Sometimes the reasons you’re wrong turn out to be the reasons you’re right.
Even a broken clock is right twice a day.
Old Wall Street adage
Anyone who has consistently sounded cautionary or outright bearish notes during the last nine years of relentlessly rising equity markets has been cast aside. Wall Street is bipolar. You’re either right or wrong, and wrong doesn’t buy mansions and Maseratis. Like that broken clock, the so-called permabears have had a couple of minutes when they were right, far outweighed by those 1438 minutes when they were wrong.
Or maybe it’s all a matter of perspective, and it’s the last nine years that amounts to two minutes. In geologic time nine years isn’t even a nanosecond. Perhaps even on time periods scaled to human lifetimes and history, the last nine years will come to be seen as an evanescent flash that came and ignominiously went.
Markets don’t listen to reasons. They’re exercises in crowd psychology and crowds are emotional and capricious. That doesn’t mean that reason is a useless virtue in market analysis, quite the opposite. It’s reason that allows the few who are consistently successful to separate themselves from the crowd and capitalize on its emotion and caprice.
Reason identifies rising stock markets as one symptom of a sugar high global economy. Since 2009, staring into the abyss of debt implosion, central banks acting in concert have promoted furious debt expansion as the finger-in-the-dike remedy. Governments expanded their fiat (aka out of thin air) debt, and central banks monetized that debt with their own fiat debt. Not only did that create loanable reserves within the banking system—private debt fodder—it drove interest rates so low that yield-deprived investors were herded into the stock market. Borrowers won, savers lost.
The reason markets rose is also the reason they will fall. How can central banks exchanging fiat debt for governments’ fiat debt produce economic growth or anything else of lasting value? That metaphysical query pinpoints the artificiality of the expansion since 2009. That you can’t get something for nothing has not been repealed. The stock market has been the great and powerful Oz telling us not to pay attention to the fiat debt charade going on behind the curtain.
However, the expansion has been extraordinarily weak. It’s not clear that there has been any growth at all if you back out the debt necessary to produce what the government reports as growth. What is clear is that across developed country economies, each currency unit of debt is buying successively less growth and adding to an increasingly onerous debt burden.
Is a mechanic who warns that if you don’t don’t replace an engine part your car will break down a broken clock, simply because it may not break down this month? Is a doctor who warned that if you didn’t stop drinking your liver will fail a broken clock if it hasn’t failed yet? Objectively analyzing economies and equity markets hooked on rising levels of debt that generate diminishing returns, the conclusion is inescapable: this can’t work.
As the burden of debt becomes too much for the economy to bear, corporate profits slow and then vanish, creditors stuck with bad debt must write down assets values, and isolated credit brush fires merge and become a raging conflagration. We saw it in 2008 and 2009. Elevating the perspective beyond the last nine years, there are reasons to predict that this conflagration will be much worse, a once-in-many decades, perhaps a once-in-many centuries, disaster.
There is more global debt, either absolutely or relative to global production, than there has ever been. All financial assets are debt or equity claims. Most income streams, financial assets, and real assets are pledged as sources of debt repayment. The global economy and asset values are inextricably interlinked in a vast morass of debt, unfunded liabilities, collateral claims, inexorably declining production and inexorably mounting debt service. It can’t work and when if fails, the question becomes how far financial markets and the economy fall. If they fall far enough, the last nine years will indeed seem like an evanescent flash.
Today’s debt superstructure is built on the gradual separation of the dollar from its gold backing since 1913, when the Federal Reserve was established, to 1971, when Nixon abandoned the last vestiges of the gold standard. Central banking is a something for nothing proposition. The impending crash may well wipe out much of the ostensible something that rests on that foundation of nothing. Financial market technicians use the term “correct back” to denote the time when a market was last at a level to which that market has fallen. Markets and the economy may “correct back” to at least 1913, and the correction could extend even farther back than that.
The US’s peak economic growth was during the period between the Civil War and World War I. Growth has been in an irregular downtrend ever since as steady dollar depreciation and the growth of debt after 1913 have exacted their inevitable economic toll. During the gold standard era, there was a gentle deflation due to increased productivity and something close to laissez-faire capitalism. Nowadays only “fringe” elements endorse the gold standard, productivity-caused deflation, or capitalism, and even more fundamental ideas are under attack.
Because government is institutionalized violence, war is the oldest statist institution. What followed World War I can only be described as massive intellectual default. There was no recoil from state-sponsored carnage and the state after the world’s then deadliest war. There was no reexamination of its premises and practices, no calls for somehow limiting this deadly institution, and no reaffirmation of freedom and individual rights.
The intellectuals went the other way. They hailed Marxism, socialism, welfare statism, the income tax, central banking, and virtually anything else that increased the size and power of governments. They deplored pesky notions of individual rights, ordered liberty, and constrained government tracing their roots back to the American Revolution, the Enlightenment, the Renaissance, and ancient Greece. Such impractical precepts impeded their vision of rule by self-appointed elites who supposedly knew and protected the “common good” better than the commoners they were to rule. The cherry on this statist sundae would be global governance.
The world’s deadliest war and the introduction of weapons that could destroy humanity only twenty-seven years after the World War I armistice didn’t slow this intellectual freight train. Somehow tens of millions dead and a world in ruins thanks to the depredations of its governments was an argument for still more government and the United Nations, the camel’s nose under the tent for global government. There was nary a peep of protest from the intellectual mainstream, most of which became servants of the state. Only a few rebelled, and they were ignored, snubbed, marginalized, maligned, threatened, and exiled until they repented.
As the intellectuals sow we all reap: a world on the cusp of its worst financial crisis and quite possibly wars that could annihilate humanity. Faced with the irrefutable death and destruction wrought by statism over the 100 years, statist intellectuals no longer pretend their schemes will lead to a better world. Instead, they denigrate the reason, applied logic, intellectual rigor, initiative, hard work, science, technology, contract and property rights, markets, and voluntary exchange that accounts for what value that remains in this world. Their vision offers less than nihilism and promises to destroy that residual value. The world will reflect the chaos, panic, and blind hatred that fills their heads. If that sounds too dire, just listen to their vacuous intellectual progeny on most college campuses.
If their “vision” triumphs and the values that made civilization civilized are discarded, humanity could “correct” back to Stone Age barbarism. The broken clocks’ minute is upon us. Unfortunately, it may well last many hours.