The Morning Line
Stocks Act Fearless as Oil Price Soars
If you can keep a cool head while everyone around you is panicking, perhaps you don’t understand the situation. That’s what they say, anyway. It is exactly what we saw last week when stocks barely shrugged even as the shooting war in the Middle East took another baby step toward nuclear conflagration. The oil markets certainly recognized the danger, spiking sharply after our titular president warned that Israeli warplanes might soon start targeting Iran’s refineries. Energy quotes scored their biggest weekly gain in years while stocks, although relatively subdued, appeared to consolidate for yet another psychotic upthrust. What seemed to matter most on Wall Street was not the threat of cities going up in flames, but a few meaningless, cooked job stats implying that droplets of juice from America’s financial bacchanal have begun to trickle into the parched gullets of gig workers, nurses and cocktail waitresses (if not yet retail clerks).
Longshoremen could join them shortly with a 62% raise to $69 an hour, including the union’s legendary no-shows. It’s a little late in the Kondratief cycle for them to become rentiers, but the prospect of owning a few shares of Nvidia seems realistic enough. Although keeping up with the Joneses has gotten easier because the Joneses’ inflation-adjusted net worth has been stagnant for 50 years, chasing inflation has only grown harder. And that’s measured against phony data that understate inflation by half. Take heart, all you working stiffs: beating inflation is going to be a cakewalk when the next recession brings it down to, like, minus five percent.
What About Microsoft?
Speaking of recession, this IBM chart, even to the unschooled eye, suggests the Beamer may be about to reverse in a big way. Although I have never tracked the company’s shares closely, there may be a few old-timers who still remember when Fortune and Forbes featured Big Blue on their covers regularly. Now, the computer services company is so little thought of, at least by traders, that IBM puts and calls barely register a pulse. Spreads are too wide to use options for shorting the stock even though it looks likely to make an important top at or near 226.34. I’ve been drum-rolling that Hidden Pivot resistance as a prospective bull-market top since last January, and now it’s finally time to flip long positions. Does that mean MSFT, our #1 bellwether and currently trading for 416, will not test the all-time high at 464? Time will tell. Although its ABCD pattern is too obvious to work precisely, it is also too compelling for the ‘D’ target to give way easily. In any event, it’s hard to imagine IBM usurping MSFT as the stock to follow, but the relentlessly steep pitch of Big Blue’s bull market would surely qualify it as a full-fledged member of the lunatic sector (aka the idiotically misnamed ‘Magnificent Seven’).
Levitating Kamala
Expect stocks to continue their heedless waft into outer space until the election. They would not likely do so if investors even remotely imagined Kamala Harris might win. James Kunstler provided the most succinct reason we’ve heard for why this is not going to happen: “The people in this land are finally sick of a faceless blob ruling madly from the shadows,” he wrote in the current edition of Clusterfuck Nation. “Mr. Trump has become a national father figure, a titanic offense to a party run by women with daddy issues and to their Marxist allies dogmatically bent on destroying the family (along with every other institution). As it happens, countries need fathers, both actual and symbolic. What a surprise!”
So what about polls that show Harris and Trump neck-and-neck in some swing states? Even ostensibly conservative news outlets such as Fox and the Wall Street Journal have been reporting this as though the data were authentic. My guess is that the editors and news gatherers have all been overwhelmed by the nation’s left-tilting news media into believing polls that have been massaged with poor sampling, misleading questions and purposeful misinterpretation. In reality, the believers are like the audience assembled on a barge to witness David Copperfield make the Statue of Liberty disappear. Although some in the audience would swear this happened, it didn’t; the barge had simply been repositioned while a curtain was raised to obscure a large swath of the horizon.
8%-10% More Believable
Although the magician eventually revealed how he did the trick, the New York Times et al. will not be called upon to explain how they levitated Ms. Harris, since she is going to lose by 20 million votes. That’s a realistic number if forecaster Martin Armstrong is right, as he often is about so many other things. He says Harris is actually polling in the 8%-10% range, notwithstanding numbers from Quinnipiac and the Wall Street Journal that have her garnering half the popular vote.
Meanwhile, if stocks have been rallying because they sniff a Trump landslide, investors had better prepare to sell before November 7. We’ve already advised ‘selling the news’ for those who have been gung-ho on stocks in anticipation of Fed easing. That has already begun, and the best conceivable outcome has been priced extravagantly into the market. Trump will inherit an economy pumped full of hot air, and the inevitable bust will occur during his watch. No amount of business acumen can prevent this, but it will be better to have a businessman in the White House than a closet Marxist who will not let the crisis go to waste.
