The US deficit is a disaster and economic growth is slowing. This quarter analysts are looking for S&P 500 earnings to post an overall 4% decline. What has fueled the growth we have seen has been big government deficit spending and low interest rates.
The Fed tried to normalize rates and failed. So now the Fed Fund futures market is looking for their next big move to eventually be one of lowering rates.
We’re at the end of a big cycle and such shifts take place slowly over several quarters.
But many people are believing that this time it won’t end in disaster for the stock market like the bear markets of 2000-2003 and 2007-2009 did.
Each of those tops saw the creation of big distortion bubbles that bust into
This time we have a big distortion in the bond market – with record government debt and wildly elevated corporate debt levels used to do stock buybacks.
That’s the danger.
But a new theory has risen to say don’t worry.
It’s called “Modern Monetary Theory” and asserts that the government can print as much money as it needs to create as much debt as it can because it can.
So debts don’t matter.
Maybe you saw Bernie Sanders on Fox News this week? His top economics advisor is a proponent of “MMT.”
Many of the Democrat “socialists” are embracing this as a way to explain how they would pay for their programs like a “Green New Deal,” but now many “conservative” stock market commentators are embracing it too as a way to justify ignoring Trump’s record budget deficits and to say that we are now in a stock market bull market that can last forever.
In reality the theory works until it stops working and every past cycle has seen the creation of some new paradigm embraced by people so that they could believe that the stock market would never drop again.
In 1999 the theory was that Alan Greenspan and Robert Rubin were maestros who had perfected monetary policy so that there never would be a recession again.
You may not remember those days (or even been trading then), but the idea was that the computer and internet gave them the information to control markets and to prevent recessions.
CNBC would play songs of Greenspan when he walked into Federal Reserve meetings cheering him on and the talking heads on ther all embraced this theory.
Time magazine did a cover about it.
Of course the theory seemed real until everything came apart in the Fall of 2000.
Then when the next bull cycle came and real estate prices went up Ben Bernanke once again asserted that Federal Reserve wisdom could prevent another stock market bear market and create a “soft landing” for the economy that stalled out.
That became the big meme of the year in 2006 and a growing assertion appeared that real estate prices could only pause and not really drop as there is a limited supply of it.
At the same time in
The new paradigm they promoted forced them to make this assertion even though none of what they were saying was real.
And the stock market masses believed it all, simply because they wanted to believe it.
And so for the past few weeks we have been seeing the stock market rally on the conviction that the yield curve action means nothing, because a new paradigm of “Modern Monetary Theory” means that the government can spend as much money as it needs to prevent a recession with no real consequences and that the Fed can create a new QE program if needed too.
This is the new paradigm people in the stock market are embracing to believe that it will never fall again.
They are no longer buying stocks on future earnings growth, but on the notion that all risks are now insured by the government so that another stock market drop will be prevented no matter what the cost.
The left and the right yell a lot at each other, but leaders of both movements in the United States are embracing their own forms of “Modern Monetary Theory” and members of both movements want to believe that another stock market drop will never happen again.
It’s a fascinating time.
As long as the market averages can trade above their moving averages current conditions can continue.
We are in a sleepy calming moment and I do not think the stock market is about to dump this week, but we must be on guard for another market drop later this year, probably in the Fall.
And I believe the thing to do is to shift as much of our money as possible into the pockets in the financial markets that are not only going up now, but will go up even more when “Modern Monetary Theory” proves to be a giant myth just as the genius of Alan Greenspan was shown to be as events unfolded after March of 2000.
This is not to say sell everything you own. It is to say keep your eye on the big picture and buy things to benefit as the cycle shifts.
I’m talking about this
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