POITOU, FRANCE – Watch out, Dear Reader, this could be a tough week for investors.

Investor’s Business Daily reports:

Dow Jones futures sold off sharply Sunday night, along with S&P 500 futures and Nasdaq futures, as China’s yuan tumbled to a record low. That follows a tough week for the current stock market rally as new Trump tariffs escalated the China trade war.

Then Monday was the worst day of trading so far of 2019.

So far, the big, fat, ugly Dow has sat on the wall and stubbornly refused to tumble. But last week, Donald J. Trump gave Humpty a shove.

He turned up the Trade War Dial, from 1/2 crazy to 3/4 crazy. China retaliated with its own version of crazy, cutting agricultural purchases from the U.S. and letting the yuan fall.

Inflate-or-Die Trap

China, like the U.S., is in an Inflate-or-Die trap. Its economy is even more grotesque and distorted than the U.S.’

It has millions of empty apartments … silent factories … roads to nowhere … bridges that connect nothing to nobody … and whole ghost towns, put up to satisfy a demand that wasn’t really there. It has excess capacity in almost every sector.

Now, it can’t just sit back and let Mr. Market correct Mr. Party Functionary’s mistakes. It must keep the money flowing, or the economy may collapse … and drag its communist rulers down with it. A weaker yuan helps it inflate domestic prices … while making its exports even harder to resist.

Almost all major countries are stuck. They’ve all built their economies on fake money and phony interest rates. Soon, they’ll all be competing to debase their currencies to keep the fake money flowing and the whole fandango going.

That’s why Donald Trump is so eager for the Federal Reserve to cut further. From his Twitter:

The E.U. and China will further lower interest rates and pump money into their systems, making it much easier for their manufacturers to sell product. In the meantime, and with very low inflation, our Fed does nothing…

Undermining Capitalism

Labor costs about $5 an hour in China. In the U.S., it’s about $25. With a 5-to-1 advantage, China is the world’s go-to source for many manufactured items.

The U.S. can’t compete on raw labor costs. It has to use capital — money, machinery, knowledge — to produce higher-quality/luxury brand goods with less labor input. No trade agreement is going to change that.

But instead of even trying to understand the real challenge, the feds make the problem worse. Like the commie leaders in China, they pretend to stimulate, manage, and improve the economy.

But the typical Democrat or Republican knows no more about economics than the typical communist. Maybe less.

So, instead of letting capitalism do its work, the feds undermine it with phony prices and ersatz capital.

Capitalism needs real capital — savings. But the geniuses at the Fed have been punishing saving and rewarding debt (anti-capital) for at least the last 10 years. That’s why growth rates are falling and almost all the new jobs created in the last 20 years are in the low-wage, low-productivity service sector, rather than high-value-added manufacturing.

And the trade war is just another capital-killing move by the feds. Deep State grifters want to tell us with whom we can do business … and on what terms.

So, instead of buying from the most efficient producer — China — American firms are forced to turn to Vietnam or Mexico to get what they need at higher prices.

Or, they can hire lobbyists and spend time trying to get special exceptions, dispensations, and indulgences from Washington. Either way, it is time (and capital) down the drain.

For the moment, Humpty is still comfortably high on the wall. But the wall may give way from under him. And while we have no way of knowing what will happen, or when, we try to stay alert. And when we judge that the odds of a major fall are high, we run our old, tattered Crash Alert flag up the pole.

Doom Index Update

The poor old black-and-blue flag has seen better days. It’s been up and down so often over the last three … and it stayed out in the rain, wind and weather for so long … we’ve begun to feel sorry for it.

“You keep warning about a crash. If you keep it up, you’ll be right eventually. Even a stopped clock is right twice a day,” writes a skeptical reader.

Our reader is right. But it’s better to be right eventually than never. And twice a day seems like plenty. So, we’re leaving the damned flag up. Besides, our research department, led by the capable Joe Withrow, tells us this is no time to take it down.

Joe’s report on the Doom Index in detail can be found below. But here’s the CliffsNotes version:

We got another 8 reading, keeping us at crash levels. The economic numbers show a clear slowdown … Stocks valuations remain stretched … We are seeing twice as many bond downgrades as upgrades, which is concerning given the sheer amount of debt coming due over the next four years … And credit growth slowed by 80%. No wonder the Fed is rushing to cut rates …

The Dow hit an all-time high on July 11. But remember, according to classic Dow Theory, a new high in the Dow 30 industrials must be confirmed by a new high in the Dow Transportation Index.

The transports — trucks, ships, rails — tell us when the goods are moving. If the transport stocks don’t go up, something is wrong. No new high in transports, no real new bull market.

The industrials hit a new high. But we never got confirmation from the transports.

“If it can’t go up,” say the old-timers, “it must go down.”

Stay tuned…



• This article was originally published by Bonner & Partners. You can learn more about Bill and Bill Bonner’s Diary right here.