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January 29, 2019 | Investors Will Fight This Trend… And Lose

Is an American author of books and articles on economic and financial subjects. He is the founder and president of Agora Publishing, and author of the daily financial column, Diary of a Rogue Economist.

DELRAY BEACH, FLORIDA – Stocks got off to a rough start yesterday.

Heavy equipment maker Caterpillar reported punk numbers; investors took it as a sign that the world economy is slowing.

That’s our guess too.

 

Night Is Day

After a 38-year boom, the fundamentals have reversed. Day is night; night is day. From lower and lower interest rates, we see rising ones. From sunny, clear skies, we see dark storms approaching.

Already, the benchmark 10-year U.S. Treasury Note is yielding twice what it did at the bottom in July 2016. And all the credit that was so free and easy in the boom years, is suddenly getting tight.

China’s economy is slowing down too. The big story of the last 40 years was China’s race into the modern world. In the space of a single generation, 500 million peasants sprinted into the world economy – with real jobs and money incomes.

Of course, China did a lot of very dumb things, too – spending outrageous amounts of money on factories, apartment buildings, and infrastructure that were either never needed or never used to capacity.

So doing, China became the world’s leading buyer of raw materials. And it was also the world’s leading seller of cheap finished products.

But everything has a price – especially stupid central planning. Chinese stocks are down 20% from their peaks… and the economy, properly measured, may be effectively stalled with $40 trillion total in unpaid bills.

And now, with China in decline, the rest of the world will make less money selling basic materials to the Chinese. And it will have less disposable income to buy gadgets and gizmos from them.

 

Reversing Course

The world’s central banks, too, are reversing course. They’ve made the biggest Mistake #1 (lending too much for too long at rates that were too low) in history. Now, they’re struggling to make Mistake #2 (trying to correct the damage of Mistake #1 by raising rates).

The U.S. Fed, for example, is now in “tightening” mode – raising interest rates and unloading its stock of bonds (which reduces the money supply).

Frightened by falling stock prices, it is now being “patient” with future rate hikes. But it can’t abandon the normalization project altogether, not without giving up its only policy tool. So, it will continue tightening until it brings on the inevitable crisis.

And foreign central banks will have little choice; they followed the U.S. down into the debt hole. Now, they too will try to figure a way out of the deepest pit ever dug – some $230 trillion in world debt.

And talk about stupid central planning, the Christmas tax cut of 2017 borrowed from the future so corporate insiders would have more money today.

But today is already yesterday… and tomorrow will be here any minute. And now, borrowing itself is becoming a big problem.

Thanks to tax cuts and spending increases, the feds alone will have to borrow more than $1 trillion again this year. And without the central banks adding credit, borrowing becomes more and more expensive.

Borrowers compete for the little credit available, and eventually give up; they can’t afford the interest payments, much less to borrow more.

 

Don’t Fight the Tape

Financial trends may currently appear random… later, like a life examined in old age, the wrinkles tell a story. Etched in the lines, long-term trends appear; as they become clearer we see the story that dominated the market’s mood for decades.

Recognizing those trends is the key to making investment profits and protecting them. “Don’t fight the tape,” is how the old-timers put it. Figure out the trend, in other words, and go with it.

The long credit cycle is the most important one. It lasts a lifetime – about 70 years. That is why it is so hard to see; we rarely live long enough to become familiar with it.

The downswing of the current yield cycle (a bull market in bonds) began in 1982, when the 10-year Treasury yield was over 14%.

Since then, yields and interest rates came down, down, down… to a low of 1.39% in July 2016.

You never know for sure until much later, but that looks like the bottom has been hit. And if so, we are in a bear market in bonds… which will probably last for the rest of our lives. The last one began in 1949, and continued for the next 33 years, until 1982.

What Goes Up

Credit acts much like real money. As it expands, so does the amount of spending. The whole economy expands, pushing up asset prices, too. That’s why almost everyone loves a credit expansion.

But credit is not the same as wealth… or real money. It is just a loan… which must be paid back (or otherwise extinguished).

That’s why we have credit cycles, because the credit that goes around, comes around as debt – and it must be repaid. Nobody likes that part of the cycle.

And that is the part that is beginning now. In China. In the U.S. In stock markets. In bond markets. In real estate. In postage stamps and baseball cards. In almost everything and almost everywhere… what went up so delightfully is coming down… painfully.

So, get ready for the whining, the wailing, and the gnashing of teeth. Get ready also for political and social kvetches… and crackpot “remedies” such as higher taxes on the rich… and larger fiscal deficits.

And, oh yes, much higher rates of inflation… bankruptcy, defaults… and of course… more claptrap.

Regards,

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January 29th, 2019

Posted In: Bill Bonner's Diary

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