$10.275 TN In Nine Months

Doug Nolan

Federal Reserve Assets surged $120 billion last week to a record $7.363 TN. Fed Assets inflated $3.593 TN, or 95%, over the past 66 weeks. 

M2 “money” supply surged $228 billion in this week’s report to a record $19.226 TN – with a 66-week gain of $4.255 TN (28%). 

Overheated markets have become wholly enchanted by this frightening monetary inflation.

In early rules-based versus discretionary central banking debates, it was long ago recognized that discretion came with the risk of one misstep leading invariably to a series of only greater policy mistakes. 

This is the story of the contemporary Federal Reserve – from Greenspan to Bernanke to Yellen and now Jerome Powell. Policy doctrine has become progressively in the clutches of a runaway financial Bubble.

The Fed was out digging a deeper hole this week – an error compounded by Chairman Powell’s press conference dovish overkill. We’re in the throes of a period of precarious Monetary Disorder. 

This is apparent in Credit data and the monetary aggregates, throughout the financial markets and, increasingly, in housing markets across the country.

Financial conditions are precariously loose. 

Yet virtually everyone is convinced extremely loose monetary policy is appropriate considering the economic hardship being suffered across the United States. This thinking – utter reverence for monetary and asset inflation – has become only more perilous during the pandemic.

Powell responded to a question on elevated equities prices: 

“Asset prices is one thing that we look at… We published a report a few weeks ago on that… And I think you will find a mixed bag there… With equities, it depends on whether you’re looking at PE’s or whether you’re looking at the premium over the risk-free return. If you look at PE’s, they’re historically high. But… in a world where the risk-free rate is going to be low for a sustained period, the equity premium, which is really the reward you get for taking equity risk, would be what you’d look at. And that’s not at incredibly low levels, which would mean that they’re not overpriced in that sense. Admittedly, PE’s are high, but that’s maybe not as relevant in a world where we think the 10-year Treasury is going to be lower than it’s been historically, from a return perspective.”

December 14 – Bloomberg (Rich Miller): 

“U.S. financial conditions are the easiest they’ve been in more than a quarter century as stock markets scale new heights on hopes of an end to the Covid-19 pandemic, according to an index compiled by Goldman Sachs… The index, which dates back to 1990 and also takes account of the value of the dollar and interest rates, reached its loosest level ever last week. That came as financial markets have boomed, thanks to unprecedented support for the economy from the Federal Reserve and Congress.”

Evidence of egregiously loose financial conditions is everywhere. 

The Fed’s ballooning balance sheet. 

Unprecedented system “money” and Credit growth, along with the largest quarterly Current Account Deficit ($179bn) since 2008. 

Dollar weakness and the rapidly inflating cryptocurrencies. 

Record stock prices – across market indices from the S&P500 to the small caps. 

Massive ETF inflows. 

There are myriad indications of conspicuous speculative excess: The Nasdaq100’s 47% y-t-d return, with a P/E of about 40. 

Individual company valuations with no basis in reality (i.e. Tesla’s $660bn mkt cap). 

A booming IPO marketplace. 

The SPAC phenomenon. 

Surging retail trading volumes (“Robinhood Effect”). 

The booming options-trading marketplace – retail and institutional – and, more specifically, the manic popularity of call option speculation. 

The blowup of hedge fund short-only and long/short strategies – with the Goldman Sachs Most Short Index surging 43% since the end of October and over 200% from March lows (up 53% y-t-d). 

Historically narrow corporate bond spreads (and low CDS prices) – in the face of major and mounting Credit impairment throughout the economy (households, corporations, state & local govt, etc.). 

Record investment-grade and high-yield corporate debt issuance. 

Booming private-equity and M&A.

In his press conference, Powell admitted the economy has proven more resilient to Covid spikes than the Fed would have anticipated. 

Clearly, economic activity has been bolstered by loose financial conditions, resulting booming equities and debt markets, and unmatched fiscal stimulus. 

But prolonging this addictive stimulant is fraught with risk. 

These risks do resonate with some Fed officials, with Robert Kaplan providing a voice of reason.

December 18 – Wall Street Journal (Patricia Zengerle and Eric Beech): 

“Reserve Bank of Dallas President Robert Kaplan said Friday that he believes it will be time for the central bank to start pulling back on its bond-buying stimulus efforts when it is clear the economy is recovering strongly. ‘I’m going to deliberately stay away from a timetable,’ Mr. Kaplan said… However, Mr. Kaplan said that as 2021 moves forward and vaccines to treat Covid-19 roll out, if the Fed is ‘making substantial progress on our dual mandate goals, I do think it would be healthy and very appropriate to begin the process of tapering our asset purchases.’ …Mr. Kaplan said he remains concerned extended periods of bond buying could bring problems. ‘These purchases, if they go on for longer than they need to, I worry that they have some distorting impact on price discovery, that they encourage excessive risk taking, and excessive risk taking can create excesses and imbalances that can be difficult to deal with in the future.’”

Abruptly redeploying QE in September 2019 – despite an increasingly speculative backdrop pushing stock prices to record highs (and with unemployment at multi-decade lows) – was a hefty blunder. 

QE should be recognized as a dangerous tool to be employed only in the event of systemic illiquidity precipitated by powerfully destabilizing de-risking and deleveraging (popping of a Bubble).

A measured QE response was appropriate in March. 

It is categorically inappropriate today – and arguably a dereliction of the Fed’s duty to safeguard system stability. 

Rather than supporting an unstable system’s adjustment to a changing financial and economic backdrop (as in 2008 and March), QE today directs powerful liquidity flows to already over-liquefied and highly speculative markets. 

Instead of accommodating deleveraging, $120 billion monthly QE at this late-cycle phase stokes speculative leveraging and only deeper structural maladjustment.

