‘We all live in a yellow submarine
‘Yellow submarine, yellow submarine
‘We all live in a yellow submarine
‘Yellow submarine, yellow submarine’
‘Yellow Submarine’ by The Beatles
A storm passed over Ireland yesterday. The power went off. Trees blew down. The roof of an old shed flew off.
Oh, if we could only live in the metaverse, where the only things that happen are things we want to happen. If only we knew where to find it!
Here on planet Earth, life goes on. And with so many hours…so many resources…so much brain power and capital applied to the fantasy world…it is not surprising that the real world feels a little neglected.
Here’s the latest news from Breitbart, ‘Productivity Crashes More Than Expected’:
‘The productivity of U.S. workers in the third quarter of 2021 dropped at a rate of 5.2 percent, the Department of Labor said Tuesday.
‘Economists had forecast productivity would decline by 4.9 percent.
‘Unit labor costs soared at an annual rate of 9.6 percent in the third quarter of 2021, reflecting a 3.9 percent increase in hourly compensation and the decline in productivity.
‘That was more than expected. Analysts polled by Econoday had forecast unit labor costs to rise 8.3 percent…’
Let’s see…higher labour costs, less labour output. Is that a formula for success or what?
But in the fantasy world, assets get more and more valuable…even though they don’t produce any more wealth…
…houses go up so much that you can ‘take out’ some of the value without giving up floor space…
…cryptocurrencies…meme stocks…NFTs…and money-losing companies can make you rich, even without sales, profits, goods or services, employees, skills, or tax bills.
What in the real world can compete with that?
Yes, we all live in a yellow submarine now…in the deep calm of the metaversian cosmos.
But where did it come from?
The real cost of cheap credit
An educated guess: from a flood of liquidity from the Federal Reserve, that buoyed up everything not firmly attached to the real world.
For the last 10 years, it’s rare that anyone’s toes have been able to touch the bottom.
Even before the Wall Street bailout of 2008–09, interest rates had been falsified by the Fed for many years. Cheap credit caused a bubble in the housing market that eventually cost up to 10 million American homeowners their homes.
Wall Street lenders, however, got off scot-free. They should have taken their losses (they lent far too much money with far too little collateral). And the stock market should have gained a solid footing, but at a much lower level.
Instead, the Fed lowered lending rates even further…and the water got deeper.
Today, the federal funds rate is all of 0.08% (essentially zero)…and inflation is running at 6.2%.
In other words, the Fed is lending to member banks at a MINUS 6% rate. And by our calculations last month, in order to get ahead of inflation — as Paul Volcker did in 1980 — the Fed would have to put its funds rate up to almost 10%.
Not going to happen
Meanwhile, the most important credit in the world, the US 10-year bond, is trading at a nominal yield of 1.4%. But subtract the going inflation rate — 6.2% — and you see that the real yield is MINUS 4.8%.
And now, after lending money for years at yields below inflation, is it any wonder that people retreat to fantasyland…a submarine quietly navigating beneath the tempestuous waves?
It is a place where time has stopped…and the future holds no risk.
You will not age.
No storms will blow up.
No one will be shot or die of the omicron variant.
Yes, it is a fantasy world. A make-believe world. A world that exists…but only as a fleeting aberration.
Is the bubble deflating?
And what’s this?
SoftBank, the Japanese company that has funded many fantasy start-ups, lost nearly 16% last week. Cathie Wood’s Ark Invest, that invested so much money in them, lost about the same.
And Bitcoin [BTC]…the coin of the new fantasy realm…lost a quarter of its peak value in the last month.
How long before the fantasists need to come up for air?
For The Rum Rebellion
PS: The Rum Rebellion is a fantastic place to start your investment journey. We talk about the big trends driving the Australian Economy. Learn all about it here.