by Robert Gore, Straight Line Logic:
Look out below.
Financial markets are exercises in crowd psychology. Analysts make good money analyzing the latest market moves and predicting the next ones. Today’s analyses often contradicts yesterday’s and yesterday’s errant predictions stops no one from making predictions today. It would be trivially easy to keep score, but few do; it would endanger six- and seven-figure compensation packages. What most everyone wants to obscure is the essence of the game: guessing where the crowd is going next.
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Greatly aiding this obscurant project is the rubberiness of one of the measuring sticks: the value of fiat currencies. If you’re keeping score in dollars, the Dow Jones Industrial Average is up over 3.5 times from its 1999 high. If you’re keeping score in real money—gold—the Dow topped a quarter of a century ago at just over 42 (Dow divided by the dollar price of an ounce of gold) and is down over 60 percent since (it’s now 16 and change).
Everybody has a choice of measuring stick: either a precious metal that has served as money for centuries and has consistently preserved its value against real goods and services, or fiat currencies that historically have never preserved their value and are backed only by promises, always broken, not to create too many of them. The stock-selling industry chooses the latter.
Measured by gold, the stock market has been in a quarter-century bear market. Crowd psychology suggests that even measured by elastic fiat currencies, it will soon be in a deep and lengthy bear market. Continuous fiat currency inflation and suppressed interest rates have fed an equity mania since Alan Greenspan flooded the financial system with central bank fiat credit after the 1987 stock market crash.
That maneuver has been repeated so often that it’s known as the “Fed Put.” A put option gives its holder a right to sell an asset at a particular price, so the Fed Put refers to the central bank pegging asset prices. BTFD is the well-known acronym for “Buy the F**king Dip,” and that strategy has rewarded the fearless time and again.
“No fear” aptly characterizes the equity crowd’s psychology. That legendary investor Warren Buffett is selling and his company, Berkshire Hathaway, has record cash reserves is ignored, as are stretched valuations and other indicators that might disturb consensus belief that over anything but the very short term, stock prices only go one direction. Artificial Intelligence is the current speculative hook, just as dot-com was before a vicious bear market kicked off the new century. Although some “transformative technology” companies thrive, the fervid hopes generally far outrun actual performance, even for technologies such as the Internet that have had an enormous impact.
A bear market in bonds began in the summer of 2020. Yields on U.S. Treasury 10-year notes bottomed, which means prices topped. Since then, yields have clearly broken downtrend lines (prices have broken uptrend lines) stretching back to 1981. The new yield uptrend roughly corresponds to the inflection in the quantity of U.S. government debt. Inflection, when a gentle rise suddenly becomes a steep one, is the inevitable acceleration point of exponential functions, which U.S. debt most certainly is.
Interest rates will trend upward with the exploding quantity of debt, and the ascent could be correspondingly steep. The rising fiat currency price of gold is clearly registering debt debasement. Rising interest rates produce a vicious feedback loop for the U.S. Treasury. They raise debt service costs, which require the Treasury to borrow more. Interest expense is now the third largest item in the federal budget and is running at an annualized rate of over $1 trillion per year. Creditors add to this pressure on the bond market. As they lose money on their existing holdings and bear market psychology takes hold, they sell to limit their losses, exacerbating the downtrend. The yields on corporate, agency, municipal, and individual debt rise with government-debt yields.
Rising interest rates reduce the discounted future value of assets, including equities and real estate, thus reducing asset prices. As creditworthiness deteriorates and insolvency and bankruptcies increase, the overall quantity of debt will finally start to shrink. Debt is the foundation of the global economy and the medium of exchange. Because it is the medium of exchange, debt contraction—from the write-offs of worthless debt and the unwillingness of a shrinking pool of solvent creditors to extend credit—is inherently deflationary.
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