What will cause the end of the bull market

It takes only two things to keep people in chains:

The ignorance of the oppressed
and the treachery of their leaders.


You have been invested in the stock market for the past nine years. You now view yourself as a financial genius. Calm down. It would have taken exceptional “skill” for an investor not to have made money, lots of it, in this bull market.

And the market still bulls upward, newly propelled by the anticipation of stimulative federal tax cuts.

Why do tax cuts simulate? Very simply, because they leave more dollars in the economy.

Think of yourself as a car and the gas station as the federal government. When you pump gas into your car, the gas station runs a gas deficit and you run a gas surplus.

The station’s gas deficit is a good thing, just as the federal government’s money deficit is a good thing for you.

But if for some strange reason, you are forced to give the gas station more gasoline than you receive (i.e. the station runs a gas surplus), your driving will be limited.

Now, you begin to see articles by pundits, who tell you the end is nigh, or surely must be nigh, because all bull markets end, sometime. The January/February issue of MONEY Magazine contains just such an article. It is titled, “3 Ways This Bull Market Could End.”

The “3 ways” are interesting, and each contains a grain of truth, but they don’t include the real way this bull market will end.

First, MONEY’s “3 ways”:

Scenario #1: The Economy Did It
What bull markets fear most isn’t the shock of war or political crisis, but recessions.

Two-thirds of all bull markets since World War II have ended in anticipation of an economic contraction. Still, most traditional indicators are signaling that the economy is doing just fine and isn’t likely to shrink in the next year or two.

Historically, real estate construction has been a terrific indicator of the economy because it takes months to construct a new home. Every recession since 1960 was preceded by a double-digit decline in housing starts.

Yet in October housing starts rose by double digits—13.7%, to be exact—indicating that construction firms aren’t betting on a slowdown in the economy in 2018.

There’s another concern. “The economy typically slips into a recession four years after the first Federal Reserve rate hike,” says John Lynch, chief investment strategist for LPL Financial.

The central bank actually started lifting rates in late 2015. Four years after that would put a possible recession start date in late 2019. And if stocks foreshadow recessions up to a year before, that means a bear could be lurking at the end of 2018.

The stock market is the world’s business-prediction method. With hundreds of millions of investors inputting their beliefs, it is the ultimate “Wisdom of the crowd” device.

But, a problem with this “wisdom,” it that not only does the “crowd” try to predict the overall market, and not only does it also try to predict the effect of individual stocks, but the crowd also tries to predict the actions of the crowd, and then act on these predictions.

Thus the crowd becomes a self-referential, self-fulfilling prophesy machine.

Further, federal interest rate hikes are not, in of themselves, recessive. On the contrary, to the degree a rate hike forces the federal government to pay more interest dollars into the economy, the increased rates are stimulative.

Rate hikes always are a prevention and cure for excessive inflation, and excessive inflation is a cause of business downturns.

It is the disease (inflation), rather than the cure (higher interest), that causes the symptom: Recession. 

Scenario #2: The Fed Did It
Central bankers at the Fed have publicly stated that they believe there will be around two or three more rate hikes in 2018, bringing the so-called Federal funds rate, which banks charge one another on overnight loans, to around 2% or so next year.

The markets have a knack for testing newly installed Fed chairmen.

It happened to Alan Greenspan, who became chairman in August 1987, at the end of an economic cycle. The Greenspan-led Fed proceeded to raise interest rates just before the October 1987 crash.

Similarly, Ben Bernanke assumed the Fed chairmanship in 2006 toward the end of another economic cycle as the central bank was hiking rates—and just before the 2007–2009 bear market.

The Fed doesn’t even have to make a big error—for instance, by raising rates too aggressively—to spook the markets. Simply raising rates unexpectedly or communicating their intentions poorly “could create volatility as rates rise.”

Although functionally, interest rate increases are not recessive, the mere belief that they introduce recessions can be sufficient to cause recessions.

The 2007-2009 bear market, which corresponded to the “Great Recession,” was caused by flagrantly illegal lending by big banks, not by interest rates.

Scenario #3: The Market Has a “Minsky” Moment
A “Minsky moment,” named after the late economist Hyman Minsky, who studied boom-and-bust cycles in the financial markets and argued how unstable bull markets can be after a long run.

[Investors take on additional risk during prosperous times or bull markets. The longer a bull market] lasts, the more risk is taken in the market. Eventually, so much risk is taken that instability ensues.

A Minsky moment was blamed in part for the global financial crisis, when investors took on ever more debt to make speculative investments in houses and mortgage securities without worry until it eventually reached a tipping point when every investor did start to worry.

