Routine Correction…or 21st Century Nervous Breakdown?


The fall of the dollar is not the fall of the dollar…It’s the fall of the American empire.

Hugo Chávez

Bad action yesterday. But a big bounce is again in the cards for this morning. Bernie? C virus? Who cares? We’ve got Joe Biden and an even lower Federal Reserve rate!

We still don’t know which way the markets are going. But the confusion…absurdity…and volatility bespeak not merely a routine market correction, but a 21st century nervous breakdown.

This giant Humpty of an empire — debt-drenched, bent by age and debauchery, befuddled by decades of wacky monetary policy — is slipping off the wall. And the Fed can’t do anything about it.

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Recession ahead

Here are two worrying warning signs…

First, take a look at the transports. According to classic Dow Theory, it’s the transports that tell you what is really going on.

The Fed might jive up stock prices generally…but the transports tell you if the goods are moving.

Trucks, trains, ships — all products have to get where they are going somehow. So, if there is no upward trend in the transports, a boom in stocks will be false…tentative…and short-lived.

And yesterday, while the whole market sold off, transports sold off even more. A midday report from MarketWatch:

The Dow Jones Transportation Average is falling 195 points, or 2.1%, and has given back everything it gained in the previous session’s big stock market bounce, and then some. All 20 index components were losing ground. […]

The Dow transports, on track for the lowest close since Jan. 7, 2019, had gained 0.9% on Monday after plummeting 14.9% over the previous six sessions. In comparison, the sister Dow Jones Industrial Average fell 2.5% on Tuesday, after soaring 5.1% on Monday, which followed a 13.0% drop the previous six sessions.

The Dow transports has now lost 18% since Jan. 16, when it closed at the highest level since Oct. 3, 2018.

And there’s one further straw in a strong wind: The yield on 10-year Treasury bonds — the common brick upon which rests the whole US financial world — fell below 1% for the first time ever. Since consumer price inflation is running over 2%, the net real return for lending money to the feds is MINUS 1%.

This means three things: First, people are running scared. They want what they see as the safest refuge in the financial world — US bonds. Second, the economy is softening. The falling T-bond forecasts recession ahead. Third, speculators expect the Fed to buy more T-bonds at higher prices.

Fully addicted

Of course, it is not our place to advise the august Fed governors on how to do their job. But in the spirit of civic mischief we offer this little hint about how an inflate-or-die economy works.

Once you begin inflating…you have a period in which, by decisive and steadfast action, you can undo the damage and return to a more-or-less healthy and honest economy. That is what Paul Volcker did in 1980.

It’s too late for that now. When an economy becomes fully addicted to your funny-money stimulus, you can’t take it away. The withdrawal pains are so severe that, politically, it is impossible to do.

Businesses, larded up with debt, will fail. Rich campaign contributors will close their wallets. The voters will howl for more giveaways just as tax revenues decline and deficits soar.

And economists at Harvard and the International Monetary Fund will tell you that you are a fool for ‘withdrawing stimulus’ when the economy needs it most.

Famous economic forecaster Harry Dent warns of a ‘crash of a lifetime; coming in 2020… Get the Free Report Now.

So, you have to keep adding stimulus (inflation…liquidity…etc.). But it’s not enough to add what the market expects. That is the error the Fed made yesterday. A 50% rate cut had already been fully priced in.

‘Buy the rumour, sell the news,’ say the old timers. Speculators know as well as we do that the Fed is in an Inflate-or-Die trap. Then, when the Fed only cut the expected 50 basis points, they sold.

An economy that depends on inflation (more money and credit from the central bank) is inherently unstable. It can’t stand still. The feds have to up the ante all the time or it collapses in on itself.

So heads up, Jerome Powell. If you want to join Alan Greenspan on the ‘Committee to Save the World’…or join Ben Bernanke as The Atlantic magazine’s ‘Hero,’ you’ll have to do better than a measly 50 basis points.


Bill Bonner,
For The Rum Rebellion

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries.

A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities.

Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally.

With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance.

Bill has been a weekly contributor to The Rum Rebellion.

The Rum Rebellion