Sell the News
The stock market went bonkers following the Fed’s first rate-cut since March 2020, but it’s more than a little tempting to sell the news. A return to easing had been rumored for the last couple of years, but with a pitchfork mob threatening to descend on the Eccles Building, Fed Chairman Powell finally gave in to Wall Street. The mainstream media has given him cover with the lame story that lower rates will help spur employment. Historians are more likely to recall that the central bank’s pivot toward lower rates came at a time when stocks were breaking out to new all-time highs, inflation was ravaging the middle class, and home prices were at record levels. Still, it’s an election year, and what did we expect? The Open Market Committee is simply revivifying the American Dream — not with a scrawny chicken in every pot, but with renewed hopes of a leased Lexus in every garage.
What will lower rates mean? For one, they could conceivably delay a crash in home prices and stocks for a while. It has been coming ever since the 2007-08 deflation failed to finish the job. At the time, one might have surmised that the nation’s most popular and pernicious delusion — growing rich simply by owning a home — had suffered a fatal blow. Alas, whatever lessons the Great Financial Crash held for us were erased by a turbocharged recovery that has pushed home prices higher than ever.
And stocks, too. Although Powell’s steadfast hawkishness may have disappointed investors every month for the last three years, it did not impede the stock market’s steep rise even slightly. Nor did it quell Congressional spending, which is currently adding $1 trillion of debt to the U.S. balance sheet every 100 days. Historians will recall that statistic, too, when they pick through the rubble of the financial collapse that is coming.
Party On, FOMC!
Although the mainstream media watched CPI and employment data obsessively to predict Powell’s next move, it’s clear that he was thinking on a different plane. By making dollars merely somewhat more difficult to borrow, he was on the only path that could conceivably have reined in Federal spending. The strategy also supported the dollar’s hegemony, and it rebuked easy-credit policies of the EU that cannot possibly produce a happy ending. Now Powell has joined the party.
It is almost unimaginable that rates will fall far enough to trigger a re-fi mania like the one in 2020-21 that kicked the U.S. economy into high gear. Thirty-year mortgages could be had for as little as 2.65% then, but the only way we will see rates that low again is if the economy slips into recession or worse. If conditions in 2020 were ideal for promoting inflationary growth, the opposite is true now: we are at the precipice of debt deflation. While mortgage rates have fallen from a high of 7.1% in 2022 to a current 6.1%, that is still far too high to stimulate a wave of home-buying. With residential prices poised to fall, a repeat of the 2007-08 experience seems unavoidable. This time, however, the collapse will be fed by much greater excesses, making it more likely to kayo the economy for a decade or longer.
The ‘Wealth Effect’ Is a Delusion and a Fraud
The so-called ‘wealth effect’ is the Tulipmania of this era on steroids, creating untold sums of money from speculative spume. If materializing vast quantities of spendable cash is the goal, a revved-up wealth effect makes the Fed Open Market Committee look like a ladies’ luncheon club. Indeed, it can take long months or even years for the central bank to stoke the consumption furnace using swaps, repos and direct purchases of Treasury debt. These obfuscations are designed mainly to make the promiscuous use of credit more attractive to everyone. However, the money must be borrowed into existence for profligacy to work its magic on the economy, and that takes time. There is a much faster and simpler way to inject cash into the system. It works every time, and the result is instantaneous, effectively showering Wall Street with a blizzard of $1000 bills.
This is a monetization trick that is not taught at Wharton. An added feature is that even Joe Sixpack can pitch in simply by buying stocks on margin. Turbocharged by a 4x multiplier and a steeply rising stock market, Joe will be driving an Escalade and living in a grandiose suburban home he will never own in practically no time.
The chart shows how it’s done, satisfying America’s money sickness in ways even the financially ingenious Dutch might not have imagined. Their seaborne empire was at its height in the 1630s, when greed and hysteria combined in just the right proportions to make the masses believe a rare tulip bulb could be worth as much as ten acres of prime farmland. The Burghers who invented the open-outcry exchange had the good sense to restrict futures trading in flower-bulb contracts in one crucial way: traders could not sell them short.
