The Fed Prepares for Mistake #3

TV is censored in Dubai. WhatsApp and Skype aren’t allowed. Liquor is tightly controlled.

But there’s an oasis in the hotel bar, where foreigners gather in the evening. Strangers in a strange land, they tell their stories.

One of them, brown from the sun and woozy from the alcohol, described the place where he had washed up…

‘Yeah…it’s a kind of welfare state based on oil revenue. Only about 15% of the population are citizens. They treat the rest like dogs. Workers from Pakistan, Sri Lanka, and India built this place. They’re the ones who pour concrete in the 100-degree heat. But they can only stay as long as they have a job. Then, they’re kicked out.’

‘We should do that in the US,’ said an American voice.

‘But they treat citizens much better here. If you’re a citizen of Dubai, you’ve got it made. When you get married, they give you a house and $25,000 to help pay for the wedding expenses.’

Don’t fight the Fed

Meanwhile, back in the USA, things get curiouser and curiouser…

Yesterday, the Dow popped up some 350 points. Why the big move?

Well, investors’ animal spirits were titillated by the thought of a trade deal with China. This is on top of the titillation brought last week by the Fed, which — in the wake of a deteriorating economy — seems ready to shift to Mistake #3 even before it has completed Mistake #2.

You’ll recall that Mistake #2 is raising interest rates to try to mitigate the damage done by Mistake #1 (leaving rates too low for too long). Mistake #3 is dropping them too sharply to try to undo the damage caused by Mistake #2.

‘Don’t fight the Fed’ is the hoary credo on Wall Street. If the central bank is making Mistakes #1 or #3, you don’t want to be short; if it’s making Mistake #2, you don’t want to be long.

Investors believe that central banks control stock prices — which, of course, they do…to a point.

But, King Cnut couldn’t stop the tides. And the Fed can’t stop the deep tides of economic fortune. The tide of hope and optimism that had begun with the Reagan Administration crested in 1999. It has been downhill ever since.

At least, that’s our hypothesis.

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Greed to fear

Since then, GDP growth rates have gone down; real incomes for real people — in America — have declined. And a large part of the public has shifted from looking forward to the future to looking backward to the good ol’ days. From a positive-sum, win-win world…it ebbed back to a zero-sum, win-lose world.

From Greed to Fear, that is.

That’s what we’re calling the big moves in our Dow-to-Gold gauge. It peaked out in 1999 at over 40 (it took more than 40 ounces of gold to buy the Dow). Today, it’s around 20.

Three times in the last century, the gauge went below 5. Our guess is that it would have reached its rendezvous with destiny again — below 5 ounces of gold to the Dow — in 2009, had the Fed not intervened.

But the Fed panicked. It then disguised, delayed, and denied the truth of this tidal shift by falsifying the most important price signal in capitalism — the price of capital itself.

Mispricing capital — by setting artificially low interest rates — made the downtrend worse. Growth slowed further. The Swamp deepened. The empire grew bigger and more corrupt.

The downward trend is not limited to the US. Europe, Japan, and China all show the same symptoms. And this week, the president of the European Central Bank (ECB), Mario Draghi, announced that it would keep making mistakes…even bigger ones.

Unlike the US, the ECB seems to have skipped Mistake #2 altogether. Its key lending rate never got above zero. Nevertheless, Draghi says he’s ready to take it even further into negative territory. This from Bloomberg:

ECB President Mario Draghi appeared to set a low bar for action on Tuesday when he said additional stimulus will be needed ‘in the absence of any improvement’ to the outlook for growth and inflation. He specifically cited rate reductions as an option, sending the euro lower and prompting money markets to price in a 10 basis-point cut by December. […]

“Draghi is going to finish his tenure with a cut,” said Claus Vistesen, chief euro-zone economist at Pantheon Macroeconomics. “The door is now open and I don’t see how they cannot walk through it.”

Investors bought European stocks. But what was more curious about this was the reaction of the US president on Twitter:

Mario Draghi just announced more stimulus could come, which immediately dropped the Euro against the Dollar, making it unfairly easier for them to compete against the USA. They have been getting away with this for years, along with China and others.

European markets rose on comments (unfair to US) made today by Mario D!

Mr Trump thinks the ECB is manipulating the euro lower to make European exports more attractive.

This is, of course, the same man who rants against Jay Powell for not manipulating the US dollar lower. He recently complained that US stock prices would be ‘10,000 points higher’ if the Fed had followed his advice.

He now comes forward with a complaint against Mario Draghi. For what? For using monetary policy to manipulate the euro lower!

We’ve got no special beef with hypocrisy. And no special beef with the US president.

The press, Congress, the White House, investors, economists, the Fed — all seem to think the same poppycock…that central banks are responsible for stock prices and the economy.

But can you really make your economy stronger by faking your interest rates and cheapening your currency?

Look for more in tomorrow’s Diary

Regards,

Bill Bonner


Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance.


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