steve Jobs with John Sculley again.
Figure 6. Apple profits and revenues.
Figure 7. Apple price versus profitability.
The performance of stock markets, especially in the United States, during the coronavirus pandemic seems to defy logic. With cratering demand dragging down investment and employment, what could possibly be keeping share prices afloat?
~ Bob Shiller (@RobertJShiller), Yale University
Microsoft. The stodgy old lady of tech sits at 35 times net income with a sustainable 6.5% per annum nominal earnings growth over 8 years. The rest of their 600% capital gains over that same period was valuation expansion.
Figure 8. Microsoft’s profits and revenues.
At particular times a great many stupid people have a great deal of stupid money.
~ Walter Bagehot, 19th century British Journalist
Amazon. The Bezos dynasty has racked up a 1,000% return in 6 years. Wow. Just thinking out loud, Amazon is a great company, but at 150 times net income and >80 times free cash flow, it reminds me of that $300,000 Honda Civic. Here’s a gedanken experiment: if you completely unwind that 1,000% gain by collapsing its share price by 90%, you’d have a p/e ratio of 14.
If you bought every company that lost money in ’19 that had a market cap over $1 billion…you’d be up 65% so far this year.
~ Joel Greenblatt, Capital Allocators
Netflix. NFLX has risen 100-fold in a decade. That is hard to argue with, but it is priced at >100 times net income and 10 times revenue after having borrowed $11 billion during the last 5 years to create new content. They are losing money or, in the vernacular, there’s no ‘F’ in earnings. The creation of content is not like building a nationwide rail system. That beast needs to be fed continuously. Do they mooch another $11 billion? Are there any potential customers left who have not discovered Netflix? Now imagine unwinding this 100-bagger completely—dropping the share price by 99%. They would still be losing money and would also lose access to the credit markets. My brain hurts.
We are either moving into a completely new paradigm, or the speculative energy in the market is incredibly out of control. I think it is the latter. I have said before that we have entered the silly season, but I stand corrected. We are in the ludicrous season.
~ Scott Minerd (@ScottMinerd), Guggenheim Partners
Nvidia. Having rocketed 2,000% in five years and >100% this year alone, this FAANG designated hitter sports a p/e of >100, price-to-book of >20, and price-to-revenue (or sales) of 25-ish. These were crazy-high numbers even for the dot-com era. The appeal must be the 0.12% dividend and a strong payout ratio.
This market is divorced from reality…there’s such a strong bid to this market—particularly in the overnight futures trading— it just doesn’t make any sense.
~ Christopher Ailman, CaLSTRS CIO
Facebook. Stockman notes this >$800-billion-dollar deep-state investment is not on the surface crazy at 30 times free cash flow. But their low single-digit earnings growth facing the biggest impending plunge in advertising revenue in modern times seems ominous.ref 21 Neither online advertising nor demand for scraped data is unlimited. (See “Wealth Creation”.) I suspect—admittedly it’s only a hunch—that some of their earnings come from governments’ interest in scraped data. That many of us think the world would be a better place if Facebook completely disappeared is also a concern.
Google. Sitting at a $1.2 trillion market cap, a price-to-earnings ratio of 35, and two years of flat earnings owing to that rumored advertising crunch, Google seems expensive. It is yet another data scraper cannibalizing each other’s revenue streams, but you should listen to the more learned individuals on this one. What I can tell you is that, as discussed in “Wealth Creation”, you can aim a digital warhead directly at my frontal lobe, but I am still only buying one mattress and only when I need it. Data scraping is cool but it seems like just smarter advertising to me.
Right now, we’re in an absolute raging mania. We’ve got commentators encouraging companies to do stock splits. Companies then go up 50%, 30%, 40% on stock splits. That brings no value, but the stocks go up.
~ Stan Druckenmiller
Zoom. Skype gave up a 35:0 lead to Zoom, which tacked on 800% as of October before dropping back to a net 500% gain. (They were pikers compared with Carver Bancorp, which tacked on 800% in one day.ref 22) Zoom, with revenues in the $1–2 billion zone, is now considered more valuable than Exxon-Mobil with revenues topping >$200 billion. When will a better conferencing software be developed by some Stanford graduate student? I also wonder what data is being scraped? What is the market price (and who would pay it) for conversations of stodgy old bastards talking about their business plans?
Robinhodlers. Dave Portnoy, also known as Davey Daytrader and the founder of Barstool Sports, is no newcomer to marketing. He realized he could run a digital pump ‘n’ dump operation by summoning his very large army of followers. The appearance of the Robinhood trading site sporting zero trading fees was perfect for those who could not afford fees. Dave tapped into the millions of youngsters collecting their $600 checks absolutely unfettered by the slightest clue of what they were doing. Robinhood added more than three million new users by the end of April. This was what the pros call “distribution”—transfer of risk from the pros to the amateurs—at a whole new level.
Something we really never think we’d see but we saw yesterday — buying hundreds of billions of shares of bankrupt companies, sending their shares 300%. It’s sort of this speculative behavior that we saw at the end of 1999 and the beginning of 2020.
~ Julian Emanuel, chief equity and derivatives strategist at BTIG
Davey and his merry band of Robinhodlers were wreaking havoc on markets. Parents were complaining that their post-pubescent kids who’ve never made it to second base also couldn’t play online Fortnight because their friends were too busy stock trading.ref 23 The Robinhood management admitted that they were seeing deposits and trades in $600 increments. This nouveau Jim Jones was picking some of the most hopelessly insolvent companies and morphing them into ten baggers. Chapter 11 darlings like J.C. Penney, Pier 1, Whiting Petroleum, and Hertz (see below) witnessed 100–1,000% gains in one day.ref 24 Portnoy would pronounce useful Ben-Graham-esque platitudes like “stocks never go down” and then provide his daily picks. One day he made his daily picks choosing Scrabble letters randomly.ref 25 The big-league ballplayers (hedge funds) were rumored to be front running the little leaguers, driving shares of even highly liquid large-cap shares markedly higher.ref 26 Robinhodlers heard everyone is buying FAANGs and drove the price of a Chinese company with symbol FANGDD from $10 to $130 in 4 hours.ref 27 Then those Merry Men discovered 3x Levered ETFs (TQQQ).ref 28 Yeeehaw!
Buffett is an idiot…All I do is make money, this game is fucking easy. Literally the easiest game I’ve ever played. All I do is print money….I should be up a billion dollars.
