The Investment Strategy Letter #739 May 20, 2022 predicted a big drop in in the Dow with its title of “TIME TO LIGHTEN-UP ON ANY FURTHER MARKET RISE.” In June 2022 the Dow was at approximately at 37,000 and then fell to 30,000 and has since then managed to rally to about 34,500. As I said in market letter #741 in June, “Expect Rallies.”  During the same period the S&P dropped from 4,800 to 3,500 and the rallied to 4,000; whereas the NASDAQ fell from 15,300 to 13,100 and is now at 10, 900. I NOW BELIEVE THE RALLY IS OVER AND THE MARKET IS READY TO RESUME ITS DONSIDE ‘BEAR MARKET’ THAT BEGAN LAST SUMMER. Our DOWNSIDE PROJECTIONS ARE: a DOW of 28,000 to 27,000 (Now 33,866), NASDAQ 9,000 to 8,000 (Now 10,876) S&P-2,900 to 2,700 (Now 3,951). Don’t fight the Fed!

The reason that I believe the stock market is ready to resume it downside trend and turn into a true ‘Bear Market’ are many, but the main one is that the Federal Reserve is depending on higher interest rates to stop inflation. MY worry is that the ‘cure’ may kill the patient. Also, I believe that investors should be worried as the Federal Reserve quickens the pace at which it removes one of its primary pandemic supports, quantitative easing, or QE.

The Fed’s balance sheet ballooned from a little over $2 trillion in early 2008 and $4 trillion in 2020, to a peak of nearly $9 trillion now. While QE brought investors back to the stock market, it also helped stoke inflation. Now, the Fed is reversing course through quantitative tightening, or QT, pulling back its support for financial markets while it raises interest rates to quell inflation. Investors should worry that the quickening pace of the Fed’s pullback could become too much for markets to bear, undermining the safety and reliability of the Treasury market.

If demand for Treasuries can’t keep pace with the supply, it could pull bond prices down. Prices move in the opposite direction to bond yields, a measure of borrowing costs. Higher Treasury yields would put more pressure on borrowers already grappling with the Fed’s campaign to lower inflation by raising interest rates. I am worried that we are pilling Q.T. on top of these rate hikes and it will push us into recession or worse.

Gridlock In Washington

I was surprised to see in today’s New York Times an editorial by Bret Stephens and David Brooks entitled “The Party’s Over for Us. Where Do We Go Now?” For decades, conservative values have been central to Bret Stephens’s and David Brooks’ political beliefs, and the Republican Party was the vehicle to extend those beliefs into policy. But in recent years, both the party and a radicalized conservative movement have left them feeling alienated in various ways. Now, with an extremist fringe seemingly in control of the House, the G.O.P. bears little resemblance to the party that was once their home. To quote from the article, “When people get on a bad path, whether it’s drinking or gambling or political or religious fanaticism, they tend to follow it all the way to the bottom, at which point they either die or have that proverbial moment of clarity. I’ve been waiting for Republicans to have a moment of clarity for a while now — after Joe Biden’s victory, or Jan. 6, the midterms, Trump’s dinner with Kanye West. I had a flicker of hope that the Kevin McCarthy debacle last week would open some eyes, but probably not. Part of the problem is that so many Republicans no longer get into politics to pass legislation. They do it to become celebrities. The more feverish they are, the better it sells.”

If these two stalwart Conservative Republicans have lost faith in the Republican Party, it appears there is no hope for a government that works for the people it serves. As James Madison said, “If there be no virtue in the electors there can be no virtue in the elected.” We are indeed in trouble as a man like George Santos serves in the House of Representatives after lying about everything in his resume. I am reminded of a session on June 9, 1954, when Senator Joseph McCarthy hunting Communist in the government when an amazed television audience looked on as Joseph Welch responded with the immortal lines that ultimately ended McCarthy’s career: “Until this moment, Senator, I think I never really gauged your cruelty or your recklessness.” When McCarthy tried to continue his attack, Welch angrily interrupted, “Let us not assassinate this lad further, Senator. You have done enough. Have you no sense of decency?”

I am very concerned. I believe as do Stevens and Brooks that “a successful democracy needs a morally healthy conservative party — one that channels conservative psychological tendencies into policies to check heedless progressivism while engaging productively with an evolving world.” I believe in the core values of old-fashioned democracy, faith in the goodness of people, human rights, the rule of law, free speech, political compromise, the political process itself. I believe in building things up, not just tearing them down. For the next two year, and maybe even longer, I believe the stock market and the country will suffer as the government falls into gridlock and disarray and maybe even defaulting on its debt..

World debt $226 trillion up from $74 trillion in 2019 (worth repeating from  ISL #742)

The market rise was due to low interest rates, quantitative easing, cheap oil and unprecedented growth of debt. Simply put the market went up to far. Now, high inflation, interest rates and gas prices and the war in Ukraine are worrying investors. Last year, we observed the largest one-year debt surge since World War II, with global debt rising to $226 trillion as the world was hit by a global health crisis. Debt was already elevated going into the crisis, but now governments must navigate a world of record-high public and private debt levels, new virus mutations, rising inflation and falling stock and real estate markets. Borrowing by governments accounted for slightly more than half of the debt increase, as the global public debt ratio jumped to a record 99 percent of GDP. Private debt from non-financial corporations and households also reached new highsMy concern is in the world’s ocean of corporate debt, worth $226 trillion up from $74 trillion 2019. US corporate debt has climbed during the same period from $18 trillion to $30 trillion. Two-thirds of non-financial corporate bonds in America are rated “junk” or “BBB”, the category just above junk. The growth in debt has now stopped, because suddenly bankers are worried and interest rates are high and going higher

US federal debt to GDP was in 1980  34.5%, 2000 57.9% and in 2021 100%

The US Federal debt is over $30 trillion dollars and is growing. US Federal spending is $6.2 trillion and tax revenue is $4.2 trillion ($12,000 per person) for a $2 trillion deficit.  $30 trillion is a debt of $243,000 per tax payer and $91,000 per tax citizen. The US federal debt to GDP was in 1980  34.5%, 2000 57.9% and is about 100% today. The unwritten rule is anything above $100% is dangerous! Total US and State debt to GDP is 142%. ANNUAL INTEREST ON DEBT; $450 BILLION AND IS RISING AS INTEREST RATES GO UP. Here is the scariest statistic: OTC Derivatives are $600 trillion (10 TIMES WORLD GDP). $600 trillion is at about the same level that caused the 2008 trouble in the banking system.

Dow 33,916,     NASDAQ 10,881    S&P 500  3,957 

Carl M Birkelbach


Mr Birkelbach does not offer investment advice, but merely his own personal opinion. This report has been prepared from original sources and data we believe reliable but make no representations as to the accuracy or completeness. Mr.Birkelbach , his affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in securities. Past performance is no guarantee of future success. Upon request, we will supply additional information.