"Were We Wrong About Everything?"
By Bill Bonner
"Well, it looks like we were wrong about everything. Everything. The Fed. Donald J Trump. The stock market. The economy. Even the weather. Yesterday, we looked at the sky and forecasted rain. Instead, the sun came out. Then, the Fed raised rates. Donald Trump was proclaimed a great statesman. The US economy was reported to be booming. And the stock market did not fall apart.
Changed America: ‘The problem we face…’ we complained to a nephew from Virginia who has come to visit, ‘…and we face it every day when we read our mail…is not that we’ve changed…but that America has changed. We’ve never liked anyone telling us what to do, and we gladly return the favor. At home or abroad… we’re against meddling. And people who want to force you to follow their ideas are always the same people whose ideas are idiotic.
We used to count on old-fashioned conservatives to agree with us. But the I-told-you-so cranks and that’ll-never-work curmudgeons have disappeared. The Democrats are still a Big Government party. But now, so are the Republicans. They’ve got their man in the White House and they think he rides a white horse. And if we dare to notice that he’s a moron, they get very mad.’
But who’s the moron? Suddenly, dear readers are pointing the finger in our direction. Trump is a hero, they say; he may win the Nobel Peace Prize for taking Kim Jong-un off the axle of evil and putting him onto the chemin de la croix, plodding along the stations of the cross like a 60-year-old virgin.
Despite our predictions of gloom, the economy seems to be booming; we already have ‘more than full employment.’ Does it get any better than this? And the Fed is ‘normalizing’ its monetary policy.
Maybe it’s time for us to retire. Or rethink. Or have a drink.
Return to normal: But let’s take these things one at a time. As long-time Diary sufferers know, we have made a bold prediction: The Fed will never willingly return to normal interest rates.
Our reasoning is this: The economy now depends on the stock market…and the stock market now depends on the Fed’s EZ money. Take it away, and the whole shebang falls apart. Then, the Fed will have to react…as it did in ‘87…in 2001…and in 2008. That is, it will have to revert to un-normal interest rates again in order to try to fix the problem its abnormal rates caused in the first place.
Remember, we said that Fed policy can be best understood as a series of mistakes. First, interest rates are held down too low for too long, leading to a bubbly economy. Second, the Fed tries to let some air out…raising rates…which sets off a crash and a recession. Third, the Fed panics and goes back to its ultra-low lending rates. We’re now at the beginning of the second of these mistakes…which the Fed thinks it can get away with because the economy is so strong.
Reuters is on the case: ‘The Federal Reserve is guiding a U.S. economy that is as close to ideal as it could have dreamed a decade ago, when the darkest days of the recession forced it to take big risks to protect workers, banks and economies around the world from further devastation. The nightmares that long haunted both hawks and doves have not come to pass, even as the Fed held interest rates near zero for years and snapped up some $3.5 trillion in bonds in an extraordinary effort to boost the recovery. Prices did not spike in response to the immense monetary stimulus, nor has the job market cooled since 2015 when the Fed began tightening policy.’
And what if the Fed isn’t making mistakes at all? What if the geniuses really can guide the economy? Reuters continues: ‘The Fed deserves tremendous credit for steering the economy to calmer waters, supporting what is likely to be the longest expansion in U.S. history while meeting inflation and employment objectives,’ said Stephen Gallagher, chief U.S. economist at Société Générale.’
Oh là là…we feel the Earth shaking beneath our feet. Our head spins. Our knees wobble. Could we be so wrong about that, too? Could 12 mortals on the quasi-federal payroll - even with PhDs - really do a better job than millions of borrowers and lenders with their own skin in the game? Using their ‘dynamic stochastic model,’ could the Fed governors really find the exact interest rate that the economy needs exactly when it needs it?
Bound to go wrong: If so, we’re finished. We’re done. This is not a world we know. Up is down. Down is up. Time goes backward. Suckers are given better-than-even odds. And fools are reunited with their money. If so…we will recant, insincerely, and slip off our little stage like a drop of rain off a windshield.
And what about Mr. Trump? Is he really the instinctive genius our dear readers say he is? Does he have some gift for doing the exact thing the world needs exactly when it needs it? The economy was flagging…and he pushed through a trillion-dollar tax cut. Now, GDP is said to be growing by more than 4% per year. Reuters again: ‘But for now, the Atlanta Fed estimates the U.S. economy is roaring at a 4.6 percent rate, a level it reached only twice since the recession. Economists generally expect growth to remain above 3 percent through year end, while Fed policymakers raised their forecast a touch to 2.8 percent on Wednesday.’
The Korean Peninsula was threatened with nuclear war, and Mr Trump brought the fat boy to the bargaining table. Now, they’re as chummy as Julius Caesar and Gnaeus Pompey. (Malicious rumor has it that Mr Kim offered his daughter in marriage to Mr Trump’s son to cement their new friendship.)
And the stock market? Can there be any clearer sign? A burning bush? A cross in the sky? After a drop in January, the Dow has since recovered much of its loss. It now stands at only about 1,000 points below its all-time high. In light of so much good news - unemployment is at a 50-year low! - could the Dow take off to the upside, surpass its previous high…and retake the high road? Could the Primary Trends - in politics, world affairs, economics, and finance - all move to the upside?
Of course, anything is possible. While we were talking, the sky clouded over. A light rain began to fall. ‘Uncle Bill,’ said our nephew. ‘Cheer up. Something’s bound to go wrong.’