Time To Get Out of Dodge?

In my analysis, this is a fatally flawed misreading of structural trends and cycles.

Is it time to get out of the stock market? It depends on the time frame of reference, of course. The market excels at throwing Bulls and Bears alike off the bus with counter-trend rallies and cliff-dives, so the short-term answer may be different from the weekly answer or the monthly answer.

So let’s stipulate a longer time frame of quarters or even years: is it time to get out of the stock market?

There’s a solid case for the answer being “yes.” There are two primary dynamics in play: 1) the end of hyper-financialization and hyper-globalization, both of which drove speculation and goosed profits for decades, and 2) the end of central-bank free money for financiers, i.e. ZIRP (zero interest rate policy) a.k.a. historically low cost of capital.

The bullish case for stocks and bonds boils down to this one claim: the Federal Reserve will have to “pivot” from raising rates and reducing financial liquidity free money for financiers to reducing rates and “printing” money again (increasing liquidity).

This claim is based on two assumptions:

1) inflation was driven solely by Covid-lockdown stimulus and supply-chain disruptions, and these are dissipating. Inflation will drop dramatically going forward, so the Fed can “pivot” away from fighting inflation.

2) The 2020s are a continuation of the Bull Market that started in 1981, a multi-decade era in which Big Tech leads the market ever higher, and low interest rates, low inflation, low commodity prices, hyper-financialization and hyper-globalization drive stable growth of credit, consumption and profits.

In my view, both assumptions are false.

The trend / cycle has turned, and inflation is systemic due to structural scarcities / depletion, the higher costs of reshoring, friend-shoring, re-industrializing, etc., and the decline of globalization’s deflationary impulse: there are no more pools of cheap labor and materials that can be readily exploited.

The Fed has very little control of these structural sources of systemically higher costs. Their only lever of control is to increase the cost of capital / credit, which adds an inflationary source to the other structural sources.

As I’ve endeavored to explain, no cycle or trend lasts forever, and the 40-year uptrend has ended. Now a different cycle and trend is developing.

The basic reason is diminishing returns: a little credit injected into a credit-starved economy can have a dramatic impact on growth and prosperity.

But shoving more credit into a debt-saturated economy will have no positive effect at all. Rather, since all debt accrues interest, it has a negative effect by reducing disposable income via bigger interest payments.

Introducing some globalization (competition and new products) into a stagnant, sclerotic economy can boost growth and prosperity, but pushing hyper-globalization in an economy already hollowed out by globalization won’t have any positive effect at all.

That’s where we are: the status quo “solutions” remain financialization (The Fed Will Save Us) and globalization (find a cheaper pool of labor to exploit and a no-environmental-standards place to stripmine the Earth).

Due to diminishing returns, financialization and globalization are now problems, not solutions. We can’t indebt / exploit our way out of the holes dug by financialization and globalization.

The Bear case is based on the fundamentals of a slowing global economy that can’t be saved by increasing financialization and globalization and the impacts of higher costs due to scarcities, depletion, higher costs of capital and de-globalization / reshoring.

The 40-year-long Bull market was based on costs continually dropping due to technology, financialization (declining interest rates and ever-expanding credit and money supply), globalization, and expanding workforces, production and consumption.

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