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Double Whammy: Recession and COVID-19

In this article, we will endeavor to evaluate one of the single most important graphics I will ever create to illustrate the profound psychological and generational effects of social myopia and herd mentality. 

The contents of this article are as relevant today as ever, and their piercing insights into the pattern of social fallibility and shortsightedness expose the limits of human understanding and the implications of historical illiteracy. Beyond the guidance afforded the reader, this article outlines the risks of failing to learn from history, which is littered everywhere with cautionary tales about human nature and the immeasurable costs of naiveté. 

In most cases of learning, the modern student mistakenly stows away information as academic trivia worthy only of classroom consideration. In the study of history, the student erroneously assumes, whether knowingly or unknowingly, that contemporary society and its boundless technologies have distanced our species from the reported follies of our predecessors, who were simply uneducated and technologically deprived. 

With the benefit of unsurpassed technology and the divine wisdom of credentialed men and women, whose diction is as eloquent as their appearance is elegant, how could we possibly recommit the mistakes of the past? 

Well, as it turns out, that technology and those credentials have insidiously distracted mankind from acknowledging its limits, effectively seducing the Western world into committing more obscure mistakes understood by only a limited few. 

The complexity of these modern mistakes prevents the average man, in their aftermath, from ever understanding whether anything’s actually been done to genuinely rectify them. 

This leaves the average man most vulnerable to the cunningly convincing tactics of politicians and their academic cronies, who together wield the inimitable power of eloquence and knowledge to their own political and commercial advantage. 

Given the esoteric nature of the complex modern world, the average man is always more vulnerable today than ever before, and the history of the stock market, as we'll soon discover, proves this very point. 

Whereas most people assume that stocks, along with real estate, can only appreciate, the historical record thoroughly disproves this misconception. 

While the Dow Jones Industrial Average currently trades 70 percent below its 1999 peak, as measured against gold, US equities will continue their secular bear market throughout the 2020s, at minimum, until the DJIA is worth roughly one ounce of gold. The historical record also demonstrates that stocks, on average, take several decades to return to their previous highs. 

Upon the stock market decline beginning in 1929, Black Thursday on October 24 witnessed a meteoric decline in share prices. Led by automobile stocks, the Dow Jones would tumble 11 percent by market close, with a trading volume triple the normal level. 

The very next day, President Herbert Hoover rushed to restore confidence: "The fundamental business of the country, that is production and distribution of commodities, is on a sound and prosperous basis." His efforts would prove futile.

Black Monday on October 28 witnessed a further DJIA decline of 12.82 percent, followed by an 11.73-percent decline on Black Tuesday the very next day. 

This brought the Dow Jones Industrial Average to 230.07, down from its peak of 381.17 reached on September 3, 1929, after an eight-year run that began August of 1921, when the DJIA traded at 67.11. 

On July 8, 1932, two years and nine months after the carnage of Black Monday and Tuesday, the DJIA posted an intraday low of 40.56 before closing the session at 41.22, marking a full 90-percent decline from its peak in September of ’29. 

In the lead-up to the Great Crash, cheap credit emboldened speculators and investors, who believed that the stock market would rise forever. President Hoover reassured investors in his inaugural address on March 4, 1929: "In the large view, we have reached a higher degree of comfort and security than ever existed before in the history of the world." 

In an era of boundless windfalls and the belief that the stock market could only make tycoons of paupers, Americans began to speculate with record levels of borrowed money, termed margin debt. Even just ahead of the decline, the Dow Jones gained more than 20 percent between June and September, just before economist Roger Babson’s ominous warning that “a crash is coming, and it may be terrific.” 

Between August of 1921 and August of 1929, the DJIA soared from 67.11 to 380.33, a 467-percent increase over eight years. Investors and speculators were so brazenly confident that, even in the face of a 28-percent decline through August and September, they casually characterized the “Babson Break” as a “healthy correction” and a “buying opportunity.” 

While the 1929 crash would usher in a short-term buying opportunity, whereby the Dow Jones Industrial Average would rise fifty percent over the ensuing five months, this would officially mark the end of the decade-long bull market as the Dow would thereafter plunge by nearly ninety percent between April of 1930 and July of 1932. It would ultimately take more than 25 years for the Dow Jones to even return to its 1929 peak, as measured in dollars; it would take fully 30 years before the Dow would finally recover in terms of gold. 

