BALTIMORE, MARYLAND – Trading continued yesterday… with stocks swinging lustily from tree to tree like drunken monkeys.

When the closing bell finally sounded, the Dow was down just 79 points. The monkeys were greatly relieved.

And today, the Fed sets up another drink. Here’s a headline from The Wall Street Journal:

Fed May Slow Rate Increase Pace

Our advice to readers: Relax… and enjoy the comedy show.

Buffett Indicator

Deutsche Bank reports that 89% of the world’s assets are in negative territory so far in 2018 – in dollar terms. Is this a buying opportunity?

Presidential economic advisor Larry Kudlow must think so. This is what he told Fox News recently:

The economy is in terrific shape. We’re in an economic boom. People thought it would be impossible. The reality is we are clicking on all cylinders. They are absolutely crushing it, profits are rising, confidence is up, blue-collars are up, wages are up…

But stocks are now falling. Worldwide, about $5 trillion has already been knocked off stock values. The S&P 500 is about 10% below its top in September. And the FAANG stocks – the leading technology stocks – are down about 25% from their highs.

Still, they’ve got a long way to go.

Warren Buffett’s favorite yardstick for valuing stocks measures the relationship of total market capitalization (the value of all stocks added together) to GDP. The ratio should be well below 100%. Stocks cannot be worth much more than the GDP of the country that supports them.

But this ratio is now as high as it’s ever been – it’s about even with the top of the great bubble market of 1999.

Stocks today are equal to about 150% of GDP. The Dow would have to fall by nearly 50% to get back to normal.

Dow 10,000

Another, more indirect, way to look at it is to compare U.S. household net worth (which includes real estate, bonds, and stocks) to national output.

Since housing, collectibles, art, bonds, and just about everything else are all up substantially, this ratio is at a new record high – at 5 times GDP. Stocks (and other assets) would have to drop by about 30% to bring this back to its historical average.

Another calculation looks at the number of hours the typical person would have to work to buy the S&P 500 Index.

Take 1980, for example. Based on median wages and the S&P trading around 120, it took only 20 hours of toting, schlepping, and busting one’s hump to buy the 500 stocks in the index.

Today, it takes 120 – a new record. The average since the 1960s is only about 50. That implies a setback for stock prices of about 60%.

Dow 10,000… Here we come!

Greenspan Put

But not to worry. Investors think they have both the Fed and the White House backing them up.

You’ll recall the famous “Greenspan Put.” The idea, developed after the 1987 crash, was that the Alan Greenspan-led Fed would come to the aid of stock market investors and prevent any permanent losses.

Prices could fall suddenly and sharply, but it wouldn’t take the Fed long to come to the rescue. In the late 1980s/early 1990s, for example, the Fed cut some 700 basis points – 7% – off the federal funds rate, causing the bubble market of the late 1990s.

Then, after the inevitable blowup, once again, Greenspan rushed in where angels feared to tread. The federal funds rate was cut by 500 basis points, a welcome increase of spirits in the punchbowl.

And it did the trick; the EZ-money party soon started up again.

Greenspan’s successor, Ben Bernanke, used this magic again after stocks collapsed in 2008-2009. This time, though, he started from a lower position, with only about 500 basis points available.

In the panic, he cut them all… down to zero. He also increased the Fed’s monetary base – by inventing nearly $4 trillion of new money with which to buy bonds.

Again, the remedy worked – in the sense that it reinflated the bubble.

So investors are probably thinking that another big downturn will be followed by another big rescue.

They may be right, too, in thinking that they now have the president of the United States in their corner, as well as the Fed.

President T. knows that he will be the biggest loser in a bear market. His reputation as a financial master will be ruined. His political career (notably, his chances of re-election) will be trashed. And his own fortune will get banged up badly, too.

Trump will do whatever he can to keep prices rising on Wall Street – including pressuring the Fed to cut rates… announcing a phantom trade deal with China… running huge deficits… cutting taxes… or simply talking up the economy with his usual mixture of real bravura and counterfeit facts.

But this time, it may not be so easy to restart the party.

Negative Territory

First, the Fed now has only 225 basis points to work with. It can cut them. But then, it will be in negative territory.

But since the inflation rate is about 2.50%… it is already in negative territory, in real terms.

