WATERFORD, Ireland – You go for a nice picnic on the slopes of Vesuvius… You spread out your tablecloth. You open your picnic hamper. You prepare for a relaxing afternoon in the warm October sun.
And then someone comes running down the mountain, warning that the volcano is going to blow up. You pack up your sausages and put a cork in the wine bottle… and rush to the car and drive away. Better to be safe than sorry.
And then? Nothing happens.
Most of the time, you can safely ignore the nervous nellies and prophetic Cassandras. (According to legend, Apollo gave Cassandra the gift of prophecy. When she refused him, he spat into her mouth so she would never be believed.)
But sometimes the worrywarts are right…
For the last 16 years, we’ve been writing a daily e-letter – first theDaily Reckoning and now the Diary.
We saw the collapse of the dot-com bubble coming and warned readers. Most didn’t want to hear it; they were making good money in the stock market. It was a “new era.” And they didn’t want it to end.
But the Nasdaq collapsed in 2000… and didn’t recover until 15 years later.
We believed at the time that the U.S. economy would follow Japan into a long, slow slump. With Addison Wiggin, we wrote a book about it, Financial Reckoning Day: Surviving the Soft Depression of the 21st Century.
“Don’t fight the Fed,” is one of the old-timers’ rules on Wall Street. We understand the principle. You don’t fight the Fed because the Fed has more ammunition than you have.
But when we were writing Financial Reckoning Day, we never imagined that the Fed could create an entire fantasy economy based on completely unnatural signals and grotesque manipulations.
That is the economy of the 21st century. It is an economy in which the old rules of supply and demand… value and price… up and down… have to be viewed through the distorted light of central bank intervention.
When the price of new money – as set by the Fed to its best customers – is almost zero, who knows what other things are worth?
We expected investors to be as appalled as we were.
We thought they would look through the Fed’s distortions… turn up their noses… and close their brokerage accounts.
After all, who would want to pay a high price for an asset whose value depends entirely on central bank manipulation?
Instead of closing their accounts, people piled into the market like gamblers into a crooked casino. They all know the games are fixed. And they all expected to be winners.
In response to the bursting of the dot-com bubble and the mini-recession that followed in 2001, Alan Greenspan cut short-term rates and inflated another bubble – this time in housing and mortgage finance.
The financial industry amplified the Greenspan “put” and made hundreds of billions of dollars on the flimflam trade. And the housing bubble grew so large that all of Wall Street became over-stretched, undercapitalized, and out-of-control.
It was then that we warned readers again. Specifically, we suggested: Sell your expensive house in California; buy a cheap house in Arkansas.
The advice was a little fanciful, but the point was clear. As George W. Bush might have put it: “This sucker’s going to blow up!”
As it happened, the Vesuvius of mortgage debt exploded in 2008.
Roughly half of America’s stock market wealth disappeared in about six months. Millions of homeowners sank “underwater.” And just about every major bank on Wall Street would have – and should have – been flattened had it not been for the feds’ bailouts.
Again, using another GWB turn of phrase, we “misunderestimated” the power of chicanery, treachery, and fraud.
Now, it was incoming Fed chief Ben Bernanke on the case – cutting rates to near zero and claiming that the world as we knew it would vanish unless Congress gave the cronies $700 billion.
He was right, of course. The screwy world that the feds had created – funded by ultra-cheap credit – was getting what it deserved, good and hard. Humpty Dumpty had fallen off the wall.
We believed that all the king’s horses and all the king’s men would not be able to get Humpty back together again.
We were wrong. The king’s men came out with ZIRP (zero-interest-rate policy) and QE. The Humpty Dumpty stock market floated higher than ever. And the announcement last week from Mario Draghi at the European Central Bank that more euro QE was in the cards pushed him up an inch more.
Investors are aware that the market is manipulated… and it doesn’t seem to worry them. They don’t fight the Fed; they sit down at the table with it.
They play the game. And so far, they have done well.
And now… here’s the headline from the Wall Street Journal: “Fed Strives for Clear Signal on Interest Rates”
This is the latest – and in some ways the dumbest – of central bank frauds. Now, the Fed is under the leadership of Janet Yellen. And she believes in “forward guidance.”
She believes she can decide in advance what interest-rate policy the Fed should follow in the future and let investors know in advance what that policy will be. That way, they can plan intelligently.
She will signal that, soon, the central bank will begin the long return to “normalcy.” Don’t believe it. The entire system depends on abnormalcy.
It depends on more mischief from the central banks: ZIRP; QE; and as already practiced in Switzerland, Sweden, and Denmark, NIRP (negative-interest-rate policy).
Once again, we hear the grumbling of the volcano… and the smoke rising.
Further Reading: Bill believes that millions of Americans are picnicking on the slopes of Vesuvius right now. But it’s not a stock market crash… or trouble in the bond market… that he sees coming. It’s a threat so big that it could cut us off from basic things that we depend on every day: ATMs, credit cards, and more.
