Investors Are Going to Get Scalped

Guest Post by Bill Bonner

BALTIMORE – We spent a delightful, long Thanksgiving weekend in the country, entertaining children and grandchildren. Not once did we open our laptop computer or look at the headlines.

But now, it is another workweek, and we’re back on the job. As usual, we are looking at dots… and wondering how they got to be so goofy.

Particularly Moronic

This morning, for example, brings a particularly moronic news item from CNBC. The report tells us that the Dow has another 2,000 points left to drop before recovering:

More than half of the members of the CNBC Global CFO Council think the Dow Jones Industrial Average will fall below 23,000 – roughly 2,000 points from its current level – before the stock market barometer is ever able to top the 27,000 level. The 23,000 level would equate to another 8 percent in decline among the Dow group of stocks before the selling stops.

But hey… why stop there?

If CFOs think they can predict the stock market future, maybe they should tell us who will win the White House in 2020 or who will win the next Super Bowl.

Here at the Diary, we’d also like to know when the 10-year Treasury yield will hit 4%, too. It’s currently at about 3% – up from 2.4% at the start of this year.

We’re watching for 4% like one of Custer’s scouts looking out for the Sioux. When it shows up, a lot of investors are going to get scalped.

Of course, we’ve proven that WE can’t predict stock prices. But that doesn’t mean we shouldn’t look for tracks on the ground and dust clouds on the horizon… and try to learn what they mean.

Most Important Dot

Why is 4% so important?

Because while this is a market that can put up with a lot of preposterous dots, it can’t survive 4%.

The whole world economy – in which the 10-year U.S. Treasury is a benchmark – has adapted to 2%. Two additional percentage points doesn’t sound like much… But on $230 trillion of debt, that’s more than $4 trillion in additional interest payments.

The more the world borrows, the higher rates go… and the harder it is to keep up. And guess what? The biggest borrower on the planet has just doubled its demand for credit. Now, the U.S. federal government has lost control of its deficits, pushing up interest rates all over the world.

And it gets worse… because neither Congress nor the president seem to have any idea of what is coming or what to do about it.

First, President T says that he thinks the Fed should reverse course now, even before the crisis arrives:

I’d like to see the Fed with a lower interest rate. I think the rate’s too high. I think we have much more of a Fed problem than we have a problem with anyone else.

Well, yeah… it’s a monetary problem. And the Fed is to blame.

The U.S. dollar is fake money. And the Fed lends it out at fake rates. That’s always going cause trouble.

But the problem is the Fed’s Mistake #1 (leaving rates too low for too long), not its Mistake #2 (trying to correct its error by “normalizing” them after 10 years of emergency low rates).

Even now, two years after beginning its “tightening” program, the Fed’s key rate is still below the level of consumer price inflation – meaning, the Fed is still lending at less than zero percent of “real” interest…

This is why corporate, consumer, and government debt is so high… and is going higher.

But at least the president is taking the problem seriously. In a Washington Post article from yesterday, we see him struggling with the contradictions of a looney fiscal policy, as well as a BS monetary policy.

That is, the president seems to think the feds can reduce the deficit, but without reducing spending or raising taxes:

President Trump is demanding top advisers craft a plan to reduce the country’s ballooning budget deficits, but the president has flummoxed his own aides by repeatedly seeking new spending while ruling out measures needed to address the country’s unbalanced budget.

Trump’s deficit-reduction directive came last month, after the White House reported a large increase in the deficit for the previous 12 months. The announcement unnerved Republicans and investors, helping fuel a big sell-off in the stock market. Two days after the deficit report, Trump floated a surprise demand to his Cabinet secretaries, asking them to identify steep cuts in their agencies. […]

But even as he has demanded deficit reduction, Trump has handcuffed his advisers with limits on what measures could be taken. And almost immediately after demanding the cuts from his Cabinet secretaries, Trump suggested that some areas – particularly the military – would be largely spared.

The president has said no changes can be made to Medicare and Social Security, two of the government’s most expensive entitlements, as he has promised that the popular programs will remain untouched.

We don’t need the CFO Council to figure out how this will end up.

With Republicans in control of the Senate… the Democrats in control of the House… and President T off the reservation completely… there’s almost no chance that the feds will get control of their deficits.

Real rates will rise no matter what the Fed does. The 10-year yield will hit 4%. And the stock market will crash… far below Dow 22,000.

More to come…