August 9 2013 |
The Bottom Is Still Ahead for This Bear Market The dog days of summer continue. Not much action on Wall Street. Everything is on hold. The future will have to wait. But (taking a wild guess) when history starts up again we will see that:
Maybe that will turn out to be true. Maybe it won’t. But dear readers are advised to believe it – until proven otherwise. There is a big risk that stocks and bonds will drop – heavily. The stock market began a major decline in January 2000. But it has never completed its rendezvous with destiny. At real stock market bottoms you can buy leading stocks for 5-8 times earnings. And you can buy the Dow group for just one or two ounces of gold. That dark bottom has been postponed twice – each time by massive intervention on the part of the feds, first following the recession of 2001… second following the Great Recession of 2007-2009. But you can’t put off destiny forever. The final bottom still lies ahead … Get Ready for Rising Yields Trends in the bond market are even slower to develop … and more important. The last top in Treasury prices (and a bottom for yields) occurred in 1946. Yields rose for the next 34 years. Now the Treasury market appears to be topping out again… and is headed for a new high in yields … which may not arrive until 2047. It may be a long way off… or right around the corner. Either way, it will be hell getting there. The Detroit pension disaster is just the first of many. Wait until long-term interest rates hit 5% … or 10%. How many companies, cities and pension funds will still be solvent? We’ll see! But wait. You don’t think the Fed will sit on its hands and let the markets take over, do you? When stocks and bonds fall, you can expect Ben Bernanke – or whoever has taken his place (still no call from Mr. Obama!) – to panic … just as Bernanke did in November 2008. Taper off? Forget it. The End of Bullion-Backed Money Let’s review the basics … In 1971, the US switched from bullion-backed money to a fiat monetary system. A bullion-backed currency keeps debt under control. A fiat system is more flexible … more accommodating. Since 1971, credit has gone through the roof. The US economy expanded all right. But the expansion was driven not by increases in real productivity and higher ways. Instead, it was driven by increases in credit. You can’t expect a debt-driven expansion to last forever. The private sector reached its limit in 2007. It couldn’t take any more debt. A correction began, wringing excess debt out of the system by means of defaults, bankruptcies and write-downs. Then the feds panicked – offering more credit on even better terms through ZIRP, Operation Twist and three rounds of debt monetization (aka QE). Most of this new credit has gone to … you guessed it… the feds and their favorite zombies: Wall Street, the TSA, the NSA, education, health, food-stamp recipients and the disabled. But this kind of resource allocation doesn’t create productive jobs or increases in real income. That’s why, five years into a “recovery,” we still have 3 million fewer jobs than we did when the crisis began (despite population growth of an additional 8 million). And it’s why the average person – according to our simple math – has less buying power today than he did during the Eisenhower administration. How to Join the Super Rich No, dear reader, the real economy is not helped by trillions of new funny-money credits. But the people who get the loot love it. Who are these people? From Forbes:
Hedge funds have nothing to do with productivity in the traditional sense. Productivity has to do with output, not the ability to invite investors into your casino in exchange for a big share of their winnings (and none of their losses). As long as the Fed is flooding the markets with cheap credit… and financial asset prices are rising… these investors are happy to pay exorbitant fees to hedge fund managers. They won’t be so happy if our three predictions for the fall turn out to be correct. Few hedge funds are really hedged. Instead, they have been “fragilized” by their own go-go incentives. Take a big gamble? Why not? Your typical hedge fund manager figures that if his fund makes a big profit, the investors will think he is a genius and he will get a big chunk of their money. If the fund loses a lot… well, the poor schmucks should have known better! |
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