The Breakdown - How Monetary Policy Undermined American Resilience

Episode Date: September 11, 2020

Today on the Brief: Jobless claims slightly exceed expectations at 884,000 ECB keeps policy unchained; euro rises versus dollar  Survey: What’s the right way to understand the business and market cycle in the U.S. today?  Our main discussion: interest rates and the undermining of American resilience.  In this discussion, NLW looks at a number of artifacts of the low interest rate world, including: Increasing cost of child care  Declining share of total net worth held by bottom 50%  New startups using lottery tactics to incentivize savers

Everyone has been pushed so far away from savings and so far out onto the risk curve. There are simply no financial options for savers other than stocks. This creates a cycle where stocks have to keep going up so it doesn't crater the system. But designing the entire system around this means that we have to keep inflating the asset bubble more and more. If and when we experience the mother of all asset bubble pops, what are those, quote, savers left with? Put differently, stocks are really safe until they're not. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world.

The breakdown is sponsored by Crypto.com, BitStamp, and nexo.io, and produced and distributed by CoinDes. What's going on, guys? It is Thursday, September 10th, and today we're talking about how monetary policy undermine American resilience. First, however, let's do the brief. First up on the brief today, it is Thursday, which means it is jobless claims day, and this week we saw 884,000 new claims versus about 850,000 that were expected. The total number of people receiving state and federal assistance, which includes help for self-employed and gig workers, stands at 29.6 million. So a huge, huge portion of workers are getting some type of assistance or another. Basically, the way to interpret this is one great big holding pattern. For some things are getting better. For others, it's still

really difficult. We're stuck in this in-between that has a lot to do with, again, the health the lack of clarity about the future, changes in consumer spending that result from that, it really is this confluence of factors that keep things treading water, and it's hard to see how we exactly get out of that. It feels very unlikely that consumer confidence is going to soar in the way that we need it to to bring consumption back, to get companies back to hiring again, et cetera, et cetera, et cetera, without some major change in health outcomes. And it looks increasingly clear to people that those promises of an early vaccine just aren't going to happen. Next up on the brief today, it is Central Bank Policy Day in Europe. The European Central Bank has

left their policy mix unchanged, which means they've continued the same negative 0.5% key interest rates, and they will continue to purchase up to 1.35 trillion in Eurozone debt. that's under the same program that was announced in March. ECB president Christine Lagarde presented an optimistic tone, and it's actually understandable why. A few months ago, it looked like Europe was really against the ropes. They were a bit slower off the ball to respond with stimulus. There was a serious question about whether the nations would support each other or just turn inward. But since then, it has fared much better than many thought.

and has in fact been a surprising success story in the context of an overall world that is still heaving. Whatever the case, investors are buying this optimistic tone. The euro is up 1% against the dollar today, and overall the euro has appreciated by more than 10% against the dollar in the last month or two. All that said, there are some new second wave fears coming. COVID-19 cases are surging in France and Spain, so we'll see if this optimism continues. What's going on, guys? I'm excited to share that one of this month's breakdown sponsors is Crypto.com. Crypto.com offers one of the most cost-efficient ways to purchase crypto out there, as they've

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APR. Nexo also lets you earn up to 10% annually on your fiat and digital assets. What's more, interest is paid out daily, and you can add or withdraw funds at any time. Get started at nexo.io. Last up on the brief today, I want to share the results of a survey on Twitter from George Goncalvez, bond strategist who was on the show a few weeks ago. On September 6th, he tweeted, Per Mark Twain, history doesn't repeat itself, but it often rhymes. Where are we in the business and market cycle, really? I can't fit all the scenarios. Some feel intertwined. Please share your views and I'll give mine too. George then gives four potential ways to characterize where we are in this business or market cycle. The first is an ongoing secular bole market. In other words, this is

real and this is just part of a larger cycle that's positive. The second is a comparison to the late 60s and early 70s, which obviously has, I think, both social and monetary policy implications. The third is Great Financial Crisis 2, the social and political version, and the fourth is turning into Japan. Of the 1,040 people who voted the least popular answers were ongoing secular bull market with 14.9% of the vote, and a comparison to the late 60s, early 70s with 14.1% of the vote. Great financial crisis to the social and political version got 28.6%, but the runaway winner was turning into Japan with 42.4% of the vote. The comparison here has to do with a large-scale shift to total reliance on the central bank for ongoing asset purchases and just continuous QE. But there

are some differences, as many of the commenters on the thread point out. One respondent wrote, Japan is very different. They have a current account surplus. Their currency is in a much different position allowing a yield advantage for Japanese to make foreign exchange hedged foreign investment. That is big for insurance companies and other financials. We wish we could be Japan. This question of Japanification or this narrative of Japanification is one that is coming up a lot more recently. So if you're interested in an episode going deeper into that, let me know and we'll see what we can do. For now, however, let's shift to our main discussion how monetary policy undermined American resilience. This discussion was inspired by a few things. I think in the background

for me was the inflation discussion that was surfaced again yesterday by Stan Druckenmiller's comments. He obviously used a very eye-popping number of 5 to 10% inflation that he thought was possible, but he also said that Fed policy had increased the risk of deflation as well. To him, the only thing that was for sure is that there had been created by the Fed a great big asset bubble that wasn't going to end well. Now, on Twitter, I saw a ton of the normal back-and-forth arguments about inflation and deflation and what's the bigger concern, and it reminded me of just how clinical our debates about inflation become. And what it feels to me like those very clinical debates often fail to recognize is the feeling of getting farther behind that so many people are experiencing.

