Sooner or later...Mr. Market will have his say

Jan 9, 2015

- By Bill Bonner

Bill Bonner
London, England

Dear Diary,

The Dow was up 323 points yesterday.

People come to think what they must think when they must think it. But what do they think now? Why do they think stocks are so valuable?

Apparently, they believe that Janet Yellen, Mario Draghi, and Haruhiko Kuroda -- that is, the powers that be - will make equities go up. The Fed has stopped active pumping, but it still has its hand on the pump handle, just in case. The European Central Bank is promising and preparing to pump as soon as it can get the Germans out of the way. And the Japanese - the world leaders in modern state finance -- are pumping with both hands.

Since 2009, the Fed alone has put more than $3.5 trillion to work on investors' behalf. This - along with the help of the ECB and the BOJ...and the BOC, etc - has lifted equity markets by $18 trillion. Corporate chiefs - now back in their cushy seats after the holidays - are borrowing more money to buy their own shares. They, more than anyone else, have figured out how to game the Fed's system.

They take the Fed's zero-interest rate credit. They put their shareholders on the hook to pay it back. And they pay themselves bonuses. And so, one of the wonders of the modern financial world unfolds before our dumbstruck eyes - borrowing from someone who has no money ...charging it to someone else's credit...and pocketing a good part of the cash. The average S&P 500 chief got an $11.7 million compensation package in 2013. Last year must have been even better, though we don't have the figures yet.

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Meanwhile, the dollar rises and foreign investors move their money into US stocks and bonds, seeking safety and capital return in a market where the former is illusory and the latter is fraudulent.

Good luck to them all!

Sooner or later Mr. Market will have his say. He always does.

But this may need explanation. If the central banks are all committed to pumping more money into the system (birds gotta fly, fish gotta swim, the Fed's gotta pump)...why should stocks ever fall?

Good question. Beneath the phony market created by artificial intervention is a real market. Real buyers and real sellers. At some point, the supply exceeds the demand. Then, the smartest people in the room get worried. They move towards the door...quietly. Then, the next smartest people notice that the geniuses have left the room...and they too begin edging towards the door too. The shorts (sellers) increase. Prices drop. And pretty soon, the market is in freefall.

That is what always happens. Bubbles always pop. It happened to dot.coms, to houses, to subprime mortgage companies, to oil, and to the oil slick debt:

"Prospects dim for US high-yield debt," says the Financial Times.

We have no special insight into this process. But we have faith in it. Nothing lasts forever; of that we are sure. We also have faith in certain reliable patterns of human life. No one escapes the cemetery. And markets follow boom-bust cycles. Always have; always will.

We are now in what appears to be a boom cycle on Wall Street. It could last much longer...and go much further. Often, a boom of this magnitude needs an all-out, barn-burning, super-duper final stage before it blows up. Our guess - and it is just a guess - is that there will be another big scare, first...a dip to the downside, before the final top of the equity bubble is achieved.

We expect a frightening fall...a quick reaction from the Fed ...and then, the great race to disaster will enter its Last Looney Lap.

Stay tuned.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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