Taxing Americans like George III couldn't...
INVESTORS keep bidding the Dow back into positive territory, writes Bill Bonner in his Diary of a Rogue Economist.
By nightfall, they regrett it.
For along came the President of the free world...unbowed – and perhaps unhinged – with his next shocking announcement.
The Constitution clearly gives Congress the power to tax. Even George III couldn't tax the colonies without parliamentary approval.
But last month, Donald J.Trump, on his own say-so, imposed a new tax on Americans importing goods from Mexico.
We never expected Trump to go Full Retard with his trade war schtick. His own wealth, his reputation, and his re-election are at stake.
And yet...there he goes.
And so zany is the thinking behind this latest move that many people are beginning to wonder: Is this President just dumb...or completely nuts? "Borderline crazy" says a Bloomberg headline.
Countries take responsibility for securing their own borders. They cooperate with other countries to police them. Occasionally, they put up walls. Or even seal them off completely.
But this is a first. The Donald is taxing Americans to force the Mexicans to protect the US border. But if the US can't stop people from sneaking across the Rio Grande, how is Mexico supposed to do so?
We don't know. But this buggy stock market must be looking for a windshield. And Mr.Trump has put a fleet of them out on the roads.
Markets make opinions, we reminded readers. Ours as well as everyone else's. Markets go in cycles, like everything in the natural world.
And one of the biggest, most important cycles is the shift from win-win to win-lose...from greed to fear...from trust to suspicion...or as a dear reader put it, from pollination to predation.
Sometimes, you get ahead by working and trading. Sometimes, the best you can do is not get ripped off. Always and everywhere, the two strategies co-exist.
A society is a natural thing. It must breathe in and breathe out. It must allow deep breaths of bold confidence and innovation. And it must exhale, too – in moments of panic and desperation.
That's why this is the most important ratio in capitalism – the ratio of fear to greed. It is captured in the relationship of cash to stocks...or, in our favorite version, the relationship of the Dow to gold.
When people are greedy, they buy stocks. When they are fearful, they prefer the yellow metal. The ratio is now almost at 20. It takes 20 ounces of gold to buy the 30 Dow stocks.
To put this in perspective, the Dow-to-Gold ratio hit an all-time low in 1980, when you could, briefly, buy the entire Dow with just one ounce of gold. The all-time high came in 1999, when it took 41 ounces.
But 1999 was an outlier. It marked the end of a long period in which the world economy, generally, grew freer, more open, and more prosperous – with more and more win-win deals almost everywhere – than at any time in history.
The first big milestone came in 1979, when Deng Xiaoping, leader of the world's most populous nation, announced that "to get rich is glorious". Henceforth, China was open for business.
The next big event came 10 years later, when the Soviet Union abandoned both communism and its empire.
Then, in 1993, perhaps the crowning achievement of the whole movement, the European Union was set up. It was essentially a free-trade zone big enough to rival the United States.
For more than half a century, American capitalists were in the leading ranks of this march, spreading their creed all over the world.
First, they sold US products to foreigners. Then, they bought foreign products and sold them to Americans. And then, their business schools created a global culture in which almost everyone believed in free trade and capitalism.
But now, the tide seems to have reversed. All over the world, people grow old...and want protection from life's risks and challenges. Even in Europe, the Italians want protection...from the French.
"The Italians in Italy. The French in France," say the Italians, protesting the sale of Parmigiano Reggiano to French investors.
"Brexit Now!" demand the English.
"STOP" says The Donald.
But this big sea-change didn't just happen yesterday. It started 20 years ago.
"Sell stocks, buy gold," we advised readers back in 1999. Here at the Diary, our memory is neither good enough nor cruel enough to recall all the things we have gotten wrong. But we weren't wrong about that.
The Dow, measured in gold, lost 82% of its value over the next 10 years. Gold, meanwhile, climbed 388%.
But then, something happened that puzzled and bamboozled almost all of us. The feds pumped $3.6 trillion into the stock market via quantitative easing (QE)...and another $11 trillion via fiscal deficits.
The Dow tripled. The Greed/Fear ratio popped up, from a low of 7 to the present 20.
Most commentators, kibitzers, and blah-blah mongers concluded that the tide had turned again...towards greed. "Buy, buy, buy," they said.
But had it? Or was fear still the dominant zeitgeist...the prevailing sentiment...the hegemon emotion?
Today, we stand by the road and gawk – watching stock market bugs collide with Donald Trump's windshield.