GUALFIN, Argentina – Poor Janet Yellen.
Usually, we reserve our pity for the poor, the downtrodden, and the hopeless. But today, we spare a thought for the clueless… and feel Yellen’s pain.
Markets are tense. Investors seem to be holding their breath.
Everyone is waiting to see what the Fed will do.
There must be hundreds of thousands – if not millions – of well-educated adults sitting on the edges of their seats… eager to hear what this rather ordinary functionary will say.
No Return to Sanity
Will Janet Yellen proudly put the Fed on the side of the angels, announcing that she and her crew have decided to move the Fed’s key interest rate to a more normal level… regardless of how much it costs the cronies?
Will she admit that the Fed’s ZIRP and its three QE programs have been failures? Or that they have shifted trillions of dollars toward the rich while leaving Main Street poorer?
Will she beg forgiveness for such errant policy decisions over such a long time and vow publicly never to interfere with the market again?
No, she won’t.
She will say the outlook is favorable – generally, clearing skies and fair weather is in the forecast. But there are some clouds forming out to the east that could lead to stormy weather.
So she will urge a cautious return to normalcy. She may be feeling confident and allow for a small rate increase… or she may be feeling fearful and decide to hold off for a while.
We don’t know. And it probably doesn’t matter much.
Once you begin manipulating markets, it’s a hard habit to break.
First, investors come to look forward to it. Then businesses become hooked on it. And then you can’t stop even if you wanted to.
After nearly seven years of emergency financial policies, we are now in a permanent emergency.
But it is a phony emergency. Markets are supposed to go down as well as up. They’re supposed to correct their mistakes. They’resupposed to destroy malinvestment to make way for new capital formation.
It’s never been a real emergency; it was capitalism at work.
Poor Janet Yellen must not know what to think.
On the one hand, she is lauded as the most powerful woman in all history. Helen of Troy was a bit player by comparison. Cleopatra was merely the love interest in the battle between Julius Caesar and Mark Antony.
Susan B. Anthony? No one knows what she did… if anything.
But Janet – she has the entire world economy in her hand. She can squeeze it. She can bounce it on the floor. She can do what she wants with it.
On the other hand, there are the dark nights… when she must realize she is in way too deep.
She is supposed to do what no mortal can do. She is in charge of fixing – at least to the extent she is able – the most important price in a market economy: the price of credit.
It must have occurred to her that she shouldn’t be fixing it at all. Only the gods know what the price of credit should be. She is just human. If she sets the price of credit, she is bound to err.
What’s going on? Has she been set up to take the fall for Greenspan and Bernanke?
But wait… in a fiat money system banks don’t lend out deposits… or even a fraction of deposits. Instead, with a few keystrokes, banks create money ex nihilo (out of nothing) when they lend.
Surely, the head of the central bank can decide at what price banks can rent out capital, no?
Janet Yellen’s Brain at 4 a.m.
If I raise the rate, just a little, I’ll probably be hailed as a sober, responsible economist. After all, it is unnatural for the federal funds rate to be so low for so long.
And those charts and graphs on my “dashboard”… they seem to be saying that things really are returning to normal. People have jobs. The economy is growing. Why worry?
Of course, I know perfectly well those charts are mostly garbage. All the data is so jigged and jived by the back-office boys, who knows what is really going on?
And here I’ve got Bill Dudley at the New York Fed, Goldman Sachs, and Larry Summers all telling me that natural market forces are already tightening credit conditions… without waiting for the Fed. And that if we raise rates now, we’ll just be making a bad situation worse.
Maybe they’re right. But those zero-bound rates must be causing distortions that we don’t know about. The junk bond market, for one. And the corporate bond market, in general. How were we to know those rascal corporate execs would borrow money at our low rates just to goose up their shares, via buybacks, so they could earn even fatter bonuses?
And now, stock prices depend on our ultra-low rates. That’s crazy. They must know we’ll raise rates sooner or later. Then the people who bought stocks at some of the highest valuations in history… like those gamblers at Goldman… they must realize that they’ll lose money.
