Why is the Stock Market doing so Well?

All of my negative predictions have become a reality and still the stock market makes new highs. It is puzzling and frustrating. Maybe, since retirement, I am no longer in touch with “Wall Street?” Anyway here is my opinion and view: 1) I predicted that US debt, which INCREASED FROM $7 TRILLION TO $20 TRILLION during the Obama Administration,(to combat the 2008 Bush economic debacle) would be terrible for the country.  It was, but nobody seemed to care that all the money went to save the banks, while 11 million people lost their  homes. The US could have simply guaranteed the mortgages and the money could have been used for national health care and eliminating US poverty.  2) I predicted that the Trump Administration and the Republican Party was good at winning elections, but had little interest in running the government.  (Even though candidate Trump promised he would“pay off the US debt in eight years”) My dire prediction turned out to be true, as Trump reduced taxes for the rich, which raised the US debt from $20 trillion to $28 trillion. Once again, progressive ‘safety net’ measures were ignored and the rich grew richer and the poor got poorer and the stock market went up.  3) I predicted that Covid 19 would paralyze the economy, mainly because President Trump was ignoring its severity and proper precautions (masks and immunization). Over 1 million people died and yet the stock market went up as the Biden Administration fought off the effects of the slowdown in the economy with more US debt, increasing it from $28 trillion to$31 trillion. We have spent all our $ bullets and only Corporate America and the super-rich have won. (Five US families have more wealth than the bottom 40%).Too much of this sort of winning, by raising debt can be costly, like households that may end up eventually losing its ability to find buyers for its debt.

We could have used this money  to give every american free healthcare, end poverty and  provide free collegege for all who qualify.

4) I predicted that  banks were in trouble. They were, but the US government guaranteed the deposits. (See how easyit is to help the banks, but not the homeowners). There is still a problem with the banks but it is temporarily being ignored. 5) I have been predicting that there is economic trouble in China. Suddenly everyone is writing about it (Economist Magazine, the Wall Street Journal and the NYT). Still the stock market goes up. https://www.cnn.com/2023/08/21/economy/china-economy-troubles-intl-hnk/index.html 6) I have been warning that empty commercial office space will eventually hurt the banks and therefor the whole US economy. See a 9/1/2023 NYT article, ‘All That OfficeSpace Belongs to Someone.”https://www.nytimes.com/2023/09/01/business/office-vacancies-gural-gfp.html Although more office workers are back at their desks than a year ago, attendance at office buildings in New York, Boston, Atlanta, Chicago, San Francisco and other cities is well below pre-pandemic levels. As leases come up for renewal, companies are often opting for smaller offices, leaving landlords with millions of square feet in vacant space. More space is expected to hit the market in the coming months as leases expire and more than 100,000 technology workers have lost their jobs. According to a recent study by business professors at Columbia and New York University, the value of U.S. office buildings could plunge 39 percent, or $454 billion, in the coming years.

 What if?

My latest prediction: 2024 could be a very dangerous for stock markets, because of the uncertain situation in US politics. The stock market hates is uncertainty. What if Biden get sick? What if there are riots because of the Trump court cases. What if Trump is elected and found guilty and announces as president  he will pardonens himself and all the others. Truth and the law will no longer matter? What if the debt limit is not raised? What if China becomes unstable? What if more banks start failing as they  reposed unwanted commercial real estate? Also the stock market is ending the year at an all time high, led by only 7 stocks. Very vulnerable.

SORRY FOR THE DIFFERENT TYPE SIZE ETC.: CARL

What if the Fed is raising inters rates too fast and too high? As I said in ISL #743,  (with the Dow at 35,000), 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 2022. While QE brought investors back to the stock market and inflated stock prices, 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. This could put banks and may BBB rated business in trouble .Prices move in the opposite direction to bond yields, a measure of borrowing costs. Higher Treasury yields would put more pressure on borrowers and investment portfolios already grappling with the Fed’s campaign to lower inflation by raising interest rates. I am worried that we are putting Q.T. on top of these rate hikes and it will have consequences that could push us into recession or worse.

Trouble in China!

As predicted in ISL #744, there is trouble in China. The Chinese Hang Seng Index has hit a new 10 year low. Also the China’s Consumer Confidence Index is at a record low. Something is wrong!  Is this supposedly successful fast growing super-giant in trouble? I have said so for some time. And if so, what are the economic global implications? In the September 17, 2022 edition of the Economist Magazine this was the headline on the finance and economics section “China’s Ponzi-like property market is eroding faith in the government. Its meltdown could scarcely come at a worse time for Xi Jinping.”

 

For decades the property industry has been symbolic of China’s rise. Private entrepreneurs have made vast fortunes. Average people have witnessed their net worth soar as home values trebled. Local governments have filled their coffers by selling vast tracts of land to developers. An astonishing 70% of Chinese household wealth is now tied up in real estate. To undermine trust in this model is to shake the foundations of China’s growth miracle. With sweeping covid-19 lockdowns and a crackdown on private entrepreneurs, this is happening on many fronts. But nowhere is it clearer than in the property industry, which makes up around a fifth of GDP. New project starts fell by 45% in July compared with a year ago, the value of new home sales by 29% and property investment by 12%.

 

The effects are rippling through the economy, hitting furniture-makers and steelworkers’ alike. The result is a crunch. China’s developers need to sell homes long before they are built to generate liquidity. Last year they pre-sold 90% of homes. But without access to bonds and loans, as banks cut their exposure to the property sector, and with sales falling, the Ponzi-like nature of the property market has come into full view.

Evergrande’s China’s largest real estate firm)shares fell 79% on August 28^th, after resuming trading following a 17-month suspension, wiping out $2.2 billion of the company’s market value. An effort to restructure its offshore debts, intended as a model to follow, missed an end-of-July deadline. At least 28 other property firms have missed payments to investors or gone into restructuring. Confidence in China’s economic foundations could cross a threshold, beyond which it becomes far more difficult to recover.

 

World debt $226 trillion up from $74 trillion in 2019

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 highs. My concern is in the world’s ocean of corporatedebt, 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.

THIS TIME ITS DIFFERENT by Carmen Reinhart

All economic disasters are a surprise and can start with something as simple as the SVB failure and escalate! Don’t’ forget the classic THIS TIME ITS DIFFERENT by Carmen Reinhart: It tells the story of eight centuries of Financial Folly. Each time after a catastrophe, (such as the Great Depression or 2008), economists agree that it could never happen again. Who could be so stupid as to let 10 banks control 70% of the US assets (too big to fail) and allow all the US economic growth go to the top 1%, while eighty people own 50% of the world’s wealth?

Dow 34,837     NASDAQ 14,031    S&P 500 4,515

Carl M Birkelbach

9/2/2023

ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST 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. CarlBis@aol.com