The Morning Line

The Morning Line

What Twitter and Bitcoin Have in Common

Twitter and bitcoin share a key similarity in that their success while it lasted was just hubris. Realize that both were birthed by a virtual medium capable of monetizing turds if there is any discoverable demand for them. Cardi B’s megahit single Wet Ass Pussy was proof of this. Twitter proffered turds in the form of members-only censorship that took delight in defecating on the Bill of Rights, particularly the First Amendment. But it took Elon Musk, with unlimited quantities of f**k-you money, to put a number on Twitter: $44 billion. Unfortunately for him, nearly all of it was for ‘good will’ that appears to have vanished. Nor is he likely to be consoled when it is discovered that the dark secret of Twitter’s overwrought ex-employees is that they can start a Twitter of their own with just a few mill, a rackful of servers and a dozen high school dropouts working from home, paid $20/hour to code.

Cute Little Bird

So what are the notoriously spoiled workers so disgruntled about? Leave it to an apparent millennial sympathizer reporting for The Wall Street Journal to excuse them with a high-minded quote uttered by no one in particular: “Employees said Mr. Musk pushed people to work well over 40 hours a week, but said they didn’t feel there was a compelling vision to justify it.” A compelling vision? Yeah, sure.  And exactly what lofty end did they see themselves serving under Jack Dorsey, Orwell’s darkest nightmare masquerading as a little blue birdie? Stay tuned to the blogosphere for more dithering on this and other topics of scant interest to folks who live in the real world. What should please the company’s make-believe workforce in any event is that Musk set an intergalactic record for overpayment.  If Twitter had changed hands for, say, a still-hugely-overvalued $40 million, no one would have given a rat’s ass what his plans are for the company.

Which brings us to bitcoin, another hubris-rocket fueled by insane excesses of speculative money and greed. Its sensational rise was based on a sexy story invented by, for all we know, a Hollywood flack: Bitcoin entered the space-time continuum via an algorithm written by a mysterious nerd-cum-rock-star known as ‘Satoshi Nakamoto’. His secret sauce was scarcity: there will never be more than 21 million bitcoin in circulation. An irony is that satoshi coinage inspired more than 2,000 cryptocurrency knockoffs, practically all of them rendered worthless by bitcoin’s nearly 80% plunge.

Teen Millionaires

When the bitcoin craze broke into a gallop in 2021 spurred by salacious tales of teen millionaires, it was on its way to becoming the Tulip-o-mania of this era, albeit on a global scale. The Murphy men who run our banking system cautiously signed on (even if Warren Buffett suspiciously did not), warming up the press and the rabble with luncheon speeches that lent bitcoin a veneer of respectability. No one seems to have noticed or cared that the banks themselves appeared to have no skin in the game. Their huckstering was meant to get bitcoin off the launching pad and solidly established in the firmament of Ponzis and shingles-and-siding hustles. Then, the supposedly smart money would rendezvous with the crypto mother-ship they’d helped create.

Alas, bitcoin’s pitch-men will have to start nearly from scratch now that the second-largest bitcoin exchange, FTX, has gone belly up in a scandal that is certain to widen. Its founder, Sam Bankman-Fried, has gone from patron saint and second-largest Democrat donor to schmuck in less than two weeks. You can bet that he will resurface a few years from now, claiming to have solved the nation’s energy problems with cold fusion. By that time, bitcoin will have bounced its way down to zero, where all speculative manias eventually come to rest.

Finally, the Wind May Have Shifted for Gold

[The following guest editorial was written by David Isham, a real estate investors from Northern California and long-time Rick’s Picks subscriber.  RA]

Gold Loses Status as Haven, declared a headline in the Wall Street Journal on September 22.  Two days later gold fell to $1629, the lowest daily close in more than two years; then it began an ascent that has continued to this day. A case of yet one more cover-story curse signaling a major trend change?  Quite possibly.

