January 13, 2020
The past year and decade have been incredible for investors…
The S&P 500 soared – making new all-time highs 35 times this year and 242 all-time highs over the past decade… That’s second only to the 1990s surge when the S&P 500 made 310 new highs, per Compound Capital Advisors CEO Charlie Bilello.
How long will it last?
Today, we bring you a prediction from technical trader Greg Diamond that may surprise a lot of folks who think the Federal Reserve and other central banks around the world can keep the good times rolling forever…
The Failure of Central Banks
Greg Diamond, CMT and technical trader
I usually find long-term predictions silly… especially if you think about how accurate 10-year predictions are in anything (paging Al Gore). Still, here are mine…
Central banks are clearly on a warpath to do everything possible to prop up the economy. But they are really creating the illusion of prosperity and price stability through zero- and negative-interest-rate policies and rising stock market prices.
The central banks will fail, probably sooner rather than later…
I won’t get into a major history lesson, but all great economies crumble from an expansion of too much credit in the system.
The more central banks intervene, the more dislocated things become. And the more dislocated things become… the more instability rises. And eventually that’s when systems fall apart. This is how economies collapse.
What central banks are doing is the exact opposite of the free market… Free markets sniff out ineffective institutions, technology, and corruption, allowing capital to move where it will be used best. The more central banks intervene, the more they hide and exacerbate the underlying problems in an economy which causes much more instability. That’s the exact thing central banks claim to prevent.
I’m not the doom-and-gloom, end-of-the-world type… No matter what happens, the sun will continue to rise. But I find it disappointing that the only thing that has mattered for investors over the past decade is what central banks are doing.
It’s also sad that central banks have destroyed the interest-rate market. God forbid someone just wants to earn 3% to 4% in a savings account and enjoy the time value of money… as opposed to being forced to speculate in the stock market because there’s nowhere else to park their hard-earned money at reasonable rates.
President Trump recently met with Federal Reserve Chairman Jerome Powell to discuss negative interest rates. It’s almost as if the powers that be are telling you exactly what is coming down the pike. Negative rates are already a reality in Europe, Japan has had zero interest rates for decades, and China isn’t far behind.
The one thing that makes me think we may have already reached an inflection point—and that it’s possible for things to move the other way—is the possibility that interest rates have reached their low. What if central-bank intervention has reached its peak and now, if things get out of control and interest rates rise, central banks can’t control it?
The issues in the repo market over the past few weeks are a perfect example of what can happen if things really get messy. The Fed didn’t want repo rates to go too high for fear of a freeze in lending, so it intervened. If lending does freeze up, that’s when the tide goes out and we’ll likely find out which financial institutions are really in trouble. No matter the amount of intervention, the free market eventually reveals the underlying issues.
So my big-picture prediction over the next one or two decades is the implosion of central-bank intervention. Whether we are in the beginning stages of it now, or the life span has a bit more room to run, it will make for interesting times either way.
Central banks have killed volatility over the past 10 years, so a reversion to the mean will bring it back. There will be lots of trading opportunities, if nothing else!
Now here are some of the stories we’re reading…
They’re potentially the most powerful force over a huge swath of America Inc. Alarm bells have begun to go off with some regulators, as well as with an ideologically diverse array of academics and activists.
The surveillance video taken from outside Jeffrey Epstein’s jail cell on the day of his first apparent suicide attempt has been permanently deleted, federal prosecutors said Thursday… A backup video system was in place, but the requested video wasn’t available because of unspecified “technical errors,” the court filing says.
New York, California and Illinois have been hemorrhaging residents. Almost 3.2 million more people left those states for elsewhere in the U.S. than arrived from other states, from 2010 through 2019.
And let us know what you’re reading at [email protected].
Publisher, American Consequences
With P.J. O’Rourke and the Editorial Staff
January 13, 2020