PARIS – Global warming has yet to get a firm grip on Europe. This week, the weather in Ireland turned in the direction you might expect.

It is midsummer, but in Baltimore, it could pass for a bad day in February.

It was rainy, windy, and cold when we left this morning. Even with a sweater and an umbrella, you have to stop in a tea room to warm up.

Here in Paris, it is about 10 degrees warmer… but still chilly.

Meanwhile, look out below…

Beginning to Wobble

The techs are beginning to wobble. It could be nothing. Or it could be the beginning of the end. Sooner or later – we remind readers of the obvious – asset markets will crash and the economy will go into recession.

Janet Yellen says this is unlikely to happen during our lifetimes. That she would say so reveals three startling things:

First, the crisis is probably closer at hand than we thought.

Second, Ms. Yellen is not afraid to tempt fate.

Third, the two people most important for the future of the United States of America, the president and the Fed chief, are both morons.

We wrote yesterday that we never know where a crisis will begin. But with the tech stocks lost in space, it wouldn’t be at all surprising if their owners were to get nervous.

Yesterday, that’s what seemed to be happening.

From The Wall Street Journal:

Major U.S. stock indexes slumped Thursday, as technology shares tumbled anew…

Tech shares led declines in the S&P 500, falling 1.8%. Google parent Alphabet fell $23.19, or 2.4%, to $937.82 and chip maker Nvidia shed 5.07, or 3.3%, to 146.68. The S&P 500 tech sector is up 17% this year, but has fallen 2.6% in June as some investors have questioned whether the group’s run-up has been overdone.

Goosed-Up Stock Prices

An asset market is supposed to be a place where diligent, informed investors “discover” the right prices. These prices change, naturally, as new information arrives.

But the last eight years have distorted prices throughout the economy. Price discovery gave way to price manipulation. That was the whole point of Fed policy – to lower interest rates and drive up equity prices.

It is illegal to manipulate securities prices; still, nobody objected as the Fed goosed up stock and bond prices, boosting total capitalization of both assets by as much as $20 trillion.

Providing fake money to the asset markets did not make companies genuinely more profitable or bonds safer. But the money had to go somewhere…

Corporate executives couldn’t think of anything better to do with the money than buy their own shares; capital investments in job-creating new plants and equipment and new startups actually went down.

Real value seekers were flummoxed, too. These old-fashioned investors sharpened their pencils. They put on their eyeshades… and spread out the reports.

They could find the expenses… clearly and prominently displayed. They looked for EBITDA, but where was the E? Where were the earnings? Alas, for many of the techs, there were none.

The old value guys had to pack up, leaving the ground to younger players. Try as they might, their research could not discover anything to justify higher prices.

Name of the Game

Of course, the younger players found no value there, either. But it didn’t matter. They were playing a different game. A mo-mo game. Forget earnings. Forget debt. Forget Graham and Dodd. Momentum was the name of the game.

And momentum appealed especially to the fastest-growing segment of the Wall Street world. It appealed to gamblers without real brains as well as robos and algos.

They couldn’t meet the CEO, look him in the eye, and draw his measure. But they could add. And when they saw the numbers adding up, they piled in.

And so it was that the cheap money went where all bubble money goes, to the bubbliest part of the market: the techs.

Up and up and up went the techs. They didn’t need earnings; they were bringing revolutionary new technology… or whatever it was… that promised a future so bright, it was practically blinding. Just like the late ’90s.

Buying begat more buying. Excitement begat more excitement. One tech breakthrough begat 10 more.

Isn’t Jeff Bezos going to deliver hot meals to our door… by drone? Isn’t that Russian kid completely changing the money system with his blockchain? And isn’t Elon Musk going to the moon?

It is all so thrilling… and exhilarating. But it will be breathtaking when it ends, too. We can’t wait to see the look on Ms. Yellen’s face.





Economic Insight: Credit Is Retreating

By Joe Withrow, Analyst, Bonner & Partners

Credit growth has driven the economy ever since President Nixon severed the dollar’s link to gold in 1971. When bank loan growth slows, so does the economy.

Bill’s friend and colleague Richard Duncan, who runs the advisory service Macro Watch, warns that credit must now grow at 2% to avoid a recession.

And as you can see in the chart below, loan growth is below that 2% level.

The last time loan growth slowed below 2% was nine months before the 2008 financial crisis…

Joe Withrow

Featured Reads

Which Is Better: Stocks or the Lottery?
The good news first: Stocks are a better investment than the lottery. Now the bad news: not by much.

Investors Are on a Knife’s Edge
As Bill mentioned, tech stocks plunged yesterday. This put a dent in the major indexes. Now, investors are nervous about a potential disaster.

The Best Play for Investors Right Now
With stocks on shaky footing and sky-high valuations, colleague Jeff Clark shares one strategy all investors should be considering right now.


In response to Tuesday’s Diary, one reader comments on the wealth-preserving power of gold…

You say that gold is a good store of value, and you’re right. You said yourself that in 1980 an average car cost about $19,000 and today it’s about $33,000. Gold in 1980 was about $700 per ounce and today it’s about $1,200. The math says in 1980 it would have taken about 28 ounces of gold to buy an average car and today it still takes about 28 ounces of gold to buy an average car.

– Chuck W.

Meanwhile, readers ponder the Fed chief’s claim that we won’t have another financial disaster in our lifetimes…

I too was incredulous when I heard Janet Yellen’s prediction that there wouldn’t be another financial crisis in her lifetime! Perhaps she has secretly come to the same conclusions as you Bill. That would be enough to make a person tie a rock round their neck and jump into the Potomac!

– Lawrence J.

“The weather has been so nice, Ms. Yellen is building a house without a roof!” I loved that one!

– Brian B.

I agree with you. Debt is an insidious load on the economy. It’s like a snow load on a roof. Everything is OK… until it’s not.

– Gary R.

In Case You Missed It…

As regular readers know, Bill usually doesn’t have much interest in investing in stocks. But that changed a few years ago when Bill invested $5 million of his family trust’s money into the recommendations of one man.

Bill tells the whole story himself right here.