Today, June 16th, the next round of bad news has commenced.
The unprecedented 75 basis point increase in interest rates by the Fed set the stage for today’s drop. Yesterday, the Dow went up 351 points. As of this writing, the Dow is down nearly 700 points. The psychological impact of breaking below a 30,000 Dow cannot be understated.
The point made here will remain the same. EVERYTHING has been overvalued, and now the markets must go through a long tortured process of find the true value, as opposed to the fair value, of the markets. When they arrive at the bottom, they will learn several things.
One is that the bottom is soft and mushy mud. Two is that the markets will get stuck in this mud and probably sink below the bottom. That’s right, sink below the bottom; but how deep? Market experts will point out that it is common for the market to overshoot highs and lows. Three, all the factors needed to get the markets climbing again may not line up on schedule.
Muddling, struggling, false starts are all part of the likely future after mushing down into the elusive bottom. Yes, folks, the future looks uglier, and it is getting even uglier. On Steve Bannon’ War Room, he pointed out that retailers are reporting that customers are now buying quarts of milk rather than half gallons. When the customer cannot afford a half gallon, then you know the economy is in bad shape.
That said, these same experts are also pointing out that the standard guidelines for market bottoms, such as capitulation, may not apply here. The extent of the fiscal abuse heaped on the American economy by Biden, by Congress, by the Fed have created market conditions so severe, so damaging, that forces normally expected to help with market have been pounded into the ground.
David Bratt, chair of the economics department at Liberty University has suggested that America will do better than Europe, Asia and other foreign markets because America has something they lack: Price discovery.
So, when the true bottom is found, it will be based on true price data. Investors should draw some comfort from that. However, if the extent of wealth destruction is enough to impair new capital formation, America is going to be waiting for awhile.
The other picture commentators paint is that the era of easy money is over. So, how will investors make money in this much tighter environment? The growing acknowledgement, with two weeks to go, that the GDP growth in the second quarter will be negative to zero will meet one of the first criteria for a recession: Two quarters of negative GDP.
The wild card is the possibility that a radical new technology will be introduced to the economy. The history of growing prosperity in America is punctuated by the introduction of new technologies. Telephones, electrical power, cars, airplanes, computers…you get the idea. So, what might be next? A novel use of quantum technology? Space? An unexpected breakthrough in biotechnology? It is anybody’s guess.
A historical note is that the last time America was in a deep economic funk was the late 1970s. Interest rates peaked around 17%. This was the cherry on top of the longest lasting bear market, which spanned five years during the 1970s. The Democrat created malaise of Jimmy Carter gave America the feeling that this was a nation in decline. However, surprisingly, the catalyst for recovery started with a book, “The Search for Excellence”. It excited the major corporations and other businesses and created the feeling that we could get our mojo back. After the worst bear market in history, August 1982 marks the point in time where a new bull market cycle started. Technically, it lasted until the internet bubble around 2000. Since then, the markets have generally climbed by various tricks including what will be recognized as the Era of Easy Money, 2008-2022. Put simply, dear reader, political expedience will destroy this nation. It is political expedience which has pumped up the national debt.
It was political expedience which created the Era of Easy Money, it is political expedience that has powered this period of inflation.
The best that can be said, and it may not be true, that all this political expedience will finally force the markets into reality, somewhere…down…there.