The Fed should at this juncture be preparing to “taper” – to commence a gradual process with the goal of policy normalization. It’s certainly no time to rationalize inflated securities (and housing) markets or to downplay what is obvious financial excess. 

And it is precisely the wrong time to further solidify the “Fed put” while emboldening an already manic Crowd of speculators. 

The Powell Fed has completely capitulated – and this is anything but lost on the markets. 

Our central bank has signaled to a frothy marketplace that massive (at least $120bn monthly) liquidity injections will continue indefinitely. 

It has become paramount to Fed policy to use its balance sheet to sustain market Bubbles for the purpose of spurring economic recovery. It is nothing short of our central bank abandoning its overarching monetary stability mandate.

This deeply flawed policy doctrine has reached a critical juncture: The prospect of massive ongoing QE now stokes precarious late-cycle monetary and Bubble excess – and the longer this persists, the more problematic it will be to pull back from aggressive stimulus. 

The Fed is trapped, and its credibility is in further jeopardy. Euphoric market perceptions see financial conditions remaining extremely loose for years to come. 

The nature of current Bubble excess, however, risks an unexpected de-risking/deleveraging dynamic inciting a destabilizing tightening of financial conditions – Fed QE notwithstanding.

Meanwhile, even before inauguration, the Fed has found itself entangled in political gunk.

December 17 – Reuters (David Lawder): 

“A new potential roadblock to a $900 billion coronavirus economic relief bill emerged in the U.S. Congress on Thursday as some Senate Republicans insisted on language ensuring that expiring Federal Reserve lending programs cannot be revived. One Democratic aide criticized the move by Senator Pat Toomey…, saying it would limit President-elect Joe Biden’s ability to respond to the heavy economic toll of the pandemic… But Toomey wants to ensure that the Fed and Treasury are stripped of the authority to restore pandemic lending facilities that Treasury Secretary Steven Mnuchin will allow to expire on Dec. 31, including the Main Street program for mid-size businesses and facilities for municipal bond issuers and corporate credit and asset backed securities.”

Historic Monetary Inflation is anything but limited to the U.S. After in October posting the weakest Credit growth since February ($217bn), China’s Aggregate Financing bounced back for a $326 billion expansion during November – just above estimates. 

This pushed y-t-d growth in Aggregate Financing to $5.079 TN – 43% ahead of comparable 2019 and 61% above comparable 2018 Credit growth.

China’s Bank Loans expanded $220 billion, double October’s depressed level, but below forecasts and only 3% ahead of November 2019. 

At $2.303 TN, the y-t-d Bank Loan expansion was 20.8% ahead of comparable 2019 and 24% above comparable 2018. 

Outstanding Bank Loans were up 12.8% over the past year; 26.8% over two years; and 84% in five years.

Consumer Loans bounced back for an $115 billion expansion in November, 10% above November 2019 growth. 

At $1.120 TN, y-t-d Consumer Loans growth was 8% ahead of comparable 2019. 

Consumer Loans expanded 14.6% over the past year; 32% over two years; 56% over three; and 135% in five years. 

Corporate Loans expanded $120 billion during November (15% ahead of Nov. ’19). At $1.773 TN, y-t-d growth was 28% ahead of comparable 2019 growth (48% greater than comparable ’18).

Corporate Bond Issuance plummeted during November, confirmation that a flurry of defaults has led to a meaningful tightening of Credit conditions. 

The $13 billion increase in Corporate Bonds was down from October’s $39 billion and the weakest net issuance since September 2018. 

Issuance peaked during March and April, with a two-month surge of $294 billion. 

At $679 billion, y-t-d issuance was 49% ahead of 2019.

Government Bond Issuance slowed somewhat to $61 billion. 

Yet year-to-date issuance of $1.167 TN was 75% and 69% ahead of comparable 2019 and 2018. 

At $6.945 TN, outstanding Government Bonds were up 21% over the past year; 39% over two; and 63% in three years.

For the first nine months of the year, China Aggregate Financing expanded an unprecedented $4.535 TN ($504bn monthly). 

This was 45% higher than comparable 2019 growth, and 67% ahead of 2018. Meanwhile, the Fed’s Z.1 data inform us that U.S. Non-Financial Debt (NFD) surged $5.740 TN during the first three quarters of the year, an increase of 188% from comparable 2019 and 163% from comparable 2018. 

Combining growth in Aggregate Financing with NFD, China/U.S. Credit expanded an astounding $10.275 TN During 2020’s First Nine Months, double comparable 2019 and 110% greater than comparable 2018 – in one of history’s spectacular Credit inflations.

Money supply data are similarly breathtaking. 

Through the end of November, China’s M2 “money” supply surged $4.487 TN, up from comparable 2019’s $1.333 TN. 

Similarly historic, U.S. M2 grew $3.779 TN y-t-d through November. 

This was up from $900 billion for comparable 2019 (and 2018’s $393bn). 

Respective China and U.S. “M2” monetary aggregates combined for 11-month growth of $8.266 TN – up 270% from comparable 2019’s $2.233 TN.

Chinese policymakers appear more cognizant of risks associated with ongoing extreme stimulus measures. 

System Credit growth has slowed from the frenetic $500 billion monthly pace for much of 2020. 

Regulators have moved to rein in a bubbling corporate bond market, while Beijing and local officials have tightened mortgage finance. 

Of course, Beijing will move gingerly, mindful of the risk of punctured Bubbles. 

But I believe there are today much greater risks from Chinese “tightening” than perceived by complacent global markets.

Whether it’s the U.S., China or elsewhere, Bubbles reach a point where risk becomes impossible to control. 

Excesses, distortions, imbalances and deep structural impairment lead inevitably to financial and economic pain. 

