The climate case for childlessness

Electric cars and Impossible Burgers are not enough to curb a global crisis

Janan Ganesh

KEJRPE A building site has a no entry sign warning children not to play in the area, England, October 2017
© Alamy

It brings a smirk to the lips that Thomas Malthus was one of eight children and had a further three. Unremarkable numbers in Georgian England, true, but if you are going to argue that population growth beggars the species, people will hold you to it. The sense that reproductive restraint was for thee, not he, nor his class, is one reason for the economist’s ongoing infamy.

That, and his empirical wrongness.

Until, perhaps, now. Climate change is graciously according Malthus a second life. It is hard to do anything kinder for the environment than have fewer children. Even if an infant grows to become a Prius-driving vegan who forswears air travel and line-dries the laundry, he or she will still contribute to the problem. A human cannot inhabit real time and space in a post-agrarian economy without generating carbon.

When the scholars Seth Wynes and Kimberley Nicholas calculated the most effective green steps a person can take, “have one fewer child” was first by such a margin as to make the second scarcely worth naming. When they then tracked the number of high school textbooks that offered this as guidance, the answer was zero. “Live car-free” and “conserve energy” were common.

Some sugar-coating of things is excusable for the young. But there are adults who are just as deluded that innovation will neutralise the climate costs of children. “There is no limit to human ingenuity” is a fun thing to say (and Nikola Tesla did), but it is also credulous Enlightenment hokum.

Even those who know this, who know that electric cars and Impossible Burgers are not enough, who are open to less growth, not just green growth, tend not to pursue the thought to the question of family size. I have noticed this in newspapers, even fetchingly salmon-coloured ones.

At some point, societies will have to treat childlessness, or at least small families, as a kind of public good. “What do you want,” readers will say, “a medal?” As a start, yes. Stalin used to pin an Order of Maternal Glory on Soviet women who bore seven or more children.

France still has its Médaille de la Famille Française. The state is not above the use of symbols and exhortation to encourage desirable behaviours. It now has to do it for the act opposite to the one it has traditionally heroised.

Material incentives would not go amiss, either, I can report: the inverse of Nordic pro-natalism. Only after that are we are into the realms of coercion, and if democracy cannot sustain air fares that internalise the environmental costs, it will not wear that.

Nor should it. For it can end up in a dark place, this anti-natalism — in the misanthropy of Schopenhauer and his “burden of existence”. But a soft version is amazingly difficult to propose too, even now, even among people who demand a “serious conversation” and “honest debate” about climate change.

I can understand why. This issue forces people to contemplate that which is most hateful: the non-existence of their own children. Then there is the collective action problem. Even if it is in the planet’s interest to have fewer people, it is not always in the interest of any one nation. Had its birth rate not declined in the 19th century,

France would have entered the subsequent one as a larger country than Germany. The world wars might not have played out as they did. The persistence of the Médaille in such an advanced culture seems rational enough once put in due context.

Nor do I mean to paint a green veneer on my or anyone else’s life choices. Friends and I who decided against family life did so for reasons as self-serving as often billed: a taste for leisure, a dread of sexual monotony. We did not hate to “bring a child into this world” — that smarmy anguish — so much as into our diaries.

It is just that the motive for an action matters less than its practical effect. And the effect here is of existential value to the planet. (Don’t mention it.) Societies might have to make it easier for others to do the same, at least until human ingenuity really does decouple population growth from its carbon impact.

The alternative is worse than the sound of Malthus cackling his vindication from the deep beyond.

Big tech

How to make sense of the latest tech surge

The big tech firms’ shares have been on a tear

In 2018 a new word entered Silicon Valley’s lexicon: the “techlash”, or the risk of a consumer and regulatory revolt against big tech. Today that threat seems empty.

Even as regulators discuss new rules and activists fret about the right to privacy, the shares of the five biggest American tech firms have been on a jaw-dropping bull run over the past 12 months, rising by 52%.

The increase in the firms’ combined value, of almost $2trn, is hard to get your head round: it is roughly equivalent to Germany’s entire stockmarket.

Four of the five—Alphabet, Amazon, Apple and Microsoft—are each now worth over $1trn. (Facebook is worth a mere $620bn.)

For all the talk of a techlash, fund managers in Boston, London and Singapore have shrugged and moved on. Their calculus is that nothing can stop these firms, which are destined to earn untold riches.

This surge in tech giants’ share prices raises two worries. One is whether investors have stoked a speculative bubble.

The five firms, worth $5.6trn, make up almost a fifth of the value of the S&P 500 index of American shares. The last time the market was so concentrated was 20 years ago, before a crash that triggered a widespread downturn.

