Sorry, Investor — Bad News

You Might Want to Sit Down Were you forwarded this email? [Sign-up to The Daily Reckoning here.]( [Unsubscribe]( [Daily Reckoning] Sorry, Investor — Bad News - The stock market is back to spring 2021 levels… - What Wall Street doesn’t tell you about compounding annual returns… - Then Jeffrey Tucker shows you why he believes we’re on course to suffer a “crack-up boom”… Recommended Link [Fed Rate Hike Announcement Spells DISASTER…]( [Read more here...]( On Tuesday, May 4th the Fed raised interest rates for the second time in a row! That means the market crash I’ve been predicting is right on schedule. In fact, I’ve pinpointed [the exact date and time I see it happening…]( And I’ve prepared a simple, straightforward [“Crash Rescue Kit”]( for you to make sure you’re 100% ready for the coming crisis. NOTE: This is not some risky strategy or wildly expensive research service. I created this “Crash Rescue Kit” so that anyone who wants one can claim it. Claim it while it’s still available. [Click Here ASAP]( Annapolis, Maryland May 6, 2022 [Brian Maher]Dear Reader, The stairs up… and the elevator down. Here you have the stock market’s general rate of travel — depending upon the stock market’s direction of travel. The stock market is lately making excellent speed… downward. And over the past 12 months? Let us assume you own a broad market index fund. You have spent the past year upon the hamster wheel, running and running in place. Both the Dow Jones Industrial Average and the S&P 500 trade today where they traded last spring. The Nasdaq Composite, meantime, has receded to November 2020 levels. Can you afford to spend an entire year running in place? Will it knock your retirement off schedule? These are the questions we tackle today. The market always makes its losses good, says Wall Street. History demonstrates — amply — that stocks always increase in the long run. Thus a recent investor advisory from a large Wall Street concern argues that: Despite the tumble to begin this year, investors should not panic. Over the long-term course of the markets, investors who have remained patient have been rewarded. Since 1900, the average return to investors has been almost 10% annually… our advice is to remain invested, avoid making drastic movements in your portfolio and ignore the volatility. There is much justice here. And stocks for the long run is capital advice, a dividend-yielding stratagem. The white magic of compounding interest will build and build. One day it will yield you a gorgeous pile of money. “If it was only that simple,” retorts Mr. Lance Roberts of Real Investment Advice. Roberts contends the Wall Street men omit critical details from their tale. That is, they neglect to inform you how one locust year can throw the compounding strategy into discombobulation. For example: While the average rate of return may have been 10% over the long term, the markets do not deliver 10% every year. Let’s assume an investor wants to compound their returns by 10% a year over five years. We can do some basic math… After three straight years of 10% returns, a drawdown of just 10% cuts the average annual compound growth rate by 50%. Furthermore, it then requires a 30% return to regain the average rate of return required. There is a significant difference between AVERAGE and ACTUAL returns. The impact of losses destroys the annualized “compounding” effect of money. That is, a mere 10% loss in year three guts the annual compound rate by half — half! Only a subsequent 30% bonanza can place you back upon the track. How likely is a 30% bonanza? Not especially, we hazard. Wall Street men yell about how the Great Financial Crisis soon yielded to one of the loveliest bull markets ever. This bull market made good all prior losses — and plenty more into the bargain. They do not inform you — Mr. Roberts does — that investors required nearly seven years to claw back even… on an “inflation-adjusted basis.” Please understand: Roberts does not dismiss the compounding theory. Yet he insists it reduces to timing. Timing is critical if you wish to realize the wonders of compounding annual interest: While many suggest the “buy and hold” investing will work over the long term, for most, that period is roughly 15–20 years until retirement. Here is the problem. There are periods in history where returns over 10-year periods were negative… Yes, “buy and hold” investing will work, but it depends on WHEN you start your investing journey. And by many accounts, the compounding strategy will turn up snake eyes over the next several years. Why? Because of very, very poor timing. Stock market valuations presently float at historic heights — even with the latest pulling back. And when stock valuations are excessive… you can expect hard sledding in the coming years. Your compounding strategy is in grave peril. Roberts: The return has everything [to do] with valuations and whether multiples are expanding or contracting… real rates of return rise when valuations expand from low to high levels. But real rates of return fall sharply when valuations