Authored by EconomicPrism’s MN Gordon, Annotated by Acting-Man’s Pater Tenebrarum,
A Fake Money World
The NASDAQ slipped below 8,000 this week. But you can table your reservations. The record bull market in U.S. stocks is still on. With a little imagination, and the assistance of crude chart projections, DOW 40,000 could be eclipsed by the end of the decade. Remember, anything and everything’s possible with enough fake money.
Driven by a handful of big cap tech companies, the Nasdaq Composite has made new highs – but the broad market (here shown in the form of the NYSE Index) has not even made it back to the January blow-off peak. It is a good bet the return of the average investor’s portfolio mirrors that of the latter. Such divergences are typically a sign of steadily weakening market internals which are seen near major trend changes. When such a glaring divergence in performance persistently fails to be invalidated and keeps dragging on for many months, it tends to be particularly concerning for the longer term outlook, Note that even more glaring divergences exist now between US stocks vs. European and EM stocks. Despite the fact that US economic indicators remain strong and no obvious recession warnings are evident, we have yet to see such large divergences resolve without a hiccup. Usually the hiccup turns out to be quite a doozy. [PT]
Still, we consider DOW 40,000 to be about as probable as having a dinosaur step on our car as we drive to work today. More than likely, a return to DOW 10,000 will first grace the front page of the Wall Street Journal.
In the interim, while still in the delight of this “permanently high plateau,” we’ll turn our attention to another equally suspect record that’s presently unfolding with imperfect precision. If you haven’t noticed, the current economic expansion is approaching its own record in terms of duration. At 111 months and counting, this it is closing in on the post-World War II record of 120 consecutive months of growth that occurred between March 1991 and March 2001.
One thing economist Irving Fisher will inter alia always be remembered for is that he called for the stock market to have reached a “permanently high plateau” shortly before the crash of 1929 – not exactly an example of fortuitous timing as it turned out. It is actually a valuable illustration of a general principle: the herding effect that drives stock market bubbles to previously unimaginable heights and extremes of valuation eventually ensnares almost everybody, from the shoe-shine boy to the academic economist. A handful of skeptics will of course always remain, but most will have uttered warnings for quite some time already – by the time the catastrophe is close at hand, almost no-one will listen to them anymore. This is a pity, but then again, the class of investors as a whole cannot escape the losses that follow the bursting of a bubble anyway. [PT]
If all goes according to plan, the economic expansion will enter its 121st month by July of 2019. Amazing! Certainly, this should equate with a marvelous, MAGA episode of economic betterment for all. How could a decade of economic growth result in anything less?
July 2019 – will it be time to get out the MAGA hats? [PT]
Alas, the world of fake money is a world of strange and seemingly impossible things. It challenges the mind and twists all aspects of the human world with the rigorous duplicity of a Supreme Court confirmation hearing. What to make of it?
Real Trouble
Without question, this long run of economic growth is unmatched in the disparities it has produced. The upper crust has been served quite well by it. Paper wealth, in the form of rising stock and property prices, has concentrated upward in the hands of the noblesse. The balance sheets of the wealthy have never looked so good.
But down in the valley, where the pavement is worn thin and the residential dwelling units are densely packed, a different reality presents itself. Here is the reality that the 2008-09 recession never really came to an end. Where incomes have stagnated and well-paying jobs, the kind that can support a family, are sparse. On top of that, large segments of the population have become hooked on government sponsored opioids.
The effects of all that unbridled money printing are apparently not as bad as feared – now you know why it says on the ECB’s web site that money is “long term neutral”. [PT]
Yet this disparity between upper and lower class, including a diminishing middle class, has occurred during a near record economic expansion. Somehow, the fat years didn’t leave much meat on the bone for wage earners to gnaw on.
Of course, the real challenge, the one that’s just around the corner, is the turmoil that always appears at the worst possible time. When the boom ends, and the bust begins, chaos reigns down with exacting rigor. That is when the real trouble arrives.
Moreover, the real trouble arrives at the precise moment when the liquidity of credit withers to a bone dry wishing well. That is when stock and real estate prices, which are now priced with no connection to the underlying economy, collapse; when paper wealth vaporizes faster than you can say Jack Robinson.
It is said that credit is suspicion asleep… you know it has woken up when loan officers suddenly ask all sorts of strange questions. [PT]
Corporate and consumer debt, which has accumulated over the last decade far beyond its capacity to be repaid, will go bad all at once. Then, as layoffs rise, consumer confidence – the last fortification against a recession – will roll over in short order.
At the same time, a certain clarity will be dispensed with efficient precision…
Thirteen Reckonings Hanging in the Balance
One of the notable facets of the political climate of the USA is the lack of agreement on what the facts are… and how the economy should function. Should it be a hands off laissez-faire economy? Should there be more regulatory intervention?
Then there are the questions of direct transfer payments and policies of currency debasement. On these questions, Republicans and Democrats appear to be equally inconsistent. Any remaining semblance of a philosophical operative has been watered down like cheap 3.2 beer.
The populace, for that matter, also cannot get its story straight. Their demands and desires of government always change with the direction of the wind. Still, we suspect these conflicting demands will be reckoned with during the next credit crisis and economic collapse. What follows is a partial list of prospective reckonings – thirteen of them – that are hanging in the balance:
Everyone calls for smaller government, as long as their entitlement payments are not restricted.
Everyone distrusts the government, until the economy contracts and they need a federal bailout via a cheap interest refi.
Everyone says they’re for free trade, before (not after) their job is off-shored to China or Vietnam.
Everyone disparages Made in China products, except when they can buy them at Walmart or Costco at everyday low prices.
Everyone wants safe and state of the art infrastructure, as long their taxes aren’t raised to pay for it.
Everyone despises inflation, except when it’s inflating their stock portfolio or the price of their home.
Everyone derides the ills of government deficits, until they are faced with the prospect of fiscal austerity.
Everyone favors a trade war, as long as it doesn’t jack up the price of flat screen televisions and iPhones.
Everyone loves green energy, but only at the expense of their neighbor.
Everyone believes in universal healthcare, before (not after) they have to go see a doctor.
Everyone loves cheap credit, but only up to the point where it provokes a mass debt default.
Everyone relishes government sponsored pharmaceuticals, until their family, friends, and neighbors start dying from them.
Everyone wants this, but they also want that… though only if it’s on someone else’s dime… and on, and on.
The point is, when everyone goes broke and the economy slows to a standstill, the people and the politicians will squawk and shriek in unison. They will demand for the government to “do something”, up until the moment the fake money system finally dies.
Crisis-induced insights, certain to be regretted later [PT]
After that, things will become especially unpleasant.
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