Christmas, 1929

Interest rates turned up decisively during 2021 and inflation has receded somewhat, yet stock prices are close to their all-time highs, far above traditional valuation norms. Analysts expect this trend to continue, with Goldman Sachs this week raising its 2024 target for the Standard and Poor’s 500 index to 5,100. The problem is: continued bullishness will validate both the Biden Administration and the Fed’s “funny money” zero-interest-rate policies of 2010-21. Therefore, my Christmas wish is for a long, deep grinding bear market, to flush out the excesses in the system and produce a long-term improvement in policy.

By Austrian economic theory, bear markets and indeed recessions are necessary and desirable to flush out the excess unproductive investment of the last bull cycle, cleansing the capital markets so that investment may begin again on a sound basis. You do not have to be Ludwig von Mises to believe this; the much more socialist-friendly Joseph Schumpeter talked of “creative destruction” which is much the same idea.

The United States has been suffering from artificially inflationary monetary policy since 1995, Japan has been suffering from it since Ben Bernanke visited there in 1998 and most other countries have suffered from it since 2009. In consequence, we have a towering ziggurat of bad investment all over the world, while productivity growth has been almost zero since 2008 and living standards in the West are steadily declining (partly due to a tsunami of immigration, legal and illegal). Meanwhile, the stock market and house prices have risen to ever more absurd heights, although the wealth creation is increasingly concentrated at the very top – a recent statistic showed that the stock prices of the “Magnificent Seven” overblown tech rubbish rose 53% in 2023, whereas the other 493 companies of the S&P 500 rose only 12%.

That is not how capitalism is supposed to work. Ever since the first stirrings of industrialization with Thomas Newcomen’s steam engine in 1712, human inventiveness and the industrialization to which it led have immeasurably raised the living standards of everybody, rich and poor. The annoying human propensity to breed like rabbits, when combined with the triumphs of modern medicine, have caused the global population to explode from 1 billion in 1800 to 8 billion now, so we are nowhere near as rich as we should be, but the triumphs of industrialization have been sufficient to overcome even this unnecessary drag.

The Fed’s monetary policy since 2010, when combined with the Biden Administration’s regulatory policy, have slowed the Industrial Revolution’s powerful productivity increases almost to a halt, as have similar policies in the EU, the UK and Japan. There is no technological reason why this should be so; just this year, advances have appeared in Artificial Intelligence that are clearly capable of vastly improving productivity from the present levels, and thereby increasing the living standards of all of us. Only the current appalling policies (including the “open borders” toleration of illegal immigration and cheap-labor-lobby driven increases in legal migration) can prevent us benefiting from these magnificent achievements.

For the Western and global public to benefit from the coming improvements in productivity, the current appalling policies must be reversed. Interest rates must be maintained at a level safely above the rate of inflation, so that only projects providing a positive real yield will be financed. Regulations and mandates that increase costs in the economy (notably the entire apparatus surrounding the “climate change” fiction) must be eliminated, so that money can flow freely to the areas where it is most needed and costs can be minimized. Education must be urgently reformed, so that the bulk of education spending is truly “investment” relating to acquiring skills that are actually of value in a modern changing economy.

If the market continues to rise, and the Fed “wimps out” and lowers interest rates in 2024, as seems likely, this will not happen. Maybe inflation will roar back to save us from the stupidity of our policies, but that cannot be relied upon – if its return is delayed by more than a year or so, it will not be associated in the public mind with the errors that produced it, and so policy could be even further distorted (think of the possibility of price controls, and shudder!) Meanwhile, low interest rates and excess regulation will be validated by the stock market and presumably by other asset markets. That may very well get President Biden reelected; it will certainly prolong the Fed’s appalling monetary policies – indeed it would very likely lead to a revival of the obscene “modern monetary theory.” In the long run, those policies would bankrupt the United States, but they would wreck its citizens’ living standards first, however much money the few billionaires with a speculative bent, good political connections and infinite borrowing capacity might benefit from them.

Now consider the benefits of a good bear market, that knocked down the S&P 500 index by 50-70% (more than that might do real damage, and so should not be wished for.) Over the squawking of the media, it would be blamed on the Biden administration and hence would kill his prospects for re-election, replacing him with either President Trump or a relatively conservative third-party candidate. Provided the winner was not Neocon Nikki Haley or someone of her persuasion, that would instill budgetary discipline, if only by ending the endless, hugely damaging series of subsidized proxy wars in which the United States is currently engaged. That will make the impending Social Security bankruptcy due in 2033 much easier to deal with – it is reasonable and fiscally bearable for the Social Security system to run deficits while the large Baby Boomer generation is in its last years, but not to run deficits permanently.

There would be other benefits. A new administration would presumably not be so regulation-happy as the Biden administration, nor would it impose so many economically disastrous mandates on the economy in the name of climate change. It would also at least slow the Biden Administration’s utterly disgraceful opening of the U.S. borders, which has resulted in tens of millions of invaders, who collectively will impose far more costs on the criminal justice and social security systems than they can ever bring in economic benefits. In an ideal world, legal immigration would also be sharply cut back. The cheap labor lobby has had its own way for far too long, depressing the wages of ordinary Americans by flooding the labor market, often with indentured servants on H1B and H2B visas, an arrangement only too similar to Colonial America’s shipping of criminals from England to work the tobacco plantations.

There are other, more direct benefits of a bear market in stocks and real estate. For one thing, it would very likely bankrupt many of the politically connected billionaires and tech companies whose wokery has so disfigured the last decade. The game so popular since 2010 of leveraging to the eyeballs and investing in rubbish that tracks the S&P 500 would be utterly discredited. As in the 1970s, reducing the Magnificent Seven to the Mediocre Has-Been Seven would also be hugely beneficial to the cause of small business innovation, which would flourish when the dead hand of their blighting monopoly was removed. Yes, the deaths of Polaroid and Kodak were a pity, but do we really miss Litton Industries or ITT?

A real estate collapse would be even more beneficial, restoring the ability of Millennials and Generation Z to become homeowners, thereby perhaps leading them to replicate that blissful suburban large-family 1950s idyll that was the high point of U.S. civilization. As for commercial and retail real estate, its collapse will mostly eliminate the less savory end of the real estate community, which will not be much missed.

A true bear market for Christmas will not bring much of a Happy New Year in 2024. But the outlook for 2025 and beyond would be truly glorious!

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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.)