The Last Time This Happened Was in 2008

The Dow fell about 100 points yesterday.

It’s not hard to see why…

Factory output dropped the most since last August, led by declining auto sales.

Meanwhile, housing starts are at a four-month low. Bank loans are slipping. Commercial property is ‘rolling over’. Consumers have tapped out. And the Fed’s GDP growth estimates are getting lower and lower.

But the biggest deal is that tax receipts are down, year over year, for the fourth month in a row. Taxes are real money. They’re not fake news like unemployment and inflation statistics.

When people earn less, they pass less in taxes. A decline in tax receipts means that something real is happening in the economy.

The last time tax receipts fell like this was in 2008. You know what happened next.

False impression

Meanwhile, evidence mounts that — outside of dividends — investing in stocks is rarely profitable.

According to a paper by Hendrik Bessembinder at Arizona State University, even without accounting for fees and expenses, roughly 70% of stocks deliver lower returns than the Treasury bill (considered to be one of the safest assets).

It’s part of the reason why, according to research firm Dalbar, roughly only one-quarter of active fund managers beat their indices.

Winning stocks are rare.

We have long suspected that fund managers avoid slipping behind the indices — which they use as benchmarks for their performance — in the simplest possible way: They buy the index!

This — and the fact that the big stocks in the index are the ones covered by the fake-news media (that is…by the popular press) — tends to boost the few popular stocks over the many unknown ones.

This also gives investors a false impression. With the index rising, say, 10% a year, they say: ‘If I buy “stocks,” they should give me a 10% return.’

But a 2015 paper — ‘Why Indexing Works’ by JB Heaton, Nicholas Polson, and Jan Hendrik Witte — revealed that the typical investor does not begin at zero with a 50–50 chance of beating the indices.

Because most stocks are duds, if you pick stocks randomly, they say, ‘You are starting below zero.’

Other studies blame investor behaviour. The typical investor does worse than the indices because he trades too often — often buying high and selling low — based on what he reads in the newspapers or watches on TV.

By that stage, it is old news. When something becomes ‘public knowledge’, it’s generally not worth knowing.

In other words, he doesn’t do the hard work of real investing.

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Universal laws

Remember, there are universal laws at work in the investment world — just as in the rest of the world.

Outside of politics, chicanery, and freelance robbery, with their win-lose deals, the honest world works on win-win deals.

If you want to get…you have to give. And what you get should be proportional (albeit with vast allowances for luck) to what you give.

So you have to ask: How can you expect to earn more money from your investments than other people (more than the indices)? What more are you giving?

France’s longest-serving president, François Mitterrand, a socialist, was appalled when he realised how investments worked. He replied with indignation that capitalists ‘make money when they sleep.

He had a point.

It seems unfair that a working man should have to sell his time by the hour, limited to the number of hours he has available…while the capitalist investor makes money night and day without working at all.

But capital has a value. And it makes sense that the man who lets it out to hire, rather than using it himself, should be paid for it.

In an honest economy, he is paid fairly. The deal is made — like all win-win deals — between buyer and seller, lender and borrower, with no prejudice to one or the other.

Both feel they come out ahead. The man who works the hardest to figure out how he can fructify his money and his time is the one who generally wins the most.

Artificial levels

But in today’s economy, the fix is in…and has been for more than three decades.

The insiders get money that no one ever earned or saved…and they get it at rates that are pushed down by the heavy hand of the Fed and its fake-money system.

This has created a huge influx of credit-based money that has driven up stock prices — especially the aforementioned indices.

The Dow, for example, is up 20 times in the last 35 years, while the average working man’s time, adjusted for inflation, is scarcely worth a nickel more.

People look at this and draw the wrong conclusion: ‘See, stocks always pay off over the long run.’ Or as Warren Buffett puts it, ‘Nobody goes broke betting on the USA.

But the whole thing is a fraud — with stock prices tricked up by this enormous supply of phony credit.

According to famed bond-fund manager Bill Gross, ‘All assets are elevated to artificial levels.

Which is to say that just because stocks have been good for the last 35 years doesn’t mean they will be good for the next 35.

Credit (and its evil twin debt) does not increase forever. And when the next credit crunch comes, as much as $35 trillion of excess debt could disappear in a matter of days.

US stock prices could plunge by 50% to 80%.

Then — surprise, surprise — all the king’s economists…and all the Deep State’s central bankers…may not be able to put this Humpty Dumpty economy back together again.

Regards,

Bill Bonner,
For Markets & Money

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail Markets and Money.
Bill Bonner

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