Stock Market Hope Springs Eternal

Powell Gives Dose of Reality [The Daily Reckoning] December 02, 2022 [WEBSITE]( | [UNSUBSCRIBE]( Stock Market Hope Springs Eternal - When you expect 50 lashes, but receive only 25… - More bad news for Main Street… - Then Jeffrey Tucker shows you the sins of central banks like the Fed… [Urgent From Jim!]( [Click here for more...]( Hey, it’s Jim Rickards. Big changes are coming to my research service, and I wanted to make sure you saw what was going on… [Click Here To See My Announcement]( Annapolis, Maryland December 2, 2022 [Brian Maher] BRIAN MAHER Dear Reader , Imagine a captive, bound and hapless… There he is, chained down pitifully in his cell, resigned to his inevitable punishments. Fifty lashes across the back are due him. Then comes the retributional day… This unfortunate winces in anticipation of his 50 lashes — yet his “merciful” captor issues a mere 25. This he interprets as “good news.” He momentarily forgets the fundamental fact that he absorbed 25 stinging lashes across the back. Shall we liken the stock market to our theoretical captive? Federal Reserve Chairman Jerome Powell talked on Wednesday. He said this: It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting. Wall Street interpreted Mr. Powell’s babblings as bullish — as 25 lashes spared. If not a “pivot,” the Federal Reserve will at least moderate its remorseless aggressions. Gone are the prospects of yet another 0.75% rate jacking. “Why do you stop banging the prisoner’s head against the wall?” asks the torturer. Answering his own question: “Because it feels so good to him when you stop.” Stocks were immediately up and away. The Dow Jones ended trading over 700 points higher on Wednesday. The rate-sensitive Nasdaq Composite leapt 484 points. Yet Wall Street was so dizzied by the mercy of its captor, by its 25 spared lashes, it failed to perceive the searing stings of the 25 lashes it did receive. Mr. Powell, from his same Wednesday talk: The timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level. It is likely that restoring price stability will require holding policy at a restrictive level for some time. History cautions strongly against prematurely loosening policy… we will stay the course until the job is done. There you have the 25 lashes across the back. Is this the talk of a man offering clemency? The latest inflation reading comes in at 7.7%. Yet the federal funds rate squats between 3.75–4%. That is, the Federal Reserve still confronts a desperate chase. Inflation runs far in front of it. Mr. Powell and mates may slow their pace some… but only to conserve their energies. The race ahead is long. Meantime, November’s unemployment numbers came issuing this morning. They surprised massively — to the upside. The “experts” had divined some 200,000 fresh November payrolls. Today’s report revealed 263,000. We will put to one side any concerns we harbor about the validity of reports such as these — and we harbor many. We will simply accept the Bureau of Labor Statistics at its word. Today’s report certainly informs the Federal Reserve that its aggressive hikings have yet to bottle in the economy — and that it can safely continue its tightenings. Perhaps that is why stocks were subdued today? The Dow Jones scratched out a meager 35-point gain, while both the S&P 500 and the Nasdaq Composite posted losses. Under normal circumstances a “blowout” unemployment report might jubilate the stock market. Yet today’s circumstances are not normal. And positive news for Main Street often translates to negative news for Main Street. It is the warrant for additional tightening — a “green light” for additional rate hikes. And Wall Street is against them. Thus Wall Street took some lashes today. Will it prove enough to bottle the market’s residual joys from Wednesday? We will have our answer soon enough. Meantime, below, Jeffrey Tucker shows you how central banks badly distort markets and create the boom/bust cycles they were supposed designed to prevent. Read on for the gruesome details. Regards, [Brian Maher] Brian Maher Managing Editor, The Daily Reckoning [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) Editor’s note: Did you catch last evening’s blockbuster presentation with Jim Rickards, James Altucher and Ray Blanco? They made it clear that in the financial markets — as in life — who you know matters much more than what you know. In other words… Having the right connections is often the key to getting ahead. And they offered viewers membership into a very special “club” that allows you to profit from having the right connections. They offered the chance to leverage all the connections they have, after having spent decades building a network of incredible connections inside Wall Street, Silicon Valley, the precious metals markets and even the U.S. government. These guys have called some of the most lucrative investment trends in the world long before anyone else, making the kinds of returns most investors would kill for (37X in six years in the last recession). Now they’re giving you the chance to become a part of their [“inner circle”]( — and invest your money directly alongside them. Conservatively, they’re shooting for 10X returns. If you missed last night’s event, don’t fret. You can still view it in its entirety. [Click here for your exclusive invitation to profit alongside these titans.]