By Bill Bonner, Chairman, Bonner & Partners:
Twice in the last 15 years, markets have tried to correct the mistakes and excesses of the Bubble Epoch. Each time, the Fed came back with even more mistakes and excesses. Trillions in new credit… lower lending rates… easier terms… ZIRP… QE… and the Twist!
Over the short run, markets respond to myths. Investors are ready to believe almost anything… for a while. But over the long run, there is death and destruction – a reality outside of what we believe.
No matter how badly investors want asset prices to go up, for example, asset prices don’t always comply.
Yesterday, the Dow sank 560 points in the first few hours of trading. It then recovered half of those losses to end the day down 249 points – for a 1.5% fall. U.S. crude oil plunged below $27 a barrel – the lowest level in 13 years.
The financial media don’t know what to do. Typically, they downplay a bear market as long as they can… explaining the many reasons why the sell-off is “overdone” and why the “bottom” has already been found.
The Wall Street Journal, for example, tells us that the “market’s panic is incongruent” with economic reality. Yahoo! Finance already sees “signs of capitulation.” It offers advice on “how to trade a bear market,” too.
At the Diary, we don’t believe you should try to “trade a bear market.” Bears are treacherous and unpredictable. Our best advice is to stay out of its way.
We don’t know whether it will get uglier now… or further down the road. But sooner or later, markets will retest the myths that support today’s asset prices.
They will begin by asking questions: Are stocks too expensive? Can investors repay their debt? Is the economy capable of real growth? Can a small bunch of PhD economists with no market or business experience really manage the entire world’s economy?
As to the first, second, and third questions, we don’t know the answers. But the answer to the fourth is an unhedged, undiluted “no.”
Greenspan, Bernanke, and Yellen are, after all, only human. They respond to myths as much as anyone… maybe more. They’ve spent their entire careers studying the sacred texts of modern economics. Like Talmudic scholars late in life, they aren’t likely to convert to Baptists!
They say they want inflation at 2%. Not 1%. Not 3%. Two hundred basis points – no more, no less. What theory… what experience… what revelation leads them to think that an economy should have annual price increases of 2%? There is none. It is a modern myth.
In reality, prices go up and down on supply and demand. There’s no more reason they should always go up by 2% than down by 2%.
The PhDs at the helm of the world’s central banks also believe they can change people’s buying, selling, and investing decisions – for the better – by providing them with false data. We have no doubt the Fed can change behavior. It’s the “for the better” part that troubles us.
Interest rates by Fed diktat, for example, send completely phony signals, since they disguise the true cost of credit. The theory goes that low interest rates motivate people to borrow and spend. But where’s the evidence? Isn’t there an economic law somewhere that cutting incomes for savers has the opposite effect?
And there’s more to the story. There’s a reality, as well as a myth. Reality is that resources are limited. Prices tell us what we’ve got to work with. Falsify prices and you get errors of omission and commission. After a while, the system suffers from things it shouldna, oughtna done.
As Hjalmar Schacht, Germany’s minister of economics in the 1930s, put it: “I don’t want a low rate. I don’t want a high rate. I want a true rate.”
An honest interest rate tells the truth about how much savings are available and at what price. People still make mistakes; they still get up to some pretty weird stuff. But at least the perverts aren’t handing out candy on the playground.
Then there’s the “unemployment rate.” The feds look at its figures and tell us the recovery has been a success because the unemployment rate is back down to about 5%. They are citing as “fact” a statistic so greasy even a witchdoctor would be embarrassed by it.
In December, for example, the Bureau of Labor statistics announced that 281,000 Americans had found jobs. This was widely regarded as a triumph for the Fed. Many times has Janet Yellen said she feels the pain of the jobless. Naturally, she takes great pride in the current job picture as she has painted it.
But as you have probably heard by now, only 1 out of every 28 of those new hires can buy you a beer to toast their newfound fortune. The others – 270,000 of them – don’t exist.
The feds merely made a “seasonal adjustment.” The jobs were mythical, in other words. Mythical facts. Mythical theories. Mythical recovery. Watch out. The market is a myth buster. By Bill Bonner, Chairman, Bonner & Partners
Beyond the major indexes, you see stocks running for cover. Read… A “Stealth” Bear Market Has Already Begun
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Its a confidence game…. unfortunately for the elite, smoke and mirrors only last so long.
Also unfortunately, karma can stay unbalanced longer than you can stay serene. It’s been known for a long time that booms and busts are used by your overlords (and overladies) to confiscate and consolidate the world’s wealth, even when they are not deliberately engineered.
I have no idea what to do about that.
You write well, I have to admit, an admirable skill. Something to ponder, agree or disagree. And naturally, you feel that you have a good sense of where the current dynamics are leading to. But, there is a gray zone, a large zone of uncertainty, and one needs to be aware of it.
Soros predicts China hard landing, $20 oil, and deflation. What say you all?
When China’s economy was growing at a solid rate (7-8%) or so, they were importing vast quantities of raw materials from around the world and in effect exporting inflation. As their economy has markedly slowed this process goes into reverse and they export deflation, in the absence of any other major economy serving as the replacement global growth engine. So deflation? Probably yes. As for $20 oil, yes perhaps for awhile if production stays above demand. But eventually sanity slowly returns to banking, loans are not renewed, higher cost wells are shut in and production declines and approximates demand. Prices firm. At what level? probably lower for longer given all the idle energy infrastructure that can be readily returned to service if the price us right.
If any of you look at the real indicators of a healty economy you will instantly see where we headed!
The “seasonal adjustment” in the jobs numbers is quite a staggering thing. 2700% adjustment upward. I can’t get over that for some reason..
