Northman Trader: The Lesson

Sven Henrich of Northman Trader has a post up about the fragility of the US economy, the fickleness of politicians, and other lessons –The Lesson.

The lesson of it all? The lesson is that lessons are not being learned. Of course the human species has an ingrained problem: We are all born with a blank sheet and have to learn everything from scratch. It would be helpful though if the elders could pass lessons from past mistakes on to the new generation.

But no. So we keep making the same stupid mistakes.

And here we are. Just four weeks after all time highs in markets America is again turning into bailout nation.

Yes coronavirus is an unforeseen shock. So what?

We’re supposed to handle a shock. We’re supposed to be prepared. We’re supposed to have savings and great balance sheets. After an 11 year recovery and market bull run based on cheap and easy money shouldn’t things be great and shouldn’t we be well prepared for the next downturn?

Is that really too much to ask?


We can’t even go 4 weeks without the Fed going apeshit on cutting rates to zero, launching $700B in QE, making discount windows available and launching $500B, even trillion dollar repos.

We can’t even go 4 weeks without the government launching a proposed $850B stimulus package, tax cuts, free money checks of $1,000 to Americans and suggesting bailouts for $BA and $GE.

That’s how fragile things are. They must be, otherwise the system would be able to handle a temporary shock.

But it can’t. Why?

Well for one our supposed great economy ever has the vast majority of Americans live paycheck to paycheck:

That’s a systemic problem. Sure you can blame people for living beyond their means, but in general most people just don’t have the income power to keep abreast with rising medial costs, home prices and all the other fun inflationary items that the Fed simply doesn’t count as inflation. How ignorant they are. PCE deflator. Please.

And then of course the same lesson again not learned that keeps repeating ahead of every bust: Greed and more greed.

When has it ever been a good idea to chase stocks to 150% market cap to GDP or even higher?

The answer is never. Yet they convinced themselves and others that it’s different this time. New flash: It wasn’t.

A lesson not learned and yet they did it. The chart was screaming unsutainability. And here we are 4 weeks later, yesterday closing at 109.5% market cap to GDP:

Reversion to the mean. And it could eventually get much worse.

I showed this chart in Bull Cliff in February and I stated:

“Investors keep piling money into this historically priced market….Central banks can deny all they want that they are not responsible for asset price inflation, but everybody knows better. The denials are not only hollow they are straight out lies.

And having created the Pavlovian effect we now see in the investment community they are leading investors to abandon all sense of risk when risks are mounting ever more around us as valuations and earnings multiples keep expanding as a result of monetary policy. And hence it may be said that central bankers may be leading investors off the cliff.”

Well done. Did anyone listen? I can’t say, but most haven’t. And now they are all in major pain…(continues)

Click here to read the entire article at Northman Trader.