The following graphs tell the entire story of a country stripped of hope and plundered nearly to destruction. The first tracks our GDP growth since the dawn of democracy:
Simply stated, economic activity has slowed steadily since 2008, hit zero early in 2016 and has been going sideways ever since. Now consider business confidence:
Business confidence peaked late in 2014 and is now at its lowest point since 1999. But our problems really began when Government started spending more than it received and debt began rising:
Which might be understood by seeing a graph of how government spending increased over the years:
Government tried to make the public pay with tax rate increases with the result that only 17 countries in the world charge higher tax rates than our 45 percent and most offer their citizens far more benefits than South Africans receive:
Inevitably the public resists paying what it perceives to be unjust tax collection and the well-known Lasser curve comes into play. Thereafter, further raising of tax rates results in a lower rate of collection, so note in the graph below that since 2016 the ratio of taxes raised to GDP has been static.
Government ceased being able to pay its way back in 2009 which is why our national debt soared as a percentage of Gross Domestic Product
Since tax revenue is insufficient to meet the cost of this wage bill, the Government has resorted to borrowing with the result that its debt has doubled in the past ten years:
Foreign lenders are mindful of the risk of South Africa defaulting on this debt and so our cost of borrowing has risen. To attract 30-year money we must pay 9.86% whereas Germany pays -0.10%, Japan pays 0.35%, Britain pays 0.96%, Canada 1.48% and the US Government just 2.07%. Only five countries in the world have to pay a higher premium to attract lenders; Turkey 13.34%, Venezuela 10.43%, Zambia 31.38%, Nigeria 14.3% and Kenya 11.6%. Moreover, the graph below illustrates how the marketplace has driven RSA bond rates much higher at times to a peak of 10.5% in June 2008 and to 9.9% on December 11 2015
As result the debt market imposes a massive hidden tax on local borrowers for all other rates are reflective of our sovereign bonds:
For example, home owners in South Africa currently pay a mortgage borrowing rate of 10 percent which is a global high while in 2016 and 2017 it was as high as 10.5 percent. By comparison US borrowers pay 3.83% while British borrowers pay only 1.21%
And our external debt has risen nearly four-fold since the dawn of democracy:
All this has impacted the Rand which has lost value relative to the US Dollar at a compound annual average rate of 6.2 percent as denoted by the red trend line. In 1994 R3.39 bought a US Dollar compared with a current R15.15
All of which might have created intolerable pressure upon our citizenry had not average wages risen dramatically from a low of R6 742 a month in the first quarter of 2005 to a current R21 432 a month:
But rising wages come with their own particular cost because in the absence of rising profits in a static economy employers are forced to accommodate their labour costs by reducing their number of employees and so the unemployment rate has nearly doubled since 2009:
Government has tried to address this by increasing both the number of its own employees and their rate of pay such that government wages account for 30% of the country’s overall wages although the state only employs around 12% of all workers.
Since Government cannot raise taxes much more and it has reached the limits of its borrowing capability it has been casting about for alternatives. A threat to re-direct the savings of private citizens via a prescribed assets requirement is clearly a non-starter given the high levels of protest at the merest hint that this was under consideration.
The next obvious option of reducing the State payroll via retrenchment is another non-starter because the ANC is in an alliance with the labour unions which would block such a move. But salaries are paid in Rands and so the last remaining option would be to go down the disastrous route that Zimbabwe took when it faced the same problem and inflated its way out of debt by printing money. This explains the ANC call to nationalize the Reserve Bank and change its prime mandate of defending the integrity of our currency. That is why everyone needs to keep a close eye on the inflation rate which, as my next graph illustrates, has been comparatively stable in recent years.
But stability is a relative thing. Only a few countries in the world have higher rates of inflation than ours:
One would have imagined that the basket case which Zimbabwe has become should be a sufficient deterrent but not for those driving ANC economic policy. To date, however, the ANC’s head of economic policy Enoch Godongwana has denied the rumour that the party had resolved to change the bank mandate: He told Fin 24 “I wrote the resolution. The resolution does not say we must change the mandate of the Reserve Bank.”
There are some rays of hope. Government has recognised that tourism employs large numbers of people and, notwithstanding the visa problems it imposes on visitors, the numbers taking advantage of our relatively cheap holiday scene have been growing:
Already it is one of our biggest employers:
As I have illustrated, a quarter of a century of ANC misrule has seen a massive transfer of wealth from ordinary South Africans who pay three times as much as their US counterparts for a home loan, have seen the international buying power of the Rand fall to a quarter of its 1994 value and pay among the world’s highest rates of income tax.
Only one class of South Africans have survived this onslaught. Those who invested in JSE-listed shares have seen both their capital and their incomes rise at an annual rate of 9.9 percent which is 50 percent better than the rate achieved by US investors. However, as the green trend lines show, since the advent of the Zuma administration they have lost that advantage with JSE shares subsequently rising at 10.9 percent annually while US shares rose on average at compound 14.9 during the same period.
But a few did even better. Those who invested in Blue Chip shares selected by the ShareFinder programme achieved compound annual average growth of 16.2 percent:
South Africa is near the top of the global league – when it comes to the rewards for holding money, that is. You can earn about 3% after inflation on your cash, with only Mexico having higher real short-term interest rates.
However South Africa is close to the bottom of the global growth league (see below). This is no co-incidence, but the result of destructive fiscal and monetary policies.
Figure 1: Third quarter GDP growth
Source: Thomson Reuters and Investec Wealth and Investment
Figure 2: Short-term rates less inflation
Source: BIS and Investec Wealth and Investment
Such an unnatural state of economic affairs, namely still very expensive money combined with highly depressed economic activity, has clearly not been at all good for SA business. The average real return on invested capital (cash in/cash out) has declined sharply, by about a quarter since 2012. Companies have responded by producing less, investing less, employing fewer workers and paying out more of the cash they generate in dividends.
GDP at current prices is now growing at its slowest rate since the pre-inflationary 1960s, at about 4% a year. This combination of low GDP and inflation below 4% (yet with high interest rates) automatically raises the ratio of national debt to GDP. And it makes it much harder to collect taxes (the collection rates are well explained by these nominal growth rates). Of further interest is that the actual growth in GDP is falling well below the forecasts provided in the Budget Survey (see figures below).
This leads to an economically lethal combination of low inflation and high borrowing costs (for the government and others).
