"The New Old Normal"
Are we seeing the end of cheap energy,
cheap labor and cheap money?
by Bill Bonner
Baltimore, Maryland - "An early dawn on the battlefield. Little by little, you make out the shapes in the distance – the sky, the horizon, the trees…then, smaller, less distinct…you see tanks, artillery…and the soldiers who are coming to kill you.
Last week, investors began to see what is headed their way. For most of the year, they have been in denial. Stocks go down; they buy the dip. And then, they go down again. But that only brings the same reflex. Their investment strategy was simple. BTFD, they say – “Buy the F…ing Dip.”
And so it came to pass that, once more, investors thought they heard the bugles blowing behind them. Jay Powell: “..the committee will ‘take into account the cumulative tightening of monetary `policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” That was all they needed. It was the Fed coming to the rescue! Their blood up…confident that the Fed had their backs…and that this was the dip they were looking for. They went ‘over the top,’ charging the enemy with bayonets attached, and giving out their full-throated war-cry – BTFD.
It was then that Chairman Powell let them know: “You’re on your own,” he told them: “It is very premature to be thinking about pausing. People when they hear ‘lags’ think about a pause. It is very premature, in my view, to think about or be talking about pausing our rate hikes. We have a ways to go,” he said.
Three of These Things: The next three hours were the worst for a ‘Fed day’ (when the Fed makes its interest rate announcement) in history—especially for investors in the tech-heavy Nasdaq. And who can blame them? The only world they have known was remarkably prosperous…forgiving and safe. It was a world – roughly from 1980 to 2022 – that was marked by three extraordinary things.
First, the Chinese were giving us the cheapest labor ever.
Second, capitalists and innovators were giving us the cheapest energy ever.
Third, the Fed was giving us the cheapest credit in history.
It was those three things, and not the genius of the Fed jefes, nor the wizards of Silicon Valley, nor the know-it-alls in the White House that gave us 36,000 on the Dow, the “goldilocks economy,” and the “great moderation” of the pre-2022 economy. And now, things have changed so fundamentally that investors are forced to ask questions. ‘Where are we?’ they want to know.
Here at Bonner Private Research, the question mark is our most treasured punctuation. We use it on everything, like duct tape or WD40. We keep them in the back of the truck, along with the spare tire, the jack, and the bottle of whiskey; we never know when we might need them. Typically, question marks disappear when things go well. But when the fender falls off, you get out the duct tape.
How come productivity is falling? Why hasn’t this ‘transitory’ inflation transited? What the Hell was White House press secretary Karine Jean-Pierre trying to say?
Investors long for the good ol’ days. They keep waiting, hoping, dreaming of a Fed pivot. Each time, they bid up stocks…hoping that things will get ‘back to normal’ tootsweet. And each time, our old classmate, Chairman Powell, who must keep a photo of Paul Volcker on his desk, proves them wrong.
Mr. Powell meets Mr. Market: But a whole generation of Americans have never known ‘normal.’ And now that the curiously beneficent conditions of the last few decades, have deserted them, the new normal is terrifying.
As to the cheap labor, China is running out of it. The rush of some 500 million peasants into a modernizing, industrial economy was a “one off” event. There aren’t many peasants left; those that still live in Chinese villages are needed on the farms. Chinese labor is no longer dirt cheap. And the feds are working hard to discourage trade with China, anyway. Mr. Trump limited imports from China. Mr. Biden kept his tariffs in place.
Energy isn’t so cheap anymore either. Typically, oil prices go down when the dollar goes up. But today, the dollar is at a 20-year high…while oil is over $86 a barrel – up from under $20 in 2020. Nor is oil or gas likely to get much cheaper. Practically every major government in the Western world has threatened to put the producers out of business, while actively subsidizing their competition. The price of gasoline is already inching back up. And gas heating bills this winter are expected to be about 30% higher than last year.
And interest rates? For the moment, the Fed is raising them (making credit more expensive). Mr. Market is raising them too; he’s got to protect himself from inflation. Mortgage rates, for example, topped 7% last week. Between the two of them – Mr. Powell and Mr. Market – the price of credit is going up. And for better or for worse, the world of 1980-2022 is dead."
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