PARIS – We’re having breakfast in a little café…
It is rainy and cold outside. The café is a refuge of warmth and light. Customers stand at the bar, drinking coffee, reading newspapers, talking quietly. Most of them are getting ready to go to work.
Breakfast in Café Bô Zinc
In walks a tall, young, attractive woman with a big black dog that’s dripping water onto the floor.
“Bonjour,” she says to the waiter, bending over the counter to exchange kisses with him, revealing a very tight pair of jeans.
“Bonjour,” he replies.
A man sitting close turns to us: “Nice dog,” he says with a smile.
“Yeah… nice,” says another.
Trump: “We’re in a Bubble”
“What’s with this Donald Trump character?” asked a French friend over dinner.
“I don’t know,” we replied. “But at least he lives in the real world… or at least in his version of it. Not the make-believe world of most politicians.
“He has actually made money, in a real business. He has hired people and fired people. He has bills to pay. He has enough money so he can say what he thinks. And he hasn’t been in politics long enough to keep his mouth shut.”
What does Donald Trump think about the stock market?
Investors, he recently told political website The Hill, are “being forced into an inflated stock market and at some point they’re going to get wiped out… We’re in a bubble right now.”
As far as we know, this comment is as honest and accurate as anything that has been said thus far in the race for president.
But no one has a keener knowledge of hand grenades than the man who has had one blow up in his face.
“The Donald” knows a bubble when he sees one. And he knows what happens when it runs into a sharp object.
In the exploding debris of 2009, he was knocked flat. Lying on his back, briefly, he was perhaps the world’s poorest man – with debts towering into the billions.
Magical Mystery World
Today, Trump is back in the chips. The Dow is about 20% higher than its pre-crisis peak in 2007.
Commercial property is also about 20% higher.
In housing, the picture is a little more complicated. The average U.S. home price may be lower, but property prices in select areas are higher than ever.
This is partly because the rich and the insiders are using their ill-gotten (aka Fed-gotten) gains to compete for prize real estate… and partly because foreign buyers are coming into the market in a big way.
The Chinese, in particular, have become major buyers of U.S. real estate. A report often quoted on the Internet says Chinese people are buying 80% of the new houses in Irvine, California – hard to believe.
Since 2007, the combined size of global central banks’ balance sheets has tripled – reaching more than $22 trillion. (Meaning central banks have created that amount of money out of thin air to buy bonds.) U.S. stocks and bonds are worth $25 trillion more than their 2008 level. And the world is about $57 trillion deeper in debt.
In her magical mystery world at the Eccles Building (Fed HQ) Janet Yellen surveys all of this. She has never run a business. She has never even had a job in a profit-making business.
She cannot admit that there is a bubble – in stocks, bonds, or real estate. And judging from her performance in the run-up to 2008, she probably wouldn’t recognize one if it was right in front of her nose.
But at least she – like her predecessor, Ben Bernanke – has the cowardice of her convictions!
Bernanke, in his new book, The Courage to Act, tells us that he “did not want to be remembered as the person whose decisions had led to the Fed’s destruction.”
That’s right: The biggest challenge hits the Fed in 80 years and Mr. Bernanke is worried about his own reputation!
He should have been steadfast. He should have let the barrel throw out its rotten apples. Instead, he panicked.
As he recounts it, he told the president, “[W]e didn’t think that the system – and more importantly, the economy – could withstand” the bankruptcy of the big insurance company AIG.
(Bernanke didn’t mention that AIG owed almost $3 billion to Goldman Sachs and that Goldman’s former CEO, Hank Paulson, was now in charge of the U.S. Treasury!)
A real economy is what you have when you undo the mischief done by central bankers, cronies, and regulators. It performs best when “creative destruction” is allowed to do its work.
The real economy would have applauded and breathed easier if AIG had gotten what it had coming. But “the system” Mr. Bernanke saved was not one of real commerce, industry, and capitalism. What he was worried about was the cockamamie, debt-fueled fantasy world he and his brethren at the Fed had patched together.
Under his watchful eye, it had gone too far. It had bubbled up on debt.
Desperate to bail it out, Bernanke misinformed the president. And today we have the same system – with more or less the same crony parasites running the same flimflams with more debt than ever.
And now, poor Janet Louise Yellen – a woman who reports arriving at the airport hours early because she is nervous about missing her flight – is in the captain’s chair.
She must feel the same dread… the same fear. No central banker wants to be at the helm when their bubble ship hits the rocks.
So, she steers for open water.
“Stocks rally, as 2015 rate hike appears more remote,” reports The Street.
Further Reading: Bill’s friend and controversial economist James Dale Davidson knows all about the cronies. In his book The Age of Deception, he shows how the political cronies lie and deceive us… how the financial cronies manipulate the markets to beat individual investors… and how the U.S. is being destroyed from within.
As a Diary reader, Jim has agreed to rush a FREE copy of The Age of Deception directly to your door. Claim you free book here while supplies last.
There’s a strong argument to be made that precious metals miners have hit bottom.
The Market Vectors Gold Miner ETF (NYSE:GDX), which tracks a basket of the big precious metals miners, has carved out a bottom at about $13 a share.
At almost $17 a share today, GDX is now 30% above its low for the year, set in August.
But it will take a lot more than that to make investors in this sector whole again.
Since the gold market peaked in September 2011, GDX is down 75%. That means investors who bought then need a 300% gain just to get back to break-even.
China’s Implosion Is Spreading Financial Contagion Around the Globe
Currencies expert Jim Rickards just released a time-sensitive market update. It reveals full details of the latest opportunity he has identified to profit from the uncontrollable fluctuations in stocks, oil, and gold.
What Really Drives Stock Market Returns? Value!
Wall Street types believe volatility drives stock market returns. The thinking is that stock prices bounce around a lot. And investors are “paid” to take this risk. But that’s hogwash. What really drives returns is buying value.
“Travel Hacker” Reveals How to Travel Around the World for Free
Wall Streeter turned “travel hacker” Brian Kelly travels the world six months a year. He does it virtually for free, thanks to his use of credit-card rewards and frequent-flyer miles. Find out how you can do the same.
Today, some feedback on yesterday’s Market Insight chart. (You can find it here.)
I was reading Diary and came upon a very interesting statistic – that world debt has grown twice as fast as world GDP.
But I ask, if we are on a credit binge to do this, why hasn’t the debt grown as much as the GDP?
The GDP representing what the world has produced… and assuming all that production has been bought… and assuming that debt bought it all (very generous assumptions)… why has not the debt that bought all the production just equaled it?
I sure hope you can explain this. Otherwise it would appear that those issuing the debt are getting double the money for what is bought! God… how can that happen?
– William M.
Chris comment: The answer – at least part of it – is that not all spending is captured by GDP.
GDP captures the total value of all goods and services produced in an economy. What it doesn’t capture is exchanges of stocks, bonds, derivatives, and other financial assets… or price changes of financial assets.
As Bill wrote me in an email earlier today, “You borrow money to buy stock. GDP doesn’t go up.”