The other, opposite concern is that investors may be right. The big tech firms’ supersized valuations suggest their profits will double or so in the next decade, causing far greater economic tremors in rich countries and an alarming concentration of economic and political power.

The question of a bubble is a reasonable one. Tech cycles are an integral part of the modern economy. The 1980s saw a semiconductor boom. Then, in the 1990s, came pcs and the internet.

Each cycle fades or ends in a bust.

Today’s upswing got going in 2007 with the launch of the iPhone. By 2018 it, too, seemed to be showing its age. Sales of smartphones were stagnating. Data scandals at Facebook crystallised anger about the tech giants’ flippant approach to privacy.

Global antitrust regulators were on the alert. And the loss-making antics of flaky tech “unicorns”, such as Uber and WeWork, evoked the kind of speculative froth often seen at the tail end of a long boom.

In fact, at least for the biggest tech giants, today’s valuations are built on more solid foundations. Together, the five biggest firms have cranked out $178bn of cashflow after investment in the past 12 months. Their size has yet to slow their expansion: their median sales growth, of 17% in the latest quarter, is still as impressive as it was five years ago.

Consumers say they care about privacy but act as if they care much more about getting stuff, and preferably without having to pay for it in cash. Since the end of 2018 the number of people using Facebook’s services (including Instagram, Messenger and WhatsApp) has risen by 11%, to 2.3bn.

Regulators have punished tech firms for tax, privacy and competition misconduct, but so far their efforts have been like bringing a pea-shooter to a gun fight: the fines and penalties they have imposed amount to less than 1% of the big five’s market value, a tolerable cost of doing business. And the agonies of some of the unicorns, and their biggest backer, SoftBank, have only demonstrated how hard it is to replicate the scale and network effects of the big five.

Meanwhile, the size of the opportunity is vast. As our special report in this issue explains, many parts of the economy have yet to digitise. In the West only a tenth of retail sales are online, and perhaps a fifth of computing workloads sit in the cloud with the likes of Amazon and Microsoft.

Big tech operates globally, giving it more space to expand, especially in emerging economies where spending on digital technology is still relatively low.

The trouble is that if you think that tech firms will get much bigger and diversify into more industries, from health care to agriculture, it is logical to assume that the backlash against them will not fade away but, eventually, get bigger.

As big tech’s scope expands, more non-tech firms will find their profits dented and more workers will see their livelihoods disrupted, creating angry constituencies. One crude measure of scale is to look at global profits relative to American GDP.

By this yardstick, Apple, which is expanding into services, is already roughly as big as Standard Oil and us Steel were in 1910, at the height of their powers. Alphabet, Amazon and Microsoft are set to reach the threshold within the next ten years.

When recession strikes it will fuel new resentments. Big tech could face a storm that few have yet paid much attention to. The big five firms employ 1.2m people and are now by far the biggest investors in corporate America, spending almost $200bn a year.

Their decisions about whether to squeeze suppliers, slash investment or attack weaker rivals will prove as controversial as those of carmakers when Detroit still ruled in the 1970s, or even of Wall Street in 2007-08. Big tech’s role in politics is already toxic; social media and videos influence elections from Minnesota to Myanmar.

All this means that, far from having peaked, anger may be in the foothills. Executives hope that slick lobbying will protect them. But even today, the picture outside America is not of inaction but a tumult of regulatory experiments.

China keeps its internet giants under tacit state control and wants to rely less on Silicon Valley, including Apple, which is already dealing with the covid-19 virus and other headwinds there.

At least 27 countries have or are considering digital taxes. India has cracked down on e-commerce and online speech.

The European Union (eu) wants individuals to own and control their own data, an approach this newspaper favours, although it may take years of innovation to create a system that is easy for consumers to use and profit from. This week the eu proposed curbs on artificial intelligence.

Even in America, trustbusters may limit big tech’s ability to gobble up startups, a strategy which has been instrumental to the success of Alphabet and Facebook in particular.

Just when you thought platforms were back in fashion

The $5.6trn market value of tech’s formidable five is a testament to some of the most commercially successful companies ever created. But it also assumes that they will get a lot bigger even as the world stands by and watches placidly.

Until today, big tech has been largely unscathed. The bigger it becomes, the more reason there is to doubt this can continue.

Explaining the Triumph of Trump’s Economic Recklessness

The Trump administration’s economic policy is a strange cocktail: one part populist trade protectionism and industrial interventionism; one part classic Republican tax cuts skewed to the rich and industry-friendly deregulation; and one part Keynesian fiscal and monetary stimulus. But it's the Keynesian part that delivers the kick.