Diving deeper into the dark pool could have some very strange and unwelcome consequences. The Fed will be chary of doing so. (But it will go for it anyway… as we will see.)

As for the president, he will respond as expected, too. He will come up with his own Bush-style TARP program – focused on infrastructure boondoggles.

But like the Fed, he starts from a weaker position than Bush did. The feds are already running a $1.2 trillion deficit. Their knees will quake at the thought of a $2 trillion deficit.

That won’t stop them, of course… but the additional deficits will drive up consumer prices, and probably result in some form of stagflation in the economy.

Debt will soar. Growth will slump.

And how about stocks? Will they go up again, as both Trump and Powell exercise their “puts”?

Not necessarily.

The Japanese had plenty of puts, too, and used them all after their bubble popped in 1989. But the Nikkei index never recovered. It’s still down 30% – 30 years later!

When the next crash comes, it could be decades before we see the Dow at 26,000 again.

Stay tuned…





By Joe Withrow, Head of Research, Bonner & Partners

As Bill mentioned in today’s Diary, U.S. stocks are now as richly valued compared to GDP as they have ever been – matching their valuations at the peak of the dot-com boom.

Today’s chart tracks the percentage of total U.S. stock market capitalization – as measured by the Wilshire 5000 Total Market Index – relative to U.S. GDP.

This valuation metric is often called the “Buffett Indicator.” Renowned investor Warren Buffett once told Fortune magazine that total market cap-to-GDP was “probably the best single measure of where valuations stand at any given moment.”


As you can see from the chart above, the ratio of U.S. stocks-to-GDP hit 148% – its highest level since the dot-com peak in 1999/2000.

Investors should take this as a major cautionary sign.

As you know, the name of the game is to buy low and sell high. So buying stocks when they are cheap is when you have the best chance of making money.

It is certainly possible that stocks could get even more expensive from here… but trying to buy high and sell higher is ultimately a fool’s game…

Joe Withrow


Start-Ups’ Existential Crisis
High-tech start-ups in Silicon Valley were once the envy of the world. There was a time when, if a company was going to change the world, it was coming out of Silicon Valley. But that could be changing.

You’re the Product
Recently, internal emails from Facebook’s CEO, Mark Zuckerberg, were made public by the British government. The emails reveal what we should already know: You’re the product.

And read also…

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In the mailbag, talk turns to Bill’s Diary on global warming

If the Earth is, in fact, getting warmer, it’s not due to anything mankind is doing; we are just not that powerful. Duh… Why do some scientists claim that it is? There is way too much speculation. I’m not going to worry about something that may be cyclical or some other type of natural occurrence. If it is fabricated, shame, shame on these scientists.

– Ray T.

Simple, uncontested physics (a real science) would logically infer that the entire CO2 theory of global warming is hugely expensive, absolute garbage. The garbage theory is that CO2 traps heat in our atmosphere. It absorbs infra-red radiation (IR) from the Earth and radiates it back to the Earth. That much is true, to an unknown extent.

If this happens in any meaningful way, given the low concentration of CO2 in the atmosphere, then the same process would reflect IR from the sun, away from the Earth. CO2 would logically provide shade during the day and insulation at night. The emission of IR is proportional to the temperature of the object emitting it. The sun radiates hugely more IR than the Earth does. Half the energy the sun radiates is IR.

Don’t be scared by the solemn pronouncements of the buffoons of doom. Their theory is physically impossible. Why aren’t physicists shouting this from the rooftops?

– Terry H.

Is global warming caused by man? Al Gore certainly wanted everyone to believe this. How else would he become a millionaire many times over without selling this fairytale to everyone gullible enough to listen?

Global warming is certainly happening, but it would happen regardless of human existence. It certainly is caused by the natural happenings of the universe, and not by man.

I also may add that a recession is a natural-occurring thing. If one was to repeatedly call this out, one would certainly get it right eventually. Why do you repeat, repeat, and repeat? It gets annoying eventually!

– David M.

Excellent balanced analysis, Bill, of the global warming controversy. In Canada, we are having a new carbon tax on “pollution” (the new political name for CO2) pushed on us by the Trudeau government.

Like you, I would rather wait and see, and monitor the potential benefits of doing nothing with the unproven benefits and costs of radical intervention.

– Rick F.