Different this time?

If you read this blog, you are no doubt aware that the author of these many tomes thinks that stock markets worldwide are primed to fall very significantly at some point, just like they did in 1981-82, 1987, 1990, 1998, 2000-01, 2007-08 - you get the picture. This will happen again, it is only a matter of time. 

With the stock markets having reached new heights in January, but not having yet recovered above those heights after their pull-backs in February - in spite of massive buy-backs fueled by Trump’s tax cuts - this inevitable drop may be very close indeed.

So what? 

I have been through a number of very serious, and somewhat less serious downturns in the past 35 years. Every single time, the markets have roared back to new highs. If markets drop, history suggest that they will recover, and just continue their march to new heights. Stay in, and all will be well. For the last 100 + years, this formula has worked.

Unless you live in Japan. In 1989, the Nikkei 225 Stock Index, Japan’s primary stock market, topped out at over 38,000. In late 1989 and 1990, it started to drop, and then plummeted to under 20,000 – about a 50% decline. Today, it is flirting with 22,500.

Unlike what happened with the DOW and S&P 500 over the past 100 years, after the Nikkei 225 Stock Index dropped in 1990, IT NEVER RECOVERED!  It is still down over 40% from its 1989 highs. Here is a chart that well illustrates the drop.

 

Why has the Nikkei never recovered? Are there any similarities between the situation Japan faced in 1989 and since, and what we face today that suggests that a similar fate could befall our markets after the next inevitable drop? Let’s look at what happened and at what is still happening in Japan.

Japan was massively over-leveraged in 1989, after having experienced one of the most historically significant real estate bubbles in human history. In the 1980’s, the Japanese real estate bubble became so crazed that borrowers were able to purchase three-generation mortgages, and the value of the land surrounding the Imperial Palace was higher than that of all of the real estate in the State of California.

Japan had also started to age significantly about that time, as its birth rate plummeted well below the rate needed to replace the population. The birth rate has never recovered, and Japan now has the second oldest population on Earth.

Japan, after a fantastic decade in the 1980’s, which saw it grow to an export-based economic power-house, faced significant pressure from its export partners in the USA and Europe to restrict its exports, and to locate production in those countries, especially production of automobiles.  

Finally, the Japanese government, in an attempt to stimulate the economy started borrowing and spending massive amounts of money. Today, on a debt to GDP basis Japan is the most indebted industrialized country on Earth, with the government owing more than 250% of the country’s GDP in debt.  

Why does any of this matter, and how may it have impacted Japan’s stock market?

A stock market is an almost direct representation of the economy. The stronger a given economy, the more robust will be any associated stock market.

The Japanese were hit with a number of very serious economic impacts at about the same time, especially the drying-up of leverage that drove a collapsing real estate bubble; new export restrictions; and an associated stock market pull-back. 

These, in and of themselves, would not normally have been fatal to a stock market recovery. Although the Japanese were very slow to deal with the mass of bad debt following the collapse of the real estate bubble, they did eventually sort much of this out. So why has their market never recovered?

What I think has limited the Japanese stock market recovery has been demographics. Retired people earn, borrow and spend far less than working people. An ageing and aged population has meant the slow strangulation of domestic demand in Japan, and while productivity and technological change no doubt drives some new growth in the Japanese economy, this has not been enough to off-set the drop in demand. 

The fact that the Japanese do not accept immigrants like, for example, Canada or the USA, has meant that they have not been able to import new domestic demand to replace the demand that has been lost owing to their ageing population. 

In short, retirees are killing that economy. As the economy has stagnated, so has the stock market in Japan reflecting the basic reality that a stock market is not going to go up if economic demand is moving down.

What about us?

We have a series of bubbles occasioned by the lowest interest rates in history, including a real estate bubble and a bubble in the stock market. We having looming and active trade wars that may hit our exports hard. We have very little room left to borrow so as to spark new demand. And, we have an ageing population, with the number of retired people set to double as a proportion of the population over the next 20 years or so.

