Friday, November 11, 2016

Trump's Biggest Challenge

The election of Donald Trump is totally contrary to what is being perceived by his detractors.  For one, it was the strategy of the underground establishment to not only select, but demonize whomever was nominated to run against Hillary Clinton, the one chosen nearly 30 years ago.  WikiLeaks releases, of hacked John Podesta emails, have shown the level of corruption and manipulation that went on behind the scenes.  Efforts to initiate strategies to demonize the opponent as a racist, a xenophobe, a hater of women and a neo-Nazi have stained Trump, to the point that his real history is lost, while the fiction has caused some to think it is the end of the world that he was elected and the election was stolen.  At the same time, the press and strategy was to steer the public away from the various scandals with which Clinton was involved.  That news would border on Treason and clearly on charges that could make her holding the Presidency against the law.  Clinton fabricated charges against Trump and managed the news.  In any case, as time passes the perception of Trump will change and those in the streets will either be seen for what they are or see the error in their ways. 

That said, Trump's biggest problem isn't popularity.  Trump pretty much defined it in one of the debates when he said, we have a bubble, a false prosperity built on excessive credit.  Breaking bubbles spread bankruptcy throughout the economy, liquidate excessive capacity, debt and labor and almost always make whomever is in office or power, extremely unpopular.  They take on a life of their own, as they expose financial weakness  that was heretofore hidden.  The last one was the over inflation of the housing markets and the stock market, along with the underlying securities and monetary structure of such financing.  Confidence was lost to the point that day to day financing of such holdings dissolved into thin air.  The $700 billion TARP rescue was merely the tip of the iceberg, as trillions of costs were hidden under government guarantees and Federal Reserve inflation. 

Doug Noland, of Credit Bubble Bulletin http://creditbubblebulletin.blogspot.com/  named the rescue, the government finance bubble.  In short, no one has given more coverage to the brewing financial situation since 2000, than Doug.  He saw the mortgage finance bubble and how it fed into the stock market, back in the 1990's.  His post, titled Franklin Raines, Director of Central Planning, October 21, 2001 was expose on what was to come (you can read this classic post by searching the link on Doug's page).  I suspect we will see the fulfillment of the next break in the area of government finance. 

There is no place that government bubble finance is any stronger than China.  China was a bubble going into the financial crisis of 2008, but still had fuel for the fire.   What followed is the greatest bubble of finance in history.  China already had empty cities and has built more.  The most phenomenal statistic has been their use of concrete, which I understood was greater in the combined years 2011-2013 than the consumption of concrete in the USA for the entire 20th century.  With the use of concrete, there is a parallel use of steel, as rebar.  Steel capacity in China is double demand and the excess is such they can flood the world with export and the entire mining industry around the world depends on this continued demand.  Funny finance has permeated the economy and evergreen loans, where bad debt is covered up with more bad debt are massive.  More so than anyone can know.  Shadow banking has run wild.. 

The result is an overbuilt economy, based on the printing of money, backed by US Treasuries.  This cycle of vendor financing, debt recycling, was behind the bubble of the Great Depression.  Bankrupts financing bankrupts. Rather than merely let the yuan appreciate, China creates a corresponding amount of Chinese funds on the back of these holdings.  Fears of them dumping our bonds are overblown, as the real fear is that capital flight will necessitate the sale to acquire dollars.  A lack of this backing could cause the hyperinflation that has taken place to reveal itself in a collapse of one or both currencies. 

In Europe, the problem is worse.  European banks were not bailed out during the financial crisis as they were in the US.  There are no less than 3 and probably 5 governments in Europe that are totally broke, Greece being the worst case.  This insolvency has been covered up to this time.  The corresponding flow of funds between national central banks is out of balance and cannot be solved, without another bailout.  The social insurance system in Europe is for all practical purposes, existing on a wish.  The risk of financial crisis in Europe is high.  An event will be blamed, but the weak link isn't any more the cause than the weakness of the entire structure. 

Low American interest rates have led to a massive amount of emerging market borrowing in dollars.   The value of currencies is beyond most people.  The primary need for dollars around the world is to cover dollar denominated debts.  Many of these countries are based on rapidly growing manufacturing bases or mining to feed the growth in China and other areas.  Capacity was expanded to serve the overinvestment in these growing areas and demand hasn't kept up with the bubble.  Hot money moves in and out and when it moves out, an imbalance is created and the currencies move in one extreme or the other.  Brazil has seen such a problem as the boom a few years ago attracted hundreds of billions that suddenly wanted out on the bust. 

The financial system is built on counterparties.  The borrower and the depositor are counter parties and the bankers that create such transactions are counter parties to both.  Credit is money that doesn't exist except in the solvency of the parties on either side of the bankers balance sheet.  Your deposit in the bank is called a credit, a liability of the bank, because that is what it is, credit against their assets.  There is no money involved, only liquidity and solvency. 

