Beware the Power Lines

Fed Funds are not the only source of ‘liquidity’ to float asset prices upward. And as we suggested yesterday, when the markets bubble up, they give off a vapor that causes even more giddy behavior.

The Hindenburg crashes on May 6th, 1937 in Lakehurst, New Jersey, Source: Getty Images

Friday, January 31^st, 2025

Bill Bonner, writing from Baltimore, Maryland

In a world full of genuine uncertainty – where real historical time rules the roost – the probabilities that ruled the past are not those that will rule the future.

—Lars Syll

What if the whole kit-and-kaboodle – $100 trillion worth of ‘assets’ worldwide, unsupported by real world output – suddenly melts down?

Where’s our Big Gain then? Let’s leave that question, like an uneaten pizza; we’ll heat it up later.

First, we look at why the ‘big picture’ can be so misleading.

One of the curiosities of today’s asset prices is that stocks rose even while the Fed was tightening. The Fed began its fight against inflation in 2022. It raised rates steadily for the next two years…until July of 2024.

But instead of meekly succumbing to the Fed’s higher interest rates, the Dow hit a low under 30,000 in September of 2022, and then rose 14,000 points over the next two years. This was not what anyone expected, including us. No analyst we know saw it coming.

Their (our) logic was airtight. The Fed had driven up stock prices by dropping interest rates almost down to zero. But now that inflation was on the loose, they’d have to raise rates to fight it; they couldn’t rescue a falling market for fear of making it worse.

But anyone who thinks economics is a science must have a Ph.D. or a hedge fund to promote. The rest of us know it’s voodoo. The number of inputs is always infinite…cause and effect are never clear…and the test results are irreproducible. This is why central planning always fails…and macro (big picture) investing is so treacherous.

“History shows no clear correlation between real prosperity and the keeping of macroeconomic statistics,” writes Reuven Brenner.

You can never actually see the ‘big picture.’ Instead, you look at statistics, such as GDP growth, unemployment, and inflation, that are supposed to describe it. But often, they are more fraud than fact. GDP figures count government spending as ‘output.’ But the more resources consumed by government, the less real wealth—valuable goods and services – are available for everyone else.

The unemployment numbers are similarly misleading. They count everyone with a job as ‘employed’ – whether he works 20 hours or 60, and whether he earns minimum wage or a million dollars. Lower unemployment doesn’t mean people are better off; after all, there was full employment in the Soviet Union.

And inflation? The statisticians don’t merely add up the prices at the grocery store or the latest real estate sales. They create ‘models’ that adjust prices according to their own cockamamie theories. If this year’s computer is faster than last year’s, for example, they’ll tell you that the price has gone down – even though you paid more for it.

Garbage in. Garbage out. The statistics are always contrived, revised, and largely fictitious. The data is fluid. And the theories – the Phillips Curve, the Fed’s ‘stochastic’ model, Keynesianism, Marxism, Modern Monetary Theory – are always imbecilic. Add as many Greek symbols as you want; they’re still nonsense.

(Only one school of economics really makes sense. It rejects ‘data’ in favor of ‘principle.’ More to come…)

But our sad mission is to try to connect the dots, and to try to understand what is really going on. Why did stocks go up, for example, even while the Fed was raising interest rates?

Fed Funds are not the only source of ‘liquidity’ to float asset prices upward. And as we suggested yesterday, when the markets bubble up, they give off a vapor that causes even more giddy behavior. Crypto currencies are now worth $3.3 trillion. The stock market, overall, is worth $55 trillion. The average house is worth $420,000.

Suppose you paid $200,000 for the house ten years ago. Now, you have $220,000. The house may be exactly the same. But now you can borrow much more money against it. You can access more ‘liquidity’. And you might use it to gamble on Nvidia…or #Trump…or an apartment building down the street. After all, they’re going up!

Stocks have added nearly 50% in value since the bottom in September ‘22, or about $17 trillion total. And yet, actual output (GDP) has only been creeping up only at a 2.2%.

And the money supply, M2 (see above), has been going up too. It hit a high of $21.7 trillion soon after the Fed began to tighten. Thereafter, it shed a trillion dollars to a low of $20.7 trillion a year later.

But then it rose, even as the Fed continued to raise rates, for another 18 months.

What made the money supply go up? What made stocks go up? Why did investors go mad for AI?

An influx of money from overseas, eager to take advantage of the Fed’s higher interest rates? Cash ‘on the sidelines?’ The Trump effect?

Or, the momentum of the biggest bubble in history...now, like a Hindenburg drifting slowly towards the power lines?

Stay tuned…

Bill Bonner

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Research Note, by Dan Denning

Where has all the London gold gone? COMEX April gold futures traded at a record intra-day high yesterday over $2,850/oz. Stories abound of a ‘shortage’ in London gold vaults as traders in New York and Chicago rush to stockpile physical ahead of Donald Trump’s tariffs.

Later today, for paying subscribers, I’ll tell you what’s really going on. I reached out to my old desk mate in London who works in gold to get his side of the story. And on this side of the pond, I’ve got a chart to show you from a trader who worked on COMEX and NYMEX for three decades.

In the meantime, check out the Dow Jones Industrials priced in gold. The price action confirms our basis thesis: stocks have been going down in gold terms since late 2021 (lower highs and lower lows). As gold approaches $3,000/oz, the next stop on the Dow/Gold ratio is 15.