Bill Bonner writes This Has Predicted Every Market Crash in History.
I recreated the chart in Fred and added trendlines. But let’s tune in to Bill Bonner.
“Buy the dip” has worked for the last 38 years. And now, investors are more than 100% convinced that it will work again. But they are wrong. Every major stock market decline and every recession in the last 100 years was preceded by the Federal Reserve raising short-term interest rates by enough to provide the pin to prick the balloon.
Note the emphasis on every. Yes, there have been periods where the Fed raised rates and a recession didn’t ensue. Everyone knows the famous saying about the stock market having predicted nine of the past five recessions! That may be true, that rising rates don’t necessarily cause a recession. But as an investor, you must be aware that every major stock market decline occurred on the heels of a tightening phase by the Fed. More importantly, there have been no substantive Fed tightening phases that did not end with a stock market decline.*
This is an economy built on debt. The whole capital structure – stocks, bonds, and real estate – now depends on excess debt… and more of it.
In a correction, the only way to stop stock prices from falling and the economy from shrinking is to bring in some more debt. But when you do that a few times, you are soon beyond Peak Debt… which is to say, you’re way over the legal limit.
Debt has been growing three to six times faster than income for more than an entire generation. This makes the old 1.5-to-1 ratio of debt to income seem quaint. It is now 3.5-to-1 nationwide.
Every penny in debt that we add now is a penny that cannot be repaid, not by any plausible combination of economic projections.
Because there is no way to “grow your way out of debt” when your income is falling while your debt is still increasing. Instead, you have to suffer the indignities of a correction, including a major reset in the stock market.
That’s what happens when stocks that are more than fully priced meet a debt load that is beyond 100% of capacity.
Bill Bonner
Word About Predictions
The chart shown does not “predict” anything, at least in a meaningful sense. It does show what eventually happens.
In regards to “rising rates don’t necessarily cause a recession” I would add that rising rates “never” cause recessions.
Recessions are caused by the inept policies the preceded the recessions.
Three rounds of Fed QE, even bigger QE by the ECB, suspension of mark-to-market rules, and massive global stimulus elsewhere sowed the seeds of the next recession.
The recession on deck will be a deflationary bust, not an inflationary one as we saw in the ’80s. Credit busts are deflationary by definition.
As I stated earlier today, Inflation is in the Rear-View Mirror.
Addendum
I originally posted a chart of the Prime Bank Lending Rate, not the Fed Funds Rate. They tell the same story.
Mike “Mish” Shedlock
link to vimaxmedan.xyz
link to pasutri-makassar.com
Well actually Dalio is with you on that, he says in his quaint and tidy economic-machine model that only productivity matters over the long run. Of course, his key audience, the economically illiterate political class, nods their heads at this in token agreement, only to then enquire among themselves how they’re going to keep the economy chugging along until the next election.
The answer is of course always the same: more debt, more spending. You and I understand that Keynesian pragmaticism is employed to create the depression-averting illusion that every actor in the economy is always getting richer, “numbers go up,” so the masses won’t collectively lose their faith in the markets. Human nature is just like that unfortunately: it’s not good enough to have economic security today: you need to know that everything is looking good 30-years down the line.
To satisfy this common superficial greed for long-term security, but only for the sake of surviving a 1930s financial deflationary depression, Keynes prescribes to politicians to wield the ludicrously unjust and unsustainable banking system to MAKE SURE the numbers keep going up. And the nations of morons out there go on being fooled like a donkey chasing a carrot stick because they accept and ignore inflation as unquestioningly as they accept and ignore the weather.
Well naturally, once Keynes justified temporarily creating artificial demand in the economy with debt, economically illiterate politicians, and the masses that voted for them, took that as a green light for decade after decade of non-stop borrowing. Because the average politician takes from Keynes, not as good prompt to ask whether or western banking as it evolved up to that point was a just and good idea, no, as you say, all that was taken from Keynes was “Demandz Iz Gud-4 Econemey”
Caution required. Association is not cause and effect. In the phase of the Industrial Cycle, not as its mistakenly called the business cycle, of over-extension, interest rates rise due to increase in demand. Central Banks mimic this effect and sometimes move faster than the curve. But they do not invent this trend, they add to it or subtract from it as they mistakenly did in the second half of 2015. Given the tax giveaway, the level of debt, and naturally rising interest rates, FED governors would be wise not to talk up interest rates so much.
