POITOU, FRANCE – What does our Doom Index tell us now?
Here’s a quick update from Joe Withrow in the Bonner & Partners research department:
We are still waiting for second-quarter data to come in before we can update the index for the new quarter. But I have the monthly metrics updated… and there was one interesting change. The Fed quietly restated bank loan growth for Q1 2017. It was originally reported as 1.5%. It is now reported as NEGATIVE 0.6%.
Credit growth going negative bumps the index up to a 6 – which is our warning level. There have been a number of instances where the index hit this level and then cooled back off. So we aren’t definitely in dangerous territory yet. But this makes the second-quarter data especially interesting for us.
If doom is coming for a visit, the stock market is unprepared.
The music is still turned up loud. Investors are still partying. Stocks are still selling near peak prices despite a bit of nervousness in the tech sector.
But just because you don’t see an unwelcome visitor coming doesn’t mean you shouldn’t tidy up and put away the empty liquor bottles.
Sometimes, guests show up unannounced.
Meanwhile, the media is abuzz over President Trump’s meeting with Russian President Vladimir Putin… and Donald Trump Jr.’s previously undisclosed meeting with a Russian lawyer who offered to give him dirt on Hillary.
Information is valuable only when it surprises you; nothing in the foregoing is at all surprising or interesting.
The only newsworthy thing to come out of Trump’s European tour was in a speech in Poland. Mr. Trump took aim at the “steady creep of government bureaucracy that drains the vitality and wealth of the people.”
“He’s right about that,” says our gardener. “Here in France, you can’t even [go to the bathroom] without filling out a lot of paperwork.”
But the creeps go far beyond the federal bureaucracy; they infest the cronies’ world, too… and the whole economy.
It’s not just the GS-1-through-GS-15 civil servants who drain the wealth and vitality of the people. Add the sectors of the economy that are under the feds’ control, and you have about 60% of the U.S. economy.
That’s more than half of all economic activity that is heavily persuaded by politics, most of which produces little or nothing of value. The Wall Street Journal:
America doesn’t have a worker shortage; it has a work shortage. The unemployment rate is at a 15-year low, but only 55% of Americans [sic] adults 18 to 64 have full-time jobs. Nearly 95 million people have removed themselves entirely from the job market.
According to demographer Nicholas Eberstadt, the labor-force participation rate for men 25 to 54 is lower now than it was at the end of the Great Depression. The welfare state is largely to blame. More than one-fifth of American men of prime working age are on Medicaid. According to the Census Bureau, nearly three-fifths of nonworking men receive federal disability benefits.
Don’t stop there. Think of all the thousands of students in colleges and universities who produce nothing.
They borrow money (credit subsidized by the feds) to stay in school and believe (erroneously) that their degrees in political science (oxymoronic) or English literature (entertainment) will improve their productivity.
And think of all the thousands of people who work for tax-favored nonprofits, think tanks, and charities. They all believe they are doing “good.” But without market pricing to guide them, probably most of what they do is a waste of time.
And think of how the feds have distorted the whole economy… so that even things that are subject to price discovery no longer provide honest information.
What is anything worth when credit is almost unlimited and dirt cheap?
The 95 million people in America of prime working age who do no work at all – thanks to the feds’ many programs that either keep them from working or make it possible for them to live without working – are just part of the picture.
There are another 25 million or so who have jobs but do no useful work. They labor directly for the government. Or they busy themselves trying either to obey rules or dodge them.
Together, they measure the height of toilets… rifle through your underwear looking for bombs that aren’t there… front run central banks and arbitrage the distorted financial markets… gin up wars… game taxes… and tax games.
Let’s see: 95 million not working… plus another 25 million doing useless work… out of a total of 205 million working-age people. That leaves 85 million of us to carry an economy of 330 million people.
People wonder what has gone wrong with the 21st century.
Why have productivity and GDP growth slowed? Why are most people unable to earn more money? Why are so few good new jobs created? Why do people no longer start up new businesses?
Hey, wrecking an economy is easy: Pay people not to work. Make it hard for them to learn how to work, too, by setting minimum wages and workplace regulations.
Then, put up roadblocks to starting new businesses by increasing paperwork… and by giving trillions of dollars in easy credit to their big, entrenched competitors.
And, oh yes, the most insidious part: Flood the economy with fake savings ($130 trillion of new credit worldwide since 2002) to discourage real savings.
Nobody will know what anything is worth… and young, ambitious people will focus on speculating for short-term profits rather than creating real, wealth-building businesses over the long term.
Then, blame the Mexicans.
By Chris Mayer, Editor, Chris Mayer’s Focus
If you want to find out what’s wrong with modern capitalism, you could start with the idea that there aren’t enough capitalists. Too many businesses are in the hands of hired guns, not owners. You want to invest with owners.
I’ve written about this for years, but new research keeps coming out to support the commonsensical idea of investing with owners. I’ll share the latest remarkable study with you in a minute.
First, let me share a little anecdote to show you how stupid corporate governance has become.
Markel is a $13 billion company with interests in insurance and other businesses. The stock has been churning out gains for a long time, partly due to the investing skills of Tom Gayner, who is the company’s co-CEO today.
Gayner also sits on the board of directors of Colfax, another publicly traded company that makes pumps and filters and other equipment. Colfax shareholders should be happy to have Gayner on their board.
