The Law of parsimony

Monday, 15 November 2021 — Laramie, Wyoming

[6 min read]

Dear Reader,

Greetings from the edge of the Great Plains, where the Rocky Mountains loom up to the west and the wind never stops blowing in the winter. It’s not even winter yet and the wind is blowing. But life goes on. And we’re one day closer to the inevitable end of the most absurd financial experiment in human history.

Am I exaggerating? Consider the evidence. Consumer price inflation in the US rose at an annualised rate of 6.2% last month. Producer prices rose even higher, at 8.6%. Food, fuel, rent…it’s all getting more expensive. And why?

The clowns, charlatans, Marxists, and morons in charge of US fiscal and monetary policy will tell you that inflation is ‘transitory’. They’ve claimed that people saved up during the pandemic, banked government cheques and cash splashes, and are now spending that money. The supply chain can’t keep up. Hence, rising prices. But look at the chart below:

Up…up…and away!

Follow the money. And use Occam’s razor, which states that the simplest explanation for something is usually the best. The chart above shows the growth of ‘broad money’ in the United States, or M3. It includes cash and coins in circulation (only about US$2.2 trillion). But it also includes liquid and less liquid forms of cash — things like time and savings deposits and certificates of deposit (CDs). Notice anything?

The monetary base exploded after the Global Financial Crisis in 2009. In the United States, it’s gone up 35% — from US$15.4 trillion to US$20.9 trillion. You’ve got a lot more money chasing goods and services. Inflation is the obvious result.

And then there’s the Fed. It added US$1.4 trillion to its balance sheet in the last 12 months. At US$8.6 trillion, the Fed’s assets have more than doubled from US$4.1 trillion at the beginning of the pandemic. It also held its target Fed Funds rate at effectively zero. So what?

This unprecedented buying of bonds and mortgage-backed securities has kept interest rates down (real rates, adjusted for inflation, are negative on both 10-year and 30-year US government bonds). That’s pretty important for a government with almost US$30 trillion in debt. If interest rates were allowed to rise, the cost of servicing outstanding US debt would quickly go up too.

Amazingly, the Fed’s balance sheet is ONLY 37.5% of GDP. It was 20% before the pandemic binge. But the Bank of England’s ratio is 41%. And the European Central Bank — a heavy buyer of corporate bonds — has a balance sheet-to-GDP ratio of 80.5%. That means the Fed is still lagging its global brethren in boosting asset prices.

Don’t get me wrong, zero rates plus quantitative easing have been rocket fuel for growth assets (tech stocks, cryptocurrencies, digital assets). The five largest companies in the S&P 500 now make up close to 25% of the index’s total market capitalisation. That’s Apple, Amazon, Microsoft, Facebook (Meta), and Google (Alphabet).

And speaking of the S&P, it’s up nearly 25% year-to-date. It’s been up double digits in eight out of the last 10 years. The two exceptions were in 2018 when it was down 5%, and 2015 when it was up 1%. So what?

So you’ve been warned. Massive asset price inflation preceded massive consumer price inflation. But both are ultimately unsustainable.

Regards,

Dan Denning,
Editor, The Rum Rebellion

PS: The cash conundrum is upon us. On the one hand, it’s mildly surprising to me that there’s only US$2.2 trillion worth of cash and coins in circulation. I like having cash on hand — or stuffed under the mattress — if the payment system goes down. Also, you don’t want to be queuing up for cash in a crisis. It’s not safe.

On the other hand, the investment hand, a massive allocation to cash when inflation is becoming entrenched in the psychology of consumers isn’t great either. In that sense, the soaring prices of digital assets are understandable. It’s people getting out of cash and into something that’s going up much faster than the official rate of inflation.

Our goal in The Bonner-Denning Letter is to beat inflation without exposing ourselves to the risk of assets that don’t generate cash flows. You can’t price those assets. You can only speculate and try to sell them to a greater fool.

We live in a world full of fools — or at least people who act like fools as part of a crowd/mob mentality. That means a lot of people have gotten wealthy — on paper, and in dollar terms — selling to fools. Our advice is not to get greedy and mistake your P/L for your IQ. When the losses come, they will be swift and merciless.

‘What men or gods are these? What maidens loth?

‘What mad pursuit? What struggle to escape?

‘What pipes and timbrels? What wild ecstasy?

‘Heard melodies are sweet, but those unheard

‘Are sweeter; therefore, ye soft pipes, play on’

‘Ode on a Grecian Urn’, by John Keats

What a wonderful time to be alive!

Wait…news flash…

Our Doom Index has just hit ‘8’…which is ‘Crash Alert’ level. Details tomorrow…

Meanwhile, the world is just chock-a-block with marvellous, magical, absurd, and absolutely ridiculous things. Like a city sewer in a flood, we are awash in things best not looked at too closely.