Looser financial conditions and additional monetary inflation only further destabilize finance and economies – delaying the pain but worsening the outcome.

Reasons to be cheerful

The pandemic could give way to an era of rapid productivity growth

Businesses have adopted new processes and technologies—and there are signs that they may pay off

THE PROSPECTS for a productivity resurgence may seem grim. After all, the past decade has featured plenty of technological fatalism: in 2013 Peter Thiel, a venture capitalist, mused of the technological advances of the moment that “we wanted flying cars, instead we got 140 characters”. 

Robert Gordon, of Northwestern University, has echoed this sentiment, speculating that humanity might never again invent something so transformative as the flush toilet. 

Throughout the decade, productivity data largely supported the views of the pessimists.

What is more, some studies of past pandemics and analyses of the economic effects of this one suggest that covid-19 is if anything likely to make the prevailing productivity picture worse. 

According to the World Bank, countries struck by pandemic outbreaks in the 21st century (not including covid) experienced a decline in labour productivity of 9% after three years relative to unaffected countries.

And yet, stranger things have happened. The brutal years of the 1930s were followed by the most extraordinary economic boom in history. A generation ago, economists had very nearly abandoned hope of ever matching the post-war performance when a computer-powered productivity explosion took place. 

And today, once more, there are tantalising hints that the economic and social traumas of the first two decades of this century may soon give way to a new period of economic dynamism.

Productivity is the magic elixir of economic growth. While increases in the size of the labour force or the stock of capital can raise output, the effect of such contributions diminishes unless better ways are found to make use of those resources. Productivity growth—wringing more output from available resources—is the ultimate source of long-run increases in incomes. 

It’s not everything, as Paul Krugman, a Nobel economics laureate, once noted, but in the long run it’s almost everything. Economists know less about how to boost productivity than they would like, however. Increases in labour productivity (that is, more output per worker per hour) seem to follow improvements in educational levels, increases in investment (which raise the level of capital per worker), and adoption of new innovations. 

A rise in total factor productivity—or the efficiency with which an economy uses its productive inputs—may require the discovery of new ways of producing goods and services, or the reallocation of scarce resources from low-productivity firms and places to high-productivity ones.

Globally, productivity growth decelerated sharply in the 1970s from scorchingly high rates in the post-war decades. A burst of higher productivity growth in the rich world, led by America, unfolded from the mid-1990s into the early 2000s. 

Emerging markets, too, enjoyed rapid productivity growth in the decade prior to the global financial crisis, powered by high levels of investment and an expansion of trade which brought more sophisticated techniques and technologies to the developing-economy participants in global supply chains. 

Since the crisis, however, a broad-based and stubbornly persistent slowdown in productivity growth has set in (see chart 1). About 70% of the world’s economies have been affected, according to the World Bank.

Accounting for the slowdown is a fraught process. The World Bank reckons that slowing trade growth and fewer opportunities to adopt and adapt new technology from richer countries may have helped depress productivity advances in the emerging world. 

Across all economies, sluggish investment in the aftermath of the global financial crisis looks a culprit: a particular problem in places with ageing and shrinking workforces. Yet while these headwinds surely matter, the bigger question is why seemingly powerful new technologies—like improved robotics, cloud computing and artificial intelligence—have not prompted more investment and higher productivity growth.

Broadly speaking, three hypotheses compete to explain these doldrums. One, voiced by the techno-pessimists, insists that for all the enthusiasm about world-changing technologies, recent innovations are simply not as transformative as the optimists insist. Though it is possible that this will turn out to be correct, continued technological progress makes it look ever less plausible as an explanation for doldrums. 

AI may not have transformed the world economy at the dramatically disruptive pace some expected five to ten years ago, but it has become significantly, and in some cases startlingly, more capable. GPT-3, a language prediction model developed by OpenAI, a research firm, has demonstrated a remarkable ability to carry on conversations, draft long texts and write code in surprisingly human-like fashion.

Though the potential of the web to support an economy in which the constraints of distance do not bind has long underwhelmed, cloud computing and video-conferencing proved their economic worth over the past year, enabling vast amounts of productive activity to continue with scarcely an interruption despite the shuttering of many offices. 

New technologies are clearly able to do more than has generally been asked of them in recent years.

That strengthens the case for a second explanation for slow productivity growth: chronically weak demand. In this view, expressed most vociferously by Larry Summers of Harvard University, governments’ inability to stoke enough spending constrains investment and growth. 

More public investment is needed to unlock the economy’s potential. Chronically low rates of interest and inflation, limp private investment, and lacklustre wage growth since the turn of the millennium clearly indicate that demand has been inadequate for most of the past two decades. Whether this meaningfully undercuts productivity growth is difficult to say. 

But in the years before the pandemic, as unemployment fell and wage growth ticked up, American labour productivity growth appeared to be accelerating, from an annual increase of just 0.3% in 2016 to a rise of 1.7% in 2019: the fastest pace of growth since 2010.

But a third explanation provides the strongest case for optimism: it takes time to work out how to use powerful new technologies effectively. AI is an example of what economists call a “general-purpose technology”, like electricity, which has the potential to boost productivity across many industries. 

But making best use of such technologies takes time and experimentation. This accumulation of know-how is really an investment in “intangible capital”. Recent work by Erik Brynjolfsson and Daniel Rock, of MIT, and Chad Syverson, of the University of Chicago, argue that this pattern leads to a phenomenon they call the “productivity J-curve”. 

As new technologies are first adopted, firms shift resources toward investment in intangibles: developing new business processes. This shift in resources means that firm output suffers in a way that cannot be fully explained by shifts in the measured use of labour and tangible capital, and which is thus interpreted as a decline in productivity growth. 

Later, as intangible investments bear fruit, measured productivity surges because output rockets upward in a manner unexplained by measured inputs of labour and tangible capital.