The backdrop for gold’s rise is a commodity bear market that dragged along for 48 years but which appears to have bottomed in 2020 with a false breakout in the CRB Index. False breakouts often signal trend reversals, and so far this indicator seems to be working. The commodity bull has unfolded with enough vigor, seemingly, to last for a decade or longer. As for gold, it recently began to show signs of life following a steep selloff begun last March. The GDX:GLD ratio that tracks the relationship between mining stocks and the price of gold looks like it is breaking out, with miners outperforming bullion. This is usually an early sign that the precious metals market is about to shift into high gear.

Still Plenty of Time

Because gold and silver can be expected to make their biggest percentage gains near the end of their respective bull markets, there is still time to board the train and start accumulating. Before this bull market has run its course, I expect gold to hit $10,000 per ounce, and silver $350. A barrel of oil will be quoted at $250, and the HUI Gold Bugs Index, currently trading for around $275, will be trading north of $1,200.

Furthermore, the implosion of crypto is very bullish for junior miners, since speculative money will return to its natural home in bullion. Michael Saylor, a big player in the crypto world, tweeted the following last week: “If it has counterparty risk, it’s not money. #Bitcoin.”  The timing of this was ironic, since the world’s second-largest cryptocurrency exchange, FTX, went belly-up on Friday. Just a week earlier, high-profile investors, including some Silicon Valley billionaires,  were still shoveling money into FTX. Now they likely understand that the exchanges themselves are the counterparty risk.

Some will still argue you can put all of your bitcoin holdings on a thumb drive and avoid exchanges. But do you really believe the average consumer will put up with the hassle?  FTX’s competitors — OKX, KuCoin, Poloniex and Huobi — immediately told their customers they would do a “proof of reserves” to let them know whether their Bitcoin funds were actually there. I come from a different generation – a generation where verifying one’s reserves entailed lifting one’s mattress to determine whether your gold, silver and ammo were still safe and sound.  My gut feeling is that we are going back to the way things used to be.

Looking Beyond Recession Denial

Economics, the “dismal science,” has taken quite a beating in the current election cycle. Last week, Joy Reid, MSNBC’s rising-star bimbo, tried to convince viewers that the word “inflation” has no meaning outside the academy and the newsroom. “Most people who would never use that word in their lives are using it now because they’ve been taught it [by the Republicans.]” Oh, really? Perhaps she has a more accurate word to describe the cause of soaring prices for nearly everything since Biden ostensibly took charge? A network headline the same day evinced further confusion on the subject: White House Disputes Recession Fears. Although it’s Biden’s prerogative to try to control the narrative, he risks alienating even Democrats with such outrageous spin when the plain truth is staring us in the face. For the first time in more than a decade, middle-class Americans have been tightening their belts and cutting back on essentials, and 81% of them say they are either somewhat dissatisfied or very dissatisfied with the economy.

Despite this, the recession debate, such as it is, has been going on for quite some time and continues to this day. You could even argue that Biden appears to be winning on points. Eggheads, pundits and other credentialed dissemblers recruited by the mainstream news media to take a bullet for the team have been dependable recession deniers. And even Chase president Jamie Dimon, who should know better, speaks of recession as a “possibility” in 2023. All of them should harken to the observations of Matt Barnes, a Rick’s Picks subscriber who noticed the U.S. economy slipping into recession early in the second quarter. He would know, since he’s in the shipping-pallet business, as good a mine canary as you could have for discerning a drop-off in economic activity.

A Silent Crash in Real Estate

An outwardly plausible cover story for the deniers is that the stock market, after plummeting earlier in the year, has leveled off and seems, as the President is wont to remind us, to be doing fine. Indeed, the Dow Industrials are trading exactly where they were in June, so how much could the economy have deteriorated since then?

