Yesterday, it felt like all hell was breaking loose. It was the kind of day when each man looked to his own. He checked his bank balance and his margin account. He counted his gold coins and looked in his liquor cabinet. He wondered what would happen next…
The Dow dropped 353 points. Gold lost $87.
What does this tell us? It shouts a warning: Mr Bernanke is losing control. He desperately wants inflation. He’s getting deflation instead. He wants low interest rates, yet, rates are rising.
But he is getting the worst kind of deflation – sluggish price-increases against a background of rising interest rates. Consumer prices are rising at their slowest pace in 53 years. And, as PIMCO chief Bill Gross says, it looks like the long bull market in bonds, which began 30 years ago, is finally over. Yields are rising. The feds’ borrowing costs are going up.
This is the exact opposite of what the Fed wants… and needs. Its strategy is to hold interest rates down while encouraging consumer and asset prices up. This would make possible a gradual growth in the GDP while the real value of the debt was whittled away by inflation. Then, it could ‘taper off’ its quantitative easing (QE) and zero interest rate policy (ZIRP).
Instead, the debt gets heavier as yields rise, backs ache, legs buckle, nerves crack.
Old timer Richard Russell comments: ”Bernanke has finally realised that the Fed has lost its battle with the primary trend. The Fed and the economy are now at the mercy of the strengthening primary bear trend. Deflation, which the Fed has tried frantically to hold back, is now taking over. The Fed would like to exit the battle field but it can’t. The mere thought of the Fed giving up the battle to hold back deflation terrifies the stock and bond markets. Years ago Ben Bernanke stated emphatically that he would never, ever allow the nation to deflate – even if he had to drop cash from helicopters to prevent it. But now deflation is happening. And Bernanke, the academician who has never understood markets, is frozen with confusion, consternation, and fear.
“Everybody’s escape, so far, has been to rush headlong into Treasury bonds. But that avenue is no longer working (the bonds are sinking). The next avenue of escape is the dash for cash. Cash today amounts to intangible Federal Reserve notes, which are fiat paper and actually intangible financial garbage. The last and final avenue of escape will be to gold…”
Bill Bonner on markets, economics & the madness of crowds
Receive Bill Bonner's free daily email 'The Daily Reckoning' straight to your inbox
All over the world, the feds are trying to lock the exits and bar the doors.
David Franklin at Sprott Asset Management: ”With the Indian rupee plumbing new lows against the US dollar and the country’s current account deficit at record levels, the Reserve Bank of India (RBI) is taking the easiest route to tackle both; it has declared a war on gold. … The central bank has announced a series of measures over the past month, including restraining lending against gold-backed assets, and restricting gold imports. The hike in gold import duty to 8% this month is the most recent announcement in this drive and doubles the duty that was applied at the beginning of this year… Indian finance minister P. Chidambaram has even urged banks to advise their customers not to invest in gold.”
Meanwhile, from “Always Something Interesting”, this news from France: “On May 23rd the French government banned the delivery of all forms of precious metals, currency and jewelry by La Poste and all other branches of the French postal service.
“The announcement was made through Legifrance, the legal publishing house responsible for all legislative publications. The ban was not reported by the press and the French government has made no statement.
“… all registered or insured precious metal shipments are forbidden by the French government.
“Although the decree is limited in language to France, FedEx had also stopped shipping precious metals in March, without explanation. More recently, FedEx suspended all shipping or taking delivery of precious metals in Germany and the UK.”
The gold price is falling. This signals to us that the ‘Great Correction’ which began in 2008 is entering a new phase. The can was kicked down the road by the feds. Now, the markets are stumbling over it. In the end, markets always triumph. And now, the markets are correcting, whether the Fed likes it or not.
What will happen next? Like everyone, we wonder too. But we have a hunch. If the ‘Great Correction’ intensifies, the feds will be forced to react. They can permit neither a bear market, nor deflation, nor higher interest rates. They will have to resort to ‘overt monetary financing’, otherwise known as dropping money from helicopters.
Markets will rock, roll, and lay down on the floor in spasms of laughter and revulsion. And at the end of the day, when the dust settles and the music stops, gold will be the last man standing.
• Don't miss Bill's next Daily Reckoning. To receive the next article straight into your inbox as soon as he's written it, sign up to the email list here.
Information in The Daily Reckoning is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. The Daily Reckoning is an unregulated product published by Fleet Street Publications Ltd. Fleet Street Publications Ltd is authorised and regulated by the Financial Conduct Authority. FCA No 115234. http://www.fsa.gov.uk/register/home.do
New to MoneyWeek?
Welcome, and thank you for visiting us.
Here at MoneyWeek, our aim is simple. To give you intelligent and enjoyable commentary on the most important financial stories of the week, and show you how to profit from them.
If you've enjoyed what you've read so far, we've got something you'll definitely be interested in.
Every week day, Monday to Friday, we send out a thought provoking and often controversial email called the Daily Reckoning. In it, we try to figure out the markets and how current economical events are shaping the world we live in. If you're interested in investment opportunities and the markets, we think you should be reading it…
With your permission, I'd like to send you the Daily Reckoning for FREE.
We hope you enjoy your stay on the site.
Editor, The Daily Reckoning