Back in 2010, the failure to account for intangible investment in software made little difference to the productivity numbers, the authors reckon. But productivity has increasingly been understated; by the end of 2016, productivity growth was likely about 0.9 percentage points higher than official estimates suggested.

This pattern has occurred before. In 1987, Robert Solow, another Nobel prizewinner, remarked that computers could be seen everywhere except the productivity statistics. 

Nine years later, American productivity growth began a ten-year acceleration which evoked the golden economic age of the 1950s and 1960s. These processes are not always sexy. In the late 1990s, the soaring stock prices of flashy internet start-ups earned most of the headlines. 

The fillip to productivity growth had other sources, like improvements in advanced manufacturing techniques, better inventory management and rationalisation of logistics and production processes made possible by the digitisation of firm records and the deployment of clever software.

The J-curve provides a way to reconcile tech optimism and adoption of new technologies with lousy productivity statistics. The role of intangible investments in unlocking the potential of new technologies may also mean that the pandemic, despite its economic damage, has made a productivity boom more likely to develop. 

Office closures have forced firms to invest in digitisation and automation, or to make better use of existing investments. Old analogue habits could no longer be tolerated. 

Though it will not show up in any economic statistics, in 2020 executives around the world invested in the organisational overhauls needed to make new technologies work effectively (see chart 2). 

Not all of these efforts will have led to productivity improvements relative to the pre-pandemic norm. But as covid-19 recedes, the firms which did transform their activities will retain and build on their new ways of doing things.

The crisis forced change

Early evidence suggests that some transformations are very likely to stick, and that the pandemic quickened the pace of technology adoption. A survey of global firms conducted by the World Economic Forum this year found that more than 80% of employers intend to accelerate plans to digitise their processes and provide more opportunities for remote work, while 50% plan to accelerate automation of production tasks. 

About 43% expect changes like these to generate a net reduction in their workforces: a development which could pose labour-market challenges but which almost by definition implies improvements in productivity.

Harder to assess but no less realistic is the possibility that the movement of so much work into the cloud could have productivity-boosting effects at the level of national economies or globally. 

High housing and real-estate costs in rich, productive cities have locked firms and workers out of places where they might have done more with less resources. 

If tech workers can more easily contribute to top firms while living in affordable cities away from America’s coasts, then strict zoning rules in the bay area of California will become less of a bottleneck. Office space in San Francisco or London freed up by increases in remote work could then be occupied by firms which really do need their workers to operate in close physical proximity. 

Beyond that, and politics permitting, the boost to distance education and telemedicine delivered by the pandemic could help unlock a new period of growth in services trade, and the achievement of economies of scale in sectors which have long proved resistant to productivity-boosting measures.

None of this can be taken for granted. Making the most of new private-sector investments in technology and know-how will require governments to engineer a rapid recovery in demand, to make complementary investments in public goods like broadband, and to focus on addressing the educational shortfalls so many students have suffered as a consequence of school closures. 

But the raw materials for a new productivity boom appear to be falling into place, in a way not seen for at least two decades. 

This year’s darkness may in fact mean that dawn is just over the horizon.

Milton Friedman was wrong on the corporation

The doctrine that has guided economists and businesses for 50 years needs re-evaluation

Martin Wolf

         © James Ferguson

What should be the goal of the business corporation? 

For a long time, the prevailing view in English-speaking countries and, increasingly, elsewhere was that advanced by the economist Milton Friedman in a New York Times article, “The Social Responsibility of Business is to Increase Its Profits”, published in September 1970. 

I used to believe this, too. I was wrong.

The article deserves to be read in full. But its kernel is in its conclusion: “there is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” 

The implications of this position are simple and clear. That is its principal virtue. But, as H L Mencken is supposed to have said (though may not have done), “for every complex problem there is an answer that is clear, simple, and wrong”. This is a powerful example of that truth.

After 50 years, the doctrine needs re-evaluation. Suitably, given Friedman’s connection with the University of Chicago, the Stigler Center at its Booth School of Business has just published an ebook, Milton Friedman 50 Years Later, containing diverse views. In an excellent concluding article, Luigi Zingales, who promoted the debate, tries to give a balanced assessment. 

Yet, in my view, his analysis is devastating. He asks a simple question: “Under what conditions is it socially efficient for managers to focus only on maximising shareholder value?”

His answer is threefold: 

“First, companies should operate in a competitive environment, which I will define as firms being both price- and rule-takers. 

Second, there should not be externalities (or the government should be able to address perfectly these externalities through regulation and taxation). 

Third, contracts are complete, in the sense that we can specify in a contract all relevant contingencies at no cost.”

Needless to say, none of these conditions holds. Indeed, the existence of the corporation shows that they do not hold. 

The invention of the corporation allowed the creation of huge entities, in order to exploit economies of scale. 

Given their scale, the notion of businesses as price-takers is absurd. Externalities, some of them global, are evidently pervasive. 

Corporations also exist because contracts are incomplete. 

If it were possible to write contracts that specified every eventuality, the ability of management to respond to the unexpected would be redundant. Above all, corporations are not rule-takers but rather rulemakers. They play games whose rules they have a big role in creating, via politics.

My contribution to the ebook emphasises this last point by asking what a good “game” would look like. 

“It is one”, I argue, “in which companies would not promote junk science on climate and the environment; it is one in which companies would not kill hundreds of thousands of people, by promoting addiction to opiates; it is one in which companies would not lobby for tax systems that let them park vast proportions of their profits in tax havens; it is one in which the financial sector would not lobby for the inadequate capitalisation that causes huge crises; it is one in which copyright would not be extended and extended and extended; it is one in which companies would not seek to neuter an effective competition policy; it is one in which companies would not lobby hard against efforts to limit the adverse social consequences of precarious work; and so on and so forth.”