I guess it’s almost our duty to teach them a lesson…
But what if all these dumb-heads who’ve been gaming the Fed… betting that we’ll keep ZIRPing along for far longer than we probably should have… what if they panic?
What if we get a couple days of 1,000-point drops on the Dow? Won’t they all start pointing their fingers at me… claiming I caused the panic?
Of course, I did nothing of the sort. It’s not my fault they bought stocks at such high valuations. We were just trying to boost asset prices so the “wealth effect” would make Americans rush out and spend.
We have to raise the interest rate at some time, or the entire system will become unmoored… drifting to who knows where… and washing up on who-knows-what rocks.
But what if Larry is right? What if a rate increase makes credit conditions too tight? What if that provokes a sell-off in stocks… and sets in motion a chain of events such as those that led to the Great Depression?
Then stock markets plunge. The “wealth effect” turns negative. World trade collapses even further. Unemployment rises. And we end up in a new depression that lasts 10 years…
What if they say it’s my fault? What if they call it the Yellen Depression?
Oh, no… It’s not fair… It’s not fair… Boo-hoo… sob… sob… I should have stayed at Harvard. I’d have tenure. I’d have a nice pension. George and I could go the Martha’s Vineyard in the summer. It would be such a nice life.
Further Reading: Bill has been warning that the Fed’s policies will lead to an even bigger crisis than the one that hit in 2008. The danger is almost too frightening to consider. But it’s nevertheless very real.
America’s leaders have already spent over $4 trillion – more than we spent on World War II – trying to contain the coming disaster. But it may not be enough.
And when the next crisis hits, every service you’ve come to depend on – from your bank to your grocery store to our federal government – could shut down. This may sound outrageous. But Bill is simply following his research to its logical conclusion.
The first step in protecting yourself is to understand what’s really going on. Find full details here.
All major asset classes are in negative territory for the year…
Here’s a quick run-through, based on popular index-tracking ETFs.
Negative momentum is the dominant force so far in 2015.
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Last Tuesday’s Diary on the absurdity of the living wage continues to provoke controversy among readers.
There must be a logical and reasonable way of indexing the “right” level for minimum wage to the GDP, current CPI, median federal and state taxes on income, and variables that consider geographic location, state, and local sales taxes, etc.
We have computers that can be programmed to do this – it’s not rocket science.
It’s equally ludicrous to assume that a burger flipper in a McDonald’s in West Armpit, Arkansas (heart of the Ozarks), and one in a McDonald’s in downtown Manhattan are both being fairly and efficiently paid at a “minimum” hourly wage of $15.75 an hour.
For the Ozarks resident living in a trailer on a small piece of land in an unincorporated township, that might be a windfall. For the worker in Manhattan, that might barely be enough for weekly subway fare, much less apartment rent in Brooklyn and something besides rice and beans to eat.
– Geoff S.
I would like to start by repeating something from presidential candidate Ben Carson, “There is only one person who I trust with the word ‘fair’ – God.”
I am a truck driver and have been traveling the country for 21 years. One of the things I stop for plenty of times is food and coffee. I happen to like the coffee at McDonald’s. And most of the time, your “fair wage” employee can barely get that order right. It is normally a person under the age of 25.
The main reason for all this discussion, in my view, is because in Obama’s economy there are so many older people working at these low-end jobs for a number reasons.
The older generation still has a sense of personal pride of doing a good job… no matter the wage. The younger generation can rarely count back change and have tried to give back even more because the computer said so.
God help us.
– Roy D.
You are one of my favorite editors! I read you like my bible, every day.
This was great, you gave me a $38K raise, and well deserved according to my education. I am a pastor who serves his people with joy and happiness for $45K, which is great for where I live and the work I do.
Did you mention filmmakers and actors? Filmmakers take a risk. They should get the fruits of their labors. Actors are pretending to be something they are not. So they should not make as much as the prostitutes and financial planners, who provide a real service.
Thanks for helping me stay sane…
– Richard W.
Some people don’t recognize hyperbole when it stares them in the face.
There should be a fairer distribution of the cake?
By whose definition?
– Bruce S.
Do you have a personal story to share with Bill and the team about the “living wage”?
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