Bear with me. This will be a long and high-powered post.
Genesis 41 tells the story of Pharaoh’s dreams and Joseph’s interpretation of them. Updated for 2016, Pharaoh dreamt that he stood by the river and suddenly there came out of the river seven fine looking and fat bulls, and they fed in the meadow. Then seven ugly and gaunt bears came out of the river and ate the seven fat bulls. He had a second dream with seven weak stalks of grain eating seven healthy stalks.
So Pharaoh summoned your friendly proprietor (me) to interpret his dreams. I told him that seven fine looking and fat bulls represented the gain in equities following the financial crisis of 2008. The DJIA increased from a low of 6,594 on March 5, 2009, to a high of 18,312 on May 19, 2015, a gain of 178%; the S & P 500 increased from 735 on February 25, 2009, to a 2,131 on May 21, 2015, a gain of 190%. This was the great bull market in the seven inclusive years 2009-2015. Pharaoh’s 2016 dream portends seven lean years in equities.
In Genesis 41, Pharaoh put Joseph in charge of economic policy. He collected a fifth (a 20% flat tax) of the harvest in the seven years of plenty that was used in the following seven years of famine to save Egypt from ruin. Instead, in 2016, President Obama has piled up another $7 trillion in debt since 2009. Instead of saving 20% of revenue during the bull market to meet public expenditures in bear market years, he squandered it all.
Why will seven years of a bear market in equities follow seven years of a bull market?
The central bank, the Federal Reserve System, is at sixes and sevens. Its members do not know what to do. They are lost at sea. They disagree on what works and what doesn’t. Monetary economists disagree on what strategy and tactics the Fed can and should now employ. The massive expansion of the Fed’s balance sheet through purchases of a variety of securities to expand bank reserves has not restored growth to the pre-crisis rate.
The steady growth of regulations over the decades weighs on the economy like a heavy anchor. Federal regulatory authorities are incorrigible and recalcitrant bureaucracies, constantly adding new rules and rarely discarding old ones.
The federal government continues to spend more, not less, money, borrowing trillions to make up what it does not collect in taxes. The rate of annual increase varies, but the amount never falls.
Barring an indictment, Hillary Clinton will be the Democrat nominee for president. If she wins the general election in November 2016, she will increase taxes and impose new regulations, further choking growth. Her emphasis on redistribution of income and wealth will reduce incentives to work, save, and invest. If a Republican wins, who knows? The last Republican president led the U.S. into two costly Middle East wars and presided over the onset of the Great Recession. Tea Party-elected Congresses in 2010 and 2014 failed to reverse the direction of economic policy.
The era of supercharged growth in China is over. Nine–ten percent growth a year for three decades is slowing to 4-6% growth, reducing demand for commodities and other imports. Growth will slow in countries that prospered selling raw materials, agricultural products and other inputs to China. Slowing growth will reduce profits and equity prices of private enterprises around the world.
Oil is likely to remain below $50 a barrel for the seven bear years. Whenever the price of oil rises much above $40 a barrel, shale producers will immediately expand output. In addition, wind and solar are rapidly becoming cost competitive. Hybrid and electric cars are using less fuel. Driverless cars available on call will reduce the purchase of privately owned vehicles and petroleum products.
Investors will stop searching for positive yield. Instead, they will pay banks and governments a percentage of their deposits and purchases of bonds just to preserve capital. Negative interest will be routine in the new financial order. Free money will fuel unproductive speculation—can you hear the sound of bubbles popping?
Free money will encourage more government borrowing. Whoever wins the presidency has promised to take a leadership role in the world in defeating ISIS, protecting Eastern Europe’s NATO members from Russian aggression, expanding U.S. military presence in East and Southeast Asia, and venturing deeper into African’s ethnic and religious wars. In seven years, Americans will look back to the good old Obama days of merely trillion dollar annual deficits.
Why only seven years of bear markets? By 2023, every institution (e.g., universities, operas, museums, etc.) will suffer a marked decline in the value of their assets and difficulty in paying operating expenses from withdrawals of endowment. Donors will reduce giving. American industry will be less competitive than it is today. The labor force participation rate will continue to fall while dependency on government handouts will rise. Technology will enrich the few, but not the many, and won’t be able to prevent the fiscal and economic decline, or at best, stagnation.
In 2023, the people will say “Allons enfants de la Patrie” (Arise, children of our Nation) and this time the entire political establishment will run for its life. The U.S. will realize a turning point. America’s new leaders will do the right thing in restoring economic freedom and opportunity and ending disastrous military adventures abroad. The bear market will end after seven hungry years.
In 2023 we will know if your friendly proprietor’s interpretation of the Pharaoh’s 2016 dream is correct.