Is it Black Monday or Another 2008?
It's official: we're in a bear market.
It seems like only yesterday -- well, 3 weeks ago -- that the S&P was floating on gossamer.
Crashing jobs, bankrupt manufacturing, millennials buying ramen on installment from Mom's basement, nothing could dent the coke-addled euphoria of Bidenomics -- er, Harrisnomics.
Since then it's been a rocky ride: Over those 3 weeks, the S&P dropped nearly 11% as the parade of economic data overwhelmed the media-amped combined powers of Janet Yellen, Jerome Powell, even cackles herself.
The question at this point is are we looking at a 1987-style flash-crash. Or are we in for a 2008 style reckoning or even a replay of the 1970's, this time without the BeeGees.
How we Got Here: ZIRP to Covid
So, first, how did we get here. The original sin, this cycle anyway, was zero interest rates -- ZIRP -- imposed on the crawling economy in the wake of the 2008 bailouts.
They did these to stimulate a limping economy with cheap money, but they actually cripple productivity, Japan being the poster child.
Zirp briefly relented as the Fed hiked to poke a stick in the bicycle wheel of Trump's economy. Only to be taken up once more when Covid hit and the Great Reset came into view.
Covid nearly doubled federal spending as the deficit hit nearly $3 trillion in 2021, Joe Biden's first year.
Bidenflation
By failing to stop trillion-dollar deficits metastasizing, the Fed midwifed Bidenflation.
Then, when the inflation headlines got embarrassing, the Fed shivved the real economy with the most savage rate hikes since the 70's.
Metaphorically, the Fed bulldozed all the cars off the highway so Joe Biden can drive fast.
Even when it was obvious that Covid was done, the Fed yes-sir'd with gusto, dutifully financing permanent trillion-dollar deficits while keeping interest rates higher for longer to keep that highway bulldozed.
This sapped the real economy to the point most jobs were deficit bought, going to government and what the Wall Street Journal called the welfare industrial complex.
The Data Swamps the Narrative
But it was all academic until last week, when markets finally broke on a series of bad job reports culminating in Friday's report showing monthly jobs dropping by half.
Interestingly, Charles Payne overlaid a chart of the Nasdaq and Kamala's betting markets odds, turns out it was one for one.
That is, as Kamala's chances of winning go up, markets go down.
The first to break were the high-flyers -- the tech-heavy Magnificent 7 that have been holding up the entire market.
This spread by Monday to the entire market, with pretty much everything collapsing but gold.
Japan's implosion over the weekend added fuel to the fire as the Nikkei dropped by a fifth in two days and the US volatility index hit the 3rd worst in 35 years.
What’s Next
The $64,000 question is whether this past week is another Black Monday like 1987 -- a 23% flash crash that resolved quickly. Or are we looking at a repeat of the 5-years crisis in 2008 or even the decade-long catastrophe of the 70's, this time with no Paul Volcker to save the day.
That, at heart, is a question of the economic fundamentals and what policy's coming next. If, as in 1987, the underlying economy is sound and the President is pro-growth, then even a true crash bounces right off -- in 1987 it took 9 months.
But if the underlying economy is unhealthy -- say, if it's made of fake jobs, subsidy-spawned cronies, and $35 trillion in debt. Or if we've got Jimmy Carter 2.0 on cackles in the White House, we are looking at years of pain.
It could be the 5 lean years of 2008. Or it could be the lost decade of the 1970’s, this time with no Paul Volcker riding to the rescue.
Read Next:
Are We Already in a Recession?
The Rich Get Richer, Thanks to the Fed
Will Debt Sink the American Empire?
Every week I write an article on the top stories in economics with regular deep dives into history like the Fall of Rome, the Weimar hyperinflation, or FDR’s Great Depression.
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Doc, I am not an educated man in the traditional since, but I do study. The buddle of everything seems to align better with the 1719 England South Sea Bubble ( bust-Burst). What followed was 75yr long depression, I surely wish to be wrong. I believe we are seeing more than a flash crash at any rate. Thxs for what you do. Your comments are welcome, all the best.
I'm too old to wait for my portfolio to recover from a 2008. I don't know which it will be, but I suspect it will involve more printing money.