DUBLIN – Trading on Wall Street began yesterday with a thud. Earnings were reported. And the Street was not happy.
The Dow sold off by 500 points, recovering some of the loss during the course of the day.
More to Lose
What we have here, the old-timers would say, is a bubble looking for its pin. It could be earnings. It could be trade. It could be the next rate hike. We don’t know what the pointy object will be.
But Donald J. Trump is hoping the two never meet. No one has more to lose… and no one will fight harder to keep the two apart.
This morning, The Wall Street Journal reported:
President Trump escalated his attacks on Federal Reserve Chairman Jerome Powell, saying the head of the nation’s central bank threatened U.S. economic growth and appeared to enjoy raising interest rates.
In an interview Tuesday with The Wall Street Journal, Mr. Trump acknowledged the independence the Fed has long enjoyed in setting economic policy, while also making clear he was intentionally sending a direct message to Mr. Powell that he wanted lower interest rates.
Even now, two years after the beginning of a “normalization” cycle, the Fed is still lending at rates near or below the level of consumer price inflation.
Most economists would say it’s time to take away the punchbowl. But there’s our president with a bottle of gin to spike it up a bit. Mr. Trump is either an economic genius… or a complete imbecile.
But every party comes to an end. And every bubble and its pin eventually find each other.
Meanwhile, we are exploring the phenomenon of the Information Revolution, in general, and Google and Facebook, in particular.
In short: There’s a lot of wind in these two companies; it is bound to get out somehow. Here, we explore why and how.
The Information Revolution – beginning in the ’90s with the advent of personal computers and the internet – delivered more information… But who has time for it?
Who thinks we need more information? Who goes to his wife and says, “Honey, we’re out of information!”? And how many people go to see psychiatrists and report that they didn’t get enough information as a child?
When the Information Revolution of the ’90s began, it was believed that growth rates would speed up because people would have access – almost unlimited access – to information.
Well, that was the thinking 20 years ago. And what happened? Have growth rates gone up since then?
When the new century began, the economy had been running at about 4% GDP growth for the previous 18 quarters – that is, for more than four years.
Now, it’s chugging along at about 2%. And even that is very questionable, because they changed the way they calculate inflation, so the real rate of growth might be lower… or even negative.
The economy didn’t speed up. It stalled.
Growth rates began falling in the ’70s. The Information Revolution didn’t reverse the trend.
And now, GDP growth is at half the level of the ’60s and ’70s, despite the biggest breakthroughs in communication technology in history.
The other thing that didn’t happen was that capital didn’t become more productive. Remember, the idea was that information and computer technology would reduce the need for capital.
Capital – savings – would be much more efficient. Instead of needing $100 million to launch a new business, you might only need $50 million. So you could launch twice as many new businesses with the same amount of money.
That’s twice as many new products… twice as much output… and twice as much progress.
Did that happen? Nope. Not at all.
The number of new businesses should have doubled. Instead, it fell. New business start-ups, from the ’90s to today, got cut in half (approximately).
And capital didn’t become more efficient, either. The Fed has added $3.8 trillion in ersatz capital to the economy since 2009, and it produced the weakest recovery in history.
What conclusion can we draw from this?
Well, flooding the market with information did no more good than flooding it with money. Just as money is only good when it is real – and earned – information is only useful when it is real… and learned. Otherwise, every bit of it must be examined, sorted, and disposed of.
It distracts. It confuses. It takes up vital time and attention. Like manure, information can be useful, but pile too much up in one place, and it stinks.
But information is what Google and Facebook peddle. They are advertising-supported media. Advertising budgets depend on sales. And sales depend on consumers. And consumers depend on wages. And wages depend on time.
There are only so many hours available. And real wages have been essentially flat for the last 40 years. So don’t expect ad budgets to rise much.
Google and Facebook make their marks on the world not by adding to the world’s wealth (they didn’t add to productivity or wage growth)… but simply by taking market share away from newspapers, magazines, and TV.
Still, investors give the two tech giants the price-to-earnings (P/E) ratios of growth companies. Facebook trades at a P/E ratio near 25. And Google trades at almost 50 times earnings.
And they have a combined market cap (total value) of more than $1.2 trillion, roughly the GDP of Mexico.
