BALTIMORE – We’ve made two bold predictions in these Diaries.

First, that the Fed will never make good on its promise to “normalize” interest rates.

Second, that Donald J. Trump will not follow through on his threats of a trade war with China, either.

As to the first, it looks as though we may be proven right – long before we expected to be. From Bloomberg:

U.S. stocks rallied the most in three weeks, the dollar fell, and emerging-market assets surged after a dovish tone from the Federal Reserve chairman fueled speculation the central bank is closer than thought to pausing on rate hikes.

Stocks that had fallen the most during the six-week slump in American equities led gains after Jerome Powell said rates are “just below” the range of a neutral policy, potentially removing one of the biggest overhangs. Aside from the Treasury market, where yields turned lower but only by a few basis points, moves in other asset classes were just as heady…

Dangerous Distortions

By 2016, the Fed had been making its Mistake #1 – in a big way – for seven years, following the crisis of 2008. That is, it was holding interest rates down too low for too long.

Low interest rates discourage saving and make debt more attractive. As a result, savings rates fell to record lows, corporate debt levels rose 50%, and federal debt doubled.

Seeing the dangerous distortions multiplying, the Fed switched to Mistake #2 – raising rates in an attempt to mitigate the damage. Higher rates would also put it in a better position for Mistake #3 – a panic into much lower rates when the next crisis hits.

We guessed that the next crisis would come long before the Fed ever got its rates back to “normal.” This economy was suckled on abnormal – near zero – rates. Now, it depends on them.

So do the reputations, wealth, and power of the elite – including Donald J. Trump himself.

And the closer the Fed gets to “normal” rates of 3%-4%, the faster the next major crisis approaches.

Great Negotiator

And here we are… still no crisis… the key rate is still only between 2% and 2.25%, while the inflation rate (CPI) is 2.5%… The Donald is on the Fed’s back for raising rates… and Fed chief Powell’s knees are already quaking.

Yesterday, investors, anticipating EZ money forever, bid up the Dow by more than 600 points. And our guess is that they will bid it up even further when our second prediction turns out to be true, too – tomorrow.

Economic advisor Larry Kudlow set the stage for President T.’s meeting with the Chinese president on Friday. From CNBC:

“There’s a good possibility a deal can be made,” Kudlow said at a press briefing on Tuesday afternoon, noting that Trump personally called Xi to “get things started.”

Certain conditions still need to be met in order to resolve the standoff between the world’s two largest economies, Kudlow said.

Remarkable Fantasy

The remarkable conceit behind both items is the same – that politicians and bureaucrats should muscle into private transactions.

If you are borrowing money, for example, you could perfectly well work out an interest rate with a lender based on the supply and demand of real savings.

But the feds butt in. First, the Fed creates pseudo savings – credit – and lends it out at whatever rate it chooses. Thus, it distorts the whole yield curve (where interest rates are plotted out)… and enfeebles the whole economy with misinformation and miscalculations.

And then, President T. piles on. He says he is “not even a little bit happy” with Fed chief Jerome Powell and his higher rates. Mr. Trump thinks he knows better than lenders and borrowers – or the members of the Federal Open Market Committee – where rates should be. And he wants them lower, even though they are still negative in real terms.

As for the China issue, private businesses could very well truck with whomever they wanted on whatever terms they agreed. If the deal isn’t win-win, they don’t have to do it. There’s no need for the feds to get involved.

But along comes the real estate developer and reality TV star, Donald J. Trump. He says he should decide how much Americans should pay for Chinese imports… and that he should dictate the terms of trade – not just America’s trade policies, but China’s policies, too!

Tomorrow, we will discover that it didn’t really matter so much after all. Yes, a deal will most likely be made. Mr. Trump may or may not be a stable genius, but he’s no fool. He has more to lose than anyone.

A big blow-up in trade with China would be followed by a big selloff on Wall Street… and a recession on Main Street. The Great Negotiator won’t want to take the blame for that.

