‘He was going to live forever. Or die in the attempt.’
Joseph Heller, Catch-22
Well, the consensus is clear…
This stock market rally is about to fizzle out.
If you believe the experts on Bloomberg TV, that is.
I caught an episode of the ‘Opening Bell’ segment on Friday morning while on the treadmill at the gym.
Usually, I go for an interesting documentary.
The history of the Celts or Romans, something on the great artists of the Renaissance…occasionally Maradona’s best goals.
But last Friday, I thought I’d take a risk and see what the mainstream pundits were saying about my day job.
And let me tell you, it was depressing viewing…
Shock and awe
As I said, the consensus from nearly every single one of the guests on the show was that interest rates would continue to rise.
That the Fed would stick to their guns, no matter what.
And in turn, this current stock market rally would fizzle out fast.
Certainly, it’s been a fierce rally so far — we’re up more than 16% from the June lows on the US S&P 500 — and a pause or pullback wouldn’t surprise me at this point.
Our very own charting wizard Murray Dawes has been saying much the same recently. He’s yet to get confirmation from his signals that the bull is back for real.
And Murray is one voice I trust on this, so I’m playing it cautious right now.
But the pundits’ reasoning — sustained interest rate rises as far as the eye can see?
On that, I’m not so sure…
You see, the economy is so indebted that higher rates for longer isn’t sustainable.
And my base-case view is we’ll see a pivot to lower rates faster than many predict. Maybe not this year but in early 2023 for sure.
Why?
It’s just maths…
Take the biggest debtor in the world, the US government.
Their annual interest bill is around US$400 billion. If the coupon (interest) rate on government bonds increases to 3.2%, then that’s an increase of US$600 billion to US$1 trillion a year.
That’s just to pay the interest on their debt.
Now, the US annual GDP — the total value of all the goods and services produced — is around US$23 trillion.
So, a trillion dollars of interest is 4.3%. In other words, you’d need the economy to grow at a nominal rate of 4.3% just to pay the interest bill.
The historical average from 1948 to 2022 is 3.13%, and with a recession looming, it’ll likely go backwards over the next 12 months.
Which means this debt is only going to grow thanks to budget deficits as far as the eye can see — including a new US$750 billion spending bill passed this week.
Part of this bill, called the Inflation Reduction Act, hired 87,000 new tax agents.
I can’t imagine shaking down taxpayers for more money will go down too well in November’s primary elections.
And ironically, with stock markets falling sharply with increased interest rates, it’s likely capital gains tax receipts will fall too.
Making the budget situation even worse…which can only be covered by…yes, you guessed it…more debt!
The Fed is shooting itself in the foot and contributing to an unstoppable debt spiral.
This is why, in my opinion, forget what the pundits on Bloomberg say, any rate rises can only be temporary.
In my opinion, they’re really trying to ‘shock and awe’ inflation into coming down fast. And for that to work, they need punters to believe they’ll go hard and high.
Herein lies the paradox for investors.
The more jawboning inflation down works, the less they’ll do on interest rates.
But if markets call their bluff and rise, knowing a pivot is coming soon, the Fed will increase rates faster to prove they’re serious.
Even if the economic consequences are terrible.
It would all be funny if people’s jobs and livelihoods didn’t rely on it…
Peak insanity
How did we get into this situation?
A point where the Fed can play God?
What they’re saying, what they’re thinking, what will they do next…?
It’s all anyone cares about these days because it’s the only thing driving markets.
And it’s not normal.
I mean, the stock market is meant to be where real businesses are sized up.
Where stocks are bought and sold on the basis of the competition of products, management, marketing, and everything else that makes a good (or bad) business.
Instead, we’ve got trillions of dollars slushing around on the whims of 12 people meeting in private and dictating terms to everyone else.
It’s literally a financial dictatorship we’re living under.
I’ll admit, I sometimes feel a bit crazy for even suggesting this in polite company.
Certainly, no one on Bloomberg TV was!
And in that spirit, I’ll leave you with a quote from Joseph Heller’s masterpiece, Catch-22:
‘There was only one catch and that was Catch-22, which specified that a concern for one’s safety in the face of dangers that were real and immediate was the process of a rational mind.
‘Orr was crazy and could be grounded. All he had to do was ask; and as soon as he did, he would no longer be crazy and would have to fly more missions.
‘Orr would be crazy to fly more missions and sane if he didn’t, but if he was sane he had to fly them. If he flew them he was crazy and didn’t have to; but if he didn’t want to he was sane and had to.
‘Yossarian was moved very deeply by the absolute simplicity of this clause of Catch-22 and let out a respectful whistle.
‘“That’s some catch, that Catch-22,” he observed.
‘“It’s the best there is,” Doc Daneeka agreed.’
Good investing,
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Ryan Dinse,
Editor, Money Morning
