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Buying stocks is easy when you can borrow for free...

The TV CHANNELS and newspapers all reported the Dow 15,000 story last week as though it were just a stepping stone on the way to 16,000...or 20,000...or Dow 30,000, writes Bill Bonner in his Daily Reckoning.

Heck, the sky's the limit!

Investors have reached a new level of bullishness. They're borrowing again to buy stocks, confident that prices go in only one direction.

Advisers, too, seemed sure that this was not the end of a trend, but the beginning of one. Just what you'd expect at a market top.

There's also a swift current of economic analysis telling us that the commodities boom is over... that the Fed has the situation under control... and that the bull market in gold is finished.

All of which is amazing... and often breathtaking.

Stock market investors don't seem to know or care that the main thing propping up their investments is the same thing that will ultimately destroy them. And that the longer the situation continues, the bigger the mess will be when it finally blows up.

We're talking, of course, about Fed, Bank of England, Bank of Japan and People's Bank of China monetary policy. It is "experimental". It is "bold". It is also reckless and potentially catastrophic.

Lending money at negative real interest rates creates grotesque distortions in the market.

Savers get nothing for their trouble. In fact, they lose money in real (inflation-adjusted) terms. So they shift to speculating on stocks. The stock market goes higher... but it is not a market you can trust.

It is being driven by the printing of trillions of Dollars, Yen, Pounds and Renminbi. But central bank policy hasn't been able to budge slumping economic fundamentals. And any attempted exit by central banks in the absence of a genuine economic recovery will be, in the words of hedge fund manager Paul Singer, "somewhere on the continuum between problematic and impossible."

It is also unnatural for a central bank to print up new money and use it, indirectly, to pay for government operations. If you could do that without penalty – that is, if you could pay for real things with fake money – you would do it all day long.

Normally, central banks don't even try. They know the penalties make it not worth the fleeting enjoyment.

Do you see any penalties, dear reader? We don't.

But the fact that the penalties have not yet been assessed doesn't mean they don't exist. And the longer we go without paying them, the greater they will eventually be.

At present, the feds get only rewards...

  • First, lower interest rates make it easier to finance federal debt.
  • Second, low debt interest payments reduce the outstanding debt in real (inflation-adjusted) terms.
  • Third, Fed Treasury bond buying indirectly funds government spending – to the tune of about $45 billion per month.
  • Fourth, the lack of yields in the bond market corrals investors into stocks. This pushes stock prices higher. Rich bankers and rich campaign contributors get richer.

What's not to like? For the moment, nothing. But the markets won't stay in this "sweet spot" for long. The time will come when the Fed will have to reverse its policies or face substantially higher inflation.

But how? Instead of buying bonds, the Fed will have to sell them. But to whom?

"Warren Buffett has a piece of advice for Ben Bernanke," Fortune magazine reports. "It's easier to buy than it is to sell.

"Buffett, speaking on Saturday at Berkshire Hathaway's annual meeting in Omaha, said he is worried about what will happen when the Federal Reserve tries to wind down its recent efforts to stimulate the economy.

"QE is like watching a good movie," says the Sage of Omaha. "Because I don't know how it will end. Anyone who owns stocks will re-evaluate his hand when it happens, and that will happen very quickly.

"People make different decisions when they can borrow for practically nothing... It's a huge experiment."

Remember, buying is easier than selling. The world's most famous investor says the world's most rapid buyer of US debt should beware.

New York Times best-selling finance author Bill Bonner founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group exposed and predicted some of the world's biggest shifts since, 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 the election of President Trump (2016). Sharing his personal thoughts and opinions each day from 1999 in the globally successful Daily Reckoning and then his Diary of a Rogue Economist, Bonner now makes his views and ideas available alongside analysis from a small hand-picked team of specialists through Bonner Private Research.

See full archive of Bill Bonner articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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