The Disaster Post.

W. H. Bernstein

by W. H. Bernstein, Facebook, Sept. 22, 2024- The US economy is headed for disaster.  OK, I said it.

We have several areas that are ripe for collapse.  Any one of them would be a major event but collectively they will be overwhelming.  Where to start?

The biggest bubble is of course the stock market.  Stocks are trading above levels even of the dot com boom.  In the last quarter profits were expected to grow by 5%.  They grew by 15% but stock prices grew by nearly double that.  None of that is sustainable.  And its the worst companies doing the best, mostly related to AI (more in a minute).  But strip out the top ten names from indexes and the market isn't up all that much.  One estimate says the market is over valued by 50%.  I believe it.

Crypto currency.  

I refer to this class as crapto currency for a reason.  It is literally nothing, and people are paying money for it.  The government passing of regulations on it has resulted in a gusher of new issues, with Trump and his sons feeding at the trough to the tune of $3B. The current value of the crypto market is over $4T.  For an asset that has value only because people think it has value.  It isn't like real estate, stocks, or gold, which have actual value, even if their nominal value far exceeds that.  When people stop believing crypto is a viable asset class, its price will go to zero.  That's $4T in assets wiped out, plus the collateral damage involving companies whose business depends on it.

Private credit.  

The private credit market is over $3T today.  Wall Street has been rushing to make this available to average investors, and Congress has passed legislation allowing it for retirement accounts.  What is "private credit"?  IT is lending outside the regular banking/brokerage system.  Why would a company want that? Because they can't get funding in the tradtional channels.  This is why private credit returns are higher than other types of lending.  If all of this sounds like sub prime lending from the early 2000s it's because it is.  And unlike sub prime lending, there isn't much in the way of assets underlying the loans.  So that will be $3T in assets up in smoke, plus the fallout to companies involved in it. Which includes banks and brokerages, btw.

AI related.  

Is AI going to change how we do things?  Certainly.  Is it going to be the gusher for corporate profits everyone is banking on?  Definitely not.  AI is this generation's internet, this generation's commercial airplanes.  Everyone knows it will change things, but it will never match the hype.  Currently a lot capital spending is going to build out data centers to handle all the computing resources necessary.  But once it becomes apparent they are over building--just as companies over built fiber networks not long ago--that spending will stop.

Agriculture.  

The US used to be a major exporter of things like soy beans. And China was our biggest market.  Thanks to lousy policies we will sell zero soybeans to China, which has sourced them to Brazil instead. Add in a labor shortage, thanks to lousy immigration policy and the Ag sector is looking bad.

Construction.  

Gee, what happens when you raise prices on basic construction material like steel and aluminum, raise prices on components that are imported, and gut your labor supply? Nothing good.  Slowing housing demand shows which way this market is going.

Auto.  

Same dynamic as construction.  Ford says they will pay out $2B in tariffs this year (so much for China paying it).  The EV market is not living up to its hype (see data centers above), and companies are cutting EV production, especially with the loss of the government subsidy.

Many recessions have started with weakness in housing, autos, and agriculture.  Now we have all three.

The signs are all there.  Average credit scores are dropping.  Average card balances are increasing, along with delinquencies.  Employers are hiring fewer people.

Meanwhile, the government continues to borrow at unsustainable levels, pushing inflation and squeezing consumers and businesses further.

Bill Bernstein, formerly of Nashville where he was owner of Eastside Gun Shop, now lives in Sumter, South Carolina. He is a scholar with a BA degree from Vanderbilt University and degrees in Classics from Corpus Christi College, Oxford, UNC-Chapel Hill, and University of Pennsylvania.

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