Yes , Dorothy! You are not in Kansas anymore. And yes, your government is lying to you. Their contempt for the American public now matches only that of the upper ranks of the financial elite. Ever wonder what else they are lying to you about?
And the manipulation continues…
China is willing to keep intervening in the stock market to make sure a few speculators don’t benefit at the expense of regular investors, China’s vice president said in an interview. Calling the country’s market “not yet mature,” Vice President Li Yuanchao said the government would boost regulation in an effort to limit volatility.
Economics has become a pseudoscience that cannot provide worthwhile predictions for even a couple of months in the future. It seems to exist mainly to provide a convenient justification for propaganda and disinformation. Letting “Ph-d’s in Economics” run critical economic institutions is like letting witch doctors perform brain surgery.
Economics is not a science, it is several opposing groups of financial theory’s.
And several sets of national, and global, accounting standards.
“Economics has become a pseudoscience”
Not exactly. Basic theoretical structures of economics are valid, such as supply and demand, and do have the explanatory and predictive value characteristic of true science. But it has been corrupted. For example, for the last several decades valid, insightful conceptualization has been deemphasized in favor of the adoption of approaches relying on fanciful higher mathematics, which amounts to the logical fallacy of Blinding With Science. Contemporary, conventional higher economics suffers from a distinct lack of falsifiability.
“It seems to exist mainly to provide a convenient justification for propaganda and disinformation.”
This much is certain. It’s well-known that economics has been hijacked and weaponized by financial predators. There are many examples. The “free market” meme is phony, because important markets are either regulated or dominated, with seemingly little in between, and in either case are not “free”. Efficient Market Theory (EMT) is a myth, and then there’s the myth of ‘rational actors’. But some of us still prefer to treat economics as an actual science, which requires freeing it of the corruptions of finance, and that is still doable. Just don’t tell the financiers.
Holding one of my degrees in Economics and having worked on Wall Street, I think you hit on some of the major points affecting the profession in the last 30 years. All economists learn the basic theories but that doesn’t prepare them to deal with the irrational actors that cut their paychecks. On Wall Street they are paid to justify the outrageous profits skimmed by the firms. They all know the system is being weakened by the theft of productivity. But where else do they go, government has their own agendas and the pay is worse. Everywhere they are expected to lie for the paycheck.
My other degree is CS, Applied Mathematics, you are right about the corruption of the use of math in the financial world. The quants(math geeks) create the models that justify whatever craziness allows the firms to extract more profits. Investors should be under no illusions that financial models hold anything other than a manufactured excuse to steal from them. When I worked on Wall Street these models were such a joke, we referred to them as the models du jour.
Thank you Petunia. You might like this one, although it’s probably not news to anyone here.
Confessions Of A Wall St. Nihilist: Forget About Goldman Sachs, Our Entire Economy Is Built On Fraud
Hee, hee! You are basically agreeing with me. Note I said “has become” not “has always been”. I agree with you that the old style economics was established on a solid scientific basis and is well worth studying today, the works of the classic economists such as Adam Smith. Ricardo, Mills, Keynes, Malthus and even Marx are essential for understanding what is happening economically in our world today. In the case of Marx I am restricting him to the mature work of his later years, Das Kapital. He predicts in often remarkable detail today’s economic mess. But all of these present distinct points of view and by comparing and contrasting them you get a balanced perspective of the authentic science of economics.
I wonder what the Davos crowd is talking about in private? Perhaps they are comparing notes to see how much more, if any, can be squeezed out of the world’s masses. Or perhaps they are making plans for their last redoubt for the coming serf’s uprising. If they are going with the latter, I hope they are using Custer’s tactics. I like the sound of “The 1%’s Last Stand”. A guy can dream can’t he?
Phd’s in Economics ought to review their Econ 101 courses.
1. Dictating interest rates downward favors Capital over Labor. Ergo companies can replace workers with technology at rates far higher than they otherwise could. This is the largest drag on domestic jobs and the Fed seems blind to the problem.
2.There a few things in an economy that you can tinker with that doesn’t result in unintended consequences. Cheap money is not building new factories- it is buying back shares and purchasing competitors. Mergers and acquisitions always kill jobs, never create jobs. Cheap dictated money, once again is a job killer.
You are mistaken that capital in our current environment is replacing labor with technology. Capital is being extracted and the firms are liquidating before our very eyes.
All that buyback money is benefiting stockholders and management at the expense of productive labor. The more people they fire the more money is available for non productive activities, debt repayment, dividends, bonuses. There is no reinvestment of any kind that is meaningfully increasing the productivity of these firms. They are hollowing out.
One thing is certain: things sure are screwy out there.
Why Are Corporations Hoarding Trillions?
Explanations for a number of features of the present economy have not seemed particularly satisfying, but it’s possible I’ve just gotten stuck in Skeptic mode and am in need of adjustment.
“The PhDs at the helm of the world’s central banks also believe they can change people’s buying, selling, and investing decisions – for the better – by providing them with false data. ”
Pretty much this. For what they call “the dismal science” do you ever notice that they are always “surprised” by bad economic news and never by good? Nope this ever-optimistic bunch sails along certain in the fact that this, truly, is the best of all possible worlds.
Economists at the CBs are employees. Much like professional soldiers, they fight the wars their employers start. Start voting out the captured political class and then maybe the behaviors will change.
Kudos for this article and comments. Let me just add my piece from my collection of stored memorable quotes:
Alan Greenspan: We’re never going to agree on Fraud.
Brooksley Born (CFTC): What do you mean?
Alan Greenspan: You probably think there should be rules against it.
Brooksley Born: Well, yes I do.
Alan Greenspan: I think the market will take care of itself and the fraudsters.