We have argued that History moves in 36 Year Cycles. We have argued that the real Bull Market ran from 1983 through 2001; and that a real Bear Market should run from 2001 through 2019.
One of our favorite charts we use to exhibit these 36-year Cycles in the 20th Century is the Dow/Gold Ratio, which shows the Dow Jones Industrial Average price divided by the price of gold. Look how the cycles in the chart correspond almost perfectly to my designated historical cycles. The Dow/Gold Ratio rises when stocks appreciate and when gold falls; and the ratio falls when gold rises and when stocks fall.
1911-1929: Day-Cycle -- Expansion
1929-1947: Night-Cycle -- Deflation
1947-1965: Day-Cycle -- Expansion
1965-1983: Night-Cycle -- Deflation
1983-2001: Day-Cycle -- Expansion
2001-2019: Night-Cycle -- Deflation
Thus, stocks should have been declining since 2001, or at least moving sideways. Night-Cycles are about the world resting, sleeping, not about going back to ground zero. In truth, without FED spending (trillions of our future money), stocks would have bone sideways, as they always seem to do (1929-1947; 1965-1983: an average gain or loss of about 1% a years). Of course, time is money, so a sideways move for 18 years is a losing situation.
Miraculously, through FED invention, this cycle has apparently been broken during this Night-Cycle, because the patterned decline of stocks through 2019 has been annihilated by FED spending.
And this is literally true. To get a picture of how much stocks have appreciated in the current bull market one only needs to take the price of stocks and divide it by FED spending. Thus, we see there has been NO GAIN IN STOCKS -- that is, there has been no gain without FED spending.
What does this mean? Well, it means that FED spending has accounted for all the so-called stock gains since 2001. Let's look at the FED's balance sheet to get another view of this.
Clearly, without FED spending (we used to call it printing) there would be no Bull Market. So is this really a Bull Market? Yes, clearly stocks have gone up. But this is the only Bull Market in stock market history that has been quite literally subsidized by FED or Government Spending.
Where did the FED get the money to subsidize this Bull Market? Well, they printed it (even though they didn't really print it, they 'spreadsheeted it'). Does that make the money free? Does anyone believe that this extra, created, subsidy is free?
If the FED subsidy to the markets to avoid the Bear Market from 2001-2019 was free money, then we have no arguments with the FED. Hell why don't they subsidize the markets all the time, creating millionaires and billionaires all the time with their free money? It sounds like a good idea. There is no money to pay back. It is make believe money in a way. But does that make the stock market gains 'make believe money' also? Does all this 'make believe money' simply vanish when we wake up? Do we ever have to wake up? Or can we just go spending make believe (FED printed or not printed free money) through the rest of our history, everybody happy, no one punished for this 'adventure in creative government'?
Maybe we should just all relax and trust the government. Have they ever let us down before? Is FED spending debt, in the traditional sense? Does debt even matter? If debt doesn't matter for the government, then why should it matter for the individual? The government can't default, right? They can just print money when they need it. Does this make FED spending (non-printed new) money counterfeit dollars?
A lot of questions; and not many answers.
We know that debt is growing: government debt, corporate debt; everything but mortgage debt, because Americans can no longer afford to buy houses in America -- Americans have stopped buying houses. Housing is still too expensive. Rent is too expensive also; so Americans are rushing to food stamps so they will be able to afford housing and still be able to eat.
What does FED spending do to the value of the Dollar? We know through our Introduction to Business courses that increased supply leads to decreased demand and lower prices. Is the FED's spending killing the value of our currency?
We've all seen charts showing how FED policies and increased debt have destroyed the purchasing power of the US Dollar.
But if all the currencies of the world are being destroyed slowly by spending and debt, does it really matter, since currencies all have relative value only, one to the other?
I guess my main question is will the FED's spending money from the future to keep stocks from falling today (and real estate from falling, always rising) come back to bite us in the butt?