To be sure, Rob Arnott, chairman of Research Affiliates, notes that “the temptation in a bull market is to buy more.”

Not only does a bull market tempt investors to buy more, but the bull market itself automatically rebalances an investor’s portfolio toward more speculative, higher-flying investments.

Market action alone could take a very conservative portfolio consisting of 50% stocks and 50% bonds, into a new, aggressive ratio of 75% stocks and 25% bonds.

And now, The Real Reason for Recessions:

A large economy contains more money than does a smaller economy. The U.S. economy contains more dollars than does the California economy, which in turn contains more dollars than does the Los Angeles economy.Related image

Gross Domestic Product, the typical measure of a nation’s economy, consists of three, basic measures: Federal Spending + Non-federal Spending + Net Exports.

All three are money measures. Federal Spending pumps dollars into the economy. Non-federal spending is done with dollars that are in the economy. Net Exports add dollars to the economy.

While Federal Spending adds dollars to the economy, federal taxes take dollars out of the economy. The difference between spending and taxing is Federal Deficit Spending, the net amount of dollars the government adds to the economy.

When net dollars are added to the economy, this stimulates economic growth. When net dollars are taken from the economy, this is recessive.

When the federal government runs a deficit, the economy receives dollars, and when the federal government runs a surplus, the economy runs a deficit.

If the normal federal deficit instead becomes a federal surplus, the economy will have a Depression or at “best,” a recession.

U.S. depressions tend to come on the heels of federal surpluses.
1804-1812: U. S. Federal Debt reduced 48%. Depression began 1807.
1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Great Depression began 1929.
1997-2001: U. S. Federal Debt reduced 15%. Recession began 2001.

Even reductions in deficit growth can lead to recessions:

Monetary Sovereignty
Federal Deficit — 1955 – Present. Vertical Bars are recessions

As the federal deficit growth line drops, we approach recession. Recessions are cured only by deficit increases.

Federal deficit growth is necessary for economic growth.

Recently, the Republican-dominated Congress passed a tax law that included reductions in business and personal taxes, predicted to add $1.5 Trillion to the federal debt.

That represents $1.5 Trillion added to the economy, which is stimulative — or would be stimulative but for this:

Ryan says Republicans to target welfare, Medicare, Medicaid spending in 2018.

“House Speaker Paul D. Ryan (R-Wis.) said Wednesday that congressional Republicans will aim next year to reduce spending on both federal health care and anti-poverty programs, citing the need to reduce America’s deficit.”

Because deficits add stimulative dollars to the economy, deficit reductions lead to recessions. If Ryan cuts federal spending for social programs, we will have a recession, the severity of which will be related to the size of deficit cuts.

Starve consumers of their purchasing dollars, and businesses will experience reduced sales and profits.

In summary, interest rates are not a true point of concern. Rather, deficit growth cuts, or worse yet, federal surpluses, will drag us down to recession or depression, and only massive deficit spending will cure the disease.

Rodger Malcolm Mitchell
Monetary Sovereignty
Twitter: @rodgermitchell; Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell


The most important problems in economics involve the excessive income/wealth/power Gaps between the have-mores and the have-less.

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics.

Implementation of The Ten Steps To Prosperity can narrow the Gaps:

Ten Steps To Prosperity:
1. ELIMINATE FICA (Ten Reasons to Eliminate FICA )
Although the article lists 10 reasons to eliminate FICA, there are two fundamental reasons:
*FICA is the most regressive tax in American history, widening the Gap by punishing the low and middle-income groups, while leaving the rich untouched, and
*The federal government, being Monetarily Sovereign, neither needs nor uses FICA to support Social Security and Medicare.
This article addresses the questions:
*Does the economy benefit when the rich can afford better health care than can the rest of Americans?
*Aside from improved health care, what are the other economic effects of “Medicare for everyone?”
*How much would it cost taxpayers?
*Who opposes it?”
3. PROVIDE A MONTHLY ECONOMIC BONUS TO EVERY MAN, WOMAN AND CHILD IN AMERICA (similar to Social Security for All) (The JG (Jobs Guarantee) vs the GI (Guaranteed Income) vs the EB (Economic Bonus)) Or institute a reverse income tax.
This article is the fifth in a series about direct financial assistance to Americans:

Why Modern Monetary Theory’s Employer of Last Resort is a bad idea. Sunday, Jan 1 2012
MMT’s Job Guarantee (JG) — “Another crazy, rightwing, Austrian nutjob?” Thursday, Jan 12 2012
Why Modern Monetary Theory’s Jobs Guarantee is like the EU’s euro: A beloved solution to the wrong problem. Tuesday, May 29 2012
“You can’t fire me. I’m on JG” Saturday, Jun 2 2012