Shorts Power Bull Markets
In contrast, a key feature of today’s mania is that nearly any security can be sold short. This naturally invites the occasional short squeeze, an irresistible wave of panic buying triggered by an accelerating rise in the price of a stock that speculators have bet against. When the inevitable margin calls go out to traders suffering rapidly mounting losses, their collective short-covering gooses stocks with such force as merely bullish buying could never provide. In their eagerness to escape the vise, they jackhammer stocks through thick layers of resistance and previous peaks while sellers stand aside and let their profits run. Few pleasures in the investment world are more exhilarating than watching a stampede move one’s way.
Lest the threat of catastrophe elicit a slap on the wrist from regulators, the officially sanctioned mountebanks who control the markets have mastered the art of triggering off less-noticeable mini-stampedes every morning, usually in megacap favorites such as NFLX, AMZN, GOOG, MSFT and NVDA. Hardly a day goes by when one or more of these stocks does not open on a gap like the one pictured in the Walmart chart. That nearly volumeless short-squeeze in the opening bars of the session added at least $3 billion of wealth-effect money in mere minutes. Relatively few shares changed hands as the stock spiked through a smattering of sellers.
Replicate this momentarily unhinged price action in a half-dozen mega-cap stocks routinely, and pretty soon, as the late Sen. Everett Dirksen once quipped, you are talking about real money. In 2024, Nvidia alone tacked on $2 trillion of valuation in mere months. This occurred even as other heavyweight stocks, including the once-staid IBM, were rolling up unconscionable gains.
For all the hubris, there are relatively few customers’ yachts plying the waterways. But all across America, the upper echelons of the middle class are flush with cash, eager to spend it on luxury goods. It is mostly fund managers with the financial acumen of lab rats who have racked up the biggest scores. Most of it is sitting on the books, a napping cosmos of ‘wealth effect’ money that can be hocked six ways of Sunday at the first opportunity.
Re-inflating a Pension Fund?
Unfortunately for us all, it would barely dent what we owe collectively. That is such an enormous sum that even tens of trillions of dollars of ‘wealth effect’ money cannot begin to pay off our liabilities for Medicare, Social Security and the welfare state. Wall Street’s gaseous wealth is fated to contract to nothingness in the next bear market so that the aggregate value of all publicly traded stocks would not likely bail out even a single state pension fund. Illinois seems the most likely to test this forecast, since the state’s very name is synonymous with corruption, arrantly stupid governance and reckless budgeting. But there are at least two dozen other states not far behind, and there will be no bailing them out. Only an imbecile could think ‘the Government’ will come to the rescue. Substitute the word ‘taxpayer’ for ‘Government’ and you’ll understand why. Although it is easy for ‘the Government’ to pump up financial assets and nominal GDP by monetizing debt, expanding credit and spending money it does not have, it is not possible to re-inflate a collapsing pension fund. Each sends out hundreds of thousands, or even millions, of checks every month so that recipients can pay for food, shelter, health care and other essentials. The nation’s taxpayers would quickly tire of supporting them, especially if they were all about to get stiffed themselves.
Our #1 Bellwether Is at Cliff’s Edge
I continue to believe the bull market’s fate can be divined simply by paying close attention to price action in Microsoft shares. The company is not only the second-largest in the world by capitalization, slightly behind Apple; it is also the most important. That’s because its huge stream of recurring subscription revenues from Windows and the Office suite is all but impervious to economic downturns. This is not true of Apple, whose iPhone sales will plunge in the next recession.
So what is Microsoft saying? We’ve been expecting the stock to hit 449.42 for more than a month. Although that would be well shy of the record 468.35 achieved on July 5, it would mark a secondary top corresponding to the one that ushered in the 1929 Crash and the Great Depression. There remains the possibility the implied rally from Friday’s low could head into the wild blue yonder after achieving 449.42, but we’ll consider this scenario more seriously if and when the stock blows past the target.
One thing that makes the wild-blue-yonder prospect somewhat less likely is that the E-Mini S&Ps on Friday breached a key support decisively enough to imply they are headed significantly lower, to at least 5189 from a current 5403. We should know by no later than midweek whether they are about to drag MSFT lower, rather than the S&Ps being pulled higher by a resurgent MSFT.
