POITOU, FRANCE – Well, it looks like we were wrong about everything. Everything.

The Fed. Donald J. Trump. The stock market. The economy. Even the weather.

Yesterday, we looked at the sky and forecast rain. Instead, the sun came out.

Then, the Fed raised rates.

Donald Trump was proclaimed a great statesman.

The economy was reported to be booming.

And the stock market did not fall apart.

Changed America

“The problem we face…” we complained to a nephew from Virginia who has come to visit, “…and we face it every day when we read our mail… is not that we’ve changed… but that America has changed.

“We’ve never liked anyone telling us what to do, and we gladly return the favor. At home or abroad… we’re against meddling. And people who want to force you to follow their ideas are always the same people whose ideas are idiotic.

“We used to count on old-fashioned conservatives to agree with us. But the I-told-you-so cranks and that’ll-never-work curmudgeons have disappeared.

“The Democrats are still a Big Government party. But now, so are the Republicans. They’ve got their man in the White House and they think he rides a white horse. And if we dare to notice that he’s a moron, they get very mad.”

But who’s the moron?

Suddenly, dear readers are pointing the finger in our direction. Trump is a hero, they say; he may win the Nobel Peace Prize for taking Kim Jong-un off the axle of evil and putting him onto the chemin de la croix, plodding along the stations of the cross like a 60-year-old virgin. [Read more in today’s Mailbag below.]

Despite our predictions of gloom, the economy seems to be booming; we already have “more than full employment.” Does it get any better than this? And the Fed is “normalizing” its monetary policy.

Maybe it’s time for us to retire. Or rethink. Or have a drink.

Return to Normal

But let’s take these things one at a time. As long-time Diary sufferers know, we have made a bold prediction:

The Fed will never willingly return to normal interest rates.

Our reasoning is this: The economy now depends on the stock market… and the stock market now depends on the Fed’s EZ money. Take it away, and the whole shebang falls apart.

Then, the Fed will have to react… as it did in ‘87… in 2001… and in 2008. That is, it will have to revert to un-normal interest rates again in order to try to fix the problem its abnormal rates caused in the first place.

Remember, we said that Fed policy can be best understood as a series of mistakes.

First, interest rates are held down too low for too long, leading to a bubbly economy. Second, the Fed tries to let some air out… raising rates… which sets off a crash and a recession. Third, the Fed panics and goes back to its ultra-low lending rates.

We’re now at the beginning of the second of these mistakes… which the Fed thinks it can get away with because the economy is so strong.

Reuters is on the case:

The Federal Reserve is guiding a U.S. economy that is as close to ideal as it could have dreamed a decade ago, when the darkest days of the recession forced it to take big risks to protect workers, banks and economies around the world from further devastation.

The nightmares that long haunted both hawks and doves have not come to pass, even as the Fed held interest rates near zero for years and snapped up some $3.5 trillion in bonds in an extraordinary effort to boost the recovery. Prices did not spike in response to the immense monetary stimulus, nor has the job market cooled since 2015 when the Fed began tightening policy.

And what if the Fed isn’t making mistakes at all? What if the geniuses really can guide the economy? Reuters continues:

The Fed deserves tremendous credit for steering the economy to calmer waters, supporting what is likely to be the longest expansion in U.S. history while meeting inflation and employment objectives,” said Stephen Gallagher, chief U.S. economist at Société Générale.

Oh là là… we feel the Earth shaking beneath our feet. Our head spins. Our knees wobble.

Could we be so wrong about that, too? Could 12 mortals on the quasi-federal payroll – even with PhDs – really do a better job than millions of borrowers and lenders with their own skin in the game?

Using their “dynamic stochastic model,” could the Fed governors really find the exact interest rate that the economy needs exactly when it needs it?

Bound to Go Wrong

If so, we’re finished. We’re done. This is not a world we know. Up is down. Down is up. Time goes backward. Suckers are given better-than-even odds. And fools are reunited with their money.

If so… we will recant, insincerely, and slip off our little stage like a drop of rain off a windshield.

And what about Mr. Trump? Is he really the instinctive genius our dear readers say he is? Does he have some gift for doing the exact thing the world needs exactly when it needs it?

