After a brief plunge following the Brexit vote, the S&P 500 is now up an astonishing 8% in less than two weeks as markets now anticipate a greater amount of fiscal and monetary stimulus. “We’re in unchartered territory,” says Bert Dohmen, President of Dohmen Capital Research Group, on today’s podcast.
More hints of liquidity, helicopter money, or whatever attempts to forestall a correction or economic slowdown reveal one important thing: central bankers “have no idea of what they are doing” and by juicing assets higher and higher, the eventual correction will only be that much greater, he told listeners.
Noting that the stock market bubble, as he called it, could go on for much longer than reasonable analysts expect, China still presents a major threat to global markets and will likely put a drag on global economic growth in the years ahead.
Here’s what he had to say:
Dohmen: We're seeing something very unusual right now. We are really in unchartered territory everywhere around the world. The central banks first launched ZIRP, which means zero interest rate policy, and that didn't work so they went to NIRP, which means negative interest rate policy. Negative interest rates have never occurred in the history of mankind, which is kind of long—you're talking about thousands of years. So, the end result of this is totally unknown and we can only guess what will happen.
One thing for certain is that the people at the central bank that have undertaken this very unique experiment are taking us along for the ride and they have no idea what they are doing. This is becoming more and more clear. We are being led by the blind and it's not going to be a good experience.
Whenever the stock market or the investment markets as a whole want to adjust to the new reality—that is, to get back to more historical valuations—then the central banks step in. If they see a recession coming, they try to avoid a recession and that is about the most dangerous thing that can ever be done. We need recessions. Recessions are very healthy because they clean out the system. They get the excesses out.
Ludvig von Mises, one of the founders of the Austrian School of Economics in the 1930s, wrote that when a…central bank puts even more stimulus into the system in order to prevent an implosion, it eventually generates a much greater implosion and that unfortunately is what I think we are going to see.
Financial Sense: How much longer or higher do you think markets can go from here?
Well, that's exactly the critical question...and I think it can go on much longer than reasonable analysts expect. This should have caved in last year and we have seen several attempts for the markets to adjust...[but] the central banks counter any moves for the markets to cave in. We saw this in January and February. The markets wanted to adjust and we had big plunges, especially in emerging markets. There were markets that were down 30-50% in six weeks time, then the central bankers came in on February 11th... This is all manipulated. Every market out there is manipulated right now.
Let's talk about China and your recent report, The China Crisis Is Here. What are you warning investors when it comes to the world's second largest economy?
In our first book, we warned that the fantastic double-digit growth to infinity in China was not going to happen. The economy in China has benefitted from two things basically: cheap labor and getting Western technology—hundreds of years of technology—free. If a US company wants to do business in China, they have to sign over their intellectual property to China for free with no compensation. So, they had the benefit of those two things and those benefits are now gone. China no longer has cheap labor and a lot of US companies are bringing their production back to the US because it's not much different.
So, what we have now is everything coming to a head and the entrepreneurial spirit in China wants to take over at this point in the economic cycle—the Chinese are very hard working and very smart people—but they hit the Great Wall of Communism. That's it, and communism will prevent further growth at this point and you can tell everything that the current President is doing is counterproductive and we are going back in China to the days of Mao Tse Tung—coercion to the n-th degree where the media cannot report what's happening, journalists are arrested for reporting what's happening, and he [the President] has made it clear to the media that it is your duty to support the policies of the government and not to bring anything negative out...
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