Are We "Too Negative"?
Bill responds to popular demand...
Bill Bonner, reckoning today from San Martin, Argentina...
Every sunset brings the promise of a new dawn.
~ Ralph Waldo Emerson
Back home on the range, after 2 days on the road, we take stock. Has anything important changed?
Are the economy and the markets still following the script we laid out?
Colleague Tom Dyson just asked dear readers what they thought of our service. Many remarked that your editor was ‘too negative.’
Whew! We worried that we were too positive. We were afraid we had not warned you with sufficiently lurid details about the crash, depression, hyper-inflation, revolution, war, poverty and mass death ahead.
Nevertheless, today, we will respond to popular demand. We’re not changing our tune. But we’ll try to be more up-beat about the coming catastrophe.
Buying the Market
You’ll recall that Wall Street was once a market for stocks and bonds. Each one was analyzed, inspected, weighed and judged. Investors looked for the best of them and traded them with each other, depending on their guesses and opinions.
Then, the Fed came into the picture…cautiously…gradually…and then emphatically. Marty Zweig was among the first to notice that Wall Street had become something different…no longer a market of stocks, now it was an investment of its own…a ‘stock market,’ that investors could use like a gambler used Las Vegas…as a place to make his bets.
Instead of doing any real studying, an investor could just “buy the market” …perhaps by getting an ETF…and his fortunes would rise (or fall) with the stock market itself.
Zweig noticed, too, that the key to succeeding in this new market was to understand the role of the Fed.
“Don’t fight the Fed,” he advised.
After stopping inflation with a 20% Fed Funds rate in 1980, Fed policy pushed rates down and the stock market up for the next 40 years. From 1982 to 2022, the Dow doubled once…twice…thrice…four times…FIVE TIMES.
But in 2020, the bond market topped out. Interest rates hit record lows (when bonds go up, yields go down)…and then began an historic move up. A four-decade bull market in bonds (with lower and lower yields) was over.
Measured in Real Money
Last year, the Fed changed course, too. It is now raising rates and lowering stock prices. Here’s the Wall Street Journal:
The Fed has been trying to curb investment, spending and hiring by raising rates, which makes it more expensive to borrow and can push down the price of assets such as stocks and real estate. The fed-funds rate influences other borrowing costs throughout the economy.
Speculators have been slow to understand. They put their ears to the rail…listening carefully for sounds of that coming Pivot Express. They are sure it is rolling their way; soon, they believe, things will return to ‘normal.’ In the meantime, they are still ‘buying the dip’ and expecting a return to booming markets with super-low interest rates
As we’ve pointed out, there was little ‘normal’ about the last 22 years. And stocks do not always go up. So far in the 21st century, even the greatest investor of all time – Warren Buffett – has not made a penny. Not in real money, gold.
Is this beginning to sound ‘negative?’ Well, let’s look at it from the bright side. The US has been on the decline…with fake money, fake wars…and fake prosperity for the last 22 years; happily, Buffett’s flagship company, Berkshire Hathaway, hasn’t lost value. Priced in gold, it is neither more or less valuable than it was in 1999.
That brings us up-to-date. There has been no real change in the program since the bond market hit bottom and the Fed changed course. Interest rates up; asset prices down.
And from here on out, there’s nothing but good news:
Currently, consumer, business, and government debt is still going up. Borrowing puts more money in circulation, which causes prices to rise (inflation).
Sunny Side of the Street
Thanks to the Fed’s error – keeping interest rates far too low for far too long – we have far too much debt, much of which can never be paid. But, (more positivity!) – that’s what recessions are for. Trying to stop recessions and corrections is like preventing episodic forest fires. The dry tinder just builds up – creating an even bigger danger.
That is what has happened. Like fallen limbs and pine needles, the US has accumulated some $90 trillion worth of debt, including about $50 trillion in ‘excess’ tinder (above traditional norms). Good news for a pyromaniac!
So…on with the sunny-side-of-the-street weather outlook:
For now, all is hunky dory. Low unemployment (as measured by the feds)…and satisfactory consumer spending (thanks to borrowing) allow the Fed to continue its policy of raising rates, without really causing much pain. Said Jerome Powell:
“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.”
And (will the good news ever stop?!) the Fed’s higher rates will probably have the effect the Fed desires – stocks will fall, interest rates will rise, borrowing will go down, consumer spending will drop off…and jobs will disappear. And debt will decline – either by defaults, bankruptcies and write-offs…and/or, later, by inflation.
Yes, there’s a small shadow over our otherwise sunny report. It’s easy to turn down a hamburger when you’ve just eaten a steak. It’s much harder when you are starving. When the lean days come – when stocks crash and the economy goes into a recession – we expect Powell’s appetite for a ‘pivot’ to be irresistible.
And he’ll have plenty of company. Yes, the Fed is subject to the same fads and trends as the rest of the government. ‘Diversity hires’ at the Fed are likely to favor more government, bigger deficits, lower interest rates and looser monetary policies.
