Dana Blankenhorn

False Dawn

Because the government (once again) threw money at people who didn’t need it, Wall Street is great again.

Anything that works, the growth stocks and the big retailers, is overpriced. People are even throwing money at things that don’t work, like airlines, cruise lines and casinos.

But this is a false dawn.

Opening too early puts us on track for what the underwriters at Willis, Towers & Watson call their “limited success” scenario.  In this case, deaths continue through the summer, but the fall brings a new, even more-severe outbreak than before.

This is precisely what happened in the 1918 flu pandemic. There were three outbreaks. It was the second one, in the fall of that year, that was the killer.

People think this thing is licked because, as restaurants open and idiots demand haircuts now, there has been no spike in cases. That’s only because most people aren’t going to those restaurants or running out for haircuts. If no one around you has the virus, you’re safe. If one does, and you’re around them for about an hour, then you and dozens of other people get sick at once.

On top of that, we have outright lying about how many people are sick and dying. Georgia, where I live, transposed dates so it seemed case loads were declining. Florida fired a woman who refused to fudge the numbers.

The virus doesn’t care about any of this.

The Great Bull Trap of 2020

Three times in the 12 years, Republicans have convinced the rest of us to bail out common stockholders.

• During the Great Recession, banks were bailed out by the Federal Reserve creating cash, subsidizing consolidation, and forgiving them the crime of creating fake “insurance” for mortgages.
• In 2017, the Trump Administration bailed out the bull market with a tax cut that went almost entirely to propping up stock prices, extending the disconnect between stock values and the real economy.
• In 2020, the Federal Reserve created trillions of dollars of new money, and Trump wound up giving it to people who didn’t need to spend it, once again propping up assets like stocks.

Toward a New Normal

A new, post-pandemic normal is coming into view.

It looks different from the world we left.

Presidents and Governors won’t decide when states open back up. Consumers will. Most Americans believe what medical experts are telling us.

That’s not what we’re seeing from Trump, or any other Republican. This willful ignorance is going to get people killed.

The most logical program is to practice social distancing for a year or two, until the pandemic has passed, and vaccines are widely available. Meanwhile, all industries that depend on crowds will have to build new business models. When sports come back, it will be to empty, or near-empty, stadia. Movie theaters and malls are gone. So are restaurants where people sit close together. So are cruise chips and casinos. Bailing them out is throwing money down the drain.

Meanwhile, the Federal Reserve has dramatically expanded the money supply, handing out cash to keep the economy going now. The money will remain after the storm has passed. Further money supply increases will be needed to repay today’s debt. The pandemic has whipped deflation. The worry now is the value of money.

The economy is getting through thanks to the Internet. The Internet lets us continue to work from home. The Internet lets us order the goods we need to get through this. The Internet is telling us what’s what and what’s not.

The 1918 “Spanish flu” pandemic happened two years before the first radio broadcast. It makes a difference. (To learn more, I recommend Pale Rider  by Laura Spinney.)

Cooperation in a New Century

There are two kinds of cooperation between people and government.

There is the kind China has engaged in, cooperation by force. It seems to have worked. They’re getting back into business. Many people will say, out of ignorance, that this proves authoritarianism works.

Then there’s the second kind of cooperation, voluntary cooperation. It’s a cooperation of the mind, not just the body. It’s what I’ve talked about for years now. It’s what makes America great. We call it liberty.

It’s this kind of cooperation that will be essential to America’s comeback, not just over the virus but over the authoritarian Chinese threat, which will be the hallmark of the coming decade. It’s why getting rid of Trump is essential.

I’ve written a lot about economics here. I’ve talked about various economic eras in American history, how each featured a dominant industry, which rose to power and fell as the next took over.

But there’s something these earlier eras had in common. They were all built on resources. They were all built with possession of physical goods as the limiting factor to growth, as the main ingredient in the wealth of nations.

The Second Gilded Age

As Congress, and the American people, put $2 trillion, plus $4 trillion in Federal Reserve created cash, into bailing out the economy, a lot of criticism fell on companies that bought back stock, paid out fat dividends, and kept cash balances low over the last decade.

I take a back seat to no one in my criticism of companies like AT&T, IBM and GE, whose dividend-first policies acted as a slow liquidation while the cloud grew up around them. A company needs to grow if it wants to survive. It must keep investing if it wants to have a business tomorrow.

But it is hard to do because of the real villains in this piece.

Hedge funds. Vulture capitalists.

