You only grow by coming to the end of something and by beginning something else.
– John Irving, The World According to Garp (1978)
Once they are debt-entombed, economies are inexorably capable of ever-more modest rates of growth. That truth is written all over the subway walls, as Simon & Garfunkel once put it.
Between 2001 and 2007, for example, global debt rose from $86 trillion to $140 trillion. At the same time, global nominal gross domestic product (GDP) increased from $33 trillion to $58 trillion. That is, $54 trillion of new debt bought $25 trillion of new GDP.
Debt exploded from the pre-crisis level of $140 trillion to $255 trillion by 2019. Meanwhile, GDP rose to just $85 trillion during the 11-year cycle subsequent to the pre-crisis peak.
That is, in the latest “recovery,” it took $115 trillion of new debt to generate just $27 trillion of additional GDP. That’s $4 dollars of going into permanent hock for just $1 dollar of (temporary) current GDP.
That debt-fueled route to nominal GDP growth has played out. The household sector is at Peak Debt. And the business sector has been lured into massive financial engineering, not productive investment, by the speculative casino on Wall Street.
Alas, this is the end product of monetary central planning.
All that massive central-bank stimulus – in the form of fiat credit expansion – never escaped the canyons of Wall Street and its counterpart venues around the world. And, there, it did cause growth and inflation – but only of financial asset prices, and egregiously so.
Asset prices are now precariously purchased in the nosebleed section of history. We’re talking stock prices and bond prices, too. The $17 trillion of sub-zero-yielding government and investment-grade bonds in the world are also hideously overpriced instruments of rank speculation.
But, if you look at the charts, there are massive air pockets down below, let’s say, the 2,700 level on the S&P 500 Index.
If there’s a shock event – like some tankers blow up in the Persian Gulf, or something really bad happens in the Taiwan Straits, or the Chinese pull some real retaliatory stunt like dumping a couple ten billion of U.S. Treasuries in a few hours – it could ignite the selloff fuse on a market which is overwhelmingly machine-driven, thereby tanking the whole applecart.
After all, 80% of daily volume in the stock market is essentially either indexed-driven exchange-traded funds and mutual funds or various kinds of quantitative, machine-driven momentum-based investment strategies.
If these carbon- and silicon-based chart-monkeys ever lose their formulaic footings, the market will drop through a deep air pocket. And then it’s all over except for the shouting.
If the S&P 500 drops 400, 500, or 600 points, you’ll trigger another go-round for CEOs and CFOs. They’ll wake up – like they did in October 2008 – and suddenly realize, “Oh my God, we’ve got too much inventory, we’ve horded too much labor, we’ve got a lot of M&A assets that aren’t producing returns…”
And, then, Corporate America will go into these big restructuring programs, laying off workers by the tens of thousands, taking huge write-downs, closing facilities, extinguishing assets in order to appease Wall Street.
The next thing you know, of course, you have a C-suite-triggered recession. That’s how it happens these days under the baleful regime of monetary central planning. Recessions don’t happen anymore because the Fed is tightening credit costs on Main Street.
That’s the old days. That’s your grandfather’s economy. And that’s your great-grandfather’s Fed.
We’re now in the era of Bubble Finance. Our monetary central planners basically inflate the financial system until it collapses. And then it spills onto Main Street when CEOs and CFOs panic at the thought of disappointing their masters.
So, if the stock market cuts through the air pockets down below, the recession will happen instantly. And no one will see it coming – just like it was in 2008.
I remember well the talk in the spring of 2008 about a “Goldilocks economy.” By November 2008, they were talking about the end of the world. This is exactly what’ll happen if the stock market breaks loose.
I don’t know exactly when it will happen. It could happen before November 2020, or it could happen after the election. No one can really predict. But the odds are that it will happen before the election. And, if it does, the Donald is toast.
Under that scenario, Elizabeth Warren will be the next President of the United States. And, as that prospect becomes ever-more probable, the panic in the stock market will be something to behold. It’ll be worse than anything we’ve seen since October 1987.
Indeed, if the stock market is faltering in November 2020 or has already crashed, and the economy’s in trouble, you’ll have a populist, redistributionist, big government, statist President and Congress.
That’s a totally different world than the fantasy that we’ve been living for the last 30 years.
And that’s what’s going to make the Turbulent Twenties an altogether different ballgame.
How to Play It
I’ll say it again: This is the most politicized market in history. And the Tweeter-in-Chief is still in charge. So, the situation is changing almost by the minute.
It’s “Impeachment!” in Imperial Washington and all over the Mainstream Media. It’s “Easy Money!” on Wall Street and across Bubblevision.
And it seems as if the whole world has, indeed, gone mad.
Amid this chaos, prices will continue to rise and fall, trends will continue to develop and dissipate.
Well, The Stockman Letter is made for times like these. And we’ve updated our design to help us better navigate to not only the safest harbors but also the most promising opportunities.
The stakes are as high as they can be heading into 2020. Markets appear to be straining, catching up to an economy that’s been weak and getting weaker for years.
The Donald is tied up in the day-to-day movements of the major stock indexes like no president before him. The increasingly desperate incumbent will do anything he must to hold the White House.
It’s a major tipping point. And there’s no telling what the Donald’s great disruptions could do to your wealth.
Please click here to learn more about The Stockman Letter and what comes next…
To common sense.