Figure 3: Nominal GDP growth
Figure 4: Nominal GDP growth vs forecast
Source: Investec Wealth and Investment and Treasury
Only actions by the government that clearly indicate it is heading away from a debt trap (ie printing money and so much more inflation in due course) can permanently reduce expectations of higher inflation and thus bring down long-term interest rates. Debt management is a task for the government, not the Reserve Bank.
The investors in those companies that depend on the health of the domestic economy have not been spared the economic damage. The value of these South African economy-facing interest rate plays (banks, retailers and investment trusts for example) have declined significantly and have lagged well behind the JSE All Share Index. The JSE small cap index has lost 40% of its value since late 2016. Since January 2017, the JSE All Share Index is down by 7%. However an equally weighted index of SA economy plays is down by 22%.
Figure 5: Top 40 and Small Cap indices (2014 = 100)
Source: Bloomberg, Investec Wealth and Investment
Figure 6: JSE All Share Index, Precious Metal Index and SA Plays (equally weighted, 2017 = 100)
Source: Bloomberg, Investec Wealth and Investment
It’s against this worrying backdrop that I offer my New Year wish list for South African business to be able to transform its prospects and with it the prospects of all who depend on the domestic economy. It is after all business which is the most important contributor to the economic prospects of all South Africans. My first wish is that those in government and its agencies should recognise that without a thriving business sector the economy is doomed to permanent stagnation. They should, therefore, show more respect for the opinions of business and the policy recommendations they make. Most important, they should interfere less in the freedoms of business to act as the business sees fit.
The opportunities that economic growth provides are a powerful spur to upward mobility – of which poor South Africans are so sorely lacking.
Economic growth is transformational and inclusive. Stagnation is just that: nothing much happens, especially for the poor who are stuck in a state of deprivation from which it is difficult to escape. The opportunities that economic growth provides are a powerful spur to upward mobility – of which poor South Africans are so sorely lacking.
My second wish is that government turns over all wastefully managed SOEs to private control (there are no crown jewels) and in this way improve performance and generate cash and additional taxes with which to reduce national debt. Any sense from government that this might happen would bring long-term interest rates sharply lower and immediately reduce the returns required of SA business and in turn lead to more investment.
A third wish (linked to the second) for business success in 2020 is that government cuts its spending and raises revenues from privatisation, rather than raises tax rates next year. There is no scope for raising tax revenues unless there is faster growth. Higher tax rates will depress economic growth and growth in revenues from taxation still further. The wish is therefore that Treasury knows that only cutting government spending can avert the debt trap and has the authority to act accordingly.
Finally, a wish for monetary policy. South African business would benefit from lower short-term interest rates (notably mortgage rates) under Reserve Bank control. Lower interest expenses would help stimulate the spending of households, which could help get business going. It is my wish for business that the Reserve Bank will do what is most obvious and natural for it to do: to act decisively and urgently when both inflation and growth are pointing sharply lower.
Figure 7: Nominal wage growth
What relevance have the events of the 1920s to do with modern economics and global investment? Well the overwhelming evidence is that the cause of the Great Depression was, firstly, the fact that in the years leading up to the 1929 share market crash the US monetary authorities allowed an approximately four-fold increase in the total American money supply and the direct consequence was a nearly mirror image gain in the average prices of shares on the New York Stock Exchange.
The Dow Jones Industrial Index rose from 9 511 in November 1922 to 37 618 in August 1929. The money supply increase led inevitably to soaring inflation, but the actual cause of the share market crash and the subsequent economic depression was the fact that the Fed raised interest rates in order to soak up excess money and so the actual cause of the crash was this tightening of credit.
Continuing the serialisation of Richard Cluver’s latest book, you can order the full e-book version by right clicking on the following link http://www.rcis.co.za/the-crash-of-2020-order-form/
Now let us turn to recent events and note in my next graph that on October 11 2002 the Dow Industrial Index reached a low point of 71 975 and subsequently doubled reaching a peak value of 141 980 on October 12 2007. The subsequently correction that lasted until March 5 2009 saw the entire growth between 2002 and 2007 completely undone.
That increase happened against a background of a steadily declining value of the dollar which was the result of a massively adverse US balance of trade that understandably led investors to seek safer havens for their money.
A major beneficiary of these world investment flows during the same period was South Africa where the JSE All Share Index more than quadrupled from a low point of 73 612 in April 2003 to a peak value of 332 329 in May 2008.
So, were there parallels between the money supply data of the 1920s and the first decade of the new millennium? Surprisingly at this stage of mankind’s development when we have access to data on practically everything, official global money supply statistics are extremely hard to come by. However a group of amateur US investors who, as they explain themselves “… got fed up with the lack of straight and relatively simple data on investing and economics, and put up a web site to address our various concerns….”
( http://www.nowandfutures.com ) have been collecting data from every available source in order to, among other conclusions observe that the total global money supply rose nearly five-fold between July 2004 and July 2007. Their graph below tracks the annual percentage rate of change of the US “Monetary Base” together with the total change rate of reserves of the main Central Banks of the world.
It basically measures how fast the central banks were adding liquidity by measuring the growth rate of their own reserves at the International Monetary Fund, then adding the Monetary Base to overweight the US Federal Reserve fund data. It is overlain with a graph tracking the annual rate of change in the dollar price of gold and what is important about this contrast is how accurately the gold price responds to increases in global money supplies albeit with an approximately two-year time lag.
So let us note in the next graph that the gold price quadrupled- from a low of $252.60 on August 25 1999 to a peak of $1 014.40 on March 17 2008. This tidal wave of new money had been engorging the world’s markets seeking a home wherever it could be found. So it should be no surprise that tales back then abounded everywhere of credit cards arriving unsolicited in the post and of unemployed people being offered tens of thousands in shopping credits.
The process reached its pinnacle of irresponsibility with the advent of the sub-prime mortgage lending industry which had its roots in the US and whose ultimate collapse during 2007 shook the world’s financial system to its core. Here again it was a case of when the conventional lending market had become saturated, the money surplus inevitably began trickling down to would-be borrowers whose past credit record was so poor that in normal circumstances they would never have qualified for a loan. Suddenly, as if by magic, it was argued that this risk had gone away because someone had the bright idea of packaging thousands of these mortgages together and selling them on to investment banks and pension funds who bought them on the understanding that by this process of aggregation only a moderate percentage of the loans might be expected to default and that this risk was covered by the relatively higher interest yield that the packages were offering.