In fact, quite a bit, even if the extent of the damage is not yet visible. I am alluding to the silent crash that has been gathering force in residential and commercial real estate. With mortgage rates pushing 7%, transactions have dried up almost completely. Buyers who were jumping into bidding wars a year ago have moved to the sidelines in expectation of lower prices. But sellers continue to sit tight, comforted by the delusion that prices could start firming at any time. It is predictable that the gap between the two sides will continue to widen — until a few of the latter hit the panic button as the recession deepens. If they live in a neighborhood with $2 million homes, each will be repriced overnight to reflect the worst case, not the best. That is about to happen not just in pricey neighborhoods, but all across the U.S., in every boondocks subdivision where houses sell for $500,000 or more.

SF Offices 40% Vacant

Commercial real estate looks even more vulnerable, since workers who deserted office towers at the start of the pandemic are never coming back. San Francisco, with a commercial vacancy rate of 40%, will lead the way down, since the city has myriad other fatal problems, including a huge drop in convention business that by now is irreversible. But the crime centers of New York, Chicago and L.A., with their growing squalor, will not be far behind. Democrats say their opponents only want to talk about crime, the better to exaggerate its impact on urban centers. But how many of these suburban hammock-dwellers would dare descend into Gotham’s subway at any hour of the day? Or buy a quart of milk at the neighborhood bodega after dark? Or go jogging in Central Park unarmed?

The suburbs are facing massive real estate problems of their own, including the impending death of shopping malls anchored by department stores that until now have survived web-based competition. And then there are the movie chains that have outlasted the pandemic. Audiences have dwindled, even on Saturday nights, and it is predictable that every last one of the multiplexes, some with as many as 30 screens, will die. The only reason they remain open is that the owners can’t figure out what to do with them after they are closed.

The End of Wokeness

With the economy crumbling beyond the salve of political obfuscation, Republicans appear poised for significant electoral gains. But don’t expect new leadership to turn things around any time soon, if at all. Just look at the infinitely resourceful Elon Musk, who already seems to be struggling to pull Twitter from the muck of corruption and censorship. Extricating the U.S. from the deepest socioeconomic morass since the 1930s will pose vastly larger challenges, and even with the profound political realignment that seems likely, it will take many years or even decades to accomplish this. Although it might feel like morning in America a week from now when the boot of wokeness begins to lift from our necks, the celebration on Wall Street is likely to be short-lived as economic reality reasserts itself.

We should also consider the possibility the Democrats will take the U.S. Senate, presumably hastening the collapse of the stock market and the economy. In an interview Friday with USAWatchdog’s Greg Hunter, cycles forecaster Martin Armstrong raised the possibility that neither side will accept the outcome, whatever it is. This could result in the suspension of the 2024 election, he says, since no one on either side of the political divide would trust the electoral process any longer.

The ‘Fetterman Paradox’

Armstrong asserts that the GOP would easily take the House and Senate in a fair election, but that there is already evidence of cheating sufficient to throw the upper chamber to the Democrats. As noted above, he sees big trouble no matter what. But here is where I disagree: If the GOP takes both houses, the Democrats are sure to raise a ruckus. However, they will be in no position to do anything about it because they will have been politically castrated, and because any charges they could gin up would not be even remotely provable. My concern is that a Fetterman victory alone, because it could not imaginably have been achieved honestly, could pitch the country into a bloody civil war. Gunfire would break out locally, and torch mobs would take to the streets in America’s heartland, if Fetterman’s win has enabled the Democrats to take control of the Senate. This is a grim thought for many, or perhaps most, Americans, but it merely acknowledges that the war of words cannot escalate much further without tipping into widespread physical violence.

How AAPL Helps Wall Street Sustain a Crucial Illusion

The thimble-riggers who control Apple shares have done a brilliant job holding the stock market aloft. Ingeniously engineered short-squeeze rallies in the world’s most valuable stock have helped sustain the illusion that the U.S. economy will somehow muddle through a deepening recession that is still disingenuously described by Biden and his economists as a ‘rough patch’. Unfortunately, factors that are about to bring the stock market and the economy crashing down are firmly in place and inured to happy talk. This is notwithstanding the carnival-midway shenanigans of trade-desk mechanics who are paid not merely to exploit big moves in stocks, but to create them.