Assets vs. Investment

The recent fall in the stock market makes now a good time to talk about the difference between assets and investment.

Assets, as you’ve seen, are worth only what someone will pay for one of them.

If you bought Apple at $300 and now have a share worth only $240, it’s because the last guy to buy Apple bought it at that price. One sells for that, they’re all worth that. Collectively, they’re all worth that. So it was that nearly $300 billion got wiped away.

Spending, investment, is something else. Buying something, building something, improving something creates value that lasts. Facebook began investing in cloud data centers, at $1 billion/quarter, before it had $1 billion/quarter in sales. Amazon.Com invests nearly everything it brings in. It leads its financial records with the cash flow statement, which includes the amount of money it spent on data centers, on delivery vans, and on warehouses.

Getting Through Today’s Crisis

For the last few years, I’ve made a living talking about stocks. Let me start with that.

Don’t look at your retirement account. It won’t do you any good to sell right now. Unless you must. If you must, and you’re in a taxable account, sell your worst losers first. If you’re in a tax-free account, sell your strongest stocks first.

I have been expecting something like this for a long time. About 25% of my retirement account consists of cash, or equivalents like a three-month government note. I’m going to need to do some bargain hunting to get back to even.

That said, I’m not grabbing a falling knife. So long as the panic is ongoing, don’t get in front of it. The best time to buy, it turns out, is near the end of a down day. The best time to sell, meanwhile, is at the end of an up day.

There are three types of stocks to look at once we hit bottom. Some stocks involved in virus research, like Moderna, Inovio and Regeneron, are up on the virus. That’s stupid. Once the panic subsides, sell them and wait for them to return to normal values.

Some stocks should bounce back quickly. The Internet stocks are going to do great business, yet they’re falling with everything else. Grab them once the storm subsides. I’m talking about companies like Amazon.Com, Microsoft, Nvidia. I’m talking about Salesforce.com, Workday, and ServiceNOW. If anything, the move toward these companies will accelerate, as companies find telecommuting works.

The Gating Factor

Why will liberals win in 2020, why should they win, and why should businesses applaud?

It has to do with the gating factor. 

The gating factor is whatever is limiting something. In an Internet session, it’s the speed of the slowest connection between server and client. This is true on a micro level as well. Chip companies put memory on-chips because the speed of data movement into processing is the gating factor. 

In an economy, the gating factor changes, usually every generation. In the early days of the Republic, the gating factor was labor. That’s why owning slaves made economic sense for Washington, Jefferson, and Madison. Then the gating factor became transportation, and then capital had to be organized. When manufacturing dominated, demand was the gating factor. Failure to grow demand by expanding the money supply caused the Great Depression.

In my generation, resources were the gating factor to growth. It made sense to invest in troops and military hardware who could control vital resources like oil.

In today’s technology economy, the gating factor is brains. Not just people, but smart, motivated, empowered people.

We’re just starting to understand what this means in terms of economic policy.

After the War on Oil

As the war drums beat post-war planning isn’t given a second thought. (To the right, the Air-Gen, which pulls energy directly from the air.)

We can do better. We need to do better regarding the War Against Oil.

Make no mistake. The War Against Oil, which I first wrote about over a decade ago, is behind our current crises. Saudi efforts to destabilize the Middle East are funded by oil. Russian efforts to destabilize the U.S. are built on oil. Trump is all about oil.

But oil is losing. Oil is doomed. The coronavirus, COVID-19, proves it. The International Energy Agency now sees falling global demand for oil at the end of the year.

We should have seen this coming. While Democrats were arguing about “banning fracking,” the frackers were flaring off more natural gas than ever before. Even with that, they couldn’t get $2/mcf for it. The UAE recently said it found a giant pool of gas, close to its export terminals. Texas gas is losing what markets are left.

The Avalanche

Between the Iowa caucus debacle and the rocketing stock market, a lot of Democrats spent the first week of February in a very depressed mood.

Rising stock prices, and low unemployment, have the Trump approval rating as close to 50 as it can get. He is certain to be even more unhinged, and unbound, by the Republican Senate’s refusal to even censure him for his theft so far.

Lincoln said it best. “The hen is the wisest of all the animal creation, because she never cackles until the egg is laid.” 

The tide is still running out on Trumpism. Demographically, it stands no chance. In terms of issues, the same. It’s only the market that’s with him. That, too, may be about to change.

That’s because the stock market, like the housing market, is made up of assets.