‘There is a tide in the affairs of men which, taken at the flood, leads on to fortune omitted, all the voyage of their lives are bound in shallows and in miseries.’
William Shakespeare, Julius Caesar
‘When the tide goes out, you can see who’s been swimmin’ naked.’
Warren Buffett
We’re happy to be back at home. Not that we didn’t like our sejour in France. But it’s still nice to be back in our own bed.
And here, with nowhere to go and no one to see, we have more time…at least for a while. In two weeks, we’ll head to South America, where we’ll check up on the ranch. An election is coming up. Typically, the leftists give money to the troublemakers in advance of an election. The idea is to stir things up. We don’t understand the logic of it, but that’s what they do.
Maybe they are just buying votes.
We’ll let you know the status of things when we get there.
The affairs of men
In the meantime, here we are in peaceful Ireland…green grass…contented cows…and the back-and-forth flow of the Blackwater River beside us. The Blackwater is tidal, this close to the sea…it drains out every day, revealing an ancient weir, where fish were trapped as they swam back downstream. Generations of locals — as well as invaders — used the river for food and transportation. They timed both to the tides.
‘There is a tide in the affairs of men’, too, wrote Shakespeare.
A whole generation of investors (from 1982–2021) rode the flood tide to glory. They bought stocks and watched as the Fed pumped trillions of dollars’ worth of money and credit into the system. Their fortunes rose. They didn’t have to toil. Neither did they spin. They made money on ‘the float’…by following Marty Weiss’s famous advice: Don’t fight the Fed.
But they learned the wrong lesson.
Investors who buy stocks now are pulling their oars against the current. Investors should buy stocks when they’re cheap and SELL them when they’re dear. But stocks are already expensive. If there is any upside, it’s not likely to be much.
And now, the Fed has reversed its monetary policy. It’s raising rates rather than lowering them. Just as the Fed called upon investors to buy in the 1982–2021 bull market, they now invite them to sell in the ’22–? bear market. Buy stocks now and you are ‘fighting the Fed’.
Premature celebration
The tide turned in the stock market at the beginning of last year. The Fed stopped supporting the stock market with lower rates; it began raising them. From near zero, the Fed’s key rate is now 4.75%. A big difference. And Jerome Powell says he will continue raising rates. From CNBC: ‘Chair Powell says it’s ‘premature’ to declare victory against inflation’.
With a total of US$90 trillion outstanding, in private and public debt, the difference between zero interest and 5% interest is US$4.5 trillion dollars. That is how much interest the US economy would have to pay if its debt were suddenly marked up…just a quarter point above the Fed’s key rate…and still below the level of inflation.
Of course, it doesn’t happen that way…debt maturities are staggered. Overall, the US interest rate bill is about 15% of GDP…or about US$3.6 trillion. But as time passes…and the Fed continues to nudge lending rates higher…more and more debt (mortgages, corporate bonds, federal bonds) must be refinanced at much higher rates.
How high will they go? We don’t know. But we believe rates must be at least two or three percentage points above inflation in order to bring price increases under control. So, if inflation settles down at 5%…lending rates will have to be around 7% or 8% to reach some kind of equilibrium.
Let’s see, 7% of US$90 trillion is US$6.3 trillion — or more than a quarter of GDP. Something big is likely to break before we get there. Higher interest payments leave less and less money available for normal spending…which pinches sales and corporate profits…and leaves businesses struggling to pay their debts.
War and pieces
Meanwhile, real wages have been sagging (lower than inflation) for nearly two years straight…productivity is falling…GDP growth is anaemic and soon will be negative (in recession)…the money supply is falling…savings rates are near record lows…consumer debt is at a record high…business debt too is at record levels…and here’s the latest from the housing market. From Newsweek: ‘Housing Market Crash Fears After Prices Fall for Fifth Month in a Row’:
‘In November 2022, house prices in the U.S. dropped for the fifth consecutive month, with prices down 0.1 percent, compared to October.’
And that’s not all…
…the US is at war with Russia, through its proxy, Ukraine…it is preparing the nation for yet another war with China, soon…and much of the world is looking for alternatives to US dollar hegemony.
Not to mention that leading Western governments are trying to wean their economies off traditional fuels — another explosive mine, revealed by the falling tide!
Tides rise. Tides fall. And surprises happen. We would be surprised if the next surprise were a happy surprise.
Regards,
 |
Bill Bonner,
For The Daily Reckoning Australia