~ Dave Portnoy (@stoolpresidente), Barstool Sports
Shockingly, the Robinhodlers were soon slapping Pampers on their faces to stem the blood flow. Some thought there must be a mechanism to get a Mulligan on a bad trade. A 30-year-old day trader turned a $77,000 grubstake into a $9-million-dollar loss as oil plummeted deeply negative—a uniquely 2020 story in its own right—only to find the screen read was incorrect.ref 29 Another got $730,000 in the hole with options and offed himself.ref 30 One wonders how an unemployed 20-year old got that kind of leverage. The Robinhood management took the time to say they were “deeply saddened” as they masterminded an IPO.ref 31 The Robinhood app got hacked and a few thousand accounts dragged off into the forest.ref 32 “Aaaand it’s gone.” With no emergency phone number to call,ref 33 the kids had ample time to ponder what just happened.
I’m overleveraged, so something’s gotta be sold.
~ Dave Portnoy (@stoolpresidente)
Be fearful when others are fearful and greedy when others are greedy.
~ UCLA Freshman
The Robinhood IPO at a $12 billion price tag got tabled during Covid-19 and is said to have failed to get the right licenses.ref 34 Imagine, however, if they had pulled it off. It would have been epic, surpassing the previous record 600+% first-day gain of TheGlobe.com.ref 35 (Trivia point: that little gem was created in a Cornell dorm. I’m sure liquor and pot were involved.)
Vision without execution is just hallucination.
~ Henry Ford
Tesla. The granddaddy of all bubbles is Tesla. By every metric, the investing world has lost its mind. Yes, their cars are cool as described in “Wealth Creation.” Give them points for having the first and only self-igniting car on the roadref 36 and for not needing commands from the driver to accelerate markedly.ref 37 They put up four quarters in a row of fake profits by selling gobs of government-granted carbon credits for cars not yet sold as part of a failed strategy to be put in the S&P 500 index.ref 38 Think about that for a second: the 5th largest company in the world was not allowed into the S&P 500. What do they know? Tesla controls about 0.5% of the global car market in 2019 (last full year) while sporting a market cap that is larger than the entire US and European auto sectors.ref 39
Tesla’s metastable and metaphysical p/e ratio of 1,240 means investors are paying $100,000 to buy $82 of annual earnings. This is like buying a 10-year treasury but with a tad more risk. It is said that “TSLA is not being priced to perfection… it’s being priced to impossibility.” Its market cap popped $64 billion in one day, which corresponds to $200,000 per car sold last year. (Face in palm)
Tesla stock is no longer tethered to anything tangible.
~ Bob Lutz, auto analyst
Figure 9. Tesla imitates SpaceX (650% gain ytd).
Figure 10. Tesla versus the legendary South Seas Company.
Elon has done well for himself. Charlie Grant of the WSJ suggested their billion-dollar quarterly compensation expense (including options) seemed high and may have kept them out of the S&P.ref 40 Charlie adds that the “controversial long-term incentive plan” in 2018 could net Elon $50 billion from stock-option grants if the company increases its market cap to $650 billion. A 660% gain off the March lows placed the share price pennies from that bogey as I edit. Even if he misses it, Elon is still richer than Mark Zuckerberg and Warren Buffett. His compensation to date has been sufficiently generous that Musk and the Tesla board are being sued for ‘unrelenting avarice.’ref 41 Tesla may have also woken the giants.
Most customers already have an autonomous driver. It’s called a chauffeur.
~ Rolls Royce spokesperson on self-driving cars
Gamma Squeeze. All year long we heard rumors of a “gamma squeeze” and a single gamma squeezer named the “Gamma Whale” or “Nasdaq Whale” said to be the proximate cause of many of 2020’s equity wildings. The derivatives gurus are somewhat horrified that equity pricing is now following derivative pricing.ref 42 A single purchase of $300 million call options, by example, is a lot of leverage even for a whale.ref 43 Many think the Whale is SoftBank, an institution of dubious repute, and its founder, Masa Son, of Karate Kid fame (not really). Goldman said the options activity was without precedent. (This “Goldman” guy gets around.)
Here is what I know: gamma refers to a complex hedging strategy that can force stock buyers into frenetic buying or selling strategies through gamma feedback loops, and is the third letter in the Greek alphabet. (I can recite the whole Greek alphabet and watched Animal House 27 times.) Like the other Greek hedging strategies, gamma hedging is said to reduce risk, which is a serious load of omega (hooey). Gamma hedging probably has no socially redeeming value (like Animal House) except to make its creator stinkin’ rich (like Animal House). The 2020 options market was said to be full Leeroy Jenkins, referring to a video game hero with crazed fearless. The Gamma Whale is said to be too big to fail now. Right. I believe that.
Indexing. Mike Green was the talk of the town when he presented his case that the relentless bid from index investing would make the markets just keep going up for a very long time.ref 44 I get the logic but am unconvinced, because that has never worked. The folks at Gavekal call indexing an “in-vogue form of socialism…the bigger you are, the more capital you get” and cannot think of a “stupider way to allocate one of the key resources on which future growth relies.” Some argue that the rapid rise of indexing using environmental, social, and governance (ESG) funds to monetize virtue signaling is buying companies that don’t know how to create wealth. If you peer behind the curtain, the ESGs merely replaced Exxon and Phillip Morris with FAANGs.ref 45
What could be more advantageous in an intellectual contest—whether it be bridge, chess, or stock selection—than to have opponents who have been taught that thinking is a waste of energy?
~ Warren Buffett, 1985 Berkshire Hathaway Letter to Shareholders on passive investing
Salesforce.com. In a historic adjustment, Exxon, Pfizer, and Raytheon were booted from the Dow and replaced with Amgen, Honeywell, and Salesforce.com.ref 46 Wait. What? A little Googling to ascertain what the hell Salesforce.com does for a living suggests the Dow is moving to the cloud. (Let me point out that neither Amazon nor Google is in the Dow. Let that sink in.) Salesforce.com also trades at 200 times free cash flow (less stock-based compensation), price-to-book of 6 (below 1 is cheap), has no dividend, and has been laying off workers.ref 47,48 Although the oil market has hurt Exxon, it carries a whopping 8% dividend yield, which they have promised to keep (beware). Pfizer, the largest pharmaceutical company in the known universe, has a completely secure 4% dividend and may have just helped save the world.
