Gold News

Tokyo First, Then Buenos Aires

Hold on tight for America's rapid tour of the monetary mayhem worldwide...
WHEW! The US Federal Reserve is number one in central banking. And it's finding out just how tough it can be to meddle with a $16 trillion economy, writes Bill Bonner in his Daily Reckoning.
Last Wednesday, Ben Bernanke came out with a public statement. He said that if all went well...and he didn't change his mind...and nothing unexpected came up...and the Federal Reserve's Open Market Committee felt like it...the Fed would begin tapering its bond buying sometime soon.
That was all it took to send a shiver up investors' spines...and a sell signal to Wall Street. Everything sold off – stocks, bonds, commodities, name it.
Over the next two days, the Dow sank more than 500 points, before stabilising on Friday. From Adrian Foster, head of financial markets research for Asia-Pacific at Rabobank International in Hong Kong:
"Clearly, the Fed tapering is on the table now. There is a reversal of perception in liquidity and it will take some time for investors to digest, rebalance and what not."
When the Federal Reserve's EZ money programs end, there will be Hell to pay. We're not sure that bill has come due yet. We'll have to wait and see.
But Mr. Market wants a correction. Mr. Bernanke wants to avoid it. In the long run, we don't have any doubt about who will win. Mr. Market always wins. But rarely in the way you expect.
Mr.Market might play with Mr. Bernanke for years before administering the coup de grâce. Investors might be deceived, surprised, and completely faked out once...twice...three times before the curtain finally falls.
Do you want our best guess?
Here it is: Tokyo...then Buenos Aires.
We suspect that the Great Correction is intensifying. Stocks will fall. Bonds will fall. Real estate will fall. Just like they did in Japan.
But unlike Japan, yields will rise. Yes, that's the most interesting thing that is happening. After 30 years, the bull market in bonds appears to have finally come to an end. Yields are rising. Bond prices are falling.
And this is happening at the worst possible time. Just what you'd expect, in other words.
Let's go back a bit further to get more perspective. Aided and abetted by the Federal Reserve, for 60 years America's private sector loaded itself with debt. Then, in 2007, the weakest link – subprime mortgage debt – broke apart. The end of the cycle was at hand.
We estimated that the process of de-leveraging – paying down, writing off, defaulting, going broke, inflating away and otherwise shucking debt – would take 7 to 10 years. We're now in year 6.
We knew the feds would fight the correction, but we didn't realise how reckless they would be about it. Their interventions, worldwide, have cost $7 to $12 trillion, depending on whose tally you believe. These meddles make it very hard to know what is really happening.
The Federal Reserve rigs the most important price in the most important economy in the world – the price of credit. All other prices are affected. You can study price movements, but it's impossible to know what they really mean.
One thing is sure, the Fed – and not a real recovery – was responsible for the big run-up in stock prices from 2009. So, it's reasonable to expect that when the Fed backs will stock prices.
Then, instead of the 'wealth effect' helping to hold up the economy, we'll have a negative wealth effect – falling asset prices – pulling it down.
A correction is meant to correct mistakes. The Federal Reserve has tried to stop it. It has kicked the can down the road. But over the last 6 years...we have gone further down the road.
And there is the can again! And now, it appears that the Great Correction must intensify. It must continue its work: correcting the foolish mistakes of the bubble period AND the foolish mistakes of the last five years too.
But if the bond market has turned against the Fed, falling bond prices will make it harder for borrowers everywhere to keep going. And the biggest borrower in the world is the Fed's own boss – the US government.
Federal Reserve governors know they have to 'taper' sometime...or risk a bigger calamity. But they can't back off now...not with the bond market falling. They'll have to increase their buying...and cause even more distortions.
That's how we get to Buenos Aires. Hold on tight!

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

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