It is true, as many authors in this compendium argue, that the limited liability business corporation was (and is) a brilliant institutional innovation. It is true, too, that making corporate objectives more complex is likely to be problematic. 

So when Steve Kaplan of the Booth School asks how corporations should trade off many different goals, I have sympathy. 

Similarly, when business leaders tell us they are now going to serve the wider needs of society, I ask: first, do I believe they will do so; second, do I believe they know how to do so; and, last, who elected them to do so?

Yet the problems with the grossly unbalanced economic, social and political power inherent in the current situation are vast. On this, the contribution of Anat Admati of Stanford University is compelling. 

She notes that corporations have obtained a host of political and civil rights but lack corresponding obligations. Among other things, people are rarely held criminally liable for corporate crimes. 

Purdue Pharma, now in bankruptcy, pleaded guilty to criminal charges for its handling of the painkiller OxyContin, which addicted vast numbers of people. Individuals are routinely imprisoned for dealing illegal drugs, but as she points out “no individual within Purdue want to jail”.

Not least, unbridled corporate power has been a factor behind the rise of populism, especially rightwing populism. Consider how one goes about persuading people to accept Friedman’s libertarian economic ideas. In a universal-suffrage democracy, it is really difficult. 

To win, libertarians have had to ally themselves with ancillary causes — culture wars, racism, misogyny, nativism, xenophobia and nationalism. Much of this has of course been sotto voce and so plausibly deniable.

The 2008 financial crisis, and the subsequent bailout of those whose behaviour caused it, made selling a deregulated free-market even harder. So, it became politically essential for libertarians to double down on those ancillary causes. 

Mr Trump was not the person they wanted: he was erratic and unprincipled, but he was the political entrepreneur best suited to winning the presidency. He has given them what they most wanted: tax cuts and deregulation.

There are many arguments to be had over how corporations should change. But the biggest issue by far is how to create good rules of the game on competition, labour, the environment, taxation and so forth. Friedman assumed either that none of this mattered or that a working democracy would survive prolonged attack by people who thought as he did. 

Neither assumption proved correct. The challenge is to create good rules of the game, via politics. 

Today, we cannot.


by Egon von Greyerz

Is the global investment world about to be caught in the Hannibal trap?

Hannibal was considered as one of the greatest military tacticians and generals in history. He was a master of strategy and regularly led his enemies into excruciating defeats.

The trap that investors are now being led into has many similarities with Hannibal’s strategy in his victory over the Romans at Lake Trasimene in 217 BC.

Hannibal was a general and statesman from Carthage (now Tunisia) who successfully fought against the Romans in the Second Punic War.


In 218 BC Hannibal took his troupes, with cavalry and elephants, over the Alps and into Italy. Hannibal enticed the Roman Consul Flaminius, and his troupes, in 217 BC to follow him to Lake Trasimene in Umbria. 

The Romans followed Hannibal’s troupes into a narrow valley on the northern shores of the lake. When the Roman troupes were inside the valley, they were trapped. They had the Carthaginians ahead of them, the lake on their right and hills on their left.

What the Romans didn’t know was that Hannibal had hidden his light cavalry and part of his army up in the hills. So once the Romans were locked into the valley, they were attacked from both ends with nowhere to escape.

Over 15,000 Romans were killed and 10,000 captured in a catastrophic defeat.

So what has Hannibal got to do with the present world? Well, it is pretty obvious. It is all about being led into a fatal trap without even being aware.


As we are approaching the end of an economic era in the world, anything that can go wrong will. The Coronavirus certainly fits that picture, since it could not have hit the world at a worse moment. Whether Covid-19 was accidentally or deliberately created by humans or just a product of nature, we will never learn.

What we do know is that Covid was like putting a match to a timebomb. The timebomb being a global financial system which is about to explode.

Major businesses in retail, leisure, travel, airlines are closing by the day and most won’t open again. Globally, 100´s of thousand of small businesses have closed with devastating effects for their owners.

The coming depression will affect all levels of society.


At the top of the global wealth pyramid, we have the biggest wealth trap in history. These are the 2,200 billionaires in the world. In the last three years their fortunes have swelled by a staggering 70% or $4.2 trillion. Their total wealth is now $10.2t.

These billionaires are likely to lose at least 90% of their wealth, in real terms, in the next 5-10 years. But not a single one of them expects this to happen or prepares for it.

As regards the number of millionaires in the world, the estimates vary between 13 and 46 million. Escalating house prices have clearly created a lot of extra millionaires.


Total global financial wealth is up almost 3x since 1990 from $80 trillion to $225t.

But this massive wealth accumulation is resting on a very weak foundation of debt.

It was only possible to treble wealth by, at the same time, more than trebling global debt from $80t in 1990 to $277t today.


So there we have it. The world hasn’t created any net wealth. Instead wealth has just been inflated artificially by credit creation and money printing of the same magnitude.

I do realise that total global debt and global personal wealth is not quite like for like. Still it gives a very good indication how this additional wealth is created since 1990.

Yes, it was created by just simply printing money to the extent of $200 trillion in the last 20 years!

This is clearly the biggest wealth trap in history. Hannibal couldn’t have done it better.

Billionaires, millionaires and ordinary investors have all been sucked into a honeypot believing that they have real wealth based on sound foundations.

What they don’t realise is that they will in the next few years be ambushed by what to them is an invisible enemy.

This will initially involve total debasement of the currency, whether it is dollars, euros, pounds or yen. No they can’t all go down together against each other.

But they will all go down in real terms. Real terms means measured in the only money which has survived in history – GOLD.

The route there will not be straight forward. As currencies collapse, we will most likely first see hyperinflation. That could temporarily boost asset prices in nominal terms but certainly not in real terms.

