Normal Markets

The Daily Reckoning PRESENTS: A ‘normal market’ is a lot like a ‘normal tornado’ – both can whip things up and tip over the outhouse. Our only hope is that we’re not in it when it does. Bill Bonner explains…


“You can’t always get what you want, but…you get what you need.”
– The Rolling Stones

“Bernanke’s words lift investor sentiment,” said the headline in the Financial Times article on the subject.

According to the report, the head of the U.S. central bank wished investors to know that there was no cause for alarm, because the markets were working ‘well’ and that they were functioning ‘normally’.

On this point, we have no doubt. It is normal for prices to rise to unrealistic levels. It is normal for a correction to follow, when they fall back down to more ordinary heights. It is normal even for asset prices to crash occasionally…after having run up too far too fast.

Our doubts arise when we consider the circumstances. Mr. Bernanke told investors that his economic forecasts were unchanged. His soothing words and professorial demeanor led them to believe that they had nothing to worry about. But a normal market is like a normal tornado. Both can whip things up and tip over the outhouse.

Let us turn to Zimbabwe for a little instruction and entertainment. You will recall our dictum: A normal correction is equal and opposite to the deception that precedes it. Thanks to the scheming of the Mugabe government, the prices of consumer items are soaring. The inflation rate was 600% a year ago. Now, it’s 1,600%. “This means that on average, goods and services normally purchased by households for final use in Zimbabwe were about 17 times as expensive in January 2007 as they had been 12 months before,” said the man in charge of distorting the figures.

Readers who want to keep up with the rate of inflation in Zimbabwe are invited to go to where they can get a quote. According the figures on the website, the Zimbabwe dollar has lost 16% this week alone…and now sits about 10,000 to one against the U.S. model.

Meanwhile, Gideon Gono, Zimbabwe’s central bank chief, said that ‘new farmers’ were the cause of the problem. These new farmers are unlike the old farmers in that they don’t actually grow anything. This came about because the government decided to confiscate white farmers’ land – in the name of ‘justice’ – and turn it over to political hacks and cronies.

We only mention this to show how ‘normal’ markets work. They tolerate fools and knaves for a very long time, but never forever.

But the nice thing about the markets is that the punishments tend to fit the crimes. The greater the deception and scheming…the harder the punishment. The farther out-of -the-ordinary prices go…the more they have to move to get back into the ordinary. The greedier investors become, the more they lose.

If the markets are really functioning as well as Ben Bernanke thinks, they will soon correct the foolish and absurd bubbles blown up by today’s excess liquidity. Even after the mini-collapse of this week, Chinese shares are up 34% this year. Investors, quoted in the Financial Times, say they are not worried. They expect to continue investing in the stock market and are confident they will make money. Little wonder; over the last 12 months, Chinese stocks re up more than 100%.

Stocks in Vietnam – another Marxist paradise – are up 51% this year, again after this week’s price slippage. Over the last year, they’re up 200%. Again, reports tell us that speculators have no intention of getting off this gravy train until it comes to a full stop. Junk bond investors are just as bullish. Even after openly threatening default, Ecuadorian bonds still yield only 11%. And in the former Soviet republic of Latvia, real estate agents say property prices went up 40% between July and September of last year (according to the FT). GDP growth in that tiny Baltic nation hit 12% in 2006 – faster even than China.

All over the planet, people working in the money shuffling industry are making more money than they ever made before, financial assets are more expensive than they’ve ever been before, and more money and credit is being added than was ever added before.

Normally, you’d expect a correction.

Ben Bernanke tells investors to relax. Markets are functioning normally, he says. He might as well tell sinners not to fear because God is just. But that’s what they should be worried about.


Bill Bonner
The Daily Reckoning
March 2, 2007

Editor’s Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons).

In Bonner and Wiggin’s follow-up book, Empire of Debt: The Rise of an Epic Financial Crisis, they wield their sardonic brand of humor to expose the nation for what it really is – an empire built on delusions. Daily Reckoning readers can buy their copy of Empire of Debt at a discount – just click on the link below:

Empire of Debt

What next?

As you know, a Battle of the Bubbles is going on. The worldwide bubble in liquidity is still getting bigger and bigger. The European money supply, for example, was shown to be growing at its fastest pace in 17 years. The supply of the local currency in India is growing at a 21% annual rate. In the United States, the authorities no longer report M3, the broadest measure of money supply. But experts have clocked it growing at about 10% per year – three times faster than the goods and services it is meant to buy.

Where all this money is coming from is a long story. Where it is going is simpler. It is going into financial assets, which have been going up many times faster than consumer prices.

One day of course, the whole process has to go into reverse. That’s a long story too. But never was there a bubble that kept expanding infinitely. The reason for that is simple too. By definition, it an anomaly. It means that certain things are growing much faster than other things – bonds faster than gold…or Chinese stocks faster than retail stocks. Imagine a man’s nose growing faster than his face…or cars growing faster than the roads they drive on. If this were to continue forever, the whole world would be ridiculous. That’s why there are ‘corrections’ to put things back in order.

Right now, the Big Bubble Battle is a fight to determine how and when the worldwide liquidity bubble gets corrected. On the one hand, the U.S. housing bubble is deflating. On the other hand, the amount of cash and credit in the world at large – judging from the money supply figures – is still increasing.

And this week, a new battle zone opened up. Equities – especially those in China and emerging markets – suddenly started taking incoming. All around the world, stock market investors rose up to attack bubble level share prices. The following day was calm. And then, yesterday the Dow dropped more than 200 points before staging a wobbly recovery. It ended the day still about 360 points below where it began on Monday. Asian markets continued to go down – with Chinese stocks giving up another 2.7%.

