Dana Blankenhorn

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.

1918 vs. 2020

There are too many differences between the COVID-19 pandemic and the 1918 flu pandemic to count. Here are just a few.

First, the viruses have almost nothing in common except that they’re viruses. No one even knew the 1918 pandemic was even caused by a virus until years later. Over time, virology evolved. We now produce semi-reliable vaccines against mutations in the H1N1 virus that caused the 2018 flu every year.

With COVID-19 we have a lot more tools. But it's a completely different type of virus, as different from H1N1 as you and I are from whales. Still, we had a model of it available within weeks of the outbreak. We understand about messenger RNA and have hundreds of vaccine candidates now going through testing.

But knowledge has yet to bring power. Until science delivers an answer, we’re mainly doing palliative care, just as we did then. That goes for everyone, making this a true global event. But, as it was in 1918, our willingness to listen to what science DOES know makes a big difference.

This time, unlike 1918, many Americans aren’t listening.

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.)

Blessings of the Pandemic

The economy has tanked.

We are all in our homes, scared out of our minds.

But there are blessings amid the ruins.

The air is cleaner. The water is cleaner. It is quieter. Animals have come out of hiding around the world. People have re-learned the value of family. Science matters again. Community matters again.

There were pictures posted, early in April, of Venice with water you could see through, of LA without smog. Those were retouched. Things aren’t that good.

Still, they’re immeasurably better than they were.

The climate crisis doesn’t have to destroy that progress. Unless we have a death wish.

Preventing the Next Trump

This moment is too big for any one man, or woman, to handle. The truth is, as Barack Obama has said, paraphrasing a poem and a song, “We are the people we have been waiting for.”

We always have been. That is the point of democracy. If sovereignty rests with the people, rather than the leaders, then the people must take responsibility for protecting that sovereignty. 

Barack Obama came too soon. He could have led us through this moment. He was a Churchillian leader, calm, composed, and a great writer. But we spent that cartridge on the economic crisis.

Now instead of having Churchill, we have Mussolini. Trump knows he’s inadequate but, like the mob boss he has always been, he also knows that falling out of power means losing everything. He will be killed, his children will be killed, everything he has now will be seized. That’s why he will hang on desperately and is willing to American democracy down with him.

The Birth of the 21st Century

If you and I survive the Coronavirus pandemic, historians will record it as the real beginning of the 21^st century.

We know that previous eras didn’t start on time. The 19^th century ended with World War I. The 18^th ended with the French Revolution.

Previous crises in this century, 9/11 and the Big Shitpile, were built on the 20^th century economy. Resources still mattered. This time it’s different.

There’s another key difference. This is the first event in world history happening everywhere at once. Thanks to globalization, the virus has put the entire planet on lockdown. Previous panics were regional, and you could even evade World War II by going to South America. This is the same event here that it is everywhere else. Only the performance of government, and thus the result, will be different.

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.