Dow 20,000 is Canary in the Coal Mine for the Coming Recession

On Wednesday the Dow hit a historic high of 20,000. In response, Trump tweeted “Great!” a description that sounds contradictory to his campaign message that the stock market is a “big, fat, ugly bubble”. Peter Schiff points out this contradiction in his latest podcast along with an examination of the “pillars” propping up the US bubble economy: cheap money and low interest rates.

Trump’s reaction seems to suggest he was being politically expedient during his campaign or he doesn’t believe stocks are overvalued. More confusing is his appointment of Carl Icahn to a special advisory position. Icahn has been a vocal proponent of the coming economic recession for some time, criticizing the US economy’s lack of manufacturing.

Regardless of Trump’s actual feelings, the reality of the current economy when combined with his proposed fiscal stimulus plans, looming national debt, rising inflation, and falling dollar are spelling disaster for the president’s plan to get the economy back on track.

The two things that have been propping up our economy are artificially low interest rates and cheap foreign imports. Not coincidentally, both are focused on aiding the US economic engine and all-mighty creator of wealth: the consumer. Formal policies promoting savings simply don’t exist because central bankers think consumerism is the way out of any recession. The ludicrous idea is that we need more of the thing that got us where we are now: more zero down payments, home equity loans, etc. Peter explains:

“Americans have been living off of inflated asset prices. They’ve been living off of cheap credit. They’ve been living off cheap imports. Americans haven’t had real earnings growth, but we can keep buying things because we keep importing stuff from other countries.”

Consumers are addicted to cheap imported goods, and Trump’s protectionist plan to circle the wagons around the economy will be a difficult political move, given his current inability to prepare voters for the necessary hardships ahead. The President’s executive orders so far have been an attempt to deliver on campaign promises important to his base like immigration and trade.

The same influence of low interest rates and cheap money on corporate America is also responsible for inflating the stock market bubble. “What’s been driving the stock market?” Peter asks. “Share buybacks. Where does that come from? … Cheap money, artificially low interest rates, corporations borrowing a lot of money and buying back stocks. Stock market valuations are higher. The lower the interest rate is, the higher the present value of the earnings from that company. So everything’s been a function of cheap money or cheap foreign imports.”

Peter also makes an important point about the recent movement of bonds and the dollar. For a while now, each have had an inverse relationship: when bonds go down, the dollar moves up and vice versa. But now both are down at the same time. The only thing staying relatively stable for the moment is gold.

“If we’re now going to have a bear market in bonds, a bear market in the dollar, rising inflation, rising interest rates, what’s going to work? Commodities are going to work. Gold is going to work. Emerging markets are going to work. Foreign stocks are going to work.”

The calm before the storm that is the coming economic crisis presents a good time to re-examine your portfolio, diversify, and preserve your wealth. Buy gold and silver today to protect your self from the coming collapse.

Highlights from the show:

“Trump would have been criticizing the Dow; now he loves it. ‘It’s great. This is huge. This is incredible.’ He’s taking credit for it: ‘Hey, the Dow is at 20,000 because of me. I’m president. Things are good.’”

“It’s a bubble. If it was a ‘big, fat ugly bubble’ when it was Barack Obama’s bubble, now that it’s Donald Trump’s bubble, it doesn’t change the characteristics, the nature; it’s still a bubble. If it was a bubble then, it’s a bubble now… When it’s your bubble, it’s a bull market. When it’s somebody else’s bubble, well then it’s a bubble.”

“Interest rates are going up…the market is going to push rates higher. Certainly long-term rates are going to go up and corporate rates are going to go up for corporations that have been borrowing money on the cheap for years. The cost of corporations to borrow money is going to go up.”

“Americans have been living off of inflated asset prices. They’ve been living off of cheap credit. They’ve been living off and cheap imports. Americans haven’t had real earnings growth, but we can keep buying things because we keep importing stuff from other countries.”

“All of that is coming to an end, whether it comes to an end naturally or because we bring it on ourselves as a result of policy coming out of a Trump administration.”

“Those pillars of this bubble economy are going away. Imports aren’t going to be so cheap anymore. Interest rates are going to go up. Your home mortgage is going to get more expensive. Those cheap 0% financing for automobiles are going away. All of this dynamic is changing.”

“If we’re now going to have a bear market in bonds, a bear market in the dollar, rising inflation, rising interest rates, what’s going to work? Commodities are going to work. Gold is going to work. Emerging markets are going to work. Foreign stocks are going to work.”
 

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