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!

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.

Market Mythology

Yesterday, 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.

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%.

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.

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 281,000 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.

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 newfound fortune. The others – 270,000 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.

Regards,

Bill

Further Reading: The ongoing rout on Wall Street is just the start of what Bill calls the “Great American Credit Collapse.” It’s a disaster the feds already spent more than $4 trillion to prevent… but even that couldn’t stop what’s heading our way.

To find out how it’s all going to unravel – and what you can do to sidestep the worst of it – watch Bill’s urgent warning here.

The “stealth” bear market in stocks Bill warned about in the January 6th issue of the Diary is fast becoming a full-blown global bear market.

The MSCI All Country World Index tracks stocks in 23 advanced economies and 23 emerging economies around the world.

As you can see from today’s chart, it’s down 19% from its 52-week high.

The standard definition of a bear market is a sustained fall of 20% or more from a recent high.

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Mailbag

Bill’s ideas about markets continue to split opinion. Here’s what readers thought about yesterday’s issue on the hidden reason why stocks are tumbling.

You need to stick to financial and market analysis and quit trying to be this sage political analyst and psychologist. I don’t need to pay to read your misguided drivel. Cancel my subscription. – Jerry L.

This is one of the best letters write it by Bill that I have had the honor to read! Thanks! – Jorge H.

I just want to thank Bill Bonner for his wonderful blog. He so often makes me smile. And that is a lovely gift for his readership – smiling at his truthful observations about his life and, by extension, ours as well. Bravo. – Mimi S.

Just to let Bill know that I have been reading his books and newsletters for the last 10 years and he is pretty well the only financial commentator that I really trust… Thanks again for your honesty, bravery and clarity. – Michael W.

Readers have also weighed in on Bill’s issue about the growing gap between the world’s rich and poor.

I was feeling down until I read the “Rich bast**ds” opening quote from Charles Gave. The initial lift kept getting augmented with puffs of helium, until, by the time I got to Market Insight, I was feeling quite giddy (and my voice was an octave higher). God’s in His Heaven! Who cares what’s wrong with the world? – Phil C.

Your diary entry today was excellent. I especially liked your comment about nature trying to level the playing field via the financial meltdowns. That was pretty insightful. Nice to know getting into the top 10% only takes $68K and $760K for the top 1%. I wonder if ANY of our elected politicians are NOT in the top 10%. I suspect most of our congressional representatives meet the 1% rule, even those ranting about the top 1%… Such hypocrisy! – Doug L.

Do you feel like you’re living in the top 10%… or even the top 1%?

Send your thoughts to [email protected].

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