Nikola. Freshly IPO’d Nicola (pronounced Neee-kolaaah) is not an Alp yodler but rather a truck knock-off of Tesla. Nikola shares jumped 50% when GM announced it was taking a $2 billion equity stake. After doing a demonstration of a fuel-cell-powered 18-wheeler motoring down the road, Hindenburg Research and Citron Researchref 49 called them frauds, claiming that they had pulled the truck to the top of a hill and pushed it: the truck was barreling down a hill. Nikola had demoed the first gravity-powered truck!ref 50 The founder said, “My bad” and resigned.ref 51 The FBI and DOJ intercepted him at the airport preparing to flee in a petroleum-powered plane to parts unknown.ref 52 Although the company has revenue equal to the list price of one truck and no reported book value, the share-price drop left it still comfortably above the IPO price. Why? GM said it will work with Nikola to close the deal. Why? I don’t know. But then in late November GM came to its senses and gave them a gravity-powered trip off the cliff.
Virgin Galactic Stock Soars Because Covid-19 Can’t Hurt Companies With No Sales
~ Barron’s Headline
Hertz. Facing complete insolvency, Hertz was preparing to sell its fleets and facilities to pay off senior creditors (but not before paying themselves bonuses.ref 53) It was about to flood the used vehicle and rental vehicle marketsref 54 when Robinhodlers drove their worthless shares up tenfold in three trading days.ref 55 A friend sitting on a massive Hertz short at 50 cents per share with no intention of covering—selling to zero as they say—rode out that tenfold spike. Even the Vatican got burned throwing a few Hail Marys at Hertz in the distressed debt markets funded by alms for the poor.ref 56 The high command at Hertz furiously tried to exploit the blip to put together a billion-dollar equity offering until the SEC put the brakes on it to save face,ref 57 which triggered a brief short squeeze for reasons unknown to the unwashed. Thanks to the bailouts, the Fed now owns the Hertz bonds.ref 58
A Few Other Crazies. A few others are worthy of bullets just to highlight the markets of 2020.
- On the verge of collapse, Kodak got a special deal in which Trump offered them $765 million to prepare pharmaceutical intermediates.ref 59 This is not as crazy as some think; Kodak has serious chemistry history. Kodak scrambled to give the CEO 1.75 million options the day before the deal was announced. Kodak’s shares also drifted from $2.50 to four times that before the announcement.ref 60 They then drifted to $60 the day of the announcement, putting the CEO’s paper gains at $83 million.ref 61 Unnamed sources noted the CEO declared, “This was even better than when we announced our move into blockchain. Damn! I love this shit!” The deal was estimated to, at best, double Kodak’s revenues,ref 62 putting yet another ding in the efficient market hypothesis (EMH). Improprieties surfaced—ya think?—and the deal with the authorities collapsed.ref 63 The share price is still at $8, which is >5 times its low for 2020. That loud thud was the EMH doing a face plant.
- Adobe reached 15 times sales at the apex of the dot-com bubble, which is nuts. After tanking 75% over several years, a 10-year 2,000% run now has it priced at 21 times sales, which is 4.5 times nuts. The long haulers will be fine; the new hodlers are likely to get hurt.
- The strangest story emanates from the online shopping company Wayfair. Strange sales of items you would expect to find in Target were sporting bizarre prices in the $10,000 range and had odd names associated with them.ref 64 Internet sleuths sitting idle after Pizza Gate fizzled claimed that the names coincided with kids currently on milk cartons. Wayfair’s CEO runs a children’s foundation while furnishing migrant camps. (No. Really.) Despite these troubles, no evidence of profits, and a reported negative book value, Wayfair rose 1,600% off the March lows before settling back for handsome gains of 150% for the year.
- More than a year after Bill Ackman covered his Herbalife shorts and licked his wounds inflicted by a brawl with Carl Icahn, federal prosecutors raided the health supplement maker.ref 65 Carl had already sold his 14.7 million shares and was last seen scampering out the back door.
- Shopify (SHOP) has returned a fabulous 4,300% in five years and has 170% this year. It trades at 60 times revenue, makes no money (although they swear they will), and has a $125 billion market cap. If they gave back all 4,300% of those gains, they would still have no profits and a price-to-book ratio that would be twice that of Exxon-Mobil.ref 66
- Penny stock Genius Brands International (ironically) was chased up 4,200% by the Robinhodlers in mid-June but gave most back closing the year up 500%. Although there is no profit, their balance sheet looks pretty good.
- Overstock.com founded by the wild and crazy Patrick Byrne had a 5,000% intra-year run. One analyst sees a 50% upside from here as it benefits from “seismic forces” whatever that means. I am loathed to call it crazy because I know smart guys like Marc Cohodes who like it because of a position in the blockchain. I guess I would too.
2020 has already set IPO records that exceed those of the tech bubble. Only 9% are estimated to be profitable.ref 67 The banks are marketing “synthetic collateralized debt obligations” again. One ETF trades under the symbol “AAA.”ref 68 Somebody has a sense of humor. Fed-sponsored capital is getting into mischief. It is easily argued that the baby harp seals are about to meet the business end of Wall Street’s Louisville Sluggers. It’ll be huffing bath salts to smelling salts in very short order. It is only through pain that we can achieve suffering.
If orgies of unrestrained speculation are permitted to spread too far, however, the ultimate collapse is certain not only to affect the speculators but also to bring about a general depression.
~ Galbraith on the 1929 crash
During peacetime the central bankers need to go back to their narrow remit. I wish that they had not treated every day of the last decade like every day was an emergency.
~ Kevin Warsh, former Federal Reserve governor
Our hyper-leveraged economy was heading for trouble long before Covid-19 struck. The ensuing bailout was not your standard Fed suppository of trillions of dollars of treasuries jammed into the plumbing. We were sitting atop the largest corporate debt bubble in history,ref 1 so it should be no surprise that a vast preponderance of the bailouts targeted corporate debt that had metastasized from years of irrational Fed monetary voyeurism. It is also no surprise that the blueprints for it were rumored to be sketched out years ago.
One message was clear: although the average Joe is told to have 6 months of savings for a rainy day, everything in corporate America is now “just in time.” Redundancy cuts into profit margins; we will worry about the future when it shows up. Admittedly, the government-mandated shutdowns added complexity to the moral hazard of this carefully orchestrated mess, but that only provides cover for the aggressive response to paper over criminal incompetence. The Feds were bailing out companies and the highly levered pension and hedge funds that held this largely toxic debt.ref 2 The demands for freebies was deafening.
For the morons who defend buybacks, consider this: IBM bought back $140 billion of stock over the last 20 years. IBM’s market cap is now $105 billion. IBM just reported its lowest revenue since 1998. How is this winning again?
