The Panic Pivot

Sooner or later, the real massacre will begin...

(Source: Getty Images)

Bill Bonner, reckoning today from San Martin, Argentina...

A few years ago, we developed what we called Bad Guy Theory (BGT).

The idea was that there are good guys and bad guys. The bad guys change, of course. Germany was bad in 1940. Now it is good. Ditto with Japan. Today, Russia and China are bad.

The bad guys come and go. But the good guy – the USA, the “one, indispensable nation” – never changes.

And since good guys do only good things, bad things miraculously become good things when they do them. Such as, invading Iraq. Or blowing up other peoples’ pipelines. Or assassinating their leaders. Without noticing, the good guy becomes a bad guy.

The Panic Pivot

We’ll come back to that as we puzzle out how China became a bad guy…what America is becoming…and why you should brace yourself as the US rehearses the unhappy comeuppance of empires throughout the ages. But today, let us check in on how the financial reckoning is going.  

Our hypothesis: the inflation Indians are off the reservation. The Fed will continue to raise rates, trying to get them under control, until the economy reaches a crisis point. Then, it will panic and ‘pivot’ towards more money-printing. 

Here’s one little item from YahooFinance:

Car Debt Is Piling Up as More Americans Owe Thousands More Than Vehicles Are Worth

The build-up in negative equity — or the amount that debt exceeds a vehicle’s value — is rattling consumers and raising alarms within the industry. Though it’s not unusual for drivers to carry negative equity, some dealers say more people are arriving at their lots up to $10,000 underwater, or “upside down,” on their trade-ins. They’re buying at still-sky-high prices and rolling debt from one car to another and even onto a third. Loans are commonly stretching to seven years.

“As trade-in values begin to cool, each month more and more consumers will find themselves falling from positive to negative equity,” said Ivan Drury, director of insights at auto-market researcher Edmunds. “Unless American car shoppers break their habit of buying again too soon, we’ll see the negative equity tide continue to rise.”

Disruptors Disrupted

As cars decline in value, so does the car-selling industry. Carvana – the ‘disruptor” that was once worth $31 billion has lost 96% of its value. It’s lost money every year since it was created in 2014. A $100 million loss one year, $150 million the next. But last year, it lost $1.5 billion, for a total loss of $2.107 billion during its career.

Meanwhile, another ‘disruptor,’ WeWork, has wiped out $15.5 billion of capital since it began in 2016.

These are not just the ‘paper’ losses of stock market speculators. This is real wealth – time and resources – squandered on bad ideas, a total of more than $17 billion by these two companies alone. That’s about what the total national debt was during the Dust Bowl drought of 1931 (not adjusted for inflation). Back then, the debt-to-GDP ratio was a mere 22%. 

While speculators lose money, so does the middle class; its houses are going down  as well as its cars.  

Mortgage applications are at their lowest level since 1995, while mortgage payments rose 26% last year…and the average sale price fell 16% since last July. Home sales fell for the last 12 months straight…and are now 37% below their level of a year ago…the biggest decline on record.  

The Real Massacre

And here’s Breitbart, adding it up:

Homeowners in the United States have lost $2.3 trillion in total value since its peak in June, according to an analysis from Redfin.

“The total value of U.S. homes was $45.3 trillion at the end of 2022, down 4.9% ($2.3 trillion) from a record high of $47.7 trillion in June,” an analysis of the Redfin Housing Value Index claimed. The research indicated that the drop in total valuation across the United States is the “largest” drop in total percentage terms from June to December since 2008.

What can desperate consumers do? Borrow! Credit card balances just took their biggest jump since the 2001 recession.

Total debt for millennials is up 27% since 2019, the most for any age group.  Millennials also had the highest delinquency rate.

In other words, so far, so good. Both the rich (investors) and the not-so-rich (the middle class) are getting scalped.  

Sooner or later, we think, the real massacre will begin…

…and the Fed cavalry will, alas, come to the rescue…like Custer to the Little Big Horn.  

Stay tuned.

Regards,

Bill Bonner

Joel’s Note: Hmm… underwater cars and upside down trade-ins… empty WeQuit office space and Main Street real estate collapsing… all while delinquent millennials pile high the credit card debt and hope for the best?

Gee… what could go wrong?

Of course, long-time readers of these pages know this kind of “until something breaks” strategy has practically defined the Fed’s playbook for years. And now, it’s all coming to a head. Here’s Bonner Private Research’s investment director, Tom Dyson, writing to members yesterday…

The thesis behind our strategy for 2023 is simple. The financial authorities–the Fed, the US Treasury, the Congress, the President, the banks–blew up a gigantic credit bubble by suppressing interest rates, incentivizing bad decisions, forcing cheap liquidity into the system and promoting speculation. Every time the bubble started to deflate, they doubled down, with even bigger interventions. 

Now the game’s up… and we’re in the stage now where massive losses need to be recognized… and digested. We’ve speculated that these losses will be processed partly through falling prices and partly through currency debasement, a process we call “inflation volatility.” 

I expect a lot more pain to come in the stock market, the bond market and the real estate market – always observed in terms of gold for an accurate picture – as higher interest rates send cap rates and earnings yields much higher. I’m not expecting a crash… more like a long, grinding path lower.

And here’s BPR’s macro analyst, Dan Denning, reminding dear readers that the early 2023 rally looks a lot like the last couple of bear market traps, which he and Tom cautioned readers to stand clear of last year…

“The growth rally this year was a lot like the growth rallies in February and June of last year,” observed Dan in a private email to the BPR team yesterday. “Each time the dominant story was that inflation had peaked and the rate hikes were done. But then the data came in showing inflation was stubbornly high and rates have kept climbing. Result: lower highs and lower lows. Look out below!”

Long. Grinding. Lower.

If you’re not already prepared for this possibility/probability, now’s the time to take action. Start by downloading our special BPR research reports and following along with Tom and Dan’s twice weekly market notes, including regular updates on the Bonner Private research Official Stock Watchlist which, as of yesterday, had eight open positions (including the Trade of the Decade) with an average gain of 29%.