The fiscal and monetary cliffs have arrived
According to Doug Ramsey of the Leuthold Group, 334 companies listed on the New York Stock Exchange recently hit a 52-week low, more than double the amount that marked new one-year highs. This has only happened three other times in history – all of them in December 1999.
How did we get back to the precipice of the year 2000, where tech stocks plunged 80% and the S&P 500 lost 50% of its value over the next two years? Well, start with the fact that the amount of new money created by our central bank over the past 14 years is $ 8 trillion. By the way, this is only an increase in the basic money supply and does not include all the new money created by our debt-based monetary system. Thus, from 1913 to 2008, the Fed created 800 billion dollars. And, it took from 2008 to today – just 14 years – for it to create $ 8.8 trillion in basic money supply. Does one really have to wonder why inflation has now become a salient issue, especially for the middle and lower classes, and why the stock market is now poised for a collapse similar to the NASDAQ collapse of two years ago? decades?
Some might argue that the stock market bubble was much different in 2000 from what it is today. They’re right. The overvaluation of 22 years ago is paltry compared to today. With its record P / S ratio of 3.5, down from just 1.8 in 2000. And the record TMC / GDP ratio of 210%, which is an astounding 68 percentage points ahead of its previous level. at 22 years. .
Okay, so the stock market is much more expensive today than at any time in history, but what will be the catalyst to bring it down? Last week I talked about the monetary cliff coming in the next couple of months. Review: The Fed will cut its record $ 120 billion per month counterfeiting program to zero dollars during this period. This QE involved the process of handing newly created money back to banks, consumers and businesses to stimulate consumption. But by ending this flow of new money, the Fed will also end its tacit support for the municipal bond market, primary dealers, money market funds, the REPO market, international SWAP lines, the ETF market, the markets. primary and secondary corporate debt, to commercial paper. market and support for student loans, auto and credit cards. All of this was directly supported by Jerome Powell’s with the Fed’s latest quantitative easing program.
But it does not stop there. Mr Powell can’t just end QE, not a 6.8% CPI! Therefore, very soon after QE ends, interest rates go up and the Fed’s balance sheet must start to shrink. However, an occasional 25 basis point rate hike here and there will not be enough. He needs to hike rates by 680 basis points just to hit a zero percent real federal funds rate. Now, of course, Powell does not intend to increase his monetary policy that much, as he is fully aware that this would cause the entire artificial market construction to collapse long before he comes close. of this level. But the point is, the FOMC has lost the luxury of being able to delay and procrastinate as it has in the past because inflation is at its highest level in 40 years. Therefore, the Fed will have to raise rates quite aggressively until inflation, the economy or asset prices collapse. But since the three are so closely related to each other, they’ll likely all be cascading simultaneously.
And, now this week, I want to shed new light on the simultaneous fiscal cliff and dig a hole in Wall Street BS excess savings As most of you already know, I’ve been pretty clear on the effects. negative consumer spending that will result from ending the $ 6 trillion in government donations over the previous two years. This massive and unprecedented largesse pushed the savings rate in the United States from 7.8% in January 2020 to 33.8% in April of the same year. However, that savings rate has now collapsed to 6.9%, below its pre-pandemic level. But what about the savings pool that consumers sit on and which is expected to drive GDP ever higher this year?
Well, it looks like the rainy day fund is dwindling fast. According to the NY Times and Moody’s Analytics, the excess savings of many working-class and middle-class households could be depleted by early 2022. This would not only reduce their financial buffers, but also potentially affect the economy as consumer spending grew to become nearly 70% of GDP.
We’ve already seen several federal aid programs in the pandemic era expire last September, including the massive federal supplement to unemployment benefits. Now, with the expiration of the Expanded Children’s Income Tax Credit, which gave up to $ 300 per child under 6 and up to $ 250 per child aged 7 to 17 over the July period In December, the tax challenges became salient for many Americans.
But what about that heap of savings? It is now estimated to be around $ 2.2 trillion (8.5% of GDP). It is mostly in the hands of the very rich, who are savers and have a much lower marginal propensity to consume than the middle and lower classes. According to a study by Oxford Economics, 80% of these savings are in the hands of the richest 20%, and 42% went to the richest 1%. Again, this is important because it is the middle and lower classes that are responsible for the majority of consumption. So how is this economically crucial cohort doing? Well, besides being hit by inflation and falling real wages, they are quickly depleting their stimulus packages. According to a recent study by JP Morgan Chase, households earning $ 68,896 per year or less have on average only $ 517 more in their checking accounts than their pre-pandemic level. As unimpressive as it sounds, add the fact that people don’t eat their savings with the same zeal that they spend on new government handouts, and you can see the so-called ‘mountain of savings’ that Wall Street likes to brag is not much more than a molehill.
When you factor in huge fiscal and monetary cliffs as well as the most overvalued stock market in history, you have the recipe for unprecedented potential stock market chaos, which should be loaded upstream into “22. If Your Savings- retirement is from a Wall Street state, you own a mix of stocks and bonds that are set on autopilot, their fate should be the same as that of the Hindenburg and the Titanic.
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