Meanwhile, central bankers in Beijing, Brussels, Tokyo and Zurich warned that there was too much speculation going on…and that they were going to do something about it. So far, they haven’t done much…but there’s always tomorrow.

And this week, too, our own former Fed chief, Alan Greenspan first told an audience in Hong Kong that as far as he was concerned, a recession in 2007 was nothing to laugh at. And then, on Thursday, he backtracked, after being accused of causing the sell-off himself. “By the end of the year, there is the possibility, but not the probability of the United States moving into recession,” Greenspan is reported to have told another audience.

His earlier statement was, “probably misinterpreted, that’s why we see a clarification today,” said Glenn Maguire, chief Asia economist for Societe Generale SA in Hong Kong.

Our guess is that it wasn’t misinterpreted at all. Greenspan has long made a habit of saying anything people want to hear. After people told him that his ‘recession’ comment was unwelcome, he took it back.

Ben Bernanke, too, took the microphone to tell investors what they wanted to hear. (More below…) Recession, he asked? He didn’t see any recession.

Even ‘Freddie Mac Tightens Standards”, says the New York Times. And mortgage defaults – so far limited to ‘subprime’ borrowers – seem to be busting into better neighborhoods.

“Mortgage Defaults Start to Spread”, begins an article in the Wall Street Journal.

The WSJ reports that a record $400 billion of midlevel loans – better than subprime…but not quite prime prime – were originated last year. Now, these loans too are beginning to come under fire.

So now the war is on. Manufacturing in the United States has practically run up the white flag. Housing is under siege. And this week showed that stocks were vulnerable too.

What next?

We don’t know, but our ‘Crash Flag’ is flying. Our money is tucked away. The bar at the beach shack is stocked and ready for our return. Heck, if the going gets really rough…we’ll take another vacation!

More news:


Chris Gaffney, reporting from the EverBank world currency trading desk in St. Louis…

“The Japanese yen is the best-performing currency in the world this week. The South African rand and the New Zealand dollar (higher yielding currencies that have benefited from the carry trade) are the two worst performers in the week.”

For the rest of this story, and for more market insights, see today’s issue of The Daily Pfennig


And more views…

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In Warren Buffett’s annual letter to Berkshire Hathaway shareholders, he asserted that he’s looking for a “young value investor” to eventually replace him as chief investment officer.

“I intend to hire a younger man or woman with the potential to manage a very large portfolio, who we hope will succeed me as Berkshire’s chief investment officer when the need for someone to do that arises,” he wrote.

Up for the challenge? Send Mr. Buffett your resume. And good luck.

*** “But Dad,” Henry asked. “What would we do if there were a real depression? Would we have to sell the beach house?”

“Well, if there were a real depression, we probably wouldn’t be able to sell it. We’d have to live in it. You boys would have to learn to fish so we’d have something to eat.”

“We’d probably starve…”

*** “There’s more going on here than you think,” Elizabeth reported.

We had been noticing all the changes that have taken place in Nicaragua since we first came to the place seven or eight years ago. The highway from Managua to Granada has been rebuilt. It is much better than it used to be. Granada itself is cleaner and more attractive. There is more traffic on the roads, and many more new cars.

The beaches are no longer completely deserted.

“Dad…there are a couple of people on our beach,” Henry told us yesterday. The news came to us like a sighting of an animal believed extinct. We all rushed out to have a look. Sure enough, there were two white bodies in the surf.

“Our” beach is about a mile long. A couple of years ago, we never would have seen anyone on it other than ourselves. Now, every morning, there are a handful of gringos…some of them French!

A boat showed up the other day with a group of French surfers. The fellow next to us has built a golf course and put up condos. Several houses are under construction. Others are already being used.

The Clubhouse nearby is also seeing more use. On the one night we went for dinner, the place was packed.

There is even a group of permanent residents – Americans who have retired to the Nicaraguan coast.

“Yes, and isn’t it remarkable,” Elizabeth continued. “People are not just ‘retiring’ here. They’re finding new lives for themselves. Dennis has started a store. I don’t know if it makes much money, but it is an occupation and it’s probably kind of fun to have something to do.

“And that nice woman we met – I think her name was Margie – she works at the local clinic. I think that is really great. She’s a retired nurse. They need her down here. So she’s able to do something good…and she must feel very good about it too. And not only that, she’s now getting other people involved. She said there was a dentist and an opthamologist among the people who are moving down here. And they’re talking about building a new wing…for a lab…so people don’t have to go all the way into Managua to have tests done.

“This is great for everyone…I mean, it’s obviously good for the local people who desperately need this kind of medical attention. But a lot of people don’t know what to do with themselves after they retire. They come down here…walk on the beach…watch the sunsets…but after a while, it must get a little boring. But these people are finding ways to use their time and their training. It makes you wonder what else might be done…”

*** “What’s a ‘Great Wall?” Edward wanted to know.

Edward, 13, is a car buff. He’s the only one in the family who seems at all interested in them. He noticed a new breed of car when we on our way to the airport this morning. The cars and trucks looked like Japanese imports. But on the back were the words ‘Great Wall.’

What kind of cars were these?

We don’t really know, but we suspect they are Chinese. And we will guess that they are a part of the reason U.S. auto companies can’t make any money.

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“I’d like to invite you to the 2007 Agora Financial Wealth Symposium. This event is quickly becoming one of the world’s most successful investment conferences. In fact, last year saw our best speaker line up and attendance ever… and generated chances to enjoy gains of 58%… 107%… and even 147% just six months later.

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[Ed. Note: You can think of this conference as ‘basic training’ for global investing. You’ll get a complete perspective on how a rare confluence of politics, business, globalization, and the age-old forces of supply and demand could make Asia the profit opportunity of a lifetime. To secure your ticket, call Agora Travel at 800-926-6575.

The Daily Reckoning