This Stock Market Bubble Will Not Prick Itself

We spent the weekend walking on the beach…sitting on our terrace…and even playing some guitar…

We also spent time reading Thomas Sowell’s latest book, Wealth, Poverty and Politics

…and generally wondering what the heck is going on.

Bill Bonner

Bill plays the guitar with Jorgelito, the resident ‘cantante’ at Rancho Santana
[Click to enlarge]

Donald Trump’s election and subsequent comportment stirred emotions and provided entertainment.

But the critical question was always simple: Does this administration represent a break with the pattern of the last 40 years…or a continuation of it?

All too human

Reagan, Bush, Clinton, Bush II, and Obama — all of them have taken our political economy in essentially the same direction. More debt. More Deep State control. More consolidation of power in the executive branch (including the military).

A new president always has some influence. Typically, he can rearrange the furniture and hand out some choice sinecures.

But not since John F Kennedy has any president dared to change the direction the government is going or challenge the real power of those who run it.

And today, it would take an almost superhuman leader to do so.

Mr Trump sounded, at times, as if he posed a threat to the elite. Liberals acted as though he were a devilish scourge sent by evil gods.

Conservatives allowed themselves to believe he was the long-awaited messiah.

And now we see that ‘The Donald’ — for all his late-night tweets and bull-in-a-china-shop bluster — is all too human, prone to sin and error…just like the rest of us.

Most likely, the important trends of the last four decades will intensify as the insiders use the chaos and distraction of the Trump team as cover to take even more power and wealth from the American people.

In short, our guess is that there will be plenty of little surprises coming from this administration, but no big ones.

President Trump has already proposed to shuffle more cash to the generals and to the jailers. Soon, we will see more money grabs…from the insiders in finance.

No correction

Among the coming non-surprises will be the feds’ reaction to a crash on Wall Street…or a recession on Main Street.

Here’s a shorthand for how it will probably go down: Crash and/or recession = QE4, direct asset purchasing by Fed, and helicopter money = more wealth for the cronies.

The US economic expansion — albeit weak by historic standards — has gone on for 93 months. That makes it the third longest in history.

If it goes on another 27 months, it will set a new record: the longest expansion on record uninterrupted by a recession.

Although that sounds like an achievement, it is like setting a new record for eating jalapeno peppers — you know you’re going to be sick soon.

Economies make mistakes; corrections clean them up. Typically, the interest rate serves as a ‘hurdle’. If your project can’t produce enough money to pay for the cost of the capital that went into it, it gets eliminated.

But if you reduce the cost of capital to almost nothing by way of ultra-low interest rates, you never have to reckon with your mistakes. Today, the hurdle is so low that you can’t even trip over it.

The errors stay in place — misallocating more precious savings and consuming more real wealth.

Irrelevant rate hike

Meanwhile, the stock market is at record levels.

On a CAPE ratio basis — which looks at stock prices relative to the average of the last 10 years of earnings — only three times since 1929 has the S&P 500 been so pricey, all of them in the last 18 years: first in 1999, then in 2007, and again now.

And like the business expansion, this bull market must contain trillions of dollars of uncorrected errors.

And for the same reason: When capital is almost free, it’s hard for businesses to stumble. They don’t go out of business… They just refinance…merge…acquire a competitor…and buy more of their own shares.

But wait… CBC News reports:

Federal Reserve chair Janet Yellen gave investors a pretty clear sign on Friday that the U.S. central bank is likely to raise its benchmark interest rate later this month — and more hikes to follow later this year.

In a speech on the central bank’s economic outlook at the Executives’ Club of Chicago on Friday, the Fed chair told the gathered audience that a slight increase to the federal funds rate would be “appropriate” when the bank next meets for a two-day policy meeting on March 14 and 15.

And here we can be clear about what the Fed won’t do…

There will be no big surprise coming from that quarter either; the Fed will only raise rates to the extent that it is irrelevant.

In its meeting, the members of the Fed’s policy setting committee, the FOMC, will vote on whether to raise rates one-quarter of a percentage point.

We don’t know which way that will go. But we know it won’t matter. Because if it did matter, they wouldn’t do it.

That’s really what Ms Yellen means by ‘appropriate’. It will only be appropriate if it doesn’t cause or exacerbate a correction; that is, they will only raise rates as long as it doesn’t interfere with the debt bubble.

If the Fed’s ‘data’ appears weak…and even a tiny increase might prick the bubble…there’ll be no rate increase.

In sync

The deeper meaning of this is that the Fed, Wall Street, the Pentagon, and Team Trump are all in sync.

None wants to upset this apple cart. It would reveal too many rotten pieces of fruit in the pile. All now collude with the media to keep the public distracted and off-balance, while the whole shebang keeps rolling along.

The Trump administration picks unnecessary fights with unimportant adversaries…pretending to be defending the common man. The media is confused…and confuses the public even further.

The Pentagon goes about its business…happily scaring the public in order to transfer money and power to itself and its crony pals.

Wall Street provides the illusion of prosperity…bidding up stock prices as though they were made more valuable by the administration’s dumb-head policies.

And the Fed provides as much fake money as necessary to keep the scam alive.

But the first big test can’t be long in coming. The feds are running up against their debt ceiling.

There again, the sound and fury will sell newspapers. Democrats will fume. Republicans will fret. But it will be essentially meaningless agitprop.

All of the main players are firmly committed to more spending. They won’t let prudent legislation or a $20 trillion deficit stand in their way.

Here’s pseudonymous blogger Tyler Durden at Zero Hedge:

While in recent weeks there has been a material increase in Fed balance sheet normalization chatter, according to a new report from Deutsche Bank analysts, it may all be for nothing for one simple reason: should the U.S. encounter a recession in the next several years, the most likely reaction by the Fed would be another $1 trillion in QE, delaying indefinitely any expectations for a return to a “normal” balance sheet.

No return to ‘normal’. Not voluntarily. Empires don’t back up. And bubbles don’t prick themselves.


Bill Bonner,
For Markets and Money, Australia

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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