- By Bill Bonner
What did we tell you? That Janet Yellen Fed will not raise rates in any meaningful way anytime soon. Instead, she will announce new QE programs.
Yesterday, red was showing up just about everywhere - US stocks, European stocks, Asian stocks, emerging markets, commodities, oil...the only thing in the black for the day was gold, with a $14 increase.
But it could have been worse. Bloomberg reported that US stocks recovered some of their losses for the day after news came out that the Fed isn't planning any rate hikes until certain unspecified conditions are met:
Today's economy depends on large doses of cheap credit. And like morphine, you have to increase the dosage just to stay in the same place. Take away the drugs, and the pain rises.
The pain caused by falling stock prices, for example. Take away the cheap credit and the buy-backs on Wall Street stop. Profits per share drop. With flat and falling sales, and stagnant household incomes, the inevitable direction for stock prices, too, is down.
We've already seen that today's stock prices are not the result of sober reflection on the part of investors. They do not sit down with a yellow pad and a number 2 pencil and calculate streams of income over the next 10 years. Instead, they count on the cronies to rig the market for their benefit (and their own, of course). This they are able to do by borrowing at ultra-low rates and using the money to buy their own shares. The insiders get bonuses and capital gains...by looting the company's actual capital and replacing it with debt.
Cheap credit is essential to the looting process. Take it away and the flim flam falls apart. And so do stock prices.
But a hard crash in the stock market is something the feds can't allow. The whole 'recovery' illusion is based on rising equities. Supposedly, the 'wealth effect' causes the rich to spend like drunken capitalists - starting new businesses, hiring new workers, buying oil and raw materials...not to mention enjoying a few luxuries along the way. The economy is supposed to explode with growth...leaving coins all over the street for the poor to pick up.
Of course, it doesn't happen. Instead, the cheap credit goes to the cronies who use to manipulate the stock market. Stocks go up. But the real economy goes nowhere.
At the Sprott-Stansberry Conference last month, our friend Steve Sjuggerud debunked the idea that a rising interest rate cycle always coincides with falling stock prices. He pointed out that stocks actually go up during a period of rising rates. Don't worry about the Fed tightening, he told the audience. It doesn't have to mean lower stock prices.
We don't doubt that he is right. Typically, when the economy heats up, interest rates rise...and so do stocks. But this is no typical economy...and no typical bull market. The whole thing is counterfeit. The stock market that has been tricked up by cheap credit and buy-backs. And the economy is not in a healthy expansion, which would push up stock prices and interest rates at the same time.
Today's economy is as cold and lifeless as a corpse. Key commodities are reaching record lows - including copper, which signals a deteriorating economy worldwide. Shipping and freight prices show a slowdown in trade. Emerging markets are getting hammered by widening credit spreads and a rising dollar. China is struggling to avoid a Great Depression.
That's why Ms. Yellen is reluctant to allow rates to return to more normal levels. She knows it will be painful when she does. Instead, she'll administer more morphine.
Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.