( [Crypto millionaire James Altucher just revealed the cryptocurrency he’s piling into now… and it’s NOT Bitcoin…]( [Click here for more...]( He reveals exactly what it is on this page predicts 8,788% returns. However, events are happening RIGHT NOW in the cryptocurrency space that could swallow up this opportunity forever. If you missed the first crypto boom… do NOT miss this one. This could be your last chance for easy profits… [Click Here To Learn More]( The Daily Reckoning Presents: Central banks: what are they good for?… ****************************** A Big Theory of Boom and Bust By Jeffrey Tucker [Jeffrey Tucker] JEFFREY TUCKER Our times of boom to bust are the perfect illustration of the credit cycle first presented in its fullness in the 1920s. Why then? Because this was the first decade after most countries created central banks. They caused some very odd behavior that made 19th-century-style economics seem to have less explanatory power. That was when a few economists working in Vienna put together a model for understanding how business cycles work in a modern economy. Their names were Friedrich von Hayek and Ludwig von Mises. They drew on their theoretical knowledge based on the following inputs: Richard Cantillon (1680–1734) observed that when governments inflate the money supply, the effects are unevenly distributed among economic sectors, affecting some more than others and in different ways. Adam Smith (1723–1790) explained that a critical element of rising wealth is embedded in the division of labor, in which individuals specialize in tasks and cooperate across firms and those firms cooperate with each other. Carl Menger (1840–1921) saw money as an organic market creation, not an invention of the state, which implies that it should be produced like any other good or service. Knut Wicksell (1851–1926) demonstrated that interest rates function as a price mechanism to allocate investment decisions over time, which is why the yield curve exists. Manipulation of the interest rate disturbs the natural allocation of resources. Eugen von Boehm-Bawerk (1851–1914) explained the structure of production as consisting of far more than just consumer and capital goods. Capital itself is heterogeneous in that investment decisions include a forecast of time expectations, and the interest rate is crucial to coordinating them. You can put all those pieces together to come up with a mental model of a well-functioning economy as described by Jean-Baptiste Say (1767–1832) who saw the alignment of supply and demand as a law of economics, which is to say that a market economy is inherently stable. The Central Bank One can see, then, how a central bank messes everything up. By lowering the interest rate, the central bank fuels the creation of new bank credit that otherwise would not exist. An artificially lowered interest rate acts like fake savings. Savings are resources drawn from deferred consumption. They serve as the basis for sustainable investment. But artificially low rates signal the existence of savings that are not there. Not only do low interest rates create fake savings, but they actually draw real savings away from short-term projects toward longer-term projects, thus distorting the production structure as described above. They create a kind of subsidy toward capital products that would not exist had the interest rate stayed at its natural market-based level. Massive Distortion The result then is not just inflation, as the monetarists would describe it. It is also a distortion of the production structure. Capital gets a subsidy over consumption goods, and not only that, but longer-term projects get a boost over shorter-term projects. Bottom line: The last 14 years of zero-interest rates have created a paradigmatic case of the Austrian business cycle theory. It has massively distorted interest rates, more so than ever before. This was Ben Bernanke’s wonderful innovation. Many people thought his move in 2008 would generate inflation but he found a workaround. Bernanke paid the banks to keep their new and faked resources locked away in the vaults of the Fed. This kept the hot money off the streets and kept prices stable. But that only solved one problem. It created another: It created huge malinvestments in a whole series of sectors in tech and media and housing yet again! [[CHART] Could Inflation Hit 20%+ In 2023?]( [Click here for more...]( Take a close look at this scary chart pictured here… What you see is the money supply in America… And as you can see, the number of dollars in circulation has exploded in the last few years. In fact, more than 80% of all dollars to ever exist have been printed since just 2020 alone! Which is why some say inflation could soon explode even higher than it is now, to 20% or more. And if you’re at or near retirement age you must take action now to protect yourself… otherwise you risk losing everything. See how to survive America’s deadly inflation crisis. [Click Here Now]( What resulted was a disgustingly overbuilt tech world replete with Zoom-class employees with college degrees earning six figures without limit. Central bank credit caused the creation of an overclass that eventually caused all sorts of mischief, economic and cultural. They invented idiotic ideas like ESG, DEI and woke philosophy in general. None of