My title today derives from a quotation attributed to rear admiral David Farragut during the 1864 Battle of Mobile Bay. The actual sequence went more like this:
“From his high perch, where he was lashed to the rigging of his flagship, USS Hartford, Farragut could see the ships pulling back. “What’s the trouble?” he shouted through a trumpet to USS Brooklyn. “Torpedoes”, was the shouted reply. “Damn the torpedoes.”, said Farragut, “Four bells, Captain Drayton, go ahead. Jouett, full speed.”[27][28] The bulk of the fleet succeeded in entering the bay. Farragut triumphed over the opposition of heavy batteries in Fort Morgan and Fort Gaines to defeat the squadron of Admiral Franklin Buchanan.”
Torpedoes, as they were known in those days, were contact mines. If you weren’t paying attention they could easily blow you and your ship out of the water.
Is the market sailing in torpedo infested waters?
Absolutely. It is always sailing in a sea of known and unknown risks. Since the bottom in 2009 a legion of talking heads, pundits, the Wizards of Wall Street have been warning us about these submerged killers. For the past seven years their warnings have continued as we have marched to new secular bull market record highs.
There are two things that worry me about this: someday they will be right (in the short-term and we get a cyclical bear market) or some day they will turn bullish, thus signaling the end of this great market run and the imminent beginning of a new secular bear market.
Does this mean I’ve turned bearish or unconstructive? No. I still believe the market has much further to go (not withstanding predictable downside jolts and surprises). However, there is one area where, on a longer-term basis, I am beginning to feel a little queasy … money creation and the corollary, debt creation.
Money creation experts: The USFRB
During and after the 2008 the US economy was in a very precarious position. I give great credit to the Fed and Treasury for the way they moved us through and beyond that near-death experience for our economy, including the Federal Reserve’s Quantitative Easing (QE) in the years after the blow-up. During that period the Fed purchased over $3.5 trillion worth of treasuries and mortgaged backed securities.They printed the money. At the time it was a good thing and it was expected that the bonds and MBS would either be sold or allowed to mature to bring the money back out. That never happened.
Importantly, it is not just the Fed. It has been the work of central banks all over the world doing the same thing.
The nascence of our debt problem
I believe it is safe to say that the two major military operations in Afghanistan and Iraq, coupled with the financial crises of 2008, were the main culprits but it did not end there. This was followed by the Tax Cuts and Jobs Act of 2017. ‘A trillion here, a trillion there … and pretty soon you’re talking about real money.’ In the real quote from the late gravel-voiced Republican Senator from Illinois, Everett Dirksen, the amount was a ‘billion here and a billion there…’ That’s some real inflation folks! The party of the ‘Tea Party’ has seemed to have lost its way on deficit destruction. Then you have a whole raft of Democratic Presidential candidates proposing new programs and taxes without mention of getting our house in order financially.
Because we’ve had little or no inflation, no one seems to care or believe it will come back to bite us in the derrière. This is disconcerting.
The Upside
You have too much money chasing too few goods. This eventually equals demand-pull inflation. The operative word is “eventually.” I can’t say when this might happen but my guess is that it begins where the sting of globalization originated, the cheap labor markets of the far east. Big and fast-growing consuming middle classes have developed in Asia. Couple this with a secular commodity bear market that is getting long in the tooth and you have the ingredients for a resurgence in inflation.
Cheap labor abroad and technology have kept US pricing and wage growth at bay. With 3.5% unemployment wage pressure domestically and foreign inflation on the rise US corporations would have cover for price increases, something most corporations have found illusive for the past two decades … increased unit sales plus pricing, what a novel concept for continued earnings growth. This will be good for stocks until it isn’t.
The Downside
Rising inflation would eventually lead to higher interest rates, including interest paid on the current US federal debt, $22 trillion and change. Interest on the debt in fiscal 2019 was $394 billion – that is on a 2019 fiscal spending of $4.529 trillion (int = 8.7% of federal spending). What if that number went to $1 trillion (less than 5% interest on our current debt balance)? Assuming we were to hold current spending flat (unlikely) that would amount to a spend of 20% of our current budget just to cover the debt service.
In the final analysis this will all end very badly! It always does. It is the stock market’s way of the world.
Meantime …
Everyone is averting their eyes from the problem, Republicans bragging about the great (fed, deficit and tax cut induced boom, i.e. 2% GDP growth) economy and Democrats promising new improved programming. There is no one talking a little shared sacrifice to get out of this hole.
Jim Cramer cried “fire” in the crowded and panicked market of October 2008 when he broadcast to the world his warning, ‘If you need the money any time in the next five years, you need to sell now.” I bet those who took that sage advice were thrilled 5 years later after the S&P 500 had gone from a low of 741 in October ’08 to a low of 1641 in October of 2013. Now he makes this sage political observation,“Cramer: None of the Democrats at the debate seems to care about your 401(k).” I guess we all have to vote Republican or we can kiss our future financial well-being good-bye.
