Another week. Another high in US stocks. And another attack on the human spirit and the spirit of enterprise by authoritarian psychopaths in governments all over the world. Sadly, Australia is leading the way. And Victoria is right at the head of the line. Let’s dig in.
First stocks. Remember our basic idea to begin with: stocks were headed for a correction anyway in January of this year. Valuations were high. Animal spirits were reckless. Then came COVID.
Stocks crashed immediately all over the world. The bull market appeared to end. But then something remarkable happened. And no, I’m not just talking about government shutting down society and the economy. And no, I’m not talking about central banks pumping trillions into financial markets.
I’m talking about stocks roaring back to life and ignoring the millions of unemployed, the accumulation of sudden and massive deficits, and the creation of a permanent state of emergency that has crushed small businesses and thousands of lives. The stock market, by all appearances, has completely decoupled from economic realty.
Take the S&P 500. It made a new closing high on Friday above 3,500. It had its best August performance since 1984 (up 7.24%). It was the fifth straight week of gains. Importantly, as I explained in January to readers of The Bonner-Denning Letter, a close above 3,500 would make THIS bull market (having begun in March 2009) the best-performing bull market in US history (better than the tech bubble that popped in 2000).
Discover five ASX-listed firms that have been beaten down during the crisis…with the potential to rally strongly as the market recovers. Click here to learn more.
Why you should keep your eye on the Dow/Gold ratio…
Now we’re there. And for the record, I predicted in January that the S&P 500 would take out 3,500 and THEN crash by 50%. What I didn’t know at the time is that COVID would price the bubble and lead to a sudden 35% fall in most global indices. What now?
Keep your eye on the Dow/Gold ratio. The Dow Jones Industrial Index went positive for the year on Friday’s close. It’s been three out of the last four weeks. With the Dow at 28,653 and the US gold price at 1972 (also the year Victorian Premier Daniel Andrews was born), the Dow/Gold ratio is at 14.52. Why does that matter?
The main force driving all asset prices — in the US, in Australia, and across all asset classes — is the decline of fiat money against precious metals. One of the best expressions of this is the ratio between financial assets (as defined by the Dow) and gold (as defined by gold). When paper money declines against real things, it takes fewer ounces of gold to buy a ‘share’ of the Dow.
We reckon we’re in the midst of what my co-author Bill Bonner calls ‘gold’s long walk to destiny’. Bill is not normally so dramatic. But a 50% decline in stocks and gold rising to $5,000 or $10,000/oz IS dramatic. Yet why does the mainstream press NOT see it coming?
In a headline this weekend, Forbes asks ‘Can stock splits drive the S&P 500 above 500?’ As if changing the number of shares you own makes anyone richer. The main purpose of a stock split is to make the nominal price of a share appear cheaper to a stock-consuming public. The value of the share doesn’t change. Only a change in business conditions (lower costs, higher profit margins, more efficient use of capital) can do that.
But financial ‘journalism’ like that is a classic example of late-stage bubble thinking. It reminds me of the historical accounts of the South Sea bubble and the Mississippi bubble. In both cases, investors fell in love with the idea that far-away places — previously undiscovered or at least unexploited by European settlement — would generate vast riches.
Visions of future cash flows — virtual rivers of gold from the New World — danced in their heads. They bid up the present value of those future cash flows to sky-high levels. The levels were absurd to begin with, even though the New World DID have vast natural resource wealth. But when the absurd valuations gave way to the psychological phenomenon of mass delusion, the popping of the bubble was inevitable.
As it is now. The only caveat — and it’s a big one — is the decision by the US Federal Reserve to adopt a policy of ‘average inflation targeting’. In a big speech late last week, US Fed Chairman Jerome Powell declared himself the champion of the ruination of the US middle class. He said the Fed would let inflation run above average to combat the dual deflationary forces of debt and demographics.
Powell was making formal what investors and speculators have long suspected: the Fed will ignore inflation in asset prices in the name of avoiding deflation in consumer prices (which is nonexistent). I wrote a fuller analysis of this policy shift in the latest Bonner-Denning Letter (published later this week in Australia). The short version: monetary regime change and the death of paper money are well underway.
But speaking of the ruination of the middle class, all is proceeding as we have foreseen in Beijing on the Yarra. Crossbench members of Parliament are bargaining with the Andrews government overextending Victoria’s state of emergency by six months or 12. And this is reported as progress (Andrews was unilaterally proposing a 12-month extension).
Meanwhile, 9News breathlessly reports that a gang of anti-lockdown protestors spent yesterday afternoon terrorising police in Melbourne’s north. They’ve got it all wrong. It’s the police and the Andrews government that are terrorising the people. Masks, curfews, check points on public roads. Victoria, under Andrews, has quickly rolled out the most advanced police state in the Western world.
Australia’s politicians have become arrogant vandals
Victoria Police report that 192 people were fined yesterday alone for violating COVID restrictions. 20 people were fined for not wearing masks. 69 people were fined for breaking curfew. And astonishingly, 14,569 vehicles were stopped at police checkpoints. What’s worse, 4,284 ‘checks’ were conducted by police on people’s homes, businesses, or public places.
Tell me again how this is NOT a police state? This comes straight from the authoritarian fantasies of career politicians who believe that civil society and free enterprise wouldn’t exist without a government ‘plan’. It comes from the smokey-back room discussions of political elites who believe that less freedom and more control is what’s necessary for ‘the greater good’.
What on Earth would Daniel Andrews know about any of this? After spending six years getting a Bachelor of Arts degree in Politics and Classics from Monash, Andrews went straight into politics. He’s been there ever since. His resume is that of a man interested in studying and accumulating power to wield over others. Not of a man interested in serving his neighbours or his countrymen by creating wealth and opportunity.
To my knowledge, he’s never started a business, met a payroll, or had to deal with an irate customer in a retail business. He’s never had to serve an individual or marketplace by creating something of value with his labour. Yet his government has the gall to tell ordinary people their businesses aren’t essential and their work (the work they do to feed their family and pay their mortgage) isn’t valuable.
It’s the sort of thing only an idiot or tyrant would do. Often, you get two for one. My point: Australia’s politicians have become arrogant vandals, doing untold damage to complex arrangements they don’t understand, respect or value. COVID has become a blanket excuse to clamp down on human freedom. And in so doing, they are slowly crushing the spirit of thousands of Australians. When will it end?
Editor, The Rum Rebellion