Economic growth should include the “bottom” 99.9%, not just the .1%, the only question being, how best to accomplish that. Modern Monetary Theory (MMT) favors giving everyone a job. Monetary Sovereignty (MS) favors giving everyone money. The five articles describe the pros and cons of each approach.
4. FREE EDUCATION (INCLUDING POST-GRAD) FOR EVERYONE Five reasons why we should eliminate school loans
Monetarily non-sovereign State and local governments, despite their limited finances, support grades K-12. That level of education may have been sufficient for a largely agrarian economy, but not for our currently more technical economy that demands greater numbers of highly educated workers.
Because state and local funding is so limited, grades K-12 receive short shrift, especially those schools whose populations come from the lowest economic groups. And college is too costly for most families.
An educated populace benefits a nation, and benefitting the nation is the purpose of the federal government, which has the unlimited ability to pay for K-16 and beyond.
Even were schooling to be completely free, many young people cannot attend, because they and their families cannot afford to support non-workers. In a foundering boat, everyone needs to bail, and no one can take time off for study.
If a young person’s “job” is to learn and be productive, he/she should be paid to do that job, especially since that job is one of America’s most important.
Businesses are dollar-transferring machines. They transfer dollars from customers to employees, suppliers, shareholders and the federal government (the later having no use for those dollars). Any tax on businesses reduces the amount going to employees, suppliers and shareholders, which diminishes the economy. Ultimately, all business taxes reduce your personal income.
7. INCREASE THE STANDARD INCOME TAX DEDUCTION, ANNUALLY. (Refer to this.) Federal taxes punish taxpayers and harm the economy. The federal government has no need for those punishing and harmful tax dollars. There are several ways to reduce taxes, and we should evaluate and choose the most progressive approaches.
Cutting FICA and business taxes would be a good early step, as both dramatically affect the 99%. Annual increases in the standard income tax deduction, and a reverse income tax also would provide benefits from the bottom up. Both would narrow the Gap.
There was a time when I argued against increasing anyone’s federal taxes. After all, the federal government has no need for tax dollars, and all taxes reduce Gross Domestic Product, thereby negatively affecting the entire economy, including the 99.9%.
But I have come to realize that narrowing the Gap requires trimming the top. It simply would not be possible to provide the 99.9% with enough benefits to narrow the Gap in any meaningful way. Bill Gates reportedly owns $70 billion. To get to that level, he must have been earning $10 billion a year. Pick any acceptable Gap (1000 to 1?), and the lowest paid American would have to receive $10 million a year. Unreasonable.
9. FEDERAL OWNERSHIP OF ALL BANKS (Click The end of private banking and How should America decide “who-gets-money”?)
Banks have created all the dollars that exist. Even dollars created at the direction of the federal government, actually come into being when banks increase the numbers in checking accounts. This gives the banks enormous financial power, and as we all know, power corrupts — especially when multiplied by a profit motive.
Although the federal government also is powerful and corrupted, it does not suffer from a profit motive, the world’s most corrupting influence.
10. INCREASE FEDERAL SPENDING ON THE MYRIAD INITIATIVES THAT BENEFIT AMERICA’S 99.9% (Federal agencies)Browse the agencies. See how many agencies benefit the lower- and middle-income/wealth/ power groups, by adding dollars to the economy and/or by actions more beneficial to the 99.9% than to the .1%.
Save this reference as your primer to current economics. Sadly, much of the material is not being taught in American schools, which is all the more reason for you to use it.

The Ten Steps will grow the economy, and narrow the income/wealth/power Gap between the rich and you.


2 thoughts on “What will cause the end of the bull market

  1. You didn’t comment on distributional effects, which I believe should be significant. The tax cut will put more money in the pockets of people who already have more money than they know what to do with, and very little will trickle down to people who will actually spend it. Cuts in social programs, though, would powerfully affect spending. So it isn’t just deficits or surpluses that affect the economy, but how they are implemented, right?


    1. You are correct that distribution is important, especially the effect on the Gaps between the richer and poorer.

      That said, money going to the rich doesn’t all stay with the rich. Some, in fact, does trickle down as the rich spend and invest that money. Unfortunately, the trickle-down effect is minuscule.

      The far more important effect is “trickle-up,” whereby the spending by poor and middle benefits the rich-owned businesses.

      So yes, cutting social programs hurts the entire economy, though it hurts the middle and poor most.


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