It is likely we will be hearing a lot more of Mr. Cramer’s thought process by others as we approach impeachment and the fall elections. Forget about everything else. Your pocketbook is the only thing that counts. These are not the torpedoes we should be worrying about. If a Democrat wins, it will not be the end of the world, we will be fine … remember the great markets under Clinton and Obama.
Impeachment
This impeachment is not about whether the economy, market or our retirement accounts do well. It is about the soul of our democracy, and the next 11-1/2 months will be the most important test that our democracy has faced in my lifetime. This is not a trivial matter or a witch hunt. I believe our founding fathers contemplated the type of activity the president is accused of when they placed the impeachment remedy into the Constitution. I also believe a fulsome trial in the Senate where heretofore restricted witnesses are allowed to testify is the only way to handle this process. Absent a fair process in the Senate, the ballot box in November will be the final arbiter. Whatever the outcome and associated media/political noise it will probably not be a market killer.
What’s your take?
P.S. I want to thank you for your readership and wish you and yours a happy, healthy and prosperous New Year!
The information presented in kortsessions.com represents my own opinions and does not contain recommendations for any particular investment or securities. I may, from time to time, mention certain securities for illustrative purpose, names where I personally hold positions. These are not meant to be construed as recommendations to BUY or SELL. All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.
Bill – Just had to comment on a couple things so you know I still read every post! Thanks for your great blog!
1. Republicans are hardly the party of the Tea Party. The entrenched Republicans fought the Tea Party and the fiscally conservative policy proposals harder than the Democrats, and successfully killed the movement.
2. Are you advocating for an impeachment process in the Senate that is every bit as fair as the secret closed-door hearings that the House conducted? That’s a pretty low hurdle!
Thanks for all you do! Happy holidays!
Bill
Bill, it is wonderful to hear from you. It is also wonderful to note mutual respect from a couple of guys who are really on the opposite side of certain issues. Let me reply to the issues you have raised.
On question one I have to say you are absolutely right. As much as I disagreed policy-wise with John Boehner and Paul Ryan, I recognize they were both seasoned legislators and willing to compromise to deal with The White House on issues. Their efforts were met at every turn in the road by tea party players that were absolutely not going to play with anything that came out of the White House — never compromise. If President Obama said the sky was blue they would immediately say no it’s gray. And though they talked about issues concerning the huge government deficits and debt, my sense is that they were more a reaction to president Obama than anything else. Having said that, there are still many tea party types around who raised issues with the tax cut 2017 but still went along with the Republican majority and voted to pass it. Without their support there would’ve been no Tax and Jobs Act. As a former moderate Republican, I remember the party (with or without the tea party component) to be strong on fiscal responsibility.
On issue number two, I’ve heard the objection raised many times that the House intelligence Committee investigation on the issue of impeaching President Trump was unfair/secretive as it was held behind closed doors out of the public eye. One charge was made about the inability of the Republicans to call witnesses, in particular, the whistleblower (if that had happened it would have been the end of the whistleblower program and possibly the whistleblower’s life). This is absolutely absurd. They certainly could have called fact witnesses other than the whistleblower but chose not to.
As it pertains to the first part of the preceding being done behind closed doors, this was the same as the Republican rules used during the Clinton impeachment hearings. And it makes completely good sense to me after seeing the grandstanding in the public sessions why this would be done. I don’t know how many Republican members are on the committee. I would imagine just one shy of the Democrats. They had equal time during those closed sessions to question witnesses. They got to hear the same testimony that the Democrats got to hear. So, I ask where is the foul?
With the public sessions you got a significant amount of grandstanding. But again both sides and equal time to questions and make their case. It would’ve been absolutely wonderful if all those witnesses that have been prohibited from testifying by the White House would have been allowed to speak. But to say what was offered was hearsay is a bit disingenuous.
For members of the Senate, again to be asking for testimony from the whistle blower or from Adam Schiff is a sideshow having zero to do with getting at the bottom of the impeachment question. What they should be demanding is to hear from all those people in the White House in the administration who have been barred from testifying. That would be what I would call a fulsome proceeding.
To the extent that the president is not allowing these people to testify he is impeding the fairness of the proceedings.
Thanks for checking in. We are probably (over)due for a lunch sometime in the near term future.
Bill
Bill Kort, Your response to Bill was exactly what I would have posted had I gotten there first! Republicans continue to make the same false arguments about how unfair the House investigation was totally ignoring the actual facts you have presented. I think the first Bill is a victim of too much Fox News viewing. We are now confronted with McConnell who has flat out stated he has no intention of being the impartial juror the Constitution requires him to be. Really worrisome about where that leaves us.
Thanks for checking in John. As it pertains to our political system and democracy it is very reminiscent of earlier times in the formation of bygone totalitarian regimes…times when good people failed to speak out. This is indeed the scariest time I’ve seen in my 73 years