It was cold here last night.
The temperature dropped to 48 degrees. We had to close the windows and put another blanket on the bed.
France is a Catholic country, despite its secular government. Important things — even changes in the weather — are marked by the church calendar.
Usually, the cooler weather doesn’t begin until after the Virgin has been assumed into Heaven on the Feast of the Assumption on 15 August. Or so they say.
Friends and family are packing up. Back home they go. Back to work. Back to real life. One daughter already left for Los Angeles via London. Another leaves tomorrow for Baltimore, taking grandson James with her.
Corrupt and unsustainable
James has been a big help.
Trying to get him to sleep at night, we have been telling him fantastic and unbelievable bedtime stories — full of grotesque monsters…evil maniacs…and events that couldn’t possibly be true.
Yes, we have been explaining our modern money system…and coming to understand it better ourselves.
The boy, just 14 months old, has probably missed some of the subtler points. But we feel confident that he got the gist of it. He knows the system is corrupt and unsustainable. He probably wonders how it will end; so do we.
Like a child that has climbed a ladder when no one was looking, US stocks are near an all-time high. Soon, its parents will startle awake…and try to get it down without injury.
For the last five straight quarters, US corporate earnings have fallen, while stocks have gone up. This divergence is not likely to last much longer.
Companies only have value because they earn a profit; take that away, and there is no point in owning them.
And price-to-earnings ratios — which measure the multiple that investors are willing to pay for each dollar of earnings — are already far above their long term averages.
Either companies will find ways to boost profits…or stock prices must fall.
Which one will it be?
You know what we think. We don’t like to be ‘negative,’ but our guess is that US corporations will not find a major new source of profits anytime soon.
What are they going to do?
Cut costs further…after eight years of trimming expenses to protect the bottom line?
Refinance loans at lower interest rates…after almost doubling corporate debt over the last eight years?
Increase sales…to whom?
The most likely outcome is that stocks will decline. That is how the next chapter will begin.
No turning back
A bear market should be of no particular concern to the authorities.
After all, since when was the Fed in charge of making sure that the rich get richer?
Ah… since about 1987!
That’s when Fed chairman Alan Greenspan began the foolish and fatal policy of protecting investors from their own mistakes.
When the Dow collapsed by 22% on ‘Black Monday,’ Greenspan reacted by lowering rates and telling the press that he was committed to stabilising stocks.
Since then, every attempt to correct the stock market or the debt market has been met by the feds like the French Imperial Guard charging the British lines at Waterloo. Hopeless and futile, it nevertheless confused the situation and postponed the inevitable collapse.
And now, almost 30 years later, there is no turning back. No point in reconsidering. It’s too late for further reflection. The Fed must draw up its cannon, unsheathe its sabres, and ride to the sound of the guns. Otherwise, the battle will be lost.
Falling stock prices — when they come — will first be greeted by calm announcements from the Fed.
‘We are keeping a close eye on the situation,’ it will say.
‘Our data show nothing to worry about,’ and so forth.
But investors will worry. They will retreat with more of their money. Prices will fall further…and the Fed will be forced to bring out its heavy artillery.
‘New initiatives’ will be widely discussed. Incredible new weapons will be unveiled.
But that is still in the future…perhaps far in the future.
For now, after James leaves tomorrow, we will have to go back to shuffling around the garden and muttering to ourselves.
For Markets and Money, Australia