Thursday, 9 December 2021 — Wollongong, Australia

By Greg Canavan Editor, The Rum Rebellion

[6 min read]

Dear Reader,

As I mentioned last week, tomorrow will be your final edition of The Rum Rebellion.

From next week, you’ll automatically start receiving The Daily Reckoning Australia. You’ll still hear from Vern Gowdie and Bill Bonner, and Dan Denning and myself occasionally. But The Rum Rebellion will be no more.

For my final essay, I thought it might be useful to describe how I see the state of financial markets right now.

Which is kind of useless, because the market doesn’t care for how I see things. And, to be honest, nor should you.

What did the Bible say? Trust no man?

Something like that.

Anyway, this is my soapbox today, so I’ll have my say regardless.

Firstly, it shouldn’t be controversial to say that the markets are madness.

Exhibit A is the Nasdaq. Here’s a long view to show you the melt-up:

This is what a bubble looks like. It’s continued to inflate this year, with every dip bought.

You can talk about and consider all the short-term reasons behind this dip buying, but the bottom line is that we’re in a bubble of epic proportions.

But if you’ve been reading Vern’s stuff for a while, you already know that.

Here are the top 10 stocks in the Nasdaq 100. They make up over 50% of the index:

What about the ‘more diversified’ S&P 500?

Apart from Berkshire and JPMorgan, the top 10 stocks are the same:

For every dollar some unthinking chump puts into a ‘low-cost’ international index fund, this is what they’re getting.

Such a diversified portfolio…

Now, let’s descend into the forest and get amongst the trees.

What’s behind this latest ‘buy the dip’ stupidity?

Well, for one, the global media empire’s fear campaign of the new ‘OMG, Omicron!’ variant didn’t have legs. Viruses mutate. It’s what they do. And they mutate into less deadly variants. Not a good story for the media and politicians whose business models thrive on fear.

The other buy the dip excuse is ‘China stimulus!’.

From Reuters:

‘BEIJING (Reuters) — China’s central bank said on Monday it would cut the amount of cash that banks must hold in reserve, its second such move this year, releasing 1.2 trillion yuan ($188 billion) in long-term liquidity to bolster slowing economic growth.

‘The People’s Bank of China (PBOC) said on its website it would cut the reserve requirement ratio (RRR) for banks by 50 basis points (bps), effective from Dec. 15.

‘The world’s second-largest economy, which staged an impressive rebound from last year’s pandemic slump, has lost momentum in recent months as it grapples with a slowing manufacturing sector, debt problems in the property market and persistent COVID-19 outbreaks.’

When China has done this in the past, the liquidity has largely gone into property development. But this time, we know that China is much more concerned about the property bubble expanding again.

So it will be interesting to see where this liquidity flows.

Does it mean the iron ore miners are past the worst of it?

Not at all. In my view, they’re just enjoying a dead cat bounce.

It’s a similar picture for Fortescue Metals Group Ltd [ASX:FMG]:

But Rio Tinto Ltd [ASX:RIO] is still some way from resistance. It may have more legs than the other two…or it may not even get close:

The bottom line is that the long-term supply and demand situation is no longer favourable for the big miners. Their bears markets have only just started.

China has no intention of restarting the property development boom. They’re much more focused on managing the fallout of the forced deleveraging it imposed on the sector earlier this year.

As the Financial Review reported yesterday:

‘Any pretence that Hui Ka Yan, once China’s richest man, remains in control of events at China Evergrande Group ended this week as state representatives took the majority of seats on a new risk management committee established by the heavily indebted developer.

‘In a statement issued on Monday night after shares in Evergrande fell to a record low in Hong Kong trading, Mr Hui said the new committee would not report to the board “but will play an important role in mitigating and eliminating the future risks of the group”.

‘“The working group will take over Evergrande and find third parties, especially state-owned developers, to take over its development projects,” said Chen Long at Plenum, a Beijing-based consultancy. “After that Evergrande is done. Original shareholders including Hui Ka Yan will be wiped out.” ’

This is a managed decline, with the bulk of the once private company being absorbed into state-owned agencies to avoid contagion.

There won’t be a collapse. But there won’t be a rebound, either.

