The only true black swans on our list—2020 and 1987—resulted in very brief, short-lasting bear markets. The other stuff, like the financial crisis, well, we could see that coming a mile off.
Now that I’m not doing the radio show and I have more time, I sit around and think of what might trigger the next bear market. I am not coming up with anything! And I’ve never been accused of lacking imagination.
Meanwhile, the Fed and the government are dumping cash into the economy, and everyone has so much money there is no place to put it.
So, I have a tough time believing people who say this is somehow going to result in…deflation. I am not an economist, and this does not constitute economic analysis. I’m just the dumb newsletter writer. The simplest ideas are always the best.
If future variants of the virus cause more cash to be dumped into the economy, I have a tough time seeing the stock market going down.
What will cause the next bear market? Probably a withdrawal of liquidity when the Fed tightens monetary policy. It will make the taper tantrum of 2013 look like child’s play.
Ten years from now, when you’re making a list of big bear markets, and you look at the causes, this will be fairly obvious.
If the Fed hikes rates and the government tries to reduce the deficit, we are in for one hell of a crash.
But that’s nowhere on the horizon. This is how markets work: it will matter when it matters, and not a moment sooner. There is no use thinking about it now.
In The Meantime
In the meantime, I think the stock market could rally 30% over the next 12 months. That might be a little ambitious, but not by much.
The Fed has a million reasons not to tighten monetary policy. Two big ones are unemployment and the virus. The Fed only has one reason to tighten: inflation. And the Fed is just doing what it said it would do—making sure that inflation averages 2% over time.
I’m going back to the Coast Guard Academy for homecoming in the fall. I don’t have a lot of positive memories of my time there, but I can thank the military for instilling in me a profound sense of cynicism. It continues to serve me well to this day.
Music
Please check out my latest mix Blue on Soundcloud. It’s great for the car, with the windows rolled up, turned all the way up, until the tinnitus sets in.
Jared Dillian is the editor and publisher of The Daily Dirtnap, investment strategist at Mauldin Economics, and the author of Street Freak and All the Evil of This World. He may have a stake in the areas he writes about.