Bubble, Bubble Toil and Trouble

Like a hell broth boil... the Fed's potion brought forth all manner of wicked distortions

(Source: Getty Images)

Bill Bonner, reckoning today from Baltimore, Maryland...

YODO… you only die once. Print it out. Put it on your refrigerator.

The great Bubble distorted markets. It distorted the economy. It distorted politics and government. It distorted everything. It bent spoons. It curdled milk. And it left people with eternal truths that weren’t true for one minute.   

Almost everything was weirded through the bubble prism. Money appeared to be almost unlimited… stocks always went up… the feds could spend billions… or even trillions… on any goofy project they wanted… and America – financed by its fake money – ruled the world.

YOLO, you only live once, was the prevailing zeitgeist. You had to take advantage of this once-in-a-lifetime fantasy world: get it while the gittin’ was good.

The young, restless and reckless bought cryptos or ‘the next Apple’ or ‘the next Google’ or the next something.

Older, more cautious investors followed Buffett. They thought they could buy-and-hold their way to wealth. They were in ‘stocks for the long run,’ expecting to make money simply because they were wise enough to stay ‘in the market.’

All for Naught

Both young and old, aggressive and cautious, were wrong. Over time, stocks do not become more valuable. What really happens is that money becomes less valuable, making higher stock prices look better. In terms of real money, gold, prices are about where they were in the boom of the 1920s – a century ago. You could have bought the 30 Dow stocks in 1929 for 18 ounces of gold.  And what are the Dow stocks worth today? About 18 ounces of gold. Ninety years later… no gain. All of that hullabaloo – the Crash of ’29… the Great Depression… WWII… the Nifty Fifty… the Oil Shock… Inflation… LTCM… Ben Bernanke… the Covid Panic – for nothing.

But in the dreamtime of the Bubble Epoch, the Fed was pumping in money… and the yachts were rising.   

Our message today: the gittin’ ain’t good no more. Ante-2022, every pullback in the stock market was an opportunity to ‘buy the dip’ and make money. Losses were temporary; they lasted only for a few months, the time it took for the Fed to get more money into the system. The Fed was backstopping investors for many years.

Now it is backstabbing them. And now, when the knife goes in your back, it stays there.  Because the Fed can’t bring up the ambulance, not without also bringing more inflation.  

Yesterday, we looked at why the Fed can no longer be counted on to raise stock prices.      

First, because the momentum of a recession is likely to drag stocks down anyway.  A ‘pause’ by the Fed is likely to make little difference.

Second, because the Fed is famously trapped. It can continue inflating… or it can let the Bubble die. It can’t do both at the same time. A U-turn now will mark the beginning of the next phase of inflation. Howevermuch asset prices may go up, inflation is likely to cut them down even more.

Don’t Think Once, It’s All Right

The lurid history of inflation should cause policymakers to think twice before pivoting away from inflation fighting. In France, high rates of inflation in 1787 -1788 it led to the bloody French Revolution and the Terror. In Russia, 1917, inflation set the stage for the Bolshevik Revolution. Germany, 1921-23, it led to the rise of Adolph Hitler. In Argentina, Brazil, Zimbabwe, Venezuela – there are no inflation stories with happy endings. All end in misery, poverty, war and/or revolution.

But the elite don’t even think once. And they’re already egging the Fed on… to go back to inflating.

Here’s a typical ‘think piece’ on Substack:

Raising interest rates is a blunt means to fight inflation. It worsens living costs and job losses, while tax cuts mainly benefit the rich. Instead, the rich should be taxed more to enhance revenue to increase public provisioning of essential services, such as transport, health and education.

And here’s Markets Insider dusting off a Nobel winner:

Nobel laureate Paul Krugman warns the Fed risks going too far in fighting inflation - and predicts a return to rock-bottom interest rates

The Nobel Prize-winning economist has also predicted an eventual return to near-zero interest rates once price increases are brought under control.

And here’s the UN with its own high-minded thoughts. CommonDreams:

A United Nations organization on Monday joined critics of the U.S. Federal Reserve and other central banks across the globe hiking interest rates with the goal of reining in inflation.

"Not only is there a real danger that the policy remedy could prove worse than the economic disease, in terms of declining wages, employment, and government revenues, but the road taken would reverse the pandemic pledges to build a more sustainable, resilient, and inclusive world," the document warns.

Closer to home, analysts think the recent falloff in job offerings will harm the poor and put pressure on the Fed to do its U-Turn sooner rather than later. They say inflation is temporary, or that it is caused by “supply chain bottlenecks” that can be solved by “policy changes.” 

Of course, the concern for the poor is as fraudulent as the dollar itself. The poor don’t care if Amazon shares go down; what they care about is the price of milk and gasoline. And as for the policy changes, the only ones that would reduce inflation – cutting spending and regulation – are the ones the policymakers are least likely to make.

But the elite rule the world. And it is just a matter of time until they get their way.  

YODO.  

Stay tuned...

Bill Bonner

Joel’s Note: Left to its own devices, the market metes out reward and punishment to those who deserve it. Whether over-leveraged financial institution or under-performing developer… over-priced lemonade stand or under-stocked iGadget warehouse… the market, through honest price information, like profit and loss signals, allocates capital to those who treat it best.

But during the Fed’s “bubble, bubble, toil and trouble” years, cheap money distorted prices to such an extent that investors had no idea which companies were, in fact, financially sound… and which were merely riding the rising tide of EZ credit.

As the Austrian School economist Ludwig von Mises observed, “The boom squanders through malinvestment scarce resources of production and reduces stock available through overconsumption; its alleged blessings are paid for through impoverishment.”

We do well to remember that the “crack up boom,” as Mises describes it elsewhere, is largely a man-made phenomenon. From artificially cheap credit at the one end… through to government “bailouts” and “too big to fail” shenanigans at the other, where profits are privatized and losses socialized, the natural processes of the market are subverted and distorted.

“I’ve described the coming financial crisis as a big storm coming off the ocean and getting ready to make landfall,” Bonner Private Research’s Tom Dyson wrote to members in a note yesterday. “But it’s not the right metaphor. Storms are a natural occurrence. Financial crises are man made.”

How so, you wonder? Tom, again… 

A collapsing dam is a much better metaphor for what’s coming. The system managers built a dam to suppress volatility and prop up the stock market. I’ve called it the greatest financial experiment in history. The problem is, their intervention created a gigantic gap between quoted financial prices and actual real-world values. And now that dam is collapsing, which means we’re about to witness a violent equalization in the water level, what we might call a “financial panic” or even a “bear market.”

Unless policy makers change their minds, it feels like the dam could burst at any moment. The fact pattern shows that the global economy is becoming more and more “crashy” by the day.

FOMO - Fear Of Missing Out - is another one of those acronyms that floated to the surface during the “bubble bubble” days… and it can be difficult to resist the temptation to be suckered back into equities during bear market “relief” rallies. But Tom and Dan remain adamant. Engage Maximum Safety Mode. When the levees break, you’ll be glad you did.

Not a member yet? Learn more here.