I'm afraid it will. The problem with high debt and low interest rates is that not everyone has access to unlimited loans in an equal way. Those with significant wealth (and collateral) are even more loan-worthy than are those with insignificant wealth (and modest collateral). As debt grows, the poor reach their debt limit much more quickly than do the rich. FED policies of low rates and guaranteed profits in asset markets do not affect everyone equally. The rich become more rich. The less rich eventually mortgage themselves out of the re-fi market and then suffocate from too much debt.
The chart below shows the wealth of the top 10% of the American public. When 50% of the wealth is in the hands of the wealthiest 10% of the US populace (1929) we soon entered depression. This was at a time of the greatest debt bubble in US history, until today. Not how, also today, the riches 10% of Americans are again approaching toxic level of owning 50% of Americans' assets. Note that when this level declined to 30-35% (1942-1980), American society was generally healthier economically as a society.
Inequality breeds contempt, stratified societies, and is unhealthy for democratic principles. FED spending breeds inequalities.
We will add one more chart to our collection to show why bankers like low interest rates so much, and like debt so much.
Here is another picture of whom QE and ZIRP -- government subsidies of and socialism for the rich. Which brings up perhaps the most significant question: except for boosting asset prices -- benefiting the landlord class and Wall Street, protecting it from lower prices, which help the 99% -- what other good did FED policies do for America? The pictorial evidence is pretty grim.
The FED has essentially kept Wall Street happy; and it has helped to protect the banks; but it hasn't done much for the American public, keeping housing costs elevated and making home ownership an impossible dream for many Americans, even with mortgage rates at almost nothing, which is supposed to make housing affordable. But no one is even applying for a mortgage, even with mortgage rates at historic lows.
Of course, all the high-paying jobs Americans used to have, to be able to support housing bubble prices (both couples working) have been exported out of America by Wall Street visionaries to save US corporations high labor costs. Note that cost savings were not passed on to the consumer. Cost savings were accompanied in almost all cases by higher prices, higher profits, higher benefits, higher American unemployment. And the recent economic recovery has been fueled by half-time jobs, that are supposed to replace the house bubble hayday of high-cost house through high-pay jobs?
Americans can't afford to buy a house, as long as FED policy enforces a price limit through manipulated asset support.
Isn't it clear that from every measure but the preservation of asset prices (which benefits the landowning/landlord class most directly, the 1%, the super-rich, the banks and the bankers and corporate oligarchs), FED policies are a miserable failure.
QE and ZIRP work only for the super-rich, the top 1% of American wealth-holders. And policies which benefit only the top 1% (the Great Bankers' Robbery) are a threat to our democracy and our way of life. A future administration may even decide to hold bankers and corporate oligarchs and government collaborators legally responsible for the transfer of trillions from the national treasury to the rich 1% across the globe. If I were elected president, I would.
So why is the EU so desperate to undertake QE? It has failed in Japan, it has failed in America; is it because the rich in Europe also want to get their share? Does this presuppose a revolution of rage after the 99% eventually wake up to the fact that they have been robbed by the (already) richest 1% in the world, who apparently never have enough money? Or is the 99% basically sheep, willing to follow the 1% wherever they lead, whatever they say, hoodwinking as they go, speaking in sophisticated techno-language which the masses don't get: quantitative easing; zero interest rate policy -- what do such technical phrases rally mean anyway?
It seems like they really mean: "Let's steal as much as we can before anyone wakes up."
My continuing claim is that the Bear Market of 2001-2019 has been delayed by central bank thievery. ZIRP allows corporations to refinance debt for nothing, and allows corporations to buy their own shares, and retire shares from the market place, which drives up both share prices and the calculated earnings per share (NYSEARCA:EPS), not by increasing earnings but by reducing outstanding shares, another financial gimmick that is money in the pocket of the rich of the world. The rate of share buybacks has doubled in the last decade.
I'm afraid that this is what capitalistic systems always come to and actually always live for: the BIG PAYDAY. They back their private trains up to the Public Wealth Depository, load their own trains with as much money as they can get, helped by the government they have bought off, and then make their get-aways before everything collapses.