In many respects, we are the Japan of 1989. This is serious.

I have previously highlighted Keynes v Hayek on this blog. Both the “prime the pump” theory of Keynes and the “let the recovery happen” theory of Hayek in response to economic downturns assume economies have increasing economic demand via expanding populations and increased innovation.

But what if the opposite is true?

The great economic policy crisis of our time may be that we don’t actually have an economic theory that addresses a situation of long-run flat or even negative economic demand – a naturally retracting economy, as opposed to a naturally expanding one.

The next serious stock market pull back is coming – there is always another one. 

No one knows when it will hit, but one may want to start to to question whether the logic of old – “stay in and all will be well” will apply this time. At the very least, if we experience a Japan-light scenario, the market will recover, but only very, very slowly.

What does Mueller know?

Mueller is MILES ahead of his opponents, both political opponents and all present and future defendants. 

W-I-R-E-D magazine has been consistently providing some of the best coverage of the investigation.

Here is what they had to say about what Muelle knows..

"The sheer volume of what Robert Mueller knows is staggering. Perusing his various court filings since last September makes clear he knew the individual changes Paul Manafort made in a specific Microsoft Word document; he knew that Dutch lawyer Alex van der Zwaan was lyingabout what he did on behalf of Manafort and Gates; he knew the specific times Russia military intelligence officers were searching specific wordsway back in 2016; he knew the specific cryptocurrency transactions used to register the Russian intelligence agency accounts; he knows what the hired trolls at the Internet Research Agency were writing in emails to their family members in 2017; he knew the messages Manafort was sending on encrypted messaging services."

and...

"...the signature lesson of Mueller’s inquiry at every turn has been that his investigators knows far, far, far more than anyone in the public expected. Just ask the GRU military intelligence officers who are sitting in their office wondering how Mueller knew that on June 15, 2016, between 4:19 pm and 4:56 pm Moscow local time, they searched the web for the English phrase “company’s competence” hours before it appeared in the inaugural blog post by “Guccifer 2.0”?"

See here...

https://www.wired.com/story/what-robert-mueller-knowsand-9-areas-hell-pursue-next/

It is very well worth a read.

Trump-Putin

There is a solid argument for talking to Russia, but that is not what is going on.

Trump either colluded, or he is compromised. He needs to go.

Over to you, Republican patriots. What are your wealthy backers telling you to do? One more tax cut before impeachment?

Mueller Goes Political

Mueller charged 12 Russians with conspiracy against the USA for having hacked the Democratic National Committee - the source of the WikiLeaks - the day before Trump's meeting with Putin. 

The timing of these indictments was 100% political.

Mueller has entered a new phase in his investigation. The timing of the indictments is designed to have an effect on Trump's foreign policy vis a vis Russia - to expose it as a dangerous dalliance with a perpetual enemy of America - and to subvert his political support at home by showing that Trump is dancing with the devil.

He would not have done this unless he was VERY confident about the indictments to follow.

A few notes.

The DNC e-mails released on WikiLeaks were NOT fake news, and revealed a deeply demented politics at the heart of the Democratic Party, led by Hillary Clinton and her minions. These people are deeply corrupt. She is only a few months away from announcing that she will run again! I think her daughter will be her running mate.

Trump's foreign policy is not totally crazy. 

The USA is massively in debt, and simply cannot afford to engage the world as it has in the past. Seeking negotiated settlements with North Korea and the Russians is logical where another war is simply not affordable. The problem is not the policy, but how Trump has gone about it, favouring fake personal relations with dictators over solid diplomacy. 

On that, asking NATO to spend more on defence is the same thing that Obama did. The difference is how the request was made; one with diplomacy that befits an ally; the others like a jerk who thinks allies are employees.

Trump's trade policy has some virtues. 

