Buckle Up for Economic Destruction

The S&P 500’s up over 30 percent from the March 23 closing low.  What’s more, it’s only about 18 percent from its February 19 all-time closing high.  Could it be that the market storm’s behind us and only sunny clear skies are ahead?

Why not?  Fed Chair Jay Powell’s manning the monetary levers with gusto.  Treasury Secretary Steven Mnuchin’s assuaging his Wall Street pals.  And an interventionist Congress is hell bent on racking up a $4 trillion deficit.

With all the funny money flowing into financial markets this must be just the time to buy stocks…right?  The answer, no doubt, depends on if you’re feeling lucky.

Carl Icahn – a billionaire – is not feeling lucky.  Hence, he’s not buying stocks.  He thinks they’re overvalued.  And he should know.  The 84 year old has traded every stock market crash since the Great Depression.

Instead of buying stocks, Icahn is hoarding cash, shorting commercial real estate, and preparing for the coronavirus to trigger “some big downdrafts.”  Nonetheless, Icahn knows a government propagated distortion that bends in his favor when he sees one.  According to Bloomberg:

“A wily trader, Icahn spotted a once-in-a-lifetime opportunity amid the market gyrations.  On April 20, when it seemed the whole world was selling oil and crude futures fell to an unheard-of minus $40 a barrel, he was buying.

“Because CVR [CVR Energy Inc., one of Icahn’s larger stock holdings] constantly needs oil to supply its two refineries, Icahn realized he could use it to profit from the frenzy.  He said he instructed the Sugar Land, Texas-based company to make space in its storage tanks and put in orders for 1 million to 2 million barrels at negative prices he doesn’t expect ever to see again.”

How exactly oil futures came to touch minus $40 a barrel is quite absurd.  We’ll have more on this in a moment.  But first some context is in order…

An Assault on Free Markets

Like Icahn, we’re also suspicious of the stock market rally.  The Fed’s pumping liquidity into financial markets.  Washington’s pumping fake money into the economy.  But these interventions don’t solve a fundamental problem of the coronavirus shutdown…the mandated interference of supply and demand.  Here’s what we mean…

We’ve been blessed – and cursed – with hair.  Lots of it.  Thick, full, wild, unruly hair.  It grows up and out.  But never down.

We visit our barber, an old sailor, about every three weeks for a ‘high and tight’ cut and more gab then you’d ever want.  But Governor Gavin Newsom – Nancy Pelosi’s former nephew – has banished haircuts.  They violate his statewide shelter in place order.

Because of government interference the current demand for haircuts is high.  Yet the current supply of haircuts has been artificially suppressed.  The authorities, in an effort to save us all from the ails of coronavirus, have severed the free market connection of supply and demand.

So even though the Fed and Congress are pumping money into financial markets and the economy, their state-level cohorts are restricting where the money can freely go.  Markets, at present, are not guided by an invisible hand, as first elaborated by Adam Smith.  Rather, they are guided by the heavy hand of government.  A heavy hand that’s guiding us straight to hell.

Haircuts, of course, are but one small example of the government shutdown’s assault on free markets.  In fact, there are countless examples of these assaults on free markets throughout the economy.  All of them absurd.

One of the most absurd, is the oil market – and the resultant minus $40 a barrel.  This story started long before the coronavirus…and is a story of fake credit markets.  Washington’s war on the coronavirus, though, disfigured these price distortions beyond what’s readily fathomable.

Buckle Up for Economic Destruction

On March, 6 we offered a simple anecdote of the burgeoning economic destruction we were observing.  From our perch overlooking San Pedro Bay, the main port of entry for Chinese made goods into the USA, we observed that foghorns were less frequent.  From this simple observation we deduced the following:

“Supply chain disruptions breed consumer good disruptions, which breed declining sales, which breed disappearing cash flow, which breed layoffs, which breed less Ford F-150 sales, which breed shrinking tax receipts, which breed unserviceable public and private debt, which breed mass bankruptcies, which breed game over.”

Alas, over the last two months, the economic destruction has relentlessly exceeded what we’d anticipated.  The government shutdown has rapidly decimated the economy in ways not seen since the Great Depression.  This destruction has manifested itself in strange and unpredictable ways.

Last weekend, for example, we were shaken from our predawn slumber by a symphony of foghorns.  The foghorns, however, weren’t that of an inexplicable return of container ships loaded with cheap products from China.  Rather, they were from a collection of 27 oil tankers anchored off the coast.

The government shutdown has crashed oil demand by over 30 percent.  The glut of oil supply has overwhelmed land-based storage.  The excess oil is being stashed in tankers.  In a few weeks, there will no longer be storage space.  Oil producers will be forced to shut down.

Indeed, the destruction of oil demand, spurred by shelter in place orders, is what pushed oil futures to minus $40 a barrel.  This must be one of the greatest price collapses that has ever occurred.

Yet the oil market was already a ticking time bomb.  Over a decade of the Fed’s cheap credit had compelled oil drillers to produce oil under conditions that would have otherwise been unfeasible.  Now government interference has yanked the rug out from under it.  The broader economy, also drowning in debt courtesy of the Fed, will follow.

According to Reuters, Chesapeake Energy, the poster child for highly leveraged shale production, is preparing a potential bankruptcy filing.  There will be countless others.

Without questions, COVID-19 is a nasty virus.  At the same time, it’s now lucidly apparent that the government shutdown was a shortsighted blunder.  The nastiness of a broken economy, and the scale of the resulting human suffering, dwarfs the virus by several orders of magnitude.

The idea that the economy will quickly rebound and everything will be back to normal as soon as the shelter in place orders are lifted is pure fantasy.  The fact is we’re all so screwed at this very moment we’ve yet to realize just how screwed we are.

This is the big one, folks.  Buckle up.

Sincerely,

MN Gordon
for Economic Prism

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