Saturday, 10 February 2018

A Brief Memo On The Path From Here Following The Stock Market Correction

Broad-based financial bubbles are created by an expanding rate of monetary inflation whether expected or not. The more aggressive this expansion and the longer it lasts, the bigger the bubble, especially when official CPI inflation measures remain "subdued" and "well-anchored". Add a near decade-long ZIRP on top and you've got the recipe for an equity bubble of epic proportions - like we currently have in the U.S. and in many other stock markets around the fiat-money world. The deflation over the last week does little to change that (only makes it about 10% less worse than it already was).

About four years ago, stock prices started dislocating from a broad range of economic aggregates spanning GDP, manufacturing, retail sales, corporate earnings and dividends, and personal spending- and saving. And that is just mentioning a few of many. Already back then, stock market valuations started resembling those of the late 1990s and the build up to the previous U.S. banking crisis back in 2007.

Today, the U.S. stock market bubble far surpasses these two, both in terms of length and height. Not in terms of earnings, but in terms of every other fundamental that mattes more. This cannot be rationalized away by merely pointing to historical low interest rates. After all, they are in epic bubble territory as well as they are made possible only by central bank interventions and the resurgence of bank credit a few years back which, if continued, would mean the death of the current monetary system - of which there are great forces in play to protect the very existence of.

Naturally, the low level of interest rates (no matter how they come about) do justify elevated multiples. But nothing like those observed today this late in the money cycle and certainly not when interest rates are now actually rising.

Sure, a slim margin of interest rate increases were indeed baked into equity valuations when judged by the spread between the earnings yields and treasury bond yield. But these modest expectations as to where the future level of interest rates might be heading are now perhaps dawning on speculators as somewhat optimistic. The extravagant valuations of U.S. stocks today alone bear promises of poor future returns, even after slicing off around 10% of market prices during the last week or so (in case you're thinking about "buying any dip"). A 50% decline should surprise no sane person.

But the correction during the last week is a healthy one. At least so I've been told on numerous occasions. But healthy for whom and why? Pundits are either dumb or incompetent, and I'm still not sure which one is preferable. My vote however goes to the former. A drop in stock market prices is only healthy for those waiting to buy an expected dip. Period. It's not like the economy is reset somehow and gaining strength to grow further after a dip. Nothing fundamental happens when stock prices fall. The only thing affected is confidence, the very "foundation" of the faulty economic doctrines promoted by new-Keynesians, politicians, and other demagogues and cranks alike. Falling stock market prices have nothing to do with the real economy as all they ever accomplish is to change the hands of whom ever has the claim on real wealth. It's a matter of distribution, not loss of wealth to society. This is a fundamental concept few pundits are capable of even think about swallowing.

For decades, but on a substantially larger scale today than perhaps ever, we all in the western hemisphere live in societies where an ever-expanding class of parasites feed off an ever-shrinking class of wealth creators. Should you doubt this sweeping claim, I dare you to tell me why debt keeps expanding relative to income and saving despite ingenious entrepreneurs hard at work reducing our daily costs of living. If you can answer that question convincingly and conclusively, I see few reasons why you should not be awarded an accurate version of the Nobel memorial prize in economics. Attempts linking debt to nominal wealth will not be accepted, for reasons too obvious to mention. Government employees, lawyers and consultants making a living thanks to bureaucrats imagined and self-created problems, organisations living on state grants and subsidies; these are the sectors where "growth" are found, in addition to those hopeless projects aimed too far in the future to benefit any present-day living person. The economic waste that is the war machine, destroying livelihoods, dreams, and life around the world, especially the middle east - nothing to do with oil and power, right? Not to mention the armies of accountants wasting precious resources upholding meaningless accounting standards not benefiting the companies footing the bills, but the government narcissists demanding it, not to mention the lawyers feeding on the mistakes of both. The list is incredibly long, so long no one central planner or governments task force possesses nearly all the information necessary to keep an accurate account.

So what's the path from here? I see two; rampant money printing or a firm return to sound money. The truth will be neither. Social democrats always choose the middle-road. And they are the ones whom after all run financial regulations and politics, with the absent consent from voters whom increasingly know more and more about less and less.

Poverty will increase. Options will shrink. Decisions made on behalf of you and me will increase on account of people who are further and further distanced from where real decisions ought to be made. The path toward increased central planning, the chosen path after WWII, will prevail for many years to come and with ever-greater force and conviction. Until we all run out of purchasing power to buy the bare necessities. That's when revolutions find their breeding ground and new socialists solutions are once again re-invented to save everybody at the expense of everyone else.

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