Jean Pisani-Ferry

pisaniferry106_Mark WilsonGetty Images_phase one agreement trump china

PARIS – Since he was elected US president, Donald Trump has done almost everything standard economic wisdom regards as heresy. He has erected trade barriers and stoked uncertainty with threats of further tariffs.

He has blackmailed private businesses.

He has eased prudential standards for banks.

He has time and again attacked the Federal Reserve for policy not to his liking.

He increased the budget deficit even as the economy was nearing full capacity.

On a policymaker’s Don’t Do list, Trump ticks many more boxes than any other post-war US president.

And yet the US economy’s longest expansion on record continues. Inflation is low and stable.

Unemployment is at a 50-year trough. The unemployment rate for African-Americans is the lowest ever recorded. People who had left the labor market are returning and finding jobs. And wages at the bottom of the distribution are now rising at 4% per year, notably faster than average. On a voter’s economic wish list, Trump ticks more boxes than most of his predecessors.1

The political question everybody is speculating about is whether this economic performance will win Trump a second term. But the equally important (and related) economic question is whether it will teach governments worldwide that reckless initiatives beat analysis-based economic policies.

If it does, expertise will be ridiculed and international policy institutions will lose whatever credibility they still have. Independent central banks may well become chapels of a forgotten cult. Populists of all guises will feel emboldened.

Some, like Joseph E. Stiglitz, regard Trump’s achievements as an illusion. It is true that the picture is not entirely rosy. If anything, the trade deficit has increased. Distressed areas have not recovered. Inequality is still appalling. But this is no reason to overlook the positives.

Assessment, rather than denial, is needed to shed light on what is happening.1

The Trump administration’s economic policy is a strange cocktail: one part populist trade protectionism and industrial interventionism; one part classic Republican tax cuts skewed to the rich and industry-friendly deregulation; and one part Keynesian fiscal and monetary stimulus. The question that must be addressed is what in the economic outcomes can be attributed to each of these ingredients.

Trump’s populist agenda is very much geared toward America’s industrial heartland. Trade protection is supposed to make US manufacturing competitive again, at least on the domestic market, while companies are being instructed to invest at home rather than abroad. Yet the share of manufacturing in GDP is still two percentage points below its level prior to the 2008 financial crisis, and 900,000 manufacturing jobs have been lost.

True, Trump continues pushing. The US-China “phase one” trade agreement commits the Chinese to a near-doubling of imports of US manufactured goods by 2021. But, as Chad Bown of the Peterson Institute for International Economics has pointed out, the target is unrealistic. And there is no evidence of a Trump-engineered industrial revival.

The main aim of the Trump administration’s tax policy is to spur growth by cutting the statutory corporate rate from 35% to 21%, while broadening the tax base. It is complemented by what Trump describes as the most ambitious deregulation campaign in history, but, by his own admission, anti-red-tape measures started kicking in only recently, so they cannot account for the economic results.

In a careful collaborative analysis, Harvard’s Robert J. Barro, a Republican-inclined economist, and Jason Furman, also of Harvard and a chair of President Barack Obama’s Council of Economic Advisers, provide a numerical assessment of the impact of the corporate tax reform. Their conclusion is that lowering the cost of capital is a long-run positive, but that its immediate impact on GDP growth is less than 0.15 percentage point per year: a minor contribution to current economic performance. At any rate, relatively weak investment growth suggests that lower corporate taxes are not driving the expansion.

What we are left with, then, is the Keynesian explanation: fiscal and monetary support are the main factors behind the length and the strength of the expansion. On the fiscal side, the combination of tax cuts and spending increases may have boosted GDP some 2% since 2017.

On the monetary side, the Fed changed course in 2019 and reversed some of the interest-rate hikes it had put in place earlier to stem inflationary risks. Finally, multiple increases in state and local minimum wages have brought the effective minimum wage to some $12 per hour (66% higher than the federal minimum, unchanged under Trump), lifting low incomes and making the late expansion more inclusive.

So, the main reason for persistent growth and record employment in the United States is neither trade policy and industrial interventions, nor corporate tax cuts and deregulation, but rather demand stimulus. There was nothing certain about this result. In its summer 2017 assessment of the US, the International Monetary Fund estimated that the economy was close to full employment, supported monetary tightening, and warned against rising public debt.

Whatever the motivation, to stimulate an economy in which unemployment was already below 5% was an experiment. It presupposed trust in the benefits of a “high-pressure economy” where tight labor markets attract people left behind and help create new capacity.

It supposed a certain indifference to fiscal deficits. And it required risk-taking on the part of the Fed, which was accused of bowing to political pressure but actually fulfilled its mandate by testing the limits of the expansion. The experiment has worked – at least so far.

