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Generational Dynamics Web Log for 4-Mar-2017
4-Mar-17 World View -- Champagne corks pop as a 'Trump rally' sends Wall Street stocks parabolic

Web Log - March, 2017

4-Mar-17 World View -- Champagne corks pop as a 'Trump rally' sends Wall Street stocks parabolic

The velocity of money keeps plummeting, indicating no economic growth

by John J. Xenakis

This morning's key headlines from

Champagne corks pop as a 'Trump rally' sends Wall Street stocks parabolic

S&P 500 Price/Earnings ratio at 24.90 on March 3, indicating a huge and growing stock market bubble (WSJ)
S&P 500 Price/Earnings ratio at 24.90 on March 3, indicating a huge and growing stock market bubble (WSJ)

The Dow Jones Industrial Average has exploded upward some 2,000 points since the November 8 election, leading analysts to refer to it as "the Trump rally." The increase was infectious, and stock markets in Europe and Asia also surged. President Donald Trump tweeted on Thursday, "Since November 8th, Election Day, the stock market has posted $3.2 trillion in gains." It's believed that investors are reacting to Trump's promises to promote job growth with huge infrastructure spending and deep tax cuts to individuals and corporations.

When the word "parabolic" is applied to a stock market index (alluding to the mathematical curve called a "parabola"), it means that the stock market as been rising so rapidly, it appears to be the prelude to an imminent panic. Investors who have been popping their champagne corks in ebullient celebration out of all the money they believe they're making in the stock market are not using the word "parabolic," but that's what's going on nonetheless.

According to Friday's Wall Street Journal, the S&P 500 Price/Earnings index (stock valuations index) on Friday morning (Mar 3) was at an astronomically high 24.90. This is far above the historical average of 14, indicating that the stock market bubble is still growing, and could burst at any time. Generational Dynamics predicts that the P/E ratio will fall to the 5-6 range or lower, which is where it was as recently as 1982, resulting in a Dow Jones Industrial Average of 3000 or lower.

A stock market panic and crash is coming with 100% certainty. To this day, we still don't know what triggered the stock market panic in October 1929, and why it happened at that time rather than a little earlier or later, so we don't know what will trigger the approaching stock market panic and crash, though we know with certainty that it's coming.

David Stockman was President Ronald Reagan's budget director. He criticized some of the Reagan administration's budget proposals, and later said that Reagan has "taken him to the woodshed." That phrase has stuck with him in the 30+ years that have passed, and today he's considered to be a virtuoso budget authority. Like myself, he's been writing about the stock market bubble for several years.

In an interview last week, Stockman was asked whether the "Trump rally" can keep going. He replied:

"I donít think there is a snowballís chance in the hot place thatís going to happen. This is delusional. This is the greatest suckersí rally of all time. It is based on pure hopium and not any analysis at all as what it will take to push through a big tax cut. Donald Trump is in a trap. Today the debt is $20 trillion. Itís 106% of GDP. ... Trump is inheriting a built-in deficit of $10 trillion over the next decade under current policies that are built in. Yet, he wants more defense spending, not less. He wants drastic sweeping tax cuts for corporations and individuals. He wants to spend more money on border security and law enforcement. Heís going to do more for the veterans. He wants this big trillion dollar infrastructure program. You put all that together and itís madness. It doesnít even begin to add up, and it wonít happen when you are struggling with the $10 trillion of debt thatís coming down the pike and the $20 trillion thatís already on the books."

The huge stock market rise over the past few years hasn't made much sense from a fundamental point of view, in view of the meteoric S&P 500 price/earnings index, and the recent further parabolic climb makes even less sense. Even bullish analysts are saying that the stock market is way overdue for a correction. Whether the stock market continues, its parabolic climb, or has a small correction, or finally has its expected major stock market panic remains to be seen. Nikkei and David Stockman interview

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End of debt ceiling suspension on March 15 signals new Washington fiscal crisis

A law passed in 1917 places a limit on the amount of money that the United States government can borrow. This amount is known as the "debt ceiling" or "debt limit." When government debt reaches the debt ceiling, then it can no longer borrow money to spend, until Congress passes a law raising the debt ceiling to a higher value. In extreme cases, the government has to shut down completely.

Every couple of years the debt ceiling has to be increased, and there's a new political battle in Congress usually involving several forms of extortion by both parties over what other spending programs will be in the same bill as the debt ceiling increase.

Anyone who follows the political news will recall many well-publicized debt ceiling crises, starting with the 28 day government shutdown in 1995. Recently, there have been debt ceiling crises in August 2011, and January 2013.

You may wonder, Dear Reader, why there have been no debt ceiling crises since 2013. The answer is that both parties decided in 2015 to prevent a new debt crisis during the election campaign of 2016. So in October 2015, they passed a bill suspending the debt ceiling, allowing the Obama administration to spend as much money as it wanted.

Well, that debt ceiling suspension had an end date: March 15, 2017. On that date, whatever the current debt is of the government, that will be the new debt ceiling. That amount is approximately $20 trillion. In other words, within two weeks, the government will no longer be able to borrow money, until Congress passes a new bill to raise the debt ceiling.

The government can take "extraordinary measures" to keep running without borrowing more money: not make payments to states, not pay contractors, not pay bondholders, not pay Social Security, not pay tax refunds, and so forth. This will cause a great deal of pain to the people who don't get paid, but the government can keep running. But estimates are that even these measures will run out in October or November.

So Congress's agenda for this summer will be: repeal and replace Obamacare, costing hundreds of billions of dollars; past a $1 trillion infrastructure bill; pass hundreds of billions of dollars in corporate and individual tax cuts; and oh, by the way, increase the $20 trillion debt ceiling to something a lot higher. CNBC and CNN and Washington Examiner

The velocity of money keeps plummeting, indicating no economic growth

Back in the 1980s and 1990s, politicians could always count on having their debts and spending programs bailed out by economic growth. Politicians are expecting the same thing today. All they talk about is how they will spend money to grow the economy, and the economic growth will wipe out the debt. It's a fairy tale that used to work at the end of the last century, in a generational Unraveling era, but stopped working about 13 years ago when we entered a generational Crisis era.

What nobody wants to talk about is the velocity of money. This indicates the rate at which people are willing to spend money. You can't have economic growth if people aren't willing to spend money, which means that the velocity of money would have to increase. Instead, we have this:

Velocity of money, 1919 to 2017 (St. Louis Fed Fred Graph #366117)
Velocity of money, 1919 to 2017 (St. Louis Fed Fred Graph #366117)

When the real estate bubble burst in 2007, and the financial crisis occurred, millions of people went bankrupt or lost their homes. At that point, people stopped spending money. They used what money they had to pay off their debts and save money. As a result, the velocity of money has continued to fall steadily since then, just as it did during the Great Depression and World War II.

That's the reason why there's been on economic growth in over eight years, and why there won't be any substantial economic growth for the foreseeable future.

Investors who are pushing the stock market to new parabolic heights are completely oblivious to the fall in the velocity of money, and in fact have the vaguest clue what it means. Similarly, they're oblivious to the debt ceiling crisis that's approaching

And in news on Friday, Federal Reserve Chairman Janet Yellen indicated that the Fed may increase interest rates on March 15. It's the Fed's easy money policy that has been funding the stock market surge, so chalk this up as one more risk factor for the stock market as the summer approaches. Dow Jones

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(Comments: For reader comments, questions and discussion, see the 4-Mar-17 World View -- Champagne corks pop as a 'Trump rally' sends Wall Street stocks parabolic thread of the Generational Dynamics forum. Comments may be posted anonymously.) (4-Mar-2017) Permanent Link
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