The economy was flagging… and he pushed through a trillion-dollar tax cut. Now, GDP is said to be growing by more than 4% per year. Reuters again:

But for now, the Atlanta Fed estimates the U.S. economy is roaring at a 4.6 percent rate, a level it reached only twice since the recession. Economists generally expect growth to remain above 3 percent through year end, while Fed policymakers raised their forecast a touch to 2.8 percent on Wednesday.

The Korean Peninsula was threatened with nuclear war, and Mr. Trump brought the fat boy to the bargaining table.

Now, they’re as chummy as Julius Caesar and Gnaeus Pompey. (Malicious rumor has it that Mr. Kim offered his daughter in marriage to Mr. Trump’s son to cement their new friendship.)

And the stock market? Can there be any clearer sign? A burning bush? A cross in the sky?

After a drop in January, the Dow has since recovered much of its loss. It now stands at only about 1,000 points below its all-time high.

In light of so much good news – unemployment is at a 50-year low! – could the Dow take off to the upside, surpass its previous high… and retake the high road?

Could the Primary Trends – in politics, world affairs, economics, and finance – all move to the upside?

Of course, anything is possible.

While we were talking, the sky clouded over. A light rain began to fall.

“Uncle Bill,” said our nephew. “Cheer up. Something’s bound to go wrong.”





By Joe Withrow, Head of Research, Bonner & Partners

As Bill reported, after falling for nearly 40 years, the federal funds rate is now on the rise…

Today’s chart takes a step back to give you a long-term view of the federal funds rate – the rate at which banks lend reserves to each other – from 1954 through today.


As you can see, the federal funds rate appears to go through long cycles. It rose from just under 1% in 1954 up to a high of 19% in 1981… and then it fell for the next 40 years, nearly hitting 0% in 2008.

These are the “primary trends” that Bill has written about.

But now the federal funds rate is on the rise, and it has nearly hit 2% for the first time since before the 2008 financial crisis.

When you read about the Federal Open Market Committee (FOMC) hiking interest rates – as it did yesterday – this is the rate that it is raising.

The federal funds rate is important because it impacts the availability of credit in the financial system. When the federal funds rate rises, it becomes more difficult for businesses and consumers to borrow money.

– Joe Withrow


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As Bill mentioned, dear readers don’t care for our editor’s critiques of the president

Before you call the leaders of our country clowns and sourpuss quacks, maybe wait and see the results… not the 24-hour news cycle results, but perhaps the end results. Your professional market insights make you look good – the political commentary not so much… It sounds childish.

– Jim W.

I’m just so grateful to God for Donald Trump, president of the USA. Isn’t it a shame that none of those other presidents kept any of their promises? On the campaign trail, they sound like they care for the citizens of America. Then, they are elected and turn into milk toast. Or it is about what they can get in their pockets, and not how to help us put food on our tables. Canada should be ashamed, and so should some of those who are writing false stories.

– Anonymous

I realize you want to “hedge” and appear to see both sides… but denigrating Trump is denigrating the office of the president. I can understand you doing that with your very closest friend. But in your newsletter?

On the one hand, you seem to applaud his endeavors and outcomes (so far), but it seems to be extremely painful for you. I do so hope that you can obtain enough pain medication to help you through the next seven years. Yes, seven years, because the American people do applaud and respect him.

– Melissa P.

When I first subscribed to your newsletter, it was one of interest. But now, I’m not so sure. Your personal input on politics (negative, in my view) is beginning to make me question your trustworthiness in decisions. Stand behind our president or step aside.

– Robert P.

I do not recall your negative comments when Obummer was at the helm for eight long years, or during Clinton’s failure as Secretary of State, stealing and being an outright crook. So you benefit from the present U.S. president; it would be nice for you and others like you to show some respect and unity for this president and this country. It is a hell of a lot better than any country in South America, Central America, or on the African continent.

– Bernard K.

Editor’s Note: Over the years, Bill has had strong words for politicians of all stripes. Here’s what he said about Hillary Clinton in October of last year:

Hillary “Big Nurse” Clinton was clearly on the dark side. She favored more spending, both on social programs and military meddling. She was so deep in the pockets of lobbyists, big banks, and corporate America there was no chance she could ever climb out.


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