The Whole System Depends on Abnormalcy

Oct 27, 2015

- By Bill Bonner

Bill Bonner
Waterford, Ireland

You go for a nice picnic on the slopes of Vesuvius... You spread out your tablecloth. You open your picnic hamper. You prepare for a relaxing afternoon in the warm October sun.

And then someone comes running down the mountain, warning that the volcano is going to blow up. You pack up your sausages and put a cork in the wine bottle...and rush to the car and drive away. Better to be safe than sorry.

And then? Nothing happens.

Most of the time, you can safely ignore the nervous nellies and prophetic Cassandras. (According to legend, Apollo gave Cassandra and the gift of prophecy... but when she refused him, he spat into her mouth so she would never be believed...)

But sometimes the worrywarts are right....

For the last 16 years we've been writing these daily letters. We saw the collapse of the dot.com bubble coming in '99 and warned readers. Most didn't want to hear it; they were making good money on the stock market and - it was a 'new era,' remember - and didn't want it to end. But the Nasdaq collapsed in 2000 and didn't recover until 15 years later.

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We figured then that the economy would follow the Japanese into a long, slow slump. With Addison Wiggin, we wrote a book about it, "Reckoning Day." We were wrong then...and many times since. We have consistently underestimated the power of the feds' fixes.

"Don't fight the Fed," is a basic old-timer's rule on Wall Street. We understand the principle. You don't fight the Fed because the Fed has more ammunition than you have. And as long as the Fed was intervening in a modest way, generally in the direction the market was going anyway, it would have been suicide to go against it.

But we never imagined that the Fed could create an entire fantasy economy based on completely unnatural signals and grotesque manipulations. That is the economy of the 21st century. It is an economy the old rules of supply and demand...value and price...up and down... have to be viewed through the distorted light of central bank intervention. When the price of new money - as set by the Fed to its best customers - is almost zero, who knows what other things are worth?

We expected investors to be as appalled as we were. We thought they would look through the Fed's distortions ...look through these interventions Fed policies and turn up their noses and close their accounts. After all, who would want to pay a high price for an asset whose value depends entirely on central bank manipulation?

Apparently everybody! Instead of closing their accounts, investors and speculators went into the market like gamblers into a crooked casino. They all know the games are fixed. And all expected to be winners.

In response to the sell-off of 2000 and the mini-recession of 2001, Alan Greenspan cut rates...and caused another boom - this one in housing and mortgage finance. This boom was amplified by the financial industry - which made hundreds of billions on the flimflam trade. It grew into such a big bubble that all of Wall Street was over-stretched, undercapitalized and out-of-control.

It was then that we warned readers again. Specifically, we suggested:

Sell your expensive house in California; buy a cheap house in Arkansas.

The advice was a little fanciful, but the point was clear. As George W. Bush might have put it: "This sucker is going to blow up!"

As it happened, the Vesuvius of mortgage debt exploded in 2008. Roughly half of America's stock market wealth disappeared in about 6 months. Millions of houses sank 'underwater.' And every major bank on Wall Street would have...and should have...been flattened.

And again, using another GWB turn of phrase, we misunderestimated the power of chicanery, treachery and fraud. Now, it was Ben Bernanke on the case...cutting rates to near zero and claiming that the world as we knew it would vanish unless Congress gave the cronies $700 billion.

He was right, of course. The screwy world that the feds had created - funded by cheap debt - was getting what it deserved, good and hard. Humpty Dumpty had fallen off the wall. And we believed that the all the kings horses and all the kings men would not be able to get Humpty back together and back on the wall.

We were wrong. The kings men came out with ZIRP and QE...and the Humpty Dumpty stock market floated higher than ever. The announcements last week - from the ECB and the BOC - that more QE is coming, pushed him up an inch more.

Investors are aware that the market is manipulated. It doesn't seem to worry them. They don't fight the Fed...they sit down at the table with it; they play the game.

So far, they have done well.

And now...here's the headline from the Wall Street Journal:

"Fed Strives for Clear Signal on Interest Rates" says the Wall Street Journal.

This is the latest, and in some ways the dumbest, of central bank frauds. Now, the Fed is under the leadership of Janet Yellen. And Ms. Yellen believes in "forward guidance." She believes she can decide in advance what policy the Fed should follow, in the future, and let investors know now. That way they can plan intelligently.

She will signal that, soon, the central bank will begin the long return to 'normalcy.' Don't believe it. The whole system depends on abnormalcy....that is, it depends on more mischief from the central bank - ZIRP, QE, and ...as already practiced in Switzerland, NIRP (negative interest rates).

And once again, we hear the grumbling of the volcano...and the smoke rising...

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

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