How Low Can Stocks Go Before the Feds Step in?

While Tom Dyson was out surfing in front of the house, we were watching the tape.

After a 1,000 point drop on Tuesday…stocks needed to bounce. Otherwise, say the old timers, it is a bad sign.

In the event…they did bounce yesterday…briefly…and then resumed their slide, egged on by coronavirus fears. By noon, the Dow was down another 300 points. By 3 pm, it was down more than 900 points and closed the day out down 879 points.

This morning, stocks seem to be stabilising. But there is more ominous news. The price of oil has dropped below $50. And this from MarketWatch:

‘…stocks swooning and government bonds rallying, with the 10-year benchmark yield falling to its all-time low. The 10-year Treasury note yield (BX:TMUBMUSD10Y) fell 4.5 basis point to 1.332%. The long-dated maturity is widely watched by economists and investors as it serves as broader barometer for economic growth and inflation expectations.’

The bond rally and the oil slide suggest more than just panic selling in the stock market. It tells us that the economy is in trouble, too.

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Bug crash

Yesterday, we discussed the helpful qualities of the word ‘like’. You can use ‘is’ in science. But ‘like’ is all you have to work with in the rest of life.

Is this like the hidden crash of the ’70s? The Dow began the decade at 800 and ended about where it started. But gold rose 40 times, leaving the real value of stocks down more than 90%.

Is it like the Crash of ‘87, when the Dow lost 22% of its value in a single day?

And there was the crash of the dotcoms in 2000…and the crash of mortgage finance in 2008. Is this like any of them?

Nobody has ever really seen a crash caused by a bug. And what about the bug itself? What’s it really like?

From what we can tell, the virus itself appears not to be especially dangerous. Like other winter influenza, people get it…some die. But not many. Live Science reports:

‘Currently, most of the patients who have died from the infection have been older than 60 and have had preexisting conditions.’

In an earlier era, it would have been good for the mortuary business; otherwise, it probably would have had little economic effect. We still remember what the Hong Kong flu was like. It raced across the US in the winter of 1968-69. An estimated six million people got the virus, including your pen pal. Some 33,000 died.

But for all the fevers and runny noses, it did little damage to the economy. US GDP grew 3% in 1969, topping $1 trillion for the first time. And the US put a man on the moon that year.

The stock market, by contrast, dropped 18% — probably unrelated to the virus. Instead, it had been going up ever since the Second World War and had reached a top in 1968. As it turned out, this was the beginning of the bear market that lasted until 1980.

Will this episode be like that one? The context is important. We knew 1969. And 2020, you’re no 1969.

Faked out

One big difference is that the whole economy and its financial markets have been faked out by fake money. The financial industry was still relatively small in 1969. Financial assets still toted to about twice GDP, as they had for decades. Now, they’re five times GDP.

The average wage earner could still buy a share of the S&P 500 with 20 hours of work, not over 100 as it is today. Federal debt was only $353 billion, not $23 trillion. The yield on the 10-year Treasury was 6%, not 1.36%. And the federal government recorded a surplus of $3 billion in 1969…not a $1 trillion deficit.

Today, our Humpty Dumpty is far bigger and on a much higher wall.

And today, every snowstorm is a big media event. Every guy with a grudge is a ‘terrorist’. And a new bug is an opportunity for the authorities to show how tough they are.

Left alone, the virus may do little damage to the economy. But nobody wants to die. And it is easy to imagine what might happen when the feds take charge. Already, USA Today reports that:

‘A swath of ‘hot spot’ cities and towns across northern Italy were in lockdown Monday as authorities battled to contain a fast-spreading outbreak of the new coronavirus that has killed 2,600 people in China.

‘The unrelenting spread of the virus pushed global stocks sharply lower Monday amid fears that the outbreak could become a global pandemic — a worldwide outbreak of a serious new illness. The global death toll reached 2,699 on Monday night, with more than 80,000 confirmed cases.’

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So far there are only 14 cases of the virus in the US, all of them being carefully monitored. But suppose, suddenly, a few dozen new cases of the dreaded ailment turn up in Washington, DC? Where did they come from? How many more are out there?

Will the airports be closed? Will the city be locked down? How low will stocks go before trading is suspended?

And then, what would happen in the rest of the country? Will people think twice before they go out of the house? What will happen to GDP?

We don’t know what that might be like. So, tomorrow, we’ll introduce a new word to help us imagine it.


Bill Bonner,
For The Rum Rebellion

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries.

A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities.

Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally.

With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance.

Bill has been a weekly contributor to The Rum Rebellion.

The Rum Rebellion