Batten Down The Hatches: The Turbulent Twenties Lie Dead Ahead, Part 1

The Turbulent Twenties begin 13 days from now. It will be the decade when the chickens come home to roost and a time when they cans of denial and delay can no longer be kicked down the road to tomorrow.

Instead, the 2020s will mark an era when today’s economic and political fantasies give way to:

  • the spectacular failure of Keynesian central banking;
  • a violent implosion of America’s fiscal accounts;
  • a prolonged, painful reversal of the three-decade long hyper-inflation of financial asset prices that has resulted in the Everything Bubble;
  • a ferocious global economic headwind arising from the demise of the Red Ponzi;
  • an outbreak of unprecedented partisan acrimony rendering Washington completely dysfunctional and imperiling America’s very constitutional foundation;
  • the lapse of Imperial Washington into retreat and failure all around the planet;
  • a grinding halt to US economic growth while the Baby Boom retirement tsunami causes entitlement spending to soar and generational conflict to erupt like never before; and
  • a virulent outbreak of class warfare and redistributionist political conflict unprecedented in American history owing to a stagnanting economic pie.

These baleful developments are not just possibilities—they are well nigh certainties.

And they are ultimately rooted in a common cause. Namely, the three decade long explosion of debt and speculation that was initiated in October 1987 when Alan Greenspan bailed out Wall Street speculators and launched what has become a toxic worldwide regime of Keynesian central banking.

Consequently, America is today saddled with $74 trillion of public and private debt, while the global figure exceeds $250 trillion. However, these brobdingnagian figures did not materialize during the last three decades because everyday people suddenly lost their senses and became addicted to unsustainable levels of debt, leverage and financial speculation.

To the contrary, the people here and abroad were misled, induced and baited into burying themselves under crushing debts by agents of the state—especially its central banking branch. The means were falsified interest rates, artificially inflated asset prices and a hoary theory that debt-fueled “stimulus” injections by the state can create a permanent increase in economic growth and societal wealth.

Actually, as an economic scoring matter, incremental debt does purchase added GDP in the current period as per the defective national accounting conventions promulgated by Keynesian economists more than a half-century ago. But GDP accounting is inherently incomplete because it views the economy as simply a matter of  period by period  flows—the more “spending” the better—without regard to balance sheets and the accumulated cost of debt carry over time.

Moreover, this Keynesian blindness to balance sheets and their systematic impairment has gotten far more consequential since Greenspan launched a wholly new form of monetary central planning in October 1987.

That’s because the price of debt has been deeply and systematically falsified by the central banks, thereby providing a powerful artificial incentive to borrow and a misleading signal to debtors about its longer-run implications.

In the case of households and governments especially, balance sheets have been deeply impaired in order to fund current spending, yet these two sectors virtually by definition do not borrow in order to acquire productive assets capable of defraying the accumulating cost of carry. At length, therefore, they suffer a progressive diminution of their ability to spend as interest costs on past spending/borrowing absorb an ever larger share of current income.

Even in the case of the private business sector, where borrowings used to fund new assets can add value if they generate returns in excess of the cost of debt, the relentless central bank repression of interest rates has resulted in severe balance sheet deterioration, which over time means reduced growth and wealth generation.

That’s because the cost of benchmark debt (i.e. the 10-year U.S. treasury note) is really the master cap rate for the entire financial market. Artificial and sustained reduction of cap rates result in proportionately higher asset prices and increased price/earnings multiples.

Yet cheaper debt and richer share prices are one of the most toxic consequences of Keynesian central banking. It provides powerful incentives to the corporate C-suites to borrow at sub-economic costs and use the proceeds to fund stock buybacks, thereby increasing per share earnings which trade at elevated PEs.

Likewise, cheap debt causes a huge distortion in the M&A market. Acquisitions are made to look “accretive” not because the make business sense or because there are true, sustainable synergies, but because they carry cost of purchase debt is so low.

Needless to say, these forms of financial engineering redistribute financial wealth to the top 10% and 1% of households, which own 40% and 85% of the stock, respectively. But that comes at the expense of reduced investment in productive assets and therefore lower growth and employment over time.

At the end of the day, the relentless and ever deepening financial repression of the last 30 years has generated modest one-time gains in output and jobs on main street and a massive one-time inflation of financial asset prices on Wall Street.

But now the bad money regime of the Keynesian central bankers has finally taken itself hostage. The central bankers have fostered such massive and egregious bubbles that they are literally terrified by the prospect of another stock market meltdown like those of 2000 and 2008-2009, which, in turn, would bring a renewed bout of desperate restructuring, layoffs and asset liquidations in the C-suites and a new bout of recession on main street.

So the Fed has simply launched a hail mary which is so transparent and incendiary that it will surely catalyze the final blow-off top early in the 2020s.

After all, there is not an iota of financial learning extant prior to 2007 that could possibly justify its recent panicked actions. They will result in $500 billion of repo facilities and T-bill purchases by the turn of the year (and decade!) at a time when unemployment is at a 50-year low and the stock indices are at nose-bleed highs.

Indeed, right now the catalyst which will blow off the roof of false prosperity as we enter the 2020s is brewing in the chart below. So to recap, here is where it stands.

The Bernanke Fed falsely claimed it was facing a rerun of the 1930s, and pumped the Fed’s balance sheet from $880 billion in November 2007 to a peak of $4.5 trillion in February 2015. That is, in less than eight years it printed 5X more fiat credit and injected it into the canyons of Wall Street than the Fed had generated during the first 93 years of its existence.

As we will show in Part 2 and beyond, however, that eruption did virtually nothing for the main street economy—even as it distorted, falsified and inflated financial asset prices beyond all recognition.

Then during the next three years—from early 2o15 to the fall of 2017—-the Fed dithered and delayed shrinking its balance sheet back to pre-crisis levels, as Bernanke and the rest of his band of drunken monetary sailors insisted they would do when the QEs were launched during the crisis.

Worse still, after a tepid 15% retrenchment during 2018 through August 2019, the Fed turned tail and ran in the face of bitter attacks from the White House and unrelenting pressure from the bully boys and crybabies of Wall Street.

And now the last bit of sanity in the Eccles Building has vanished. From a low of $3.76 trillion on August 28, the Fed has already pumped $377 billion into the bonds pits. That represents a staggering $1.1 trillion annualized rate of expansion and brings its balance sheet back to $4.14 trillion as of last Wednesday, and heading toward well beyond the old high water mark of $4.5 trillion early in 2020.

That’s the great monetary match. The stock indices have now been entirely disconnected from earnings, which have declined for four straight quarters, and economic fundamentals, which are heading into the recessionary drink, beginning with hardly 1.0% GDP growth in the current quarter.

Stated differently, the repo ruckus last September was the warning bell that the 30-year era of Bubble Finance was fixing to blow.

But the fools in the Eccles Building, blindly fixated on enforcing their interest rate pegs, effectively got out a gasoline hose and fueled what is now the blow-off top. And that will  pave the way for the Turbulent Twenties, and for the unfolding of all the baleful factors listed above.

Stay tuned for why and how this coming era of payback will all play out.