This they accomplished last Thursday in AAPL to spectacular effect. The company is entering the most challenging retail environment it has faced in more than two decades, but you’d never know it from the way Apple shares faced down a brutal gauntlet of analysts last week that earlier in the day had mauled two FAANG stalwarts, Amazon and the company formerly known as Facebook. With 2023 shaping up for them as a bust, their stocks plunged by 21% and 25% respectively in mere minutes. Apple couched its after-hours announcement more delicately, but only a fool would have ignored the devastating impact that simultaneous recessions in the U.S., Europe and China are about to have on iPhone sales.

Fools Rush In

Unsurprisingly, enough fools evidently did overlook the deep-purple clouds to provide AAPL’s handlers with perfect conditions to short-squeeze the stock 15% overnight, leaving it significantly higher than before the news. This will give Wall Street a couple more weeks of breathing room to distribute stocks, since, with earnings for the most important corporate giants out of the way, the impact of downbeat reports from hundreds of other, much smaller companies will be muted.

The effectiveness of this subterfuge cannot be underestimated. It is borne of necessity, since Apple throughout the bull market has been the one no-brainer investment that portfolio managers could count on to provide not just a good living, but Champagne, caviar and summer yachting on the Mediterranean. Get AAPL right and you get the market right. I’ve repeated this so many times that it has become my mantra. It predicted Friday’s powerful resurgence in the stock market, affirming AAPL’s role as the best leading indicator we have for what the smart money is doing. [For more on my thoughts about the economy and a silent housing crash that is well under way, click here for my most recent interview with Jim Goddard of This Week in Money.]

Bear Market Kabuki

The seemingly strong rally that ended the week merely balanced out three days of bland weakness that had preceded it. In the S&P 500, the upthr ust steepened by the hour but ultimately failed to surpass any important prior peaks. The bear seems out to challenge bulls and bears alike with its obviousness. For one, most of the larger trend moves of the past two months have been reversals off price spikes outside regular hours. And for two, middling ABCD patterns in stocks and futures are finishing at their ‘D’ targets with predictable regularity. That sums up last week’s kabuki in the E-Mini S&Ps, when they head-butted the 3777.00 ‘D’ target of a large ‘reverse pattern” repeatedly, only to die a hair short of it at the bell.

Docile Sellers

Sellers have been particularly docile for more than a month, allowing DaBoyz to twiddle their thumbs until optimal short-squeeze conditions surfaced. Sometimes news was the catalyst, although there seems to be no such thing as bullish or bearish news — only news to spike the market whichever way seems most opportune at the time. Friday is DaBoyz’ favorite day, when half-hearted selling is easily reversed with rallies that gain momentum as the day wears on. That’s because no one wants to go home short over the weekend on a day when bears have looked anemic. And so it goes for a bear market that seems destined to become the granddaddy of them all: weeks-long stretches of price action so tedious and haphazard that predicting a Sunday evening opening, or the reaction to Fed ‘news’ or to earnings announcements, has become a coin toss even for diligent chartists. All bear markets have a touch of Frankenstein in them, but this one’s nasty sense of humor promises to be something to endure.

October ‘Surprise’ Too Well Advertised?

The spread between permabulls and permabears is at an extreme these days, even for October. This is the month when pessimists’ hopes are highest that an epic bear market will correct dangerous excesses that have been building up in the financial system for more than 50 years. A presumptive and welcome side effect of such a crash is that it would reset things in accordance not with the designs of nefarious plotters, schemers and conspirators who meet every year in Davos, but in a more natural way that inflicts pain on borrowers and financial evildoers more or less in proportion to their sins.

We permabears should be careful what we wish for, however, since deep hardship affecting the broad middle class, the poor and even the very affluent could persist for a long time — perhaps a decade or more as occurred after the Crash of 1929. It is particularly troubling to consider that it took a world war in which 50 million people died to end the Great Depression rather than persistent fiscal and monetary meddling by the government. Anyone who thinks the Fed will ultimately lift us from the economic abyss into which we are about to descend should recognize that it is the banksters who will have put us there.