In the plainest of language, the speculation and cheap credit of the 1920s have nothing on the speculation and cheap credit of the most recent decades, where debt and stock market confidence dwarf their counterparts of the 1920s. 

The new millennia has already witnessed the single greatest levels of sustained and peak margin debt, along with record levels of share repurchases, in the history of the US stock market, which has, in keeping with the Roaring Twenties, produced unprecedented gains in the stock market, and with them irrational exuberance and the illusion of free money. 

The latest rally in the Dow Jones marked the longest bull market in history, completing a 356-percent increase between March 6, 2009, and February 12, 2020. 

Pursuant to his 1920 campaign promise, "Less government in business and more business in government," President Warren G. Harding reduced federal spending from $6.3 billion in 1920 to $5 billion in 1921, then down to $3.3 billion in 1922. From there, President Coolidge would reduce federal spending by one third. By the turn of the decade in 1930, the public debt was $15.05 billion, or 16.5 percent of GDP, ahead of President Roosevelt's inordinately pricy New Deal programs; this hardly compares to today's debt load of $23.589 trillion, or 109 percent of GDP, as government spending has since eclipsed $8 trillion annually, roughly 40 percent of GDP, across federal, state and local outlays. 

Even in the depths of World War II, total government outlays exceeded 35 percent of GDP for only four years, climbing as high as 50 percent in 1945 before shrinking below 25 percent in 1948; meanwhile, government spending has hovered near or above 30 percent over each of the past fifty years  above 40 percent since 2001  as the public debt has surged from $5.656 trillion (or 58 percent of GDP) in 1999 to $23.589 trillion, or 109 percent of GDP, today

Between 2009 and 2020, the Dow Jones recovered from a low of 6,469.95 to its all-time high of 29,551.42, a 356-percent increase. Measured in gold, however, we find a more modest rally of 130 percent, and that the 2020 high is grossly overstated in comparison to its 1999 high. For those keeping score at home, the Dow Jones would have to eclipse 36,000 in order to match its decade high, or 69,000 in order to match its all-time high set in 1999.

In the midst of the dot-com bubble, the Dow peaked at 42 ounces of gold in 1999, before plunging to 6 ounces of gold in August of 2011, as the Federal Reserve suppressed interest rates to near-zero and launched a series of quantitative easing efforts to inject trillions of dollars of liquidity into the bond and mortgage markets in order to buoy asset prices and salvage the illusion of a viable economy. 

After repetitive claims that the Federal Reserve would not monetize debt, that they would eventually normalize their swelling balance sheet of US Treasurys and mortgage-backed securities, they would ultimately amass $4.5 trillion in assets by January of 2015. Meanwhile, the federal funds rate would remain at or near zero for the duration of this period. The combination of a confident Federal Reserve, extraordinarily cheap credit, and rising asset prices, generated frothy optimism in a stock market rally lacking beyond luster. 

Out of accordance with the rest of history, the latest bull market lacked the confirmation of the Dow-to-gold ratio, which rose only as high as 22 over the period, 48 percent below the 1999 high, which remains the highest in history. This implies that, while the Dow peaked at 11,497.12 in 1999, remarkably 18,054.30 points (or 61 percent) below the 2020 high, it was really worth 91 percent more than the 2020 high. 

What can we take away from all of this? 

First, “corrections” are not always prime buying opportunities, as they are often the beginnings of an extended and thorough recession. Second, speculation run amok can drag share prices to the moon, yet atmospheric reentry often proves a much longer and more violent process than expected. Third, while US equities have risen to all-time highs in the year 2020, they have accomplished this feat merely in nominal dollar terms, obscuring the truth of a secular bear market over the past two decades, which has witnessed a gold-denominated decline in excess of 70 percent since 1999. 

Ultimately, with history and principle as our guide, we can expect the secular bear market to continue unabated throughout the next decade. In the face of financial crisis and panic surrounding the COVID-19 pandemic, government officials and the Federal Reserve have already launched their latest quantitative-easing efforts. 

