This Inflation Script Won’t Last

The Shiller’s cyclically adjusted price-to-earnings (CAPE) ratio for the S&P 500 is currently 34.66.  This is representative of a stock market that has lost all touch with reality.  It even exceeds the 31.48 CAPE ratio hit in 1929, just before the stock market crashed and the onset of the Great Depression.

But it’s not the highest it has ever been.  There are two instances when the CAPE ratio has been higher than today.  December 1999 – at the height of the dot com bubble, just before the crash – when the CAPE ratio hit 44.19.  And October 2021, when the CAPE ratio reached 38.58.

For clarification, the CAPE ratio looks at the price of stocks relative to their average earnings, adjusted for inflation, over the past 10 years.  This provides a big-picture view, which smooths out the year-to-year swings in earnings.

According to the CAPE ratio for the S&P 500, today’s stocks are super-duper expensive.  This doesn’t mean they will crash tomorrow.  In fact, they could become even more expensive.  What it means is, at today’s prices, stocks are very risky in terms of any potential reward they may offer. Continue reading

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What You Must Know About Interest Rates

The buzz has faded away.  The intoxicating effects of the mass money printing and debt binge during the coronavirus years has come and gone.  But the hangover remains.  And while the money printing has subsided – for now – the debt binge has continued.

The consequences of high consumer price inflation, massive government debt, and countless economic distortions, were never really worth it to begin with.  As the last of the stimulus is consumed and wasted away, a great reckoning awaits.

What will happen when the labor market rolls over and debt overloaded consumers lose their jobs?  We may soon find out.

In fact, longtime market analyst Gary Shilling sees a recession coming by the end of the year, with unemployment rising up to 7 percent.  He also believes stocks, which have been driven higher by speculation, could drop as much as 30 percent.  And that the decline could be violent.

“You look at all the kind of speculation that we’ve had out there, it’s indicative of a lot of overconfidence, and that usually gets corrected and corrected violently.” Continue reading

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Policies of Disaster

This week, following the FOMC meeting, the Federal Reserve left the federal funds rate unchanged – at a range of 5.25 to 5.5 percent.  No surprise there.

The real dirt, however, was buried in the implementation note.  That’s where the Fed revealed that starting June 1, it will taper its monthly balance sheet reduction of U.S. Treasuries from $60 billion to $25 billion.  In other words, $105 billion less Treasuries will need to be issued in Q3.

The Fed, in essence, is trying to put a lid on rising interest rates.  Perhaps this buys the Fed, and the overextended financial system, a little time in an election year.  But with persistently high consumer price inflation and a balance sheet that’s still over $7.4 trillion, this simmering pot must to boil over.

For there are factors at play which are much greater than Fed monetary policy.  If you understand the mechanics of what’s going on, you’ll be well ahead of 99 percent of your peers – and even many of the so-called professionals.  Where to begin? Continue reading

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Destination TEOTWAWKI

Financing the U.S. government’s mega budget deficit – the gap between government spending and tax revenue – has become an act of madness.  Just this week, the U.S. Treasury flooded the market with $180 billion of new debt.  Did you buy some?

Washington’s spending is completely out of control.  Even the International Monetary Fund (IMF) is speaking up.  Its recent World Economic Outlook points to spending “that is out of line with long-term fiscal sustainability.”

Of note, are expanding U.S. budget deficits, which ballooned from $1.4 trillion in fiscal year 2022 to $1.7 trillion in fiscal year 2023.  This trend is continuing.  We’re now over six months into fiscal year 2024 and Washington is on track to hit a deficit of over $2 trillion.

Each year may start fresh.  With a new deficit to accrue.  But each year’s deficit doesn’t go away when the new year starts.  These deficits, which are are racked up year after year, are stacked onto the national debt – now over $34.6 trillion“Something will have to give,” the IMF warned. Continue reading

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