But guess what? Google and Facebook aren’t growing much anymore. Now, there are newer tech companies taking market share from them.
Teeka Tiwari told us in Bermuda that real techies don’t use Google or Facebook anymore.
They’ve moved on to blockchain-based technology. These new companies don’t collect and sell data the way Google and Facebook do. Instead, they let users control their own data… (How do they make money? To be explored!)
The departure of young users comes at the worst possible time… just before a broad market sell-off. It leaves the “old” tech giants in a tight spot – with declining market share in a low-growth industry (advertising-based media) in a falling stock market.
Yes, that is what happens when the pin and the bubble finally meet up. P/E ratios deflate.
Instead of 25 or 50 times earnings, Google and Facebook may soon sell for only 10 times earnings, while ad budgets and market share contract. Instead of being worth more than a combined $1 trillion, they will be lucky to be worth half that much five years from now.
More to come… including the Dark Side of Big Data… how Facebook and Google could help turn the U.S. into a Police State… and other paranoid realities…
MARKET INSIGHT: WELCOME TO THE MELT UP
Editor’s Note: As Bill showed yesterday with his “Insights From Our Conference,” we regularly publish a wide range of ideas from our editors. Sometimes, other editors agree with Bill. Sometimes, not. And that’s fine. Dear readers are invited to consider all sides and draw their own conclusions.
For today’s guest insight, we turn to Bill’s long-time colleague Steve Sjuggerud. As you’ll see, Steve has a different outlook for U.S. stocks than you’ll usually read in the Diary. Read on to find out what he sees ahead for the bull market…
By Steve Sjuggerud, editor, Daily Wealth
If you’re a regular reader of the Diary, then you know that Bill believes this bull market in stocks is living on borrowed time.
I agree that the bull market is in its final innings. But selling now would be a huge mistake.
You see, before Bill is proven right, I believe we’re about to see a huge move higher in U.S. stocks.
To explain why, let me take you back to three years ago – September 2015.
Stocks had just finished their first 10%-plus correction in years. But I was bullish.
I was preparing to give a speech at the Stansberry Alliance conference. It was titled, “Welcome to the Melt Up.”
I was worried as I got up on stage. I didn’t know how the crowd would react.
I was about to give a speech that was against what everyone in the room believed.
They were all bearish – the speakers and the attendees. The stock market had fallen in August, and then again in September. These stock market declines had driven investors to an extreme in fear.
“Welcome to the Melt Up” was the opposite of what they wanted to hear. But it turned out to be exactly right…
Stocks have soared over the last three years… They’ve hit new high after new high.
Hindsight makes those gains seem obvious now. But calling for the “Melt Up” was a massively contrarian opinion in late 2015.
But I was confident because I’d seen a Melt Up before…
The most recent major example was the top of the 1990s bull market. The Nasdaq Composite Index soared more than 86% in 1999 alone. Now that was a clear Melt-Up period.
Importantly, these huge Melt-Up gains typically begin after a time of extreme fear.
In late 1998, stocks had fallen dramatically in the wake of the Asian Financial Crisis, and we hit a fear extreme. Then, stocks surprised everyone and soared higher – the Nasdaq rose 200% in 18 months.
Take a look…
That’s what a Melt Up looks like – a massive, blow-off top at the end of a bull market.
The important thing to remember is that Melt Ups usually begin after a period of extreme fear. And that’s exactly what we had in late 2015 and early 2016.
Stocks fell in autumn 2015 and at the beginning of 2016. In both cases, the short-term downside was 10%-plus. And those were the first 10%-plus declines in stocks since 2011.
Investors had gotten used to consistent gains and easy money. But these declines showed a crack in the armor, which caused a major spike in fear.
One simple way to size up fear in the markets is through the Volatility Index (the VIX) – often referred to as the market’s “fear gauge.”
The VIX spiked during both of these falls. Generally, a VIX reading above 20 shows fear in the market. In autumn 2015, the VIX rose above 40 – a level not seen since 2011. The VIX nearly hit 30 again in early 2016.
This set the stage for what has happened since… It set the stage for the Melt Up.
We were late in the bull market – and stocks fell slightly, causing a major fear extreme.