The Death of Wokeness

Meanwhile, it is unsurprising that some top technical forecasters disagree vehemently over what lies just ahead. One who sits in the pantheon of chartists says that, for cyclical reasons, the stock market is about to embark on a major rally. A colleague achieved instant success — soon to become notoriety? — with his own cycles-based forecast calling for a crash starting this week and continuing until the November election. Although I fear that a severe crash is coming that will tip the U.S. and global economies into a deflationary depression, I doubt that it will happen on the schedule of some guru whose predictions have been making banner headlines in the blogosphere. Mr. Market typically rebukes such hubris by causing stocks to lapse into tedium until the noise dies down. If he remains true to form, we should expect an eventless October and early November. Anything could happen thereafter, though, so beware of a sneak attack, especially if the election produces an upswing in America’s mood. It would be ironic but hardly surprising if stocks start to plummet just as most of us are celebrating the death of wokeness and relief from the nation’s self-destruction under Biden and one-party rule. [Are digital currencies coming?  I doubt it and explain why in this recent interview with Howe Street’s Jim Goddard. RA]

What Rough Beast Cometh?

A pen-pal from the world of very high-tech inventions is a self-described ‘collapsitarian’. He wrote me recently to say he enjoys these weekly screeds for their relentlessly glum insightfulness. (For your information, he is 50% in cash, 25% in gold, and 25% short stocks.) Longtime readers will know that I seldom shout ‘The Sky Is Falling!!’ in a headline. Rather, the not-so-great news is dispensed matter-of-factly in the final sentence or two, where you are admonished to reef the sails, batten the hatches and retreat below. And if the vessel should pitchpole, leaving one badly shaken and crawling on the galley ceiling, what then?  Prepare for the 100-foot rogue wave yet to hit is about all I can advise.

That’s what I see coming, “probably” sooner rather than later. The disaster seems all too likely to arrive in the form of an unscheduled bank holiday that touches off a fatal spasm of debt deflation. I often reiterate in that final paragraph, matter-of-factly, that deflation is inevitable because, well, because it is. I’ve been writing about this– some would say bloviating — for long enough to have annoyed more than a few readers. One was upset about a particularly gloomy column I’d written 25 years ago for the San Francisco Examiner. He told me he managed $250 million and asked what qualified me to predict such a scary future. I responded by critiquing some minor errors of grammar and punctuation in his email. He shut me down with an unexpected reply. It turns out the $250 million was his personal money, and English was just one of six languages he, a cosmopolitan Iranian, spoke fluently. Our subsequent exchanges became increasingly friendly, and I never even asked how he’d fared with the enormous stake he’d amassed in Nokia.

The Broken Clock

Others mentioned that even a broken clock will provide the correct time twice a day. This is weak metaphor, though, and no one should be consoled by the thought that someone who has been predicting economic Armageddon will eventually be right. Do I actually believe the economy will be reduced to barter and that the chief concern of tens of million of us will not be protecting our nest eggs, but securing food and fuel? I do. Just such a scenario is the subject of a scary video published on YouTube by my friend Bill Bonner.  He sees oil hitting $500 a barrel and a gallon of gas fetching $50. Don’t let the fact that Bill is pitching subscriptions to one of his publications put you off. The YouTube video runs 75 minutes and is dense with enlightening facts supporting his thesis.

Deflation is as much doomsday theorizing as I can handle, and so I don’t much ponder $50 gasoline, Category 6 hurricanes, our dying coral reefs or the billions of people that some fearmongers flatly assert will eventually succumb to the Covid jab. (I remain hopeful that the eventual death toll will go no higher than 600 million to 800 million — or maybe a billion, tops.) A deep-thinking Nostradamian I hear from now and then envisions a future so dark that it would make all of these disasters seem like a relative picnic. The real trouble will start, he says, with an earthquake that splits the Dome of the Rock, literally unleashing hell on Earth. Two world wars, global disease and famine will follow, extinguishing all human life — and what would be the point of preparing? All we can do in the meantime is enjoy what pleasures life in these wretched times still affords.

