Stocks in the Crazy Years: The Bubble in Central Banking

Dear Reader,

Poor Australia. Caught between an authoritarian, nationalistic and rising empire in Beijing and an indebted, decoherent falling empire in the US. With friends like that, who needs enemies? Then again, to paraphrase Lord Palmerston, nations don’t really have friends or enemies, they only have interests. I’ll come back to Australia’s interests in these crazy years in a moment.

But speaking of crazy, what do you make of the wild gyrations on markets? The ASX 200 fell 3.1% on Friday after a 1.89% drop on Thursday. Compared to the 6% fall on the S&P 500 on Thursday, it doesn’t seem so bad. But the numbers don’t tell the real story.

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What’s the real story?

The real story is that nobody knows what numbers are real and what numbers are fake. The S&P’s 35% rise off the March lows was supported by a huge expansion in liquidity from the US Federal Reserve and trillions of dollars in emergency spending from the US Congress. If the liquidity flows, stocks tend to rise.

And valuations? They don’t seem to matter much. Nor to the so-called ‘fundamentals’. And by that I mean the impact of millions of unemployed workers and thousands of businesses that are insolvent and on the verge of bankruptcy. That, of course, is thanks to COVID-19 and the decision of State and Federal governments to put the economy in ‘lockdown’.

Here we are, gently on the way out of lockdown. But we don’t know how many of the lost jobs will come back. And we don’t know whether businesses will be in the mood to hire and invest. Or whether consumers will be in the mood to borrow and spend. Or whether the dreaded ‘second wave’ of COVID-19 infections the experts have warned about will lead to another lockdown.

With so many ‘known unknowns’ — pandemic, depression, war — not to mention ‘unknown unknowns’ (things we don’t even know that we don’t know yet), the stock market’s behaviour is perplexing. But this is one of the great challenges of our investment time.

Do we trust the market price in the face of our own doubts?

Investment greats like Paul Tudor Jones and Stanley Druckenmiller say this market rally has ‘humbled’ them. They expected the crash to be long and grinding. But the fiscal and monetary policy response was so effective that it’s like the whole pandemic — and the 44 million new unemployment claims in the US — never happened.

It DID happen though. Which brings us back to the problem. You can argue with the market the way an old man yells at a cloud. But you’re still yelling at a cloud. A realistic (or at least agnostic) strategy would be to let the market be the market, trust the price, and if you see stocks climbing a wall of worry too higher highs, set your own feelings and prejudices aside.

Our brains aren’t wired that way, though. We are wired to feel fear. We are wired to base our future expectations on our past experiences (for better or for worse). It takes an almost abnormal act of will to set aside your swirling emotions and to base financial decisions on ‘the facts’.

It doesn’t help that we’re living in what American author Robert Heinlein called ‘the crazy years’. The headline crazy is the US coming apart at the seams over racial conflict. Not far behind is China’s emerging kind of crazy, killing of ‘one country two systems’ autonomy of Hong Kong (as a precursor for ‘reunification with Taiwan’). And then there’s the technological crazy of having suddenly, almost overnight, realising we are living in a total surveillance police state (and in the US with a militarised police force).

The comforting thing about being a market agnostic is you can avoid all the crazy politics and focus on price. And if the price is a real thing, the politics, the crazy, the wars, the pandemics and what not, none of those matter. You steadfastly ignore them and stick to your plan.

The biggest issue, by far, is whether the price in markets can be trusted. That is, a market supported by emergency central bank liquidity isn’t really a ‘normal’ market, is it? The price is distorted because investor behavior is distorted by the intervention. If you ‘know’ that policy makers have put a huge safety net under asset prices, you’re more likely to engage in even riskier behaviour.

Here’s the bottom line: the risk of another 50% crash in markets is as high now as it was in March when COVID lockdowns were ‘priced in’. COVID was the needle that pricked a valuation bubble. But the even bigger bubble has been blowing since 1987. That’s the bubble in central banking.

Another way of putting it is that the US’ imperial power is based on a big military financed by a dollar-based global financial system. It’s THAT system that now appears to be in free fall. When it reaches terminal velocity, the basic trade and financial relationships that have held the world together over the last 50 years will change.

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How does Australia navigate that change? Do you throw your lot in with authoritarian communist China and sign of the Belt and Road and take the money and run? Or do you double down on liberal values of freedom of speech, sound money, the rule of law, and limited government? Or is there a third way? Send us your thoughts to

with ‘Rum Rebellion stocks in the crazy years’ in the subject line.

Until next time,

Dan Denning,
Editor, The Rum Rebellion

Dan Denning is the co-author of The Bonner-Denning Letter.

Dan was a founder of Port Phillip Publishing back in 2005, which quickly became the leading publisher of its kind for independent financial research and insights. In 2014 he left to head up Southbank Investment Research in the UK. Dan is also the author of the 2005 book, The Bull Hunter. Today, he’s based in his home state of Colorado. Each Monday in The Rum Rebellion you’ll get Dan’s unique contrarian thinking to provide insights you won’t find anywhere else.

Dan Denning’s belief in free markets, sound money, personal liberty, and small government have underpinned everything he’s done during his 23 years in the financial publishing industry.

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