Mr. Market Goes to Washington

Step aside dunderheaded politicians... there's a new sheriff in town!

(Source: Getty Images)

Bill Bonner, reckoning today from Youghal, Ireland…

Bloomberg has the latest:

Metals Haven’t Crashed This Hard Since the Great Recession

Industrial metals are on track for the worst quarter since the 2008 financial crisis as prices are pummeled by recession worries. Copper, the great economic bellwether, has ricocheted into a bear market from a record four months ago, while tin just tumbled 21% in its worst week since a 1980s crisis froze London trading for four years.

Mr. Market is doing what he always does. When things are too expensive, he marks them down. When they are too cheap, he bids them up. If there is a shortage, he increases prices to bring forth more production. If there is a surplus, prices crash and producers cut back. 

Mr. Market always does the right thing at the right time. If there is a boom, he throws on cold water. If there is a bust, he brings a bottle of Jameson and a loaded pistol.  

He deflates bubbles… but breathes air into flattened industries.

Blowing Bubbles

The cryto bubble, for example, has now lost $2 trillion of gassy value. Cryptophiles are hoping they’ve seen the end of the deflation. Bitcoin is holding above $20,000 – for now. They’re waiting for some oxygen. But are cryptos part of an industry worth saving… or just a faddish speculation? We’ll wait and see.  

After hitting record highs, shipping rates are coming down, too. People aren’t buying as much stuff; so there’s less need to restock the shelves. And the price of oil is also falling. 

Higher mortgage rates have hit the housing industry. Sales of existing houses are down.  And there’s less hammering going on in the construction business. Markets Insider has the story:

Lumber prices fell Thursday, marking the first decline in more than a week, as mortgage rates rose to the highest level since November 2008.

Prices ticked down 2.3% to $598.50 per thousand board feet, after rallying for six consecutive sessions to edge back above $600. Earlier this month lumber tanked toward a nine-month low as gloomy housing indicators continued to pile up. 

Yes, Mr. Market is at work… settling up… putting out-of-whack things back into whack.

But count on the dunderheads in Congress to misunderstand everything.  

Elizabeth Warren came forward on Wednesday. Addressing herself to Jerome Powell. HuffPost reports:

Sen. Elizabeth Warren (D-Mass.) told Federal Reserve chair Jerome Powell that he should be careful not to “tip the economy into a recession” with interest rate hikes.

Warren told Powell, “Inflation is like an illness, and the medicine needs to be tailored to the specific problem, otherwise you could make things a lot worse.”

Warren asked what was worse than high inflation and low unemployment and then gave Powell an answer: High inflation with a recession and millions without jobs.

“I hope you consider that before you drive this economy off a cliff,” she said.

Another Dopey Moron

Poor Mr. Powell cringed. In front of him was a moron… lecturing him about inflation.

Didn’t she know? Mr. Market is in charge now. It is he who is driving towards the cliff. But a cliff is not the end of the world; it’s just a correction. Yes, of course he could see it coming. What did she think he was, an idiot?  

And what was this ‘inflation is an illness’ claptrap? Does she think there is some pill the Fed can prescribe… and then after a few days of bedrest, the economy will be good as new?

What a dope!

Mr. Powell knows that he only has two choices. He can let Mr. Market go about his business – correcting the Fed’s error… straightening out the markets… and bringing things back to some semblance of ‘normal.’  

But in that case, he will have to stand up to know-in-alls like Ms. Warren. Will he have the guts to do it? It won’t be easy. As the economy sinks, she’ll turn up the volume, looking for even bigger headlines. She’ll claim that he, Jerome Powell,  pushed the economy over a cliff.

And then, what will he do?  

That’s his second choice: he can intervene, stop the correction and go back to printing money. The result will be a total disaster… not just for the economy, but for the nation and everybody in it – hyperinflation, war, revolution, hunger, cold, poverty… the whole shebang. But it will take years to develop. And in the meantime, he’ll get Madame Warren off his back… and be treated like a hero.  He’ll prove that he, too, (following in the footsteps of that insufferable twerp, Ben Bernanke) has the ‘courage to act.’

These thoughts must have raced through the Fed chairman’s mind… along with the ‘b-word’ … as he faced his antagonist on the Senate Finance committee.

But it’s way too soon for option #2. So, what could he say?

The way forward, he told the Senate committee, will be “very challenging.”

Regards,

Bill Bonner

Joel’s Note: According to Bonner Private Research investment director, Tom Dyson, we’re just at the beginning of this cycle. Here, from his June report…

The bubble has now popped and the entire financial system is in the early stage of a chaotic collapse. It’s been ‘orderly’ so far. But ropes are starting to fray. And rivets are starting to pop… 

The Fed’s liquidity backstop is the only thing that can stop this chaotic collapse. But even that’s not a given. Because the market now doesn’t quite trust the Fed. 

In order to regain the market’s trust, and induce leveraged speculation again, the Fed would have to say something like: “We’re backstopping the market and we promise we’ll never take the liquidity away ever again.” I don’t think the Fed can make that promise. We’ve gone too far to go back now.

The systemic collapse is going to continue until the Fed comes to the rescue. But even then, I don’t expect the rescue will be able to re-inflate the credit bubble. More likely, it’ll just stretch out the losses for a few more years. And it will turn the US dollar into the relief valve for all the losses, instead of the stock and bond markets. 

If Tom’s right, the losses we’ve seen so far will be nothing compared to what’s coming down the pike. Hence the warning he, Dan and Bill keep hammering… Maximum Safety Mode. That means plenty of dry powder (cash) plus precious metals (physical gold… and some silver), hard assets… and a whole lotta patience.

If you haven’t yet read Tom’s latest, you can do so by becoming a member of Bonner Private Research today. At $2 a week, we reckon it’s just about the best investment going…