Overall, the lesson from Trump’s apparent economic success is not that recklessness and economic nationalism should guide policies. It is that in a low-inflation, low-interest-rate environment, the room for expansionary policies is larger than usually thought; that such an environment calls for bold policymaking, rather than the usual coyness; and that policy can spur economic inclusiveness.

Of course, voters’ ability to assign causes to outcomes is limited. So, unfortunately, this may not be the lesson they will learn.

Jean Pisani-Ferry, a senior fellow at Brussels-based think tank Bruegel and a senior non-resident fellow at the Peterson Institute for International Economics, holds the Tommaso Padoa-Schioppa chair at the European University Institute.

viernes, febrero 21, 2020



The Cost of Pessimism

Jared Dillian

If you’ve ever spent time hiking the Appalachian Trail, you know that hikers give nicknames to each other. My nickname: Pessimist.

I always tend to look on the bad side of things. Of course, human beings are pessimistic by nature, but I elevate it to an art form. I will take the worst-case scenario, and in my head, make it the base case scenario. My logic is that if things work out better, I will be pleasantly surprised.

Much has been written about how pessimism has been a giant liability in this bull market. And it has.

In 2009, you could have thought that we would never escape the financial crisis.

In 2011, you could have thought that the European Debt Crisis would blow up the planet.

In 2012, you could have thought that the US debt downgrade would blow up the planet.

In 2015, you could have thought that Ebola was going to spread all over the planet.

In 2018, you could have thought the vol explosion would blow up the planet.

And so on. These were all legitimate concerns. But if you took these opportunities to add to your stock holdings, you were rewarded.

Now, “buy the dip” is a little simplistic. I’m not aware of any studies that show that buying the dip is a robust strategy, but I spend a lot of time wondering if and when it ever makes sense to not buy the dip, and how do you know? There have only been four bear markets in US history where stocks declined about 50% or more. You sure wouldn’t want to get that wrong.

One quick note: one thing I marvel at was the speed of the financial crisis. Top to bottom in stocks, it took less than two years. It speaks to the amount of leverage and how quickly losses were transmitted through the economy. But it didn’t last that long.

Let’s talk about some things that could go wrong in the next few years.

Things That Could Go Wrong

As The Daily Dirtnap readers know, top on my list is politics.

People have been radicalized. It seems that a large percentage of the country would be willing to support an honest-to-goodness communist for president. That’s not good.

Second on my list is interest rates.

The economy simply cannot withstand higher rates. Get 10-year notes up to 3.5% and alarms are going to go off at the White House and the Fed. There’s the potential for a mass deleveraging if interest rates rise significantly. This has led some people to predict that interest rates will not be permitted to rise.

War is always a possibility, though at this point in time, it seems unlikely.

Some of you might say climate change. I’m not so much worried about climate change as the efforts to fight climate change. The energy sector is a disaster. If we really did something like ban fracking, the economic impact would be cataclysmic.

Plus some oddball ones, like this coronavirus that’s spreading around China. Earthquakes, hurricanes, black swan stuff.

The funny thing is—people are so focused on the things that can go wrong, that almost nobody thinks about how things can go right.

For example, if you naively bought stocks when tax reform was announced in 2017, you’d have killed it. It doesn’t get much more obvious than that.

I don’t get too sad about missed opportunities. I am a macro guy and not big on the stock market anyway. I find other ways to make money.

But if you’re a retail investor, and it’s a matter of being in stocks or stable value in your 401(k), your pessimism could be a hindrance rather than a help.


But I am starting to wonder if pessimism might become an asset someday soon.

I had my day in the sun in 2008. I shorted a lot of stocks, especially the sketchball mortgage companies and muni bond insurers. I was in on all those trades. Those trades aren’t working these days. Just ask the TSLA shorts.

And I worry about this election. Yes, about the outcome of the election, but also the path we take to get there. It could be an election with a lot of volatility. One thing is for sure—whoever loses will characterize it as “rigged.”

I like to think of myself as an expert on sentiment and social mood, and I don’t like what I see out there. Trump, with all his crowing about the stock market going up, has caused some unintended consequences. His political opponents are starting to make noises about wanting the stock market to go down, which I think would be a first for the United States.

The old newsletter cop-out call was to predict volatility. I don’t know what’s going to happen, but it’s going to be volatile! Trump blew that out of the water—three years of insanity and the stock market hardly moves. Having said that, I’m not surprised by much anymore, but I’d be very surprised if we don’t have some volatility in 2020.

If we don’t, I should hang up my newsletter writer spikes and maybe be a radio host or something.