~ Chamath Palihapitiya (@chamath), Social Capital CEO
I have written about stock buybacks every year since 2011. Although first popularized in Peter Lynch’s books as evidence that management thinks their shares are cheap, long ago corporate chieftains recognized them as superb vehicles for pump ‘n’ dump schemes in which the buybacks put perpetual bids under the shares and generate a buyer of last resort for their options-granted shares. Wall Street markets them as returning capital to investors: that is an intellectual air ball as discussed extensively last year.ref 3 Corporate balance sheets had been gutted by gluttony and were barren when the rainy day appeared. I touch upon buybacks below, but I am tired of beating that dead horse. I will, however, offer a few recommendations:
- Make the board of directors totally independent of the CEO and his cronies.
- Compensate high-ranking execs with options that cannot be liquidated for a very long time and contractually cannot be hedged. Force them to build a durable company or eat the losses personally. If they don’t like that, get another CEO.
- Stop paying CEOs using share price as a metric.
- Claw back every penny of the profits gained by the corporate robber barons even if it involves using RICO laws and flame throwers.
- Mandate that corporate boards are staffed by underrepresented groups including women, minorities, and the LGBTQ community. I’m half kidding; the Nasdaq just announced that rule under threat of delisting.ref 4 It shouldn’t be hard but as a mandate? No doubt it is a good time to be a highly qualified black lesbian.
America’s executive class in the last few decades has settled into a Ponzi-like pattern: borrow, inflate, strip assets, crash, get bailed out, start over.
~ Matt Taibbi (@mtaibbi), former Rolling Stone
A quick gander at the dusty archives shows gruesome lootings of yore.ref 5 “Do it for the children” is the rallying cry of leveraged speculators. It’s an addiction. (You know what they call functional addicts? “junkies”.) After so many beatings by the husband, the abused wife has to say, “There are risks, but I need to either leave or cut the gizzard out of that bastard with a rusty butter knife.” A 1994 paper by Romer and Akerloff details how the banking system’s business model is designed to profit on the run-up to euphoria and the collapse to destitution by exploiting government handouts.ref 6 (I can attest personally that Romer remains amused by the resurgence of this work.)
“The money powers prey upon the nation in times of peace and conspire against it in times of adversity. It is more despotic than a monarchy, more insolent than autocracy, and more selfish than bureaucracy. It denounces as public enemies, all who question its methods or throw light upon its crimes. I have two great enemies, the Southern Army in front of me and the Bankers in the rear. Of the two, the one at my rear is my greatest foe.
~ Abe Lincoln, killing it long before Facebook and Twitter.
The 9/11 crisis elicited large-scale hush-money to the victims to make sure airlines would continue to run profitless enterprises and insurers and reinsurers would not have to actually insure anything.ref 7 The savings and loan crisis in the 1980s cost taxpayers serious bucks. The Great Recession witnessed bailouts of automakers (or at least their creditors). The claim that the government made money in the GFC is fraudulent bean-counting. When the World Bank, IMF, or BIS rescue countries, they are merely rescuing the bankers who loaned them money. Countries like Brazil, Greece, Mexico, and Argentina would happily tell the bankers to take a hike. Iceland actually did just that in ‘09, and then the nouveau bankers went back to fishing for cod. It is the Graft Cycle that overlays the credit and business cycles.
Why did we do the bailouts? It was all about the bondholders. They did not want to impose losses on bondholders. They’re supposed to take losses.
~ Sheila Bair (@SheilaBair2013), FDIC Chair, 2006-2011
We’ve decided that hundreds of thousands of people dying is meaningful, but the NASDAQ going down would be worse….
~ Scott Galloway (@profgalloway), NYU and serial entrepreneur
Despite the somewhat different optics on the Covid-19 bailout, the pattern continued unbroken. I was livid that we were about to witness a monetary Fyre Festival on a grand scale and the debutant ball for modern monetary theory (MMT).ref 8 I launched tweets daily knowing—knowing—that we were on the cusp of another looting. Here’s a smattering:
Within days the lines at the bailout trough looked like a Trump rally. Every imaginable financially interested party had their hands out with palms up. “It is for the employees. They will starve if you don’t give us money.” Elon Musk and Jeff Bezos asked for billions in grants, loans, and IRS credits.ref 9 A variety of industry associations asking for bucks included hotels ($150 billion), restaurants ($145 billion), manufacturers ($1.4 trillion), shopping centers ($1 trillion), beer ($5 billion), candy ($1 billion), and rails (Amtrak, $1 billion).ref 10 Importers wanted waivers on duties paid by those found guilty of dumping. The Collum Foundation wanted free internet.
Any time there is a crisis and Washington is in the middle, it is an opportunity for guys like me.
~ GOP lobbyist
The Federal Reserve is presently acting in blatant non-compliance with the Federal Reserve Act of 1913. An institution violating the rules of its own charter is de facto admitting that said institution has failed and is fundamentally broken.
~ Jeff Gundlach (@TruthGundlach), CEO of DoubleLine
And so, central banks and governments blanketed the globe with an estimated $20 trillion (and still counting) of monetary napalm. They had learned their lesson, however: make sure it appears to be bailouts for the little guy. Rat studies show the subservient rats will quit cooperating if they don’t win occasionally. Human studies show they will burn the joint down. The Paycheck Protection Program (PPP) and Coronavirus Aid, Relief, and Economic Security (CARES) Act were named accordingly. Who could object with names like that? Meanwhile, special purpose vehicles (SPVs) would make loans or purchase assets of companies, corporate bonds, asset-backed securities, commercial paper, and exchange-traded funds. Secretary of the Treasury Mnuchin was handed $500 billion to use at his discretion and in secret with legal protections to block the prying eyes peeking through the Freedom of Information Act.ref 11 Nothing dubious there. The legality of the Fed actions was so sketchy that they set up a bunch of Enron-esque vehicles.ref 12 The acronyms—CPFF, PMCCF, TALF, SMCCF, MSBLP, MSLP, MLF, EIDLP, PDCF, CPDPF, FICC, CFNM, and MILF—stretched the limits of the alphabet. Section 13(3)(D) of the Federal Reserve Act lets the Fed keep the specific details of the credit confidential.ref 13
The only persons to be helped [by printing money] are the rich.
~ Du Pont de Nemours, 1790
Split the bill!!! One bill “for the people” and the other for bailouts. Otherwise, they get political cover. Trust me, I was a State Senator, this is how things work. Bundling checks for the people with trillions of $ of pork is very much on purpose.