Instead, whatever is said in Buenos Aires during the G20 summit this weekend, Mr. Trump will declare victory… and things will go on as they did before, just as they did after the NAFTA negotiations.

The comedy continues… The Swamp spreads.

Regards,

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Bill

MARKET INSIGHT: A LONG WAY FROM “NORMAL”

By Joe Withrow, Head of Research, Bonner & Partners

Bill predicts the Fed will never willingly “normalize” interest rates… And the Fed would need to allow interest rates to go much higher to prove Bill wrong.

Today’s chart maps the federal funds rate over the last 50 years – from 1968 through today.

As regular readers know, the federal funds rate is the rate at which banks lend reserve balances to each other overnight to maintain reserve requirements.

In other words, when a bank falls below its reserve requirement, it must borrow funds from another bank to make up the difference. These reserve balances are held with the Federal Reserve; thus, the Fed sets the federal funds rate.

The federal funds rate is important for investors to watch. That’s because the Fed uses this rate to control the money supply, which in turn impacts economic growth and employment.

Chart

With the Fed’s most recent rate hike in September, the federal funds rate now sits at 2.2%. As you can see, this puts it 58% (3.1 percentage points) below its 50-year average of 5.3%.

Despite Fed chair Jerome Powell’s statement yesterday that interest rates are “just below neutral,” rates are still well below where they have been for the past five decades.

Fed policy is the reason rates are so far below their historical average. The Fed has injected $3.6 trillion – created from nothing – into the U.S. economy since 2008, specifically to push interest rates down. In fact, the federal funds rate was just barely above zero from the end of 2008 through the beginning of 2017.

As a result, the economy has become hooked on artificially cheap credit. This cheap credit led governments and businesses to run up massive debt totals – the largest in history – and that debt is only affordable with low interest rates.

That’s why Bill says the Fed will never “normalize” rates. It would halt the American economy in its tracks, and send the U.S. stock market plummeting.

Joe Withrow

FEATURED READS

Here’s What GM DOES Have Money For
As Bill wrote yesterday, General Motors announced it would cut 14,000 jobs by 2020. Net, this move would save the company $4.5 billion. The official reason is to be more efficient with its cash. But when it comes to buying its own shares, GM seems to have cash to spare…

Return of a Tech King
Microsoft, once the undisputed king of consumer technology, fell out of favor at the start of this decade. The company lost market share to companies like Apple, which innovated to create a new generation of mobile devices. The PC king looked like a has-been. But perhaps not anymore.

The Assassination of Bitcoin
Earlier this month, Bill speculated that central banks could be gearing up to issue their own crypto-coin. Dan Denning, Bill’s right-hand man on The Bill Bonner Letter, thinks it’s all but assured. Only one thing stands in the way of the central banks: bitcoin.

MAILBAG

In the mailbag, Bill’s Diary, “Investors Are Going to Get Scalped,” gets readers talking…

Of course investors will get scalped, because corruption is in charge, and an administration that seems to support that corruption.

– Anonymous

Bill, you crack me up! You start out this Diary saying you don’t predict or are no good at forecasting, yet you end the piece doing just that, painting an even darker picture than those experts. Please, don’t join the likes of Chuck Schumer or so many others who make nonsensical statements. These guys and gals are unintentionally funnier or crazier than the real comics.

– Erich K.

Bill, you have been calling out the fake economy for a long time. Yet the reality of the last 10 years plays hard on those who did not participate. How do you reconcile that with gains harvested by some in the meanwhile? Don’t get me wrong; a healthy dash of cynicism serves anyone well in finance. Yet profiting from a strong economy should be encouraged, no? As I pen this, it occurs to me smart people that know how to run a business much prefer their view of the world to the stock market. Maybe that’s your point?

– Michael C.

DID YOU MISS BILL’S ANNOUNCEMENT?

Last night, Bill – along with financial publishing legends Doug Casey and Mark Ford – revealed his most ambitious project to date. Thousands of dear readers tuned in to hear the details. If you weren’t one of them, be sure you take some time to listen to this important announcement.

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