have historically exceeded 23X trailing earnings and revert to their long-term mean. Yes, “buy and hold” investing will work, but it depends on WHEN you start your investing journey. At 35X CAPE, such suggests that returns over the next 10–20 years could be disappointing. Are you prepared for a two-decade stock market malaise? It is a grim projection. Yet as we argue often, time equalizes as nothing else. Scales balance, that which goes up comes down, that which goes down comes up... The mighty fall, mountains crumble, the meek inherit the Earth… And the stock market ultimately “regresses to the mean.” The mills of the gods may grind slowly, as Greek philosopher Sextus Empiricus noted. But as he warned… They grind exceedingly fine. Read on for more. Below, Jeffrey Tucker argues that the economy is on path for a “crack-up boom.” Regards, [Brian Maher] Brian Maher Managing Editor, The Daily Reckoning Editor’s note: “The Dow is up 900 points! What CRASH warning?” That’s how one reader responded yesterday to Jim Rickards’ [market warning.]( But today showed that Jim’s thesis is intact, as the Dow was down more than 1,000 points. Jim’s [Crisis Unfolding Briefing]( breaks it all down for you. We strongly advise you to take a look if you want to be prepared for what’s likely coming next. [Click here for more...]( [Click here now for Jim’s Emergency Zoom Briefing.]( Recommended Link [Could the contents of this USB Drive transform your retirement portfolio?]( [Read more here...]( That’s what thousands of Americans are wondering… Why? Because this USB Drive contains the ticker symbols of a special class of assets that have thrown off gains as big as 6,000%... 9,000%... and 22,000%... (All in less than two years). Which begs the question… How YOU quickly and easily get the ticker symbols stored on this USB drive? The answer is quite simple… [Go Here Now]( The Daily Reckoning Presents: On course for the dreaded “crack-up boom”… ****************************** The Crack-Up Boom By Jeffrey Tucker [Jeffrey Tucker]How long will we live in this state of denial? I don’t mean you. I mean most people. Yes, people are grumbling about high gas and food prices, But we are not yet at the panic stage. For goodness’ sake, the president of the United States warned about coming food shortages. If he had any credibility at all, there would have been a run on grocery stores. This didn’t happen for three reasons. First, people do not take Biden seriously. He seems not to know this. He continues to pronounce at press conferences in ways that seem almost crazy, like he doesn’t know that he is no longer believable. Second, Americans have lived 40 years with relatively predictable supplies and prices. At this point, it is baked into how we think and behave. Third, there seems to be a widespread assumption that these price increases are temporary and will settle down to the old normal at some point. The reality is that all the current price increases are permanent. The Fed has no ability to bring them back down, even if the Fed had the desire to do so. The measure of inflation, called personal consumption expenditures, just reached a 40-year high. And the momentum of change seems entirely with higher prices throughout the year. By year's end, we could inhabit an extremely unfamiliar economic environment. There is no question that the pace of inflation has blindsided the Fed, which was predicting 2% this time last year. How could they not have seen this coming? The M2 money supply is up 42% in two years. Is there really no one involved at the highest levels who understands the relationship between money supply and prices? The state of denial dates back to 2008. Last time there was a huge crisis and the Fed unleashed monetary expansion on a dramatic scale, it observed continued downward pressure on prices. That was contrary to many predictions, among which my own. What I had not anticipated was the advent of a new policy. The Fed actually paid banks — and did for many years — a higher return for holding assets in the system rather than releasing them. This kept hot money off the streets. Why did the Fed do this? Because the entire point of the policy was to re-capitalize the banking system. There was no great macroeconomic agenda. The Fed wanted to save the system from collapse. That it did. And it did it with newly created money that never landed in the hands of producers or consumers. The entire event ended up a vast exercise in financial cosmetics. The markets loved it. The expansions of 2020 and 2021 were entirely different. Congress spent money it did not have. Trillions and trillions. That spending was debt financed. The Fed stepped up to buy the debt. The money was dropped directly into bank accounts of both businesses and consumers. It became very hot. The Fed felt it had no real choice. It pointed to Congress as the culprit. It merely responded to the wishes of government, and that’s true to a point. Regardless, that was not without consequences. You just can’t get away with something on that scale forever. The great “Austrian School” economist Ludwig von Mises in the 1930s fleshed out his theory of the business cycle in great detail. He demonstrated that the distortions we see with credit expansion go way beyond steady price increases. The new money distorts all the signals in the market leading to a mismatch between production and consumption. This creates the conditions that lead to the economic bust. Recommended Link [New Federal Rule could change America forever]( [Read more here...]