~ Jim Forsythe (@JimForsythe5)
As Jim Bianco noted, “To put it bluntly, the Fed isn’t allowed to do any of this. The central bank is only allowed to purchase or lend against securities that have government guarantees.” Jim: You’re thinking like a peasant! All this was under constant bloviations about “stimulus”, which is Fed-speak for bailing out leveraged speculators (monetary camel toe). Stimulate this, J-Po. The payroll protections were based on the honor system hoping companies would do the right thing. In their eyes they did by writing themselves handsome paychecks and bonuses. There were restrictions on executive bonuses and buybacks, but nobody is watching. And when the program ended, the companies were honor-bound to keep those employees on the payroll. I must also confess that I can’t possibly keep straight what was forgivable, forgettable, must be paid back, who can be laid off and when, and who is in charge of overseeing this $6 trillion third-trimester bailout.
We’ll just buy whatever central banks are buying.
~ Rick Reider, Blackrock, the designated bond buyer for the Fed
Who’ll run this ad hoc goliath of a bailout? Well, Blackrock had a ton of collapsed corporate bonds to dump, and they had just hired ex-Fed Head Stan Fischer.ref 14 Why not hire Blackrock to purchase all those corporate bonds? Blackrock matters. Bloomberg’s FOIA request for information about BlackRock’s dealings offered up 19 pages of completely redacted goolash.ref 15
I believe we are on the edge of a fundamental reshaping of finance.
~ Larry Fink, founder and CEO of Blackrock
There were, of course, specific and highly publicized payouts directly to the unemployed workers. By any arithmetic reasoning, however, these “relief” checks represented cosmetic percentages of the total bailout tab. I guesstimate about 5% of the total. People need to eat—there was no choice—but it was still hush-money. It also caused problems during attempts to re-staff low-wage jobs that society needed because sheltered workers had little incentive to return to work. (I imagine more than a few figured out how to be paid under the table. It also would have been a great opportunity to elevate your position from busboy to waiter.) The personal savings rate during the sheltering hit a historic 33% in April,ref 16 shattering the previous 1975 high of 17% as people holed up in their abodes bought only necessities, which apparently included shares of bankrupt companies using the Robinhood app.
If the Fed buys junk bonds, what POSSIBLY ensures that the security for emergency loans is sufficient to protect taxpayers from losses? JAIL. THEM. ALL.
~ John Hussman, a rare example of showing an emotion
Bailouts were run by a Treasury deputy secretary, Justin Muzinich. To avoid conflicts of interest during his impending junk-bond buying spree, he transferred his junk bond portfolio to his father’s company that specializes in junk bonds.ref 17 Shockingly, ethics experts were a little creeped out noting that Justin can simply get them back after leaving government. “This is something akin to a fake divestiture,” said a law professor and ethics specialist. As the bond market rallied Muzinich & Company recouped billions in losses as they traded with newfound clairvoyance. A Muzinich executive noted, “The Fed has been about as supportive, helpful, accommodative—whatever word you want to use—as anyone could imagine.” Indeed they were.
Buybacks are the primary example of a growing strain of incompetence amongst CEOs and boards. And it’s where we need to start thinking about how the rules need to change.
~ Chamath Palihapitiya (@chamath), Social Capital CEO
Airlines. As the world collapsed, somehow the airlines and Boeing became the poster children of the bailouts. That is true for the European airlines as well. Why? What makes them so special? They must have great lobbyists as politicians were working the backchannels hard to “go easy on them.”
I don’t have a need for an equity stake. I want them to support the credit markets, provide liquidity. Allow us to borrow against our future. If they force it, we just look at all the other options and we’ve got plenty of them.”
~ Dave Calhoun (@Crash_n_Burn), Boeing CEO
I am not so sure you do, Dave, which is why you asked for $100 billion bailout. How about you and your commercial airline customers reissue those shares, even if it sends the price down the other side of the ramp. (United did an equity sale that diluted the shareholders 15% on top of a $6 billion loan.ref 18) The airlines had blown 96% of their cash flow and cranked up a 78% increase in their debt to fund share buybacks over the last decade to goose the options of senior execs as well as the largest shareholder, Berkshire Hathaway.ref 19 (The Orifice of Omaha eventually sold near the March bottom.) Boeing was $25 billion in the hole after having bought back $100 billion in stock over the last 8 years. These companies should have been taken down to the studs long before Covid-19 hit.
Michael O’Leary, the CEO of RyanAir, played by the rules and was furious about the bailouts.ref 20 He had built a fortress balance sheet with €4.1 billion in cash reserves only to watch his competitors get bailed out. Instead of a guy who knew how to run a company buying up remnants at a steep discount, the competitors get to cannibalize his potential business. No good deed goes unpunished. Scott Galloway underscores the immorality of the airline bailouts noting that US airlines have declared bankruptcy 66 times since 2000.ref 21 Admittedly, it’s a tough business, but if they can’t do it profitably they should hang sheetrock instead. Bailouts are likely to be money down a rat hole this time because it is very unlikely corporate clients will be returning. They’ve been Zoomed. The backstops will, once again, make their creditors whole. And there is the rat hole.
I don’t know that 3–4 years from now people will fly as many passenger miles as they did last year….you’ve got too many planes… Our airlines position was a mistake. Berkshire is worth less today because I took that position.
~ Warren Buffett on liquidating all airline stocks
Cruise Lines. The cruise lines posed a huge optical problem. They are domiciled in the Cayman Islands, pay almost no tax in the US, and are costly to the US when their ships, quite literally, have to be pulled off the rocks.ref 22 Their employees are foreign nationals working long hours bringing in an estimated $1–3 per hour wages with a health plan that involves dropping them at the nearest port if they can’t work.ref 23 They are serial debt-based share purchasers. Bailouts were politically impossible.
OK Mofo: I will lend the money to you but at exorbitant rates.
~ Walter Bagehot (paraphrased but spelled right this time)
A consortium of hedge funds was ready to bend the cruise lines over with loans at 15% collateralized by the ships. All was going swimmingly for the Pirates of the Caribbean who were teaching cruise line CEOs lessons endorsed by 19th-century scholar Walter Bagehot (lend dearly), but then the hedgies were set adrift unexpectedly. The US banks with Fed proddingref 24 and the Bank of England (BOE) bailed them out on far friendlier terms. The BOE bailed out many non-British companies.ref 25 Most Limey’s don’t even know this. Let us not forget that all central banks work for the multinational banks, not sovereign states. Don’t doubt for a minute that We the People would be ballast if the banking system willed it.
