You have almost certainly moved before, like from one house to another. If your experience is anything like mine, what happens is that you start with the big stuff, such as beds, cabinets, the dining room table, the chairs, and so forth. Only a few hours into the move, you look around and figure that you’ve made so much progress so fast, that this thing will be over in no time!
But as the moving progresses, things begin to slow down exponentially. You pack clothes into boxes. You start to clear out the garage. And then, God help you, you start to go through all the bathroom and kitchen drawers. The things you’re packing getting smaller and more multitudinous. Plus, whereas early in the process you neatly and carefully labeled each box with tremendous detail, by the 50th box you’ll just writing “STUFF” on the side with a thick black Sharpie. The point is that what seemed like it would be done swiftly is actually taking forever, because the clearing-away of things takes longer and longer, so much so that you eventually figure, screw it, I can just leave some of this junk behind.
That, in a metaphorical sense, is what I think is happening with this bear market, which began on November 22 2021 (for tech stocks) and January 4 2022 (for everything else). We’re not even a year into this thing, and already the financial press is drenched with articles asking if it’s over. Well, no. All we’ve done is move the big and easy stuff, such as fraudulent crap like Nikola and WeWork and laughably-overpriced garbage like Facebook (oh, sorry, Meta). It’s easy to find stocks that have had 95% of their value blown into oblivion, but if you look at a stock like Apple, which is the exact same price it was last November, we’re hardly dealing with a situation in which the entire equity universe has been hammered down to bargain prices. Not even close.
I decided to come up with a list of Really Bad Things that aren’t even here yet and offer these ideas about why asset values have vastly more to fall. I didn’t do extensive research to come up with this list. I literally grabbed a scrap of paper and, off the top of my head, scribbled down whatever came to mind, in about 40 seconds I already had a dozen ideas. I figure that’s enough. Let’s just all agree there are probably dozens more. Here is my list, in absolutely no particular order:
- Plunge in capital gains revenue – In recent years governments have been enjoying an absolute bonanza of tax revenue from capital gains. Here in California, they collected literally more money than they knew what to do with – – $98 billion for 2021! – – so naturally, being a government, there are finding all KINDS of things to do with that cash, spending like a drunken sailor. Indeed, with inflation raging, the state has deigned to just remit a portion of all that revenue right back to the taxpayers as “inflation relief.” That’s right. They are putting tens of billions of dollars of cash into taxpayer hands to help relieve inflation pressures. I guess you have to work for the government to really accept this as rational. In any case, this flood of revenue is going to get shut off, and it will continue to be depressed as capital-loss carry-forwards drag on in years ahead.
- Impact of interest rates on government debt – This is huge. The reason the government has been able to “get away” with issuing tens of trillions in debt is because the interest rate has been basically zero (and, really, negative) for so long. This is changing in a big hurry. This study suggests the percentage of federal revenue devoted to just interest payments is going to rise from merely 8% to about 40%. That’s basically society-ending stuff right there. And it wasn’t some crackpot coming out with these projections. It was none other than the Congressional Budget Office itself.
- Losses on government bond purchases – Who has gobbled up more government debt than anyone else on the planet? The U.S. government. Have you seen a bond chart lately?
- Impacts of layoffs – Here in Silicon Valley, the pace of layoffs is accelerating by the week. The huge employers around here are slowly realizing that they have tens of thousands of vastly-overpaid engineers who, in the post-Covid world, have decided to basically kick back, take it easy, and enjoy the direct deposit. The senior management at these places has had enough, and they’re starting to gently coax people out the door (a couple of years from now, I suspect these dismissals won’t be so delicately handled).
- Post-election relaxation – The midterm elections are merely weeks away, and there’s no doubt that incumbents are doing everything they can to hype good news and hide bad news. Starting on Wednesday, November 9th, I strongly suspect we’ll start hearing about all kinds of information and data that doesn’t look so good. One tiny example is, again, from California – – in an unprecedented move, scores from statewide testing are being kept under wraps “until a future date” (AKA after the election), and it’s very clear this is being done so as not to harm the prospects of high-paying, cushy jobs that Tony Thurmond enjoys.
- Higher monthly payments – Every debt out there, be it a mortgage, a home equity loan, or any other loan, which has an adjustable interest rate, is going to have its monthly payment change before long. Some of these loans update only once per year. My mortgage, for instance, was last calculated by the bank last November, and I’m paying an interest rate of 2.375%. Let’s just say that I’m bracing myself for what the new payment is going to be (mercifully, the loan-to-value on my house is about 5%, but for newer homeowners, it could be suffocating).
- Resumption of student loan payments – This is basically a different flavor of “the government is delaying something for political purposes.” The suspension of student loan debt payments put $200 billion into the economy that would have never been there in the first place. That all ends – surprise! – shortly after the elections. On January 1st, those payments start right back up again, and that’s going to cause a drain.
- The War – Remember when the Russia/Ukraine conflict began on February 25th, and within days people were talking about a peace settlement? That’s always the way it is with war, isn’t it – – that people figure it will be over in no time. And yet, here we are, and it’s getting worse by the day. What if this goes nuclear? Think that’ll spice up the ol’ 401-k valuations?
- That nettlesome $31 trillion debt – and growing by trillions every year. But debt doesn’t matter, right, Mr. Krugman?
- The next twenty-six political months – How I miss the political atmosphere of the United States in the late portion of the 20th century. Perhaps the elimination of a common enemy (that is, the USSR) was largely responsible. In any case, it seems that everyone in America hates everyone else, and while the election that is just weeks away is going to be consequential, the one in November 2024 is going to be batshit insane. The political landscape between now and then is something I don’t think any of us can possibly imagine.
- Underwater houses – I bought my house in Palo Alto a third of a century ago. It would basically take nuclear war for me to lose money on it, and probably not even then. For newcomers to this area, however, they are already hundreds of thousands of dollars, if not millions, underwater. This is being played out, on a smaller scale, all over the world. That’s going to leave a mark.
- Earnings for Q3 – In just a few weeks, we are going to be knee-deep in earnings, and I strongly suspect there are going to be some shockers in there. The global shift from Prosperity to Demise is moving at a glacial pace, and this will be the first quarter of earnings where that shift is going to be deeply felt.
- The crypto crash – It’s going to happen. And it’ll drag everything down with it. In a way, the final wipeout of cryptocurrencies will be the final nail in the coffin of the 2020 bailout insanity. Plus, Michael Saylor will finally STFU.
That’s about all the sunshine I’ve got for you right now. I’ve long held a target of 3500 on the S&P for this year, and the next major level down is 3200 (which may or may not take place this year, but if not, almost certainly early next year). Considering all the risks above, perhaps even I’m being too optimistic.