Last week, the Dow punched up above 19,000 – a new all-time record. And on Monday, the Dow, the S&P 500, the Nasdaq, and the small-cap Russell 2000 each hit new all-time highs. The last time that happened was on the last day of December 1999.
Ironically, two events that were almost universally expected to trigger large stock market declines were followed by quite rapid and strong gains. Would the market have fallen if Hillary Clinton had won the presidential election? That would have confounded expectations as well. Also, the S&P 500 declined for nine days in a row (even if not by much) just before the election – at the time Clinton was still widely expected to win. it remains to be seen whether and for how long the recent discounting of Nirvana will last – click to enlarge.
Just a few months later, the dot-com bubble burst and the tech-heavy Nasdaq lost 80% of its value. And the U.S. stock market, overall, lost about 50%. But investors are bullish. They believe President-elect Trump will be good for stocks.
He is supposed to arrive in Washington for his inauguration and march directly over to the Capitol to demand a tax cut. This will return over $6 trillion to the private sector over the next 10 years… not to mention a proposed $1 trillion splurge on “infrastructure.”
As Trump’s chief adviser (and former Goldman alum), Stephen Bannon, explained to Michael Wolff of The Hollywood Reporter last week:
“Like [Andrew] Jackson’s populism, we’re going to build an entirely new political movement,” he says. “It’s everything related to jobs. The conservatives are going to go crazy. I’m the guy pushing a trillion-dollar infrastructure plan. With negative interest rates throughout the world, it’s the greatest opportunity to rebuild everything. Shipyards, iron works, get them all jacked up. We’re just going to throw it up against the wall and see if it sticks.”
Everybody’s talking about the feds’ opportunity to “invest” free money. It makes us nervous; we know how hard it is to get a good return on investment – especially when you don’t know what you’re doing.
The government pays just over 2% on 10-year loans. If inflation over the next decade is anywhere near its long-term average, the real cost of funds is roughly zero. The money, say the Big Spenders in Washington, will be free.
And henceforth it will be getting fed for free!
In the pages of the Financial Times is another voice for investing money that doesn’t exist. Here’s Fed Vice Chairman Stanley Fischer speaking to the Council on Foreign Relations think tank:
“Macroeconomic policy does not have to be confined to monetary policy,” said Mr. Fischer…
“Certain fiscal policies, particularly those that increase productivity, can increase the potential of the economy,” he said.
This is a train that’s going to sell out fast. Everyone is going to want to board. Free money. Jobs. Inflation. Infrastructure. What’s not to like? Who will not want to be a passenger on this express train to Fantasyland?
Already on board, near the head of the train, is our friend Richard Duncan at Macro Watch. Richard, a specialist in credit analysis who has worked with the World Bank, shares our view: The world economy is a giant bubble waiting to pop.
But his prescription is different. We would happily get out a pin and give the bubble a prick. Not that we like to see innocent people suffer. But we hate to see guilty people not suffer.
Richard, on the other hand, is a kind-hearted soul, an optimist with a warm and uplifting view of human nature. He can’t bear thinking about the widows and orphans stuck in “another Great Depression,” which he believes would result if the credit bubble bursts.
All it would take is a big enough increase in interest rates. With so much debt in the world, he says, higher rates would be catastrophic. How to avoid it? Richard:
“Very large-scale government investment in the industries and technologies of the future will lift America’s poor out of poverty. It will save the middle class. And it will make the most prosperous segments of our society wealthy – and healthy – beyond their wildest dreams.”
In an open video-letter to Donald Trump, he proposes that the feds should identify 10,000 of America’s “most promising entrepreneurs.” They should all have good ideas for the future – biotech, nanotech, green tech, whatever – but it should have a “tech” at the end. Then the feds should invest in their businesses, forming public-private partnerships.
Allocation of scarce resources by government bureaucrats – what could possibly go wrong?
Our cynical heart stops for a second. All that money up for grabs. All those cost-plus contracts! Architects’ phones must be ringing already; insiders are planning new wings for their Aspen vacation pads. These are government “investments” – no need to ever satisfy a customer or ever show a profit.
And we’re talking 10 times more money than the $100 billion in Corn Belt giveaways… or the penny-candy subsidies to sugar tycoons, the Fanjul brothers (who, taking no chances, put on Miami campaign fundraisers for both Clinton and Trump). But Richard is already in the observation car, enjoying the sun on his face, dreaming.
“Imagine what that would do,” he suggests, adding helpfully, “It would really Make America Great Again.”
Our imagination is not up to the challenge. We close our eyes. We scrunch up our face. We just can’t do it. We can’t imagine a group of hacks, has-beens, and bureaucratic chair warmers capable of identifying the “industries of the future.”
Richard Duncan probably figures that they will be helped by experts… and miracles will occur as well! It’s almost fool-proof…
No one else has been able to foresee the future. How could they? Venture capitalists, even when their own money is at stake, are notoriously bad at backing successful futuristic enterprises. The feds, “investing” other people’s money, are bound to bet on the wrong ones.
But wait – our imagination has finally rebooted. And what’s this? No train to the future? What we see is a runaway locomotive. Incompetence at the throttle, flimflam stoking the engine, and impossible, pie-in-the-sky hocus-pocus putting on a show for the passengers.
A hellish train, in other words – loaded with trillions of dollars of looted resources – misallocated, stolen, and frittered away.
The express train to hell. It is possible that tickets for the train to the future were sold out. Better luck next time.