Nomi Prins | Fed Gives Market Half a Trillion Through Repo

Albert Lu: I’m joined today by Nomi Prins, the author of Collusion. The journalist and former managing director of Goldman Sachs will be the keynote speaker at the coming 2020 Sprott Symposium on Natural Resources. Nomi thanks for joining me again.

How are you?
Nomi Prins: I’m doing great. Thank you so much for having me on.

AL: It’s great to have you on again and, you know, I really enjoyed your recent article, The Soaring Twenties, to start the new year. I think it was a great way out to kick off this new year — Ten Economic and Market Trends to Consider for 2020. So, let’s start with just an overview.

What do you think the overall backdrop for 2020 is going to be? We had a tremendous 2019. Is it going to be more of that?

NP: I actually think of myself, generally, as a fairly skeptical person, but I also like to look at the data. And what we saw towards the end of last year and, actually, throughout most of last year, was the Fed retreating from its hawkish stance in 2018 and moving very quickly to a more accommodative stance, with three rate cuts.

But it wasn’t just the Fed doing rate cuts. The Fed also opened up its balance sheet a little bit more through a little bit more money. Actually, when I say a little bit more, half-a–trillion dollars’ worth more money into the markets through repo operations — meaning short-term loans to the banking community and to the communities they service.

From a corporate standpoint, all of that helps, not just [to] lift the markets, because the extra money was coming in which we’ve seen in some of the years in the past decade as well, but also because of the confidence that the markets then could have that the Fed would be there. That, if the Fed needed to, it would find ways.

They might not be rate cuts, they might not be conventional QE, but they’d be this sort of back and backhanded QE through the repo markets. And not just the Fed, but central banks around the world — and not just the main central banks, but a lot of the emerging market central banks and the sort of medium to smaller form of economies throughout the world — switch to their own accommodative states for their own reasons. And that’s something relatively new.

So, we have almost a three-to-one number of central banks and emerging markets find some form of either rate reduction or other accommodative way to alter their money cost in their own countries throughout the world. All of that culminates into a generally bullish backdrop I think going forward into this year.

AL: You know, I couldn’t agree with you more. That reversal was key last year and that, you know, strong double-digit return. Powell talked a tough game but when it came down to it he really gave in.

What do you think, if anything, could make him retreat, yet again, and reverse direction in 2020?

NP: In terms of becoming hawkish again, I think it would take an amount of inflation in real prices that I don’t think we’re going to see. And even if we see it, I think it’s going to be difficult for him to act on it because there’s a lot of chatter within the Fed, and there has been actually [in the] last few years, about whether their inflation targets even make sense and whether or not the 2% level is the right level to even start to worry about.

So before we would even get to a 2% level, which we don’t have, in terms of real price appreciation, but even if we do get there, I think would be more talks within the Fed as to whether that was meaningful.

And so I think that’s going to keep the Fed pretty much in limbo. And also again, we have US elections coming up towards the end of the year. There’s going to be a lot of focus on that, and plus other emerging markets and other types of economies have their central banks also on a neutral-to-accommodative stance. So I think they would have to overcome a lot of data to get back to a particularly hawkish stance, or even to raise rates this year.

AL: I find myself in this strange position not of just agreeing with you — we agree quite often — but also coming around and, sort of, seeing it the way that the consensus is looking at it — that is, all the things are lined up for another good year. I say that reluctantly because of the underlying problems we have in the economy.

But I really think you’re right and they’ve already sort of left the door open, or cracked the door open, to sort of reconsidering that 2% threshold by saying they want a symmetric 2%, which means they can overshoot. So, you know, I totally agree with you in that. Now, another point you made was about emerging markets, and this also came up in your article. Emerging markets and gold will beat the dollar.

So, you seem to think that our easing is going to beat their easing. Is that a correct way of looking at it?

NP: There’s a couple of different things going on. I think our easing will actually beat their easing, in terms of the fact that we’re not, actually, going to be doing anything. But, we are adding money into the markets. They will potentially be reducing their rates more, but I think net-net that additive inflow into the markets of money from the Fed will be like an ease, right?

So, not to get complicated on that, emerging markets have less tools because they have less balance sheet capabilities to take on the sort of debt, or other things, in their own country. So it’ll be two different kinds of easing. So yes, we will be because we’re opening the Fed’s balance sheet and it’s growing easing by more than emerging markets will. But emerging markets will be easing and that’s going to stimulate their markets and potentially their economies.