Whoopee Cushion Bounce
In the meantime, some Rick’s Picks subscribers may have taken long positions in MSFT over the weekend, since I’d proffered 401.56 as a perfect place to back up the truck and buy ’em hand-over-fist. When the stock plummeted on Friday ahead of the opening, it kissed that number and Whoopee Cushioned $10 higher before giving it all back by the closing bell. If the relapse continues, taking out the 385.58 low shown in the chart, I’d infer that the bull market that began in 2009 is over.
Price action in Bitcoin somewhat corroborates this. I’d drum-rolled 54,701 as a correction target when it was trading around 60,000. On Friday, however, my proxy for Bitcoin, BRTI, knifed through the target like a boning knife through a raw chicken breast. This implies a further fall to at least 49,543, but possibly as low as 44,386. This matters because bitcoin is a good indicator of speculative activity in the markets. Crush the spirits of those who trade it, and the markets in general will become less feisty. The good news for Bitcoin speculators is that a plunge to 44,386 will have been carefully scripted by its deep-pocketed handlers. They are looking for a safe place to park and augment their holdings while they wait patiently for the next outbreak of fever. _______ UPDATE (Sep 13): My back-up-the-truck number in MSFT at 401.56 caught the actual low at 400.80 within 76 cents. The subsequent rally hit 431.83 by week’s end, a $31 gain. I am projecting additional upside to at least 449.52, a longstanding target. Here’s a chart that shows the stock’s trampoline bottom, which was replicated by rallies in the Nasdaq 100 index and the S&Ps..
Time for a Holiday…
[I’m taking a summer break, so this will be my last commentary until after Labor Day. It will be the usual busman’s holiday for me, however, and actionable ‘touts’ for popular symbols will be updated ‘round-the-clock as always. Some recommendations will be accessible to non-paying subscribers, so check the home page regularly, especially if stocks go bonkers. I will also continue to provide tradable guidance and timely analysis in the chat room. To sum up the markets for now, though, let me note that the scripted savaging of the lunatic stocks (aka the egregiously misnamed ‘Magnificent Seven’) unfolded in July exactly as anticipated. Now, I am focused on the strong possibility that the manic bounce that has ensued will turn out to be a sucker rally, a distribution much like the summer binge that preceded the 1929 Crash.
Concerning the painting, it is by Geoffrey Leckie and titled ‘Restoration of St. Marco’. Geoff and I attended the University of Virginia at the same time and shared a farmhouse outside of Charlottesville. He is a deeply gifted artist whose works, mostly oil on canvas, include landscapes, still-lifes and portraits that have always stirred me with their beauty and uncompromising style. His California seascapes are a particular favorite of mine, capturing the roughness of the Northern California coastline and the ceaseless fury of the waves. Geoff lives in Venice, Italy, but travels the world for inspiration. Here is a link to some of his other paintings and the galleries that represent him.
The Venetian scene is thematically tied to the literary text below, an excerpt from Thomas Mann’s magisterial The Magic Mountain. Mann considered vacations essential to restoring one’s vital energy following boring stretches on-the-job. His novella Death in Venice concerns a writer who takes a holiday to recoup his gifts, only to become fatally attracted to a young Polish boy. It is in The Magic Mountain, however, that the author deals with the weighty subject of time at the deepest level, explaining how we perceive and recall its passage, versus how we live it. If you’ve ever wondered why a year in grade school seemed so vast, while the same, 365-day interval rocketed by in later life, a close reading of Mann’s opus will reward you with a profound epiphany. The translation, which I have published here before, is by H.T. Lowe-Porter.]
Excursus on the Sense of Time
“There is, after all, something peculiar about the process of habituating oneself in a new place, the often laborious fitting in and getting used, which one undertakes for its own sake, and of set purpose to break it all off as soon as it is complete, or not long thereafter, and to return to one’s former state. It is an interval, an interlude, inserted, with the object of recreation, into the tenor of life’s main concerns; its purpose the relief of the organism, which is perpetually busy at its task of self-renewal, and which was in danger, almost in process, of being vitiated, slowed down, relaxed by the bald monotony of its daily course. But what then is the cause of this relaxation, this slowing-down that takes place when one does the same thing for too long at a time? It is not so much physical or mental fatigue or exhaustion, for if that were the case, then complete rest would be the best restorative. It is rather something psychical; it means that the perception of time tends, through periods of unbroken uniformity, to fall away; the perception of time, so closely bound up with the consciousness of life, that the one may not be weakened without the other suffering a sensible impairment. Many false conceptions are held concerning the nature of tedium.