The S&P 500 is up around 54% since its 2016 bottom. That’s the Melt Up in action. But I don’t believe it’s over yet…
– Steve Sjuggerud
P.S. Tonight at 8 p.m. ET, I’ll be hosting a free online Melt Up event. There, you’ll hear my latest thoughts on the Melt Up… as well as the name and ticker of a little-known stock that could soar 1,000% in the next 12 months.
And you’ll have a chance to win several prizes worth more than $9,000. Again, this online event is completely free to attend. Reserve your seat here.
Most Stocks Are Already Correcting
As Bill wrote above, the Dow stumbled yesterday. But the index has yet to enter “correction territory,” which is broadly defined as a 10% fall. But look inside the index, and you’ll see a different story. The vast majority of individual stocks are in correction territory… or in an outright bear market.
Why You Should Own Fewer Stocks… And Hold Them Forever
Most dear readers are looking for ways to be better investors. In this essay, Chris Mayer, one of Bill’s ace stock pickers, reveals one of the best ways to get rich from stocks: buy fewer of them… then forget you ever did.
The Future of Malls
The American mall used to have a simple strategy. Big “anchor retailers” like Sears and JCPenney would draw traffic. And smaller stores would profit from residual consumer spending. But with traditional department stores failing, that strategy has to be reevaluated. Here’s what the future of American malls might look like…
In the mailbag, dear readers consider the real meddler in U.S. elections…
I think, at one point, you said what it’s all about, and if that’s correct, then my theory is that it’s all about power and world (new world order) domination. It’s not so much about money, because they have all the money they could ever use up. In my view, China and Russia are in collusion (monetarily and propaganda-wise) with the socialist-communist party that’s cloaked as the Democratic Party. The amount of money poured into this election process only confirms the stakes are high and how much there is to gain by whichever side wins the power struggle.
– Roland D.
I don’t know much about you, so forgive me if I’m way off base here, but your tirade against Sheldon Adelson today was a little frightening. Please tell me that you’re not a leftist nut! The last thing I want to do is pay money for a subscription service written by one of those lunatics. Don’t get me wrong, I’m no fan of the Republicans myself, but compared to the Democrats, it’s not even close. Please tell me that, after the Kavanaugh circus, you don’t actually believe that Republicans and Democrats are all the same.
– Richard T.
Adelson is most likely not the largest source of money for meddling in elections. Bloomberg, George Soros, and Tom Steyer are all committed to spending over $100 million on these elections. Hence, the Democrats’ ridiculous lead in fundraising. I would like for you to offer some theories on why these leftists are spending so much. The motives of Adelson and the Koch brothers are fairly easy to discern, but what do billionaires gain from advancing socialism and communism? It is probably power, but your opinions are usually valuable… So what do you think?
– David W.
I absolutely loved Bill Bonner’s Diary today titled, “Forget Russia. Here’s the Real Threat to American Elections…” On another note, my family came here in 1968, running from communism (our Prague Spring was crushed by the Warsaw Pact in August of that year). I visited Prague in the 1980s and saw how the city had been left derelict. No one took care of anything. It was dark and dreary, right in line with the general population’s attitude, whether you went to a store or restaurant.
The city had scaffolding everywhere, and the joke at the time was “that it was put up to protect the pedestrians from the crumbling buildings.” They – i.e., the communist ruling class – planned to repair the buildings, but never seemed to be able to do so. A few years after the fall of communism, the buildings were returned to their rightful owners and Prague became the jewel it is to this day. Thanks for the continued info.
– David K.
Bill, wonderful column, but I am sorry that there is one very important thing you are continually missing. There’s about 36% of the population, always referred to as the Trump “base,” mostly in the flyover states, that will absolutely believe anything they hear from Trump, whether online or on Fox News. Yes, I know it’s very disturbing, but it’s true, and you should not be discounting it. These people are totally incapable of thinking for themselves and it’s a huge problem.
– Bill S.
Mr. Bonner, perhaps Ireland is a democracy, but the United States of America is a constitutional republic. The difference is that a democracy is rule by the whims of men, whereas a constitutional republic is ruled by law! Yes, I know, many Americans have lost sight of that.
– Jim H.
IN CASE YOU MISSED IT…
Take a look at the graphic below…
You may not realize it, but the U.S. is falling way behind the rest of the world in a key technology.
And unless this is corrected soon, it could pose a threat to national security. More here…