Breaking the Spell

Magic Money and the Fed's Full Fantasy Flimflam

(Source: Getty Images)

Bill Bonner, reckoning today from Normandy, France...

Permit me to issue and control the money of a nation, and I care not who makes its laws! 

~ Amschel Rothschild

Everything depends on the Fed! It controls the money.

Last week, when investors expected the Fed to continue raising rates, stocks fell.  Then, on Friday, a report from the Bureau of Labor Statistics told us two seemingly contradictory things: that the labor market was better than expected…but that wages were rising less than expected.

The first of these things implied a stern response from the Fed – higher rates.  The second suggested it might go out for coffee.  Investors, in their wisdom, focused on the second interpretation; the Dow shot up more than 700 points. 

What a remarkable state of affairs. Reporters study every word from the Fed.  Analysts anticipate its every move. And now, businesses hold back on billion-dollar investments…wondering if the economy will take off after the Fed ‘pivots.’ Employees wait for the Fed’s next move to decide whether to look for a new job.  Investments postponed…careers cut short...vacations put off… marriages delayed…

…and yes, the Fed has become the most powerful unarmed organization in the world. By decree, it can wipe our trillions of dollars of wealth…destroy businesses…make the rich richer and the poor poorer.

An Implicit Guarantee

Last week, however, we saw that not even the Fed can make the sun stand still. Time waiteth for no man…certainly not for Jerome Powell. And eventually, the bubble pumped up by reckless printing press money implodes. Then, as the air whooshes out…those companies that benefited most…lose most.  

We have some direct insight into this phenomenon. Our company, Agora, has offered investment advice since 1979 – more than 40 years. The advice was sometimes shockingly good, sometimes not-so-good. After all, Mr. Market does not give away his secrets readily.

But the more the Fed favored the stock market – with artificially low interest rates and an implicit guarantee – the more people wanted stock market advice. And the more our subscription sales went up.  

This was not altogether a good thing. The Fed gave investors the idea that making money was easy. All they had to do was to buy stocks and sit back. Then, in this century, the Fed went Full Fantasy, increasing the money supply (its own holdings) by 1,200%, with its key interest rate approaching zero…far below the inflation rate. Then, investors discovered that they could make the most money in the least valuable investments, those least tethered to the real world of time and stuff. Cryptos, for example, had no value. They earned no profits. They had no employees to speak of. Nor did they have any assets worth mentioning – no factories, no patents, no distribution networks.

Buying a crypto might get an investor a profit far higher and far faster than he could get from a real, old industry company. At first, our editors and analysts hesitated. This was not the kind of “investing” that made sense to them.  But they gradually adjusted…giving readers what they wanted. Sales soared; but both our own editors and the investors they served were learning the wrong lesson.  

The Bubble Epoch

The peak in the Bubble Epoch came in August 2020. This was in the middle of the feds’ Covid Hysteria, in which they added $5 trillion to the economy to offset the shutdowns they had caused. Early in the month, the 10-year treasury note hit a record low yield of barely more than one half of one percent. Then, on August 24th, the Dow replaced ‘old economy’ ExxonMobil with ‘new economy’ Salesforce.

Salesforce grew by leaps and bounds – offering software from ‘the cloud’ to companies such as ours. Almost all investment-related companies were adding customers and making money.  

But after August, 2020, the bond market took a new direction – down; the bubble was losing air. It wasn’t obvious at first. Salesforce did not peak out until more than a year later. But investors were already backing off. Our sales were going down.  Investors sensed that the Bubble Epoch was over. The Dow peaked out at the end of 2021 at just over 36,000.

This is good news. The spell is broken. Analysts can go back to doing what they should be doing – offering solid investment insights and advice.  

The Fed’s Mettle

But wait. Instead of carefully studying the ledgers of public companies, investors and analysts are still enthralled to the same monster that created the Bubble in the first place. And now the question is: 

Will it ‘pivot’ this year?  

The Fed says “no pivot”…un un…no way, Jose… Fed minutes:

“No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023. Participants generally observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2 percent, which was likely to take some time.”

Do you believe that, dear reader? We do. But we also believe that the participants can change their minds. And if we get a real crisis – a major bankruptcy…a run on a bank…a crash in the stock market…a hotter war…a new virus… any excuse at all…then Fed governors’ foreheads will grow damp…their knees will tremble…their backs will bend – and they will fold like lawn chairs.

We’ll see.

Regards,

Bill Bonner