( Everything about your way of life is about to change – thanks to a new rule passed by the Federal Government. How much you pay for energy… how you shop for groceries… even how much you pay for healthcare – it could all radically change. That’s according to the man dubbed “The Tech Prophet” by Forbes magazine. Not only that, he believes it could create one of the greatest money-making opportunities in American history... [Click Here To See Why]( At this point in the cycle, what happens next is determined by the central bank’s response. If the central bank is determined to avoid recession, it will lean in with more monetary expansion, leading to ever more rapid price increases. Hyperinflation hits. The recession and then depression happen anyway. This threatens the integrity of the money itself, as people more and more flee paper for goods. This process leads to the most feared event in 20th century economic history: the crack-up boom. There is a shortage of money even as production collapses, leading to goods shortages. The very possibility of such a thing in the U.S. was essentially unthinkable in 2019. But then the lockdowns happened, and the preposterous decision by Congress and the Fed to game the whole system with fake money and massive spending. There is always a lag to the effects of such things, typically running 18 months. We are past this point, so what we are seeing right now is entirely predictable. The Fed is acting like a hawk right now but if you listen to the language it is using, the rate increases are solely designed to tamper down inflation. There is still a strong intention in place to avoid recession. What will the Fed do if recession happens anyway? It’s anyone’s guess but it strikes me that no one at the Fed or anywhere in government today has the courage to let the economy fall into recession. Back in 2021, Ron Paul issued a strong warning that his trajectory could in fact lead to a crack-up boom. He was pretty much alone in daring to utter the words. So far his warning has proven prophetic. Even as he spoke, the Fed was still talking like this inflation would be transitory. It is far from it. The future of prices is heavily influenced by consumer and producer behavior. If expectations are high, the fear becomes self-fulfilling. Right now, there is still vast room for inflation. The Fed is very much behind the curve at this point. No one is contemplating the kind of policies that would even attempt to suck up all the excess liquidity. It has to go somewhere. Meanwhile, there are growing signs of recession. Mortgage rates just hit a new four-year high. The yield curve is inverting on key bonds. The timing could not be worse from a political point of view: The Biden administration will do everything possible to avoid a recession as we approach November. There is a huge additional problem with the breakdown of trade relations both with Russia and China, and China too seems to be headed to a period of slow growth, if not recession too. Germany already faces 8% inflation, with no end in sight. This raises a remarkable prospect of a global crack-up boom. No one dares talk about it. The Biden administration is facing all of this with some of the most dangerous budget proposals in many decades, if not ever — record-breaking tax increases plus innovating a new method of taxation: going after not only income but yields on wealth held. You are awake to all of this, but how long will it take for average people to get hip to the dangerous realities in which we live now? We could be facing not only two decades of weak stock market returns but a weak economy. Very few are prepared for these possibilities. Regards, Jeffrey Tucker for The Daily Reckoning Ed. note: “The Dow is up 900 points! What CRASH warning?” That’s how one reader responded yesterday to Jim Rickards’ [market warning.]( But today showed that Jim’s thesis is intact, as the Dow was down more than 1,000 points. Jim’s [Crisis Unfolding Briefing]( breaks it all down for you. We strongly advise you to take a look if you want to be prepared for what’s likely coming next. [Click here for more...]( [Click here now for Jim’s Emergency Zoom Briefing.]( --------------------------------------------------------------- Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:dr@dailyreckoning.com) [Jeffrey Tucker]( is an independent editorial consultant who served as Editorial Director for the American Institute for Economic Research. He is the author of many thousands of articles in the scholarly and popular press and eight books in 5 languages, most recently Liberty or Lockdown. 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