Why stock are struggling to reach the peak...
LIKE a benumbed climber on Everest, the Dow once again made an assault on the summit last month, writes Bill Bonner in his Diary of a Rogue Economist.
This was its fourth attempt at getting beyond the peak set back in October 2018. And once again, it failed.
According to Dow Theory, if the market stalls before passing its previous high, it is exhausted...and ready to tumble back down the mountain.
But who knows?
The Dow is supposed to tell us what America's biggest and most successful industries are worth. But what if the Dow has been suborned, bribed...paid off...or censored?
Money is a "primary measure" in our society. We depend on it to keep track of how much our time is worth, and to decide what investments to make, whether to save or spend, and what to buy and sell.
It also marks our place in society – by how much we earn and what we do with it. Our savings tell us how much of a claim we have on the time (and output) of others. Our debts tell us how much of a claim they have on us.
Markets take this individual information and aggregate it – so we know how much stocks and bonds are worth, for example.
But there's something wrong. Stocks and bonds went up last month, but the economic signals are warning of a slowdown. And that's a trend that has been underway for the last 40 years.
In 1980, the nation's GDP was about $2.8 trillion. Stocks were worth about $1 trillion. Today, GDP is at $21 trillion – about 7.5 times more.
But total market capitalization has moved up to $30 trillion...30 times higher than in 1980.
What's the stock market telling us? That the real value of companies went up four times faster than the economy they depend on? Over a four-decade period? It's nutty.
Also, negative yields can't be "true". Bonds pay interest because a bird in the hand is worth two in the bush. Interest rates measure the risk of defaults, inflation, force majeure...anything that might keep you from getting the money you've been promised.
You may die before you get your money back. Your debtor may die before he pays you back. Or he may skip town.
That's why interest rates are higher for risky inner-city paycheck loans, for example, than for US Treasury bonds. And it's why Argentines pay more to borrow than, say, the Swiss.
Negative interest rates imply that the risks have completely disappeared, which is, well, also nuts. And yet, some $13 trillion in government bonds – mostly in Europe and Japan – are yielding less than zero.
We know, too, that the Fed is still lending at only 18 basis points (0.18%) over the inflation rate...having kept its key rate below the inflation rate for the last decade. Cheaper money at this stage isn't going to make any difference to the real economy.
So why do stocks go up? And what do negative interest rates mean?
The markets are supposed to give out honest price information. But now, they're not measuring risk. And they're giving us nutty prices for stocks and bonds.
Why? In a word or two: The markets have been censored by the feds. They have been forbidden from telling the truth.
Here's what we think is true:
In March 2000, a historic shift began. The tide of hope and confidence that had begun 20 years earlier started to ebb away.
The promise of the internet turned out to be largely barren. Most dot-coms didn't create wealth; they destroyed it. Stocks sold off...with the Nasdaq in a brutal collapse that wiped out the entire gain from 1996 on.
The markets told the story, faithfully reporting the news as the index fell from 3,201 to 805.
Six years later, it was the illusion of a one-way real estate market that perished in the snow. Stock prices lost their footing. The Dow dropped from 13,900 to 7,600 in 18 months, effectively wiping out the previous 10 years of growth.
But after each collapse, central bank helicopters flew to the rescue. The Bank of England, the Bank of Japan, the European Central Bank, and of course, our own Federal Reserve whirlybird have pushed $20 trillion in new money into the financial markets since January 2000.
Stocks rose in gusts of central bank wind. But it was a fake out.
Money talks. Even fake money. And it roars so loudly, it drowns out the market's whispers...effectively smothering, censoring, or scattering useful price information.
Instead of hearing the truth about what equities are really worth...and the risks in the bond market...investors hear the lies and loudmouths on Bubble TV.
The money is fake. Interest rates are artificial. Prices are fraudulent. And today, the price signals are worthless. The Dow is near an all-time high...while the economy approaches another major crisis.
The blizzard of lies will get more and more intense.