There will also be an implosion of both the debt bubble and the asset bubbles in stocks, bonds and property.


Robber Barrons were feudal lords in medieval Europe who robbed travellers and merchant ships.

The term Robber Barons was used from the 1860s for some of the entrepreneurs at the time. They used unscrupulous methods to acquire wealth, thus the term. Most of them started new industries that became dominant in their field.

They included Rockefeller (oil), Vanderbilt (railroads), Carnegie (steel), Ford (cars), Morgan (banking), and Astor (real estate).

Major fortunes were created by these Entrepreneurs and Rockefeller is still considered the wealthiest man in the world ever, adjusted for inflation. Interestingly, the sectors these millionaires were in are all major industries today except for railways.

The modern “Robber Barons” – Bezos, Gates, Musk, Zuckerberg and Buffet are in diversified areas like online retail, technology, car manufacturing and investments/finance.


The big difference between the Robber Barrons in the late 19th century and today is how their wealth is measured.

150 years ago valuations were conservative and price earnings ratios for public companies were normally below 10!

Quick jump to today. Amazon has a p/e over 90, Microsoft & Facebook “only” in the 30s, and Tesla has a staggering p/e of 1,100!

So on a historical basis, all of the biggest companies in the world today are grossly overvalued at p/e’s of 32 to 1,100 !!

This is what happens when governments and central banks primary economic strategy consists of creating money out of thin air and then these funds are used to support the stock market.

A major part of the $150 trillion debt created since the Great Financial Crisis started in 2006 has stayed with the banks and not gone to consumers or industry.

Conveniently the money has reached investors and been invested in asset markets as I showed in the Debt/Asset table earlier in the this article.


Thus it is debt based liquidity which is primarily driving up asset markets. This is creating fantasy p/e’s and valuations which has very little to do with the growth of industry and finance 150 years ago.

So back to Hannibal although he has been dead for 2200 years.

We have major and potentially terminal problems in the financial system since September 2019. And we have a virus which has led to major parts of the world economy collapsing due to governments handling of this virus, But in spite of these massive problems, stock markets around the world are booming.


We have probably not seen the end of the stock market explosion as I explained in a recent article on the coming LIFTOFF & COLLAPSE. But at some point in the next few weeks or months, the market will burst.

Before this burst every investor, big or small, who has any spare liquidity must be sucked into the market just before the top.

This is the Hannibal trap. Everybody must be hauled into the stocks at the top of the market.

And then BANG! Just like Hannibal totally took the Romans by surprise, so will a violent stock market crash.

But this time it won’t be like in March 2020 with a quick recovery. Yes, of course most investors will buy the dips. That will only increase the pain. Because the coming collapse will be the start of a secular bear market that could last 10 years or more.

And just like Hannibal slaughtered the Romans, the coming bear market will slaughter investors.

Investors could easily see all the bubble assets, stocks bonds and property decline by more than 90% in real terms. Again, real terms mean constant and stable purchasing power.


The Dow/Gold ratio is today 15. In 1980 it was 1 to 1. The ratio topped in 1999 and the long term trend is now down as the chart below shows.

The target for the ratio is 0.5 to 1. This means that the Dow will lose 97% against the Dow in coming years.

Few people believe this magnitude of decline is possible.

But remember the Dow in itself went down 90% from 1929 to 1932 and that it took 25 years before it recovered.

This time the situation is drastically worse both from a debt point of view and overvaluation of stocks. So 95%+ is not unrealistic.


Only gold fulfils the role of always holding its value in real terms. Again history proves it.

One ounce of gold bought a good costume for a man in Hannibal’s days, 2200 years ago, just as it does today.

Since investors have been saved by central banks for decades, they expect the same today. This is why they will stay invested and also buy every dip until they run out of money.

Sadly very few investors will get out before the bottom.


That is why we will see the biggest wealth destruction in history. Instead of the 2,200 billionaires currently, the world might have as little as 200 in 5-10 years time (in today’s money).

All businesses will of course not disappear. But earnings will decline dramatically and p/e’s will collapse.

Let’s take a business with a share price of $300 today and earnings per share of $10.

Thus the p/e is 30 (30x$10=$300).

If profits decline by 70% in a recession/depression and the p/e goes to 5 it will look as follows: Eps $3 x 5 p/e = $15 share price.

So this company is still making a profit, albeit smaller. Still, the share price is down from $100 to $15 or by 95%.

P/e’s of 5 or less are not unusual during depressions/recessions. I experienced this in the 1970s. The same happened in the 1930s.


Again, as I often stress, the best lessons we learn are from history.

Everyone thinks “It is different today” but I promise it isn’t. Almost everything we experience today has happened before.

So vast fortunes will be wiped out in coming years. And other fortunes will be made in areas like hard assets and the resource industry. Precious metals will be an obvious major beneficiary.

Some of the shrewd Swiss private banks like Lombard Odier advised their clients to hedge their portfolios with gold earlier this year. Very few wealth managers are as clever as 200 year old Swiss banks.

Precious metals mining stocks are likely to do spectacularly well in the coming currency collapse and so will gold and silver.

But the ultimate wealth preservation in the next 10 years is physical gold and silver held outside the banking system as history confirms.

Remember that markets can always go higher even though they are massively overvalued.

But when risk is at a maximum, investment is not about squeezing the last bit of profit out of your portfolio. Instead, it is all about protecting your profits. 

And you can’t do that by staying fully invested in overvalued assets.

Remember that in a secular bear market everyone is a loser. 

The trick is to lose as little as possible. 

The Forgotten Radicalism of Jesus Christ

First-century Christians weren’t prepared for what a truly inclusive figure he was, and what was true then is still true today.

