Trade wars are not good. Nor are they easy to win.
Starting one with the world’s second-largest economy at the same time you’re perpetrating a Fiscal Debauch and luxuriating in Easy Money the likes of which has never been seen in modern history means you’ve set the stage for an epic disaster.
What’s going on in the policy arena isn’t even invisible anymore. All the Duopoly and its mechanics have is “wealth effects.”
That’s despite mountains of data establishing the fact that monetary policy’s transmission through credit markets and to Main Street is no longer operative.
The Federal Reserve’s massive injections of fiat liquidity – via Federal Open Market Committee (FOMC) operations and “quantitative easing” – have never left the canyons of Wall Street. They’ve simply inflated prices of financial assets to ever higher levels.
And, now, we wait until speculators’ natural greed grows so rampant that it generates a blowoff top and a subsequent 50% to 80% crash…
This sort of monetary metastasis has occurred twice already this century. The shared characteristic is that prices of “risk assets” like stocks uncouple – egregiously – from cash flows they purportedly capitalize.
That’s Clearly the Case Today
The post-Global Financial Crisis/Great Recession reflation by the Fed and its fellow monetary central planners around the world was the most radical attempt yet to stimulate Main Street by through the wealth effects channel of Wall Street.
But the household sector, for all practical purposes, is at Peak Debt. With $15.6 trillion already outstanding, regular Americans can’t borrow more, relative to income, no matter how low interest rates go.
The business sector, meanwhile, entombed by its own $15.6 trillion pile of debt, has been lured into heavy financial engineering.
Corporate America now prefers to channel the cheap borrowings enabled by our monetary central planners into self-dealing distributions of capital and cash flows to options-holding management and Wall Street speculators.
That’s what lies beneath the recent rise of stock buybacks, stepped-up dividends, and empire-building M&A.
Nearly $20 trillion of globalized QE since the pre-crisis peak in 2007 has simply caused the greatest uncoupling of profits and risk-asset prices ever.
Since the U.S. economy stabilized in early 2012, pre-tax corporate profits have actually fallen by about 9% while the S&P 500 Index has risen by another 114%.
The cause of the next crisis, friends, is the yawning gap between the brown line in the chart above, which represents the S&P 500, and the purple line, which represents pre-tax corporate profits…
The Great Disruptor Hath Risen
On September 26, 2016, on his way to a result that will one day be the benchmark for upset victories, when the S&P 500 was up only 65% from that 2012 starting point, the Donald said, “We are in a big, fat, ugly bubble.” That part is widely quoted.
What’s too often left out is the part the Donald should have heeded: “And we better be awfully careful.” Of course, the Donald has taken for his own a stock market that’s 40% higher, even as underlying profits have continued to sink.
There’s more and more desperation creeping into his tweetstorms these days; seems he may be getting an inkling – through his bile, bombast, braggadocio, and bullshit – that trouble’s brewing:
What he advocates is nuts.
But when it comes to the essential task of thoroughly, unequivocally discrediting the Fed and its destructive regime of monetary central planning, he couldn’t be more on target.
The trend lately is for the Tweeter-in-Chief’s activity and mood to be reflected in the major market indices. Get ready for more volatility, as he fixes as never before to shift blame to his man Jerome Powell.
Ironically, these attacks will only hasten Wall Street’s impending crash. It’s baked into the cake, and it will be the proximate cause of the Donald’s Recession.
It is his destiny to be The Great Disruptor.
How to Get the Straight Dope
Desperate times call for… “common sense” measures.
And these are desperate times… Markets are corrupted by monetary central planning. They’re confused. And the road back is going to be treacherous.
We’re looking at a major re-pricing for all financial assets. And thousand-point intraday or day-to-day swings are part of that equation. Those can be frightening… for “buy and hold” investors.
I have a different approach, one that combines strategy and tactics into a plan flexible enough for you to survive and thrive amid the coming chaos. It’s called “The Stockman Model.”
All we’re after is a little stability, perhaps a chance to pocket a windfall when opportunity presents…