this nonsense had anything to do with reality but in Bernanke’s world, reality didn’t matter anymore. This sector got so huge that it became a critical number to push lockdowns under the slogan “Stay home, stay safe.” These privileged elites forced the working classes to serve them food at their doorsteps and face the virus while they luxuriated in their fancy apartments pretending to work on laptops. The Chart That Reveals All So that we understand the radical nature of this experiment, please study the following chart carefully. This is the federal funds rate adjusted for inflation. What we see is the longest period of production distortion in American history. This chart goes from 1950s to the present. [Image 1] This whole policy becomes unsustainable once the value of the dollar begins to fall due to price inflation. At some point, the central bank has to turn things around. When things become shaky or prices start to shift and the central bank starts to back off its pillaging policies, the house of cards starts to fall apart, as resources are drained from long-term speculation to shorter-term consumption and the restarting of real savings. That’s precisely where we’re in the cycle. Long-term projects are falling apart. Consumers and investors are turning away from the long parts of the yield curve to make money in the short term. Resources in general are going through a massive shift in terms of time allocation as interest rates shift. The Yield Curve That the yield curve has dramatically inverted is hardly a surprise. It is a sign that the ship of production is turning very slowly, and investors are unconvinced yet that the Fed will keep this up. But that point is that the Fed must keep this up if it intends to get inflation rates back to the target. The federal funds rate will have to enter back into positive territory in real terms. That means 6%, 8% or even 10%, pushing long yields far into the double-digit range. To be sure, we should all in a macroeconomic sense look forward to a new age of more honest finance. The disaster of zero-interest rate policy is finally coming to an end. Former Fed chief Ben Bernanke’s Nobel Prize notwithstanding, this policy massively distorted capital allocation in the economy and around the world for the better part of 14 years. With its end, we’re going to get a taste of some economic and financial rationality. We might even be able to save money without losing money. So in that sense, the man who bears the main responsibility for inflation, current Fed Chair Jerome Powell, is the same guy who will finally fix what Bernanke broke all those years ago. Remember those days when everything seemed too good to be true? There was a financial crisis that the Fed magically fixed with no downside. Except that there was a huge economic, cultural and social downside. Frugality and prudence gave way to massive excess and a level of craziness in culture that we never imagined we would experience. What made this preposterously unjust system possible was the Fed with Bernanke at the helm. Quantitative easing turns out to mean upending all normal life and paying the horrid price for this a decade and a half later. Someday historians will look back at our times as a great turning point. We’ve been through calamity, and it worsens by the day. Will we enter into a new Dark Age? Or find the light and crawl our way toward it before it’s too late? If we find our way, it will be because the Austrian economists of old will guide us. Regards, Jeffrey Tucker for The Daily Reckoning P.S. Did you catch last evening’s blockbuster presentation with Jim Rickards, James Altucher and Ray Blanco? They made it clear that in the financial markets — as in life — who you know matters much more than what you know. In other words… Having the right connections is often the key to getting ahead. And they offered viewers membership into a very special “club” that allows you to profit from having the right connections. They offered the chance to leverage all the connections they have, after having spent decades building a network of incredible connections inside Wall Street, Silicon Valley, the precious metals markets and even the U.S. government. These guys have called some of the most lucrative investment trends in the world long before anyone else, making the kinds of returns most investors would kill for (37X in six years in the last recession). Now they’re giving you the chance to become a part of their [“inner circle”]( — and invest your money directly alongside them. Conservatively, they’re shooting for 10X returns. If you missed last night’s event, don’t fret. You can still view it in its entirety. [Click here for your exclusive invitation to profit alongside these titans.]( Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) [Jeffrey Tucker] [Jeffrey Tucker]( is an independent editorial consultant who served as Editorial Director for the American Institute for Economic Research. He is the author of many thousands of articles in the scholarly and popular press and eight books in 5 languages, most recently Liberty or Lockdown. He speaks widely on topics of economics, technology, social philosophy, and culture. [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2022 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. 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