Although, I generally don’t believe there’s a real relationship between economic growth and market growth, but it will provide a perception throughout the world of market growth, which will bring in capital in emerging market countries. So it’s sort of like there’s two different reasons but, together, it means the dollar should weaken relative to emerging market currencies. Emerging markets, in general on a stock basis, should outperform the US, and gold should outperform, potentially, both. 
AL: That’s interesting. So, I was going to ask you about that. Gold, I mean, the dollar has been strong for quite some time now. It’s reasonable to expect that that would turn around.

But you think gold relative to other currencies would be a good bet this year?

NP: Yes, because of that implicit, and explicit, easing that will be happening with respect to all these other currencies. The Fed opened the door for these other emerging markets to ease their monetary policies. And as such, relative to those currencies, gold will also be able to outperform as they outperform the dollar.

So the relationships, I think, into this year are going to be really interesting from that perspective. It’s not a hundred percent intuitive, but that’s what I see. 
AL: Okay, another point you make here: corporate bond markets will expand. You think that the environment is going to be ripe for continued issuance?

NP: These lower rates, I think that’s going to be a pretty much global type of thing. That’s going to happen. It’s going to be more corporate debt issuance in the US, in the major economies as well as in the emerging market economies because, again, they’re reducing the cost of their money. So their corporate issuance is going to basically increase. The corporate issuance in general has been in an upward trend in the US and other major economies. That’s going to continue because rates themselves are not going to be moving up.

So, in general, the overhang of debt that we have globally, which will ultimately be a problem, this is still ultimately a crisis that’s being pushed off — all this debt — but I believe this year we’re going to hit more record debt on an absolute global basis. And then, also, in all the individual economies relative to their GDP, relative to their growth. 
AL: You highlight a very, I guess, critical problem, and that is the amount of corporate issuance we’ve had. You started the article with a quote from F. Scott Fitzgerald’s wife pertaining to the 1920s, “We couldn’t go on indefinitely being swept off our feet.” And that’s what’s been happening now. We’ve been swept off our feet for many years in a row, and it’s been a great environment to issue debt. But more and more this is becoming a problem. We can’t have levering up forever, corporate buybacks forever.

And, what I’m wondering is, how is this going to play out? Because, on the one hand, we can’t keep doing this and there’s going to be some type of crisis in that market. On the other hand, the government sort of needs negative real interest rates forever so that they can keep borrowing. So how is this going to play out?

Are these spreads going to just blow out spectacularly, or what’s going to happen?

NP: Ultimately, that’s what will happen. So the question is when will that happen? And what will be the cause of that happening? You and I have talked for years about the fact that there’s too much debt in the world as it continues to increase. And what we saw last year is that the ability for debt to increase [with] what is now a more accommodative interest rate pattern globally than it was in 2018 or 2017 just has made it increased by more. And because there’s no real impetus to raise rates at this point, this is going to be again a year of increasing of debt.

But at what point does the fact that companies, and countries, are not growing as fast as their debt is growing come to a head? I think that will happen through more extraneous circumstances, like when we saw the assassination of the Iranian general by the US and then the world was waiting whether Iran would retaliate — how would they retaliate?

And then, Iran, yes, sent a bunch of missiles to attack some Iraqi bases with US personnel there. Nobody was hurt, but all of those kinds of unforeseeable, yet actually potential if you think about it, phenomenon could be the things that actually come in and make countries a little more tense in terms of their debt versus their growth scenarios, and investors more tense and money retreat and, therefore, spreads blowout. But I think it’s very periodic. The market really digested that whole event really, really quickly.

Another market, a year ago or a year and a bit ago, when the Fed was still in raising-rates mode, that would have had a 500-600 point drop on the Dow, just with that activity. And it had a few hundred points, but most of them popped right back up. And so there’s a resilience there.

At some point, though, those activities with that much debt will cause the crisis and, I think, it’s going to be when we finally get to leaving this current accommodative period into more tension.

Will there be raising rates? I don’t think, again, it’ll be this year, but let’s say it’s next year, the year after. And then you have those factors. And then, let’s say the trade agreement that was just signed, the “phase one” of the agreement between the US and China which was just signed, is digested. And then, concern, say, grows for “phase two.”

When will that happen?

Will that happen?

Will that happen before the election?

If it does happen will it mean anything?

Will China then do something to really annoy the United States?

Will Trump get reelected and react accordingly?