Addressing Chinese demands that US companies hand over the intellectual property before accessing the Chinese market, and forcing the Chinese, South Koreans, Japanese and Europeans to stop discriminating against US auto exports with massive tariffs, where the US has virtually none against their auto exports, was long overdue. The problem is that he has not been able to resist expanding the trade war that he has started.

New indictments are to follow...

The West

Times, they are a changin’…

Here are just some of the drivers pushing hard against the political, social and economic status quo that was crafted by the West and which has existed, in some cases since the end of World War Two.

Western Domestic Politics - Obama’s election, which was followed by Trump’s, reflecting the almost complete Red-Blue divide in the USA that is neutering the ability of that country to maintain world leadership and the related institutions; Euroscepticism, including at least Brexit, Italy’s Five Star Movement, the second-place finish of Le Pen as candidate to be the President of France, and perpetual Greek dissatisfaction as well as that of almost all of the other member states; Scottish nationalism that will destroy the UK if Brexit is successful; The rise of Muslim dictatorship in Turkey; Merkel’s weakened position in Germany, and the subtle rise of German nationalism. 

The West has probably not been as weak as it is now in three generations. The problem is both material and metaphysical - to a very real extent, many in the West no longer believe in the West anymore.  

Economics - Greek insolvency and economic depression, and impending debt crises in many other nations including the USA and many Western states which cannot ever pay their debts, and which will have tremendous difficulty even financing their debt in a world of…rising interest rates, which are guaranteed to burst asset bubbles in stock and housing markets, and spark a worldwide recession; The impending insolvency of domestic pensions in many Western states, especially in the USA, which will exacerbate political extremism; Emerging market vulnerability to these other events, which could see emerging market depression in many countries that were formally “non-aligned” which could have a significant impact in international relations (read – China takes over); Trade wars, unlike any that we have witnessed in generations, that will definitely hurt economic growth and wider international relations.

Economic threats are serious enough to remake domestic and international politics in a way that results in a “new world order” that is far less friendly to the West and its related ideals. The West is losing the ability to set the agenda.

International Relations - A newly aggressive Russia, now actively expanding in Syria, Ukraine, and likely trying to push into the Baltic States and the Caucuses region soon; A newly aggressive China, asserting ownership over the South China Sea and arming it to the teeth, while making new veiled threats against Taiwan while expanding its soft power influence throughout Africa and Asia; A nuclear-armed North Korea, guaranteed to cause serious reflection about rearmament - including the nuclear option - in South Korea and Japan especially in the face of the questionable attempt to disarm North Korea on the part of Trump; The twin disasters of Syria and Libya with the rise of ISIS all over the world, following hard on the catastrophe of Iraq, and the quiet, on-going bloodletting in the proxy war between Saudi Arabia and Iran in Yemen, all signalling the present and continuing destabilization of the entire region; The economic stagnation and slow reversion to autocracy and kleptocracty in Africa and elsewhere, especially in Venezuela and Turkey; The eventual loss of Afghanistan and much of Pakistan to the Taliban and the continuing challenge of international terrorism.

As the West neuters itself domestically and faces significant challenges to the world it crafted stemming from impending economic stresses, the West’s historic and other opponents are moving in to claim territory, allies and access to resources. China will come to effectively rule most of Asia.

There are other significant threats as well – environmental (Climate Change) and technological (AI). 

The world as we know it will not exist in five years.  It will take a giant of a person - an enlightened person with significant foresight - to move from this chaos to a new paradigm with a positive outcome.  

We have Trump.

The Amazing Fossa!

A Fossa is an animal that lives in Madagascar! 

In fact, the Fossa is the LARGEST mammalian carnivore on the island! They have been compared to a small cougar. They can live up to 20 years in captivity.

Unlike some animals that are either nocturnal or diurnal, the Fossa hunts both day and night. 

Their favourite prey is Lemurs! It also eats lizards, birds, and rodents.  

Buy-Back Binge!

