I said financing is far more equity oriented than debt oriented in comparison to the past when high taxation, regulation, and anti-competitive business philosophy forced capacity expansion to be underwritten with debt offerings.
I don't agree that corporate debt levels are at extreme highs, and don't agree that the debt to equity ratio looks OK because equity prices are so high. Debt to equity looks good because we are in prosperity so take downs aren't necessary.
None of this puts Net companies at risk. It is inability to make money that does, because there are few ways to make a profit online. The equity capital has taken these companies as far as it can. They have to become self-sustaining. They are being thrown out of the nest. Most will die in the fall.
The FED is always able to contain a crash. Indeed, this has been the core problem since the '30s. I thought that after 1980 the FED would have gained enough wisdom to recognize they have to let the economy go all the way back to the '30s and let it work out its problems on its own. Instead, in 1982 they decided to intervene again which has finally brought about payback time.
The way the FED contains a crash is by money creation. The risk is that propping up stock prices exacts a toll in industrial economy through higher inflation. This is where monetary inflation reinforces economic inflation. Economic inflation is the wealth effect where labor gets away with demanding compensation in excess of output.
The FED is mandated under Humphrey-Hawkins to prevent economic upheaval due to stock price turbulence. They would never use economic prosperity to arbitrarily adjust stock prices down. The board members may acknowledge excesses in the stock market, but they wouldn't intentionally try to make adjustments. They would unintentionally try though. The method is for Fed presidents to jawbone the markets by publicly expressing their concerns. No overt action like reducing RP production would be invoked.
This is a problem since the net effect is to spray gasoline on the fire. The longer they delay stepping aside and letting the market determine the equilibrium price for loanable funds, the greater will be the final height to which rates will climb. The stock market knows this and is adjusting downward the most vulnerable issues first. The old line debt sensitive companies are already in strong bear trends. Only the new big tech companies which have extremely high returns on equity are able so far to escape. The escape is the action which bags the public.
As for action, in the past we have always seen major market declines after or before the 3rd rate increase.
Long ago we used to call that the "Three Steps and a Stumble
Rule". Probably only Don Boller remembers that one. It is inaccurate. You will never be able to find the rule valid in any rate chart, but there is some logic to it. It's similar to the proverbial straw or two's company and three's a crowd. When does data become effective? Third time is a charm. With the public, never.
This market is like no other we had before so it would not surprise me if it takes 4 rate increases.
The '50s were better. In many ways so were the late '60s. This market since late '97 has been impossible. You'll never get the public to admit it, but unless you were holding a tech fund, you would have had a tough time of it. I know because I have various contacts within the professional money management world. None of your stocks rise, but your portfolio does. This year it has been the higher the stock market goes, the more your portfolio loses.
There is a strong relationship to falling equity markets
and rising gold.
I don't agree. In some eras they are well-correlated. In others, anti-correlated. In the last 20 years stocks have risen and fallen although the long term is up, and gold has fallen and risen and is long term down, but about the only correlation has been the major trend and that has been anti. We are inflating and it is effecting gold by changing gold from a downtrend to a base. Since the FED can't stop feeding the fire of the will to inflate, gold will eventually change trend to up. CBs, mining companies, demand/supply, etc. are never reasons to hold gold. Never believe the claims to the contrary. All that stuff just creates a flat random walk. Inflation creates the uptrend.
I don't know how the gold price move will develop. It might be slow and not tradable. I just know that what the FED is doing, price fixing, guarantees gold will rise. The lock is that the FED doesn't see their daily intervention as interference. Governments never do. |
