We’ve looked at the past: $20 trillion added to the world’s monetary base over the last 20 years…$250 trillion of debt worldwide…US stocks pushed to record highs…
We’ve looked at the present: sales, pre-tax earnings, and incomes all going nowhere…sluggish GDP…trade war…$1 trillion deficits…and, over the last two days on Wall Street, nearly a 1,400-point sell-off in the Dow…
Today, we look at the future.
Going loco
And we begin with America’s president, Donald J Trump.
POTUS says the Fed is to blame for falling stock prices. It’s ‘gone loco,’ he claims. It’s ‘out of control,’ he charges.
He’s right. But the Fed went loco a long time ago. When he was a candidate for the White House, Trump saw it clearly.
The Fed had ‘created a false economy’ with lower interest rates, he charged. Trump — always the fighter — said they did this in order to make Obama look good. He said it had created a ‘big, fat, ugly bubble.’
He’s right about almost everything. Except the Fed didn’t create the bubble to make Obama look good. The Fed lowered rates to make itself look good — as the saviour of the economy.
It was just part of its classic Three Mistakes Policy: 1) Keep interest rates too low for too long, 2) Raise rates to try to offset the damage from Mistake #1, and 3) Cut rates in a panic when markets fall.
Once elected, however, Mr Trump came to like Mistake #1. If the Fed could make Obama look good, he reasoned, it could damn well make him look good, too.
No president likes Mistake #2. It sets up a correction…and risks defeat at the polling stations. But Mr Trump is especially vulnerable. And today, no one stands to lose more from a stock market crash than he does.
King of debt
First, his own personal wealth depends on low interest rates.
In the New York area, for example, condo prices have doubled in real terms over the last 20 years. Developers like the ‘King of Debt’ himself, Donald J Trump, use cheap, borrowed money to leverage that gain. So the Trump family might have seen a 10x increase in the value of the buildings left by Fred Trump.
But take away the cheap money, and Trump’s fortune suddenly teeters. Yes, Dear Reader, The Donald’s fortune — along with the fortunes of millions of others in America’s squalid empire of bling — depends on Mistakes #1 and #3.
As soon as Mistake #2 begins to bite, palms sweat, tempers flare, and common sense flies out the window.
Second, once in office, Mr Trump used the stock market as a measure of his own success. He said he had ‘already made America great,’ and pointed to rising stock prices to prove it.
If stocks go down, he won’t look like such a genius. A sustained bear market on Wall Street will crack the whole illusion of economic competence on which his reputation and political clout depend.
Third, much of Mr Trump’s foreign policy is based on the flimflam of US economic strength.
The president thought he was winning the trade war with China, for example, because Chinese stocks were falling and US stocks were going up.
And now, the Trump team is throwing its weight around all over the globe, based on the sham of the US as an unstoppable economic powerhouse.
Economic sanctions, to give you another example, have been levied against several different countries, including Iran and Venezuela. But once the US markets stumble, the sanctions will lose much of their sting.
Blame the Fed
So the Trump team wants to do whatever it can to avoid a market sell-off. Barely had the leaves fluttered on Wall Street before Mr Trump was putting up the hurricane shutters.
Of course, Mr Trump wants to protect himself from the howling winds of a financial storm. And, of course, he is right to blame the Fed; more than anything else, the Fed is ultimately at fault.
But it was Mistake #1 that caused the core problem — too much credit — not Mistake #2.
We watched the action yesterday. The Dow sold off in the morning. Then, it rallied at noon. In the afternoon, it didn’t seem to know where it was going…and finally, by the closing bell, it was down more than 500 points.
And this morning, it looked like the market was having a good bounce.
This is not the sort of action you expect in a real panic. There has been no rush to unload overpriced stocks.
Why not?
Our guess — and this is purely guesswork on our part — is that investors are reading the same writing on the wall that we are. It’s the handwriting of POTUS himself. And he’s telling us all what to expect.
The US won’t go gently into a correction. Instead, in a panic, the Fed will abandon its normalization policy…and go into ‘Full Japanese Central Bank Retard’ mode.
That is, it will begin buying everything in sight — US Treasury debt (which will explode to $2 trillion a year)…stocks…corporate bonds…baseball cards…you name it.
And then, watch out…It will make Mistake #4 — dumber…more dangerous…and more destructive than any other mistake we’ve ever seen.
Stay tuned…
Regards,
Bill Bonner