A wide valley has developed between the bubble economies and those that cannot benefit as well in such a system.  The US election showed the fallacy of bubbles in various stages, in that sans California, the Washington DC area, the NE financial economy states and Chicago, the election was a massive Trump landslide.  This is what 2016 was about, the battle between financial interests and the localities that benefitted from the credit bubble and the rest of the nation.  This is more than a system of outdated industries, ruining lives as they are liquidated, but a system where well placed people actually benefit from the liquidation, the free credit and the covering of risk by the government in general.

The term millionaire was coined in the John Law, Mississippi Bubble around 1720, as people close to finance got filthy rich, on a temporary basis, through the creation of a paper money scheme.  The scheme was such that it was adopted in London as well, the South Seas Bubble.  The bursting of these bubbles brought hardship on both countries followed by years of war between them. 

It isn't by chance that the billionaire class has become so broad.  We are seeing the same influence.  Money inflation creates speculation, in lieu of investment.  It distorts economies and unjustly enriches a few, many of which later go bust, as the illusion of wealth was just that in the first place.  We are told inflation is low, but it is high, showing up in asset prices rather than consumer prices.  The demand isn't there to satisfy the artificial investment that has happened through ultra low interest rates on flexible paper debt.  Government debts keep this game afloat and this debt is bought and sold repeatedly to finance otherwise phony schemes.  This is much the basis of the hundreds of trillions of derivatives around the world.  It is the primary reason you get next to zero on your money in the bank.

The world is printing money to cover up insolvency.  The pool of Federal Reserve money has grown by over 400% since Obama became President.  This money has financed consumption up front, but it has financed speculation on the back side.  The adjustment of prices of everything to reorder things has not been allowed to occur.  It is important to see who benefits from printing money and who suffers, as assumed prosperity isn't easy to measure in inflationary terms.  A revealing book was written around the turn of the 19th century by a man named Andrew Dickson White, titled Fiat Money Inflation in France.  It is worth a read, as it is short and concise.  https://mises.org/library/fiat-money-inflation-france 

One thing I learned from the above posted book was the devastation of inflation on the middle class, the economy at large and the total ruin of the poor.  It become habit and excessive inflation was behind the Great Depression.  Governments really have no solution other than to postpone the inevitable.  Thus, the pile of crap from 2008 was merely shoved forward to today.  There is no real rebound in the economy to provide prosperity to the population at large, because the debts weren't resolved, only hidden.  One only need look at the meek rebound in housing starts and home ownership to see how poor the situation really is.  This cannot be seen in bubble lands, NYC, DC and California.  The rest of the nation is suffering under the solution to the problems that have kept the players and states of CA, NY and DC afloat.  New schemes have been added to such, in more money from around the nation and the world.  There will be little prosperity until this bubble is resolved.  Resolution will bankrupt many wealthy players and this is part of the reason  Trump couldn't win, though he did.  He won because the rest of the nation never recovered and what recovery there was for many was the replacement of a good job with a job at Wal-Mart. 

There is no doubt the bubble will break. For the third time in less than 20 years, California will have a government finance crisis.  This is because the phony bubble tech stocks that have made so many Californian rich will seek their true level and deprive the overburdening government of its free cash flow.  The magic that appeared under Jerry Brown, as the bubble reflated, will be seen as another round of witchcraft.  They will cry for a bailout.  Hopefully Trump gives them the middle finger and the Obama/Clinton lovers will have to reach into their dwindling pockets or cut their socialism.  The suckers that bought such inflated assets will again swear they will never do it again and a few of the scheme artists on Wall Street and Silicon Valley will get away with some money.  Others will find themselves broke and in some cases, faced with securities fraud.  Facebook, which trades at roughly the value of Exxon, will be re-priced, like Yahoo was last decade.  The bubble leaders in 2000 have never recovered.  Neither have many of their bag holders.

Will the entire economy freeze up this time?  Who know.  What will occur is a slowdown due to the long cycle mal-investment investments that are made during bubbles.  Just like the steel and concrete industries in China, the down line investment in mines and factories to build factories will cease.  Credit fueled bubbles are never funded entirely by real savings and the margin is that difference.  The 2000's were based on equity extracted from housing, used to continue consumer spending.  What was left for many was little or no equity and a mortgage balance that wouldn't be liquidated in a sale.  Such are bubbles. 

The biggest bubble in the US may be in the corporate finance area, where money has been borrowed, not for expansion, but for partial liquidations of the corporations themselves.  Many of these bonds are of the junk variety.  These partial liquidations are better known as stock buybacks.  Money that should have gone into the US economy directly, went into the pockets of speculators and management.  This money isn't invested, it is often used to buy existing assets.  This creates more inflation in the markets.  The wealth effect goes away when bubbles burst.  What a catch 22 we have been given. 

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