New Year’s Day, we awoke to the sound of sirens.
By Bill Bonner
After a week at the family farm, we had come back to the city for New Year’s Eve. But hardly had the new year begun when the echoes of the old year filled the streets and alleyways.
Over the holidays, a mental defective had firebombed nine cars near our house in Baltimore. And this morning, the bums are still sleeping at the church entrance next door. One of them has turned the whole area into a dump, with trash and rags strewn all over the steps.
“Yes, it looks like 2019 is going to be a lot like 2018,” said one of the children.
Where We Come From
But before we get to where we are going, let us back up to look at where we come from.
What happened in 2018? We went around the table on New Year’s Eve and asked what everyone had achieved in the 12 months just passed.
“We put a roof on one barn and a foundation under another,” we volunteered. We had just spent the holidays working on the family farm, shoring up an old barn with concrete and cinder blocks; the dirt was still under our fingernails and the work still fresh in our mind.
It was little to show for a whole year, but at least it was something real and durable.
But what about the wider world? Are our foundations more solid? What did we learn?
The headline events are easy to recall. “If it bleeds, it leads,” say the old newspaper editors.
Mr. Trump, waving his saber wildly, made the headlines every day. North Korea, China, Canada, his own staff… trade wars… porn stars… shyster lawyers… Trump charged like Cardigan at Balaclava – with great gusto, but little reconnaissance. And like Cardigan, he survived and became a hero to his fans.
But for all the sound and fury, what did it accomplish? Where did it take us? Are we better off?
Follow the Money
Our beat is money. So we will skip the culture wars, nominee confirmations, and foreign policy initiatives. Let’s just follow the money.
And what we notice immediately is that the last decade (save the final three months) was a great time to be rich. The Fed pumped up your stocks, bonds, real estate, and collectibles… And then, Donald J. Trump added a tax cut.
Even after the sell-off at the end of the year, the typical stock owner was still two to three times richer than he was in 2009.
But his luck seemed to be running out. By the end of 2018, he was losing money and ended the year down about 6%.
In keeping with the loony zeitgeist of the year, the stock of WWE (pro wraslin’) tripled during the first nine months of 2018. But the typical fan didn’t own the stock; he didn’t have a stock portfolio.
He had only his time to sell – by the hour, the day, the week, or the month.
And his time became less valuable. In March 2009, he could have worked for 40 hours and used the money to buy the entire S&P 500. Now, he’ll have to work three times as long – 127 hours – to buy the same collection of stocks.
And even over the last 12 months, his time took a body slam. According to the Bureau of Labor Statistics, the average working stiff earned $26.71 per hour on January 1, 2018. Today, he earns $27.35 – 64 cents more, or a 2.4% increase.
But the inflation rate for 2018 was about 2.5%. That means he actually lost 2 cents per hour during the last 12 months.
That would account for a savings rate that has dropped to the lowest level in 12 years – 2.4%. A lower savings rate, of course, means that people have less to save… or are drawing down previous savings.
Either way, it is what people do when they are losing ground.
Overall, real wealth (very roughly measured by GDP) grew at about 3% in the U.S. last year – totaling some $600 billion worth of additional output.
But at the same time, debt grew faster. The federal deficit alone was $833 billion (and is already programmed to go to $1 trillion this year). Altogether, corporate, government, and household debt grew by $1.9 trillion – or more than three times as much as the output that must support it.
The 2018 economy was heralded, nevertheless… by the press, Wall Street, and the president… as a great achievement.
Mr. Trump quickly forgot all about the “big, fat, ugly bubble” that he claimed Barack Obama had created. Now, it was HIS big, fat, ugly bubble… and it was beautiful.
Unemployment went down to levels not seen since the 1950s. GDP growth even pushed up into the 3-4% range for a couple of quarters – just as it had under Barack Obama.
Trouble was, it was still a big, fat, ugly bubble… and Mr. Trump made it even bigger, even fatter, and even uglier by adding more lard.
The idea was that cutting taxes for the rich would cause the economy to grow faster and wealthier.
And it would have worked if the feds had cut spending, too.
This would have released real resources that the feds were wasting on assorted boondoggles to be put to work shoring up businesses and improving output.
Alas, that part of the message wouldn’t fit into a tweet. Instead, the feds increased spending and increased the debt.
And as we’ve mentioned before, if you could get rich by borrowing and spending – or by simply “printing” money – there would be a lot more rich people on God’s green ball.
And so it came to pass that in 2018, the Fed continued to lend money at below the rate of consumer price inflation (effectively giving it away)… and Washington continued to spend money it didn’t have on things it didn’t need.
The rich lost money on Wall Street. The poor lost money as the Main Street economy stumbled. The year came to a close and we were all collectively older and poorer. But no wiser.
What’s ahead for 2019?
As we will see, the past casts its shadow over the future. Bloomberg is on the case:
Key Fed Yield Gauge Points to Rate Cuts for First Time Since 2008
Some of the most accurate gauges of economic health are pricing in lower Fed rates for the first time in more than a decade.
The little-known near-term forward spread, which reflects the difference between the forward rate implied by Treasury bills six quarters from now and the current three-month yield, fell into negative territory on Wednesday for the first time since March 2008. Two-year yields dipped below those on one-year paper in December.
