• Economic and market conditions are worrisome
• There is even a possible trigger for a crash ahead
• For those concerned, what to do?

Yesterday, we took a look at a handful of historical stock market crashes, their similarities and differences. Today, we turn our attention to the present.

Let’s begin with the economic context. As we know, much of the world is mired in economic stagnation. That’s certainly the case here in the UK and across the Channel in continental Europe.

China is going through its most prolonged period of weak growth – possibly outright recession – in decades. Emerging markets appear to be growing but, absent strong demand in the developed world, only slowly.

Amongst large economies, the US has been a shining light over the past two years, growing at a rate not far below what economists estimate as a potential 2-3% per annum.

However, that has been achieved in large part due to high government spending of more than 5% of national income.

That’s not sustainable. And President Trump’s and Elon Musk’s efforts with the Department of Government Efficiency suggest that government spending is not going to support US demand over the coming year. Rather the opposite.

I’ve made the case on multiple occasions in recent months that the US private sector has probably been close to or in recession for at least a year and possibly even longer.

Nor is there any sign of it recovering. One chart I turn to frequently to assess the health of the US private sector is commercial and industrial lending. Businesses borrow to invest and expand. If they’re not borrowing, chances are they’re not growing and hiring more workers.

Well, adjusted for inflation, commercial and industrial loan growth has been negative for well over a year.

Taking a more direct look at business investment, here is a look at capital goods orders (excluding defence, which isn’t really investment) also adjusted for inflation:

Adjusted for inflation, orders have been negative since 2022. Government spending has thus been carrying the US economy for quite some time. Given weakness elsewhere, it’s been carrying much of the world.

The S&P 500 was up some 25% last year, including dividends. It is also positive year to date. Given the context above, why has the stock market been doing so well?

Good question. The answer: seven companies. That’s right, the so-called Magnificent Seven are largely responsible for that. Comprising about 20% of the S&P in 2023, they now comprise 33%, or 1/3 of the entire index.

Strip those companies out and performance has been positive, but far less impressive. But put them back into the S&P and you have a market price-to-earnings (P/E) ratio of about 30, far above the long-term average.

So, we have a situation in which the private sector is in recession, businesses aren’t investing in the future, most stocks are going nowhere, yet seven companies have taken the overall US stock market to a historically elevated level.

If you recall our discussion from yesterday, the US stock market today is even more richly valued than in either 1999 or 2008.

Perhaps this helps to explain why some value-oriented investors are raising cash.

Take Warren Buffett’s Berkshire Hathaway as a prominent example. The company currently holds 28% of its assets in cash or equivalents, the highest level in many years.

Of the 72% that is invested, in recent quarters the company has trimmed its holdings of financials and added to those in energy and consumer staples. That’s a defensive rotation.

So, let me ask you a simple question: were the market to crash this week or next, would you be surprised? Or would you look back in retrospect, with 20:20 hindsight, and conclude that it was probably inevitable?

I think I know your answer.

But what of the trigger? Doesn’t a crash need one?

Perhaps. In retrospect, one can always find one. There is no way to prove one way or the other what, exactly, it was.

But one can make an educated guess.

One of my favourites is what, exactly, caused the historic crash that began in October 1929, on “Black Thursday”.

Throughout 1929, money and credit conditions had been tightening. Industrial production was in decline. Yet the Roaring 20s were still roaring.

What changed in October?

Well, the nights drew in, as they always do that time of year. But something else happened specific to that year: the general tariff on imports, proposed months prior by Senator Smoot and Representative Hawley, was now expected to pass through the Senate Committee on its way to a full vote.

A version of the bill had already passed through the House. A Senate vote in favour would mean tariffs would be imposed as early as the following year, quite possibly initiating a global trade war.

A global trade war would devastate growth, including that of corporate profits.

Sure enough, that’s precisely what happened in 1930-34, before President Roosevelt decided enough was enough and began to negotiate an end to the trade wars.

The damage, of course, was already done. Between 1929 and 1934 the US went through what was the worst economic downturn since the aftermath of the devastating Civil War.

The US stock market wouldn’t recover its losses until the 1950s, following years of depression and war.

Investors who fled into cash did the right thing, at least up until 1934, when Roosevelt devalued the dollar by some 60% versus gold. The better decision, although Roosevelt made it illegal, would have been to flee into gold instead.

Today, we once again face the threat of tariffs and escalating trade wars. Hopefully we don’t face the threat of a full-on depression or world war.

But to suggest that conditions are not ripe for a possible market correction or crash would be wrong. They are. And, if history is a guide, there is even a possible proximate trigger hiding in plain sight.

So, what to do? Sell up and flee into cash? While that might have some appeal for the cautious, inflation remains positive. It has even risen somewhat of late. Sitting in cash is thus a sure-fire way to lose real purchasing power.

Thus I’d recommend those concerned sell up and flee into gold instead.

Putting all one’s eggs into one basket is never a good idea. As pointed out above, the risk of a market correction or crash is concentrated in seven stocks. If you stay away from those, rotate into defensive market sectors, and increase your holdings of precious metals, your portfolio will probably be fine.

And you’ll also be able to sleep at night, which is priceless indeed.

