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The Daily Missive

Indefinite Finance and The Real Economy

By September 27, 2022February 8th, 2023No Comments

“There is nothing certain but uncertainty, and nothing more miserable and arrogant than man.”

Michel de Montaigne

What a week…

Dow futures this morning suggest the “buy the dip” crowd was going to hop to it and rescue your retirement funds shriveling for a twelfth straight trading day.

Alas, at the time of this writing the dip-buyers have failed to show up.

All three major indices are firmly in “bear terror-tory,” defined as a 20% or greater drop from the all-time high back in January.

Watching these markets bleed is like a slow motion car wreck. It’s awful, but we can’t avert our eyes.

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Fascinating, if hard to watch. (Source: Creative Commons)

Yesterday, we happened across an excerpt from Peter Thiel’s book Zero to One. Mr. Thiel claims that America finds itself in a state of “indefinite finance.” Thiel, here, explaining the difference between “definite” thinking and “indefinite” thinking:

While a ‘definitely optimistic future’ would need engineers to design underwater cities and settlements in space, an ‘indefinitely optimistic future’ calls for more bankers and lawyers. Finance epitomizes indefinite thinking because it’s the only way to make money when you have no idea how to create wealth.

Thiel’s thesis, paraphrased: Billionaires, Thiel included, don’t know what to do with their money, so they give it to banks. Banks don’t know where to put the money so they spread it among institutional investors. Institutional investors don’t know what to do with their money so they spread it throughout their portfolios of stocks.

In the end, writes Theil, “Companies try to increase their share price by generating free cash flows. If they do, they issue dividends or buy back shares and the cycle repeats.”

“At no point,” says the billionaire tech guru turned political strategist, “does anyone in the chain know what to do with money in the real economy.” There’s that phrase again.

As we’ve witnessed, The Fed is hell bent on trashing the Real Economy by crushing demand. Nomi Prins, our guest this week, elaborates:

Since [$6 Trillion+] was dumped into the economy during the Pandemic, we’ve had certain price spikes. Particularly in energy and food, but we also have had all of this extra sort of help. We’ve had supply chain issues and political issues and all the things that we were talking about before.

We still have an allegedly healthy economy. But it’s not true. We were obviously very negative during the Pandemic when the global economy was shut down. We could consider the lockdowns as just a dark period.

But even before that, our economy in the US was barely growing at zero to 1% on average since before the 2008 financial crisis. We have not seen any real benefit from whatever the Fed has done one way or the other in the real economy for over a decade. That is a problem. 

By keeping the Real Economy propped up with what Nomi calls “cheap money” and financing Too Big To Fail banks in perpetuity, the economy never had a chance to wring out bad loans, bad debt, bad business models, bad speculation, bad coffee, bad beer, bad pizza.

In turn, the money that was “created” out of thin air is worthless, er, worth less. Real people call this inflation. Nomi continues:

For a decade, the Fed was trying to get people back in the water. “You’re going to do fine,” they said if you read between the lines. “No problem. Yeah. It’s down big. But it’s no problem. It’s going to turn around tomorrow.” All while they had information indicating a turnaround wasn’t going to happen.

“Unprecedented monetary policy actions,” concurs a report from the International Monetary Fund (IMF), “while needed to stem the impact of COVID-19, have driven asset prices up by causing a sharp drop in both risk premiums and risk-free discount rates. This suggests that withdrawal of these monetary policy actions could trigger a reversal.”

You think?

Back to Thiel. In an indefinite world, real people, real investors, real homeowners actually prefer the Fed’s irrational optimism. He calls it “unlimited optionality,” and in this kind of system “money is more valuable than anything you could possibly do with it.”

Today, for example the dollar index is above 114 – territory it hasn’t staked out since the 2001 Tech Wreck.

“The U.S. dollar’s unrelenting surge is raising worries over corporate earnings,” Michael Wilson, Morgan Stanley’s top equities strategist, told Marketwatch. Wilson calculated that every 1% rise in the U.S. Dollar Index has a negative 0.5% impact on S&P 500 earnings.

Addison Wiggin

Addison Wiggin Addison Wiggin is an American writer, publisher, and filmmaker. He was the founder of Agora Financial and publisher for 18 years. An acclaimed New York Times best-selling author, his books include: Financial Reckoning DayEmpire of DebtThe Demise of the Dollar, and The Little Book of the Shrinking Dollar. Addison is also the writer and executive producer of the documentary I.O.U.S.A., an exposé on the national debt, shortlisted for an Academy Award in 2008. He lives in Baltimore, Maryland with his family. Addison started his latest project, The Wiggin Sessions, powered by The Essential Investor, in March 2020. He films from a homegrown studio in his basement.