Investment Advice from a Millionaire Barber

[Louie Piro, my barber when I lived in Mountain View CA shortly before Google arrived, became a multimillionaire with a simple investment strategy. I thought of him the other day when a Rick’s Picks subscriber wondered aloud in the chat room which investments are most likely to prosper in the recessionary hard times that Americans will soon face. The subscriber evidently favors the shares of gold companies that pay dividends. My own choice comes straight from Louie’s playbook: Invest in utility companies that serve growing populations and that have good dividend histories. Thus did Louie’s initial, $100 stake in a Nevada purveyor of water and power seed the wealth the haircutter was to amass over the next 50 years. Following is his story, as told in a column I wrote for The San Francisco Sunday Examiner 25 years ago. I have published it here before, but it seems more relevant than ever now, as investors try to figure out which stocks will be favored by the flight to safety that could come at any time. Louie’s remarkable saga holds promising investment implications as we watch Californians, New Yorkers and other blue-state refugees flee economically doomed regions of the country for better lives in Florida, Texas, Utah, Tennessee and a few other states that are not so heavy-handed in the way they regulate businesses, schools, commerce and free speech . RA

If there is a single word to sum up the success of investor Louis Piro, that word is “dull.” Piro has never made a killing on a stock. He doesn’t play hunches and he runs from hot tips. He says he passed up Pfizer not long ago because its shares were too pricey even before impotent men started flocking to their Viagra pill for a cure. Nor will Piro sell anything from his portfolio. He just keeps buying — and then only with money he knows he won’t need any time soon. He adds stock whenever the price drops substantially. Piro shuns companies that sell products or services he can’t understand, and he has never even owned a share of a Silicon Valley upstart. His favorite word — “dividend” — could be the mantra of a successful hypnotist. Zzzzzzzz. Finally there is this pearl, the cliché that underlies nearly every investment decision that Louis Piro has made in the last 45 years: “Buy shares in companies that will grow with America.”

A Modest Retirement Dream

That Piro, 63, could have amassed considerable riches by following such homely rules is probably not unusual. What is striking, however, is the remarkable degree of his success, and the singular details of his journey. He is a wealthy man by any measure, with a sizable portfolio of stocks, bonds and, until recently, real estate. But he was not thinking about getting rich when he began to funnel his spare cash into the stock market 45 years ago. At the time, he was 18 and just starting a lifelong career at Al’s Barber Shop on Main Street here. His goal was simply to build a little nest egg. “I knew then that when I retired, all I would be taking with me was my clippers,” says Piro. “There were no IRAs or tax-sheltered savings back then, so it was a question of creating some security for myself.”

Early on, the barber was literally investing all of his spare change, about $5 a week. “Every time it grew to a hundred dollars, I bought some more stock,” he says. The first was Pacific Enterprises, a natural gas company. Piro didn’t find that one himself — he learned about it from a customer whose seemingly cushy retirement was well supported by Pacific’s generous dividends. Three shares of Pacific was all Piro could afford, but he took the customer’s advice and held onto them, always reinvesting the dividends. It has since grown to 2,000 shares.

A Bulging Portfolio

He has repeated this pattern in dozens of stocks and funds. His portfolio bulges with shares of Lucent, Coca Cola, Pacific Enterprises, Wisconsin Energy, AirTouch Communications, Pacific Gas & Electric, Bank of America and California Water Services, to name a few. There are also sizable blocks of Southern California Edison, USX/Marathon, GT&E, AT&T and Sierra Pacific, as well as a slew of bond- and growth-oriented mutual funds offered by Vanguard, Prudential, Franklin and Benham. Tax-free bonds and annuities round out the list.

