Charles Mackay was a 19th century Scottish poet, journalist and author who is best known these days for his book Extraordinary Popular Delusions and the Madness of Crowds. He leads off with three of the most famous financial bubbles in history: the Mississippi Scheme, the South-Sea Bubble and Tulipomania. He also writes of fortune-telling, witches and the Crusades.
Fortune-telling remains a mainstay among the financial elite and the lowliest retail investor on the planet alike. The U.S. Federal Reserve Bank has a sort of running fortune-telling tool called GDPNow that takes up-to-date indicators and plugs them into its formula for projecting the current direction of U.S. GDP. GDPNow is revised every few days as new values for its many components become available.
The latest reading as of May 29 is minus 51.2 percent. That’s an annualized number that is seasonally adjusted. It’s a number that suggests that economic activity may have fallen at least as much since January as it did in the first four years of the Great Depression (1929 to 1933). At the bottom of the depression in 1933 the U.S. economy had contracted by about 30 percent. Unemployment in the United States reached 25 percent. The Dow Jones Industrial average had lost almost 90 percent of its value.
The current official U.S. unemployment rate at the end of April was 14.7 percent. Expect higher numbers for May. Some 40 million people have filed for unemployment benefits in the last 10 weeks. No one has ever seen anything like it. The pandemic behind these numbers continues to dominate the news.
In the face of this economic disaster the U.S. stock market first crashed by about 35 percent and now has risen to within about 10 percent of all-time highs. The explanation is that the United States and the world are about to reverse all the damage that the pandemic inflicted on the economy and go on to greater heights. Investors know this, and the stock market is a discounting mechanism. That’s fancy Wall Street talk for fortune-telling mechanism, one that captures all relevant future developments. One could ask why the stock market didn’t take into account the impact of the coronavirus pandemic until it was upon us; but that would ruin the story!
Another explanation is a blizzard of new brokerage accounts opened by inexperienced investors this year who are throwing money at the stock market as they sit home with little to do but watch cable news and CNBC. They are apparently buying the quick recovery story and for as long as they have money to throw at stocks, the markets may stay aloft.
If we are not headed for a quick recovery, but rather a slow, halting one with many reverses and exceedingly slow growth, it is unlikely that the stock market will continue to hold at a level so pricey compared to corporate earnings now that the bubble in stock prices that existed in February has been re-inflated.
There are those who say that the extraordinary intervention by central banks across the world including the U.S. Federal Reserve Bank and the unprecedented stimulus packages approved by the U.S. Congress and many other legislatures across the world have restored confidence and shored up sagging spending.
But then there’s that nagging GDPNow number that has done nothing but trend downward dramatically for the entire month of May. It’s hard to imagine that conditions have turned around or even stabilized at this point.
Belief in bull markets die hard. The last group to join in the fun and profit—before the bear market takes hold in earnest—is usually made up of inexperienced individual investors. That’s what’s happening now. A lot of people believe that the ending this time will be different, and those people are betting a substantial portion of their life savings on it.
In keeping with Charles Mackay’s precedent of dealing with more than one extraordinary delusion at a time, I offer another that is emblematic of the many we seem to be experiencing at once: Mining the moon.
At the beginning of this remarkable month few noticed news reports that revealed the United States is seeking to bring countries into an agreement for mining the moon. The idea of mining celestial bodies for valuable minerals has been around for a long time. But it has mostly revolved around asteroids which are known to contain countless billions of tons of metal ore.
The surface of the moon, so far as we can tell, is made up of the following elements according Space.com:
The average composition of the lunar surface by weight is roughly 43 percent oxygen, 20 percent silicon, 19 percent magnesium, 10 percent iron, 3 percent calcium, 3 percent aluminum, 0.42 percent chromium, 0.18 percent titanium and 0.12 percent manganese.
None of these elements are in short supply on Earth. And, even if they were, the cost of building and running mining facilities in an airless, waterless environment; scooping up large amounts of ore and loading it into spaceships bound for Earth; and then transporting the ore to the surface of the Earth, would be many, many, many times the cost of mining these same elements here.
Some might say that we could refine the ore on the moon. That would entail all the problems of running a facility requiring enormous continuing energy inputs without air or water and therefore without combustion. I suppose we could extract the oxygen from the lunar surface but that is yet another expensive and difficult process given conditions on the moon.
All the same problems hold true for the potentially more valuable asteroids, which, as things stand, have no economic value to us at all.
It is a fitting bookend to this month then, that a rocket engine being tested by SpaceX for its announced ambition of building a craft that can deliver people and payloads to Mars blew up on the test pad. This event was obscured by the successful launch of another SpaceX rocket which took a two-man crew to the International Space Station (ISS) this weekend. Of course, there is nothing remarkable about what happened since trips to and from the ISS have been routine using Russian spacecraft for years.
There are many other delusions which Earth’s inhabitants find necessary to maintain faith in our current trajectory; infinite growth on a finite planet comes to mind. When I think about it, I’ve been trying to undermine such delusions since the beginning of this blog. I confess that I and so many others who understand the limits facing humans on Earth have made little progress. Even so, I feel compelled to keep trying.
Image: Working on the asteroid (model). 2013. David Santaolalla realized this picture as a tribute to: Vincent Bousserez, Slinkachu, Christopher Boffoli, William Kass, Kurt Moses. 6 Talented Artists Creating Magnificent Miniature Worlds Via Wikimedia Commons https://commons.wikimedia.org/wiki/File:(Working_on_the)_Asteroid.jpg
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