There is this unfortunate focus on consumption as the driver of the economy, ever since Keynes was conveniently misunderstood by the Political Class. Stimulating consumption may have been the right thing to do in the very unusual circumstances of the Great Depression, but if any Central Bank (esp. the Fed) tried that today, all it would do is suck in imports until the currency lost trading value. Today, we need to focus on production. Say’s Law, and all that.
Rayner-Hills, quoting Dalio: “We’re going to have to move toward increasingly the making of purchases that put money directly in the hands of spenders …”
“Fundamentally, in real terms, when the Fed increases the money supply, all it does is steal economic resources. From those who have created them by way of effort. To those given privileged access to the fresh print. It doesn’t do anything else at all. The entire superstructure of pseudo economic’y sounding babble built on top of that transfer of wealth, is nothing more than an (unfortunately successful) attempt at obfuscating this theft.”
-Stuki
Well said! This is also the reason why Mish’s definition of inflation which takes into account credit, marked to market (although, marked to model probably would be more accurate) is excellent. The definition takes into account the debt games banks like to play such as “Let’s give ridiculous loans out for housing and education, backed by our government of course!” which causes inflation in items that (conveniently) don’t show up in the Fed’s “inflation report”.
link to youtube.com
Ray Dalio is important because I think he does, or will, represent the ruling mindset when the end of this long term debt cycle unfolds. I expect the FED will consider doing exactly what Ray Dalio says because they are much like him. That distinct brand of fatally timed clear thinking coupled with fatalistic naivety.
Mish you must be careful not to constantly underestimate cash-man Ray Dalio. Here are direct quotes of his three monetary policies from an interview.
“…then there’s a long term debt cycle that goes on 50 75 years, and it goes through its limitations when you have too much debt relative to income so you can’t service it anymore, and when interest rates go to zero so there can’t be stimulation we have run out of Monetary Policy Number One.”
“…and we have to go to Monetary Policy Number Two. Monetary Policy Number Two was quantitative easing. This happened in the Great Depression. It happened recently and that means the purchase of financial assets by the central bank. And then the sellers of those financial assets bought other financial assets, and they caused those other financial assets to rise in price. This had the effect of lowering [actual] returns and of those expected returns, and when those expected returns are low in relationship to [idle] cash that makes one almost indifferent, and so when you are buying bonds as the Fed is putting money in the system that person is going to then stop, so it’s [fundamentally] different, and that that’s called pushing on a string.”
“…and you’ll see increased exploration of the movement to make other forms of stimulation which I’m calling Monetary Policy Three. Monetary Policy Three will not be just through quantitative easing. Quantitative easing to buy financial assets from people who have them and then cash stays in the financial community. We’re going to have to move toward increasingly the making of purchases that put money directly in the hands of spenders because the linkage between having money in the financial assets [market] and having spending [in the real economy] is becoming weaker and weaker.”
@Kinuachdrach
And the key to encouraging real economy growth, is to let those who create and build something that adds value, keep the value they are adding. Rather than using a “money economy” imposed on them, to steal it, then hand it to idle leeches whose sole contribution is being part of the “money economy” social circle.
A prerequisite for that, is that the cost of obtaining a given unit of money, whether by trade OR BY PRODUCING IT, is equal to the value of that unit. Otherwise, the ones with the privilege to produce money at below cost, will just do that, instead of producing real economy goods and services. In the process, by necessity stealing all the value real they are able to obtain, from those who are producing it.
Gold and Bitcoin both, simply by virtue of anyone having equal opportunity to mine them, both meet that criteria. While any Fiat currency simply does not, as their whole purpose is specifically to facilitate those with the privilege to print them, to steal.
The money economy is important, but the real economy of goods & services is much more important. With all due respect to the Fed, the key issue is what we are doing to expand the real economy — to encourage the innovation that turns low value sand into high value computer chips. Or maybe, what we stop doing to inhibit that innovation. The key to an economy is production — getting the largest number of people to produce the largest amount of valuable goods & services.
