After the Next Crash

What’s that in the distance? It looks like a cloud of dust barely visible on the horizon.

It’s the relief column, sent from Fort Fed!

Hooray!

Confidence of the damned

And yes, it is still a long way off…

As far as anyone can see, there’s no need for relief now. US stocks are near their all-time high. Unemployment has rarely been so low. The economy is said to be picking up speed.

So the feds have put down their guns and taken out their picnic baskets.

Some are taking a nice snooze in the warm sun of Dow 26,000. Others are enjoying the canapés…and gaily talking about how they whipped the Crash of 1987…the Dotcom Bust of 2000… and the Global Financial Crisis of 2008.

Others are looking ahead…at how they will use this upbeat economy to ‘normalise’ interest rates.

Another bear market coming?

‘Bring it on!’ they say.

Thus, with the confidence of the damned, do investors and their guardians in the financial Establishment await the next opportunity to ‘buy the dip’.

Unrequited mischief

But here at the Diary, we are plagued by doubt, worry, and unrequited mischief.

Is it that easy?

What will the feds use for ammunition to fight the next downturn? What if investors aren’t as smart as they think they are?

In this, the Year of Our Lord 2018, practically everyone with money in stocks looks in the mirror and sees a genius. Practically every day of 2017 added IQ points.

As Jeff Clark at GoldSilver.com reports:

    • The Dow hit a record high 71 times last year. On average, a new high was hit more frequently than once a week.
    • For the first time ever in its almost 90-year history, the S&P 500 rose every month in 2017. And historically, there have only been four years with gains in 11 months of the year.
    • The S&P 500’s largest pullback in 2017 was 2.8%, the smallest since 1995.
    • To start 2018, the S&P 500 has risen in each of the five trading sessions, hitting a new record high every day. The last time the index opened the year with at least five straight record highs was 1964.

 

  • The CAPE ratio [which compares today’s stock prices with the past 10 years of inflation-adjusted earnings] has now matched its 1999 level, the second-highest reading in more than 100 years of data. The only higher reading for the CAPE ratio was in 1929.

‘But what about when prices go down?’ we ask the imaginary investor.

‘Stop worrying. If prices turn down, I’ll sell,’ comes the answer.

‘To whom?’ we wonder. 

Out-of-service cannon

For the last 30 years, the answer to that question was the same: to the feds!

After each crisis, the feds and their central bank cronies came blasting into the market with armloads of cash. QE! TARP! Cash for Clunkers!

Interest rates almost vanished; asset prices rose.

And today, there are scarcely any interest rates left to cut.

And as for fiscal stimulus — more government deficit spending — that cannon was fired three weeks ago when the tax bill passed.

Whether it will do good or harm, we don’t know. But what we do know is that the cannon is now out of service.

So when the next battle starts, the poor grunts out on the investment ground — with support neither from the Fed nor from Congress — could find it hard going.

The first attack is likely to be repulsed by buy-the-dippers. But the next charge is bound to get palms sweating and knees rattling. Investors will soon realise that they have no covering artillery fire. They will panic.

That is where the 30-year fantasy should end. Stocks should lose $10 trillion. Bonds should lose $20 trillion. Other defaults, failures and markdowns should wipe out another $10 trillion or so.

Then, with debt, assets, and IQs deflated down to reasonable levels, the whole loopy idea of making people rich by adding phony ‘liquidity’ can be discarded.

We can return to sound money and an honest economy, with prices discovered in free markets.

Screw-loose patriots

But that’s not going to happen. There’s no Reagan in the White House…and no Paul Volcker at the Fed.

And even if there were leaders of their calibre today, it is highly unlikely that they could hold their positions when this battle begins. Instead, they will be overrun, overruled, and outgunned by the Deep State.

President Trump will demand action. Spend more on infrastructure! Build a wall! More ships for the Navy! And bailouts for his pals on Wall Street.

Congress will promise a vast ‘shovel-ready’ infrastructure program…another tax cut…and trillion-dollar-plus deficits.

And the Fed, bless its puny, black heart, will have no interest rates to cut…and no real money to use as ammunition.

But that won’t stop it. With flags waving…pipers piping…and drums beating…the relief column will appear.

‘We’ll print the money!’ the brave central bankers will say.

And once again, with the ersatz courage of a screw-loose patriot, the Fed will come to the rescue…

…and cause the biggest financial disaster in US history.

More to come…

Regards,

Bill Bonner,
For Markets & Money


Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.


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