[Parody Alert] A local man Rodney, from Indianapolis launched an airline company this week called “Bailout Flights”. The mission of Bailout Flights is to collect a portion of the $54 billion of bailout money going to the airline industry. Rodney spoke on record stating how he is confident Bailout Flights will collect at least $10 million….“I’m pretty darn sure Bailout Flights will be able to collect at least $10 million from the government,” Rodney stated. “You see, the government isn’t very smart. I highly doubt those government ‘officials’ will even check to see how long Bailout Flights has been in business…There have been 25 new airline companies started in the past week and over 50 cruise ship companies. Half of these companies are headquartered in Boca Raton, Florida, and the other half in Bermuda….“I’m in the process of launching several cruise ship companies as well,” Rodney said with a capitalist smirk on his face. “I’ve already got a name picked out: The Titanic II, III, and IV.
Random Bailouts. The Fed and treasury slapped together bailouts estimated at $6 trillion in short order; it’s not surprising that there were a few mishaps during the 50 Shades of Bailouts.ref 26 Remember: The banks get the fees with no obligation to monitor how the money is spent.
- MiMedx, a medical firm that recently settled civil accounting-fraud charges with indictments of top executives and is the prey of short-sellers like Marc “The Leopard” Cohodes, was approved by the government for a small-business loan.ref 27 There were loans to a half dozen other ex-cons. Two weeks after paying a $6.5 million fine to the DOJ, one company received a $10 million loan.
- The Fed busily bought Amazon bonds, which actually trade at interest rates below US Treasuries. It is the Fed’s Leave-No-Retail-Alive (LNRA) program.
We’ve known the vast majority of Americans have been living paycheck to paycheck. Now we find many businesses have in essence done the same. Few reserves, no ability to sustain themselves without bailouts after just a few weeks. What will all this look like on the other side?
~ Sven Henrich (@NorthmanTrader), Northman Trader
- The Fed was buying bonds of Uber, Netflix, PetSmart, French telecoms, Italian banks, and Theranos.ref 25 (Just checking. Liz Holmes will be paid for a vaccine.)
- Private equity firms were having a field day piling debt on corporate balance sheets to fund payouts. They pushed SEC Chairman to shove the Trump administration to loosen the rules that blocked them from these programs.ref 25 This is what horrific monetary policy begets. Without it, there would be no debt-laden shells of companies to be unloaded on gullible buyers reaching for stupidity. Formerly private-equity-owned firms are said to be ten times more likely to “get bankrupted.”ref 25
- Argentina merely asked to roll some bailout money into their annual debt default and restructuring.ref 25 They do that every year.
- The Fed allowed adjusted (fake) ebitda to give private equity guys access to bailout money.ref 25
Unlike industrial leaders during World War II, these men speak the language of public relations and finance, not production, treatment, or logistics…
~ Matt Stoller (@matthewstoller), a real journalist
- Intellinetics used an $800K loan to buy a rival a week later.ref 25
- Dozens of publicly traded companies with plenty of capital and credit got loans because, well, why not? The bad optics caused some to give the money back. Headline: “Bank robbers get caught. Give back money.”
- The LA Lakers received a small business loan of over $4 million,ref 25 which they returned after the referee blew the whistle for unnecessary gluttony.
- The Catholic Church received over $1.4 billion in Covid-19 relief.ref 28 They are rumored to have plenty of assets tucked away.
- Hotel magnate Monty Bennett’s companies got $46 million in PPP loans not realizing the first two P’s refer to “payroll protection.” He fired 95% of his staff and gave himself a $2 million dividend. It is the “Pocket Padding Program.”ref 29
IRS Paid $1.4 Billion in Stimulus Payments to Dead People, GAO Report Says
~ WSJ Headline
- David Boies, lawyer to the stars, got $5–10 million.ref 30
- Kanye West’s clothing brand, Yeezy, snarfed up several million.ref 31
- The politically connected receiving funds included Transportation Secretary Elaine Chao, Senate Majority Leader Mitch McConnell’s wife, Agriculture Secretary Sonny Perdue, Jared Kushner, Jay Sekulow (Trump’s Impeachment Lawyer), Grover Norquist, Roger Williams (R-Texas), Vicky Hartzler (R-Missouri), Susie Lee (D-Nevada), Debbie Mucarsel Powell (D-Florida), and Sen. Kelly Loeffler (R-Georgia) all had bacon grease dripping down their chins.ref 32 Many are republicans from 2020 swing states. Gotta wonder. This list is, beyond doubt, a smattering of the total take.
- P.F. Chang, TGI Fridays, and other chain restaurants and hotels got some serious bucks by calling each franchise a separate financial entity.ref 33 They changed their names to P. F. Cha-Ching’s and TGI Free.
- The fiercely libertarian Ayn Rand Institute got some freebies.ref 34 You guys never found John Gault?
I have very limited ability to do direct loans out of the Treasury.
~ Steven Mnuchin (@MarriedFortheMoney), hoarding his $500 billion beer money
- Forbes Media, Washington Times, The Washingtonian, The Daily Caller, and The American Prospect all got bucks. Most of the media is nothing but painted rust.
- George Soros’s Media Matters, which appears to have been created to overturn the US government, got a few million from the US Government.ref 36
- Jeff Koons, the artist who sold a giant balloon-shaped rabbit for $91 million, reflated his net worth a bit.ref 37
- The Ohio and Florida Democratic Parties, Women’s National Republican Club of New York, and Black Republican Caucus in Florida apparently had lobbyists on payroll.ref 38
- The Chicago Mercantile Exchange (CME Group) got a $7 billion credit facility to protect against a clearing-member default.ref 39
This is a lie that’s been propagated by Wall Street. When a company fails, it does not fire its employees…it goes through a packaged bankruptcy…if anything, what happens is the employees end up owning more of the company. The people who get wiped out are the people who own the unsecured debt and the equity…but the employees don’t get wiped out and the pensions don’t get wiped out….And if a bunch of hedge funds get wiped out, what’s the big deal? Let them fail. So they don’t get the summer in the Hamptons: who cares?
~ Chamath schooling slack-jawed Scott Wapner on CNBC
- John F. Kennedy Center for the Performing Arts defunded 100 musicians with the National Symphony Orchestra after getting $25 million to pay for “fees for artists and performers.”ref 40
- Amtrak got over a billion to “maintain minimum service levels.”ref 41 They don’t maintain that during the best of times.
- US fossil fuel companies have taken at least $50 million in taxpayer money they probably won’t have to pay back.ref 42 Half are said to have ties to Trump (of course).