“In general it is thought that the interestingness and novelty of the time-content are what ‘make the time pass’; that is to say, shorten it; whereas monotony and emptiness check and restrain its flow. This is only true with reservations. Vacuity, monotony, have, indeed, the property of lingering out the movement and the hour and of making them tiresome. But they are capable of contracting and dissipating the larger, the very large time-units. to the point of reducing them to nothing at all. And conversely, a full and interesting content can put wings to the hour and the day; yet it will lend to the general passage of time a weightiness, a breadth and solidity which cause the eventual years to flow far more slowly than those poor, bare empty ones over which the wind passes and they are gone. Thus what we call tedium is rather an abnormal shortening of time consequent upon monotony. Great spaces of time passed in unbroken uniformity tend to shrink together in a way to make the heart stop beating for fear; when one day is like all the others, then they are all like one; complete uniformity would make the longest life seem short, and as though it had stolen away from us unawares. Habituation is a falling asleep or fatiguing of the sense of time; which explains why young years pass slowly, while later life flings itself faster and faster upon its course.
Reliving Youthfulness
“We are aware that the intercalation of periods of change and novelty is the only means by which we can refresh our sense of time, strengthen, retard and rejuvenate it, and therewith renew our perception of life itself. Such is the purpose of our changes of air and scene, of all our sojourns at cures and bathing resorts; it is the secret of the healing power of change and incident. Our first days in a new place, time has a useful, that is to say, a broad and sweeping, flow, persisting for some six or eight days. Then, as one ‘gets used to the place,’ a gradual shrinkage makes itself felt. He who clings or, better expressed, wishes to cling to life, will shudder to see how the days grow light and lighter, how they scurry by like dead leaves, until the last week, of some four, perhaps, is uncannily fugitive and fleet. On the other hand, the quickening of the sense of time will flow out beyond the interval and reassert itself after the return to ordinary existence: the first days at home after the holiday will be lived with a broader flow, freshly and youthfully — but only the first few, for one adjusts oneself more quickly to the rule than to the exception; and if the sense of time be already weakened by age, or — and this is a sign of low vitality — it was never very well-developed, one drowses quickly back to the old life, and after four-and-twenty hours it is as though one had never been away, and the journey had been but a watch in the night.”
Big Selloff Was Tightly Scripted
Bears shouldn’t get their hopes too high just because the S&P 500 plummeted for three straight days last week. The selloff seemed tightly scripted, given that the Dow Industrials were rising just as sharply at least part of that time. This is shown in the chart above, which captures price action on Thursday. The implication is that portfolio managers were simply shifting money from one simmering vat to another, an efficient way to keep stocks bubbling without expending much capital.
Someday their ingenious siphon pump will be overwhelmed by honest-to-goodness selling. You’ll know the weakness is real because it will last for three or more days, it will encompass all of the broad indexes, and it will gain in momentum. Three straight days of selling has been an extremely rare occurrence since this gaseous bull run began in March 2020, just before the covid hoax laid seige to the U.S. economy. But four days? You’d have to go back many years to find an instance of this.
Lessons to Unlearn
Even the 1987 crash didn’t last for three full days. It began on the afternoon of Friday, October 16, but by mid-morning on Tuesday, October 19, selling had dried up and stocks were poised to come roaring back. Bears who were slow to cover short positions got savaged almost as badly as bulls who’d been trapped in the initial avalanche. The downtrend had drawn enormous power from huge open positions in far-out-of-the-money put options. For years, selling them ‘naked’ was considered a reliable source of free money. But when stocks started to fall hard on that fateful Friday, the ordinarily docile puts turned into a water-cannon enema for short sellers.
Traders learned their lesson, and more than a few of my colleagues in the pits of the Pacific Stock Exchange were pitched into bankruptcy. There should be no doubt, however, that we will see that the lesson has been thoroughly unlearned when the next bear market comes bellowing from the deepest cavern of of hell.
San Francisco Isn’t Dying
Stories about San Francisco’s death appear to have been exaggerated. I arrived there Saturday for a five-week stay, a getaway from Florida’s insufferable summer heat. It didn’t take me long to recall why, at age 28, I came to San Francisco and stayed until I was 50. For one, the weather rarely turns hot, even when the rest of the country is sweltering. And on those rare occasions when a heat wave descends on the city, there is always an ocean of fog lurking just outside the Golden Gate, ready to pour onto the streets whenever high temperatures linger for more than a few days. It was an invigorating 65 degrees when I stepped off a JetBlue plane at SFO on Saturday morning. I’d departed Ft. Lauderdale shortly after sunrise with the thermostat already climbing into the mid-80s and humidity approaching steam-bath levels. Arriving in San Francisco was like encountering the crystal blue ice of a Norwegian fjord.