By Peter Wehner

Christ and the Samaritan woman at the well, by Annibale Carracci, 1594-95.Credit...Bridgeman Images

“Get used to different.”

That line comes from a marvelous new TV series on Jesus’ life, “The Chosen,” in which Jesus, played by Jonathan Roumie, invites Matthew to become one of his disciples. 

Simon Peter, already a disciple, registers his fierce objection. 

Matthew is a tax collector, who were viewed as tools of Roman authorities, often dishonest and abusive. They were therefore treated as traitors and outcasts by other Jews.

“I don’t get it,” Simon Peter says to Jesus about his decision to invite Matthew, to which Jesus responds, “You didn’t get it when I chose you, either.”

“But this is different,” Simon Peter answers. “I’m not a tax collector.” 

At which point Jesus let’s Simon Peter know things aren’t going to be quite what his followers expected.

First-century Christians weren’t prepared for what a truly radical and radically inclusive figure Jesus was, and neither are today’s Christians. 

We want to tame and domesticate who he was, but Jesus’ life and ministry don’t really allow for it. He shattered barrier after barrier.

One example is Jesus’ encounter, in the fourth chapter of the gospel of John, with the Samaritan woman at the well. Jesus and the woman talked about Jesus being the Messiah, why he was even deigning to talk with her, and the unnamed woman’s past and present, which she initially sought to hide from Jesus. 

(It included her five previous husbands, according to the account in John, and the fact that “the one whom you now have is not your husband.”) Yet not a word of condemnation passed the lips of Jesus; the woman felt heard, understood, cared for. Jesus treated her, in the words of one commentator, “with a magnetic dignity and respect.”

The encounter with Jesus transformed her life; after it the woman at the well became “the first woman preacher in Christian history,” proclaiming Jesus to be the savior of the world to her community, according to the New Testament scholar Kenneth Bailey.

This story is a striking example of Jesus’ rejection of conventional religious and cultural thinking — in this case because Jesus, a man, was talking earnestly to a woman in a world in which women were often demeaned and treated as second-class citizens; and because Jesus, a Jew, was talking to a Samaritan, who were despised by the Jews for reasons going back centuries. 

According to Professor Bailey, “A Samaritan woman and her community are sought out and welcomed by Jesus. In the process, ancient racial, theological and historical barriers are breached. His message and his community are for all.”

This happened time and again with Jesus. He touched lepers and healed a woman who had a constant flow of menstrual blood, both of whom were considered impure; forgave a woman “who lived a sinful life” and told her to “go in peace,” healed a paralytic and a blind man, people thought to be worthless and useless. 

And as Jesus was being crucified, he told the penitent thief on the cross next to him, “Today you will be with me in paradise.”

Jesus was repeatedly attacked for hanging out with the wrong crowd and recruited his disciples from the lower rungs of society.

And Jesus’ parable of the good Samaritan, a story about a man who helps a wounded traveler on the road to Jericho, made the hero of the story not an influential priest, not a person of social rank or privilege but a hated foreigner.

For Christians, the incarnation is a story of God, in the person of Jesus, participating in the human drama. And in that drama Jesus was most drawn to the forsaken and despised, the marginalized, those who had stumbled and fallen. 

He was beloved by them, even as he was targeted and eventually killed by the politically and religiously powerful, who viewed Jesus as a grave threat to their dominance.

Over the course of my faith journey, I have wondered: Why was a hallmark of Jesus’s ministry intimacy with and the inclusion of the unwanted and the outcast, men and women living in the shadow of society, more likely to be dismissed than noticed, more likely to be mocked than revered?

Part of the explanation surely has to do with the belief in the imago Dei, that Jesus sees indelible dignity and inestimable worth in every person, even “the least of these.” If no one else would esteem them, Jesus would.

Among the people who best articulated this ethic was Abraham Lincoln, who in a 1858 speech in Lewiston, Ill., in which he explained the true meaning of the Declaration of Independence, said, “Nothing stamped with the Divine image and likeness was sent into the world to be trodden on, and degraded, and imbruted by its fellows.”

Yet another reason for Jesus’ connection with outcasts undoubtedly had to do with his compassion and empathy, his desire to relieve their pain and lift the soul-crushing shame that accompanies being a social pariah and an untouchable.

But that is hardly the only reason. Jesus modeled inclusion and solidarity with the “unclean” and marginalized not only for their sake but for the sake of the powerful and the privileged and for the good of the whole.

Jesus must have understood that we human beings battle with exclusion, self-righteousness and arrogance, and have a quick trigger finger when it comes to judging others. Jesus knew how easily we could fall into the trap of turning “the other” — those of other races, ethnicities, classes, genders and nations — into enemies. 

We place loyalty to the tribe over compassion and human connection. We view differences as threatening; the result is we become isolated, rigid in our thinking, harsh and unforgiving.

Jesus clearly believed that outcasts had a lot to teach the privileged and the powerful, including the virtues of humility and the vice of supreme certitude. 

Rather than seeing God exclusively as a moral taskmaster, Jesus understood that the weak and dispossessed often experience God in a different way — as a dispenser of grace, a source of comfort, a redeemer. 

They see the world, and God, through a different prism than do the powerful and the proud. The lowly in the world offer a corrective to the spiritual astigmatisms that develop among the rest of us.

It’s easy for us to look back 20 centuries and see how religious authorities were too severe and unforgiving in how they treated the outcasts of their time. 

The wisest question those of us who are Christians could ask ourselves isn’t why we are so much more humane and enlightened than they were; rather, it is to ask ourselves who the modern outcasts are and whether we’re mistreating them. 

Who are the tax collectors of our era, the people we despise but whom Jesus would welcome, those around whom are we determined to build a “dividing wall of hostility,” to use the imagery of the Apostle Paul?