Piro, who everyone on Main Street calls Louie, doesn’t gloat about his net worth, nor is he eager to tell the world exactly how much stock he owns. About all he’ll say is that he’s not worried about retirement, which is coming up soon. The building that houses Al’s Barber Shop is scheduled to be razed in a year, and that’s when Piro plans to trade in his scissors, shears and comb for a set of golf clubs and tickets to exotic ports and destinations around the world. He says that, God willing, he and his wife Ann will be able to do as they please for the next 30 years — without having to sell a single share or bond from his portfolio.

Louie’s Rules

To anyone who dreams of retiring well on interest and dividends, he would offer the following advice:

* Don’t fear bear markets. They come and they go, but if you buy stock in good companies, their shares will always recover.

* Don’t ever sell any stock. If your reasons for buying are sound to begin with, the shares can only go higher over time.

* Buy more stock whenever the price drops substantially.

* Look for companies whose growth reflects the growth of America as a whole. Water, gas and electric companies will always be winners in states with healthy economies.

* Favor stocks with generous dividends, and plow every penny of it back into those stocks.

* Don’t be too conservative. Life is a gamble, and you’ll never win if you settle for the meager returns of CDs or passbook accounts.

* Never go for the quick profit, and be patient enough to hold onto good stocks when they hit the inevitable rough patch.

* Invest with money you don’t need so that you are not pressured by financial adversity or bear markets to pull out of stocks.

* Buy confidently when fearmongers flout common sense. In the depths of the 1990-91 recession, when Bank of America was trading at $7 a share, Piro says he bought heavily because he was so sure the bank wouldn’t go under. This may seem obvious now, with the stock’s value up almost fifteen-fold, Piro notes, but it surely wasn’t then.

Piro says he could never have done so well if his wife had not been willing to help shoulder the sacrifice of setting money aside regularly. Luck was in his corner, too. “You’ve got to have a little help from somebody,” he says, “and the Lord has been very good to me.” [Click here for a link to my most recent interview with Howe Street’s Jim Goddard. We talk about, among other things, how the coming deflation will change people’s lives. RA

How Inflation Has Begun Mutating into Deflation

Yields on 10-Year Treasury Notes, currently at 3.70%, are likely to hit 4.90% before they level off. It is hard to imagine an increase of such magnitude not disrupting the U.S. and global economies severely. America is already in a recession that looks all but certain to deepen before we hit bottom in a year or two. And yet the Fed keeps tightening, leaving little doubt with last week’s 75-basis-point rate hike, the third in four months, that Powell & Co. are hell-bent on crushing consumer inflation that has been rampaging for two years. The Open Market Committee must have known that our teetering economy, a super-heated real estate sector and a vaporous stock market would implode if they merely talked about raising rates. However, for the first time since Volcker’s 1980s heyday, the central bank has actually walked the walk, surprising everyone by pushing up administered rates a total of 275 basis points since last May. This has sent borrowing costs soaring, including mortgage rates that have more than doubled from the sub-3% levels that obtained toward the end of 2021.

Under the circumstances, it is surreal for politicians to be splitting hairs over whether the U.S. is in a recession. Only in comparison to the disaster that is coming could the current economy be described, as Biden is wont to do, as holding its own. The stock market has come down hard, so far without the kind of climactic selling we might expect at a bottom. This has taken a little of the steam out of inflation, albeit mainly via falling gasoline prices that reflect a global economy in a state of imminent collapse. But the broadly falling asset prices that lie just ahead eventually will trigger waves of bankruptcies so destructive and relentless that we’ll wish we were dealing merely with rising consumer prices. All that requires is merely avoiding buying certain things or buying cheaper substitutes. Debt deflation is not so easily managed, for one does not so much deal with it as struggle to survive it financially. Tens of millions of mortgaged homes will be underwater, private savings will be wiped out, most pension funds will go belly-up, and the accounting fiction that has made Medicare and Social Security appear solvent will be laid bare as benefits are reduced to subsistence levels.

