Tuesday, 10 October 2023 — Gold Coast, Australia

By Vern Gowdie Editor, The Daily Reckoning Australia

[7 min read]

Dear Reader,

‘You have power over your mind — not outside events. Realize this, and you will find strength.’

~ Marcus Aurelius

Real knowledge is in knowing True Value

We have no control or influence over what the Fed or any central bank may or may not do.

We cannot control the level of incompetence exercised by elected officials.

The only thing we have power over are our own thoughts and actions.

Knowledge is the key to successfully navigating, what I anticipate, is going to be a very challenging period ahead.

What we think we know (based on a multitude of long-established valuation metrics) is the US share market peaked in late 2021, at what can be best described as…an extremely over-valued level.

Historically, over-valued and under-valued markets go through a time-honoured process of ‘mean reversion’…falling to lower levels or rising to higher levels.

John Hussman’s ‘Durable Gains’ chart — tracking the emotional ebb and flow of the S&P 500 (blue line) against the mathematically determined ‘True Value’ (green line) since 1928 — illustrates how, over the longer term, the S&P 500 ‘ducks and weaves’ its way around the level of ‘true value’.

When social mood is less than upbeat — Depression, The Second World War and the Inflationary 1970’s — the S&P 500 falls below its True Value…a signal to buy…one most people ignore.

Conversely, if people’s spirits are buoyed by a feeling of prosperity (the 1950s and 60s and 1995 onwards), the S&P 500 is pushed higher by a feel-good air of optimism…a signal to reduce exposure…again, one most people ignore.

In more recent episodes of exuberant pricing — Dotcom & US Housing bubbles — the S&P 500 took flight from its line of True Value.

As we know, these flights were fanciful in nature and fleeting in duration.

After the Dotcom bust, the S&P 500 almost reverted to the True Value line.

The GFC dished out much harsher treatment to share investors…taking the S&P 500 below its true mathematical value.

In response to the greatest credit crisis since The Great Depression, the Fed — courtesy of multiple rounds of Quantitative Easing (QE) and ultra-low rates — launched another flight of fantasy…one, that until recently, had defied the gravitational pull of True Value.

However, as we’ve witnessed many times before, excesses ultimately do get corrected.
And, that process has now begun.

From its late 2021 peak, the S&P 500 index has only surrendered around 10%.

On an individual share-by-share basis, it has been a different story.

The price carnage for some shareholders has been brutal…especially those who went for the ride on Peloton (couldn’t resist)…

Jeremy Grantham has spent decades researching financial markets and bubbles.

His timing is not always perfect — he was early on his calls with Japan, Dotcom and US Housing — but, in the end his analysis proves to be highly accurate.

Here’s what Jeremy Grantham has learned from his 50-plus years in the investment business (emphasis added)…

‘The history books are pretty clear, there doesn’t have to be a pin. No one can tell you what the pin was in 1929. We’re not even certain in 2000. It’s more like air leaking out of a balloon. You get to a point of maximum confidence, of maximum leverage, maximum debt, and then the air begins to leak. 

‘And I like to say, the bubble doesn’t reach its maximum and then get frightened to death, what happens is the air starts to leak out slowly because tomorrow is a little less optimistic than yesterday. And gradually, people begin to pull back. And the process is very interesting, in that before the end of the great bubbles, and there’s only been a handful, so we can get carried away with over-analysis.

‘But before the great bubbles ended in 1929, 1972, and in 2000 in the US, the three great events of the 20th century, there was a very strange period in which, on the upside, the super-risk, super-speculative stocks started to underperform.’

Outside of the ‘Magnificent Seven’ (Apple, Microsoft, Nvidia et al) there’s a growing list of dismal individual stock performances. The super-risk, super-speculative stocks [have] started to underperform…this folks, is the air beginning to leak out of the bubble.

The S&P 500 (due to the heavy weighting to the ‘Magnificent Seven’) is yet to fully reflect the shift in underlying investor sentiment. But, if the pattern of past great bubble-busts is repeated, it will…especially when the algorithmic index funds are triggered to SELL!!

As a cashed-up outsider looking in, I find current market conditions fascinating.

The Fed’s ‘higher rates for longer’ policy is impacting the long-end of the bond market…the cost of debt is getting uncomfortably high.

Which brings us to…

This chart should have you quaking with fear

The last time the US 10-year bond rate was around the 4.7% level was in late 2007…just before the GFC.

The difference between then and now?

An additional US$44 trillion (that’s 44,000 billion dollars) has been added to the US debt pile.

Wow. The worst financial and economic crisis since The Great Depression was triggered by a debt load that was a little over half of what it is today…and, everything is ok?

Have we collectively lost our senses?

That’s a rhetorical question.

Anyone who thinks this is going to end with a ‘soft landing’ is a supreme optimist.

We have THE most OVER-valued share market in history together with the greatest debt load in history, set against a backdrop of increasing geopolitical uncertainty and persistent inflationary pressures. What could possibly go wrong?

Another rhetorical question.

How the S&P 500 gets down from its emotional high to True Value (about a 65% fall) is going to make for captivating viewing.