So why did 27% of shareholders vote against Gayner for re-election?
Jeffrey Bronchick at Cove Street Capital gives an answer: Some large shareholders – who don’t care much about the individual companies they “own” – outsource their corporate governance to consultants.
These consultants have some funny ideas. One of them is that a board should be “independent.” Meaning, among other things, board members shouldn’t have an ownership position in the stock.
As Bronchick writes, these consultants “have at various times voted AGAINST re-electing Warren Buffett to the boards of several of his holdings.”
Sounds like a bad idea, right? Well, now there is new research agreeing with you.
Jim Combs and Dave Ketchen write in The Wall Street Journal:
Boards that are too independent invite trouble. According to our research, it can lead to lower profits, excessive CEO pay and more financial fraud.
The consultants have been telling people to do the wrong thing for years. And it’s taken its toll. “Today, in fact, the CEO is the lone board insider at more than half of S&P 1500 firms,” Combs and Ketchen write.
Some highlights from their study of how lone-insider firms stack up against peers:
On average, lone-insider CEOs receive 80% higher pay.
The gap between CEO pay and the rest of the executive team stretched more than twice as wide.
Lone-insider boards were 27% more likely to commit financial misconduct.
Profits were 10% lower on average.
The conclusion seems obvious. Stay away from firms where the board is full of people who don’t own any stock. You want to invest with owners.
– Chris Mayer
P.S. Investing alongside owners is one strategy I use to help my subscribers beat the market. But during my time in corporate banking, I uncovered another little-known but “boring” investing technique to pinpoint small-cap stocks before they double or even triple in value. I put together a presentation to show readers this investing strategy in action. Watch it right here.
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In today’s mailbag, more debate over the difference between “fair trade” and “free trade.”
Most of the world powers deal on a Fair Trade (for their country) basis, the USA is one of a few that deal on so-called “Free” Trade, with bad deals for most of its people that are great for big business. Given the world as it is, Fair Trade, while far from perfect, will help much more citizens in America than Free Trade, which does not exist. China is a great example, a mercantilist state capitalism empire decimating the U.S. economy. “Free” trade is a textbook idea you moderate with Fair trade. Fair deals for all parties, not just big business.
– Steven C.
I am constantly astonished at how many otherwise intelligent and perceptive people fall for the “buy local” nonsense version of “fair trade.” On retiring I moved to a small city that is virtually plagued with ill-conceived businesses that should have been throttled at birth. The odd thing is that while supporters of local business take every opportunity to “boost” the concept verbally, they furtively and frequently buy elsewhere, where the price is lower and the selection is much greater. Leaving a steady string of bankruptcies and empty storefronts all around town.
Common sense would suggest that patronizing a business for any other reason than it provides the best goods or services at the best price is a recipe for mediocrity and the hallmark of a failing society.
– Dan H.
You do not seem to understand the Deep State that you talk about so much. It is the world bankers that own and control the central banks behind the scene, which is why we can’t audit them. These world bankers are right on their target to bankrupt all countries so they can pretend to save the world with a one world government with a one world currency and the world population as debt slaves, with total control over the population their end goal.
– Jim H.
The bag of organic coffee that comes from Central America bearing the label “Fair Trade,” noting that those workers who are employed to produce the commodity are paid a fair wage and are treated humanely, is either a lie or it is a fact. Who are the bureaucrats of the Deep State that are benefiting from such an arrangement? Starbucks?
There is some truth in the quote that you gave about whether the economy is meant to serve the people or people are meant to serve the economy. When the system, economic or political, fails to put people first, and people instead become objectifications of that system, then this is where such a quote becomes nothing more than the words of a demagogue.
“America First” is nothing more than an empty slogan… a slur of words the intent of which is to suggest one thing when what it really means is something else entirely. Propaganda in the name of “fair trade” is still propaganda, and free trade that is fair does indeed put people first.
When the interests of a nation are more important than the enlightened self-interest of its people, then perhaps it’s time for an overhaul of the system. And this is what many thought would happen with Trump. Who said we won’t get fooled again? Life is too short to make it even shorter by standing in front of a runaway herd heading straight into a nihilistic void. Mind your own business and leave everyone else alone!
– John D.
Your article on “America First” vs “Americans First” was perplexing. It leaves you feeling something is wrong with this thinking. You as a business owner are looking for a good deal and purchase products from Canada, as you say “Free Trade.” What happens in America as a result of this free trade? The lumberjack lost a job, the pulp mill lost a job, and the printer lost a job.
On your purchase alone, it was merely a bump in the road. Now multiply that by thousands of purchases of a similar nature. Now many jobs and businesses have disappeared. You no longer have a choice of where to make your purchases. The suppliers have vanished. “Fair Trade” adding a tax to level the playing field only exacerbates the problem. The only solution is bargaining. You would exchange an American product for your paper and printing job. You and the printer settle on the exchange.
To use your term, it’s a win-win. If you want a BMW, swap for a couple of Fords. Obviously this is an oversimplification, but I’m sure you get the idea. If you don’t produce anything, you aren’t worth nothing.
– Daniel M.
Another great article, so full of common sense and practical wisdom about how the world really works. Adam Smith would approve. Keep up the good work!
– Richard F.