They would be pissed off that someone had blocked the entrance to their cave. But there would be nothing much they could do with those gold bars.
Thought experiment: Supposing we could use a time machine to dump 1,000 tonnes of gold bars in front of a cave where our Paleolithic ancestors were squatting, naked and hungry. What would be the effect on our ancestors?
“It doesn’t work that way. The Fed stimulates lending or not.”
As long as The Fed has unlimited leeway as to what sort of lending it can stimulate, this is no constraint at all. Just announce you are now, and for the next generation, willing to buy unlimited amounts of billion dollar unsecured consumer debt issued to crack addicts in Harare at face value, as part of QE12. To “save the system” and prevent “tanks in the street” and “The Mexicans are mean and broke into your tent and stole your job na-na-na-na-na-na…”
Fundamentally, in real terms, when the Fed increases the money supply, all it does is steal economic resources. From those who have created them by way of effort. To those given privileged access to the fresh print. It doesn’t do anything else at all. The entire superstructure of pseudo economic’y sounding babble built on top of that transfer of wealth, is nothing more than an (unfortunately successful) attempt at obfuscating this theft.
Hence, as long as there is a Fed, and there is an all-powerful government de facto forcing commerce to be conducted in Fed notes, what you have is an all-powerful thief, with unlimited leeway to steal and redistribute as much as he fancies, operating entirely without any internally imposed constraints whatsoever.
Which resolves to, even when everything collapses from a literal lack of any economic resources; The Thief, and those closest to, and privileged by, it, will still be the last ones standing (look at Venezuela…..). The only means by which those guys will get their well-deserved comeuppance without first having eaten everyone else, is to either get rid of The Thief; or to weaken the authority of his enabling government to the point where they can no longer force, or even meaningfully influence, people to deal with him.
Anything else literally amounts to no more than mindless, economic’y sounding babble. Aimed at no more than trying to get The Thief and government to “use a little more lube and go a little easier on me, than you do on those guys, so I can appear relatively ‘successful’ compared to them.”
We’ve got 134,000 homeless people here in California now, roughly 25% of the entire country, despite 15 year mortgage rates under 4%. I view this entirely as a gift of our friendly Fed and it’s FOMC. Stay tuned; they’ll be bringing a slum to your town soon.
Great chart if anyone wants it type in Fedrates. At each peak instance the economy and markets were LESS able to handle the Feds rate hikes, the number at which the system breaks down is lower, and you can see by that line across the tops, that we are there presently at 1.5, though I think 3.5 for sure. For anyone with a thought, the implied market rate is declining, coincident with the beginnings of increased government deficit funding in 1980. Credit is in a bear market, and Mish right, inflation is the rear view mirror, the Fed sees modest GDP growth with little or no accompanying inflation? We already have asset inflation which prevents real GDP because the price of assets is out of reach and the days of easy money are over. While there may be asset deflation there may also be inflation on the service side, which means that new house is affordable (YEAH) but you can’t find a mortgage at any price (BOO) its a global reset on collateral, and putting hard money into the stock market is a NONO.
It would be interesting to see the same chart using rates adjusted by the CPI, rather than raw rates, by the way. In taking another look at the chart, it appears that interest rates also predict changes in which party holds the Presidency. If rates are low at the time of election, the party in power tends to stay in power, and if they are high, there tends to be a switch. The exceptions to that appear to be 1992 and 2016
“Debt has been growing three to six times faster than income for more than an entire generation. ”
Yeah, and the “best” way to “fix” that is to lower the wages by turning every state into a “right” to work for peanuts state!
This article highlights the places where we have core disagreements, but shows that we also agree on a lot. First the disagreement: you always blame all cycles on the Fed first “blowing bubbles”, and then popping them. By contrast, I believe the the Fed is not nearly as powerful as you believe. If central banks are the cause of the economic cycle, why were there economic cycles long before there were Central banks? Economic cycles existed in the Old Testament, some 3000 years ago.