Perhaps these institutions would not normally have been persuaded to take on the additional risk, but they had been under increasing pressure to obtain higher-yielding investments in order to fund the pension requirements of a society of “Baby Boomers” who had been living far longer than was anticipated by the actuaries who originally devised their pension plans. Frighteningly, however, in the aftermath of the sub-prime crisis when one after another the world’s biggest financial institutions were writing off billions in unrecoverable debts and CEOs were falling on their swords, it emerged that few had ever fully understood the risk potential of what they had been buying let alone grasped the extent of the non-performing portion of these bundled-together mortgages. The reality, of course, is that when you lend money to people who have very little ability to repay you, no amount of fancy financial engineering can cover up that fact.
Nevertheless, the whole card castle of debt might have remained hidden for far longer and assumed even more disastrous proportions had that inevitable consequence of a surging money supply, inflation, not come back to haunt the world and had central banks not, as they did in 1929, invoked their standard defence of raising their lending rates.
People, who up till then had been just able to get by meeting their mortgage repayments, could suddenly no longer do so and the process of mortgage repossessions began. In a chilling re-run of the events of the Great Depression, by the end of 2007 some two-million US citizens had lost their homes and the process was accelerating.
The graph below, courtesy again of nowandfutures.com traces US money supply over the past century (green lines) and inflation (black line) which emphasises the mirror image link between the two and, more pertinently at present, that money supply growth was at the time showing no sign of abating and with it the inexorable upward march of inflation seemed endless.
Here a brief tour through a century of economic history is appropriate to an understanding of the graph. We have already documented the events of the 1920s and the Great depression which resulted from the increased money supply of that period. Then followed the huge contraction in money of the depression itself. However, as we have noted, right up to the 1940s the Fed was once again cranking up the money supply in a vain attempt to re-stimulate the US economy and resurrect the “good times” of the 1920s.
The steep recession that followed the ending of World War 2 lasted until the middle 1960s although the corner was turned in the late 1950s accompanied by another expansion of the money supply and the first really significant post-war share market boom which was to end so spectacularly in South Africa with the crash of 1969 which, in a matter of weeks in May 1969, knocked R5,6-billion off the value of ordinary shares listed on the Johannesburg Stock Exchange. Again it was the result of an interest rate hike following a warning in Parliament by the then Minister of Finance Nico Diederichs that excessive levels of speculation were being reached.
By the 1970s, it was a widely accepted economic doctrine by followers of British economist John Maynard Keynes that manipulating the money supply in order to create modest amounts of inflation was an acceptable price to pay as a consequence of government efforts to keep unemployment low. Keynes’ view was that runaway inflation could only occur at times of full employment, a proposition that was resoundingly discredited when the cumulative consequence of this approach by central banks led to an explosive surge in inflation which peaked at 13.5% in the United States in 1980 accompanied by a long period of high unemployment; the dreadful phenomenon which was to became known as “stagflation.”
US economist Milton Friedman provided an explanation for the onset of stagflation by arguing that once they were used to inflation as a daily fact of life, people would take it into account in their financial planning and so the long-term effect of reducing unemployment by increasing the money supply was a mirage. Eventually, ever-higher rates of inflation would be needed to stimulate hiring in order to keep unemployment low…. and the economy would collapse!
This “monetarist” theory was put to the test by Paul Volker when he was Chairman of the Board of Governors of the Federal Reserve System in the late 1970s and early 1980s. He raised interest rates and reduced the money supply. The US entered a recession, unemployment went up, but inflation came down very fast. From 13.5% in 1980, it fell to a low of 1.9% in 1986. Then unemployment slowly came down and the recession ended, but high inflation did not return and had not returned by 2000 at which stage US inflation stood at 2.2%.
In the aftermath of the Milton Friedman/Paul Volcker cure, however, monetary policy was again relaxed but inflation remained low, seemingly giving the lie to the theory. We now know, however, that the reason inflation remained low during that period, notwithstanding a continued build-up of the world’s money supply, was economic globalisation: the sleeping giants of China and India were awakening their teeming millions of workers: armies who were prepared to slave long hours for less money than Western workers were accustomed to spending on lunch.
The resultant flood of extremely low-priced consumer goods exerted a dampening effect upon global inflation that masked a rapidly increasing global money supply resulting in a new era of apparent prosperity in which the world’s central bankers (led by US Federal Reserve chairman Allan Greenspan as chief guru) basked in world adulation as geniuses who had finally cracked the secret of global economic and fiscal management.
Of course it was merely another illusion – as affirmed by Greenspan himself in his book ‘The Age of Turbulence: Adventures in a New World’ – which began unravelling, quietly at first from as early as December 1998 when a languishing oil price began creeping upwards and then quite dramatically 12 months later when Brent crude prices started an upward price acceleration rising at a compound annual rate of 37.6% until mid-2006. Then, after a brief five-month respite it returned with a vengent compound annual rate of 112.3% during 2007.
Soon the oil price gains began to be matched by rises in most minerals, next by food prices and finally by wages in the beginning of another era of stagflation which promised to be even worse than that endured in the 1970s because the monetary authorities had clearly not learned the lessons of the past and were cranking up the money supply in order to stave off the pain of the sub-prime crisis.
In retrospect, other than the Great Depression, the 1970s had arguably been the worst phase of the 20th Century world economy as reflected by share markets that wallowed for over a decade after the stock market crash of 1973. And again it was clear that past lessons had not been learned for the world’s central banks continued creating new money and inevitably inflation soared on a global scale. With the buying power of money being steadily eroded, oil-producing nations of the Middle East were as a consequence prompted to form the OPEC oil cartel in an attempt to restore the real value of their exports. For a brief period OPEC held the world to ransom and, amid fuel shortages and soaring prices, the financial world had to adapt to a tidal wave of petrodollars seeking investment homes.
Simultaneously France, which had long been uneasy about the world’s dependency in terms of the Bretton Woods Agreement on the US Dollar as its ultimate reserve currency had as a consequence been accumulating huge reserves of gold. Finally in 1971 French president Charles de Gaulle directly challenged America to honour its foreign debt with payments in bullion, grabbing headlines by demanding that the US prove that it did indeed hold gold bullion in the vaults of Fort Knox equal, at $35 an ounce, to the sum of its issued paper dollars.
US President Richard Nixon responded by initially moving the official price of gold to $42 an ounce and finally, in a tacit admission that de Gaulle’s allegations were true, officially ended the link which thereafter allowed for a free float of the gold price.
