it's not about what it's about
there's more to the social unrest than we're being led to believe
Have you ever been in a heated conversation, where both sides are exchanging talking points, and then seemingly out of nowhere, the other person brings up a random issue that had nothing to do with what you were arguing about?
Usually this is a sign of a lot of pent up anger and frustration that hasn’t had a healthy release valve. The thing you were arguing about just happened to be the last straw.
This is how I see the situation on the ground today. It’s becoming increasingly clear to me (and others) that the social unrest we’re seeing spill out onto the streets goes a lot deeper than what we are being led to believe. I don’t think we would be seeing this level of unrest if everyone was happy and felt that the system generally works fairly. The American Dream is showing major cracks, and its promises are no longer being kept for an increasing number of people. And it’s likely going to get worse—much worse—before it gets better.
To illustrate the point, note the slogan “eat the rich” has made its way into the rioting rhetoric. Breaking into a Mercedes-Benz dealership and setting their cars on fire seems to be less a statement about race than it is about deep-seated feelings around economic issues.
the real economy vs the stock market
Here’s a sobering statistic: the typical American man needed to work 30 weeks out of the year in 1985 to pay for the basics of middle-class family life. To have the same standard of living in 2018, he would need to work 53 out of the 52 weeks in a year, which is another way of saying that the median income is no longer sufficient to support the necessities of a middle class lifestyle.
The past few decades proved to be a slow and painful grind up in cost of living, and I believe we are nearing the end game of this broken system. Numbers like this are never good for the fabric of society, and a complete system overhaul (similar to the New Deal about 80 years ago) is likely on the way.
Meanwhile, the stock market continues to reach all-time highs, even in the midst of a global economic shutdown. What the stock market is telling us is that things are not only as good as they were pre-pandemic, they are actually better. Everything is awesome!
let them eat cake ($1,200)
There’s been a lot of discussion about the fiscal stimulus passed recently. Secretary of the Treasury Steve Mnuchin was recently quoted as saying that the $600 unemployment insurance was acting as a disincentive to work:
What he’s saying is factually true, and anecdotally I’ve heard of many small business employers unable to find employees because they chose not to go to work since they’d be worse off financially than if they just stayed home and collected the checks. If you were making less than $25/hr, you'd be better off staying home.
But if the government is going to cut off stimulus for the working class, they must also cut off stimulus for the markets that mainly support the wealthy. The stimulus package cost the average US family $40,000, but they only saw a tiny fraction of that returned to them via checks. The rest was used to prop up asset prices—primarily the stock market. Not to mention the rampant fraud with the PPP grants, where companies who didn’t need even need the money applied and got free cash injections. There’s also the case of the missing $500B, where no one can provide answers as to where that money went.
If people understood what was going on, there would be mobs with pitchforks at the front steps of the Fed.
Unfortunately, it’s all too nuanced for the average person to be angry about, but I do believe everyone feels the injustice when they see the stock market completely disconnected from their own reality. Watch this interview clip of two well known macroeconomic thinkers (who are probably themselves in the 1%):
socialism for the rich, capitalism for the poor
Despite markets going to all time highs, a walk down Main Street tells a very different story. Either the Main Street story catches up soon and things quickly normalize, or Wall Street finally realizes that certain businesses and jobs are never coming back, and the markets sharply correct. I don’t believe the divergence between Wall St and Main St can continue much longer without social unrest really getting out of control.
With what we are seeing on the streets, we are reaching the end game of our monetary policy. We have stretched the middle class so thin, and pushed the stock market so high, that we risk revolution or war if we keep going down this path.
During the next few years, and potentially through most of the 2020s, I’m expecting massive fiscal spending by governments. I also expect state and local governments, especially ones that already have budget issues (NY, IL, NJ, CA) to finally reach a crisis point, requiring a bailout from DC. Recall that the feds control the money printer—states do not have that luxury. I just don’t see another way out of this hole other than a massive bailout via dollar devaluation.
Either that, or debts (such as state pensions and Social Security) simply don’t get paid as promised. The math just doesn’t work otherwise. But the government will probably not default on their obligations—at least not in nominal terms (i.e., if you’re promised $2,000 a month, you will still get $2,000 a month). Instead, they will likely just inflate their debts away, which is effectively a default in real terms (i.e., your $2,000 is worth $1,000).
Seeing that this is probably coming, and that there really is no alternative other than money printing (without risking riots turning into a revolution), it would be wise to position oneself for the possibility of widespread global currency devaluation, and potentially massive volatility in the coming years, just in case.
Stay safe out there. These next few months (and years) are going to be wild.
Cheers