My impression is that investors are presently enjoying the double-top of the most extreme speculative bubble in U.S. financial history. John Hussman; The Hussman Funds

 Future

America

A Deflationary Bust?

I don’t believe we shall ever have a good money again before we take money out of the hands of government, that is, we can’t take it violently out of the hands of government, all we can do is by some sly roundabout way introduce something that they can’t stop.” – F.A. Hayek 1984

Universal Capitulation and No Margin of Safety

By John Hussman of the Hussman Funds

Based on the valuation measures we find best-correlated with actual subsequent S&P 500 total returns across a century of market cycles, the stock market presently stands at valuation extremes matched only twice in U.S. financial history: the week ended December 31, 2021 (the 2022 peak occurred the next trading day) and the bubble peak in the week ended August 26, 1929. While our investment discipline is to align our outlook with prevailing, observable market conditions, my impression is that investors are presently enjoying the double-top of the most extreme speculative bubble in U.S. financial history.  John Hussman March 2024

As I’ve noted regularly, there’s one element of our discipline that gave us enormous difficulty during the speculative bubble of recent years. It was not internals. It was not even valuations. Rather, in prior market cycles, there were generally reliable “limits” to speculation – once certain combinations of overvaluation, overextended price action, and over bullish sentiment emerged, the market would quickly encounter an air-pocket, panic or even crash in fairly short-order. Amid the yield-seeking speculation encouraged by zero-interest rate policies (and the need for investors, in aggregate, to hold 18-36% of GDP in zero-interest liquidity created by the Fed), those “limits” proved unreliable, and bearish positions were detrimental.

Jeremy Grantham reminded investors last week, “if margins and multiples are both at record levels at the same time, it really is double counting and double jeopardy – for waiting somewhere in the future is another July 1982 or March 2009 with simultaneous record low multiples and badly depressed margins.”

Fire, Then Ice: Our Deflationary Future

By Charles Hugh Smith

Empires, however, might choose differently. The difference between a nation-state and an empire is generally under-appreciated. A nation-state can destroy its currency and bankrupt everyone holding its bonds / debt and start over, but an empire cannot be quite so cavalier, for the "reserve currency" of the empire is its foundation of power.

Yes, the hard power of military power projection is a core strength, along with trade, alliances, cultural and diplomatic soft power, but if the currency evaporates, so does the Imperial Project, and those tasked with maintaining the Imperial Project are forced to calibrate pain by a different standard than politicians and central bankers.

Inflation and the evaporation of the currency is not a solution for the Imperial Project, it is the surrender of all that is great and good. The only viable solution for the Imperial Project is deflation, the forced liquidation of unpayable debts and thus the forced liquidation of all the phantom wealth generated by ever-expanding debt.

Just as inflation has many sources, so too does deflation. Technology can be a source of deflation, as a new technology can dramatically increase supply and durability while dramatically lowering costs. Substitution can be deflationary, as enterprises and consumers swap a cheaper, more abundant substitute for whatever was becoming scarce and costly.

If the sum of "money" circulating in the economy contracts as credit tightens, it becomes harder to borrow more money into existence. Every dollar of debt that's written down to zero reduces the quantity of money floating around, i.e. the money supply.

If the money that is being created is immediately hoarded by the wealthy, it doesn't circulate in the economy and therefore it's the equivalent of debt being extinguished: the supply of money doesn't expand because the new money has been hoarded, in effect buried in the backyard.

To preserve the Empire, it becomes necessary to wipe out the debt and the phantom wealth it created, 90% of which is held by the hyper-wealthy, super-wealthy and merely wealthy. This is the class that has concentrated wealth and power to the point of destabilizing the social, financial and political orders, and so those tasked with preserving the Empire (the State within the State) will have to strip this powerful class of its phantom wealth indirectly, as the class is too politically powerful to be taken down head-on.

Recall that deflation--the decline in the price of assets, goods and services--is beneficial to wage-earners, as their earnings go farther as prices fall. Profits become harder to come by, and those lending and speculating on ever-higher asset valuations are wiped out.

From the Imperial point of view, this is all good: given that the only goal is to preserve the currency from evaporation, then the takedown of the hyper-wealthy class that threatens to destabilize the Imperial order is equally essential.

Just as inflation is a hidden tax on labor, deflation is a hidden tax on capital. If commercial real estate, stocks and corporate bonds all lose value for a decade, the bottom 90% will only be affected indirectly. If whatever money is being created is funneled into spending at the bottom of the economy--those buying essentials--then the deflation of private debt and assets won't strip the real economy of money in circulation, it will only strip the wealthy of the capital they were hoarding and speculating with under the guise of "investing."

Fire, then ice: as inflation (fire) threatens the Imperial currency, the Empire must choose deflation (ice) to preserve its foundation. Currency in active circulation is lumped in with the phantom wealth of debt-based assets, but they are two different things, as Aristotle observed (oikonoma and chrematistics). Just as inflation works slowly to erode the value of labor, deflation works best if it too is gradual, slowly extinguishing phantom wealth over time.

I have endeavored over the years to explain that the concentrated wealth and power of the hyper-wealthy pose an existential threat to the Imperial Project, and the showdown between debt-created phantom wealth and the bedrock of the Imperial Project, its currency, will play out in the next 6 to 8 years.

The "everything's always fine" echo-chamber holds that inflation to preserve all the debt-created phantom wealth is necessary, but they are focused on serving private wealth, not the Imperial Project. What's truly essential is to preserve the Imperial currency, and to accomplish that, both the phantom wealth and the power of the hyper-wealthy who own the vast majority of it must be extinguished. Slowly, slowly, but extinguished nonetheless.

Lest you weep for those whose phantom wealth will be drained away, recall that few win when a reserve currency dies. Labor can start earning the day after the reset, but the capital lost is gone for good.

DYI:  The sun never sets on the American Empire! 

No doubt if the Empire is to be maintained the gas must be let out of our financial debt bubble.  If you think that our Federal Government is in debt they don’t hold a candle to the private sector that is massively debt leveraged.  This includes our average John and Jane Doe who are doing what ever they can to maintain some semblances of the middle class through debt.

So far I don’t see a debt blow off to the likes of 1929 to 1932 then carried on through governmental missteps only ending by America’s orchestrated Pearl Harbor event putting the U.S. on a war time economy.  What I do envision is the likes of China who is currently letting the gas out of their real estate bubble that will be a multiyear event taking one decade to complete.

So…The most likely scenario is a multicycle stock market decline as corporate America deleverages all pushed through by the Department of Defense (DoD) over riding the Jewish banking cartel – [they are powerful bankers but the DoD has the guns] in any macro economic showdown.

My suspicion about ten years from now the U.S. stock market will completely mean invert from its current Shiller PE at 34 will bottom out around 10 and possibly lower.

Till Next Time

DYI