Send this article to a friend:

March
10
2017

Why the 21st Century Sucks – Turtles All the Way Down
Bill Bonner

A Truly Sucky Century

BALTIMORE – What an awful century! Worst we’ve ever seen. Household incomes are down. Employment is down, with 7 million people in the U.S. of working age without jobs. Productivity growth is down. GDP growth is down – to only about 0.5% per capita last year.

Even life expectancies are down. Drug overdoses are up. Suicides are up. One out of every eight children lives in a family getting food stamps. One of out every eight adults takes psychoactive drugs .

Death from drug overdoses is back in fashion – big time.  Club of Rome Malthusians can only dream of such effective population control. The picture to the right illustrates the the adventurous lifestyle of many 21^st century junkies. Contrary to many of their contemporaries, these young men are not weighed down by a great many possessions, and they do get a lot of fresh air. Before you decide on a career change to join these rugged outdoorsmen though, you should consider that they do have a bit of a life expectancy problem – click to enlarge.

Half of all families get money from the feds. Half have less than $500 available for emergencies. Two-thirds aren’t saving for retirement. More than half cannot afford their own homes. And 49 million live in poverty.

What’s to blame for such a sucky century? In addition to declining health and declining standards of living – as well as declining standards of decency – we also have wretched art, music, and architecture… unwinnable wars against poverty, drugs, and terrorism… $20 trillion of national debt… and overpriced assets that leave little of interest to the sober investor or desperate retiree.

We find much of modern art more funny than wretched actually, such as this Barnett Newman painting called Anna’s Light which recently sold for $105 million. It is often confused with his very similar looking work Vir Heroicus Sublimus, which has a differently placed white stripe and a black stripe as well! There’s also the almost exactly similar looking “Who’s afraid of Red, Yellow and Blue?”, which sports a blue stripe on the left hand side, and a tiny yellow stripe on the right hand side. Given that so much more is going on in the latter painting, it would probably trade at a premium over Anna’s Light. We see the prices paid for modern art as a very telling inflation signal. Rich people seem to be almost in a Weimar-like panic to get rid of their cash balances. Incidentally, Barnett Newman ran for NY mayor in 1930 as an “anarchist” (of the leftist variety, we presume).

And don’t get us started on the feds! Meanwhile, the signs of another debt crisis – like a flash mob at a political rally – are growing.

The stock market has been going up far too long without a correction. The economy is overdue for a recession.  Federal Housing Administration mortgage delinquencies are rising. Student debt defaults are rising. Auto-loan repayments are slipping.

How did we get in such a lamentable state of affairs? Sayeth Alan “Bubbles” Greenspan, now Alan “Hard Money” Greenspan [miraculous transmogrification! PT]:

“We would never have reached this position of extreme indebtedness were we on the gold standard, because the gold standard is a way of ensuring that fiscal policy never gets out of line.”

He’s right. And when money gets out of line, everything gets out of line. For all we know, the Dow is on its way to 30,000. But it will have to go on without us. We can’t take that much excitement.

2005: Alan Greenspan gets adorned with presidential bling. If he gets too gold-buggish, he might have to give it back.

Photo credit:  Shealah Craighead

Besides, we continue to guess that the premise behind this great rally is false. It imagines that stocks were fairly priced on November 8th, and now Mr. Trump will be able to pass a major tax cut, paid for with tax increases.

And it imagines that somehow this will lead to such a boom that will double GDP growth rates. “Treasury Secretary Steven Mnuchin Sees Tax Overhaul by August,” reads a Wall Street Journal headline.

Fantasy Turtles

In the 19th century, when the wonders of science and engineering were even more flabbergasting than they are today, Thomas Henry Huxley (grandfather of Brave New World author Aldous and evolutionary biologist Julian) traveled around Britain giving speeches on agnosticism.

Science, he argued, not mysticism or superstition, was the wave of the future. He further informed the often-benighted yokels that the Earth was a ball and that it revolved around the sun.

