Sign up to create alerts for Instruments,
Economic Events and content by followed authors
Free Sign Up Already have an account? Sign In
Tokyo Tiger
Apr 27, 2020 4:10PM ET
Please learn to use paragraphs
1
3
Quotes
All Instrument Types
- All Instrument Types
- Indices
- Equities
- ETFs
- Funds
- Commodities
- Currencies
- Crypto
- Bonds
- Certificates
Please try another search
🚨 Volatile Markets? Find Hidden Gems for Serious Outperformance Find Stocks Now
The Crash Has Only Just Begun
www.investing.com/analysis/the-crash-has-only-just-begun-200522791/
The Crash Has Only Just Begun
By Charles Hugh Smith | Apr 27, 2020 03:51PM ET While the stock market euphorically front-runs the Fed and a V-shaped recovery, the reality is the crash has only just begun. To understand why, look at income and debt.
Income – earned and unearned – is in free-fall, while debt – which must be serviced by income – is exploding higher.
Bailouts are not a permanent substitute for income. In the short-term, bailouts – in the form of payments to everyone who's lost their source of earned income – is a necessary substitute for lost income. But longer term, subsidizing income with borrowed money weakens the currency and the economy, as productivity stagnates.
As for servicing debt, the unemployed working class is getting an extra $600 a week not out of kindness but to make sure these households can continue to service their debts: auto and truck loans, student loans, credit cards, etc. Absent a federal bailout, millions of unemployed would cease making loan payments, creating a financial crisis for lenders.
Investment income is also crashing as companies slash dividends and stock market gains dry up. Oil exporters are facing a $1.2-trillion cut in annual income, and institutional property owners are facing steep declines as tenants stop paying rent and structural declines in employment will pressure rents lower in housing and commercial properties.
As the housing market implodes, capital gains from flipping houses will also collapse. As corporate America realizes it no longer needs vast office spaces for its (reduced) workforce as millions are working from home, the demand for commercial properties will fall off a cliff, and the rental income generated by commercial property will also fall off a cliff.
Even if interest rates fall to zero, the interest paid by borrowers will not be zero. But even if borrowers get very low rates, they still have to make the monthly principal payments, which can each run into the hundreds of dollars. Lowering interest rates doesn't reduce the principal payments or reduce the interest due to zero. Indeed, the student loan and credit card rackets are experts at sucking borrowers dry with late fees and much higher rates than initially advertised.
Capital isn't flowing into productive investments; it's front-running the Federal Reserve's free money for financiers in grossly overvalued stocks and seeking "dead money" safe havens.
The money that's being sent to unemployed workers is borrowed, and small businesses are being offered loans, much of which will be forgiven if the funds are used to pay wages. In other words, all of these trillions of dollars being substituted for earned income is borrowed, and with capital going to grossly overvalued Big Tech stocks and "dead money" safe havens, there are no capital flows, which will support a return to commerce and productivity that will pay wages or generate investment income (unearned income).
Bulls can argue that "this time it's different," that debt doesn't matter and earnings don't matter, but where is the history to support their claim that capital flowing into overvalued stocks is going to generate earned income that can service the exploding debt load?
The crash has only just begun. Everything, including a rational, connected-to-reality, effective financial system, is on back-order and unlikely to ship any time soon.
Related Articles
US 10Y Yield: Is a 500% Rally Enough, or Will Rates Continue Higher?
By Chris Kimble - Apr 22, 2024
US Treasury bond yields have been moving higher for the past 4 years.Furthermore, the rally marks the largest 200-week rally in 10-year yield history. Wow! So today, we ask,...
Stocks Week Ahead: Key Data, Earnings in Focus as Rate Cut Hopes Hang...
By Michael Kramer - Apr 22, 2024
2
Earnings and Economic data will dominate the landscape this week. The names on the earnings calendar will start Tuesday with Tesla (NASDAQ:TSLA), followed by Meta (NASDAQ:META) on...
2-Year Yield Eyes Rally Above 5% Ahead of GDP, PCE Data
By Ipek Ozkardeskaya - Apr 22, 2024
The week starts with a relief rally in equities following a calm weekend on the geopolitical scene. The US 2-year yield pushes above 5% ahead of US GDP and PCE updates. Four of...
The Crash Has Only Just Begun
Comments (1)
Add Chart to Comment
Confirm Block
Are you sure you want to block %USER_NAME%?
By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.
%USER_NAME% was successfully added to your Block List
Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.
Report this comment
I feel that this comment is:
Comment flagged
Thank You!
Your report has been sent to our moderators for review
Add a Comment
We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:
Enrich the conversation, don’t trash it.
Stay focused and on track. Only post material that’s relevant to the topic being discussed.
Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.
Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.