The Game Is Up
Today … a warning concerning the new highs in the Nasdaq. Stocks fell hard on Friday. The Dow saw a massive sell-off of 278 points – or 1.5%. Gold was flat. You’ve heard by now why stocks fell – because of Friday’s Employment Situation report. Nonfarm payrolls rose 295,000 in February versus expectations of the consensus forecast of 230,000 new jobs added.
Investors took this “good news” to mean that maybe the Fed would allow interest rates to return to normal sooner rather than later. After all, the crisis that led to its zero-interest-rate policy (ZIRP) is plainly over.
Photo credit: bfishadow / flickr
The stock market is where businesses are bought and sold. Prices should go up when those businesses are worth more – that is, when their prospects for earning more money improve. They should go down when the outlook darkens. So why would the value of American businesses go down just when things are looking up?
Oh, you silly reader … where have you been? Everybody knows the stock market now has little to do with the real value of the businesses it trades. Buybacks, carry trades, gambling, speculation – hey, this is 2015!
In the Nasdaq, for example, some valuations are now as frothy as they were in the last bubble – in 2000. Website Zero Hedge recently reported that tech company founders were selling a record amount of shares in the companies they controlled.
Why would you sell shares in a company that was on the verge of a cancer cure … an aging remedy … or the next Apple? Of course, you wouldn’t. The insiders know the game and when to leave the casino. And they’re getting out now.
Roundtrip complete – the Nasdaq Composite Index. Survivorship bias plays a big role in this – many of the high-fliers of the 1990s still trade way below their year 2000 peaks – and many have disappeared completely click to enlarge.
No Place for Honest People
The stock market is no longer a place for honest people who want to exchange ownership stakes in productive businesses. It’s a gambling casino. And now, with the “good news” that more people found jobs last month, the players are worried: Maybe the Fed will stop serving free drinks.
They can stop fretting. If a 278-point drop in the Dow follows a favorable jobs report, what would an increase in short-term interest rates do? Or how about an increase back to its long-term average of 4.5%? At least a 1,000-point decline for the Dow. Headlines shouting about the end of the world. And panic at the Fed and in Washington.
And … and … yes, and new pledges for “action” … and “whatever it takes” to avoid another crisis. Which is why it is important to try to understand what is really going on. And how this scammy hullabaloo might end.
If you’ve been following our line of thinking, you already know we’re expecting a breakdown in the financial system. A system that depends on ever-expanding credit cannot last forever. In the post-1971 world, credit is money. And if the Fed holds the price of credit close to zero, there is a big risk that it will set off a spate of consumer price inflation – sooner or later.
The age of “price stability” under the Fed – as far as admitted by official statistics, which have been altered many times to downplay the effect of loose monetary policy on prices – click to enlarge.
Another Volcker Moment?
At least that is the common view, based on the volume theory of inflation. “When more money chases the same level of consumer goods and services, prices must rise.” That line must be in a textbook somewhere. Then what?
Most people who’ve bothered to think about it (a small group) believe that it will end in rising consumer price inflation that forces either:
1 A Paul Volcker “come to Jesus” moment, in which the authorities come to their senses, clamp down, tighten credit and protect the dollar.
2 More and more QE and ZIRP to reduce the real value of outstanding debt.
But before we get to Option No. 2, we believe we will have a brief and terrifying visit with Option No. 3: a deflationary hell. We will go with Option No. 2; it is more likely than Option No. 1, given the Fed’s commitment to avoid another correction at all costs.
Former Fed chairman Paul Volcker – whose chairmanship is highly overrated in our opinion, but he did withstand some political pressure early on in his quest to save the fiat dollar. However, shortly after the bubble in commodities prices blew out, the US money supply was sent on an explosive rise in the early 1980s (the surge in the money supply under Volcker after 1981 was a record for the 20th and 21st century – in a single year, the true US money supply jumped by nearly 50%).
Photo credit: Reuters
Charts by: StockCharts, St. Louis Federal Reserve Research
The above article is taken from the Diary of a Rogue Economist originally written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.
Trust.
It’s all about trust….too much trust, FAR too much trust.
Most people are bewildered by the overwhelming complexity of life now. They use electronic gadgets of which they have no understanding whatsoever, medical science is bewildering (so they have no idea how to maintain their own health) and so people have become accustomed to TRUST anyone elevated to celebrity status via a political election, an advanced degree (Ph.D., MD or DO) and especially if they are “notable.”
They trust the “government” to insure the quality of everything they buy, and the money (including credit) they use to buy it.
That trust is due a massive inversion to DIStrust.
That, not some mechanistic Black Swan or “overdoing” it by the Fed, is what’s on deck. It’s also endogenous, so it’s inescapable.