“Not so fast, Mr. Huxley,” an old woman challenged him. “The Earth is flat.”

The scientist, seeing an easy foil, probed: “Then, madam, upon what does this flat Earth rest?”

“Why, a turtle, of course.”

“And upon what does the turtle rest?”

“Another turtle.”

“Well, surely that turtle must stand upon something. What?”

“Oh, you don’t understand, Mr. Huxley. It’s turtles all the way down.”

In today’s economy, we see fantasy turtles all the way down, too.

Here’s the proof: turtles all the way down! Of course, as every reader of Discworld knows, the first layer on which our flat earth rests consists of elephants that stand on the uppermost turtle.

Illustration via people.tribe.net

Crony Grab Bag

The stock market, for example, was way overpriced in November and now rests on delusions about a coming tax cut (funded by a tax increase) and more federal spending (funded by more debt).

First, the plan will not pass Congress – not without so many exceptions, jiggers, and collusion that it turns into another grab bag for crony lobbyists. And second, even a real  tax cut, unaccompanied by a spending cut, merely shifts federal funding to a less obvious source.

The resulting hotchpotch “reform” won’t reduce the win-lose deals ruining the economy. Nor will it boost corporate earnings by allowing businesses to make more win-win deals with suppliers and consumers and learn faster.  Instead, all they will learn is how to adapt to the new tax system.

Stock buybacks vs. net income. If one adds S&P 500 dividends to buybacks, the total has actually exceeded net income for several years. In other words, companies have to amass more and more debt in order to “return money to shareholders” (as the next chart shows, that is indeed what they are doing). Note that net income has ultimately gone nowhere for years – click to enlarge.

Meanwhile, much of the reason for current stock prices can be found on the back of another imaginary turtle: stock buybacks. In 2016, for example, S&P 500 companies spent more buying their own shares back (and then canceling them) than they did on dividends and research and development combined.

Where do they get the money? They borrow it. Money is made available to the biggest companies so cheaply that, after factoring in inflation, it is practically free.

US non-financial corporate debt, total (bonds + bank loans combined). It is interesting that this figure has gone “parabolic” right after the great financial crisis (GFC). One could see it as companies making up for lost time, after all it is apparently “normal”  for corporate debt to roughly double every ten years in the modern fiat money era. Let’s not forget though, two of the four most severe bear markets since 1929 have taken place  since 2000 (and the next one is waiting in the wings). The recent acceleration in corporate borrowing is a bit worrisome, especially in light of the fact that accounting profits reported during a major credit and asset bubble are in many cases illusory and simply mask capital consumption. People tend to be oblivious to this fact until the next bust unmasks it .

Fed Fraud

Beneath that one, there’s another turtle snapping at investors. It is the fraud that they can invest alongside the insiders on Wall Street by simply buying “the market” and profit as stocks become more valuable. And it even seems to be true…

Over the last six years, stock market earnings have been basically flat. So stock prices should be flat, too. After all, the underlying businesses are worth only what they can earn, right? Instead, stock prices are up 80%. Go figure.

Below this carapace is the famous “put option” pioneered by Alan Greenspan while still in his “Bubbles” phase as Fed chairman and left to his successors at the Fed.

Now investors feel they cannot lose because if there is ever another major sell-off, the Fed will again rush to the rescue with another “put” – more rate cuts and more QE – even actively intervening to buy stocks to push up prices to trigger a “wealth effect.”

It’s been a fun ride, but one day officer Bear will catch them…

Cartoon by Bob Rich

And even further down is the feds’ fake money, which carries the whole shebang on its back. This is the real reason for much of the grief that is the 21st century.

It brings fake interest rates, phony stock market performance, globalization,  financialization, fiscal recklessness, a $20 trillion pile of debt… and many of the other follies and delusions that have turned this century into such a disgraceful loser.

Turtles – all the way down!

Charts by Factset, St. Louis Federal Reserve Research

Chart and image captions by PT

The above article originally appeared as “Why the 21st Century Sucks” at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.

bonnerandpartners.com