Praying for Deliverance
‘Eternal Father strong to save
‘Whose arms hath bound the restless wave
‘Who bids the mighty ocean deep
‘Its own appointed limits keep
‘Oh hear us when we cry to Thee
‘For those in peril on the sea’
Yesterday morning investors were in trouble. The last six months were the worst in the stock market since 1970. As for the bond market, they were the worst since George Washington was president. Yesterday, stocks fell another 700 points (on the Dow) and spent the rest of the day recovering.
The seas have gotten restless. Almost everywhere you look, sailors cling to wreckage. One is buoyed by a busted-up tech stock. Another grabs a cracked-up crypto and holds on for dear life. Still, another is wondering what happened; didn’t Joe Biden say we have ‘the strongest economy in the world’?
Today, we bow our heads and pray for deliverance.
The high winds and monster waves were coming from three different directions yesterday. First: the stock market itself. A bear market takes on a life of its own. As investors’ boats sink, they need to jettison other things to stay afloat. The good, the bad, the ugly — all end up as flotsam and jetsam.
A real bear market typically takes stock prices down about 35%. This one has only off-loaded 20% so far. Much further to go, in other words.
Fear takes hold
Second, the sell-off is much more widespread than usual. North, south, in the air or on the sea…Mr Market is taking almost everything down. Here’s a headline from the Financial Times: ‘Copper slides below $8,000 as recession fears take hold’.
And here’s Market Insider: ‘Oil prices plunge below $100 as the US dollar strengthens and recession worries pile up’.
And third, the Jerome Powell Fed is not responding to SOS calls. Or at least, not yet. For the last 30-plus years, investors could count on the Fed to send out lifeboats. There was the Greenspan Put…the Bernanke Put…the Yellen Put…but things have changed. Now Mr Powell is Staying Put. He warns investors:
‘…now we are in this new world where it is quite different with higher inflation and many supply shocks and strong inflationary forces around the world.’
The Bank for International Settlements explained it further:
‘Central banks fully understand that the long-term benefits [of fighting inflation] far outweigh any short-term costs. And that credibility is too precious an asset to be put at risk.’
Yes, dear reader, central banks are leaving the poor sailors to weather the tempest as best they can. And it isn’t easy. Because the whole capital structure — stocks and bonds, credits, and debits…NFTs and beer bottle collections — the whole shebang has been distorted and corrupted by the Fed’s fake money.
The US Treasury bond was a ‘safe harbor’ for investors for decades. But in recent years, the ‘risk-free rate of return’ from a T-Bond went down, down, down — until it came to rest about 600 basis points below the rate of consumer price inflation. In other words, all the ‘return’ was underwater. All that was left was risk. And then, the yield on the 10-year T-bond rose nearly six times in the last 24 months, leading to the biggest losses (over the last six months) in 224 years.
Just getting started
This bond market correction is far more important than the bear market in stocks. It undermines pensions, insurance, debt, and federal finances too.
And it means that the real estate market is next in line for losses. Mortgage rates are linked to Treasury yields. And when mortgage rates go up, property prices generally go in the opposite direction.
A few weeks ago, we estimated that the correction would take US$50 trillion of (fake) wealth from the elite. Our fact-checkers challenged us. But the calculation was simple. Total household net worth used to average about 350% to 400% of GDP. Now, it’s more than 600%…or about US$50 trillion too much.
But that estimate may be far too low. Jesse Feldman says the bear market may have already erased US$20 to US$30 trillion. And it’s just getting started.
From Dr Doom…
And here’s Nouriel Roubini spreading more cheer on MarketWatch:
‘…today’s higher inflation is a global phenomenon, most central banks are tightening at the same time, thereby increasing the probability of a synchronized global recession. This tightening is already having an effect: bubbles are deflating everywhere—including in public and private equity, real estate, housing, meme stocks, crypto, SPACs (special-purpose acquisition companies), bonds, and credit instruments. Real and financial wealth is falling, and debts and debt-servicing ratios are rising.
‘After all, in typical plain-vanilla recessions…[stocks] tend to fall by about 35%. But, because the next recession will be both stagflationary and accompanied by a financial crisis, the crash in equity markets could be closer to 50%.’
Things will get much worse before they get better.
Let’s apply that 50% to the whole of household net worth, which is about US$144 trillion. A 50% haircut — trimming the values of houses, stocks, private businesses, bonds — would represent more than US$70 trillion in vanished wealth.
Will that happen? Who knows? It could be worse.
Tune in next week; and in the meantime, keep those life vests buckled up.
For The Daily Reckoning Australia