“How Christians, including me, responded to the AIDS crisis in the ’80s haunts me,” my longtime friend Scott Dudley, senior pastor of Bellevue Presbyterian Church in Bellevue, Wash., recently told me. 

“Had we, like the first Christians, cared first and cared most for modern day ‘plague’ victims, I think we’d be in a whole different conversation with the L.G.B.T.Q. community. 

We may still have significant differences of opinion. However, I believe the dialogue would be one of more mutual respect, and I believe the L.G.B.T.Q. community would feel less afraid of the wounds Christians can inflict.” 

But even if the conversation were not different, as Scott knows, caring first and caring most for those victims of a plague would have been the right thing to do.

No society and no religious faith can live without moral rules. Jesus wasn’t an antinomian, one who believes that Christians, because they are saved by grace, are not bound to religious laws. 

But he understood that what ultimately changes people’s lives are relationships rather than rule books, mercy rather than moral demands.

Jesus’ teachings are so challenging, so distinct from normal human reactions and behaviors, that we constantly have to renew our commitment to them. Every generation of Christians need to think through how his example applies to the times in which they live. We need our sensibilities to align more with his. 

Otherwise, we drift into self-righteousness and legalism, even to the point that we corrupt the very institution, the church, which was created to worship him and to love others.

The lesson from Jesus’ life and ministry is that understanding people’s stories and struggles requires much more time and effort than condemning them, but it is vastly more rewarding. And the lesson of Christmas and the incarnation, at least for those of us of the Christian faith, is that all of us were once outcasts, broken yet loved, and worth reaching out to and redeeming.

If God did that for us, why do we find it so hard to do it for each other?

Peter Wehner (@Peter_Wehner), a senior fellow at the Ethics and Public Policy Center who served in the previous three Republican administrations, is a contributing opinion writer and the author of “The Death of Politics: How to Heal Our Frayed Republic After Trump.”

On to the Next Presidency

Thoughts in and around geopolitics.

By: George Friedman

It’s now clear that Joe Biden will become the 46th president of the United States. 

There are many who believe he stole the election, but then post-election allegations of corruption are commonplace. 

There are those who believe George W. Bush stole the 2000 election, which was decided by a Supreme Court whose majority was selected by Republican presidents. Some Democrats called it a Republican coup. 

John F. Kennedy won his election against Richard Nixon by what many charged was the graveyard vote in Chicago. I can name many more, valid or not. As Ecclesiastes says, there is nothing new under heaven.

The only difference is in our memories. We forget what was and believe that nothing so terrible ever existed before. Yeah, it did. John Quincy Adams and Andrew Jackson are still duking it out in the afterlife over who stole the election of 1824. 

I am pretty sure it was rigged. The country survives corruption and the claim of corruption all the time. Perhaps the illusion that the battle is unprecedented moves us along. 

I find it charming that we can think this is the time that tries men’s souls. Our trials may try our sense of perspective, but not our souls.

But it is time to move on to a Biden presidency. It is an exciting time for all the Democrats who have worked closely with him as they jockey for jobs in the administration. 

Since most jobs in government are painful at best, with little power and enemies stalking you at all times, the eagerness to serve is admirable. But what truly entices them is the idea that they will have power. 

It is an interesting idea, since even the president has little power. Certainly, he can demand an outstanding tee time and get really cool acts at the inaugural ball, but the ability to shape the country, let alone the world, is elusive. The world shapes the president, not the other way around.

Biden is coming into office with plans and principles in which the world blesses him for his wisdom and the public for his lightening the burden they are suffering from. Every new president looks at Mount Rushmore to see if there is any room left for them. 

They forget that Washington had to cope with the Whiskey Rebellion, Jefferson with the French, Lincoln with the Civil War and Teddy Roosevelt with robber barons gone wild. They did OK, but they did not set the agenda for the presidency. Reality set the agenda, and they served it.

Donald Trump likewise came into the presidency with many plans. He had not planned on COVID-19, a disease that came to define his administration. Barack Obama planned to dramatically change the relationship with the Islamic world and end the wars raging in the region. 

He didn’t manage to make much headway – and even started another war with Libya. George W. Bush never imagined that his presidency would involve invading Afghanistan and Iraq after an inconceivable suicide attack. Undoubtedly Bill Clinton did not expect to go to war over Kosovo. 

As for George H.W. Bush, the idea that he would deal with the collapse of communism, followed by a full-scale war with Iraq over Kuwait, would have cracked him up had someone mentioned it as a possibility.

The last five presidents before Biden, just like the heads on Rushmore and all the rest of this curious breed, took office with the promise and the belief that they could preside over a country that was peaceful and prosperous. 

And they all had plans for making it this way. Some succeeded, but it was rarely because the world in which they expected to govern would be anything like the world they faced. Reality always ruthlessly redefined their plans.

We know some things we think will shape the Biden presidency. About half the country is hostile to him, and half of those believe he stole the election. The COVID-19 crisis will subside as vaccinations come to market, but the economy will still be deeply strained. 

We do not know whether the end of the pandemic will change the economy for better or worse. 

We know that the rest of the world believes that the end of the Trump administration will create a new world in which only good things will happen, and it’ll be shocked when it encounters the same old world.

Presidents can’t account for the unexpected – a pandemic, the intractability of events that should be tractable, the terrorist attack, the random war, the collapse of communism. 

Each of these defined a recent presidency, and each of these left the endless briefing books and slide decks awaiting their insertion in the useless hall of fame.

The election is over, but the mutual recriminations and rage continue. So far we are on course. A president committed to doing only good things and avoiding bad things has been elected. Check. 

He has a set of problems he will solve. Got it. 

And he hopes to be the first president whose intentions will align with reality throughout his term. 

Houston, we have a problem.