While this plays out, I’m very happy to be a spectator earning 5% on my cash.

Until next week.

Regards,

Vern Gowdie,
Editor, The Daily Reckoning Australia

By Bill Bonner Editor, The Daily Reckoning Australia

Dear Reader,

Laugh…and know.

~ Marcus Valerius Martialis

Every day the war drums beat louder. Asia Times:

‘US provocatively points new nuke-tipped missile at China

‘The US has just tested a new type of nuclear-tipped air launch cruise missile, reaffirming the viability of the air-based leg of its nuclear triad against evolving threats from near-peer adversaries China and Russia with profound implications for regional stability and global non-proliferation norms.

‘This month, The Warzone reported that the US Air Force had conducted nine flight tests of its future nuclear-tipped AGM-181A Long Range Stand Off (LRSO) cruise missile prototypes, including one test with a mock nuclear warhead.’

Waning Support

When Europeans were just beginning to discover North America, an intrepid explorer spent time with the tribes along the Hudson Bay of Canada. He reported that one day, the young men of the tribe took their weapons and headed north. He thought they were on a hunting party. For weeks they continued…until the trees had disappeared …and it looked like desolate tundra. Finally, they found what they were looking for — an Eskimo village. The Eskimos were different people — different language, different culture…Wasting no time, the Indians attacked and slaughtered everyone in the village — men, women, children.  

They were on a crusade. And they targeted people they must have viewed as ‘bad.’ Were they bad because they worshipped other gods? Or because they worshipped no gods at all? Were they bad because they had bad breath…or because the Indians lived on a vast, mostly-empty continent and the Eskimos were the only plausible ‘enemy’ within range?

The war in the Ukraine seems to be winding down. When Zelensky spoke to the UN last week, many of the seats were empty. Russia is winning; the rest of the world is losing interest. Reuters:

‘US public support declines for arming Ukraine, Reuters/Ipsos poll shows

‘Support for U.S. weapon shipments is down from May, when a Reuters/Ipsos poll showed 46% of Americans backed sending arms, while 29% were opposed and the rest unsure.

‘Ukrainian forces have retaken a series of villages and settlements in the counteroffensive that began in June, but its soldiers have been hampered by vast Russian minefields and trenches.

The White Flag

The Ukraine is running out of weapons, money, and enthusiasm. Most important, it is running out of meat for its grinder. The average age of its soldiers is said to be 40 years. Young men leave before they can be drafted; they aren’t willing to die for whatever crusade Zelensky is leading.    

What is surprising to us is how many are still there. All Russia asked was to keep NATO out of the Ukraine. Dying so that your country can join NATO does not seem particularly attractive.

In a similar situation young Americans would scurry out of town too. At least, that was the finding of a survey reported in the Daily Mail. Voters were asked:

‘Assume there is an invasion of America by another country and they were on the brink of victory. 

‘You can either almost certainly die fighting for your country, or surrender and survive. What would you do?’

Of young people, 18–29, only 30% would fight.

No matter. History tells us that it is easy to gin up a war fever and get millions of people killed for no apparent reason. All you need is an enemy.

And right now, America’s foreign policy experts…its glorious think tank generals…and its newspaper heroes turn their eyes east — to China.  

What have the Chinese done to us? Don’t know? But that was the point of the ‘Report from Iron Mountain.’ An enemy doesn’t have to do something, he just has to be something — a useful foe. 

The Health of the State

China is the world’s greatest success story — ever. Since 1979, it brought 800 million people up from the grit and slime of Mao’s communist poverty into the modern world of capitalism, decent salaries, abundant food and technological wonders, such as its high speed rail and Shanghai’s maglev train. The US can’t match it.  

But instead of admiring it…trying to learn from it…and hoping to profit from it, all of which would benefit the American people, China is becoming the enemy the empire elite need. Richard Cullen:

‘Bad-tempered coverage of China continues to flourish across the entire US media. It ranges from fire-breathing to pearl-clutching. Most commentators look daggers at Beijing in a dozen different over-cooked ways — and especially at the Communist Party of China — while reminding readers and viewers of America’s continuing paramount superpower status.’

Truth emerges, often, in unexpected places. The ‘Report from Iron Mountain’ may have been a spoof, designed only to elicit a knowing chuckle from the cynical cognoscenti, but it reveals the real cause of war better than any group of federal hacks ever could.

The supposed background is that a 15-member group of pipe smokers got together in a Special Study Group to speculate on the consequences of ‘peace.’ They met in a nuclear-secure bunker under Iron Mountain.

They came to the conclusion that government is incompatible with ‘peace.’ It can’t exist without war. Nation states only exist so they can make war.   

There was nothing new about this insight.

‘War is the health of the state,’ said Randolph Bourne. War is not just useful to government; it is government. The defining difference between the US government and the Catholic Church, Kiwanis Club or Walmart is that the former uses force to get what it wants. The latter do not. Without the use of force — police, jails, wars — the ‘state’ would have no reason to exist.  

Tune in Thursday…for more on why war is inevitable…and why the US will probably lose it.

Regards,

Bill Bonner,
For The Daily Reckoning Australia