Consequently, the Federal Reserve has increased its balance sheet to $4.7 trillion as it returned to its zero interest-rate policy, after reluctantly approving nine incremental rate hikes to 2.4 percent between December 2015 and January 2019. After more than three years of purported progress, rates would hold around 2.4 percent for the first two quarters of 2019, whereafter the Fed would take only seven months to cut rates to 1.55 percent in November of 2019. 

From this point, it would take only thirteen days in total for the Fed to finally slash rates back to zero, a decision announced on Sunday, March 15, 2020.  While it took the Federal Reserve ten whole years to symbolically raise rates to a trivial 2.4 percent, it took only eight months to return all the way back to zero. 

Similarly, it would take four years for the Federal Reserve to shed $700 billion from its massive balance sheet, only to turn around and add $1 trillion over six short months. 

An honest evaluation of federal funds rate history demonstrates the urgency of the Federal Reserve to cut rates into recessions, and the present case is clearly no different, varying only in the severity and precariousness of the circumstances. 

In a sober case study of trends pertaining to the economic conditions of the average American household, we may uncover the true state of the American economy, which is best assessed at the household level than on Wall Street. 

One of the metrics we can use to gauge the condition of the average American household is the quality of its income. 

Not surprisingly, we get two very different outcomes when evaluating household income in dollars as opposed to gold. 

In 1967, average household income is reported as $7,989 per year: this equated to 228 ounces of gold. In 2019, average household income is reported as $89,930, up an astounding 1,025 percent since 1967. 

However, when measured against gold, average household income came in at a mere 59 ounces, a 74-percent decline over the period. However, the condition of an economy isn’t gauged purely by the quality of one’s income, but by the capacity of the household to save for the future. Fortunately, the Federal Reserve economic data are readily available for this comparison. 

According to the data, personal saving was roughly 11.8 percent in 1967, good enough for approximately $942 annually. According to the latest statistics, Americans are now saving roughly 7.5 percent of their income, or $6,744 annually. 

While this is a minor improvement over the period between 2004 and 2007, when Americans saved only 3 percent of their income (or $2,413 per annum), it constitutes an 84-percent decrease, as measured in gold, since 1967. 

Deeper investigation exposes an even more alarming truth, as the FRED data characterize personal saving “generally… as the portion of personal income that is used either to provide funds to capital markets or to invest in real assets such as residences.” In an economy fraught with debt, cheap credit and speculation, this means that savings and equity, rendered erroneously fungible by the conventions of modern statisticians, are both illusory and far less dependable than in the past. It also means that the data misrepresent the true condition of the average American household. Indeed, according to latest reports on the subject, more than 69 percent of Americans have less than $1,000 in savings. According to the same report, more than 45 percent of Americans have nothing saved. 

What's worse, whereas the average American household saved more than 12 percent of its income and held virtually no debt in 1950, the modern American household carries more than $31,420 of non-mortgage debt, relative to a median family income of $78,646, with a saving rate below 8 percent. The average American household's revolving debt, comprised primarily of consumer credit, has increased by more than 24,500 percent since 1970, adjusting for inflation. Meanwhile, Americans carry record levels of student loan and auto debt to boot. 

In total, Americans owe more than $1.2 trillion in auto loan debt, more than $1.6 trillion in student loan debt. By definition, this debt draws from future investment and consumption, which combines with corporate debt, the greater public debt and unfunded liabilities to project a bleak forecast for the future of economic growth in the United States, where capital will inevitably be directed toward debt repayment away from business investment and capital formation, and incidentally away from its plentiful byproducts we all too often take for granted.

Ultimately, the economic condition of the average American today is hardly different from the heroin addict who depends daily upon an injection of stimulus, whether through a revolving door of cheap credit, an artificially high wage or a direct subsidy, to suspend his reality. Once deprived of that stimulus, he enters withdrawal and the sobering reality of the world he’s all too long avoided. 

In its fruitless attempts to rescue the languishing American economy, the Federal Reserve has already exhausted its entire arsenal in the very infancy of this downtrend, and history reminds us just how long and excruciatingly painful that can be. 

While the US dollar index (DXY) and long-term Treasurys have outperformed thus far, the trend will invariably turn around as the true implications of recession and insolvency weigh on the dollar’s status as the world’s reserve currency. 