It would be a “serious mistake,” said Larry Summers to load up the Fed with wokish, dovish, leftist deciders. It would cause people to expect more inflation, and thereby “put more inflation premium into interest rates…likely to lead to higher long rates, which means higher mortgage rates for the very people progressives are trying to help.”
Even there, the glass is half full as well as half empty. The housing sector has begun a decline already. Higher mortgage rates will give it a shove, helping it get where it is going sooner. Higher prices….and higher mortgage interest rates…will prevent people from buying houses they can’t really afford.
So you see, dear reader, everything always works out for the best.
Joel’s Note: Speaking of happy days, small business owners and members of America’s entrepreneurial class can finally rejoice. After years watching their bloated federal government overpromise, over-react and overspend on just about every front, President Biden swooped to the rescue yesterday with the promise of…
… higher taxes and more government spending!
Unveiling his much anticipated tax plan, Mr. Biden’s 2024 budget proposal calls for massive new social spending programs and (get ready to be shocked) tax hikes on the rich. Here’s MSN…
The president’s budget calls for paring back the deficit over the next decade while also spending more than $2 trillion on dozens of new domestic policy initiatives, paid for by more than $4.5 trillion in new revenue, primarily through hefty tax hikes on high earners and large corporations and by reining in federal spending on prescription drugs.
The blueprint envisions a much more expansive role for the federal government overall, aiming for about $10 trillion in annual spending by 2033 — up from roughly $6.3 trillion currently, and about $6.9 trillion in the next fiscal year.
Hmm… a ~50% increase in annual spending over the next decade... funded by “eating the rich?” Where have we seen this playbook before? And this, from the same ace administrators who oversaw the Paycheck Protection Program, from which a cool $120 billion was purloined… not to mention the $163 billion siphoned from the federal unemployment insurance program. Boy, these guys sure have a handle on the situation!
This latest budget would also lift the corporate tax rate to 28% from 21%, quadruple the stock buyback tax levied last year, double the capital gains tax to 39.6% from 20% for households making over $1 million and raise the top personal-income tax rate to 39.6%, from 37%, for Americans earning $400,000 or more.
But why stop there? At last count, American had 724 billionaires, the most of any country on the planet. (China is #2, at 698.) According to inequality.org, the billionaire class added $2.1 trillion dollars to their net wealth during the pandemic. Never mind whether these people earned their wealth through honest means or by grift… by providing real world goods and services or leaching off the state. Since we’re already coveting our neighbors’ property, why not just go “Full Bernie” and soak ‘em all?!
Well, because… math.
Let’s say we arrest Messers. Musk, Bezos, Gates, Zuck, Buffett and the rest of their uber rich buddies. Let’s say we confiscate their yachts, pilfer their accounts, commandeer their rocket ships and turn their factories, outlets, research plants, investment funds, offshore accounts and all the rest over to the federal government.
Taking inequality.org at its word – that is, assuming America’s billionaires have a cool $5 trillion for us to “appropriate” – looting the mega rich would yield enough lucre to run Mr. Biden’s dream 2033 federal government for… six months.
Maybe then it would finally be time, as the learned George Bush II so eloquently phrased it, to “make the pie higher.”
Ha, ha. Thanks for the humorous comment coming from amongst "dear readers" that your musings are "too negative". The more realistic perspective is that you are being far too placid in viewing a future financial and social catastrophe that will be of truly Biblical proportions. I doubt that even Ezekiel has depicted it in its true horror and destructiveness. Keep "telling is like it is". There are two ways to be fooled: One is to believe what isn’t true; the other is to refuse to believe what is true.
Biden’s proposal to soak the rich is just another variation on a theme that has been excoriated since at least Aristotle’s discussion in his “Politics.” Here’s a more recent targeting of it from Paul Rahe’s book “Soft Despotism, Democracy’s Drift” (2009):
“In Jacksonian America, as Tocqueville noticed [in the two volumes of his magisterial ‘Democracy in America’], wealth was regarded as suspect, and the wealthy were virtually banned from the political arena (I.ii.2, pp. 139–40). If their property was nonetheless safe, it was because impecunious Americans hoped to become prosperous someday themselves (II.iii.21, p. 214). If, however, as Roosevelt insisted, it really is the task of the government to ‘assure’ its citizens ‘equality in the pursuit of happiness,’ property cannot be sacrosanct. If the government is to give, first it must take. For one’s talent, diligence, discipline, parsimony, and prudence, if one possesses these attributes, one must be made to pay; and for one’s incompetence, laziness, self-indulgence, extravagance, and folly, if one exhibits these defects, one is entitled to receive compensation. In this fashion, that which in the past would have been called theft came, in the United States, to be denominated social justice. Persons, we are now frequently told, have rights; property has none. But, of course, the attack on property rights is, in fact, an attack on persons who happen to be property-holders, and it is an assault as well on the industriousness and the ingenuity that enabled them to acquire. We have forgotten what James Madison so clearly understood—that it is from ‘the diversity in the faculties of men’ that ‘the rights of property originate,’ and that ‘the protection of these faculties is the first object of Government’—and with the growth in what are euphemistically called ‘transfer payments,’ our democracy has step by step become a giant kleptocracy.”