US inflation is rising. In March, US inflation rose to 8.5%, compared to 2.6% one year earlier. We can expect that number to keep ascending as the fallout of supply chain shortages, rising food prices brought on by the war in Ukraine, and spreading economic decline around the globe take hold. Thanks to tanking stock market returns, the media is sounding the alarm this week. The stock market has fallen steadily for the last eight consecutive weeks. This week witnessed the biggest single-day decline in the markets since 2020 (when the pandemic began). The stock market has erased more than $7 trillion since January. If we measure in dollars alone, the US stock market has experienced one of its most significant declines in history since the beginning of this year. Most economists and leading investors are now convinced of the obvious; we are heading toward a major recession.
The stock market is a poor indicator of reality. It is rooted more to mass psychology than substantive economic realities, but when the fear buttons get pushed there, it does help alarm and crisis to spread faster. The scary part is how so little of the financial news makes sense. Jobs are available everywhere, but no one wants them. Home prices are surging. In the area where I live, bidding wars still occur whenever for-sale signs go up in front of houses, even as a building boom simultaneously unfolds.
After more than a decade of low-interest rates and unprecedented government spending and bailouts, we are heading into new waters in the finance system. Be wary of any economist or talking head that provides explanations or advice based on the other political party was wrong and our party was right. Politics cannot compete with arithmetic, and the math points to significant economic pain in the days ahead. It is not a President Biden or a President Trump issue. We are witnessing the unraveling of a seriously flawed financial system that both political parties have failed to reform for the last half-century.
Economic crises were not unheard of in prior eras, but they were far rarer than this generation has witnessed. The tumultuous roll of consistent waves of economic crisis since the end of the 1980s signals the deeper rot that is eroding our financial system. It also gives us previous examples to draw from to learn what the next 12 months will hold.
There’s a famous quote from billionaire investor Warren Buffett. “Only when the tide goes out do you discover who’s been swimming naked.” I first heard it in 2008 during the mortgage meltdown. It rang true then, and it is about to ring true now.
When the market is booming, it is easy for people to look smarter than they are when it comes to finance and investment. A general rising tide in the markets makes the average investor look like a genius even if he does not realize his success is usually based on overall market conditions rather than his own wisdom.
When the dot com bubble popped in 2002, day traders who previously touted their savvy with high performing returns from AskJeeves.com, Pets.com, and World.com were shocked when their profits and investments disappeared. In 2008, self-proclaimed real estate tycoons found their houses sitting empty and their mortgage payments still due. Bankruptcies and foreclosures soared.
This time around, it appears the forefront of the retreating tide will be in the crypto markets. For the past several years, many crypto investors have touted their successes in the internet-based exchanges, advertising their returns as proof of their finance savvy. While some cryptocurrencies certainly found more legitimacy than others, it is wise to recognize if the big investment houses are spending millions of dollars on ads to get you and me to invest in crypto, along with high profile endorsements, these experts see the real money is not in crypto, but in getting us to invest there.
The crypto collapse has already started. Bitcoin has fallen to half of what it was in the fall of 2021. The crypto markets as a whole lost more than $600 billion in one week earlier this month. Some cryptocurrencies have already collapsed completely.
The illusions are starting to collapse, and reality is beginning to set in, but remember, this is only the beginning. The tumult experienced in cryptocurrencies in the month of May is the first wave of hard doses of reality that will wash over various investment fronts.
Along with the exposure brought on by retreating markets comes the scandals. In the dot com bust, we had Enron and Worldcom. In the mortgage meltdown, we had Madoff. Who knows where the scandals will pop up this time, but as surely as golden parachutes will save the billionaire class in the approaching chaos, the scandals will begin erupting very soon. It will quickly become apparent that some individuals and organizations were not only less financially savvy than they thought and advertised, but they also used that misguided perception to bilk others of their hard earned savings and investments.
The very name Ponzi scheme comes from a swindler by the name of Charles Ponzi, whose con was revealed in the short market downturn in 1920. Ponzi’s scheme cost his investors $20 million and brought down six banks when it was exposed. Compare that to the ponzi scheme conducted by Bernie Madoff until 2008. By the time it was uncovered during the market meltdown in 2008, it had cost his investors $18 billion.
We will soon find out if Madoff’s scandal was just a drop in the bucket compared to what has been going on over the last decade of low-interest rates and excessive government spending. The coming wave of scandals will give us faces and names to attach to the economic crisis. The ability to place blame on someone specific is not a uniquely American attribute, but we do it better than most. It is worth remembering that we all partook in this system of financial excess and denial over the last decade. The media will give us our villains, but the problem is bigger than any one person. We have a financial system that invites scandal and corruption.