BALTIMORE, MARYLAND – Wow… another big up day for the Dow on Friday. The index had climbed 747 points, or 3.3%, by the time the closing bell rang.

Analysts credited a strong jobs market and a weak Fed.

The Bureau of Labor Statistics (BLS) said that last month, twice as many jobs had been created as had been expected. And the Fed chairman said he was in no hurry to raise interest rates back to normal.

Never Normal

Here at the Diary, we have no faith in officials or their numbers.

Last year, for example, the able Joe Withrow, author of our Market Insights, published a report. It showed that the official economic figures of the past decade had grossly misrepresented the economic health of the country. Their numbers showed a recovery – albeit a weak one – nationwide.

But after driving through the Heartland, we doubted it was true. And Joe’s numbers confirmed that more than 70% of American counties are worse off today than they were 10 years ago. Bill Bonner Letter readers can catch up here.

The Bureau of Labor Statistics’ jobs reports hide more than they show. And what we suspect is that further analysis, revision, and inspection will reveal that they are nonsense.

But while the BLS lies, the Fed merely dissembles.

The Fed was never going to normalize interest rates as a matter of principle. It would only do so as a matter of convenience. And when the stock market starts getting the shakes, raising rates – no matter how sensible, urgent, or necessary it may be – becomes inconvenient.

From Bloomberg:

Three weeks ago, it was possible for Jerome Powell to write off the goings on in financial markets as “a little bit of volatility.” Then came the last 10 days of December.

Apparently, that was enough to get the attention of the Federal Reserve chairman, whose pronouncements Friday combined with the best employment report in 10 months to send stocks back into recovery mode. The S&P 500 climbed as much as 3.1 percent, erasing the previous day’s drop.

Federal Reserve Chairman Jerome Powell pledged to be patient with any future interest-rate hikes…

In other words, the Fed is ready to cut and run as soon as it can do so without appearing to cave in to Mr. Trump. Mistake #3… here we come!

Turning Japanese

Both the Fed and the president still have investors’ backs. Or so the punters think.

And we believe, too, that both Trump and Powell will do all they can to save this market. Both have their reputations, power, status… and in the case of the president, a personal fortune… on the line.

Both are committed to avoiding a bloodbath in the capital markets because the blood will inevitably splatter onto their own white shirts.

But what can they do? If officials really could prevent bear markets and debt crises, why do we ever have them? Specifically, what’s wrong with the Japanese?

Long-term Diary sufferers know that we keep an eye on the Japanese. We might not like the direction the Japanese have gone, but we suspect we might be going there too.

Their economy and stock market boomed in the 1980s. Japan, Inc. was the envy of the world. Japanese management terms were all the rage. Japanese investors were buying iconic buildings, such as Rockefeller Center in New York. And the Nikkei 225 reached 39,000 in 1989.

But that was it. Japan crashed, beginning in January 1990. And all the king’s horses and all the king’s men couldn’t put it back together again.

The Japanese central bank invented quantitative easing – buying up debt – to push interest rates down. The key interest rate has been below zero for the last three years.

And when that wasn’t enough, the Bank of Japan began buying stocks, too. Now, Japan’s central bank owns almost 78% of the ETF market in Tokyo.

On the fiscal front, too, the Japanese were way ahead of us. Prime Minister Shinzo Abe gave the economy a “three arrows” program – fiscal stimulus, monetary stimulus, and structural reform.

The monetary stimulus, as we discussed above, was breathtaking. And the fiscal stimulus – deficits – was so aggressive that it brought Japanese government debt to a world record of 236% of GDP. The structural reform never got anywhere… and no one knew what it was all about anyway.

But none of it worked. As we mentioned on Friday, Japanese stocks are still down almost 50% a full 30 years later [see today’s Market Insight for more on this]. If the same thing were to happen in the U.S., the Dow would fall to 12,000 and stay there until 2049!

Big Loss

Yes, Dear Reader, there are no guarantees that the “buy-and-hold” strategy promoted by Wall Street will work.

Japan’s economists and politicians pulled out the biggest guns they could find. They fired away. But they couldn’t overpower Mr. Japanese Market.

He wanted to go down and stay down. And that’s what he did. And it wouldn’t surprise us if Mr. American Market did the same thing.

But wait… We don’t know the future. We’re just guessing.

All we really know is that, for most people, avoiding the Big Loss is essential. It’s the Big Loss that dooms investors. Few can ever recover.

And here’s something to think about: Since we don’t know which way Mr. Market will go, let’s imagine that there are even odds, up or down, bull or bear. What should you do?

Sell! First, because you’ll avoid the Big Loss that you might suffer if you stay in. And second, because a dollar lost is worth more than a dollar gained. That’s the idea of “declining marginal utility.”

