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Beefs and Beliefs

Wall Street isn't main street

IconicBestiary-iStock-Thinkstock bull market
The bull market in stocks will end, maybe soon, and it potentially won't mean that much to main street and farms and ranches.
An inoculation of reality seems essential as we have record levels of debt and the stock market is dramatically overvalued.

On Wednesday of this week it's quite possible the stock market could begin to unwind, but I say it's little to worry about.

As long as you don't have upside investments in the stock market, a downturn has little real relationship to the US economy. It does have everything to do with Wall Street, which has become what one astute observer often calls "the casino." To wit, Wall Street has become mainly a place where bankers and other investors borrow money from the Federal Reserve and via the machinations of the U.S. Treasury and spend it to buy stocks, derivatives of stocks, commodities, and anything else they believe might run up long enough for them to make a profit.

As evidence consider this: From the time of the so-called financial crisis, aka The Great Recession, in 2008, the economy has "recovered" at seldom more than 2.0% gross domestic product (GDP) per year and often much less by the government's own measurement. The performance for nine years has been worse than GDP during the 10 years of the Great Depression from 1929-1939.

In the same timeframe, the broad S&P 500 index has roared from its low in 2009 of about 700 to nearly 2,400 today, or by 290%. If we use the blue-chip laden Dow Jones Industrial average, the run went from its low in 2009 of about 6,500 to a high just above 21,000 only days ago, or a gain of almost 310%.

The short story is that much or all the increases have been manipulations of the market by what I call funny money, some call helicopter money, but in truth was known as quantitative easing (QE) by the Federal Reserve, the private bank which actually owns and manages the US money supply. The Fed's massive supply of money from QE had to be borrowed to enter the economy and statistics strongly show main street was not borrowing so Wall Street took it all.

Personally, I stayed out of the market because I did not understand the effects of repealing much of the Glass-Steagall Act and regulations that were eliminated or weakened to investment banks could do whatever they want with borrowed money. If I had understood, I would have ridden the market back up part of the way, at least. But that's water under the bridge for me and everyone else. If you used the stock market to lock in profits for retirement or otherwise, congratulations and being smarter or luckier than me.

But the time has come or is very near when things are almost certainly going to change.

For one thing, trouble is getting close in the form of the debt ceiling. Economist David Stockman has been warning for several months that this alone could put an end to the market run. Today (March 15), in fact, is the day the federal government’s debt ceiling is due to be reinstated.

Late last week Stockman warned readers of his newsletter that the US Treasury's operating balance was down to $66 billion. At the rate the government is burning cash, even with a modest respite in April from the annual tax collection season, the government will be out of cash before Memorial Day, and will be forced to begin potentially divisive budget talks and possibly the beginning of more fiscal hawkishness.

A second event takes place today which could have much effect on the stock market. The Federal Reserve has pretty much sworn to raise interest rates on its borrowers by another one-fourth of a percent. That doesn't seem like much, but it could be enough to slow the borrow-and-gamble cycle which has propped up Wall Street these many years. By the time you read this, the decision may be made (1 p.m. Central time) and the effects already felt or ignored.

Jim Rickards, another economist and trend watcher I read, explains the Fed is determined to raise rates enough before the next recession sets in that it can lower them to cure that recession (if you believe that Keynesian economic theory). In the process, he thinks, they may hasten the next recession.

Rickards also notes the record levels of debt in the private, corporate and public sectors will be a serious drag on the economy. Many others worry about this as well. Rickards said recently that ground-breaking research by Kenneth Rogoff and Carmen Reinhart shows how serious the impact of debt on economic growth.

"We have discussed the 60% debt ratio danger threshold ... But there is an even more dangerous threshold of 90% debt-to-GDP revealed in the Rogoff-Reinhart research," Rickards warned. "At that 90% level, debt itself causes reduced confidence in growth prospects — partly due to fear of higher taxes or inflation — which results in a material decline in growth relative to long-term trends."

This is where our country is headed.

The real warning is the government will have to trim its excesses, and as economist Bill Helming has presaged for years, this bad debt in all sectors will have to be written off the books and be extirpated from the money supply, which will be deflationary. The government could conspire with the Fed to print more money and try to devalue the dollar, thereby decreasing the cost of its debt, but that hasn't accomplished a much inflation in previous QE.

Rickards adds another event with negative consequences will happen this year. The Chinese are broke and fast running out of their US dollar reserves. Somewhere along the way, they will have to devalue their currency by a significant amount -- perhaps 20%. When they took a very small devaluation last year, US stocks took a 10% dive. Rickards thinks a bigger devaluation could trigger a bigger dive.

I don't pretend to know what will happen as these things finally unwind, but the reasoning I've presented, together with a whole lot more similar problems, will certainly cause difficulties.

The thing I want others to realize is the stock market does not really represent the economy, whether it's rising or falling. If everyone faces that as fact, the economy will fare much better than if we believe the opposite. And of course, the beef industry will fare better too.

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