Until next time,

John Butler
Investment Director, Fortune & Freedom

Land of Dreams and Shadows

Bill Bonner, writing from Johns Hopkins Hospital, Baltimore, Maryland

Narcotics won’t improve your world. But they can help you feel better about it. You nod off… even when they are cutting you open… and slide into your own dreamscape.

Here we cast our net far and wide to bring you the widest possible view of what is going on.

And here we are in Johns Hopkins hospital, not exactly by choice but, whatever the motivation, it is a learning experience.

Here’s what to expect…

—

You go into the hospital. You give your insurance info, your name and birthday. They put a plastic wristband on… and give you a badge. That allows you to go down the hall where the receptionist asks you for your name and date of birth. You are told to have a seat. “Someone will call for you.”

Someone does call for you. You enter a smallish area. She scans your armband with an electronic device.

“Your name?”

“You just called my name,” we answer.

“Yeah, I know your name. I want to make sure you know your name.”

“But I came when you called me.”

“Never mind. But I’ve got some questions for you.”

You are then required to sign several forms the gist of which is that you won’t light up a cigarette in the hospital, and that if anything bad happens to you while on hospital premises, it’s your own damned fault.

Along the road to the hospital, however, were several large billboards from law firms betting that it wouldn’t be your fault. “You deserve money. We collect $$millions$$ for our clients,” advertises one of them. Another: “Medical Malpractice? Know your rights. Get paid.”

But the questions are just beginning. Embarrassing questions – about bodily functions, medicines allergies, previous illnesses and accidents.

All of this information has already been provided, more than once. But they want to be sure.

When this interrogation is finished, we are told to return to the lobby, until “someone calls your name.”

Again, after a brief wait, we are greeted by a neat person in a hospital uniform and a mask. This time, we are taken to a small room, curtained off, with a bed and many complex instruments in it.

“What is your name?”

“William Bonner,” we answer.

“Your birth date?”

And then come the questions… health status… accidents, interventions… insurance carrier… etc. Have we had Covid shots? Do we get dizzy when we stand up too fast? Has any relative ever had cancer?

The most important question was, “Can I see your insurance card?” And for good reason. The system is staggeringly expensive. The average health insurance for a family of 4 is said to be over $20,000. The medical care expenditure per person is over $14,500.

The US now ranks 46th in life expectancy… and every one of those 45 countries where people live longer, spends less than we do. We’ve tried some of them – in France, Ireland, and Argentina. The general service seems similar… at half the cost; but the US is said to have a high-tech edge.

Our visit to Johns Hopkins gave us an occasion to see for ourselves. There are scores of people in hospital get-ups… and scores of people who ask your name and age. When they aren’t asking questions, or actually helping a patient, they are usually making small talk with their colleagues.

Thanks to the complexity of treatments, insurance programs and Medicare/Medicaid, the healthcare industry requires not just doctors and nurses… but an army of administrators. Of the $5 trillion spent on medical services each year, at least 40% has little to do with taking care of patients.

At Johns Hopkins, the doctors, nurses and skilled assistants were pleasant and competent. But efficiency does not appear to be a major concern. There’s little price competition to drive cost cutting. We never knew what anything cost. We never had to make a decision that involved trade-offs or prices. We saw plenty of ads for lawyers eager to sue… but none offering lower cost service.

And while there were no obvious efforts to cut costs, neither was much thought given to increasing revenues. We were never offered an ‘up-grade’ at a higher price. The food was free. No one solicited a charitable gift or offered a ‘frequent patient’ discount membership.

Nobody seemed to care. Including us. After all, the insurance company was paying. Why medical care is so inefficient and ineffective, we don’t know. But we can take a guess: the feds have gummed it up with regulations and subsidies. And if the new team — headed by RFK, Jr. – were serious about saving Americans $2 trillion, they’d begin by liberating the healthcare business. Whether that would result in lower prices and higher quality, we don’t know either. But it would be worth a try.

—

Our adventure at Johns Hopkins continued…

We were getting pretty good at answering questions, asked by another nurse… an anesthesiologist… and the surgeon’s assistant.

“What are you here for?” asked at least two of them.

“What do you think we’re here for?” we replied.

“We just need to be sure that we have the right person and that he is capable of understanding what is happening to him.”

“What is today’s date?” asked one. “Where are you?”

Another handed us a piece of paper with a circle on it.

“Draw a clock that says 11:30.”

“AM or PM?” we asked.

Finally, we were laid out on the operating table…with a large robot, like a many-armed Hindu goddess, ready to go to work. The anaesthesiologist administered his dose. Our eyes rolled backwards… we were getting drowsy, passing into the land of dreams and shadows.

Then, the most remarkable thing happened.

The top surgeon appeared. A tall man, dressed in a black cape with a black hood and a deep stentorian voice.

He was carrying a scythe. His eyes were like burning coals… his touch as cold as dry ice.

“What is your name,” he asked, sounding vaguely like Darth Vader.

“Jack Jones,” we lied.

“Oh… Must be some mistake. You’re not the one I’m looking for.”

Regards,

Bill Bonner
Contributing Editor, Fortune & Freedom

For more from Bill Bonner, visit www.bonnerprivateresearch.com