‘There is a tide in the affairs of men.’

—Brutus, in Shakespeare’s Julius Caesar

The Dow ebbed a little lower yesterday.

‘The Dow dropped because the market decided it couldn’t ignore trade anymore,’ says Barron’s.

Even the European Central Bank (ECB) warned investors that US stock prices ‘seem detached from their underlying fundamentals.’

They got that right.

Lost hiker

That’s the whole point of financialisation — to separate Wall Street from Main Street, which is what both the Fed and the ECB have been doing for years.

It’s why the rich have gotten so much richer, while the middle classes struggle to stay even.

And the further stock prices get away from the economy that supports them, the greater the danger that they will die in the woods, like a lost hiker.

The risk of a crash is impossible to calculate precisely or reliably. But for what it is worth, our indicators are flashing red. If this were a car, we’d pull over to the side of the road and open the hood.

There, we may find a trade war, frayed politics, stretched-out valuations, and maybe even an upside-down yield curve. We may see wires that are disconnected, leaky tubes, and broken gears.

But the stock market is not a machine; you can slow it down, but you can’t speed it up. And you can’t fix it.

Greed and fear

Today, we close the hood. Instead, we wander out on a warm night…and look out at the tides.

Because the world of money is not a mechanic’s world; it is a poet’s world. It is a world dominated by sentiment, irony, ambiguity…and moonshine.

And it is ruled by two major emotions: greed and fear. People are either eager to get more…or they are afraid of ending up with less.

As though on huge tides, the greed emotion floats on a sea of liquidity and hope, while fear intensifies as liquidity recedes and desperation sets in.

Typically, when investors are greedy, they buy stocks — especially in innovative new companies, where ‘the sky’s the limit’ on the profits they might earn.

And then, when the sky begins to fall, the tide ebbs and they grow fearful. Then, they retreat to bonds…real estate…cash…and ultimately, gold.

The same cycle dominates life itself. Boom…then bust. Greed…then fear.

A young man is greedy for new things…new experiences…new wealth. He hungers for the first light…for a race…for an app!

He can afford to make mistakes — even to lose all his money, for example. He needs to make mistakes; he learns from them.

An older man, alas, can’t take chances. He is the old dog who doesn’t want to try new tricks; he might hurt himself.

There is a time to be bold. And a time to be not so bold. If he loses his retirement nest-egg at 55…he’ll have a very hard time recovering.

Young people may try new things, new fashions, and new technologies, but the old man sticks with what he knows.

He is happy to listen to the ‘oldies’ and wear the clothes he bought 30 years ago. He rides a Harley. Young men prefer Hondas, Yamahas, and KTMs.

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Ebb and flow

But what ho? A recent Gallup poll tells us that even the young are becoming fearful. They no longer trust freewheeling capitalism, a can-do spirit, and an open economy to deliver the goods.

Millennials (those aged 22–37) told pollsters that they would be just as happy with socialism as with capitalism. Until now, Americans of all ages favoured freedom (or, at least, so they said). Now, it’s protection they want.

Old people still claim to support capitalism. But even they want subsidised pills and socialised medicine. The Financial Times:

‘A majority of Americans now do not just support universal health care…but a system in which everyone is covered by one government plan.’

Greed to fear…win-win to win-lose…life to death. Or, as a Dear Reader put it, from ‘pollination…to predation.’

Sometimes, you are optimistic, hopeful, and willing to give something in order to get something. Sometimes, you don’t want to take the chance.

Everything in the natural world ebbs and flows. Always has, though many have tried to stop it.

Xerxes had his men whip the sea; the Hellespont still defied him. The wiser King Cnut showed his courtiers that he could command the tides, but they wouldn’t listen.

It is very unlikely that Powell/Trump et al. will have more success. Trick the tides with negative rates? Flood the market with more quantitative easing (QE)? They can say what they want and do what they want.

‘F-off,’ the tides reply.

Shipwreck ahead

And here, Dear Reader, draw a deep breath. Not at the coarse language of the untamed tides, but at the scale of the shipwreck ahead.

Since 2009, approximately $50 trillion dollars has flowed into American household wealth — mostly in stocks, bonds, and real estate…and mostly into the households of the rich.

What are the odds that the tides have stopped now…and that that $50 trillion stays put?

Tomorrow, we will look at the most important number in finance — the Greed/Fear Ratio — and at where we are in the cycle.

Is it time to take a chance that will ‘lead on to fortune’? Or will it cause us to spend our whole lives in shallows and miseries?

Regards,

Bill Bonner