Yesterday, we saw the past, the present, and the future…all stumbling over one another.

On the march were the mistakes of the past 20 years — funded by trillions in fake money flushed into the markets by central banks worldwide.

The headlines, however, ignored the past and looked at the present. The markets were falling, with an 800-point drop in the Dow.

And then, there was the future…Donald J Trump explained what was going on:

‘Actually, it’s a correction that we’ve been waiting for a long time, but I really disagree with what the Fed is doing…

‘I think the Fed has gone crazy…

‘The problem [causing the market drop] in my opinion is Treasury and the Fed. The Fed is going loco and there’s no reason for them to do it. I’m not happy about it.’

Trump is on the move, too. He’s pointing his finger at the Fed, preparing to make it the fall guy, while he sets up a whole new round of claptrap ‘stimulus’ to distort markets and put off the reckoning with the past.

 

Beginning of the end

But let us begin with the Dow. Does this 800-point drop mark the beginning of the end of the boom?

We don’t know. But it hardly matters. Because what we do know is that the end is coming. Booms don’t run out of money; they run out of time. And time can’t be cheated, stretched, or ‘printed’ by the Fed.

Even a healthy boom — sustained by rising output, sales, incomes, and profits — runs out of time. Mistakes accumulate. They need to be corrected.

But this was never a ‘healthy’ expansion — it was funded by stealing from the future. That is to say, it was made possible by some $250 trillion of worldwide debt borrowed at artificially low interest rates.

Fake money and fake interest rates produced a fake boom, with runaway asset prices on Wall Street and falling real incomes on Main Street.

Here is the reality, from The Hill:

‘Almost two-thirds of Americans polled say they haven’t seen an increase in their take-home pay as a result of last year’s Republican tax-reform bill, according to a new survey.

‘A Gallup poll published Wednesday found that 64 percent of respondents said they haven’t seen a raise in their take-home pay as a result of reduced federal income taxes. That finding is identical to results in Gallup’s February/March poll taken shortly after the tax changes went into effect.’

The boom, in other words, is a fraud.

It was bought and paid for with $4 trillion of fake money created by the Fed…and a total of about $20 trillion from central banks all over the world over the last 20 years.

 

Fraudulent tax cut

The tax cut, too, was essentially fraudulent. Without a spending cut, the lost tax revenue had to come from somewhere…

The money spent to ‘stimulate’ the economy today was taken from tax revenues, which must be covered by loans — to be paid off tomorrow. That extra borrowing has pushed up interest rates, which now threaten the whole tower of bling.

Yesterday, today, and tomorrow come together in the credit markets. Yesterday’s savings (theoretically) are lent at today’s interest rates, to be paid back with tomorrow’s income.

As the weight of yesterday’s debt increases…and the expectation of tomorrow’s income declines…the universal joint of interest rates goes haywire.

After 36 years of lower yields and higher bond prices, Treasury yields bounced off a bottom in 2016. Today, the benchmark 10-year US Treasury yields almost 200 basis points more than it did at the bottom.

This is a new world for most people. Americans haven’t known a real bear market in bonds since 1980. In other words, a whole generation has grown up in a fake world of falling interest rates, as if easy credit terms were just the way of the world — like gravity and the TSA.

But gravity is real. And so are bear markets in bonds. Falling interest rates have only been a fact of life for the last 38 years. Before that, interest rates were going up!

The last bear market in bonds took us from 1946 to 1980 — about a generation in length. By the time it was over, you could buy the entire Dow for just one ounce of gold…and six times earnings. Mortgage rates were over 12%, and the Fed had boosted its key interest rate to 20%.

In short, if this new bear market in bonds was allowed to play out as usual, there would be hell to pay.

You could, for example, expect to see the Dow at 10,000 or less…house prices cut in half by higher mortgage rates…and as much as $30 trillion in ersatz US wealth wiped out.

But remember, we’ve glimpsed the future as well as the past and the present. The Trump team is already preparing to step in — with the collusion of Congress and the Fed — to prevent a bond bear market.

Instead, they will stifle the correction…and make things much, much worse.

Stay tuned…

 

Regards,
Bill Bonner