The Deeper Dive: Insightful People Speak on How it All Falls Apart

I thought I’d take a different approach for this weekend’s Deeper Dive. Since I covered all of the news that I wanted to cover as deeply as I intended to last week, other than the political stuff and the various wars, all of which some people prefer I stay out of because they have their own opinions and don’t appreciate mine, I thought I would synopsize three interviews on Adam’ Taggart’s new Thoughtful Money podcast because I found each of them quite interesting. I’ll paraphrase just the big takeaways that align with my own thinking in narrative fashion, regarding the problematic trends I believe are happening. So, the words below are a paraphrase of the interviews. Sometimes I’ll add my own notes to those I garner from the interviews, but I’ll put those in parentheses to be clear those are not directly from the interviews.

I’m going to include the first interview above the pay wall for everyone, but they each build on each other and, in my opinion, get more interesting as they go. They form a united theme of failing data that is also false data almost wherever it looks good, very narrow breadth in the stock market’s rise that means most companies below the “Magnificent Seven” are not going anywhere or are even falling, a possible very ugly looking market top in the making, deteriorating jobs, hugely expanding debt in a time of sustained higher interest, and a collapse into a recession that may have already begun but is masked by the flawed data and that will be bailed out with the biggest bailouts ever (due to diminishing returns on bailouts) because it will be so big that not bailing it out would be unbearable disaster beyond our imagining at this point of the bubble-building buffoonery. But will the bailouts work this time?

(You won’t have time to view them all or even read them all, but you can come back to this and view the ones you find interesting after reading each synopsis. The synopses, themselves, come together to tell a tale of where this chaotic year is headed.)

Michael Green: This Changes Everything

The US may wind up deciding to save the market in its next crash by giving everyone 10,000 to invest in stocks as they want. (I would imagine if it happened, they’d color the program, as they did during the Covidcrisis to make it sound like not such a blatant giveaway of US funds to stocks, but that is where much of the money went last time). Lobbying by Blackrock and Vanguard is already in that direction. (And why wouldn’t those corporations be greedy and lobby the government for money that would flow directly into their funds? It’s why they own politicians.)

Green believes US government intervention will be even more direct and greater than last time because we are running out of games we can play, so more desperate solutions will be required. (As I’ve written for a long time, we have consistently seen that it takes greater-and-greater-scale inducements of quantitative easing for the Fed to accomplish each rescue. This is the Law of Diminishing Returns in effect. The last time around, the Fed could not even lift the market at all without the federal government stepping in to pump the money directly to businesses and citizen’s bank accounts via multiple bailout programs and stimulus checks and enhanced unemployment checks. Left on its own, the Fed was dead.)

Officially reported GDP, jobs and inflation numbers look healthy, but a lot of that may be due to government pumping massive amounts of money into the economy in the form of co-investments with industry and more government jobs than ever. The reality is governments have taken on incredible debt to do this. Deficits are intense; and, while Powell extolls the quality of the labor market on Sixty Minutes, we know that isn’t true. For example, the idea that January was really great is due to massaging the numbers with adjustments, and isn’t supported in the raw data, which was actually negative!

The deeper truth is that population growth has slowed and is aging, so labor-force growth has dropped, at least in part, because of that. It’s all 180-degrees opposite of where we were in the eighties and even nineties. People are becoming disenfranchised from society to where younger people are no longer even aiming for the American dream. They don’t see a path to achieving that. That means they will probably feel inclined to just take those things from those who have them, rather than try to earn them, because they no longer see a path toward earning it. So, they will elect authoritarians (champions) whom they believe will take those things for them.

The maturity wall for high-yield bonds that are coming due for refinance at higher rates has become extreme. If these companies fail because they cannot refinance, the employment impact could be huge. The credit cycle gives a much higher probability of a big switch from hoarding labor, which we saw all of last year, to now jettisoning labor as zombie companies run out of credit to extend their operations and, hence, their existence. That will make the pervasive sense disenfranchisement worse.

One particular worry comes from the flow into passive stock-market investing, which is turning negative because of these structural changes in society. This is largely because Baby Boomers are moving out of storing for retirement to drawing down retirement. In terms of those passive-investment funds, such as retirement funds, people want to buy in when they see the fund flow is positive, but they want to sell off when they see it turn negative. This could amplify the natural demographic outflow, creating catastrophic possibilities for those funds. Given that the change is in good part a structural function of Baby Boomers hitting retirement, there will, of course, be more money flow out of the funds than into them.

Those funds invest their client’s money in stocks. As the money is flowing out, that huge flow of money that has gone into stocks reverses throughout the stock market, creating a huge drawdown. When this happens for a structural reason, we have a setup for a huge unwind, in spite of the stock-market prosperity we’ve seen over the past decade. This is when authorities will be called upon by the Blackrocks and Vanguards to play all sorts of games to prevent the market from crashing. However, we are running out of games we can play (and, because of the Law of Diminishing Returns, we are running out of capacity to do things that are big enough to prevent markets from crashing).

Noteworthy: In another video not included below, Lance Roberts, who has been right about the stock rally since the start of November, now finally says the market is poised to put in a correction. He’s not talking about the big swoon into nothingness that Michael Green sees as a structural possibility for stocks further down the road, but he is saying the market is topping out. It may run a little higher, but the “dumb money” from the retail crowd is mostly what is now supporting the fear-of-missing-out rally, as the smart money has been leaving the table. This has been a market that will bite on anything.

The rest of the interviews, each of increasing interest from people who have been acutely accurate so far, continues below for paying subscribers, but this was a free appetizer of Deeper Dives for all. One says “all hell will break lose.” The next says the data is now highly unreliable right as we sit on a very dangerous tipping point. And the last, from a former major economist at the Fed, says that the Fed’s optimism is utterly misplaced because of how poor the quality of the data has become, making recession inevitable. In fact, we may already be in one that we cannot see because of the faulty data but can certainly feel.