A Multistage Disaster

A lot of red on the screen last Thursday.

The latest inflation readings were worse than expected. The Dow dropped 500 points.

Remember, we’re only in the very first stage of what we believe will be a multistage disaster, like a traffic pile-up on I-95 during a foggy morning rush hour.

After the Bubble Epoch, created by misters Greenspan, Bernanke, (Ms) Yellen, and Powell, came consumer price inflation. It is still with us. From Bloomberg: ‘US Core Inflation Seen Returning to 40-Year High as Rents Rise’:

CPI excluding food, energy probably rose 6.5% from year ago

Report expected to keep Fed on path to big November rate hike

A key US inflation measure due Thursday is set to return to a four-decade high, underscoring broad and elevated price pressures that are pushing the Federal Reserve toward yet another large interest-rate hike next month.

And here’s CNBC with the latest on wholesale prices:

Wholesale prices rose more than expected in September despite Federal Reserve efforts to control inflation, according to a report Wednesday from the Bureau of Labor Statistics.

The producer price index, a measure of prices that U.S. businesses get for the goods and services they produce, increased 0.4% for the month, compared to the Dow Jones estimate for a 0.2% gain. On a 12-month basis, PPI rose 8.5%, which was a slight deceleration from the 8.7% in August.

The next shoe

The inflation numbers guarantee that we will stay in this deflation stage of the disaster at least a bit longer. Then, something will give. It could be a major pension fund, such as CalPERS, with half a trillion in assets. It could be a Wall Street finance house, such as BlackRock, with US$8.5 trillion in assets. Or it could be a big corporation forced into bankruptcy by rising interest payments.

The longer the Fed remains on course — to exterminate inflation — the closer we get to the ‘pivot’, when a financial shock keeps it from getting the job done.

The big questions are: When will the Fed do its pirouette? And what happens then?

Most people think the Fed will soon go back to normal — which, for them, means rising stock prices, with inflation subdued.

Maybe it’s just our imagination. But we notice a big difference between how young people look at the situation and how older people do. Anyone younger than 60 has no adult recollection of any financial world other than the one we’ve had since 1980. They thought that was normal. And after this hissy fit is over, and the Fed turns around, they believe things will go back to the ‘normal’ they have known.

But there was nothing normal about the 1980–2020 period. Is it normal for stock prices to multiply 36 times — as the Dow did between 1982 and 2021? Is it normal for real bond yields to drop from the high teens down to less than zero? Is it normal for the Fed to ‘print’ more new money in 18 months than it had in nearly 100 years…or for the federal government to multiply its debt by 30 times…even as its carrying cost (interest payments) went down?

Back to the future

We could go on. There were more freaks in this show than in Barnum & Bailey’s circus — zombie corporations, goofy cryptos, billion-dollar valuations for companies with no plausible way to earn money.

And yet…for so many callow investors…that was planet Earth — the way things have been…the way they are…and the way they shall ever be. They think stocks always go up ‘over the long run’. Yes, there may be sell-offs, they admit, but a balanced portfolio of stocks and bonds will always pay off.

Maybe. But not necessarily in your lifetime.

You’ve got to go back before the ‘80s…and you’ve got to look at it in terms of real money — gold — to see what ‘normal’ really looks like.

If you’d bought stocks in the late 1920s, you would have gotten all 30 Dow stocks in exchange for 16 ounces of gold. Then by 1933, you would’ve lost 90% of your money…and waited another 26 years to break even again.

Yes…prices move in cycles…but they are long cycles.

Same thing in the 1960s. Inflation was dogging the economy then, as it is now. And then, a stockbroker would have told you what he will tell you now — ‘don’t worry about market timing; just get good companies and hold on’.

If you’d owned stocks in the mid-‘60s, your 30 Dow stocks would have been worth as much as 24 ounces of gold. Then, it took 15 years for the market to hit a bottom, in 1980…and you’d be down 93%.

Then what? You would have waited another 17 years to breakeven. Altogether, if you’d bought stocks at age 40 in 1965, you’d be 72 years old in 1997…with not a penny of capital gain to show for it.

But imagine that you followed your broker’s advice…and you just stuck with the program. Today, you’d be 97 years old. And instead of stocks worth 24 ounces of gold, as they were in 1965, they would be worth 17 ounces! Congratulations, your stocks lost 30% of their value over the last 57 years. (Not including dividends.)

Is there a better way? Maybe.

Tune in tomorrow?


Dan Denning Signature

Bill Bonner,
For The Daily Reckoning Australia

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