BUENOS AIRES, ARGENTINA – We went to dinner last night at a little neighborhood restaurant in Palermo Soho.
It was already crowded when we arrived after 9 p.m., with a warm buzz of conversation.
But scarcely had we been there 10 minutes when the diners fell silent.
A woman at the table next to us was choking. She stood up, bent over… pointing to her throat and gagging.
Her companions stood up. The waiter rushed over. But no one seemed to know what to do. They held her arm. They patted her back. But she was still gagging and seemed to be ready to pass out.
What to do?
We wrapped our arms under her ribs. We have never actually seen the Heimlich maneuver performed… and had heard that it doesn’t work. But time was running out.
We formed a fist and jerked it up under her ribs.
Miracle! She spat out a piece of meat… stood up… and thanked all around her.
Then we all sat down and gradually, the conversation resumed.
No More Free Money
Meanwhile back in the markets… yesterday, Jerome Powell spoke to Congress for the first time as head of the Fed.
And he spooked investors by hinting that interest rates might be on the rise faster than expected.
Fed Chairman Jerome Powell pledged to balance the risk of an overheating economy and the need to keep growth on track in his prepared testimony. But Powell’s remark that inflation has strengthened since December sent yields higher and stocks lower.
The [yield on the] 10-year U.S. Treasury, the global benchmark for commercial lending, jumped past 2.9%, and equity markets in Europe and Wall Street turned south, with MSCI’s key index of global equity performance falling 0.4%.
The three major indices on Wall Street fell.
Yes, Dear Reader, the Fed giveth. And the Fed taketh away.
Ever since Alan Greenspan slashed interest rates in response to the 1987 stock market crash, we’ve been watching the Fed give what appeared to be free money to the financial economy.
Now, it seems to be taking it away.
Mr. Powell says the Fed plans to take back some $2 trillion over the next three years.
On the one hand, everything is as it has been for nearly three decades.
The Fed still believes it can manage the economy.
It thinks it knows what interest rates should prevail… and what stocks should sell for… and where consumer prices should be.
But all the evidence and sensible theory is against them.
The likelihood that a few PhDs will find exactly the prices that the economy needs is remote. The Soviets proved they couldn’t do it. The Chinese couldn’t do it, either. Nobel Prize winner Friedrich Hayek explained why no one can.
That’s the beauty of a free market economy: It doesn’t require quack economists who claim to be able to do impossible things.
A planned economy will work properly only if the planners know what the hell they are doing.
A free market economy can work well in total ignorance. Markets discover new prices every day. No one needs to know the answers in advance.
But the geniuses at the Fed deny it. They claim they can do what no mortal has ever done: impose their judgment on the markets and make the economy better than it ever would have been without them.
Wolves of Wall Street
For their part, investors don’t question it.
They still believe the Fed has their backs, as it has had for more than a generation. The buy-the-dip mentality still seems to be a great way to make money.
Until it isn’t… of course.
Which is what happens when the Fed changes course… or runs out of claptrap.
Yes, that is where the other hand is. That is the big change.
The brains at the Fed now believe they have done such a super job of shepherding the economy into high clover that they can now take a break without worrying about the wolves of Wall Street.
They’ve announced to the world that they are going to take a break… go down to the bar… and have a drink.
Instead of supporting stocks and bonds with quantitative easing (injecting cash into the system) and ultra-low interest rates, the Fed has begun quantitative tightening (sucking cash out of the system) and raising rates.
Somehow, it knew the world would be a better place with lower rates and QE in full swing. Somehow, it knows it will now be a better place with higher rates and QE in reverse.
What are investors thinking?
That the Fed doesn’t mean it? That it won’t follow through? Or that higher rates won’t affect their stock portfolios?
We don’t think the Fed will follow through, either. But it won’t get back on the job – inflating the markets and the economy – until the wolves have dragged away a few of the flock and the rest are running for cover.
That’s the way it works. The Fed is not just fallible; it is also foolish.
First, it makes mistakes. Second, it tries to correct its mistakes with more mistakes. And third, when it sees what a mess it has created, it reverts to the first mistake: It cuts rates… and holds them down too low for too long.
Then it raises them… and the economy goes into recession. It cuts again. Raises again. And then, it must cut again.
Or try to.
The 10-year Treasury note yielded nearly 10% on Black Monday in 1987. It yielded over 6% when the dot-com bubble blew up in 2000. And it yielded just under 5% when the subprime mortgage crisis hit in 2007.
But today, the 10-year note yields 2.9%, which doesn’t leave the Fed much to work with.
So Chief Powell is making the second mistake now. He is eager to get yields higher before the next crisis hits. Then, he’ll have something to make the first mistake with.
But raising borrowing costs is bound to set off the next recession/crash.
As we reported yesterday, our Doom Index is at an “Extreme Warning” level.
Disaster could strike any day… as soon as investors realize that Mr. Powell is sneaking up on the bubble with a pin in his hands.
MARKET INSIGHT: IS BITCOIN BACK?
By Chris Lowe, Editor At Large, Bonner & Partners
Bitcoin is back over $10,000.
On December 17, 2017, the world’s first cryptocurrency hit an all-time high of $20,089.
Then it tumbled 70% to reach a low of $6,048 on February 6.
But as you can see from today’s chart, it’s up since then.
That still leaves investors who bought in at the peak smarting.
Bitcoin is still down 46% from its all-time high.
– Chris Lowe
The Next Recession Will Truly Hurt
The economy is in its ninth year of expansion. And as Bill mentioned above, the Fed is now taking part in “quantitative tightening.” If this triggers a recession, it could be more severe and last much longer than any in recent history.
Don’t Fall for This “Investing Illusion”
In an excerpt from his newest book, Chris Mayer shows why most investors fall for flawed thinking and what you can do to see the bigger picture.
A Sign of A New Type of Housing Crisis
Today, there is a new type of housing crisis. It’s a housing-supply crisis. It’s getting so bad that many potential homeowners are rushing to place bids on houses they’ve never even seen.
If a very smart and honest economist were to make a plan to reduce the debt to practically zero in an appropriately reasonable time with the least disruption to the economy, what would it look like? How devastating would it be?
– Dean H.
If you predict the same thing for 10 years straight, then it’s inevitable to be correct. Anyone can do that.
– Kenneth W.
Now I don’t feel so bad about lapsing insurance, or ID cards for that matter, if our very well-traveled editor allows his passport to expire. On the other hand, it seems an extremely interesting note to a life well lived, that every little thing is not a cause of worry or obsession, unlike many of us in this hyper age. Glad you enjoyed Miami, grit and all! Cheers.
– Michael C.
A number of your readers seem to be a bit upset by your mocking of Mr. “Show me the man and I’ll find you the crime” Mueller. Perhaps they are unaware of the 100-plus years of United States interference in the politics of foreign countries on virtually every continent, save Antarctica.
From the creation of Panama, to the overthrow in Iran, to the capture of Hawaii by interlopers supported by the U.S. government, the U.S. has been “meddling” in the affairs of the known world for a long time. Payback can be a harsh mistress.
– Ken B.
IN CASE YOU MISSED IT…
Bitcoin is on the rebound…
But while crypto traders are fixated on the cryptocurrency, some of the world’s largest technology insiders couldn’t care less. That’s because they know something the rest of the world doesn’t.
It’s the technology behind bitcoin, not the coin itself, that will change the world. Details here.