The Lesson


The lesson of it all? The lesson is that lessons are not being learned. Of course the human species has an ingrained problem: We are all born with a blank sheet and have to learn everything from scratch. It would be helpful though if the elders could pass lessons from past mistakes on to the new generation.

But no. So we keep making the same stupid mistakes.

And here we are. Just four weeks after all time highs in markets America is again turning into bailout nation.

Yes coronavirus is an unforeseen shock. So what?

We’re supposed to handle a shock. We’re supposed to be prepared. We’re supposed to have savings and great balance sheets. After an 11 year recovery and market bull run based on cheap and easy money shouldn’t things be great and shouldn’t we be well prepared for the next downturn?

Is that really too much to ask?


We can’t even go 4 weeks without the Fed going apeshit on cutting rates to zero, launching $700B in QE, making discount windows available and launching $500B, even trillion dollar repos.

We can’t even go 4 weeks without the government launching a proposed $850B stimulus package, tax cuts, free money checks of $1,000 to Americans and suggesting bailouts for $BA and $GE.

That’s how fragile things are. They must be, otherwise the system would be able to handle a temporary shock.

But it can’t. Why?

Well for one our supposed great economy ever has the vast majority of Americans live paycheck to paycheck:

That’s a systemic problem. Sure you can blame people for living beyond their means, but in general most people just don’t have the income power to keep abreast with rising medial costs, home prices and all the other fun inflationary items that the Fed simply doesn’t count as inflation. How ignorant they are. PCE deflator. Please.

And then of course the same lesson again not learned that keeps repeating ahead of every bust: Greed and more greed.

When has it ever been a good idea to chase stocks to 150% market cap to GDP or even higher?

The answer is never. Yet they convinced themselves and others that it’s different this time. New flash: It wasn’t.

A lesson not learned and yet they did it. The chart was screaming unsutainability. And here we are 4 weeks later, yesterday closing at 109.5% market cap to GDP:

Reversion to the mean. And it could eventually get much worse.

I showed this chart in Bull Cliff in February and I stated:

“Investors keep piling money into this historically priced market….Central banks can deny all they want that they are not responsible for asset price inflation, but everybody knows better. The denials are not only hollow they are straight out lies.

And having created the Pavlovian effect we now see in the investment community they are leading investors to abandon all sense of risk when risks are mounting ever more around us as valuations and earnings multiples keep expanding as a result of monetary policy. And hence it may be said that central bankers may be leading investors off the cliff.”

Well done. Did anyone listen? I can’t say, but most haven’t. And now they are all in major pain.

It was the same environment of ‘abandon all reason’ during which investors chose to chase stocks like $TSLA going vertical.

Also in February I asked if $TSLA was a train wreck waiting to happen. I said then:

“Absolute vertical panic buying, it’s basically a reversion train wreck waiting to happen, technically speaking:

“This behavior here is type behavior. Get me in an any price. Market cap added by the tens of billions added every day without an actual earnings story behind it yet. It’s all future projections. What I’m saying is that vertical moves like this are not sustainable and there will be reversion pain.”

Well, here we are a few weeks later:

Investors just made the same mistakes they made in the year 2000 and the same mistake they made in 2007. Chase markets to completely unrealistic valuations and now coronavirus is the most brutal of triggers. Brutal because the Fed made the excess happen with their reckless cheap money policies last year. And now the pain is deeper than it would’ve been.

And now they’re doing even more of the same desperately trying to arrest the markets collapse.

But the best part is yet to come. Let’s bail out companies such as Boeing. Does this all smell like the stench of history?

Why should we bail out Boeing? The company has been responsible for major design flaws on their planes and has taken a major hit on this for the past year. Deservedly so. After all the company was cutting cost corners left and right. Why? Because they were short on cash? No.

The company has blown nearly $45B on buybacks in the past 8 years:

Their choice. And in process they have loaded up on debt. Why should we bail out companies that are so reckless with their operations and financial management? My suggestion:

I thought all this was called capitalism. You know socialism bad, capitalism good. Nah, it’s all talk.

There are no capitalists during a crisis:

Now the former party of “deficits are bad and we must get the debt under control”, already presiding over a trillion deficit before this new crisis, is pushing for an $850B stimulus package in an economy that will get hit by a massive recession.

I’m not opposed to the government stepping in to help in an emergency. That’s why we have government. What I’m opposed to is the hype, hypocrisy and excess that has preceded it. People got greedy, they piled into stocks at ungodly valuations. Companies that didn’t save or prepare for a crisis, instead were focused on short term market gains to juice up their stock prices. Companies such as Boeing that cut corners and blew money on buybacks for financial engineering purposes to enrich upper management and shareholders.

I say screw them. If you don’t learn the lessons of the past then live with the consequences. And who pays ultimately for the consequences?

We’ve seen this movie before

And so the larger lesson that nobody wants to confront: We keep creating business cycles driven by debt and cheap money and the consequences get starker each time around because we never address the root causes. We just mask them with ever more debt and ever more cheap money and hope for the best.

And right now they will keep printing and announcing ever more measures until they get markets under control and rally again. But be sure when this is all said and done we’ll end up with $2 trillion deficits, zero rates and a massive trillion debt burden and all we have to show for is a recession.

Oh wait. We already have all that. And we’re doing all this with this being our base line just a mere 4 weeks from all time highs, 11 years into a recovery:

The lesson? We haven’t learned a damn thing. We just keep circling the same drain under the pretense that it’s all consequence free.

Well, some just got an expensive 4 week crash course lesson in market history. See if the lesson sinks in this time. I’m not holding my breath.

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