It may be that inflation as we measure inflation has been at an anemic 1.6% for a decade, but why then is it that people feel like they can afford less? This question for me was then bolstered by a chart shared by Danielle DiMartino Booth on the cumulative change in consumer prices since 2000 that she had reprinted from the Wall Street Journal. Across all items, that cumulative increase in consumer prices was a little over 50% over the last 20 years. For child care and nursery school, however, the price had soared over 100% in that same time period. Childcare and nursery school are, of course, necessities for working parents.

This is a cost that makes it harder to get ahead. I mean, it makes it harder to stay afloat, much less get ahead. Sven Henrik brought the connection with the asset bubble into this discussion with a tweet that said 20 years, three bubbles, three crashes with a fourth one only a matter of time. The world is drowning in debt enabled by cheap money, the bottom 50% have totally fallen behind, and the rich are richer than ever. That's the structural legacy and the Fed insists on perpetuating this trend indefinitely. He then shared a chart that shows the total net worth held by the bottom 50%, declining alongside the federal funds rate over the last 30 years. In other words, as the federal funds rate decreased, you watch the net worth held by the

bottom 50% decline from a little over 4% to a little over 1%. This, of course, is the portion of the market that doesn't really hold any stocks. And as Sven put it, hear the legacy of low Fed interest rate popularity. The bottom 50% got totally screwed. The key variable here is, of course, interest rates, which are increasingly negative around the world in real terms. Another story from today that relates to this negative interest rate world is about how USB is now charging the equivalent of about $360 a month to wealth clients who hold cash

deposits of 500,000 Swiss francs or less, which amounts to over half a million dollars. This, of course, is an economic policy that's going to hit the exact opposite side of the wealth spectrum, but I think the point is the context setting of a negative real interest rate world. Still, the real thing that triggered me wanting to have this conversation was a story in Bloomberg about a startup called Yada. Here's the Bloomberg headline. Startup bets people will save money for a chance to win $10 million. Here's what that startup does.

They effectively give people a lottery ticket for every $25 they save, and they have weekly drawings where people can win anywhere from $0.10 to $10 million weekly. The savings rate they offer then is 0.2%, but the implied rate of return, according to them, is 2% if you take those winnings into account. They've now attracted 6,500 customer accounts and a total deposit of $40 million in about two months, and they've distributed $125,000 through those giveaways. Their current business model is venture capital subsidization, with an intention to eventually offer a debit card and generate revenue from interchange fees. So here's my thing with this. To be very clear, I have no problem with Yada.

It's got good backers, and it seems like it has a really sincere intent to get people to save more. What's insane to me is that this is a space that's open in the market. Everyone has been pushed, so far away from savings and so far out onto the risk curve. The almighty God of liquidity means that there are simply no financial options for savers other than stocks. This creates a cycle where stocks have to keep going up so it doesn't crater the system. And I'm not talking about Robin Hood day traders here. I'm talking about people who have built their retirement plans on a perpetual 7% return per annum. But designing the entire system around this

means that we have to keep inflating the asset bubble more and more. As we've seen, it takes more and more ammunition to keep things going the way that it does, and along the way we get these big bursts that we're not seen before. If and when we experience the mother of all asset bubble pops, what are those, quote, savers left with? Put differently, stocks are really safe until they're not.

The counter-argument to my point, of course, is that this design for growth has been hugely enriching to the people who have been able to participate in it, and there's no denying that. The long, unabated growth of equities in America has been a huge boon to so many people, but it's come at a cost. One part of that cost is, of course, a huge increase in inequities. quality and those who have and those who have not, expressed by that bottom 50% and their declining share of the total net worth. But the other cost is the cost of resilience. If the asset bubble eventually pops, if people can't get their 7% return, if the plans that people have made

go out the water because stocks are worth 50% or 40% or 30% of what they're worth now, it's not going to be the people at the top whose lives are ruined. It's going to be the folks who have designed their entire financial lives around the idea of this perpetual motion machine continuing to grow. The fear is that the cost, that resilience cost, that lack of resilience cost, could rear its ugly head sooner rather than later. And when it comes to a population that's living longer and a population that's about to start retiring en masse, the inevitable come-down could be extraordinarily narrowly painful. Anyways, guys, what do you think? Am I just falling into the same traps of worrying about savers when really everyone should just be in stocks and this is a thing that can

just keep going up? Is this a legitimate concern? Hit me up on Twitter. Shoot me an email. Let me know what you think. I think it's one of the most important conversations we can have that cuts across easy party lines. And if any time is a time for big conversations, it's moments of change like election time. Anyways, guys, I appreciate you listening, and until tomorrow, be safe and take care of each other. Peace.