What to make of the economy right now

First, I would like to start off this post by apologizing to my online friends for being out-of-touch for months. Until today, I had not checked my blog-related messages for a long time. I had an avalanche of folks expressing concern about the hurricane because I had not followed up on my previous posts. And I learned that a longtime follower had passed away, which was devastating news for me personally. I have felt awful for not responding to everyone in a timely manner. This has been a sobering year for pretty much everyone I know, in so many ways that it is frankly getting difficult to process.

Our house is okay. After we had the roof inspected, it was clear we had some impact points that are going to need to be repaired. They are not leaking, which was the main issue. The hurricane mangled our rain gutters as well, which are going to need to be repaired, but we have the dry season to worry about that. It also blew apart my garden shed and destroyed almost all of my fruit trees. Surprisingly, the bananas have all come back with a vengeance. In fact, it is somewhat fascinating to observe nature healing from a crisis. Most of the trees and bushes around here are fully leafed out again, like nothing ever happened. Apart from the neighborhoods on the barrier islands and a few on the peninsula, mostly everyone has picked up and patched their property to the point that everything looks perfectly normal. Resilient Floridians even defied local authorities and spent Thanksgiving on the beach. (Category what?) The only thing that has really jarred me was driving downtown recently and seeing the pile of multi-million-dollar yachts by the yacht basin. You haven’t lived until you have seen a heap of such vessels being discarded on the curb like carpet from a flooded house. Would make James Bond weep.

Moving on, I had several folks say they wished I would comment on the economy. Most economists right now believe we are headed into a global recession, with some suggesting it might be a serious one. I guess it is a personality issue, but I tend to be skeptical of easy consensuses and instinctively look for ways to disprove them. I have yet to find a credible argument against this one though. Many large companies have already started laying off workers ahead of the holidays, expecting miserable spending numbers WHEN ADJUSTED FOR INFLATION. Wells Fargo analysts a while back hypothesized that Christmas spending would be the last hurrah for the American consumer. They’d do what they could on credit (at 25-30% interest rates now) and then self-impose austerity next year. I do not know. It’s hard to have a boots-on-the-ground sense of things nowadays because substantially all spending is happening online.

The money-good indicator for recessions, however, is what is referred to as the yield curve. The yield curve refers to interest rates across the spectrum of Treasury maturities, from 1 month out to 30 years. People in the financial world look for two things with respect to the yield curve – whether it has a “normal” shape or is inverted (meaning the interest rate on short-term debt is perversely higher than the interest rate on long-term debt, meaning investors prioritize easy access to cash over the time value of money) and how much of the yield curve is inverted. An inverted yield curve generally means the country is headed into a recession. Right now, the yield curve is both broadly and deeply inverted. The spread between 2-year and 10-year Treasuries is approaching negative 80 basis points, which is beyond the worst levels leading up to the 2008 financial crisis. And 100% of the yield curve is now inverted. This has never not produced a serious recession.

If you want to follow the yield curve for yourself, here is a link that is adjusted in real time. The larger the negative number, the worse our financial situation as a country. (The 2YR/10YR spread is the metric typically cited when talking about the yield curve because those tend to be the biggest tranches of debt outstanding.)

The fact of the matter, however, is the country needs a financial puke to make prices for goods and services go back to normal. I know no one wants to think about it this way, but this is the financial cure to hyperinflation. This is why it is super important to teach your children that runaway pork spending has very real consequences. If you want to go down that path, you will have the tax-like misery of inflation followed by the misery of a recession. This kind of ignorant or cynical policymaking leads to very real human suffering every single time. That’s why you do not choose it in the first place. That’s why I and many others were screaming our lungs out about the zero-covid nonsense in real time. No one is reinventing the economic wheel up in here. Alas, we live in a country that cares more about pronouns than the yield curve and will get its economic comeuppance accordingly. It would be wise to get your financial house in order.

I think we are in the middle of a massive paradigm shift in terms of the economic power structure around the globe. This article from a brilliant money manager says everything I wish I could say on the topic, however, so I am just going to let you read the entire thing.

This is another very good article on the problem of our national debt. I have been highly critical of the older generation of policymakers putting our country into a far less stable financial situation, and in many ways I think the covid-era pork extravaganza has been the coup de grâce. No one ever expects the national debt to be fully retired – the government has a long history now of rolling it over again and again. But the country does have to make interest payments on the debt, to financial institutions and foreign countries. Given the historic climb in interest rates to address inflation this year, we are looking at the interest cost on rolling over our national debt approximating 1/3 of current tax receipts. On top of that, tax receipts tend to decline in periods where the financial markets puke. There will be a budget reckoning next year. When everyone is passing around the bouquets for the likes of Nancy Pelosi, understand this is the hellscape she, Schumer, and Biden are leaving for younger generations. A government that is short on services and long on pissing tax dollars into the black hole of outstanding debt.