RANCHO SANTANA – Last week went by so fast!
Stocks got a big boost on Wednesday, on news of an impending trade deal with China. Then too, Jerome Powell announced that if anything was going to ruin the party on Wall Street, it wouldn’t be the Fed. Rate hikes are off the table… for now.
And so, on Thursday, stocks closed out their best month in two years. But prices are still below the highs of last year… and stocks are still, presumably, in a long-term bear market.
If we’re right about this, your equities will probably decline by 50-90% over the next few years… and take about 15 years to recover, if they ever do.
When the primary trend is down, all you can do is get out of town.
Quantitative Easing Flimflam
But let’s just look back at what happened last week.
First, as expected, the Fed is backing off its “normalization” program. It had already said it would be “patient” about raising its key interest rate.
Now, it says it will be “flexible” about getting rid of all those bonds it acquired during its quantitative easing (QE) flimflam. Bloomberg:
The Federal Open Market Committee “will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate,” the central bank said in a statement Wednesday following a two-day meeting in Washington, opening the door for the next move to also be a cut.
In a separate special statement, the Fed said it’s “prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments.” The central bank also said it would be ready to alter the balance sheet’s size and composition if the economy warrants a looser monetary policy than the federal funds could achieve on its own.
In other words, the Fed will not really normalize at all. Flexible? It will fold up like a lawn chair as soon as markets react. Then, if the going gets really rough, it’ll turn around entirely.
Having nurtured the economy on unnaturally low rates for the last 10 years, any move to normal rates will set off a market reaction. Which means, effectively, the Fed has lost control of interest rates and the credit cycle. It can’t fight excess credit with higher rates or a dearth of credit with lower ones.
Sock it to the Rich
Second, the rich are the new pariahs, and Democrats are competing to see who can sock it to them most convincingly.
Ms. Alexandria Ocasio-Cortez has her 70% tax rate. Elizabeth Warren proposed a wealth tax. And then, yesterday, Bernie Sanders piled on, with a higher estate tax. Bloomberg:
Independent Senator Bernie Sanders is proposing to expand the estate tax on wealthy Americans, including a rate of as much as 77 percent on the value of estates above $1 billion.
Sanders of Vermont, who’s considering a second run for president, said in a statement that his plan would apply to the wealthiest 0.2 percent of Americans. It would set a 45 percent tax on the value of estates between $3.5 million and $10 million, increasing gradually to 77 percent for amounts more than $1 billion. The current estate tax kicks in when an estate is worth about $11 million.
Nothing about this is surprising. But we were startled by voters’ reactions. It is remarkable how many want to tax the hell out of anyone who earns more than they do.
But reactions tend to fall along party lines. Democrats are in favor; Republicans are opposed. And therein lies a story that’s almost more startling.
About half of all adults think the country would be fine if the Democrats would just go away. The other half think it is the Republicans who should vacate the premises.
Whichever side they are on, they believe public life is essentially a contest between good and evil, with only two possible outcomes. Either the good guys win… or the bad guys do.
How they know which is which has always been a mystery. But they claim the same gift on a global level.
There, they believe that there is an ongoing battle between the champions of liberty, democracy, and truth… led, of course, by the United States of America… and an Axis of Evil, lately composed of Iran, Russia, Venezuela, Nicaragua, North Korea… and perhaps China, too.
We wish it were that simple. If it were, all we’d have to do would be to identify the “good guys”… and stick with them.
But as we connect the dots, we find lines that wiggle and turn in unexpected directions. There are as many mush-heads among Republicans as among Democrats, for example.
And Putin, Ortega, Maduro… are they really such bad hombres?
We’ve never met any of them. But our guess is that we wouldn’t find them any less intelligent or less honorable than the average member of Congress.
Meanwhile, the public sees no alternative. Red or blue? It must take sides. And the two sides move further and further apart (and yet, closer together… as we will see next week).
Never have the two parties loathed and despised each other so intensely. And never have we agreed with them both so completely.
Editor’s Note: Today, Bill shares a few more photos from his estate on the Nicaraguan coast.
The sun rises on the Pacific coast
The view from Bill’s estate in Rancho Santana