“History never repeats itself. Man always does.” Voltaire
Seldom have I been as surprised as I was in the late 1990’s when the stock market went up every day. If it snowed it was because of the snow and if it was sunny the sunshine lifts traders spirits so they must be buying because of that. The amount of stupid stories and explanations coming out of that time period was intense. Here is the sample of how conversations were more analytical back then, “ I have some stock in an internet company. Great what do they produce, nothing yet, but they have a website and they have .com in the name. That seems a little flimsy, listen man I got stock to sell are you in or out. Ok, I’ll buy some.” This level of rigorous analytical research depth led to an 80% decline in the Nasdaq and the Fed funds rate to go to new lows that we hadn’t seen since the early 1960’s when James Dean was just a guy that sold sausage.
People today aren’t that analytical if that is possible. They have an automatic draft of their paycheck go into their retirement account that buys pre-arranged etfs, mutual funds, and index funds that contain over a third of the largest and most overvalued companies in history of the world. This is our current station in life. We are watching this. Today. The Dow Jones is up 700 points on Tuesday and the small cap Russell stock index is up 3.5%. 40% of the companies in the Russell index can’t pay the interest expense on their debt without borrowing more money, but they are up over 10% in two days. They are up almost 40% since November when Powell was rumored to cut interest rates, which he hasn’t done 8 months later.
It gets even better, regional bank stocks which are mostly insolvent, are up 20% in the last month. The sun is out let’s buy. The rain is falling let’s buy. The ex-president has been shot let’s buy. Poland is amassing troops on its eastern border let’s buy. The Red Sea is closed to shipping let’s buy. The regional bank stocks going higher is one of the greatest things I have ever seen. This is all based on the Fed cutting interest rates and they are only factoring in a couple. If we move the Fed Funds from 5.25 to 4.75 that means that interest will still be 19 times higher than when it was at 25 basis points and the banks were stuck. The commercial real estate problem hasn’t subsided, the bonds and unrealized losses on their balance sheet would improve just marginally, but they would still be roughly as bad as when Silicon Valley Bank went bankrupt last spring.
I believe that this market got so high today that a day trader looked out his window and saw a small person with wings playing a harp. This isn’t opinion, well maybe the harped little person, but let’s look at history to determine fair market valuations. According to the Shiller PE ration we are among the highest valuations in history, in fact we are much higher than the valuations of the stock market in 1929 when people were buying with unlimited margin rules and the market was a wild wild west although technically located in the east. The Buffet indicator is another good one to follow for long term valuation metrics and we are at all time highs. This measures the total market capitalization of the stock market divided by GDP. We have never been higher in our history. I say this thinking, incorrectly, that people care.
They don’t care, they aren’t even thinking about this. They are thinking about what they can buy with their next paycheck. I can afford a new house, a new boat, a new car. That is it. Now that is a large chunk of people that can afford to buy things. The rest of the country is also thinking about what they can buy with their next paycheck. Rent, food, diapers top that list and there is damn little to go around after the basics if any at all. We are one of the richest countries in the world so why does everyone feel so damn broke.
It is the decline in purchasing power. Inflation is a hidden little bastard. If you think that Pepsi isn’t going to continue to make money on you after its costs have gone up , then you would be wrong. You are getting the pass that on to fatty boom balatty slurping up the sugar water treatment. If you think that will change without major declines in wealth and/or declines in employment, then you would be wrong. People are going to be dumb until they can’t be dumb anymore. It must be forced on them because as of their own free will, they can’t help it. They don’t listen.
“Greedy people wanted more than they needed. Foolish people thought that they could get something for nothing. Impulsive people bought now in the hope of paying later. Income and wealth were distributed unfairly and dangerously. The rich regarded themselves as the all-knowing elite. The masses were not paid enough to consume all the goods they produced. The economy was unsound. The corporate structure was sick. The banking system was weak. Foreign trade was out of balance. Business data were inadequate and often faulty. This constellation of conditions left the economy a flawed and loaded gun, and when the stock market crashed, the gun did not merely fire-it exploded in everyone’s faces.” This is written about today. This was from Edward Ellis’ book A Nation in Torment written in 1970 about the events of 1929. It might as well be the C Thomas Printer Cooperative of its day only more better written and stylishly in book form.
This also from Ellis, Roger Babson once said “I repeat what I said at this time last year and the year before, that sooner or later a crash is coming which will take in the leading stocks and cause a decline of 60 to 80 points in the Dow Jones Barometer. More people are borrowing and speculating today than ever before in our history. Sooner or latera crash is coming, and it may be terrific…factories will be shut down…men will be thrown out of work…the vicious circle will get in full swing and the result will be a serious business depression.” Roger Babson was a renowned economist and he said that September 5, 1929, and therefore he had been saying it since at least 1927. Being early isn’t wrong.