- The Fed bought bonds of Apple, Microsoft, Oracle, Wal-Mart, Verizon, AT&T, and more than a few multinationals not domiciled in the US. Apple was busily buying back its stock.ref 43 Was this part of the Fed-orchestrated FAANG rally off the March lows?
- Adam Taggart documents how the Fed bailouts lined billionaire pockets to the tune of $637 billion…
- Of 40 large companies seeking U.S. bankruptcy protection during the pandemic, a third gave executives bonuses within the prior month.ref 45 Noble Corp rushed its 2020 bonuses six months early for “employee retention” and to beat the bankruptcy clock.ref 46 The execs slept soundly knowing clawbacks were statutorily off the table.ref 47 As Ben Hunt pithily suggested:
Burn. It. The. Fuck. Down.
~ Ben Hunt (@EpsilonTheory), Epsilon Theory
- The PPP reimbursed $57 billion of bank loans as of June 10. A $5.3 billion slug going to Cross River Bank (CRB) with one branch office more than doubled its total assets.ref 48 This is a screwy operation. In 2018 they were found to be “engaged in unsafe or unsound banking.” Aren’t they all?
- Lenders often gave PPP loans to its favorite customers—a “concierge service for the wealthy.”ref 49 Wells Fargo favored large loan amounts rather than the mandated first-come, first-served basis.ref 50
- JPM initially balked at making PPP loans sensing a shitstorm about to ravage the nation.ref 51 This is reminiscent of their Bear Stearns negotiation tactics.
- Hertz fired 14,000 workers while providing executives $1.5 million bonuses before its bankruptcy. They appear not to have gotten bailout money.ref 52
- Over 80 publicly-traded companies with pre-existing large credit lines got the loans as did zombies unable to cover their debt payments with cash flow before the Covid-19.ref 53 The funds were gutted quickly. Many had more than the 500-employee cap. Oversight seemed to be lacking.
I am decently financially savvy – had all ducks in a row, followed PPP legislation closely. CFO of two very small businesses (10 employees). Submitted info for PPP loan to my regional bank within 7 hrs of them providing exact guidance. My loan was not approved before the money ran out.
~ Rob Mahrt (@robmahrt)
- The Small Business Administration running the PPP told the media that it was “too consumed by the urgent effort of helping small businesses through the economic downturn” to track the loans.ref 54
- The Pentagon got over one billion to pay contractors.ref 55 That is a rounding error.
- 500 JPM employees inexplicably bagged some salary relief funds, which got unwound when they got caught.ref 56 Employees at the “chronic lawbreaking recidivist” Wells Fargo pilfered from the Small Business Administration’s coffers.ref 57 Their biggest shareholder, Warren Buffett, finally realized that any bank that gets caught this often is poorly managed and dumped half his shares.ref 58 Employees of other large banks did not get caught.
- The $2 trillion coronavirus crisis bill that passed the Senate includes a $350 million injection of cash for “Migration and Refugee Assistance.”ref 59
There will be S&L-type frauds, absolutely ostentatious frauds. I’d be looking for tens of billions of loss to fraud….With the [Main Street] relief, you might see $50,000 frauds, $100,000, $4 million…
~ Neil Barofsky (@neilbarofsky), the Special Inspector General for the last bailout
- Nigerians bilked Washington’s unemployment system for princely sums amid the chaos by siphoning off $600 unemployment checks.ref 60
- A NY Jets wide receiver got caught snarfing up $1.2 million from the PPP Funds. He spent it on bling and gambling.ref 61 The rest of it he wasted.
- Dozens of Austrians—not Austrian economists but real Austrians—got coronavirus stimulus checks from the US Treasury.ref 62 Although the banks hadn’t a clue how many were cashed, a spokesperson claimed ”in the grand scheme of things, it’s peanuts.” An unknown quantity of peanuts.
America will be unrecognizable after this pandemic if big corporations walk away with trillions of dollars and no strings attached…our leaders seem to be falling prey to what can only be called a corporate frenzy of favor-seeking.
~ Matt Stoller (@matthewstoller), still a real journalist
I am told the Fed has not actually bought any corporate bonds via the shell company set up to circumvent the restrictions of the Federal Reserve Act of 1913. Must be the most effective jawboning success in Fed history if that is true.
~ Jeffrey Gundlach (@TruthGundlach), CEO of Doubleline and the New Bond King
Fed Bait and Switch. What the Fed said and what the Fed actually did doesn’t quite align. The corporate debt market went bonkers in a frenzy of buying ahead of the Fed’s bond binge. Corporate bond issuance soared.ref 63 There was effectively a massive short squeeze in the corporate debt markets. Sleuths like Wolf Richter, browsing the Fed balance sheet to combat insomnia, couldn’t find the junk bond purchases.ref 64 As Wolf noted, the Fed essentially said “Y’all go on and run ahead, we’ll catch up later.” Think of it as an atomic sit-up. Buying junk bonds is illegal, ethically questionable, and anathema to free-market capitalism, but was it a good idea to lie like teenagers? One of the few tools remaining at the Fed (besides the Fed governors) may be market jawboning, and now these jawboners admit to being compulsive liars. (This is a poorly kept secret.) Once the Fed is done scorching the earth and poisoning the wells, America will find itself more leveraged than before the pandemic. Ex-Fed governor Kevin Warsh suggests the conduct of the Fed could have been better, but all evidence is to the contrary.
What were they thinking?
~ Scott McNealy, former CEO of Sun Microsystems (OK. That is cliche’.)
We’re not even thinking about thinking.
Jerome “J-Po” Powell, Chairman of the FOMC
Relief for Jane and Joe Sixpack. As consumers were getting monetary reach-arounds by the Fed, they should ask, “What else are they doing back there?” Overall, the checks sent directly to the consumer are estimated at a quarter billion dollars, constituting 4–5% of the entire package. Rumors abound that some are being garnished by creditors.ref 65 I am not sure if that was intended, but it is serious gallows humor. What is clear is that people would starve without the money. Long soup lines suggested folks had cars and gas but no food. Attempts to provide rent relief have met the harsh reality of contract law and damage done to the counterparty (landlord). The CDC, forgetting that the ‘D’ stands for ‘disease’ not ‘debt’, announced that evictions were forbidden until the end of 2020.ref 66 Some municipalities have pushed ahead with legislation providing landlord-funded deferred rent payments.ref 67 Those landlords are probably carrying heavy debt too, which, in turn, is on pension and bank balance sheets as CMBS, foreshadowing serial defaults. In NYC, somebody got the marvelous idea of sheltering the homeless in posh hotels.ref 68 They are said to be not so posh now.
