The Economy

The dot-com bubble sobered Amazon up, and it went from a relatively small company at that point to the behemoth it is today by growing organically using cash its business generated, not debt. In fact, it was one investor criticism of Amazon for years, it was never earning huge profits to be returned to shareholders. ... the reason was that it was plowing money back into the company to get bigger and bigger.

In order to do that, though, you need a viable, growing business (what a novel idea; also something its not easy to create). Uber may or may not have something viable in the long-term, but it has never come close to proving it. It has just kept borrowing to the tune of tens of billions of dollars, all the while losing money on an operating basis. It's not a small thing. It is drowning in debt that is dependent on the lending market being so destroyed that they can't assess lending risk, and ultra-low rates (so it doesn't drown in interest payments).

FWIW, I have posted about this (Uber) a bunch of times on here. I was pointing it out, probably as early as 2013 or 2014. The mess we are staring down today didn't happen overnight. You really need to look to the financial crisis, and the quantitative easing and zero interest rate policy they began rather than allowing the necessary defaults and cleansing to happen. We have been on the brink of it collapsing on them several times since then, but more intervention (that has dug the hole even deeper) has kicked the can down the road -- while blowing up the debt levels bigger and bigger. That is what they would LIKE to do right now is just paper over a credit crisis with more debt. ... but runaway inflation is what is different today. That monetary inflation they have created was showing up mostly in asset prices, in home prices, etc., but the combination of the trillions of dollars that was fiscally dumped on our economy with the pandemic as an excuse, and the Fed going into turbodrive to monetize it by blowing up their balance sheet to $9 trillion, created a much bigger, and more generalized, inflation problem that is now a political problem.

 

The simplistic explanation of Uber is that demand for what its core business offers is very elastic. If the price is $10, there are so many customers willing to pay it. If the price goes up to $15, the demand drops off. If it goes up to $25, the demand drops off a lot. The economics of its business are that the prices it charges needed to be higher than what they were to simply break even, let alone earn a profit. But because those higher prices would crater demand for their service they couldn't raise them to where they needed to be without admitting that what they were doing wasn't viable.

In a free market -- not one where the cost of money is being determined by a price czar -- that would have been the end of Uber. If it had tried to borrow money to subsidize the cost of its product, the way it has, there would have been few lenders, and if there were any, they would have demanded loan shark interest rates to reflect the risk of not getting their money back. In debt markets where all price discovery has been intentionally destroyed to keep interest rates artificially low, Uber has thrived. Let's say you are a retiree, or a big pension fund, looking for a risk-free rate of return. In a free market, you have money to lend, you look for safe credit risks, and you get rewarded with X percent income per year for providing that capital. What the Fed does is rob savers of that X percent of income. ... which forces them to take more and more risk to get the income they are being robbed of. That creates a chain reaction, and because their interest rate supression has taken real interest rates (what you get minus inflation) so far negative, it has worked its way down the investment spectrum, with even speculative type investors taking more and more (and crazier) risks.

In that environment, a company like Uber that never would have found lenders, has not only found a lot of willing lenders, it has been able to borrow billions of dollars at a way-too-low interest rate that doesn't reflect the fact that it hasn't proven its business to be viable. That in turn, kept Uber growing bigger and bigger on debt subsidizing the cost of its services to customers, which it then used to sell equity to more speculative investors at an insane valuation for a company that has not even proven its concept.

This story goes way beyond Uber, but Uber is instructive about what the central bank does. It creates malinvestment. Nobody ever cares until the emperor is shown to have no clothes and people are suffering for it in all kinds of ways (either they got sucked into a bubble and lose their shirt or the monetary debasement drives the price of milk through the roof, etc.), and then it's, "How did that happen"?

 

Just to follow up on this, the ECB held an emergency meeting today to address the widening spreads I was talking about. They have lost control.

It was basically the arsonists gathering at the firehouse to talk about fighting the fire they started.

European Stocks Rise Before Fed as ECB Discusses Crisis Strategy

We are headed toward a full-fledged credit crisis that they have spent the last decade and a half turning from something that was going to hurt into something that is going to destroy.

 

As for the the Fed decision today. ... it doesn't matter if they raise 50 basis points or 75 basis points. They are just way too far behind and overstimulated so much that it's way too little, too late. We are about to get some serious payback for all of their stupidity since 2007 / 2008.

Don't get me wrong, I'd rather see 75 basis points than nothing.

But the fantasy that they gave everyone and worked furiously to keep propped up in the face of market cracks (creating a bigger crisis in the making), can't handle interest rates that are normalized or anywhere near wherever the neutral rate is (and you need to raise well beyond the neutral rate to even try to address the inflation they gave us).

There are going to be some serious credit defaults in the coming months or years because of all of the malinvestment they spurred. The question is the path it all takes. They can let inflation run rampant out of fear of the economic consquences they are staring at. Or they can try to deal with the inflation and create absolute economic misery. Or they can do what is probably most likely, make a token attempt at dealing with inflation because of the pressure they are feeling, which may be the worst of both worlds, because it means extended misery / stagflation.

 

75 it is.

https://www.cnbc.com/2022/06/15/fed...-a-point-the-biggest-increase-since-1994.html

 

They are at least closer to where the Fed Funds futures were, so maybe it will tone down some of the moves in the bond market that have been creating so much turmoil.

If we're not in a recession already, all indications are we are heading into one. They put themselves in a situation where they were flooding the economy with an insane amount of cheap money during an expansion, and now they are tightening into a recession. Even if you buy that they can design something they don't even understand, a la Keynes, that is the exact opposite of the playbook.

At this point, they have to know how screwed they are. They will gladly let inflation runaway to try to inflate away as much of the debt they saddled us with. But they have to be hoping that if they go 75 now, 75 again in July (there is no August meeting), they can create some room to cut later in the year or early next year and it will somehow be enough to stimulate (it won't).. If that is the playbook, it means we are going to be living with inflation for a long time.

He's about to speak. Always fun to watch the bond markets whip around as he fumbles his words.

 

This would be comical if it wasn't so harmful to the country.

 

He said that real GDP picked up this quarter. ... He said this on the same day that the Atlanta Fed (his people) lowered their forecast to 0 percent. Just a month ago they were forecasting 2 percent (if you can call their rosy outlooks forecasts).

I'd say they are in their own world, but it's all just endless BS.

3.8 percent by 2023 is not going to get inflation under control. They need to hike beyond where inflation is. They are now in the position of playing with matches in the gasoline pit they have been creating for more than a decade, and even if they somehow doen't ignite it and bring about a credit crisis, they are going to slow the economy AND fail to deal with inflation. They backed themselves into a corner, and even from that position we are getting cowardice and prayers. This is not Paul Volcker stuff.