The assumption in this is that the 'everything collapses' scenario is still to come.
The FED's investment in the present, at the cost of the future, still must be played out, as Japan, China and Europe lead the way, finally, into the black hole of deflation. The "ZIRP Recovery" -- the FED has spent trillions through the purchase of bad debt on overpriced assets and 'toxic' obligations -- and the "Viagra Economy" built on a weaker and weaker Dollar that exports inflation all over the world is a fraud. There is no recovery.
The strong Dollar is a force for global deflation, as a weak Dollar is a force for global inflation.
I still stand by my prediction that the 2001-2019 Night-Cycle is a Bear Market (without FED bankrolling of stocks) and the Dow will retreat as low as 8787, which will make it consistent with the Dow's performance during the Night-Cycles 1929-1947 and 1965-1983. The blog below restates this logic even further.
As the Greeks have learned, and as we will learn in the near future, there is no Austerity Policy where there is not a concurrent reduction of debt. Austerity enforced in order to become worthy of more debt is the prescription for debt slavery. If Greece defaults on her debts, she will face real austerity -- but when the austerity is finished, there will be ground zero, in terms of debt, from which a real recovery is possible.
Austerity as a prerequisite of qualifying for more debt is the bankers' prescription for...how should we put it: Perpetual Debt Servitude. This bankers' view of the ideal future is one of perpetual debt servitude for the many, and kingship for the few. Austerity and debt destruction must go hand in hand -- that is the real benefit of deflation, because it DOES eventually lead to GO, back to Ground Zero, back to organic economic growth.
Default; and crush the banks that issued all the toxic debt; and face austerity as a nation, an austerity that purges (PURGATORY) the nation of a sinful period of excess symbolized by a mountain of debt and bank ownership of the country.
The new Greece leadership can show the world the way. Or face austerity and negative interest rates as a prerequisite to qualify for more debt. So that you can sustain the illusion of recovery longer and become even more the victims of Big Money; fire state workers, cut pensions, cut public spending to save the banks and preserve their bad debt -- so that the nation can go even deeper into debt, and the banks can gain an even deadlier choke-hold on the politics of the nation.
As I suggest, Greece's problem today -- the world's problem tomorrow -- this is the same problem the US also faces. The thing about Debt is the people who own the debt make the rules, and run the country, whether they are national forces or international forces. If we want to get our democracies back, we will need to throw the big banks out of power, one way or another, through painful default and massive reduction of debt, or through....well, I guess this is the only way to do it.
In the year 2019, the Old World will end; and the New World will also begin. The Old World, created from 1983-2001, is dying, is dead but refuses to accept this. The Old World is like Saturn eating his children so he will not be overthrown.
Which side are you on? Are you on the side of the dying Old World, which seeks to vapirize the world through more and more debt; or are you on the side of the New World, which will overthrow this toxic Old World that is willing to sacrifice the future for the sake of its own wealth and its own comfort?
We can build a better world than this one. In the year 2019, we will begin to build this better world. Will this new world be founded on spiritual ideals to decency, equality, generosity and trust? Or will it be founded on the pragmatic view of reality that accepts the world as it is as being good enough, or better than it might be, or better than it used to be. Saturn's logic is to accept reality as it is, and teach yourself to conform to this imperfect world. Jupiter's logic, the Son that Saturn tried to repress, will begin expanding in 2019; and this expansive, creative force will demand a better model of the world that we created in the last round of creation, which today is old, corrupt, diseased, and ready to fall from its tree.
Those interested in reading about the US Dollar's role as both the Global Inflator (when weak) and the Global Deflator (when strong), please read this instablog.
"Is the Strong Dollar the New Black Swan Event?"
Best of luck to traders. Keep on your feet. Volatility is a sign that the two forces (Change; and Status Quo Protection) are involved in a mammoth struggle for survival.
Michael J. Clark, CGTS