With the world’s monetary system again bloated, this time by petro-dollars, central banks again raised interest rates to rein in the inevitable wave of inflation and In the two years from 1972 to 1974, the American economy slowed from 7.2 percent real GDP growth to a minus 2.1 percent contraction, while inflation jumped from 3.4 percent in 1972 to 12.3 percent in 1974. The petrodollar surge had inevitably created a speculative bubble in the world’s share markets and the market crash of January 1973 was the inevitable aftermath. In the 694 days between 11 January 1973 and 6 December 1974, the New York Stock Exchange’s Dow Jones Industrial Average lost over 45 percent of its value, making it the seventh-worst bear market in the history of the index.
Worse was the effect in Britain where the London Stock Exchange’s Footsie Index lost 73% of its value. From a position of 5.1 percent real GDP growth in 1972, the UK went into recession in 1974, with GDP falling by 1.1 percent. At the time, the UK’s property market was going through a major crisis, and a secondary banking crisis forced the Bank of England to bail out a number of lenders. In Britain the market slide only ended after a rent freeze was lifted on 19 December 1974, allowing a readjustment of property prices.
Over the following year share prices rose by 150 percent. However, still reeling under the impact of an excessive build up of money, inflation continued to rise to a British peak of 25 percent in 1975 before the Paul Volcker solution ushered in a world-wide era of stagflation.
All the main share indices of the future G7 countries bottomed out between September and December 1974, having lost at least 34 percent of their value in nominal terms, and 43 percent in real terms. In all cases, the recovery was a slow and painful process although West Germany’s market was fastest to recover, returning to the original nominal level within eighteen months. However even it did not return to the same real level until June 1985. The London Stock Exchange did not return to the same market level until 1987 when the notorious Black Monday crash happened. The United States did not see the same level in real terms until August 1993: over twenty years after the 1973 crash began.
The 1970s were also an extremely painful time for Latin America. In the 1960s and 1970s Brazil, Argentina, and Mexico had borrowed huge sums of money from international creditors to fund industrialisation and infrastructure development and as a result their economies were booming. Creditors were thus happy to continue providing loans with a result that between 1975 and 1982, Latin American debt to commercial banks increased at a cumulative annual rate of 20.4 percent. This heightened borrowing led Latin America to more than quadruple its external debt from $75-billion in 1975 to more than $315-billion in 1983, or 50 percent of the region’s gross domestic product (GDP).
Debt service (interest payments and the repayment of principal) grew even faster, reaching $66-billion in 1982, up from $12-billion in 1975.
Then came the oil crisis when OPEC quadrupled oil prices in 1973. While the developed world met the challenge by printing money, the developing countries found themselves in a desperate liquidity crunch. The petroleum exporting countries were flush with cash after the oil price increases and invested their money with international banks which “recycled’ a major portion of it as loans to Latin American and African governments. Later, as interest rates increased in the USA and Europe in 1979, debt payments also increased making it harder for borrowing countries to pay back their debts.
Gradually the international capital markets became aware that Latin America would not be able to pay back its loans and the crunch came in August 1982 when Mexico’s Finance Minister, Jesus Silva-Herzog declared that his country would no longer be able to service its debt.
In the wake of this default, most commercial banks significantly reduced or halted new lending to Latin America. Since most of Latin America’s loans had been short-term, a crisis ensued when their refinancing was refused. Billions of dollars of loans that previously would have been refinanced, were now due immediately.
As a result of the Latin American loan crisis, international banks were also growing wary of their loans to South Africa where a similar situation of constantly rolled-over short-term loans was the order of the day. Thus in August 1985, US banks led by Chase Manhattan, suspended their South African lending operations. The credit crunch sent the Rand into a nose dive, which was soon followed by the imposition of exchange controls and a debt “standstill.” was declared by South Africa which froze some $10-billion in payments to foreign creditors.
In both the Latin American and South African cases, repayment moratoria were put in place and the debts were gradually repaid at the expense of general recessions in all these countries and a considerable degree of sacrifice by their citizens. Not so the Asian Tigers when they got into a similar crisis a decade later. There, surprisingly, monetary authorities again forgot the lessons of the past and turned to the printing press to rescue them, thereby sowing the seeds of the next monetary crisis that would reach its conclusion in the Crash of 2008. What a pity they had so rapidly forgotten the lessons of the 1970s and 80s when such largess was untenable and austerity was the order of the day everywhere.
The market crash of 1987 was a little unusual although, as ever, it was triggered by interest rate increases. A chain reaction had begun with Germany raising its interest rates which prompted the then Secretary of the US Treasury James Baker to comment that the increase was “…not a trend which we favour…” There was an immediate international panic among investors who for some months had been fearful that the market had been rising to excessive heights. At the time both Germany and Japan were running huge trade surpluses while the US was in deficit. James Baker’s remarks exacerbated fears that foreign investors might dump US investments and, to counter these, the Fed was rapidly forced to do what Baker had indicated it would not do: interest rates were increased and, as money supply shrank and recession again loomed, the inevitable happened: the market crashed.
Here in South Africa the JSE fell 40 percent between October 19 and November 4. In Britain where dividend yields had fallen to a record average low of 3%, the market fell less spectacularly but again the authorities over-reacted. Fearing that the crash would lead to a recession Chancellor Nigel Lawson cut base lending rates from 10% to 7.5% and slashed taxes.The result fuelled inflation and the Bank of England was later forced to raise rates to 15 percent which, inevitably, triggered Britain’s worst post-war recession.
So severe was this period of economic stagnation in the developed world that when the (Asian Flu) East Asian financial crisis gripped much of Asia, beginning in July 1997 and raising fears of a worldwide economic meltdown, only the United States was economically strong enough to shoulder the burden of throwing money at the problem. US financial authorities at that time argued that the US economy was the sole engine of world growth and as such they were obligated to crank up money supply once more “for the good of everyone on the planet”.
At the time, and as a consequence of the stagnation in most western nations, Asia had been attracting as much as half of the total capital inflow to developing countries. The economies of South-east Asia in particular were maintaining high interest rates that were more attractive to foreign investors than the returns they were getting at home. As a result of this large inflow of money the Pacific “Rim of Fire” nations experienced a dramatic run-up in asset prices. The economies of Thailand, Malaysia, Indonesia, the Philippines, Singapore, and South Korea experienced GDP growth rates of 8 to 12 percent throughout the late 1980s and early 1990s and were at the time acclaimed by the IMF as the “Asian economic miracle”.
