Fixing A Hole (with Trump)


sgr pepper

From the iconic Sgt Pepper’s Lonely Hearts Club Band, this McCartney tune was apparently a tribute to marijuana and allowing one’s mind to wander with the freedom from being told what to do.

It was the idea of me being on my own now, able to do what I want. If I want I’ll paint the room in a colourful way… I was living now pretty much on my own in Cavendish Avenue, and enjoying my freedom and my new house and the salon-ness of it all. It’s pretty much my song, as I recall. I like the double meaning of ‘If I’m wrong I’m right where I belong’.    –Paul McCartney-

 

At the risk of piping into the pool of post-election noise, it feels compelling to write about the elephant in the room.  There really has not been anything like this election before.  But the divisiveness is feeding the double meanings and the collective mind wanders.  And hey, these election results proved to tribute marijuana too.

The post mortem is going deep  –  racism, sexism,  xenophobia, immigration, protectionism, elitism, environmentalism, press manipulation, investigations of corruption, hacking, health care, supreme court and left/right ideologues.  These are all highly passioned and important  points of division.  But the real elephant in the room is more unified –  money.   Income disparity, debt, financial repression.  The struggling middle-class is a chapter of a much bigger economic story everywhere.

While they may not all articulate it, it isn’t lost on the man on the street that no Wall St bankers went to jail after the worst crisis in history.  While they may not articulate it, it isn’t lost on anyone 30ish and under that they’ve only worked in world of economic crisis and then emergency zero interest rates.  If you’re on one of the coasts and a coder or riding some tech unicorn, your life is very different then those in the economically hollowed out square states.  Voting played that out.

Back in June, in Revolution, I wrote about the great political enablers, the unelected but appointed central bankers, whose policies have allowed politicians to survive without addressing the real elephant and actually have made it even only bigger.  Clearly Trump’s “drain the swamp” and Bernie’s supporters were saying DC wasn’t working for them.  Maybe a simple conclusion out of the election is that the DNC chose to run with a pre-ordained establishment elite voice these other movements were so clearly charging against.  Arrogant or not, they just didn’t listen.  The 10-15% drop in Democrat voter turnout might support that notion.

After six years of saying no to just about everything Obama tried to do, Republicans now have the pass to say yes to pretty much anything – spending plans, tax cuts, repatriations.  It’s an interesting set-up because this, along with some advertised protectionism, may take some pressure off the Fed.  And is probably inflationary.  $20T of debt translates to $2B per basis point of annual funding costs.  Not only would rising rates be a deficit building headwind, the Republican gameplan looks to push deficits out too.  Will this bubbled bond market and a little inflation and less Fed shake the elephant?

For all the knowns and unknowns behind Trump’s lack of qualifications and whatever team he puts together, and all the social tensions that accompany his upheaval, know that the elephant is a function of three undeniable and linked global forces unlikely to be upended anytime soon.

  1. Debt.  For decades now it seems every economic hiccup was met with easier and easier monetary policy, and resulted in the need for more and more debt to create growth.  It’s handcuffed government spending capacity.  The credit crisis finally pushed interest rates to the zero bound, and normalized what would otherwise be labelled extreme experimentation of QE and negative interest rate policies.  Savers are repressed and debt has continued to grow and the policies have only exaggerated growing income disparity.  To the extent borrowing pulls forward tomorrow’s consumption to today, is it any surprise we got to a point where the growth outlook is muted and debt levels overwhelming?  How will China’s massive $18T debt-binged growth of financed excess play out?  The empty building built today is one that doesn’t need to be built tomorrow.img_0121.png

h/t Grant Williams, @ttmygh

 2. Globalization.  Decades of labour arbitrage and evolving trade have invited billions of people into the global working pool.  As much as Trump wants to rail on Nafta and China, the US economy has also benefitted greatly from being able to access global markets.  The deflation that central banks so feverishly fight is partly a function of wage pressures and the falling product prices they help produce.

Sure Apple could notionally outsource the iPhone to a contract manufacturer in Michigan but the labour costs would either collapse their profit margins and/or make the iPhone significantly more expensive and/or destroy their competitive position to other foreign manufacturers.

3. Tech Revolution.  From Moore’s Law to mobility trends to today’s glaring disruptions in the way we operate, the exponential growth curves associated with computing, data management and internet proliferation have affected all aspects of economic life, everywhere.  It’s transformed the workplace and the skillset required to be in it.

The promises of automation, robotics, and artificial intelligence are a glaring call to politicians that their job markets are changing, and fast.  Just as US manufacturing jobs have been hollowed out by global labour arb, what do tech trends portend for the job market that remains?   Self-driving trucks you say?

Screen Shot 2016-11-13 at 1.37.55 PM.png

 

Eco 101 teaches that the factors of production are land, labour, capital and entrepreneurship.  Decades of easier money, cheap capital has only accelerated these trends in labour arb and new technology innovation and adaption.  They’ve all fed on each other.  THIS is your elephant in the room.

Republicans and Democrats can rightly fight all they want over who is crooked or cracking lines of moral civility.  The Fed can print more money to buy unsustainable government debt and manipulate borrowing costs to keep government’s lights on and augment asset prices from reality.  But are we seeing that central bankers can only enable political inaction so far?  Trump’s win reminds us the growing numbers left out, squeezed out, or ill-equipped to adapt get to vote too.

You can be sure that the solution isn’t for everyone to turn insular and protectionist.  But the solution also doesn’t lie in status quo.  So we get a Brexit.  A Trump.  Maybe we would’ve had a Grexit if not for establishing a dangerous precedent for the big experiment known as the EU.  Over the next year there are elections in Italy, Austria, France, Holland, Germany, Czech Republic.  They all have the same elephant.  Will they vote status quo?

These self-explanatory graphs are from the excellent realinvestmentadvice.com  (h/t Michael Lebowitz)   Elephant sightings really.

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wage-pc-2.png

pce-composition-3.png

gdp-per-c-4.png

labor-part-5.png

wealht-ineq-1.png

wealth-ineq-3.png

Maybe everyone would see eye to eye on more social issues if they did so from a more equal economic footing.  But they are not, and they do not and it is decades in the making.

A reminder.

00 Clinton’s 8 years left $5T debt and a tech bubble.

08 Bush’s 8 years left $10T debt and a housing bubble.

16 Obama’s 8 years leaves $20T debt with many bubbles brewing.

President Trump’s Chapter 11 skill-set won’t help.

George Stockus

 

Fixing A Hole – Lennon McCartney

I’m fixing a hole where the rain gets in,  And stops my mind from wandering,  Where it will go

I’m filling the cracks that ran through the door,   And kept my mind from wandering
Where it will go

And it really doesn’t matter if I’m wrong I’m right, Where I belong I’m right
Where I belong
See the people standing there,  Who disagree and never win
And wonder why they don’t get in my door

I’m painting my room in the colourful way,  And when my mind is wandering
There I will go

And it really doesn’t matter if  I’m wrong I’m right, Where I belong I’m right
Where I belong
Silly people run around,  They worry me and never ask me
Why they don’t get past my door

I’m taking the time for a number of things,  That weren’t important yesterday
And I still go

I’m fixing a hole where the rain gets in,  Stops my mind from wandering
Where it will go oh,  Where it will go oh

I’m fixing a hole where the rain gets in,  And stops my mind from wandering
Where it will go (fade out)

A shoutout to the outstanding site beatlesbible.com for their trove of background information.  Highly recommended.