Dow 20,000?

Ps are already slipping... here's what happens when the Es join them.

(Source: Getty Images)

Bill Bonner, reckoning today from Youghal, Ireland...

“Will the Dow go under 30,000?” asks a Barron’s headline.

Well… yes… it probably will.

It’s not rocket surgery. For the last 40 years, the Fed has been favoring investors with artificially low interest rates. Now, like a bad friend, it’s turned on them.   

The Fed is raising rates and putting the squeeze on the inflation it caused. But over the last 13 years, investors, businesses and households all got very used to borrowing money at unnaturally low  rates. They came to rely on it. And now, they must feel as though the Fed set them up… and then pulled the rug out from under them.

Will 30,000 mark the bottom? More likely, it will be closer to 20,000. Because higher rates affect the economy as well as the stock market. Sales and profits go down. The E in the Price/Earnings ratio slips along with the P. Pretty soon, the Dow has dropped below the 30,000 mark and is edging toward 20,000. Bloomberg:

“Dr. Doom” Roubini Expects a ‘Long, Ugly’ Recession and Stocks Sinking 40%

“Even in a plain vanilla recession, the S&P 500 can fall by 30%,” said Roubini, chairman and chief executive officer of Roubini Macro Associates, in an interview Monday. In “a real hard landing,” which he expects, it could fall 40%.

Of course, the Dow may not drop at all. It may not have to. It could just remain where it is… so that rising inflation would lower the real price of stocks. That’s what ace investor, Stanley Druckenmiller, seems to expect. Markets Insider: 

Billionaire investor Stanley Druckenmiller warns there's a high probability of the stock market being flat for a decade

Stanley Druckenmiller said there's a high probability of a flat stock market for 10 years.

That's because of a rollback in globalization and easy monetary policy.

The Fed has already hiked interest rates four times this year.

Cut in Half

Druckenmiller recalls what happened between 1966 and 1982. Stock prices at the end of the period were about where they had been when it began. Meanwhile, inflation had erased 70% of their real value.

Already, the selloff has taken about 15% off the Dow. In addition, over the last 12 months, inflation has cut off around 8%. So investors are actually down about 23% in real terms. If next year goes the same way, stock market wealth will be nearly cut in half. One way or another, investors are going to lose money.

That would all be simple and satisfactory. Justice served. What went up, comes down. Fake wealth goes back whence it came. And the speculators get what’s coming to them.

But there’s more to the story; there always is. Even if markets were allowed to correct their excesses – in the kind of bear market Dr. Doom describes – there’s still that $90 trillion of debt. What to do with that?

We remind readers where that debt came from. When the Fed put rates at absurd levels – zero! – it drove up stock prices. But it also encouraged people to borrow. The biggest borrower of all was the US government, which added $24.5 trillion since 1999 and is now $30 trillion in the hole.  

When you owe $100, you may wonder how you will repay. But when you owe $90 trillion, you wonder how you will default. That is really the central financial theme of our time.

‘Low-flation’

In today’s America, the deciders – left and right… Republican and Democrat – don’t agree on much. But on one issue they line up like tin soldiers: someone’s going to pay for all the mistakes, boondoggles, and jackassery of the US government, but it’s not going to be them.  

Right now, we are still in the early stages of what promises to be a huge correction.  Over more than 30 years, the Fed created a fantasyland of ultra-low interest rates (as if money had no value)… ‘low-flation’... and eternally rising asset prices.  

That Bubble Epoch is over. Consumer prices are rising. The Fed is trapped. It’s either ‘inflate or die.’ If it keeps interest rates lower than the rate of consumer price increases – and ‘prints’ more money – inflation will get worse… and destroy the economy, the government, and our civil society too. All Americans will pay the price, in other words.

But if it continues to raise rates to control inflation, the bubble economy dies quickly – and the elite, who caused the problem – will pay most of the tab. Stocks fall… the Dow may drop below 20,000… and the deciders (who own the majority of our stocks and bonds) will lose, say, $50 trillion. They’ll also lose much of their room to maneuver. The days of unlimited deficits will be over too. No more passing out trillions of dollars to their friends and supporters.

They’re not going to like that. And they’re not going to go gentle into that good night. But what can they do? We’ll look at that tomorrow….

Regards,

Bill Bonner