To access Bill’s special presentation on the coming threat… and how you can prepare… read on here.
Central bank intervention isn’t the only thing U.S. stock market investors have to worry about.
This year, revenues (sales) for the companies that make up the S&P 500 are set to fall for the first time since 2009.
The last two times S&P 500 revenues fell for a full calendar year were in 2000 and 2008.
Both times coincided with recessions (the gray-shaded areas on the chart).
They also coincided with dramatic stock market crashes – a 57% crash in 2000 and 50% crash in 2008.
Stock Picker Bets His Paycheck on Top Recommendation
One equity analyst says, “I’m betting my personal paycheck… and perhaps my career… on what I believe is the best investment opportunity I’ve seen in my 20 years in the markets.”
Billionaire Hedge Fund Boss: I’m Surprised Gold Isn’t Soaring
Hedge fund veteran Paul Singer says he’s surprised gold isn’t soaring right now. “In a world where the value of paper money is affirmatively aimed at being degraded… it’s kind of surprising to me that gold can’t catch a bid.”
Why Self-Driving Cars Must Be Programed to Kill
Imagine you’re in a self-driving car. Due to an accident, you’re headed for a crowd of 10 people. The computer driving the car knows it can avoid the 10 people by slamming into a wall and killing you instead. What does it do?
Yesterday’s Diary issue on billionaire businessman and political donor Charles Koch led to some of the most impassioned emails we’ve gotten in the history of the Diary.
We’re running an extended mailbag today to try to accommodate as much of your valued feedback as possible.
Cancel any subscription(s) I have with Bonner & Partners, because I will not support with my money someone who defends Charles Koch. Such defense is anathema to me. Cancel and pro-rate a refund to my card.
I would not be canceling if it were not for such an offensive move on the part of Bill Bonner; that is also why I deserve a refund. I am one of those Americans who still believes that democracy should be our form of government, not oligarchy.
I believe Bonner recently said that Koch is a man of virtue. WHAT?!
There is no virtue in the Koch’s ALEC and the so-called Americans for Prosperity groups.
– William C.
The Koch brothers are INDEFENSIBLE. They are polluters of the atmosphere, and frankly, polluters of decent thought. Right-wing extremists who spare no expense by paying professionals to prepare lying propaganda. We all see that crap with the unsolicited emails with lies, professionally prepared cartoons misinforming their recipients.
Their charitable contributions do not make up for the way they buy politicians, defame those with whom they disagree, and their professional organization that sends mass mailings of disgusting lies about politicians and others with whom they disagree. Professional smearers. You shock me with your support of them.
– Robert B.
One of your best yet. And that’s saying a lot. Keep up the good work. Please.
– Ted K.
The problem with the Koch brothers is they go beyond wanting to be left alone. Their causes include social issues beyond their business concern and solutions that would affect everyone’s economic and environmental future.
They oppose abortion, and fund candidates who oppose it. They wish to eliminate the Environmental Protection Act, presumably so they can dump chemicals and untreated waste into rivers. I guess this qualifies as being left alone, but clearly business has some responsibility for keeping our air and water clean.
They lobby for repeal of Medicare, Medicaid, and Social Security. I know those programs have serious issues. But the Kochs offer no other alternatives, probably because they don’t care.
Incredulously, the Koch brothers advocate for making national highways and waterways privately funded infrastructure.
And finally, the brothers see an end to all taxation. “As an interim measure, all criminal and civil sanctions against tax evasion should be terminated immediately.”
Sure, that’s a good “interim” step. I guess they do want to be left alone, in 19th-century England.
– Gary M.
All of your insights are GOOD; this is the best ever. The U.S. needs more Charles Kochs!
– Henry J.
What “leftists” believe is true. The Koch brothers are the embodiment of evil working to corrupt the political system… to their ends.
– Michael C.
Thanks for your thoughts. It is about time that someone praised the Koch brothers. I have not yet met Charles. Liz and I were guests at Dave’s NYC apartment about 20 years ago. The occasion was a fund-raiser for the Reason Foundation.
David Koch was a friendly, informative, and generous host. We stayed beyond the planned time. My wife and I said goodbye and headed for the elevator. “Whoa!” said Dave. Where is your car?” “About 10 blocks from here – not a long walk,” we replied. “Not this late at night. I’ll have my driver take you.”
And that is how we traveled to our car in David Koch’s armored limo. David Koch was not only generous but also very caring and a true gentleman.
– William B.
I agree completely with your essay regarding Charles Koch and free enterprise.
Those who whine about the success of others are only expressing their own envy and resentment. If you’re wealthier than I am, it means you know things I don’t know, and have been doing things I have not been doing.
Is that your fault or mine?
Resentment and other negative attitudes only result in more things to complain about. Appreciating what you DO have opens the door for more appreciable things to enter your experience.
Why do so many people not understand that?
– Patrick S.