Time to get serious

The gap between real values and paper values will most likely be closed by a fall in the value of the dollar (aka inflation). Bonds will be the biggest losers. We don’t own them.

Thursday, September 12^th, 2024 

Bill Bonner, writing today from Normandy, France 

Let us take a minute to review. 

After the Harris-Trump debate on Tuesday night, the odds of a Harris victory probably increased. But that has no effect on the underlying financial situation.  

Neither candidate has any intention of squaring off against the big spending, parasite elites. Neither will balance the budget. Neither will challenge the warmongers. Neither will suggest to the Fed that it leave interest rates alone, rather than encourage more borrowing with a lower Fed Funds rate. The idea of avoiding bankruptcy or preventing WWIII never even came up in the Great Debate. 

So, we are in ‘Maximum Safety Mode’ (MSM). Not only do we think the long-term outlook for asset prices is negative... we also think that in the near-term the danger of a substantial sell-off in the stock market is greater than the promise of a substantial gain. Stocks are near an all-time high already. If there is upside in nominal prices, it may soon be undermined by inflation. 

Besides, our Doom Index tells us that the US economy is either preparing for a recession... or that one has already begun. So far this year, employers are planning to hire fewer people than they have for the last 19 years. Over the last year, employment has increased... but only by 1.5%... substantially lower than the 2% average. And as far as jobs for native-born Americans are concerned, they’ve gone down sharply. The Western Journal: 

U.S. Department of Labor announced a weaker-than-expected August jobs report. The addition of 142,000 jobs last month fell short of the expected 160,000 that some economists projected. 

The devil hiding in the details, however, involved statistics pertaining to native-born American workers that one expert called "absolutely stunning." 

In short, native-born workers have experienced a net job loss of 1.3 million since August 2023. 

This comes after another stunning report... a ‘revision’ that showed a starkly different picture. CNN: 

The Bureau of Labor Statistics’ preliminary annual benchmark review of employment data suggests that there were 818,000 fewer jobs in March of this year than were initially reported. 

In addition to the labor figures, an interest rate curve ‘un-inversion’ also points to a coming recession. An ‘inversion’ is when long rates (the cost of borrowing money for ten years) goes lower than the short rates (the two-year rate). This is a rare event. Long rates ‘ought’ to be higher than short rates, simply because a lot more can go wrong in ten years than in two years. The lender needs to be compensated for the additional risk. 

Typically, when the yield curve ‘inverts’ it is a warning of a coming recession. And then, when the yield curve un-inverts, the recession actually begins. Last month, the yield curve went back to normal after the longest inversion in history 

A recession will mean lower consumer spending. Stock prices should go down... along with interest rates (fewer borrowers will reduce the demand for credit). 

The bond market has done well recently, with the 10-year T-bond yield at a two-year low. (Bond prices go up when yields go down.) Bond speculators are pricing in the rate cuts expected next week... and in December. They expect the price of bonds to go up even further as the Fed returns to its EZ money formula. 

They may be right. But we’re long-term investors... we stick to investments that will give us a decent return... and are not likely to give us the Big Loss.  

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America’s debt planet — $100 trillion worth of household, business, and government debt…as big as the entire world’s GDP — has developed a gravity of its own. Even with interest rates at 4%, the carrying cost takes fifteen cents of every GDP dollar — more than twice the normal, sustainable level. And as the Fed cuts rates, the debt ball grows heavier... while stocks and bonds, quoted in ‘paper money,’ float even higher into space...farther removed from the solid mass of real values beneath them.  

We speak, of course, of the bright, shining objects in the sky over Wall Street... Apple, Alphabet, Nvidia et al. Sooner or later, we reckon, like meteorites or space debris, they will come back into the atmosphere and flame out.  

But the gap between real values and paper values will most likely be closed by a fall in the value of the dollar (aka inflation). Bonds will be the biggest losers. We don’t own them.  

Finally, as the leaves begin to fall... so do, most often, asset prices. Maybe it is the cooler autumnal air. Maybe a ‘time to get serious’ attitude takes hold as winter approaches. But since 1928, the stock market has produced an average return of MINUS 1.2% in September. 

As to the ferocity of the downturn, we have no way of knowing. So, we stay in MSM until the situation clarifies itself. 

Who knows? Maybe this September will break the trend. 

Or maybe it won’t. 

Regards, 

Bill Bonner