Then all of that stuff can be a part of a debt crisis. 
AL: I guess this is a good thing, but I think I was surprised with, I guess, how confident the market was that nothing really bad was going to come of that. Like you mentioned, the Dow did dip but not nearly as much as you’d think. If you look at oil and gold, which are, sort of, war futures — they didn’t really react very much. So the market took it really well. In fact, the market is more concerned about things like China tariffs and other things, like, you know, the way Jerome Powell is leaning much more so than the prospect of war. How do you interpret that? Is that a good thing? 
NP: Talking about the, sort of, bullish tone we’re in right now does not mean that this is like a natural period of time. We have a tremendous amount of support for the markets coming from central banks. That’s just weird, historically. But it is the case and that’s why markets care more about money, and the cost of money, that’s coming into them. And if you have enough money, markets feel that they can overcome things like, you know, missile strikes. And obviously, if there is an outbreak of a real wartime situation, the markets would digest that.

But what they’re doing is thinking — all right, well that was a thing. We were worried for a minute. But you know what? It didn’t really get too awful. At that moment, oil prices spiked; they came back down. Everything’s sort of okay and the money is flowing. I think [it] will be more of an issue if Jerome Powell were to turn around [and] be like, “You know what? We’re done with repo operations.”

I think that would make the markets upset, as opposed to missile attacks in Iraq, which is a little scary actually for the world, because what it means is that the markets kind of don’t care as much as maybe markets should if they were really reflective of opinion and reflective of economies and geopolitics. But they’re more reflective of monetary policy and they’re getting that gift right now.

And so it’s kind of like, you know, sort of placebo in terms of any types of nerves that will come in, just sort of take this be calm, handle it and don’t worry too much. That’s how they’re feeling at the moment.

AL: You mentioned Jerome Powell and his repo operations — hundreds of billions of dollars.

They’ve made a point of saying that, explicitly, this is not the same as QE. And, you know, maybe technically they’re correct. The markets, certainly, if you look at their enthusiasm, is not buying that. And at the end of the day, dollars and credit are to a great extent fungible. And so, that credit is going somewhere, to purchase something. It certainly does look like QE in terms of the end result.

What do you think is coming in the next quarter? Are we going to get a standing repo facility?

If we don’t get something like that, is the market going to have a tantrum? What do you see coming?

NP: Those things, I think. But I think the markets would have a tantrum if it didn’t continue. And I think it’s going to continue because right now, I think, Jerome Powell has positioned, and the Fed has positioned itself, to give a certain amount of money to the markets on a monthly basis. That’s what the markets are expecting. The Fed knows the markets are expecting that.

And I think it’s going to continue, which is one of the reasons why, throughout the latter part of last year actually, they were increasing their repo operations above, effectively, the $60 billion per month that they had said they would be injecting into the markets.

And so, net–net, when you look at what’s completely been injected on their balance sheet, it’s gone from $3.7 trillion in the end of August, beginning of September before they started the Fed the repo operations, and now it’s up at $4.1 trillion. And they’ve also completely stopped talking about any type of quantitative tightening on the longer end of the curve. So the only thing that’s happened whatever you call it, I call it quantitative easing at the lower end of the curve because that’s what’s happening, money is coming into the markets in return for short-term securities. That is quantitative easing at the low end of the curve.

And, the reason why the market, and banks, and so forth understand it that way is because they’re just getting the money. And whether that money gets used to back longer-term debt or longer-term issuance or an IPO or some part of another transaction, an M&A or anything else, that short-term money is still there to provide the funding.

So I don’t see the Fed changing that, certainly [not] in the first quarter because there’s no real point and they’re not seeing any inflationary data that would warrant them to do that. I think the market and the banks would get very upset.

I think it’s hard in these markets to project too far ahead. If we have sort of extraneous circumstances, but if we do I think they would be more negative than positive like [a] potential increase in tension in the Middle East or a screw up with “phase two” of the US-China trade negotiations or something like that, which would actually cause the Fed to not discontinue repo operations. So I just see them continuing.

If I had to put a number and I would say at least through the first half of the year. And what’s to say [it] can’t go on longer than that.

AL: I mean, these guys never cease to amaze me.

NP: The only thing that could make it not go on more than that, or at least not have the experiments or to stop at that time, is that if you look at the trajectory of how much money has been going into the markets through these repo operations since September — they would be back above their highest height of a balance sheet since the financial crisis. If they actually continued more than, sort of, July-August. So we’ll see what happens. But I think there might be a natural, psychological Fed boundary of: “There is no actual crisis now. So if our balance sheet actually looks like it’s bigger than an actual crisis, that’s kind of an odd thing.”

So I think there might be that natural stop, but I think they can go to that point. I just think someone in there would be like, “Hey, wait a minute, we’re getting to that point. Should we just stop?” So that time horizon kind of matches that value.

AL: Finally, you talk about inequality, wealth inequality. And we’re in an election year. I expect this will be talked about frequently. So what do you think the issue there is in terms of markets and how the markets are going to react or be impacted by this?

