The last week’s market turbulence may or may not persist and should not directly be blamed on Kamala Harris’ selection as Democrat candidate for the Presidency and her modest bounce in the polls. Instead, the focus should be on the last two decades’ economic policies, for which Harris, while not responsible, is generally an enthusiast. Huge value has been destroyed in the economy through failing to follow basic truths; markets have been ignoring this destruction, but in the end bubbles burst.

Rudyard Kipling in his 1919 poem “The Gods of the Copybook Headings” noted the tendency of leftist politicians to ignore obvious truths, and the damage they cause by flouting them. Harris herself is guilty of some of this; her insistence in 2019-20 that defunding the police force would help the fight against crime has been rewarded in city after city by a massive rise in crime after the police were defunded – notably in the Minneapolis of her Vice-Presidential candidate Tim Walz.

In a high-trust village where everyone knows each other, crime prevention can perhaps be left to volunteers. It is however a truth at Copybook Heading level that in the unpleasantly violent, diverse jungle of the modern American major city, keeping people even moderately safe requires an active, alert and well-equipped police force of substantial size that knows it has the backing of the City administration and the Court system. Ignoring this obvious truth exposes millions of innocent people to urban mayhem.

Again, during the negotiations over the laughably named Inflation Reduction Act of 2022 Harris was reported to have urged the Biden administration to provide a $4 trillion “stimulus” of wasteful federal spending instead of the mere $1 trillion for which that Act eventually provided (though in practice, the $1 trillion figure has been greatly exceeded through bloat and waste). Given that the budget deficit is already running at around $2 trillion a year and inflation is a problem, quadrupling the Inflation Reduction Act’s firehose of wasteful spending would inevitably have made U.S. economic problems even worse.

In the last few months, the U.S. economy has shown several signs of incipient weakness, most of which are disguised by the inability of statistics to take proper account of an inflow of some 8 million illegal immigrants into the economy since 2021, none of whom should theoretically be working but a high proportion of whom clearly are. Even by the official statistics, which reported a relatively weak 110,000 new jobs in July 2024, 1.2 million U.S.-born workers have lost their jobs in the last 12 months; they have instead been replaced by 1.3 million foreign-born workers.

Since the domestic-born workforce continues to grow, albeit at a modest rate, even on the official figures unemployment among domestic workers is rising, mostly by those workers becoming “discouraged” and dropping out of the workforce. Most likely, those discouraged workers then succumb to fentanyl and other plagues of our time. That is not a healthy labor market in any respect and allowing the cheap labor lobby to depress further the earnings and job prospects of domestic Americans is making it very much worse.

Monetary policy is the area where the Copybook Headings of sound policy have been most determinedly flouted. The 14 years of negative real interest rates from 2008-22 sent asset and stock prices far above sustainable levels, and at some time the price for this folly must be paid in a massive stock market and asset price crash. The malinvestment of the “funny money” period must be wrung out of the economy, so that space is left for genuinely productive investment to appear.

If you compare today’s stock prices with those of early 1995, when monetary follies first appeared, the S&P then stood at around 480, well above its level in 1987 and thus at a middling level not a deep bear market. Nominal GDP since then has grown from $7.6 trillion to $28.6 trillion, an increase of 276%. If therefore the S&P 500 index were priced similarly to its level in February 1995, it would stand at 480 x 3.76 or 1,806. At today’s level of 5,240 it is thus nearly three times where it should be. A healthy bear market would take it back to 1,806, a drop of 65.6% from today’s levels.

You cannot reasonably argue that prospects for the U.S. economy are in any way better than they were in 1995. That was the year that Internet connectivity became widely available (I got an AOL account in November of that year) and it became obvious that this new technology would change everybody’s lives for the better. The relatively benign (by today’s standards) Bill Clinton was President; more important the wholly admirable Newt Gingrich had just become Speaker of the House of Representatives, with the first House majority in 40 years. The U.S. economy was still benefiting from Reagan’s supply-side-reforms and only one Bush had so far been sent to blight its prospects. Productivity growth was trending upwards, and it seemed likely that the possibilities of the Internet would cause a further surge. The Wall had just come down, the World Trade Organization had just been formed, and the formerly Communist countries including China were embarking on a surge of rapid economic growth that would surely provide opportunities for U.S. multinationals.

You only have to list 1995’s advantages in that fashion to realize that it offered infinitely superior prospects to the productivity-blighted declining-living-standards 2024. There is thus no basis whatever for supposing that the U.S. stock market today should be more highly valued in relation to GDP than that of 1995. Just the opposite, in fact. Given the demographic, debt and policy challenges overhanging the U.S. economy today, its valuation should be no more than half that of the bright, confident morning of 1995. That would imply a decline from today’s levels of more than 83%, just to reach a reasonable valuation. As in 1929-32, such a fall would cause value destruction in the wider economy, as well as possibly bringing yet a further lurch downwards in the quality of U.S. economic policy – which together would justify a yet lower valuation. Of course politicians might well take the approach of the “dangerous pink” Harold Macmillan in his 1938 “The Middle Way” and abolish the stock market altogether.

The signals have been building in the last few months that the long-awaited market crash may be just ahead. Warren Buffett, not at this stage a guru of investment genius but at least a bellwether, has sold have his Apple (NASDAQ:AAPL) holding for $76 billion, raising his cash position in Berkshire Hathaway (NYSE:BRKA) to over $300 billion. With Apple in particular, Chinese cellphone competitors appear to be eating its lunch in the Chinese market and will presumably come for its worldwide business shortly – so much for the wonderful returns allegedly available from the emergence of China.

Last week’s hiccup may not be the start of something larger, but some time in the near future, a proper correction must take place. Tight money will not be the immediate cause; the Federal Funds rate has not increased since July 2023 and that rate only 2% above the current inflation rate. The Fed may attempt to avert a crash by further doses of “funny money,” but surely if they do so this time they will be met with a resurgence of inflation that is politically the only reliable corrective to god-awful monetary policy.

It is unfair to blame this mess entirely on Harris, of course, but the intellectual and policy tendency she so vividly represents is entirely responsible for the decline in U.S. prosperity since the glory days of 1995. So, if the much-needed market price recalibration happens soon, President Trump will indeed have been correct in referring to it as the Kamala Krash.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)