The first dollar is vitally important. You need to eat to survive. And you need a few dollars to pay for food.

But what about when you already have millions? You earn a few more dollars; who cares? You don’t eat more. You don’t move to a bigger house. You already have the car you want. More dollars have zero effect on your life.

Every dollar you earn has less and less utility, which is to say, it is worth less – when it comes to the quality of your life – than the dollar that came before it.

Logically then, the dollar you may lose in a market meltdown will be more precious to you than the dollar you might make by staying in.

When you are in a bull market, “buy the dip” is the winning formula. But in a bear market (or one that threatens to turn into a bear market), “sell the bounce” is what works.

On Friday, stocks bounced. This morning, it looks like the bounce will continue. Get out while the getting’s good.

More to come…

Regards,

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Bill

MARKET INSIGHT: JAPAN’S LOST DECADES

By Dan Denning, Coauthor, The Bill Bonner Letter

If we’ve learned one thing since the dark days of 2008, it’s that the central bank bag of tricks is bottomless. We should expect nothing less from people who conjure money out of thin air ($22 trillion and counting, through various global quantitative easing (QE) programs).

It prompted a question I asked a speaker at a private event Bill and I attended in Washington, D.C. last month: Is there any theoretical limit to what a central bank can buy, or how much of it?

“No,” was the answer.

As Bill wrote above, Japan is evidence of that. Japan’s central bank owns almost 78% of the ETF market in Tokyo. It bought $53 billion worth of ETF shares last year alone, a record. The Bank of Japan isn’t supporting the ETF market. It is the ETF market.

But as Bill pointed out, all this intervention never made Japanese investors whole. The Nikkei 225 index, which tracks 225 top-rated Japanese companies, sits at 20,039. Almost 30 years after peaking at 38,915 in December 1989, the index is still 49% off its high.

Chart

Central bank intervention doesn’t only distort prices; it fundamentally alters the incentives for market participants. It becomes perfectly rational for CEOs to borrow money at low rates and buy back their own stock.

Not only does it enrich them personally, it also delivers higher returns to shareholders, at least in the short term.

The academics who dreamed up QE surely never intended for it to work like this… that business owners would spend all their time re-engineering their capital structure rather than, you know, running their business.

But that’s the trouble with using interest rates as a blunt weapon in monetary policy. You can make credit cheap. But you can’t control where it goes.

This is a preview of what to expect from President Trump and the Federal Reserve in 2019 and beyond.

Dan Denning

P.S. As Bill said, the most important thing for most investors is to avoid the “Big Loss.” As Japan shows us, sometimes, stocks fall hard and then stay down for decades. If you’re nearing retirement and depending on your stock investments to support you, that’s something you must avoid at all costs.

Bill and I recently put together a strategy designed to protect, and even grow, your wealth no matter what the market, the Fed, or Washington do. Nothing can protect you 100% in a bear market, but we believe this strategy will protect you from the worst of it. Go right here.

FEATURED READS

2018: A Year in Charts
What to make of the year that was? Falling stocks… global trade wars… waning investor sentiment; here are the highlights from last year as told by the charts.

Are You Actually Middle Class?
Most Americans tend to think they are in the middle class. But are they? Here’s how to find out…

Trump’s Real Legacy
While the mainstream media obsesses over Donald Trump’s tweets, something unusual is happening behind the scenes. Nick Giambruno believes POTUS could be up to something big. And it has nothing to do with a trade war, an infrastructure boom, or The Wall. It’s this.

MAILBAG

After Bill recounts a tale of being stranded in the Argentine desert, a dear reader wonders if our editor is in over his head…

I had to laugh. Here you go to great extents to have your “safe, off-the-grid” farm in Timbuktu, and it really isn’t safe after all. When I look at the coming “financial apocalypse,” as some have described it, I think I’ll load up on canned food and silver coins and ride it out. Fleeing, to me, isn’t a viable or economical solution. New Year blessings.

– Steve B.

Meanwhile, another dear reader reckons the recent bounce is actually a “death rattle…”

Bill, I agree with your analysis. This is a dead cat of a bounce. It’s the death rattle of the bull market. It will fool many. The Dow is up big today, but expect a 20,000 Dow by the end of January. Some stocks will make money, but the old tech people are without innovation. The Fed and Deep State will continue to try and destroy the gift of Trump to Main Street and Wall Street. Too bad every time we get leaders who try to help the people, they are destroyed, or nearly so. It’s going to be an interesting year for sure.

– Mike H.

IN CASE YOU MISSED IT…

At the end of last year, with hardly anyone even noticing, President Trump made a surprising move…

The president signed a bill into law that opened up a multibillion-dollar market. Now, smart investors are staking an early claim in what could be the biggest investing story of 2019. Details here.

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