“This is a crystal ball, it’s telling you about the future and what the market thinks of the Fed and what it will do with its policy rate,” Tony Crescenzi, market strategist and portfolio manager at Pimco, said in an interview with Bloomberg TV. “The market is predicting a rate cut at the beginning part of next year.”
Rang the Bell
A crystal ball? Probably not. The credit markets are warning of an approaching recession. And the stock market rang its bell last year when the S&P 500 peaked at around 2,900 in September – warning of a bear market.
But there are no crystal balls in the financial markets.
Markets provide information. It has to be new, surprising information or it’s not information at all. “Tell me something I don’t know,” says the investor.
That’s why the Fed’s price fixing of short-term interest rates is so destructive. The big players game the system. They know what to expect… so the risk of speculating goes down.
And with the inflation-adjusted rate of interest on Fed Funds below zero, the cost of speculating goes down, too. No wonder the amount of speculating goes up!
Like an overloaded ferry, the extra debt weighs down the economy. Riding low in the water, there is still no guarantee the boat will sink. But watch out.
And since most speculating is done with borrowed money… the amount of debt goes up. Then, like an overloaded ferry, the extra debt weighs down the economy. Riding low in the water, there is still no guarantee the boat will sink. But watch out.
Back Into Whack
We’ll wait along with everyone else to see what “Mr. Market” will do. But we’ll keep an eye on the weather, too. There are patterns, trends, and moral lessons that make some outcomes more likely than others.
It’s not like flipping a coin, where every flip is independent of the last one. A 20-year-old man may want a refrigerator with a lifetime guarantee. But a 90-year-old can save his money. Even a cheap icebox will probably last longer than he will.
And Mr. Market is a cynic and a spoiler. When he smells flowers, he looks for the coffin. And when he sees Humpty Dumpty sitting on the wall, he knocks him off.
The longer and higher the bull market goes, the less likely it is to continue. Why?
Because there are feedback loops and automatic stabilizers that bring an out-of-whack market back into whack. High prices bring low ones. And vice versa. And a boom built on stimulus gimmicks casts a particularly dark shadow; it always ends in a bust.
Mr. Market, of course, can do what he wants. Steel, concrete, and cabbages may be predictable. He’s not.
When something is widely expected, it usually doesn’t happen. Because if you knew in advance what was coming, you would race ahead. It would be like knowing where you were going to have a fatal accident – that would be the last place you’d go!
And that’s why investor sentiment indicators are only useful as contrary indicators. When investors are extra bullish, it’s time to get out. When they are extremely bearish, it’s time to buy.
But you don’t have to trust surveys to find out – just look at the prices. Real sentiment moves with the ticker. And currently, stocks are very expensive.
In terms of Shiller’s P/E ratio, which looks at share price compared to the past 10 years of earnings, stocks are almost exactly where they were in 1929.
Tobin’s Q ratio, the ratio of market value to a company’s asset replacement cost, is 1.08. Again, that puts stocks higher than in 1929.
And many other measures put stocks way ahead, too, breaking all records – stocks/EBITDA… stocks/PEG… stocks/sales and profits… stocks/corporate profit margins… Hussman’s margin-adjusted CAPE… stocks to disposable personal income… and Warren Buffett’s favorite – the Wilshire 5,000 to GDP…
By almost any measure you choose, stocks are near the top of their trading range, a point rivaled only by 1929 and 1999.
In these circumstances, you don’t need a crystal ball. You need gold. If you stay in stocks, you could lose half of your money… or more… and then wait 20 years or more to get even.
If you get out of stocks, you will only lose the potential upside, which doesn’t seem worth the risk. And so far this century, an investment in gold has beaten an investment in the S&P – even when accounting for dividends – but with much less risk or volatility.
Most likely, stocks will rebound a little early in the year. Then, with the holidays over and the effect of the eggnog and cocktails wearing off, investors will go back to their desks and their laptops.
They will rub their eyes and listen for another clanging bell. Suddenly, or gradually, it will become clear that the good-news economy of 2018 was mostly a fantasy.
Take away one-time mood boosters – the unfunded tax cut, the unfunded extra federal spending, the repatriated profits, buybacks, and extra debt – and the whole “growth” story disappears.
And then, a tinkling sound in the background… barely audible at first… will grow louder…
The tattered investor will shudder. And he’ll feel the shadow of 2018 creeping over him… the worst year since 2008.
He’ll look across the hall to the bond traders. There, he will discover that he can earn 2.64% on a risk-free 10-year U.S. Treasury bond.
Or he’ll look at gold. Late last year, while stocks were falling, gold was going up – nearly 8% over the last two months.
“That doesn’t seem like much,” he will say to himself. “But it’s a damned sight better than losing money this year like I did last year.”
Bill Bonner is the underground news mogul and founder of The Agora publishing company. He’s written the New York Times bestselling book Empire of Debt and most recently published Hormegeddon: How Too Much Of A Good Thing Leads To Disaster. He is one of the great writers and minds in America today and also publishes a free daily letter, Bill Bonner’s Diary, which you can sign up for here: bonnerandpartners.com.