I was greeted by an old friend who has been a player for decades on the periphery of the commercial real estate market. He contends that most of the negative press the city gets is just flackery employed by developers to drive down prices. Not only have they succeeded at this, they have begun to seed long-neglected warehouse districts with large sums of money, turning them into magnets for tech entrepreneurs, residential developers, skilled tradesmen and mostly-Asian workers who earn $300,000 or more per year with their extraordinary STEM skills. So many luxury apartments have sprung up to house these young whizzes that I didn’t realize at first that I was in my old Portrero Hill neighbohood, which sits literally on the other side of the railroad tracks, about a mile south of downtown San Francisco.
Eldorado’s Infrastructure
The drive took us through a desolate patchwork of vacant lots. However, the street itself was paved with an intricate mosaic of granite blocks that hinted of a Main Street-to-come in some future Eldorado. Many old buildings that I had barely noticed when I lived there from 1978 to 2000 sported handsome, red-brick facades that had been resurfaced at great expense in the same style as two Fisherman’s Wharf landmarks, Ghirardelli Square and the Cannery.
This is a potentially sumptuous neighborhood in its nascence, destined to become a part of the New San Francisco no matter what happens to Market Street, the theatre district and the financial center. Tragically, there is no way to prevent those parts of the city from deteriorating so that they eventually come to resemble Detroit. Huge office towers cannot possibly be converted to residential use or be torn down, and so they will sit, increasingly unoccupied, until they become roosts for pigeons and vagrants. A corresponding loss of tax revenue will take a heavy toll on public amenities and services: trash will go uncollected, dispatchers will stop answering 911 calls, and the city’s legendary fire department will be reduced to tending flames rather than extinguishing them.
Blade Runner Squalor
Amidst Blade Runner squalor, new economies that function in ways no futurist could predict will flourish. The city will remain a hive of activity, as unkillable as a virus able to mutate against every new threat. The mostly-foreign work force will not miss the symphony, live theatre and Wolfgang Puck’s, since they will have had little exposure to Western culture and amenities to begin with. To avoid stepping in poop, and over derelicts, they will avoid Union Square, Market Street and whatever remains of the public transit system.
Although they will probably want to get out of the house on Saturday nights, no one could accurately predict what young people will find entertaining in the year 2030. Regardless, with its spectacular scenic vistas, hilly streets that literally take one’s breath away, its cacophonous symphony of cable-car clang-and-clatter and wistful foghorns in the night, San Francisco will continue to hold a unique and powerful attraction for job-seekers who shun boring places. Although the old San Francisco may be dying a painful and appalling death, the new one continuously under construction promises to extend the city’s life indefnitely.
Summer Doldrums It Ain’t
The dog days of summer have returned with a vengeance to Florida this year, especially in my home. The air conditioner’s condenser coil sprang a leak, which is hardly unusual considering that it’s eight years old. What is unusual, and causing more than a little inconvenience, is that the broken part will take a month for the factory to replace. So far, I haven’t been able to determine why the manufacturer, Lennox, would be having such a hard time scrounging up the part. Regardless, if you’re in the market for a new cooling system, consider Trane, Rheem or some other brand before you plunk down $8k on a Lennox system that could fail in the intense summer heat of such hellholes as Miami, Phoenix, Houston or Charleston. The interior temperature of my home has continued to rise daily and is now at 91 degrees. There is no cooling it off at night, either, since the air has been soupy, with temperatures only a few degrees cooler than during the daytime.
It’s an odd time of year for the pace of so many things to be quickening. The stock market, for one. Far from being locked in summer doldrums, the bull rally in the lunatic stocks has lurched into high gear and is being loosely controlled by the one-decision whizzes who manage money. They are not so much pushing shares higher as allowing them to rise on urgent short-covering to speculative heights that in the past have invariably led to disaster. The talking heads say investors sniff Fed easing, finally — and who could begrudge them a wild display of revelry to make up for their merely festive toga party earlier in the year, after they realized the central bank had no plans to loosen.
