I am looking at the stock market, and companies like Tesla, and frankly, I am confused. I can’t see any rational basis for investors continuing to pump new money into stocks at all-time highs, when the wheels are coming off of the economy. Unemployment is above 10% and is likely to rise substantially. Valuations on stocks cannot be justified under any acceptable metric. Real estate prices are at all-time highs in many markets even as significant downward pressure is being applied as people are moving out of high-priced markets like San Francisco and New York, where rents are experiencing double-digit monthly declines. Inflation is spiking. The value of the dollar is eroding against other currencies. We have a $3.3 trillion-dollar federal budget deficit for 2020 alone, and we will continue to run deficits for years to come. This means that taxes must go higher, regardless of who wins the Presidential election.
California, which already had a huge overall deficit, will be forced to raise taxes, even as literally millions of people are leaving the state to get away from the already high taxes here and from high rents as noted above. This is especially true for the wealthy, who can afford to relocate, with many owning properties in other states. They can see the writing on the wall – that they will be the target of higher taxes in California, so they are selling property while it is at all-time highs and leaving the state. Companies, and especially the big tech companies in California, which have already allowed employees to work remotely, will be the target of higher taxes as well, and they will likely elect to move to states with lower or no state tax burden. Pinterest just walked away from a long-term lease and paid almost $100 million to get out of that lease, viewing the payment as preferable to getting stuck in a long-term lease in California. Again, the writing is on the wall. As the wealth and corporations leave California, the state, desperate for tax revenue, will come after the only source of funds left – the middle class.
As noted above, taxes will go up on the federal level as well; they have to. Foreign capital will likely flee the U.S. as inflation rises. The Fed will be forced to raise rates to combat inflation, despite their recent pledge to do the exact opposite. Historically, the Fed has always prioritized fighting inflation above economic growth, and there is no reason to believe they will react any differently this time.
The stock market is so over-inflated, so ridiculously overvalued, that instead of an orderly correction, we are now at substantial risk of an all-out crash of an even greater magnitude than the 2008, 1987, or 1929 crashes. I know, I know, doomsday predictions are rarely given credence. I am providing this blog post as a simple warning to investors who are fully invested, and/or who continue to pump their hard-earned dollars into stocks, either directly or indirectly through 401(k)s. One of the consequences of the deregulation of the securities industries was lower commissions, which have resulted in individual investors taking responsibility for their own investment decisions. Regardless of whether you agree with inexperienced individuals making investment decisions or now, it is now a fact of life, and a fact that has a direct, material impact on the value of stock and the market overall. With the ability to make one’s own decisions comes the consequence of having to take personal responsibility when the market goes against the investor. Those who fail to actively manage their portfolios will suffer the very real and devastating consequences, should we have a crash. The related consequences of a market crash are not just the loss of profits or principle by investors, but the crushing impact on the economy, employment, businesses, and every other aspect of life as we know it.