So there you have it.

The US stock market is a mega-cap-driven tech bubble. And China’s days of iron ore hoovering growth are well behind it.

That should set us up for a very interesting 2022.

To continue following the story, keep reading The Daily Reckoning Australia. If you’d prefer to trust (and follow) no man (or woman), you can always unsubscribe.

So it’s goodbye from me, and thanks for reading.

Cheers,

Greg Canavan,
Editor, The Rum Rebellion

By Bill Bonner Editor, The Rum Rebellion

We’ve left Baltimore behind. After sufficient testing and certifying to the Irish authorities that your editor was not carrying the plague, we’ve arrived back in Ireland.

And we wrap up our history of the US’s Nightmare Winter of 2033 or 2028 or 2025?

Recall that the feds are trying to do two dangerous things at once.

First, they aim to reach net-zero carbon dioxide emissions by 2035. Second, they expect to pay for the ‘transition’ to green energy — along with routine federal budget deficits and trillion-dollar boondoggles — with printing press money.

This was never going to end well.

So we’ve been looking at what the end might look like. When we left you yesterday, the power grid had failed and mobs were looting stores for food.

Thousands died in a few horrible weeks of sub-zero temperatures

The straw that breaks the camel’s back

But now, after a thaw, the sun has come out and the juice is on. Can we return to normal?

The answer is probably no.

We remind readers that the ‘Great Freeze’ is only one of many different possibilities.

Already, the camel sags and staggers. We don’t know what the final straw will look like.

It could be a breakdown in the power system on the Fourth of July. Or a trial verdict that goes the ‘wrong’ way…followed by rioting all over the country.

Or maybe just another crash in the housing market.

Houses are rising in price three times as fast as the cost of living. People are once again ‘taking out’ equity.

As we reported last week, the median house price is now above US$400,000. If you are aged under 30, the average down payment is only about 6%. That leaves the average young buyer under 30 with a US$376,000 mortgage.

As prices rise, so will mortgage rates. And each 1% increase in the mortgage rate adds US$3,760 to the annual cost.

How long before that camel’s back gives way?

Hell breaks looser

We also remind dear readers that things don’t ‘just happen’.

The #7 ball hits the #3 ball and drives the #10 ball into the side pocket. If you only see part of the scene, you might think that the #10 ball went in by itself.

But there is always more to the story.

How do you see it? Here’s a good place to start: follow the money.

In the US today, money is created by the banking system, which is run by the Federal Reserve, which is run by the government. ‘Printing’ new money boosts up asset prices, which are owned primarily by the rich.

The more dollars the Fed creates, the richer the rich get.

And the more the movers and shakers think they have unlimited funds to do whatever they want, the more jackass programs they undertake…and the more real wealth they squander.

Investors back zombie businesses and buy meme stocks and NFTs. Corporations borrow to do mergers and acquisitions and buy back their own stock.

The government spends on wars, ‘social infrastructure’, and climate control.

Deficits and debts rise…the rich get richer and richer…and the elite becomes more and more corrupt…

Prices go up…inflation gets worse and worse…and people get angrier and angrier…

And then, the trigger: a cold winter…a hot July…a Lehman-style bankruptcy. Something suddenly snaps.

And all hell breaks loose.

Full-scale catastrophe

People lose faith — in their leaders, their neighbours, their money, their laws, their system of government, and their institutions.

And then, you don’t just have a financial problem on your hands. Not just a stock market crash, either. Nor just a recession/depression.

You have a full-scale social and political catastrophe…chaos…and a Winter Nightmare.

Like Russia in the winter of 1917, Germany in the winter of 1921, Argentina in the 1970s and 1980s, Zimbabwe 2005–present, and like Venezuela right now.

Already, differences of opinion are barely tolerated. People are ‘gunning up’ in anticipation of a showdown.

Imagine what it might be like when food disappears from the supermarket shelves…when people ‘shiver in the dark’ and the gas pumps run dry…and when prices rise at a 50% rate.

And that is where our ‘history’ ends…

The stage has been set. The actors have learned their parts. The orchestra is ready to play. The bar is closing.

And the show must go on.

Regards,

Bill Bonner,
For The Rum Rebellion