This is what makes today’s situation similar but actually more terrifying. In 1930 when banks failed, drought consumed America, and jobs dried up faster than the crops. The government public works projects, social safety net, and programs helped a lot of unprepared people to survive during the depression. Today we have people who consider this their lifestyle. They consider it their check, their government check. Today we also might not be able to do it much longer.
The social safety net adds to the debt and the debt is getting very high in nominal numbers at $35 trillion, high in debt to GDP at well over 120%, and high in difficulty in selling treasury bonds to finance this spending. People think that this spigot can never be turned off and they are mistaken. It can and it will, and millions of Americans will see their lifestyles transform from barely making it to chaos and insecurity. Let me explain…the debt and the programs it supports are only possible because the United States can sell US Treasury Bonds to supplement all the taxes it raises from the people. That is their spendable money. We know poor people don’t pay taxes. Rich people don’t pay taxes, and the middle class is getting smaller and smaller, so tax revenue is growing nominally because of inflation but as a chunk of the obligations owed it is becoming smaller. Therefore, we are left with debt and the selling of bonds which creates the money to send out food stamps or pay a bureaucrat to be rude to you.
The problem is and key difference its that the government had the ability to generate money and they did and they gave it to people. It was supposed to be temporary as is every government expenditure. Of course, it wasn’t. Today if a bond sale would fail then the government could have trouble meeting its spending obligations. Someone might not get their check and there will be hell to pay if that happens. The very thing the government would need the most to help people in need would be the very thing that they could no longer be able to do…print money.
The safety net would be gone and that would plunge no plunge isn’t a strong enough word, cascade us into financial hell. It would be Hurricane Katrina in a week for months. People couldn’t buy anything because the banks would be failing, cards wouldn’t be working, no one would have any money because no one has cash. It would like the car dealerships that lost their software to hackers. We have cars but we can’t sell them right now. This money made of digits 1 and 0 that pretend to show money but instead just show credit are all that most people have. When that system fails their debit card is a piece of plastic because the network is down because they can’t transact. Water becomes currency for a time and food also. This is the non-inflationary path.
If we prefer to keep adding to our 1s and 0s on our plastic cards of commerce then we can always have the Fed monetize the debt and just keep creating credit as always, we can give helicopter money directly to people and tell them to spend baby spend. The result of this is people do have a financial cushion and they feel better for a bit. Then they realize that their $15 used to buy a fast-food lunch and now it is $22 and he feels damn poor. He really feels poor when it hits $44 in the afternoon. Prices were more than doubling in some economies that treated their financial position as we are treating ours. We have covered them here from Hungary to Weimar Germany.
The suffering in the depression was so extreme that I feel like I cannot do it justice. In his book Ellis talks about England Arkansas, a small town of 2,00 people 22 miles southeast of Little Rock. On Jan 3, 1931, 500 armed men and their wives marched on the local Red Cross office demanding food. When denied they set out towards the town’s stores and left town with $1,500 worth of flour and lard from merchants that couldn’t afford it. They did it as politely as they could but they were ready for violence if they didn’t get what they wanted which was some basic food. There was none. The drought had killed grazing pastures, animals died, and people were starving. Here in America not some far away place on a commercial. People were living in Hoovervilles, which were the homeless tents and forts built by those that lived on the street. I realize now that we are already there. We have homeless by the thousands or even tens of thousands, we have starving people, and we have the faucets turned on with the federal government giving us money faster than any time since World War II. My god, what are we going to do if we go into recession let alone depression and what are we going to do if we can’t sell treasury bonds.
What we can do is prepare. I write this today because some of the yield curves are starting to un-invert and the Fed is projected at almost 100% chance to cut rates in a few weeks and these has historically been the signal when the public agencies recognize that we are indeed in a recession. Nvidia has blown its bubble, Tesla has blown its, and now of all things the regional banks are blowing theirs. I hope I am wrong with my little Roger Babson speech here, and the market continues to go up, mindless people putting their money into the most elevated bubble of all time get rewarded, and nothing tragic happens to people with no accountability. That isn’t how history works unfortunately. What happens next is crying and hunger.
Sincerely Yours,
C Thomas Printer
On this date in history… 104 years ago to be exact, The Carpathia, the ocean liner that rescued the survivors of the Titanic in 1912, was sunk by a German U-boat during World War I.
Also born on this date … 4-time Olympic gold medalist and widely considered the great male ski jumper of all time, Matti Nykanen of Finland.
Thank you for listening today and you can find all of our articles and more on our website cthomasprinter.com.