Housing’s High End

Amidst obsessive chatter and headlines concerning inflation, its opposite is already taking shape. Consumer are at a tipping point, holding off on home and car purchases because they think prices will be lower in the future. Prices for both have softened just a little, but the wholesale markdowns that are coming will shrink the economy so precipitously that consumers will be in no shape to hunt for bargains. That’s because their net worth will be falling even faster than prices. The collapse of home prices at the high end will be especially brutal, since the adjustment will take place all at once rather than gradually. Currently, buyers and sellers are at a standoff. The latter, with no mortgages and no urgent need to sell, are holding prices at or near peak levels. For their part, buyers are waiting for prices to come down. They are certain to be right, but in the meantime, transaction volume has dried up almost completely, and with it the vital mechanism of price discovery. In the very hard times ahead, there will be no buyers for these homes, and they will be bequeathed to a next generation that cannot afford them. Thus will today’s inflation shift into reverse, leaving the economy in a state of severe deflation and inured to stimulus just as it was in the 1930s.

Hope and Confidence Are on the Downslope Now

I’ve been reluctant to give permabears the all-clear because, being one myself, I’ve seen the bull market roar back from death a dozen times since 2009, turning my smug eulogies into embarrassments. The most punitive and outrageous of the rallies was the monster that emerged in March 2020, when investors cast off pandemic fears just as global business went into lockdown. What a fooler that was! Who could have guessed that prices for nearly everything were about to soar? A friend who lives in a South Jersey resort sold his home for $1.8 million, thinking he’d be able to buy it back for half that in a year or two. Instead, six months into the Covid lockdown, the house was worth $2.4 million and beyond his reach for a buyback. He’s living in an apartment now, but he may ultimately get his wish if real estate prices collapse in the current, deepening recession. Another friend bought his dream vacation home in Naples FL for $4 million, but readily parted with it when a giddy fool came along just 13 months later and offered him $7 million for it.

It’s not as though the economy has been booming. In fact the opposite is true, notwithstanding Wall Street’s idiotic focus on employment numbers that tell us nothing. Who could possibly care about this statistical poppycock when stores, restaurants, movie theaters and countless thousands of other retail businesses have been calling it quits or are within weeks or months of failing on their own? Did Biden’s statisticians and pundits even notice last week when the most successful category-killer of them all, Amazon, said it was scaling back growth plans significantly? When mighty Amazon starts tightening its belt, you had better believe that, after two dispiriting quarters, this recession is just getting rolling.

Levitation Ruse Failed

Which brings us to the bear rally in stocks. I’ve been looking anxiously over my shoulder, waiting for a crazy-loco short-squeeze to make investors forget we are so deeply in debt that only a full-blown depression can pay us up. Bankruptcies would accomplish this in relentless waves that will make us nostalgic for today’s rampaging consumer inflation. Wall Street chose AAPL to distract us from this grim reality, but the ruse failed. Employing subterfuge and relatively small sums of cash in ways that I described here in great detail, DaBoyz levitated the biggest-cap stock in the world to within 3.7% of new all-time highs. Unfortunately, they were unable to hold Leviathan aloft indefinitely until such time as the broad averages faked their way higher against the weight of a bear market.

And now the expansive mindset needed to propagate even fake rallies has succumbed to the growing likelihood of a severe global downturn. Nor is there a way for the central banks to significantly taper their exposure to worthless paper on their books for tens of trillions of dollars any time soon. Worse still, their foolishness has finally awakened a beast they cannot control — i.e., the dollar, a market so big that it dwarfs all other asset markets combined. Investors know this and are no longer cocksure that any asset acquired today will fetch a higher price tomorrow. Their expansive mood has swung to grimly contractionary, producing a get-ready-for-winter scramble to distribute stocks and cash out of assets. Portfolio managers may be less eager to exit than individuals at the moment, but the coming tsunami of redemptions will ultimately turn the portfolio giants into wholesale sellers of shares. Sell to whom, you ask? When Black Rock, State Street and Fidelity are the sellers, hopeful talk of a bottom will be little more than fantasy. [Here’s a link to a recent interview I did with Howe Street’s Jim Goddard that amplifies some of the themes sounded above.]