|By Bill Bonner, Chairman, Bonner & Partners
PARIS – We promised to end the week with a bang!
You’ll recall that Fed policy always consists of the same three mistakes… 1) Keeping interest rates too low for too long, resulting in too much debt; 2) Raising interest rates to try to gently deflate the debt bubble; and 3) Cutting rates in a panic when stocks fall and the economy goes into recession.
Well, here comes the Big Bang: Mistake #4 – rarely seen, but always regretted.
Mistake #4 is what the feds do when their backs are to the wall… when they’ve run out of Mistakes 1 through 3.
It’s a typical political trade-off. The future is sacrificed for the present. And the welfare of the public is tossed aside to buy money, power, and influence for the elite.
Every debt expansion ends in a debt contraction. Stocks crash. Jobs are lost. The economy goes into reverse, correcting the mistakes of the previous boom.
Investors see their money entombed. Householders await foreclosures. The authorities scream: Apocalypse Now!
The more the feds falsify price signals in the boom, the more mistakes there are to correct. For example, this week, a report in The New York Times described the big mistake in the shale oil boom.
You’ll recall that it turned America from a big importer of oil to a major exporter… and revived much of the heartland with big fracking projects in woebegone regions of Texas and North Dakota.
The shale oil boom was even credited with having scuttled the oil market, which dropped from a high of around $130 a barrel in mid-2008 to under $30 in late 2016, thanks to so much new supply.
But guess what? The whole boom was fake. It didn’t add to wealth; it subtracted from it. Accumulated losses over the last five years tote to more than $200 billion, with $36 billion lost in the Bakken shale fields in North Dakota alone.
Had credit been priced properly, it never would have happened. From The New York Times:
The 60 biggest exploration and production firms are not generating enough cash from their operations to cover their operating and capital expenses. In aggregate, from mid-2012 to mid-2017, they had negative free cash flow of $9 billion per quarter.
These companies have survived because, despite the skeptics, plenty of people on Wall Street are willing to keep feeding them capital and taking their fees. From 2001 to 2012, Chesapeake Energy, a pioneering fracking firm, sold $16.4 billion of stock and $15.5 billion of debt, and paid Wall Street more than $1.1 billion in fees, according to Thomson Reuters Deals Intelligence. That’s what was public. In less obvious ways, Chesapeake raised at least another $30 billion by selling assets and doing Enron-esque deals in which the company got what were, in effect, loans repaid with future sales of natural gas.
But Chesapeake bled cash. From 2002 to the end of 2012, Chesapeake never managed to report positive free cash flow, before asset sales.
Of course, the same thing could be said of the trillion-dollar companies, Amazon and Apple, whose market capitalizations are largely the result of cheap credit.
And it could be said of the whole tech sector – with its outrageous inputs of capital into companies that have never made a dime.
Or it could be said of emerging markets, which have managed to suck up the loose change spilling out of the financial industry. They promised slightly higher yields, and now, they owe far more than they can pay.
It could also be said of Silicon Valley carmaker Tesla, which now has an estimated $10.5 billion in debt – despite never having made a profit…
Or of the entire stock market, where trillions of dollars in cheap capital have produced very little real return.
“When the wind blows hard enough,” say the old-timers, “even turkeys fly.”
The wind never blew as hard as it did from 2009 to 2018. And overhead now are so many plump, money-losing birds that we suggest you take cover.
But that’s just the beginning… As the turkeys fall to Earth, the Fed’s reputation is called into doubt. Its manhood is questioned. Congress and the Trump administration, too, are roused to action!
The feds will make the rational choice (for them). They will go for broke.
That is, they will do things that cause you to go broke… while the insiders continue to get rich, following the tried-and-true remedy of Mistake #4 – the refuge of scoundrels and the last resort of jackasses from Zimbabwe to Venezuela.
The essence of Mistake #4 is “printing” money – lots of it – to cover soaring deficits, prop up failing enterprises, reflate markets, rescue sinking households, save the bankers, reward the cronies, and keep the zombies from running wild in the streets.
All this money-printing will spark inflation… which will soon be blazing-hot.
The Fed, of course, is duty-bound to keep prices “stable.” But in the end-of-the-world hysteria, we predict the Fed will “print”… and worry about price stability later.
“When someone is trapped in a house fire… you try to get them out,” the feds will say. “We’ll worry about the fire insurance later.”
A breathtaking infrastructure boondoggle. A “space force” so far out that it is quickly lost somewhere beyond Mars.
New trade wars to protect U.S. industries from fair competition. A “guaranteed income” for everyone.
Bailouts… Subsidies… Grants… Contracts… Spend, spend, spend. “It’s good for the economy!”
Oh… and new controls on banking and cash… and perhaps gold and even bitcoin… closing the doors to prevent people from escaping the burning building.
Our advice: Run, don’t walk, to the nearest exit now.