This Brave Ahab

This Brave Ahab

Oh, to be as carefree…as optimistic…and as brain-dead as an American stock market investor!

By our reckoning, US stocks are about US$25–30 trillion overvalued. Typically, around 80% of GDP, the Wilshire 5000, which captures all US publicly traded equities, is now almost at 200%.

What would it take to drive investors away from the stock market? A tsunami washing over Manhattan? A nuclear war? The dead rising from their graves?

Already, there’s a war on…and one of the combatants has nukes in his arsenal. Inflation is already at 8%; it looks like it will hit double digits soon. The bond market has just delivered its most reliable recession signal — the dreaded ‘inverted yield curve’.

And the Biden team has just proposed the highest income tax rates in the developed world. Fox News:

The budget blueprint that President Biden unveiled last week includes several tax hikes on the ultra-wealthy and corporations that would push the top U.S. rates on both individual and corporate income to the highest level in the developed world, according to a new analysis published by the nonpartisan Tax Foundation.

Hey…it probably won’t pass!

And now, the Fed is determined to stamp out inflation by raising rates.

Cometh the clouds

Higher interest rates will put the refinancing machine into reverse. Instead of refinancing debt at lower rates, debts will be refinanced at higher rates, causing the overall debt pile (and the economy) to shrink.

Many households and businesses will find that when the weather was fair and the going was good, they went a little too far. Cometh the clouds and they will be unable to refinance debt. Instead, they will default.

Far and wide…public, private, questioning…asset prices will go down.

Uh oh. You’d think that would make stock gamblers a little nervous. But no…here’s the head-scratcher headline from MarketWatch: ‘US Stock Futures Edge Higher as Investors Prepare for Steep Rise in Interest Rates’.

And here’s Larry Lindsey. MarketWatch again:

“I do think we’re going to have a recession, probably in the next quarter,” Lindsey said, in an interview on CNBC.

“Inflation is eating into consumer spending power, they’re going to have to cut back,” he said.

The former Fed governor also said the U.S. central bank was “nowhere close” on being able to control inflation.

Among serious commentators (of whom, there are no more than a half dozen), the prevailing view is that the Fed will have no choice. After having recklessly goosed up stock prices for the last 14 years, the Fed must now reckon with its mistakes and goose them down.

  • It pushed down interest rates far too low (below zero!) for far too long (almost 14 years).
  • The phony and unnatural interest rates created a whole phony and unnatural economy that now depends on ultra-cheap credit.
  • The ultra-cheap credit created a culture of rampant speculating and borrowing, which led to an Everest of debt, public and private — now about US$87 trillion, or roughly US$50 trillion more than in 2007.
  • With so much debt, investors, business, households, and the government are desperate to keep interest rates low. To that end, the Fed has had to make more and more cash and credit available. It and other central banks added some US$25 trillion in new money since the Wall Street bailout of 2008–09.

All this easy credit and money printing has produced the inevitable inflation…made much worse by COVID shutdowns, trade barriers, and sanctions — especially against one of the world’s largest energy exporters, Russia.

All the world’s central bankers

And now…faced with double-digit inflation, what’s a poor central banker to do? He has no choice. Not in Europe. Not in Britain. And not in the US.

He has to take the knife between his teeth and climb the rigging. David Stockman:

‘…the fools in the Eccles Building will have no choice but to throw on the monetary brakes far harder than now planned or expected during the next 8 months. That’s because the inflation menace will be in their face via the “incoming data” at 8-10% on a Y/Y basis or higher, while the negative GDP of recession will not show up until Q4 2022 or early next year.

All the world’s major central bankers — save for those in Russia, where the key lending rate is already 20% — are in the same boat. All followed the same course. All now find themselves on rough seas…

…and all must now batten down the hatches, take down the sails, and ride out the storm.

That would be the reasonable thing to do. That is what investors should expect.

But investors are still sans soucis. They are still comfortably ensconced in their deck chairs…enjoying the fading light and waiting for another drink. Whatever happens — earthquake…the third world war…plague — they still believe that Captain Powell will make sure that nothing bad happens to them.

And you know what? They may be right. This brave Ahab…on the high seas of high finance…may be just mad enough, weak enough, or just plain dumb enough, to turn a very bad situation into an even worse one.

More to come…


Dan Denning Signature

Bill Bonner,
For The Daily Reckoning Australia