A few blogs past, I noted that stock buy-backs were pumping the market, especially with money repatriated from overseas courtesy of Trump's tax cuts. The result has been stock market appreciation even in the face of rising interest rates, and looming trade wars world-wide, both of which should be pushing the market lower as the free money dries up, and economic prospects dim.

According to Bank of America analysis, the only net buyers of stocks in the first half of 2018 were companies engaged in buy-back activities, especially in the high tech sector.

https://www.zerohedge.com/news/2018-07-04/only-stock-buyers-first-half-were-buybacks-bofa 

Without this buying, stocks would have been flat, or even down. Stocks have not been rising, as a result of company performance but as a result of company buy-backs, especially in the tech sector.

This free cash from tax cuts will dry up soon, and the buy-backs will then slow dramatically. When this happens, the natural effects of rising interest rates and trade wars will be reflected in market prices, which will drop markedly. 

We had a taste of what is coming in February when, just before the tax cuts hit, the DOW dropped more than 1,000 points in one day.  

Trump promised that these cuts would stimulate economic activity and benefit everyone. Selected companies made a big show of giving bonuses to their employees from the tax cuts to illustrate just how wonderful the tax cuts were going to be for everyone. It was all "smoke and mirrors". 

The fact that the vast majority of this cash actually went almost immediately into buy-backs to pump stock prices - which produces nothing and employs no one - shows the continuing moral bankruptcy on the part of the wealthy in the USA. 

When the rich have the vast majority of the wealth and income in that country, and America is a country of rich and poor people only - with the Middle Class merely a pale shadow of itself - the rich will have but one problem left, namely that the poor can still vote. "There is no better predictor of future class warfare than the rapacious greed of the wealthy." 

Cohen Rocks and Rolls! AND Collusion versus Obstruction.

As I have noted here many times, Mueller needs Cohen, Manafort and Hicks to flip. If there was any collusion between Trump et al and the Russians - i.e. Clinton e-mails guaranteed to land her in prison and hand the presidency to Trump, in return for the relaxation of sanctions on Russia - these people would know.

Manafort goes to trial on July 25th. I would think that his lawyers are negotiating with Mueller right now.

Cohen is ending his defence agreement whereby his counsel shares information and tactics with Trump's lawyers, and he advised ABC news over the weekend that, "My wife, my daughter and my son have my first loyalty and always will. I put family and country first." 

A.K.A. "I'm ready to roll."

Cohen had previously said that he would take a bullet for Trump. Apparently, there was an asterisk at the end of that promise, which highlighted the following qualifier...

"'Take a bullet' should be interpreted so as to say, "Unless, in the fullness of time, I should face the prospect of incarceration stemming from various activities undertaken on behalf of the aforementioned Donald Trump, in which case I will review the 'take a bullet' undertaking in the light of my preference to remain at liberty and to not be incarcerated, and I will - after due consideration - flip like a pathetic "nothing burger" at the BBQ of perpetual fear and loathing.'"  

Translation - "Mr. Mueller, make me an offer and I will spill every bean I know of, everywhere."

One would think that Cohen will also cooperate with the NYC Attorney General, and that he has a relentless pile of damaging evidence to offer on Trump, far beyond anything related to possible collusion. Given that sitting presidents probably can't be charged with a crime, Trump may have to survive Mueller's investigation and run for office again in 2020 just to stay out jail.

Oh...where is Hope Hicks?

But what about the possible outcome of this investigation and Trump's future? 

The evidence will lead where it will lead, but from a political perspective there are only two real possibilities here.

1. No matter what else the investigation may lead to, if it leads to collusion-related charges against Trump's son and son in law, Trump is finished. 

2, If it does not lead to any collusion-related charges, but only to more obstruction charges and, most importantly, only to an allegation of obstruction against Trump related to the firing of Comey, then he will win the next presidential election in a landslide.  

A great and greatly flawed man speaks...

"Nothing would please the Kremlin more than to have the people of this country choose a second rate president." - Richard M. Nixon