Dana Blankenhorn

The Cost of Free Money

With the Federal Reserve having thrown trillions of dollars into the economy, many people ask where inflation went?

Look at your portfolio.

What should have happened in March was that helicopter money would go into spenders’ pockets. That money would have then gone into rent, into food, and into other necessities, increasing the value of companies that made and sell those goods, keeping the economy going.

Instead, the money went to investors who, with bonds priced near zero, bought stocks. Meanwhile the economy collapsed.

Anything that works now carries a ridiculous price. Amazon.com (AMZN) is a great company, but is it worth 110 times earnings? Apple (AAPL) faces huge supply chain problems, so is it worth 27.5 times earnings? Microsoft (MSFT) is at 35 times earnings, and slow-growth Walmart (WMT) is at 25 times.

Money is also flowing into things that should be worthless. AMC Entertainment (AMC) admits its movie theater chain may have to go out of business. Yet the stock is worth $5.50 per share, the market cap is still $575 million. Luckin Coffee (LK) is practically Enron. It lied about its revenues and is facing delisting. But it still trades, at $2.61 per share, a market cap of $650 million.

There’s your inflation. It’s hiding in asset prices.

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.

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 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.

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.

The Big Secret of 2020

The stock market is not the economy.

The fall of Trump is secure because of that.

Trump has long confused the health of the stock market with the economy. But 84% of stock is held by people in the top 10% of income. The bottom 80% own just 6.7% of shares. 

Whether it’s true or not that most Americans own some stock, as the nit-pickers at Politifact want you to believe, the fact is that prosperity is going to fewer-and-fewer people. (Thanks to two careers in tech, some of it is flowing to me.)

This trend has accelerated during the Trump time. Among the hottest stocks today are companies that cater to the needs of poor people. Dollar General is up from $60 to $160 since Trump’s election. A former Dollar General CEO, David Perdue, is a Senator from Georgia as a result. The other Georgia seat is held by Kerry Loeffler, whose husband runs Intercontinental Exchange, Atlanta-based owners of the New York Stock Exchange.

You may think Trump’s base consists of racists and mullahs, but it’s really moolah. A Goldman Sachs client survey shows 87% expect Trump to be re-elected. Hedge fund billionaires love this market, and they love Trump, even though they know his pumping of stock prices must end. 

I’m one of very few reporters working today who was doing this job in 1980. I’m on the same business beat I was on then. I was also politically active in 1980.

Dorsey of Africa

Everyone’s scared of China. Everyone thinks China is about to take over the world.

It’s not.

China is aging faster than we are. China’s authoritarian rulers stop new ideas from developing. They’re wasting just as much money, and potential, in Xinjiang and Hong Kong as we are with our Gulag and border wall.

In an age where human capital is the gating factor to economic growth, there is only one name for young men and women to know.

Africa.

This is not just about Twitter and Square CEO Jack Dorsey’s plans to spend half his time there next year. It’s about what is there whether he’s there or not.

Truth

Since finishing my book on Moore’s Law (for delivery on the Amazon Kindle after Thanksgiving), I’ve begun a new project.

It’s called 1933. (This is not it. It's a history by Philip Metcalfe I've been using in my research.)

It’s an alternate history novel. It’s based on the idea that FDR, and the people around him, understood the threat of Hitler from the start and acted against it.

That era had a lot in common with our own. Manufacturing was acting on the economy as Moore’s Law is acting on ours. Efficiency created more supply than bankers could create demand for. A few wealthy men presided over a society of millions of fearful people who couldn’t keep up with the pace of change.

The most charitable thing I can say about Donald Trump is that he wants to make Warren G. Harding great again. His policies are identical. Fealty to Wall Street, corruption, laziness, isolationism. He even uses the phrase Harding used to describe this – America First. Democrats, by contrast, have a Harry Truman view. They have learned from the Hitler era, and the long Cold War following it, about concepts like collective security. From 1947-1990, we used all our strengths, overt and covert military action, but also the “soft power” of diplomacy, our economy, technology, and liberty, to take down the Russians. Moore’s Law, and everything that came with it, began as a Cold War activity.

Now Trump’s throwing all of that on the fire.

It’s almost impossible to conceive a world where World War II did not happen. But it began quite suddenly. Hitler gained power as Chancellor in late 1932. By the middle of 1933 democracy had been dismantled, Jews were being brutalized, the first concentration camps were being built. Hitler, and his henchmen, were completely transparent about their aims. They accomplished those aims, and this led Germany down the road toward its complete destruction.

The 2020s: A Future in Three Parts

Moore’s Law accelerates change. Aging accelerates time.

Hard as it may be for me to believe, the 2010s will be over in less than 5 months.

In technology the last decade has been a Golden Age for clouds and devices. So, too, in business and in politics. The refusal of cloud companies to lock-down their technology elected Donald Trump. The result has been a march toward civil war, global war, trade war, the biggest crisis since the late 1960s.

But you ain’t seen nothing yet.

Moore’s Law of Health means I may live much longer than my parents did, long after history should have rolled over me. At least that’s true in those places where people can afford medical care. The likeliest replacements for Donald Trump are both older than he is. Al Gore is younger than either Joe Biden or Bernie Sanders. We’re still debating Woodstock, 50 years on.

We’re going to start turning the page on the current era in 2020. The hold of the autocrats is weakening. It’s weakening in Russia. It’s weakening in China. It’s weakening in Texas.

Moore’s Law continues marching onward, better and better, faster and faster, reaching further and further afield.

In this decade it has made Africa accessible to global markets, made India as well as China an economic power. Over 1 billion people have entered the middle class this century – they have homes, some material comforts, and they have hope.

What might the next decade bring? If I make it to the end of this decade, I’ll be 75, so this may be my last shot at predicting the future.

But here goes.