Then came the Asian Crisis that started in Thailand with the collapse of the Thai Baht which in turn resulted from a decision by the Thai Government to float the Baht by cutting its peg to the US Dollar. Thailand had acquired a burden of foreign debt that made the country effectively bankrupt even before the collapse of its currency and the drastically-reduced import earnings that resulted from the forced revaluation rendered a quick recovery impossible without strenuous international intervention. As the crisis spread, most of Southeast Asia and Japan saw slumping currencies, devalued stock markets and asset prices, and a precipitous rise in private debt.
Although most of the governments of Asia had no national debt and seemingly sound fiscal policies, the International Monetary Fund (IMF) was forced to initiate a $40-billion aid program aimed at stabilising the currencies of South Korea, Thailand, and Indonesia, whose economies were hit particularly hard by the crisis.
Japan had already been in a state of profound recession due to a highly inefficient banking system weighed down under mountains of bad debt, much of which up to that point had been relatively invisible because of the established Japanese banking practice of hiding the losses of major customers. As part of the IMF-engineered life raft, the United States intervened to stop a precipitous slide in the value of the Yen by agreeing to buy some $2 billion worth of the Japanese currency. In doing so, the United States hoped to increase the value of the Yen, which had fallen to its lowest point in some eight years. In Indonesia, after 30 years in power, President Suharto was forced to step down in May 1998 in the wake of widespread rioting that followed sharp price increases caused by a drastic devaluation of the Rupiah.
The seeds of the monetary crisis of 2007/8 were sown then for not only were the printing presses resorted to in an effort to re-float these Pacific economies, but Japan’s recovery plan included dramatically lowering its interest rate structure which led in turn to the development of what became known as the “Carry Trade”. Taking advantage of Japan’s low interest rates, speculators were able to borrow money at rates of less than half a percent and invest this initially in US bonds that were then yielding as high as 6.75 percent. Then these certificates were round-tripped in order to be pledged as security for even more Japanese loans. Trillions of Dollars of fiat money were thus created, seemingly again out of thin air. Then, as US bond rates fell steadily to a low of 4.2 percent in June 2003, this carry trade money began searching for new investment markets which inevitably led to the worldwide share market boom of April 2003 to October 2007.
At this point I need to remind my readers of the conclusion reached on the analysis of the Great Depression. “If the government (had) allowed the market to correct itself through interest rate hikes and bankruptcy, the consequent recession would have been severe but brief. If, however, the government interfered with the market, the country would be in for a slow, arduous bloodletting and, ultimately, a future littered with cyclical depressions.”
Which brings me to the actions of the Bank of England and the US Federal Reserve around the sub-prime crisis. In members question time in the British parliament on November 14 2007 Prime Minister Gordon Brown was asked to confirm that the Bank of England had loaned in excess of 25-billion pounds to the sub-prime-troubled Northern Rock Bank in order to stave off a run by customers: more than Britain had spent that whole year on education. And multiple billions were to follow in the bail outs of 2008.
Weeks before that both the Bank of England and the US Federal Reserve had lowered interest rates successively and both had indicated that they were prepared to do so again if necessary in the future to ensure the continued stability of their respective economies. Meanwhile, in the United States, President George Bush was assuring home owners that action would be taken to save their homes from repossession.
Of course a primary function of central banks is to ensure financial stability and the Bank of England, the US Federal Reserve and the European Central Bank were acting responsibly when they created extra money at that time. Clearly, however, they had been less than responsible in previous years when they allowed such a mass of extra money to be created. The real question though is whether the central banks were any longer in control of the money supply? Former Fed chairman Alan Greenspan had, in his book The Age of Turbulence: Adventures in a New World’ effectively admitted that they are not.
To understand this point of view it is important to recognise that while the central banks create the monetary base, base money is only a minor part of the money supply. Most of the money we use is credit issued by private banks in the form of deposits. Bank deposits are accepted as money because of the promise that they can be converted into base money on demand. Thus, for example, when carry trade speculators borrowed money in Japan to invest elsewhere and in turn recycle these investments as security against further loans in a virtually endless cycle, almost infinite sums were created which the modern central banking system was virtually powerless to regulate.
Next we have the phenomenon of the velocity of money. In the bygone era of the Gold Standard when the basic unit of most currencies was a fine ounce of gold and pounds, dollars, roubles and yen were thus all interchangeable throughout the marketplaces of the world, a merchant in Johannesburg ordering a consignment of fine linen from Manchester would ship the necessary coins in the form of a bank draft as payment in advance of delivery in an extended journey by rail and ship which could take weeks or even months to reach its destination. Today the same value in electronic bank transfers can circle the globe in seconds. In relative terms then, the effective buying power of money has expanded in direct proportion to the rate in which individual transactions can be completed.
So, the world’s money supply is growing exponentially as a consequence of both bank credit and the speed with which transactions can now be completed because of the development of the internet.
Finally, one needs to recognise that for the carry trade to prosper, it is necessary that interest rate differentials exist and so when central banks act in concert to raise rates, it understandably becomes increasingly unattractive to maintain the carry transactions and as each loan is repaid, the money supply again shrinks.
Thus, in theory, the central banks are still in control. In practice, however, each nation has its own political and monetary agenda and so consensus is seldom a practical reality. When it does occur it is usually in response to a crisis as illustrated by central bank action in the aftermath of the sub-prime crisis. And the consequent reality is that the world’s money supply has expanded at an alarmingly unhealthy rate.
Worse, it logically follows that when private banks and market speculators lose their appetite for risk, close out their speculative positions and refund their loans, the world’s money supply can contract even faster: which is what happens when speculators fear that a bank rate increase or series of increases might be in the offing or when investment markets are perceived to have become dangerously expensive. Volatility has increased exponentially and with it the risk facing investors.
In summary then, when the global money supply expands the twin consequences are that commodity and investment market prices rise in like proportion. Central banks, whose primary role is to keep inflation in check, were in the past able to directly control the quantity of money that was in circulation by manipulating the rate of interest that they charged when they lent money to private banks.
Now, because of a huge overhang of bank credit which acts like a shock absorber dampening down the effects, it is accepted that it can take upwards of 18 months for a change in base lending rates to percolate through the system and affect the inflation rate.