But since it’s Friday, let us at least take a look at something that happened last week.

3,519,252 financial advisors

As every sentient being on the planet knows, Elon Musk, the world’s richest — and clearly, cleverest — man decided to guide his financial life via a Twitter poll. That is, he asked the Twittersphere if he should sell 10% of his stake in Tesla [NASDAQ:TSLA].

This is obviously a novel way of making decisions. And perhaps better.

If two heads are better than one…surely, the 3,519,252 poll respondents, including the 2,037,647 who answered ‘Yay’, raise the quality of the decision at least to a C+.

What is most amazing about the whole thing is that 3,519,252 people…all supposedly compos mentis…probably adultish…presumably with real lives…actually found the time to weigh in on a financial question that didn’t concern them.

The decision would normally be of interest to only one, the very one person who — if results are anything to go on — is the most qualified human being to make the call.

After all, if the world’s most successful man can’t decide when to buy or sell his own stock, who can?

Have your say

And now that we see that there are so many people ready to help with our personal decision-making…perhaps we should make use of it.

Should we have a café latte this morning…or a cappuccino? You decide for us.

Where should we invest? In stocks? Bonds? Farmland in Argentina or Nicaragua (prices are low because they are…like…disaster areas)? Tell us, please.

Is it time to buy a new pair of blue jeans? Get a COVID booster shot? Wink at the pretty barista? We need guidance.

We invite replies and promise to abide by the results as faithfully as we would if they came from the US federal government or the Papal See.

Wacky world

They should have taken a flier on DWAC instead. Digital World Acquisition Corp is a SPAC…a special-purpose acquisition company. In this case, its special purpose was buying Donald Trump’s new company — Trump Media & Technology Group.

And when word of the purchase got out, DWAC shot up. Shares rose from US$10 to US$175.

As a general rule (in our rulebook, at least), all SPAC deals are bad deals. But who knows? There was no trace of it in the documents made available to the public, but DWAC might even eventually come up with a way to make money.

And in this wacky world, you don’t need to make money to get money. What money do the cryptos make? What money do the NFTs make?

What money has Elon Musk made? What money did Nancy Pelosi or Mitch McConnell make? Between the two of them, they gained US$105 million in new wealth since 2004. Where did it come from?

Twitter says sell!

So, let’s return to the other curiosities surrounding this story.

And don’t worry if we get the facts wrong; they hardly matter. What matters is the cockeyed principle of the thing…which is what we’re trying to figure out.

In any event, Musk’s poll was taken. The twitterers rendered judgement. And it was in the affirmative.

This news then had a remarkable effect (but not at all unanticipated…at least, not by Elon Musk’s bro, Kimbal, who sold US$109 million worth of shares on Friday).

Earlier this week, Tesla stock fell, wiping out nearly US$235 billion from the value of the company.

That vanished US$235 billion represents more than the combined value of GM, BMW, and Ford. In other words…well…there really are no words that can do the situation justice.

Elon effect

Investors who judged the stock worth US$1,243 on Thursday of last week found it was worth only US$1,011 on Tuesday of this week.

Same company. Same products. Same earnings. Same markets. Same Joe Biden. Same Elon Musk. Same customers. Same problems. Same weather. Same COVID. Same everything. So why would a share be nearly 19% less valuable?

We hope you’re not expecting an answer from us.

As far as we can tell, Elon is sui generis…an economic law all of his own. God? Man? We can’t say. But when he pipes up…investors hear melodies so sweet, they can’t resist.

If he buys something, it goes up. If he mentions something, it goes up. Even if he mentions something else by mistake, it goes up too.

So far, the Elon effect is the most reliable indicator in modern finance.

Enrichment of Elon

And now, Elon is the richest biped ever to walk on the planet. That is odd too, considering that up ‘til now, his contribution in goods and services is worth (net) less than zero.

Add up all the money that has been invested in Elon’s projects. Subtract the value of all goods and services (mainly Tesla cars) rendered.

Do this for Edison, Ford, Rockefeller, Jobs, even Zuckerberg — almost any really rich person — and the sum will be hugely positive.

Their companies make profits by providing goods and/or services that are more valuable than the resources (including capital and labour) that go into them.

We’re not going to do the math for Elon. It’s too much work. But the result must be a staggeringly negative number. His businesses do not make money, they lose it. They destroy wealth, they don’t create it.

He is so rich because the Federal Reserve has falsified the value of capital…and rigged the auto market with carbon credits. There is also the mysterious Elon effect, for which we offer no explanation.

Enrichment of the elites

The enrichment of Elon, in other words, parallels the growing wealth of the entire elite caste.

It is not based on actual output — neither on sales nor on profits — but on fake money and fake interest rates.

It favours gamblers…showmen…

…geniuses, as well as grifters.

And as we saw last week, it goes as well as comes.

Regards,

Bill Bonner,
For The Rum Rebellion