Stock Market Bubble Built on Interest Rates Must End Some Day

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Today’s Agenda

Bubble Watch Enters Year 12

Even when you understand the science behind them, some natural phenomena just never cease to amaze: the Northern Lights, moon haloes, Paul Rudd’s immunity to aging.

The resilience of the stock market is another one. Global pandemic? Buy stocks. Vaccine for that pandemic? Buy stocks. Big job gains? Buy stocks. Big job losses? Buy stocks. That last bit happened just today: The Labor Department reported the economy shed 140,000 jobs last month, far short of expected small gains. Not great! But, of course, stocks rose, because that is what they must do.

And the rationale du jour is pretty obvious, writes Brian Chappatta: Job losses mean more stimulus, which is even more likely now that Democrats will soon control all of Congress. West Virginia Democrat Joe Manchin briefly rained on this trade when he said he wouldn’t back the $2,000 stimulus checks President-elect Joe Biden promised to close the deal in Georgia runoff elections. But Manchin quickly backtracked, and the stock-buying resumed, as it probably would have anyway.

We all know the reasons stocks never stop rising: the Fed, ETFs, Paul Rudd’s face. What we don’t know is how this will end. It has to end sometime, right? And not just because it always does. John Authers lays out the evidence we are in the “fog a mirror, buy a house” phase of another market bubble. Most striking is this chart of cyclically adjusted price to earnings:

The eagle-eyed, Paul Rudd-like readers of this newsletter will observe that the “different this time” part of that chart is the red line, which tracks long-term interest rates. They have spent the past year drilling toward the Earth’s core, mining fuel for the blue line above. But what, John wonders, will happen to stocks when rates reverse? And will it be Biden’s supersized stimulus, ironically, that makes that happen?

Coup Watch: Impeachment Watch Edition

Two days later, America is still picking up the pieces — and other, uh, stuff — from the MAGA attack on the Capitol. A police officer has become the fifth death. People are being arrested. Lindsey Graham is being harassed. But what does it all mean? Maybe it’s the opening shot in a new civil war waged by a right-wing fringe hopped up on nonsense media, Jonathan Bernstein writes. Or maybe it’s the death throes of that movement and the first stage in re-solidifying American democracy. Or maybe it’s something in between: the latest growing pains of a democracy that is really just 50 years old, if you think about it.

This more nuanced view makes the riot a bit less of the gift to Vladimir Putin it might seem, writes Leonid Bershidsky. It’s still a huge embarrassment to Donald Trump’s onetime fellow traveler Boris Johnson. He probably regrets getting too close to Trump now, writes Martin Ivens, especially considering how little he got out of the relationship.

Another big question is what becomes of Trump himself. Last night he released a video, apparently recorded under duress in a Tehran hotel, calling for calm and promising an orderly transition to the administration of He Who Shall Not Be Named (Biden,  whose inauguration Trump will not attend). The video may have been an effort to turn down the political and legal heat on himself. But impeachment is still coming, as soon as Monday. Removal is still unlikely, but prosecution of some sort is not. For that reason, Trump has reportedly discussed pardoning himself, but Cass Sunstein explains he can’t do this. 

Further Coup-Reaction Reading: Mob violence is bad for business. — Brooke Sutherland

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