The graph above, courtesy of Wikipedia, illustrates the ebb and flow of US inflation over the past century offering us an historic perspective of a problem that refuses to be tamed by the modern central banking system. Note particularly the sharp decline in 1920 which arguably allowed the US Federal Reserve the opportunity to massively inflate money supply and accordingly lay the foundations for the market crash of 1929. Note also the relatively low rates from 2000 onwards which laid the foundations for the events of 2007/8.
Because of this lengthy time lag, central bank intervention has increasingly become a hit and miss affair and, most dangerously, has resulted in heavy-handed interest rate manipulation that on no less than five occasions in recent years has plunged the world into recession.
Share market price levels, while a consequence of both long-term changes in money supply and changes in the profitability of their constituent companies, are as much driven in the short-term by human emotions and the herd instinct as they are by corporate profit growth. Thus, while changes in interest rates are nearly always intended to control monetary inflation and usually result in eventual changes in the profitability of exchange-listed companies many months in the future, the investing public will often indulge in immediate opportunistic buying or panic selling which usually results in the prices of securities grossly exaggerating the probable profitability changes and either rising far above or falling far below their long-term price means.
Intelligent investors have accordingly learned to adopt investment strategies to try and exploit these boom and bust cycles. However, the introduction of Capital Gains Taxes by governments desperate for additional sources of revenue to fund the ever-increasing social demands that have been placed upon them, have made it all but impossible for investors to sell their shares ahead of an anticipated share market crash in order to try to protect the capital value of their investments.
In an effort to negate this impediment, professional fund managers have turned to the futures market to hedge the risk. In theory, buying a hedge will, as a rough guide, offer a ten-fold greater return if the market moves in the direction that the hedger expects. However, if it goes against the fund manager, it offers the fastest way the financial industry has ever devised to destroy investment capital. Not surprisingly, there have been increasing calls to make hedge funds illegal and many pension funds now ban their managers from ever using the process.
More critical, however, is the impact upon the wealth of nations and the impoverishment of the increasing numbers of economically marginalized people in the world. It is imperative that the world find a means of eliminating these repetitive cycles of growth and recession for in every recession, the productive capacity of nations is forced into underutilisation and workers lose their employment forcing them to live for extended periods on their meagre savings and, ultimately throwing them on the mercy of governments which are forced to rescue them with social wages which, as I have demonstrated, they simply cannot afford.
Demonstrably then, if the root cause of these boom and bust cycles is the political manipulation of currencies that has happened with increasing frequency since the world abandoned the discipline of the Gold Standard, we need to find an alternative monetary base which defies political meddling.
In the developed world and especially the US, and even in China, our economic challenges are rapidly approaching that point. Things that would have been easily fixed a decade ago, or even five years ago, will soon be unsolvable by conventional means.
There is almost no willingness to face our top problems, specifically our rising debt. The economic challenges we face can’t continue, which is why I expect the Great Reset, a kind of worldwide do-over. It’s not the best choice but we are slowly ruling out all others.
Last column I talked about the political side of this. Our embrace of either crony capitalism or welfare statism is going to end very badly. Ideological positions have hardened to the point that compromise seems impossible.
Central bankers are politicians, in a sense, and in some ways far more powerful and dangerous than the elected ones. Some recent events provide a glimpse of where they’re taking us.
Hint: It’s nowhere good. And when you combine it with the fiscal shenanigans, it’s far worse.
Central banks weren’t always as responsibly irresponsible, as my friend Paul McCulley would say, as they are today. Walter Bagehot, one of the early editors of The Economist, wrote what came to be called Bagehot’s Dictum for central banks: As the lender of last resort, during a financial or liquidity crisis, the central bank should lend freely, at a high interest rate, on good securities.
The Federal Reserve came about as a theoretical antidote to even-worse occasional panics and bank failures. Clearly, it had a spotty record through 1945, as there were many mistakes made in the ‘20s and especially the ‘30s. The loose monetary policy coupled with fiscal incontinence of the ‘70s gave us an inflationary crisis. Paul Volcker’s recent passing (RIP) reminds us of perhaps the Fed’s finest hour, stamping out the inflation that threatened the livelihood of millions. However, Volcker had to do that only because of past mistakes.
Beginning with Greenspan, we have now had 30+ years of ever-looser monetary policy accompanied by lower rates. This created a series of asset bubbles whose demises wreaked economic havoc. Artificially low rates created the housing bubble, exacerbated by regulatory failure and reinforced by a morally bankrupt financial system.
And with the system completely aflame, we asked the arsonist to put out the fire, with very few observers acknowledging the irony. Yes, we did indeed need the Federal Reserve to provide liquidity during the initial crisis. But after that, the Fed kept rates too low for too long, reinforcing the wealth and income disparities and creating new bubbles we will have to deal with in the not-too-distant future.
This wasn’t a “beautiful deleveraging” as you call it. It was the ugly creation of bubbles and misallocation of capital. The Fed shouldn’t have blown these bubbles in the first place.
The simple conceit that 12 men and women sitting around the table can decide the most important price in the world (short-term interest rates) better than the market itself is beginning to wear thin. Keeping rates too low for too long in the current cycle brought massive capital misallocation. It resulted in the financialization of a significant part of the business world, in the US and elsewhere. The rules now reward management, not for generating revenue, but to drive up the price of the share price, thus making their options and stock grants more valuable.
Coordinated monetary policy is the problem, not the solution. And while I have little hope for change in that regard, I have no hope that monetary policy will rescue us from the next crisis.
Let me amplify that last line: Not only is there no hope monetary policy will save us from the next crisis, it will help cause the next crisis. The process has already begun.
In September last year, something still unexplained (at least to my satisfaction, although I know many analysts who believe they know the reasons) happened in the “repo” short-term financing market. Liquidity dried up, interest rates spiked, and the Fed stepped in to save the day. Story over? No. The Fed has had to keep saving the day, every day, since then.
We hear different theories. The most frightening one is that the repo market itself is actually fine, but a bank is wobbly and the billions in daily liquidity are preventing its collapse. Who might it be? I have been told, by well-connected sources, that it could be a mid-sized Japanese bank. I was dubious because it would be hard to keep such a thing hidden for months. But then this week, Bloomberg reported some Japanese banks, badly hurt by the BOJ’s negative rate policy, have turned to riskier debt to survive. So, perhaps it’s fair to wonder.
