I sometimes get the feeling that somewhere across that huge puddle, in America, people sit in a lab and conduct experiments, as if with rats, without actually understanding the consequences of what they are doing. – Vladimir Putin, 4 March 2014
We promised to explain how it ends. The world, that is. The world we live in now.
First, we need to understand that this is a very different world from the world of the 19th and early 20th centuries. It is a world where central bankers play a role somewhere between con artists, mad scientists and God Himself.
They deceive and cheat. They conduct their experiments without any real idea how they will affect people. And, they move almost every price in the world, sending investors, householders, and business people running in one direction of the world.
Their influence changes not only prices quoted on the Big Board and the supermarket. They also change the physical world. Jobs are lost to machines that – without very low interest rates – would never have been built. Those in the 1% are only as rich as they are thanks to the Fed’s manipulations.
America’s supersize houses also are largely the result of the Fed’s 2002-2007 real estate bubble; and many a mansion has been built in Aspen or the Hamptons with money from Wall Street bonuses, which wouldn’t have been possible without the feds.
And China is the way it is today – with its gleaming towers, its mega-factories, its empty cities and clogged roads – largely because US officials made it easy for Americans to buy things they didn’t need,with money they didn’t have.
Central bankers – along with central governments – have created a kind of monetary fantasy, which depends on ever-increasing amounts of cash and credit. But where can all this new money go? Real output can’t keep up with it. So prices must adjust. In the event, they bubble up, first one market, than another, first one sector, than another…
And after the bubble, what? The bust! That’s what we’re waiting for. A bust-up in the biggest debt bubble of all time.
Bill Bonner on markets, economics & the madness of crowds
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When the credit inflation ball bounces off the ceiling, it produces an equal and opposite reaction in the other direction. Asset prices fall. This is deflation. It begins with asset prices, and then makes its way into consumer prices.
Most investors think they need to protect themselves from this kind of ‘volatility’.
There are academic studies that show that the most volatile stocks tend to underperform more stable stocks. And it is obvious that if your stock goes down 50%, you need 100% on the upside in order to get back to where you started.
At the Bonner Family Office, one of our principles is that you need to “make volatility your friend”. Because volatility itself is not the problem. The real problem is risk. There is risk that you will buy the wrong investment at the wrong price. Then, you’ll get whacked.
EZ money policies – low rates, quantitative easing (QE), paper money – produce an apparent stability. As long as the money flows freely, even some of the worst businesses and the worst speculators can borrow to cover their losses. Stocks go up and up and up…
It looks good. But it masks real risk. As the bubble in credit increases the risk of a major blow-up increases, until it becomes a certainty.
This is where volatility can be your enemy and your friend. Just as Fed policies have made stocks too expensive, the equal and opposite reaction of the financial markets will be to make them too cheap. Stay tuned.
So, there you have it. The first stage of ‘the end’ will be a major sell-off of stocks. At present prices, of course, they’ve got it coming anyway.
But the implosion of the debt bubble and the collapse of asset prices is not likely to be the end of the story. Not as long as we have delusional activists running central banks and central governments.
Tune in tomorrow for the second stage of ‘the end’.
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