Is This the ‘Crack-Up Boom’?

Monday, 1 June 2020
Melbourne, Australia
By Greg Canavan

US cities are burning right now…

While China’s totalitarian regime spreads its tentacles into the once vibrant city of Hong Kong.

And the stock market…goes up?

Now’s a good time for my near weekly reminder that markets never do what you expect them to, when you expect them to.

The Aussie market opened down sharply this morning, only to rebound almost immediately. The ASX 200 is up over 30 points (and rising) as I type.

The weight of money trumps all else.

It brings to mind the famous quote from Ludwig von Mises.

[I couldn’t remember it off the top of my head, so I went to my bookshelf to find his treatise on economics, Human Action. I knew the quote was in there somewhere. I found it, along with a bunch of other goodies, which I’ll get to in a moment.]

First, the money quote:

The boom can only last as long as the credit expansion progresses at an ever accelerating pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market. But it could not last forever even if inflation and credit expansion were to go on endlessly. It would then encounter the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and the breakdown of the whole monetary system.’

Have the latest virus related emergency (read: panicked) liquidity measures encountered the barriers that prevent the endless expansion of credit? Is this the crack-up boom and breakdown of the whole monetary system?

No one knows the answer to these questions.

But I’ll tell you one thing, not many are even thinking about it.

The problem is, no one knows what the breakdown of a modern monetary system looks like. And if someone is certain of it, it tells you more about their biases than anything else.

A lot of people think it means the collapse of the US dollar, while others believe it means a massive spike in the US dollar.

There is no real consensus. This just points to the huge complexity of the issue.

What you can be pretty certain of though is the fact that this is the direction we are heading in. Central banks know they must keep the credit creation machine going at all costs, otherwise economies will collapse.

The reason why stock markets have rebounded so strongly is because central banks and governments appear to have thrown more short-term stimulus at economies than was really necessary.

That’s not to say the funds reached the people who really needed it. It never does. But in aggregate, the stimulus thrown at the economy is likely to provide a much bigger short-term boost than initially thought.

In addition, you’ve got a one-off spending hit from the early release of super.

As it turns out, most people wanted access to their money, but didn’t really need it.

The Financial Review reports today that:

Almost two-thirds of superannuation money withdrawn early during the coronavirus crisis has been frittered away on alcohol, take away food and clothes, according to research by AlphaBeta, which is part of Accenture, and credit bureau illion.

A further 11 per cent of the retirement savings was spent on gambling.’

The research claims that 40% of those who accessed their super didn’t experience a drop in income. They just wanted more money to spend.

So expect to see some pretty decent consumer spending figures come through in the next few months. The question is: What will growth look like when support begins to drop off after September?

Getting back to Mises, here is another very interesting quote I found. Thankfully I had underlined it in my previous reading of it around a decade ago. It relates to the move to reduce interest rates to zero, or in some cases negative.

‘…there can not be any question of abolishing interest by any institutions, laws, or devices of bank manipulation. He who wants to “abolish” interest will have to induce people to value an apple available in a hundred years no less than a present apple. What can be abolished by laws and decrees is merely the right of the capitalists to receive interest. But such decrees would bring about capital consumption and would very soon throw mankind back into the original state of natural poverty.’

With official interest rates at or near zero around the world, and government bond yields similarly low, stock markets are in the process (once again) of valuing a future apple at the same price as one today.

An apple in the hand is no longer worth two on the tree of next year’s harvest. Because there is no cost of money to make it so.

Yes there is time still, but no time value of money when interest rates are at zero.

Looking at vision of the riots in the US, it’s easy to think society is coming apart at the seams, that mankind is heading back to its original state of poverty.

I suspect that Mises was being dramatic to make a point. That is, if there is no such thing as interest, or a return on capital, capital will be consumed, and the process of wealth creation will cease to exist. If there is no capital formation, and our existing capital stock is consumed (because there is no reward for reinvestment) then we’re in a spot of trouble.

I don’t think that is the situation we’re in now.

But we might only be one more boom/bust cycle away from it…

Continue scrolling for this is week’s ‘Week Ahead’ update from Pivot Trader’s Murray Dawes.


Approaching Stiff Resistance
By Murray Dawes


[Click on the picture to watch Murray’s up to the minute analysis of the E-mini S&P 500 futures, ASX 200 futures and oil.]

Last week the ‘Week Ahead’ update was called ‘Spike and Failure’. In it I predicted a spike in US equities, which would end up encountering stiff selling pressure.

We have seen the spike, now we wait for the failure.

The short-term momentum remains to the upside so we can still expect to see strong buying pressure. But the higher it goes the further it moves into the sell zone of the whole wave down in the crash.

After such a huge sell-off, I would be surprised to see markets recover their all-time highs without encountering some serious selling pressure.

It will only take one bad night in the E-mini S&P 500 futures to see prices fall back below the 200-day moving average. From there momentum could shift back to the downside rapidly.

The ASX 200 saw strong buying in the banks last week and that theme could continue with a weekly buy pivot confirmed in the Financials Index [ASX:XFJ]. The weekly trend in the ASX 200 remains up for now but similar to US equities, there is a lot of resistance not far above where we are trading now.

Brent crude oil on the other hand continues to rally. I predicted a move to $43.50 when a weekly buy pivot was confirmed four weeks ago. Prices have jumped from $30 to $37.80 since then and it looks like there will be further upside towards the target in the near term.


Murray Dawes,
Editor, Pivot Trader