Ok, so what's your alternative?
Probably the hardest question out there. I'm not saying that the stock prices aren't real, they absolutely are as they reflect what the buyer is willing to pay. The question becomes how many buyers are left in the market at these prices. When the markets are high and non-financial types get in that is a big signal that the number of buyers is thinning out at a given price range and the market is in a late-stage bull market. Investment wise, excluding a simple preservation of capital strategy, the trick is to find where the herd is in the early stages of moving to or will be moving to.
But the real issue is deeper: what I can see is that cracks in the debt market have been forming, and the debt market is foundational for derivatives and everything else as it the thing that provides cash to pay off other debts, grow through investment, etc. There is a huge amount of financial entanglement between all markets and the banks. What makes this concerning is that it is the banks that create money via loans (fractional reserve system) appear to have started tightening who they give money to, and it causes money to not be created and pushed into the economy. The Fed can lower rates as much as they want but if the banks don't lend this creates a huge issue with respect to GDP and paying off other loans. The other contributing factor is decreasing consumer sentiment: if they don't spend but become net savers or use all of their money to live, this is a further limitation to the velocity of money as it obviously translates into a decrease in retail sales which results in layoffs in both the services and manufacturing sectors. And income growth has stagnated while overall weekly hours worked has decreased, which is currently causing a decrease in take-home pay and contributes to lower money velocity.
In 2024 about 30K businesses declared bankruptcy. Thats 17% higher than 2023. In January of this year there has been an 11% increase in commercial bankruptcy filings from January 2024. And commercial real estate defaults haven't even gotten started yet. What happens to that debt that is in the derivatives market and secondary markets? It's the write-down to book value and the destruction of that cash inflow from debt repayment that is the lynchpin to a lot of things. We talk about AI being the wave of the future, and it probably is to some extent, but if a business doesn't exist it doesn't need AI. The more businesses, the more AI customers there will be. You can say the same for every industry, not just AI. The debt market is the elephant in the room, and it is supported by the consumer who has historical levels of debt and their default rate is very high. But the debt market must grow for the economy to grow. We can pile debt to the moon, but if it isn't paid off via cash or other means the economy will shrink. I think we are approaching an inflection point; which way it goes will be determined by the consumer and whether they have enough money to buy and a corresponding positive outlook on their personal finances and the economy overall.