As stimulus fails again to revive the American economy, and as the Federal Reserve fails to buoy the stock and real estate markets, investors will come to terms with the reality of debt monetization, fiscal and current account deficits, and their implications for Treasurys and the US dollar, whose performance relies more precariously than ever upon confidence predicated upon the price performance of stocks and other assets. 

Rest assured, the lender of last resort will continue to blow air into this bubble, through the corridors of Wall Street and Main Street, even long after it's popped. Without fail, the Fed will forsake the dollar in delivering on its promise, its dual mandate, to drive prices higher and keep Americans busy.

Dazzled by the blissful optimism of financial commentators, whose own conflicts of interest inherently prevent them from being objective in their coverage, the average American is always fooled into interpreting every market pullback as a buying opportunity. 

The modern American is so thoroughly conditioned to measure his wealth in dollars and digital formations, among them dollar-denominated stock and real estate holdings, that, even in the face of widespread shortages, rampant inflation, sharp selloffs, and the inability to buy much of anything with them, he will still measure his wealth in dollars while mindlessly entrusting those markets with the responsibility of preserving his wealth.

Of course, the average Baby Boomer, and even those of earlier generations who’ve long forgotten their history, would ask incredulously, “Why not?” 

As far as he’s concerned, the strategy has prevailed across his entire lifetime, whereupon the Dow Jones has skyrocketed from 607 points in 1974 to 29,551 points in 2020. 

In his mind, the stock market always goes up, and he assumes that any sale of stock today would only guarantee a higher re-entry price at a later date. 

Never mind the historical record, much less the lurking and tedious laws of economics, which might caution the average investor to heed the warnings of the past. 

With a clear head, we can do just that.

Although we are not far removed from the depths of the Great Recession, the average American has long since evicted those memories from his mind, opting to roll the dice again, this time more intelligently. Or so he thought. 

The average American, engrossed in mainstream media, never really learned anything from the Great Recession, accepting the losses while assuming that smarter men in suits would solve the problems. Well, they haven’t, and they never will. 

They will play their violins and sing their tunes as long as the ship stays above the water, orchestrating a game of musical chairs on the deck of the Titanic as it sinks to the bottom of the Atlantic. 

With a clear head, we can reserve a seat on one of the lifeboats, instead of negotiating for a seat aboard the sinking ship.

Those who still believe that the markets are impervious to shocks of this magnitude need only to remember the not-so-distant history of bear markets. 

Between 1999 and 2009, the major stock indices surrendered more than half their inflation-adjusted dollar value, only to recover those losses after 14 years. 

Beginning in 1966, stocks would lose more than three quarters of their value over 16.5 years; it would be more than 30 years in total before the market would recover. 

Measured in gold, each of these bear markets was even longer and more pronounced, with losses measuring 86 percent between 1999 and 2009, a full 95 percent between 1966 and 1980. 

Ultimately, it’s not only the severity of the decline, but the period of the recovery, that merits consideration before playing musical chairs or tossing the life preserver overboard and going back to bed. 

Unfortunately for the many, the tunes will lull them back into the game, or back to sleep, as the inevitable takes shape before them.

In a technical development this past week, US stocks have retraced their steps back to the day of Donald Trump's election, when the Dow Jones traded at 18,332.74. This decline has already erased the entire Trump rally, despite the president's repeated claims that this is the greatest economy in the history of our country. 

What's more, the 50-day moving average has descended below the 200-day moving average, forming a death cross in the Dow Jones Industrial Average. This follows a 35-percent decline in the Dow, as measured in dollars, and fully a 45-percent plunge when measured in gold.

Traditionally signaling the continuation of a downward trend, this development aligns with the economic fundamentals and the undeniable truth that we have, as Americans, spent and borrowed too much, and produced and saved too little, for far too long. As far as COVID-19 is concerned, it's merely the final snowflake to set this avalanche in motion.

As hard as the Federal Reserve has worked to convince the markets that we can paper our way out of debt, that we can print, spend and speculate our way to prosperity, and that low rates and Dow 30,000 are the new age of America’s manifest destiny, the laws of economics are here to “demonstrate to men how little they really know about what they imagine they can design."


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