Market Mythology

LONDON – Twice in the last 15 years, markets have tried to correct the mistakes and excesses of the Bubble Epoch. Each time, the Fed came back with even more mistakes and excesses. Trillions in new credit… lower lending rates… easier terms… ZIRP… QE… and the Twist!


MW-BX052_FOMC_m_MG_20140319160153The gaggle of price-fixers the job of which is to regularly falsify one of the most important price signals in the economy. The idea that the economy can be “improved” by the interventions of a handful of people who have zero practical economic experience and rely on extremely dubious theories to guide their decisions is downright bizarre. Who can possibly believe that this works? It is a huge farce – one that is very dangerous for prosperity and economic progress.

Photo credit: Bloomberg


Over the short run, markets respond to myths. Investors are ready to believe almost anything… for a while. But over the long run, there is death and destruction – a reality outside of what we believe.

No matter how badly investors want asset prices to go up, for example, asset prices don’t always comply. On Wednesday, the Dow sank 560 points in the first few hours of trading. It then recovered half of those losses to end the day down 249 points – for a 1.5% fall.

U.S. crude oil plunged below $27 a barrel – the lowest level in 13 years. The financial media don’t know what to do. Typically, they downplay a bear market as long as they can… explaining the many reasons why the sell-off is “overdone” and why the “bottom” has already been found.

The Wall Street Journal, for example, tells us that the “market’s panic is incongruent” with economic reality. Yahoo! Finance already sees “signs of capitulation.” It offers advice on “how to trade a bear market,” too.


1-DJIA and WTICThe DJIA and crude oil. Over the past two days they have begun to bounce a little after becoming extremely oversold. Still, the market doesn’t care about anyone’s opinions – it will do whatever it needs to do – click to enlarge.


At the Diary, we don’t believe you should try to “trade a bear market.” Bears are treacherous and unpredictable. Our best advice is to stay out of its way. We don’t know whether it will get uglier now… or further down the road. But sooner or later, markets will retest the myths that support today’s asset prices.

They will begin by asking questions: Are stocks too expensive? Can investors repay their debt? Is the economy capable of real growth? Can a small bunch of PhD economists with no market or business experience really manage the entire world’s economy?

As to the first, second, and third questions, we don’t know the answers. But the answer to the fourth is an unhedged, undiluted “no.”


Only Human

Greenspan, Bernanke, and Yellen are, after all, only human. They respond to myths as much as anyone… maybe more. They’ve spent their entire careers studying the sacred texts of modern economics. Like Talmudic scholars late in life, they aren’t likely to convert to Baptists!

They say they want inflation at 2%. Not 1%. Not 3%. Two hundred basis points – no more, no less. What theory… what experience… what revelation leads them to think that an economy should have annual price increases of 2%? There is none. It is a modern myth. In reality, prices go up and down on supply and demand. There’s no more reason they should always go up by 2% than down by 2%.


2-CPIThe “era of price stability” under the Fed. As you can see, they are real masters at fulfilling their absurd mandate. Their inflation targeting theory is not only completely bereft of theoretical and empirical support, it is in fact plainly contradicted by both theory and the empirical studies that do exist (some of which have been undertaken by the Fed’s own economists!). In short, it is complete hokum – click to enlarge.


The PhDs at the helm of the world’s central banks also believe they can change people’s buying, selling, and investing decisions – for the better – by providing them with false data. We have no doubt the Fed can change behavior. It’s the “for the better” part that troubles us.

Interest rates by Fed diktat, for example, send completely phony signals, since they disguise the true cost of credit. The theory goes that low interest rates motivate people to borrow and spend. But where’s the evidence? Isn’t there an economic law somewhere that cutting incomes for savers has the opposite effect?

And there’s more to the story. There’s a reality, as well as a myth. Reality is that resources are limited. Prices tell us what we’ve got to work with. Falsify prices and you get errors of omission and commission. After a while, the system suffers from things it shouldna, oughtna done.

As Hjalmar Schacht, Germany’s minister of economics in the 1930s, put it: “I don’t want a low rate. I don’t want a high rate. I want a true rate.”

An honest interest rate tells the truth about how much savings are available and at what price. People still make mistakes; they still get up to some pretty weird stuff. But at least the perverts aren’t handing out candy on the playground.


hjalmar-schacht“Old School” economy minister and later central banker, Hjalmar Schacht – not interested in manipulate interest rates.

Photo via Wikimedia Commons


Greasy Numbers

Then there’s the “unemployment rate.” The feds look at its figures and tell us the recovery has been a success… because the unemployment rate is back down to about 5%. They are citing as “fact” a statistic so greasy even a witchdoctor would be embarrassed by it.

In December, for example, the Bureau of Labor statistics announced that 292,000 Americans had found jobs. This was widely regarded as a triumph for the Fed. Many times has Janet Yellen said she feels the pain of the jobless. Naturally, she takes great pride in the current job picture as she has painted it.


3-payrollsBy the time the final revisions arrive, the numbers won’t be recognizable anymore. The initial release is usually so far removed from reality, one wonders why anyone should be interested in it at all. The main reason why governments gather these statistics is that they give them a reason to meddle with the economy – click to enlarge.


But as you have probably heard by now, only 1 out of every 28 of those new hires can buy you a beer to toast their new-found fortune. The others – 281,000 of them – don’t exist. The feds merely made a “seasonal adjustment.” The jobs were mythical, in other words.

Mythical facts. Mythical theories. Mythical recovery. Watch out. The market is a myth buster.


Charts by: StockCharts, St. Louis Federal Reserve Research


Chart and image captions by PT


The above article originally appeared at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.



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