Six-Three = MAGA High-Fives
On the legislative front, the Supreme Court’s conservative majority has six-three’d a bunch of bad laws that 1) excessively regulated our right to bear arms; 2) allowed ‘Joe Biden’, with an imperious sweep of the hand, to cancel more than a trillion dollars of student debt; 3) allowed the admissions offices of Harvard and the University of North Carolina to practice reverse racism; 4) and, most recently, put the nanny state on notice that they will no longer be able to levy huge fines without giving alleged violators a jury trial.
Change is in the air, and it is not requiring a push from Trump and all the supposed ‘MAGA crazies’ to throw off the oppressive weight of wokeness and political ineptitude at the top. Although it appears that Kamala Harris is all but certain to oppose Trump in November, her fellow Democrats, especially Hillary, are not going quietly into the night. A long, hot summer lies ahead, and chants of ‘Burn, baby, burn!’ could turn Chicago into a literal blast furnace.
Dollar Derangement Syndrome
Of all the markets tracked by Rick’s Picks, the dollar arguably has been the most interesting. This might seem paradoxical, given the relatively placid look of the Dollar Index chart above. Although there has been moderate turbulence since early last year, the overall impression is of a transoceanic flight cruising within a vertical range of several thousand feet. Most striking has been the dollar’s ability to hold aloft a mere 4% below 2022’s peak of around 115. This is tough to square with apparent reality, since the greenback’s global hegemony for the last 90 years has come under increasing challenge — from the BRICs, for one: Brazil, Russia, India, China, South Africa, Iran, Egypt, Ethiopia, and the United Arab Emirates. It were as though they had ganged up on the schoolyard bully, changing the way international trade in goods and commodities is settled so that dollars are disfavored in every meaningful way possible. Most recently, the Saudis announced with some fanfare that they would sell as much oil as demanded of them for payment other than in dollars. As the chart makes clear, however, if this had any discernible impact on greenbacks, it was to have caused their slight rise. Why the seemingly anomalous behavior?
A logical explanation is that global trade flows are but a relatively small portion of the uses to which dollars are put. The entire market for crude oil, for example, is estimated at around $2 trillion per annum. This may seem like a big number, but it is a pittance in comparison to the dollar sums that change hands in financial markets. There the tallies reach into the quadrillions of dollars — thousands of trillions, that is, if such numbers are even imaginable when tied to the flow of actual business. Compare that to global GDP of around $120 trillion, and you can see the futility of BRIC or anyone else trying to push the almighty buck around with threats scaled to the relatively meager volume of world trade in goods and services.
Does It Matter?
So many dollars are wanted and needed simply because it is the only currency that can handle the action of tens of thousands of financiers all eager to bet untold millions of Other People’s Money on a roll of the dice. Do these mind-boggling sums matter? Some would argue that estimates that put the notional size of global derivatives markets as high as $2.4 quadrillion are just accounting fiction. They say the actual, gross value of all derivatives is closer to $15 trillion, and that anything higher than that requires a lot of double counting and loosey-goosey assumptions used to quantify the financiers’ bets.
But anyone who saw the film ‘The Big Short’ or read the Michael Lewis book on which it was based will understand why it is the economists and bankers, with their conservative estimates, who have it wrong. In the movie, some big-time blackjack players are working huge piles of thousand-dollar chips purchased directly from the casino teller. But the boisterous crowd that has gathered around them are making side bets with ‘notional’ dollars aggregating into the many millions.
How Leverage Works
In the same movie, we are startled to learn that the derivatives market for insuring bonds is 20 times the size of the bond market itself. Does anyone actually believe that a crisis in the bond market would have no impact on all of the 20x money? Okay, it’s just a bunch of hedges. But when they unravel someday, as seems likely, it will wipe a very long string of zeroes from the global balance sheet. And while the implosion may be a zero-sum game between borrowers and lenders, the money involved will be lost to both parties and to the banking system as a whole. Regardless of whether the sums are considered as ‘gross’ or ‘notional’, they will never again buy a pearl necklace, a home in the Hamptons or a Ferrari.
Memo to the BRICs and other sovereign entities suffering from Dollar Derangement Syndrome (DDS): Trying to replace urgently wanted, and used, dollars with something else is a non-starter. It also raises the question whether we want to pay for all of our stuff, particularly energy, with hard, honest money that is tied to gold. That would be powerfully deflationary, a topic for another day.