Bonner: Step Aside, Fed. Let the Market Set Interest Rates
POITOU, FRANCE — Stocks traded down on Wednesday. Investors are getting spooked by high bond prices (low yields).
The yield for the longest-dated Treasury bond is now a hair’s breadth away from plumbing its lowest level in history. Investors said the $22 trillion U.S. government debt market was now approaching this key milestone on a combination of factors including the growing world of negative-yielding government bonds, expectations for Fed easing spurred by rising recession concerns, and the absence of inflation pressures.
Central bankers must think they are repairing a lawn mower. So rather than do the right thing — and let Mr. Market set prices and interest rates — they get out the screwdrivers and wrenches and go to work on it themselves.
Faced with the next crisis, the grease monkeys at central banks are going to do what everyone expects them to do. They’ll turn the screws on savers, harder than ever. They’ll buy bonds and force interest rates down — all to keep the (fake) money pumping into the bubble markets.
The trouble is, speculators know as much about small engine repair as the feds. They know what tools the Fed will reach for … so, guess what, they grab them first.
Yes, the gamblers are front-running the Fed, bidding trillions of dollars’ worth of bonds into negative-yield territory, confident that the Fed will push prices even higher.
But stock investors have eyes too.
They see the bond market flashing a warning: yikes, an “inverted yield curve” — with lower yields for long-term bonds than for short-term ones.
They know it signals recession. So they sell stocks — triggering the very sell-off the Fed was trying to avoid.
The level of claptrap is breathtaking.
Both the public and the central bankers themselves believe the economy depends on them to make precisely the right adjustments at precisely the right time.
But where’s the evidence? The more they tinker with the economy, the worse it works.
Savings (real capital) have collapsed to only a quarter of what they were in the last century. Real wages for the average man are down 27% since the ’70s. Real growth is running at less than 2%, while debt increases three times as fast.
A Provocative Question
We ended our Diary yesterday with a provocative question. If the know-it-alls were so successful at creating the best of all possible worlds, how come “Make America Great Again” was such a successful campaign slogan? Doesn’t it suggest that America is not-so-great now?
The answer, of course, is right there in front of us.
Many voters — especially those in the stuff-producing heartland — feel like the country has gone downhill. They voted for someone who pledged to turn it around.
Hillary Clinton tried to parry the MAGA line with “America is great now,” but it fell flat in most of the country.
People in the swing states — Ohio, Pennsylvania, Michigan and Wisconsin, and many others — knew it wasn’t true. Something was wrong. They lived it, even if they didn’t know what it was.
Meanwhile, the stock market was going up. By the time of the 2016 election, the Dow traded around 18,000 — about 2.5 times what it was in 2009 … and 18 times higher than it had been in 1980.
Surely this tells us that Trump voters were wrong … and that American capitalism — guaranteed by the Fed, governed by the White House and Congress, guided by the elite — is making everything better … that we’re all getting richer … and that everything is hunky-dory, right?
Stocks tell us what investors are thinking. Companies create wealth. And if stocks are going up, it means the future is bright, right?
What it really meant in 2016 was that the Fed was falsifying interest rates and asset prices. And while the stock market cheered, gold made a rude gesture with its middle finger.
That’s why the Dow-to-Gold ratio is one of the most important signals in capitalism. Gold is impossible to control and hard to hoodwink. Like a barometer, when the ratio falls, it spells trouble. When it rises, all is well.
And what’s this? Gold has outperformed stocks for the entire 21st century. And not by just a little — but a lot. The Dow rose 145%. Gold rose 420%.
Compare this to the 20th century. It was just the opposite.
In the whole 100 years, the price of gold rose from $20 to $290 — an increase of 14.5 times. The Dow began the century at about 70. At its end, the Dow was trading over 11,000 — up about 160 times.
Now things are beginning to make sense.
Americans were big winners in the 20th century. And Warren Buffett is right; owning profit-making, wealth-producing companies was the best way to profit from it.
By 1900, America was already the world’s biggest economy. By 1950, it produced 35% of the world’s total output. And by 1989, its leading rival — the Soviet Union — simply dropped out of the race; it knew it couldn’t compete.
But, so far, the 21st century has been a bust. America’s share of world output has declined to 24%. And all the promises for the glorious new century turned out to be lies.
The fabulous new technology … the geniuses at the Fed who were so wonderfully managing the economy … and let’s not forget our great leaders…
George W. Bush, with his $5 trillion “mission accomplished” in Iraq … Barack Obama’s medical care plan that “(would) not add one dime to our deficits” … and Donald Trump’s promise to “balance the budget” and “pay off the national debt in eight years.”
America has been slipping and sliding for at least the last 20 years. Its economy and its stock market have both been going downhill.
What’s going on?
• This article was originally published by Bonner & Partners. You can learn more about Bill and Bill Bonner’s Diary right here.