With the federal government continuing to spend towards disaster, and with Biden acting as a dictator, the market activity seems like minutia.

For a long time in writing this blog, I have stressed the importance of being healthy and maintaining an income.  While I tend to focus on the Federal Reserve and market activity, I always say that you should worry about your source of income more than your investments, with certain exceptions.

If you have a net worth over a million dollars with a modest middle-class salary, then you should actually probably worry more about your investments than your job.  But for most people, your job or main source of income comes first.

Joe Biden is threatening tens of millions of Americans that they will have to get the government’s jab in the arm if they want to keep their job.  As of now, we are still waiting for OSHA to release the details of these tyrannical dictates, so we don’t know how much of it is a bluff and how big the loopholes will be.  Still, thousands of people across the country are already losing their job because their employer put in place a mandate.

With that said, I still have to pay attention to what is happening in the overall economy.  It has been the focus of this blog over the years.  I can fight hard against Biden’s immoral and unconstitutional dictates while still commenting on the economy and the markets.

Stocks Show Signs of Weakness

The last week of September was a tough one for the stock bulls.  But I am not convinced that this is the beginning of a bear market or some kind of major pullback.  We have seen this trick before.  Last year and in previous years, there have been significant pullbacks of 5 or 10 percent.  Then the pullback stops and within months or weeks, stocks are hitting new all-time highs again.

In the present scenario, the financial media is blaming the pullback earlier this week on rising long-term yields.  The 10-year yield hit 1.5% this past week, which supposedly frightened investors.

It is hard to believe that a 10-year yield of 1.5% is frightening to the markets.  If that is frightening at all, it should be because it is way too low, not too high.

Price inflation, even by the government’s own measures, is running above 2% at this point.  Yet bond investors are accepting a return of 1.5% per year over a 10-year period.  This means, even before taxes, that the yield is negative in real terms.  You get 1.5% on your money, while losing 2% or more in purchasing power.  It’s not exactly the path to wealth.  It could be argued, however, that it is a path to protecting wealth in a time of great risk.

It actually doesn’t make sense that stocks would fall because of a modestly rising 10-year yield.  If anything were to signal trouble for stocks at this point, it would be falling long-term rates.

The only reason a rising long-term yield could spell trouble for stocks is that there is fear the Fed will have to tighten.  But this is really a reflection of price inflation.  The only reason the Fed would tighten faster than expected is because price inflation is getting out of control.  It’s not clear that the higher 10-year yield is due to fears of higher price inflation.

The Yield Curve

The best predictor of a recession is an inverted yield curve.  And a recession and a crashing stock market typically go hand-in-hand.  In this sense, we should see the yield curve inverting before we see a major crash in stocks.  This means that the short-term rates would go up or the long-term rates would come down, or some combination of the two.

With a slightly rising 10-year yield, this is getting away from an inversion.  The yield curve is getting steeper.  So it is not necessarily pointing to a recession.

Here’s the problem though.  We did have an inverted yield curve in 2019.  There is typically a delay of 6 months to over a year after this happens before the recession becomes evident and stocks fall.

But things didn’t happen as normal in 2020.  (That’s the understatement of the year.)  Due to COVID hysteria and government lockdowns, there was a massive slowdown in business activity across the board in March 2020.  The Fed reacted right away.  It even reacted before the world shut down.  The Fed’s balance sheet took off to the stratosphere.

In a more normal situation, the Fed would not react like this.  If there had been no COVID hysteria in 2020, then a recession likely would have followed a more typical path.  We probably would have seen signs of a slowdown, with stocks falling, and then the Fed would have reacted.  It would have been too late, and there would have been some kind of a real recession, instead of the very brief one in the spring of 2020.

Since the Fed started the process of inflating and lowering interest rates before the recession even officially began, it prevented a major shakeout.  While it was a bad time for many small businesses, most large companies seemed to get through just fine, or even better.  The resumption in the bull market came in late April or May of 2020, and it has been a major boom time ever since for stock investors.

We never really got any kind of correction.  We never saw much of a cleansing of the malinvestment.  Therefore, I don’t know if we ever saw a true recession following the inverted yield curve in 2019.

This makes me wonder whether we actually need to see another inverted yield curve in order to get the next recession.  It really isn’t clear at all because of the abnormality of what happened in 2020.

I generally think that the latest trouble in the stock market is not the beginning of a sustained bear market.  However, I do think we are in a massive bubble that could implode at any time.

When it finally does implode, it is going to severely hurt a lot of people who put their faith in the dictum that stocks always go up in the long run.

Maybe it’s true that stocks always go up in the long run, especially when you have a central bank always willing to inflate.  But “the long run” can mean different things to different people.

Do you know anyone who has made a lot of money in the stock market over the last decade who has sold most of it off and taken the gains recently?  I don’t.

You have conservative investors who have been light on stocks who have missed out on the gains, and you have more aggressive investors who are heavy on stocks who have done quite well over the last decade.  But the ones who have done quite well have mostly stayed in stocks, or have even become more aggressive.  So when the crash finally comes, they are going to be devastated.  We just don’t know when that will be.