Now, turning to where we agree, looking at Fed increases, it has predicted all recessions, but also many times when there was none. It is worth pointing out that that would be true even if rate increases didn’t cause the recession. Why? Interest rates always go up in good times, and sooner or later, bad times follow good times, so whether they cause recessions, or merely appear to predict them, interest rate increases always precede them. I also agree that the next downturn will be deflationary, not inflationary. I agree with your prediction that we are due for a downturn; I just don’t blame either the good times or bad on the Fed.
If the FED continues to shrink their balance sheet and continues to raise rates, 2019 is going to be a catastrophe for the stock market. It’s mathematically impossible for the stock market to keep going up when close to $2 trillion in additional debt is being absorbed and the cost of money is going up. Sure as a plant will die without water, the stock market can’t keep going up. I suspect people will figure this out in advance and we’ll see the market go down long before Jan 1. The only way out is if the FED changes direction or we get a flood of foreign investor money.
typo: “This market is a bubble created by the Fed.”
This stock market boom is a bubble the Fed with cheap money. Now that the Fed is tightening, this market will be seen as it really is, and that the economy is not strong. Consumer spending is 70% of GDP, and consumer’s credit cards a maxed out. Wages are flat for 60% of the workforce. Easy credit cannot replace good wages. The underlying economic fundamentals are not good. Mr. Market is getting ill. The party is over.
THE economic driver of the past 40 years has been ever increasing leverage facilitated by the downward sloping trend line depicted in the chart. Well kids, we’ve reached the zero bound! In other words, just like a slide in a playground, we’re fast approaching the end of the slide and are about to stop our forward momentum and hit the ground with our @ss! Lord only knows what happens next but one thing is for sure – it’s going to hurt. A lot.
You have finally figured this out? Hello Mcfly, is anyone home? Lather, rinse, repeat. Now try and make a dollar or two.
Why worry about the Fed? When Corps. announce 675 billion in stock buybacks, won’t this cause a constant bid?
It doesn’t work that way. The Fed stimulates lending or not. If the Fed printed $5 trillion tomorrow, what would happen if it did not stimulate credit? Take away interest on excess reserves and the answer is: nothing. Think about it. It would have the same effect as Printing $5T, putting it in a rocket ship and firing it at the sun. Other than wasting a rocket, nothing would happen. Banks create money by lending. The Fed tries to encourage lending, blowing asset bubbles in the process.
The Yen Yuan and the euro are all worse than the dollar fundamentally.
“In fact, when this all ends, the dollar won’t even be accepted as currency, let alone be revalued.”
Are you talking 20 years from now, 50, or 100? And when it happens (I agree a currency cisis is coming) the dollar will likely be among the last standing.
The problem with QE AND interest rate increases is that QE doesn’t work for the poor. In effect, it’s doubly punitive for the poor as wage stagnation, QE inflation and interest rate increases don’t allow the poor to progress – this would lead to more inequality and eventually to the election of Bernie Sanders and a collapse.
Hate to keep bringing up Ray Dalio, but cash-man believes, or advises at any rate, that when the end of his “long term debt cycle” occurs, the FED, and all central banks, carefully print money to perfectly counteract deflation. So that M0 replaces contraction in M1, and M1 replaces contraction in M2.
What do you think about that Mish?
I wonder exactly how Ray Dalio’s hyper-QE would work. It seems to me that, depending on how it works, the money could either go nowhere and do nothing, OR it might enter into the real economy and trigger hyperinflation.
Of course, his vision of it is that it will go into the pockets of investors to buy the dip in asset prices (as if there won’t be enough cash already on the sidelines after all).
link to youtube.com
It is called “Asymetrical Monetary Policy” and it has been in effect for the past 30 years.
Yup. That chart clearly shows that the Fed will keep hiking right into the jaws of the upcoming recession. It will only take another two or three 25 bps hikes and then it’s Goodnight Irene.
Sorry, here’s the link: link to fred.stlouisfed.org
Here’s the link:
No, the Bank Prime Loan Rate is shown and shown correctly.
I think the axis’ are a little off. Didnt we have zero percent interest rates for the last 10 years before the most recent increases?