IS THE BUBBLE POPPING?

The DOW closed down more than 1,000 points today mostly on the fear of the expanding cases of the Coronavirus. Those who follow my work know I’ve been warning of the potential for a market crash for some time. While I still believe that the worst economic problems will happen in late 2020 or early 2021 this is a serious harbinger of what’s coming. The fear of this infection is certainly the button being pushed, and the potential disruption to world markets, global travel and international trade is very real. But there are many underlying problems in our economy that have been ignored by these markets and could create the foundation for a collapse and long-term recession. This panic is rapidly deconstructing the open markets that the European Union has spent decades creating in the hopes of a unified Europe and a financial powerhouse to equal America and China’s economic prowess. With the Coronavirus spreading through some European nations at an intensified rate there is a strong push to close borders and limit free access, the very foundation of that Union. International trade in general is one of the driving forces behind the exploding stock markets, and no matter what you may think of “globalization” it is the ability to move products and people around the globe that fuels much of our collective financial markets. As that slows down, so will the collective growth.

But there are other issues involved in this situation that will play an important part in the future of our economic health. For one thing this stock market is insanely overbought. We are in the middle of what is called a “melt-up”, a phenomenon that occurs frequently before a market collapses. It happened in the stocks before many crashes, including in the “roaring twenties”, followed, as we know by the Great Depression of the 1930s. It happened n the oil markets, the Dot-Com bubble, even as far back as the Tulip Bulb bubble and the South Sea bubble of 1711. So any bad news is apt to have an overblown reaction where people will take profits and essentially run for the hills. When this happens finally and there is no recovery millions of Americans will be at risk of losing their security, retirement funds and basic foundation. America (and other nations around the world) has artificially lowered interest rates to the point where buying US bonds won’t bring you enough return to offset inflation, let alone add to the security that bonds have often been used for. This is a foolish approach to investments selling off our long-term protection for a stock bubble that will eventually burst. Of course this is nothing more than adding enormous debt to an already risky balance sheet that was seriously damaged by the trillion and a half tax theft Trump pushed through the Republican Senate. But then he has always proudly referred to himself as “the king of debt”. In essence Trump is running the US treasury the same way he ran every business he ever owned. He runs up debt, grabs the cash, doesn’t pay anyone and then tells his creditors to sue him.

So while this “correction” in the stock markets was triggered by the threat of a pandemic, the underlying foundation is so weak and dishonest that it won’t take much to pop the bubble once and for all. And if that happens, and it will, lord help us and our children, for it will take a generation to recover from this unconscionable mishandling of the collective wealth.