Gold News

Phony Boom, Real Crash

Guess why, and how, this stockmarket crash began...

IT'S SNOWING here this morning, writes Bill Bonner in his Diary of a Rogue Economist from his chateau near Poitiers, France.

A soft, slow snow.

Peaceful. Quiet. Like the last breath of a dying man.

We came out to the country to pack and close up. We're leaving France this week, headed back to Baltimore.

"What?" asked a friend in Paris. "You're leaving Paris for Baltimore? That doesn't seem like a good trade."

"Well, Baltimore is not Paris," we replied. "But then there's nothing quite like Baltimore."

Everything has its charms. Fortunately, we are happy in both cities.

We are looking forward to getting back to the US...just in time to watch a market meltdown up close.

Last Friday's 391-point drop in the Dow – a nearly 2.5% fall – ended the worst 10-day start to a year in US market history.

The average stock in the S&P 1500 – which includes about 90% of all stocks in listed in the US – is now down more than 26% from its high.

The standard definition of a bear market is a sustained fall of 20% or more from recent highs.

"Woeful earnings," suggested MarketWatch as a cause.

Another guess: "The stock market is freaking out over Trump and Sanders."

Barron's was closer to the real source of the plunge: "Without Fed's Juice, Market Suffers Withdrawal Pains."

In 1971, phony fiat money replaced the old gold-backed Dollar...and money that came "out of nothing" replaced real savings.

At first, inflation rates rose. No one trusted the new fiat Dollar. But then, incoming Fed chairman Paul Volcker showed the world that the US could manage its currency in a responsible way.

Consumer price inflation fell, along with interest rates. Debt increased. And gradually, every Middlesex village and farm has become dependent on more and more bank credit.

The dot-com bubble blew up in 2000. The mortgage finance bubble blew up in 2007.

Now, it looks as though another bubble is deflating...

In 2008, the Fed cut rates all the way down to the "zero bound" to try to keep the jig going.

But after seven years of its emergency zero-interest-rate policy (ZIRP), it became obvious that something had to be done to get back to "normal."

Like a long binge on booze and drugs, things were starting to get a little weird.

The juice had to go.

But we doubt that the syringes and the Johnnie Walker have been put away for long. Despite announcing a great improvement in employment, for example, there have never been so many American men without jobs.

Retail sales are falling. The transport industry – ships, trucks, rails – is in a funk. And the energy sector is in crisis...with as much as one-third of the sector's debt headed for default.

What's the matter?

The simple answer is that credit is not expanding fast enough. Lenders have become wary. Rolling over short-term financing is getting harder and harder to do.

Yields on supposedly "risk free" Treasury bonds are going down (and prices are going up). Yields on junk bonds are going up (and prices are going down).

"Any time credit fails to increase by at least 2% a year," said credit analyst Richard Duncan at Macro Watch, "the economy shrinks."

And what's happening now? How fast is credit increasing?

Uh-oh...

It's not increasing at all. It's falling...for the first time since 2009.

Not only is the juice no longer going into the system, it is actually going out.

Which is just what you'd expect. The phony boom created and funded with the Fed's phony money is now turning into a real bust.

China's foreign exchange reserves are falling. The ships sit idle in their ports. Orders for new trucks, new rail cars, new tankers...and yellow machines of all sorts...are hitting record lows.

The whole kit-and-caboodle creaks and groans to a halt.

And now, Bloomberg asks:

"Is it over?"

At least that question is easy to answer.

No, it's not over. It has hardly even begun.

Bill Bonner has co-authored a number of New York Times Bestsellers including Financial Reckoning Day, Empire of Debt and Mobs, Markets and Messiahs. In his own opinion, Bill's most recent title, A Modest Theory of Civilization: Win-Win or Lose, is his best work yet. Bill also founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group have exposed and predicted some of the world's biggest shifts since that time, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and more recently the election of President Trump.

See full archive of Bill Bonner articles

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