Time to Panic?

Time to Panic?

Our subject is the ‘Decision of the Century’. Which way will the feds go? Will they stop inflation? Or let ‘er rip?

We think we know the answer. But let’s not rush to judgment. This will probably be the most important decision the feds (including the Fed) ever make.

And our educated hunch about which way it will go is probably our most important guess too.

If you think the feds will really stick with their ‘tightening’ program…you should panic now. Sell stocks, bonds, collectibles, the house, the kids — everything. They’ll all soon be available at much lower prices. But be ready to buy back in when the bottom is reached. Maybe in six months. Maybe 24. Maybe 50.

But if the feds flinch and begin another loosening, stimulating cycle…well…you’ll have more time. Prices will go up…in nominal terms, but down in real, inflation-adjusted value. It will be confusing. Ambiguous. The bottom won’t come for maybe 10 years…maybe 20. And be sure to renew your passport. When the end comes, it will be a horror show of poverty, hunger, chaos, corruption, and revolution.

‘Festina lente’

So, let’s hasten to make our call slowly, carefully, after much prayer, meditation, and heavy drinking. We’ll race along…trying to connect the dots…as if our financial lives depended on it — which they do. But before taking action, we’ll hesitate, and reconsider.

Emperor Augustus told his commanders to “festina lente”…or “hasten slowly”’, began our favourite fund manager, Chris Mayer, last week. The setting was the gracious old mansion, Woodlock House, near Waterford, Ireland, which serves as our overseas business headquarters.

The coffee had been served. Introductions had been made. We sat in plush chairs waiting for hard facts. Chris took centre stage; he was going to explain why the fund was down and what he was going to do about it.

What would he say, we wondered? We have all lost money. Would other investors be worried? Would they be mad?

But the group was as genteel and relaxed as the setting. We have all been around the block. We’re grown-ups. We don’t cry in public.

Chris noted that there is always a tendency for investors to panic, especially when things are going very badly. If so, this would be a good time to do it. Never in our 50-year career have we seen such a gloomy set-up as this.

Back in the 1970s, the inflation numbers were worse. But John Williams at ShadowStats still calculates the rate the same way they did back then; he gets 13.5% for today’s inflation — almost exactly what it was in 1979.

But in 1979, conditions were much different. The beer from the last party had already gone flat. Stocks had hit a peak in 1968. By 1979, the froth was gone; adjusted for 11 years of inflation, they were already near the very bottom of their range. They would not go much lower, no matter how high the Fed raised its lending rate.

Cresting Mt Debtmore

Today’s stocks are coming off an all-time high. So far, they have lost about 15% of their value — which leaves another 30–40% more to go.

And the federal debt in 1979 was still less than US$1 trillion…less than a third of GDP. Now it has crested US$30 trillion…which is about 130% of GDP.

And here’s the latest. As expected…housing prices are rolling over. Bloomberg:

The US and European real estate markets are experiencing a downwards shift in prices as the buyers fall away, according to the global chief investment officer of Hines, one of the largest closely held real estate investors in the world.

Prices have fallen by about 5% to 10% compared to a year earlier in some areas, according to David L. Steinbach, with Europe following a trajectory set in the US. “I think we’re in for a rough few months,” he said. “This year is going to be choppy water”.

Meanwhile, stocks are getting hammered. ‘Markets plunge amid fears of sharply higher interest rates’, say PBS Newshour. The other day, the Dow fell nearly 900 points.

And it’s the worst year for bonds in history — with a 12.8% loss for the US 10-year treasury.

As for a traditional portfolio — 60% S&P 500 stocks, 40% US Treasury bonds — it’s already lost 15% of its value. Not since 1937 has it done so badly.

Readings of consumer sentiment have never been lower — ever. Or at least not since the University of Michigan began tracking it in 1952.

Most people don’t own many stocks or bonds. What they care about is how much they earn each week and what they can buy with it. And for the last 63 weeks, they’ve been getting poorer as wage hikes lag consumer price increases.

Rough Saylorin’

And the foam is coming off the foamiest part of the market, too. Here’s Bloomberg: ‘Bored Ape NFTs Face Steep Declines in Broad Cryptoasset Rout’.

The NFT Index is down 23%. Bitcoin is at an 18-month low. The market cap of Bored Ape Yacht Club fell 47% in the past week. And some of the fringiest crypto assets have been blown away completely. The price for Luna, for example, is now so microscopically low that you could add or subtract zeros, and no one would notice.

And poor Michael Saylor. A couple years ago, the MicroStrategy jefe had a very bad idea — to use the company as a proxy for Bitcoin [BTC]. He used stockholders’ money to buy BTC. Then, as crypto prices rose, he borrowed millions more to buy more.

This looked like a winning strategy for a while. People could easily buy his stock. Then they’d ‘own’ bitcoin without having to remember passwords or key codes. At its peak, in February 2021, his stock was selling for more than US$1,300.

Alas, the froth on that heady brew disappeared too. As the price of bitcoin fell, Saylor’s coins were underwater. How would he repay lenders, investors asked themselves. The stock lost nearly a quarter of its value over the weekend and is now trading at US$150…a loss of nearly 90%.

More to come…

Regards,

Dan Denning Signature

Bill Bonner, s
For The Daily Reckoning Australia