Whatever the cause, the situation doesn’t seem to be improving. On Dec. 12 a New York Fed statement said its trading desk would increase its repo operations around year-end “to ensure that the supply of reserves remains ample and to mitigate the risk of money market pressures.”
Notice at the link how the NY Fed describes its plans. The desk will offer “at least” $150 billion here and “at least” $75 billion there. That’s not how debt normally works. Lenders give borrowers a credit limit, not a credit guarantee plus an implied promise of more. The US doesn’t (yet) have negative rates but the Fed is giving banks negative credit limits. In a very precise violation of Bagehot’s Dictum.
We have also just finished a decade of the loosest monetary policy in American history, the partial tightening cycle notwithstanding. Something is very wrong if banks still don’t have enough reserves to keep markets liquid. Part of it may be that regulations outside the Fed’s control prevent banks from using their reserves as needed. But that doesn’t explain why it suddenly became a problem in September, necessitating radical action that continues today.
Here’s the official line, from minutes of the unscheduled Oct. 4 meeting at which the FOMC approved the operation.
Staff analysis and market commentary suggested that many factors contributed to the funding stresses that emerged in mid-September. In particular, financial institutions’ internal risk limits and balance sheet costs may have slowed the distribution of liquidity across the system at a time when reserves had dropped sharply and Treasury issuance was elevated.
So the Fed blames “internal risk limits and balance sheet costs” at banks. What are these risks and costs they were unwilling to accept, and why?
We still don’t know. There are lots of theories. Some even make sense. Whatever the reason, it was severe enough to make the committee agree to both repo operations and the purchase of $20 billion a month in Treasury securities and another $20 billion in agencies. They insist the latter isn’t QE but it sure walks and quacks like a QE duck. So, I and many others call it QE4.
As we learned with previous QE rounds, exiting is hard. Remember that 2013 “Taper Tantrum?” Ben Bernanke’s mild hint that asset purchases might not continue forever infuriated a liquidity-addicted Wall Street. The Fed needed a couple more years to start draining the pool, and then did so in the stupidest possible way by both raising rates and selling assets at the same time. (I don’t feel good saying I told you so but, well, I did.)
Having said that, I have to note the Fed has few good choices. As mistakes compound over time, it must pick the least-bad alternative. But with each such decision, the future options grow even worse. So eventually instead of picking the least-bad, they will have to pick the least-disastrous one. That point is drawing closer.
Underlying all this is an elephant in the room: the rapidly expanding federal debt. Each annual deficit raises the total debt and forces the Treasury to issue more debt, in hopes someone will buy it.
The US government ran a $343 billion deficit in the first two months of fiscal 2020 (October and November) and the 12-month budget deficit again surpassed $1 trillion. Federal spending rose 7% from a year earlier while tax receipts grew only 3%.
No problem, some say, we owe it to ourselves, and anyway people will always buy Uncle Sam’s debt. That is unfortunately not true. The foreign buyers on whom we have long depended are turning away, as Peter Boockvar noted this week.
Foreign selling of US notes and bonds continued in October by a net $16.7b. This brings the year-to-date selling to $99b with much driven by liquidations from the Chinese and Japanese. It was back in 2011 and 2012 when in each year foreigners bought over $400b worth. Thus, it is domestically where we are now financing our ever-increasing budget deficits.
The Fed now has also become a big part of the monetization process via its purchases of T-bills which also drives banks into buying notes. The Fed’s balance sheet is now $335b higher than it was in September at $4.095 trillion. Again, however the Fed wants to define what it’s doing, market participants view this as QE4 with all the asset price inflation that comes along with QE programs.
It will be real interesting to see what happens in 2020 to the repo market when the Fed tries to end its injections and how markets respond when its balance sheet stops increasing in size. It’s so easy to get involved and so difficult to leave.
Declining foreign purchases are, in part, a consequence of the trade war. The dollars China and Japan use to buy our T-bills are the same dollars we pay them for our imported goods. But interest and exchange rates also matter. With rates negative or lower than ours in most of the developed world, the US had been the best parking place.
But in the last year, other central banks started looking for a NIRP exit. Higher rate expectations elsewhere combined with stable or falling US rates give foreign buyers—who must also pay for currency hedges—less incentive to buy US debt. If you live in a foreign country and have a particular need for its local currency, an extra 1% in yield isn’t worth the risk of losing even more in the exchange rate.
I know some think China or other countries are opting out of the US Treasury market for political reasons, but it’s simply business. The math just doesn’t work. Especially given the fact that President Trump is explicitly saying he wants the dollar to weaken and interest rates go even lower. If you are in country X, why would you do that trade? You might if you’re in a country like Argentina or Venezuela where the currency is toast anyway. But Europe? Japan? China? The rest of the developed world? It’s a coin toss.
The Fed began cutting rates in July. Funding pressures emerged weeks later. Coincidence? I suspect not. Many factors are at work here, but it sure looks like, through QE4 and other activities, the Fed is taking the first steps toward monetizing our debt. If so, many more steps are ahead because the debt is only going to get worse.
As you can see from the Gavekal chart below, the Fed is well on its way to reversing that 2018 “quantitative tightening.”
Louis Gave wrote a brilliant essay recently (behind their pay wall, but perhaps he will make it more public) considering four possible reasons for the present valuation dichotomies.
I’ll quote the first one because I believe it is right on target:
The argument: The Fed’s current liquidity injection program is not a genuine effort at quantitative easing by the US central bank. Instead, it is merely a short-term liquidity program to ensure that markets—and especially the repo markets—continue to operate smoothly. In about 15 weeks’ time, the Fed will stop injecting liquidity into the system. As a result, the market is already looking through the current liquidity injections to the time when the Fed goes “cold turkey” once again. This explains why bond yields are not rising more, why the US dollar isn’t falling faster, and so on.
My take: This is a distinct possibility. But then, as Milton Friedman used to say: “Nothing is so permanent as a temporary government program.” The question here is: Why did the repo markets freeze in mid- to late September? Was it just a technical glitch? Or did the spike in short rates reflect the fact that the appetite of the US private sector and foreign investors for short-dated US government debt has reached its limit? In short, did the repo market reach its “wafer-thin mint” moment?
If it was a technical glitch, then the Fed will indeed be able to “back off” come the spring. However, if, as I believe, the repo market was not the trouble, but merely a symptom of a bigger problem—excessive growth in US budget deficits—then it is hard to see how, six months before a US election, the Fed will be able to climb back out of the full-on US government monetization rabbit hole in which it is now fully immersed.