A compassionate society has both economic reason and ethical responsibility to provide a social safety net to its most vulnerable members. It is an act of both economic insanity and ethical corruption to provide a financial safety net to its most reckless speculators.
~ John Hussman
There is a calm blanketing the country right now. A calmer administration is entering the Whitehouse. I suspect the economic damage is unmeasurable and huge. Through the fog I think I can make out the tail lights of the 79th car in a pile-up.
Loans will be interest-free for the loan term (1 year). The Interest rate will be 12% per annum on the unpaid balance thereafter” 12%. Good luck, Florida.
~ @SheepleAnalytic, anonymous genius, on the Florida Small Business Emergency Bridge Loans
From personal experience as a caregiver and spouse of over 30 years, great healthcare is not something you can find by looking at some Top-100 lists in US News and World Reports.
~ Nowonmai (@DavidBCollum)
The healthcare system took a shot in the shorts this year. The regular functions of hospitals got shut down to handle the influx of Covid-19 patients. A rational individual might wonder why elective surgeries didn’t proceed forward with the proviso that circumstances may require rescheduling. Instead, hospitals went to DEFCON 1, eventually furloughing an estimated 1.4 million “non-essential” healthcare workers. That is a lot of “non-essential” healthcare being bypassed. The ground-zero locations for Covid-19 such as NYC were preoccupied with the large case count briefly. They may have reached breakpoint, although those hospitals have a lot of staff and beds, and big-city hospitals always appear to be at a breaking point from the patient’s perspective. The makeshift hospitals and the hospital ship brought to port in NYC were not used. According to a recent (September) tally, 170,000 healthcare workers had Covid-19, which means we have 170,000 who are now well-positioned to return to the front lines. The CDC said over 1,700 have died,ref 1 which is an astonishingly low tally given that many were stewing in the viral plumes. Staffing shortages appeared to stem from peak case counts (of course) and early efforts to quarantine healthy, but exposed, staff.
Serving up healthcare under battlefield conditions on a disease and a pandemic—they are not synonymous—caused a lot of forced errors. In this section I focus on the damage done to the healthcare system itself and possible long-term effects. Let’s lead off with a personal example.
About ten years ago my wife slipped and did a header into a cabinet. The CT scan came out negative, but the astute doc noticed she was holding her head with her hands. He slapped the brace back on, took another peek, and announced she had a double break with a 40% fatality rate. This was odd because in ’99 my mother slipped, did a header into a lovely 18th century Chippendale desk, nice patina, some restoration…never mind. She snapped her neck and died. I have a point to make that has nothing to do with me being a sick puppy and possibly a one-trick pony matricidal maniac. During the sheltering, my wife fell again while gardening and did a face plant. (Really? A face plant while gardening? Shameless prose.) We picked some mulch out of her face, but at dinner she was holding her head with her hands. This time the ER was a ghost town. I begged to go in but no deal. The CT was negative but declared so by whom? Late-night scans are often interpreted overseas in places you wouldn’t necessarily wish to trust with your life. She never saw a doctor. The release papers were boilerplate. I got her to a neurosurgeon the next day, and confirmed she was OK. But that was a total failure of a higher order. My sister-in-law has been waiting 6 weeks to see a doctor for a broken shoulder.
How many people died or were seriously maimed because we slammed the brakes on the entire healthcare system? Coronary angioplasty and stents were put off because they were not critical at that moment. ER doctors reported a disturbing 40% collapse in the number of heart attacks and 50% collapse in reported mild strokes, suggesting the victims walked them off or went house-to-morgue directly.ref 2 You can almost hear the thuds. Doctors called the shutdown of the system a “mass casualty Incident” with “exponentially growing negative health consequences” to non-Covid-19 patients. The downstream health effects…are being massively under-estimated and under-reported.”ref 3 The American Cancer Society said cancer detections dropped by 80%, mammograms by 87%, and colonoscopies by 90%.ref 4 Patients were skipping chemo treatments.ref 5
Fun Fact: I once live Tweeted a cystoscopy: “It burns! It burns!…it looks like Nemo’s fish tank.”
The hospitals got financial help during the bailouts including subsidies for handling Covid-19 patients, but I suspect the revenue streams weakened many systemically.ref 6 One report from months ago claimed that 42 hospitals had closed permanently and filed for bankruptcy.ref 7 Insolvency is more like cancer than a heart attack. It takes a while to kill the patient.
Municipal bankruptcy (a most curious part of bankruptcy law) which might not make hospital purchases so wise in that the terms of trade will need to be renegotiated between those hospitals and the newly formed state Medicaid offices.
~ Dave Lewis, friend and former Moore Capital
Here is where it gets very dicey. There are an estimated $5 trillion in private equity (PE) funds itching for some hospitals to buy from the discount table. Hospitals were irresistible targets before the crisis.ref 8 Over the last decade, PE firms have scooped up $340 billion worth of hospitals and related healthcare providers including nursing homes, hospices, medical practices, ambulance services, and even emergency rooms.ref 9 With vast Fed-sponsored funds sloshing around, you could imagine an army of twenty-somethings occupying cube farms scooping them up by the dozen, all done with massive leverage.
As practices and hospitals struggle with lost revenue during the coronavirus disease 2019 pandemic, they may become more susceptible to private equity acquisition.
~ Joseph D. Bruch, BA, of the Harvard T.H. Chan School of Public Health
Recall that PE-owned firms are ten times more likely to go bankrupt. Why? Because the PE guys load them with debt, pay huge bonuses, and sell them to gullible investors who are happy to buy shitty companies with stage IV balance sheets because of the grotesque excess of liquidity in the system. It’s a buy, strip, and flip model, also known as strip mining. Joel Freedman bought Hahnemann University Hospital in 2018, which was known for serving a disproportionate number of indigent patients.ref 8 When the city needed to use the now-empty hospital during the pandemic, Freedman demanded $1 million a month.
The alternative model of private equity is to hold onto the companies (hospitals in this case) and squeeze profits out through greater efficiencies. I suspect that will not improve the quality of care.ref 10 The huge win for PE guys using this latter model will be when national healthcare provides a guaranteed payer—you.
I blame the Fed. The PE guys are a rational free-market response to horrid monetary policy and a bloated banking system that long-ago ceased being a facilitator of capitalism. Nonetheless, if karma is real, some of these guys are gonna die of coprophagia in one of their own ERs.
Click here to read Part 2 of David Collum’s 2020 Year in Review, available free to all readers.