NP: From a market standpoint, as long as the money is coming in, they’ll continue to inhale it. Banks will inhale it. It’ll transfer itself into debt, but what happens on the ground? I mean, why inequality continues to grow is that, on a percentage basis, there are fewer participants in the market than the value of the market is increasing.

So, most citizens in most countries have zero positive outcome from the market going up, and they know this. As debt increases, and as public debt increases — as Treasury debt and Japanese government debt, the European Union, debt in emerging markets increase — it means there’s less money left to go into infrastructure growth and into cultural programs, into education, and to health and to things that governments would otherwise potentially fund, which means that for people living on the margin, their ability to get things without having to pay more for them, when they’re not making more on the margin, is that much harder.

And so that tends to result in some of the things that we’re seeing, in civil unrest around the world because of that economic inequality, because of austerity programs, because of just money being used for financial assets and not for citizen assets. And that’s one of the reasons that led to what is going on in Hong Kong, Venezuela, the Middle East, potentially in the US into the election — probably in a more subdued manner because we tend to be more subdued — and in some of the demonstrations that have the United States on a relative global basis. But I think that inequality growth does manifest in the civil unrest and in how people vote as well.

We saw that, in general, with the UK voting very strongly for Boris Johnson’s party, the Conservative Party, because they did not believe that the Labour Party was offering them a way out of inequality. So why not just — I’m oversimplifying; it’s a major, larger conversation — but, stick with what we have, you know, decrease uncertainty going into Brexit and let’s just move on. But that’s not necessarily good for them economically. So I just think there’s going to be more instability throughout people at the middle and lower echelons of money and society as the markets go up. 
AL: So we’ve heard some of that in the early phases of the Democratic primary. How much traction do you think they’ll get on that in the election? And then I guess I’ll ask you to predict now where you think the election is going.

NP: So, I think that, from the standpoint of inequality, I think that the Trump Administration is going to obviously downplay that because there is a certain number that looked good on the surface, like the level of stock market being high, like unemployment, right? Average wage is going up even though that doesn’t mean people aren’t working multiple jobs and don’t have higher costs in their own households.

So I think from the perspective of how that story plays out, the Republican Party and the Trump Administration will do everything they can to underscore that the positive elements of a general economic health. Whereas, the Democrats are going to continue to highlight what their constituents are saying and what the rest of the numbers bear out — that even if on average certain things look good, like the market or unemployment, the struggle is still there and the, sort of, inequality just deepens that struggle.

And how do we understand that that’s what citizens are, actually, sort of thinking about on a regular basis. And then the extent to which they can talk to people and give them real solutions and real platforms that will be something else. I do think it resonates with a lot of voters, not just Democrats, but I think even on middle Republicans who have problems making their bills or meeting their bills on a monthly basis, that things are more expensive than the overall markets and the overall economic health rhetoric might indicate.

So, I mean, we’re going to find out in the next month or so. I think what’s going to happen on the Democratic side, I think if Biden continues to be the front-runner and becomes the ultimate candidate, I think he will talk about inequality. I think he’ll more talk about the sort of problems of what has been happening in the last couple of years with respect to trade, with respect to war, etc. I think if Bernie Sanders becomes the candidate, he’s going to continue to talk about who’s getting the money, you know? That it is Wall Street relative to Main Street, and resonate with people who are feeling that in their own lives in that manner.

In terms of who wins in November, it’s hard to say. I mean, there’s a strong tendency to vote for an incumbent president or for an incumbent president to win in the second term unless there’s a major economic downfall going on. For example, George Bush did not win a second term because there was a major recession going on as he was working towards being reelected.

So given that on the outside the economy still has a lot of positive numbers that are played repeatedly, that could move the line over to reelecting President Trump. But I think we have yet to see the story of how people in the swing states resonate with the candidate when there’s only one candidate on the Democratic side and, you know, six or seven that are still running. I think it will become a lot clearer as to what people are going to support.

Will they support healthcare for all type of thing — where they can actually have that comfort on the healthcare side and that comfort on [the] student loan side? I mean, there are debt problems, there are cost problems that do need to be resolved, whoever is going to run the country come next year. I do think voters on both sides of the equation want to know what those solutions really are.
AL: Nomi, thank you very much for joining me on the show. I really appreciate all of your insights and I’m really looking forward to speaking with you again and seeing you in Vancouver at the Sprott Symposium this July. Please visit Nomi at and on Twitter @NomiPrins.

Nomi, once again, great to see you, to catch up. Thank you very much and I hope we can do it again soon. 
NP: Thank you and I look forward to Vancouver. I’m really excited.