In this scenario, the markets will come to an interesting crossroads around the Ides of March. At that point, the Fed will have to take one of two paths:
1. The Fed does indeed stop its “non-QE QE” program. In this scenario, US and global equities are likely to take a nasty spill. In an election year, that will trigger a Twitterstorm of epic proportions from the US president.
2. The Fed confirms that the six-month “temporary” liquidity injection program is to be extended for another “temporary” six months. At this point bond yields everywhere around the world will shoot up, the US dollar will likely take a nasty spill, global equities will outperform US equities, and value will outperform growth, etc.
Looking at the US government’s debt dynamics, I believe the second option is much more likely. And it is all the more probable since triggering a significant equity pull-back a few months before the US presidential election could threaten the Fed’s independence. Still, the first option does remain a possibility, which may well help to explain the market’s cautious positioning despite today’s coordinated fiscal and monetary policies (ex-China).
Just this week Congress passed, and President Trump signed, massive spending bills to avoid a government shutdown. There was a silver lining; both parties made concessions in areas each considers important.
Republicans got a lot more to spend on defense and Democrats got all sorts of social spending. That kind of compromise once happened all the time but has been rare lately. Maybe this is a sign the gridlock is breaking. But if so, their cooperation still led to higher spending and more debt.
As long as this continues—as it almost certainly will, for a long time—the Fed will find it near-impossible to return to normal policy. The balance sheet will keep ballooning as they throw manufactured money at the problem, because it is all they know how to do and/or it’s all Congress will let them do.
Nor will there be any refuge overseas. The NIRP countries will remain stuck in their own traps, unable to raise rates and unable to collect enough tax revenue to cover the promises made to their citizens. It won’t be pretty, anywhere on the globe.
Luke Gromen of Forest for the Trees is one of my favorite macro thinkers. Like Louis Gave, he thinks the monetization plan will get more obvious in early 2020.
Those that believe that the Fed will begin undoing what it has done since September after the year-end “turn” are either going to be proven right or they are going to be proven wrong in Q1 2020. We strongly believe they will be proven wrong. If/when they are, the FFTT view that the Fed is “committed” to financing US deficits with its balance sheet may go from a fringe view to the mainstream.
Both parties in Congress are committed to more spending. No matter who is in the White House, they will encourage the Federal Reserve to engage in more quantitative easing so the deficit spending can continue and even grow.
As I have often noted, the next recession, whenever it happens, will bring a $2 trillion+ deficit, meaning a $40+ trillion dollar national debt by the end of the decade, at least $20 trillion of which will be on the Fed’s balance sheet. (My side bet is that in 2030 we will look back and see that I was an optimist.)
My 2020 forecast issue, which you’ll see after the holiday break, I’m planning to call “The Decade of Living Dangerously.” Sometime in the middle to late 2020s we will see a Great Reset that profoundly changes everything you know about money and investing.
Crisis isn’t simply coming. We are already in the early stages of it. I think we will look back at late 2019 as the beginning. This period will be rough but survivable if we prepare now. In fact, it will bring lots of exciting opportunities. More on that in coming letters.
It wasn’t a white light moment. And gold didn’t seem exceptionally cheap to me. $265 an ounce seemed like a lot. But if I’d known anything at all about the price history, I might have had a different opinion.
I didn’t think about gold much when I got to Lehman Brothers in 2001, either. I was getting a job in equities. All the jobs were in equities or fixed income. I didn’t even know that Lehman Brothers had a commodities desk, and even if I did, nobody would have thought about getting a job there.
Around this time I was reading a lot of Ayn Rand stuff, and I kept coming back to Alan Greenspan’s 1966 essay titled “Gold and Economic Freedom.” I probably read it a hundred times and even memorized parts of it. The takeaway was that if the government had too much debt, it would be compelled to print money to buy the debt to keep interest rates down.
The year was 2005—we were still three years away from quantitative easing, although it was already a twinkle in Bernanke’s eye.
That was about the first time that I thought of gold as an investment. And coincidentally, that was the time that some folks from State Street and the World Gold Council came by the office to sign us up as Authorized Participants for the new gold ETF, GLD.
To this day, GLD remains a very important financial innovation—subsequent attempts to securitize commodities have led issuers to create products in ETN form that tracked or held futures contracts, introducing basis and roll risk into the equation.
GLD is simple—it holds physical gold. A few years later, there would be some arguments about “paper gold” and unallocated versus allocated gold. But GLD is still trucking to this day, and it’s the most liquid and practical way to buy large quantities of gold.
Of course, when Bernanke actually did launch quantitative easing, gold got really popular, along with something called CMS caps, which was basically a structured call option on interest rates.
People thought there would be lots of inflation, and if you read Greenspan’s “Gold and Economic Freedom” essay, you might be led to believe that.
Gold worked, but the CMS caps didn’t, as bond yields actually went lower. Of course, the feared inflation never materialized. But as far as trades go, the gold trade was a pretty good one, and it worked based on the fear of inflation, not actual inflation.
After the last eight years in purgatory, gold is starting to work again. The technicians are saying that it broke out. This is where things get complicated. Why does one buy gold?
Is it as an inflation hedge?
Is it because of political risk or geopolitical risk?
Is it because of deficits?
Is it because of stupid monetary policy?
It is kind of a confluence of all these things:
Which means it should be a pretty good environment for gold.
You don’t need gold if you believe that the Federal Reserve will be a good steward of purchasing power. That looks less likely under this administration or any subsequent administration. The takeaway:
You don’t need inflation to skyrocket for gold to work-although we should have learned that from the 2009–2011 period.
Am I a gold bug? Maybe, but without the conspiracy theories. I’ve always been pessimistic about the Fed’s ability to control the currency. That pessimism has at times been unwarranted.
Bernie Sanders is essentially tied in Iowa and New Hampshire. The probability of him being president is not zero (in fact, it’s about eleven percent). Try to imagine what a Bernie Sanders Fed would look like, given what we know about his love for MMT. Something tells me that the Sanders Fed would be even less free from political influence than the Trump Fed.
I’m not here to tell scary stories. Some people say that gold outperforms stocks. Some people say that stocks outperform gold. It depends on where you pick your starting point, and people are very dishonest about that.
I will say this: It only takes a small amount of gold to dramatically change the risk characteristics of your portfolio—for the better.
And I don’t think that millennials own a single ounce.