On the Frontlines of a Paradigm Shift

We parted ways with a lot to think about… and a book inscription:


Sorriso Restaurant in Washington, D.C., was the place. Nomi Prins was our dinner company.

Ms. Prins is a brainy mathematician, author, journalist, ex-Goldman Sachs managing director and more. We’ve been making our way through her latest book, All the Presidents’ Bankers: The Hidden Alliances That Drive American Power.

It explains the 100 year bedfellowship between Wall Street and D.C, and how those power relationships affected American public policy, the economy and you.

The short version, as you might expect, is they’ve affected policy, the economy and you a lot. And not in your favor. The extent of it, though, is greater than we originally thought, and we’re only barely into the chapter on the 1920s!

“I researched the history in my book,” Nomi explained, “because it’s the intellectual foundation for examining the power dynamics at work today and their impact.”

Her convictions are why we took an interest in Ms. Prins’ work in the first place. In 1999, Addison and Bill Bonner founded these Daily Reckoningsto pull back the curtain so everyday investors can see what goes on in the boardrooms of Wall Street’s biggest banks and in the corridors and meetings rooms of the Capitol in Washington, D.C.

More than giving you a glance, though, we also want to offer you a credible alternative. Ways to understand what’s happening, invest and prosper, despite the shadowy alliances driving the financial system.

Jim RickardsDavid Stockman… Nomi Prins…

A bankster’s worst nightmare, each of them. Together, they’re a bankster’s coronary.

They’re on the front lines — in books, on TV, in our publications — chipping away at the status quo. Each time they do, they help us understand the endgame of central bank and political meddling in the U.S. economy — and, by extension, the global economy.

That endgame, as we’ve said before, will be a paradigm shift — a fundamental change in the way people view, model and explain economic reality.

Jim Rickards often cites Thomas Kuhn’s example of the paradigm shift from the geocentric model of the universe (the Earth’s the center of the universe) to the heliocentric model (the sun’s the center of the universe).

That bad model persisted for about 1,500 years, until Galileo’s paradigm finally prevailed. The church and all the smartest people in the world used very good math, physics and astronomy to embellish the old model despite more and more evidence that appeared to the contrary. And they were completely wrong.

Today, the Fed’s models are the economic and financial equivalents of believing the Earth’s the center of the universe. We firmly believe that if you, like the Fed, buy into those wrong models, you’ll disastrously get the wrong results. They’re the same models you’ll find in the mainstream financial press. Bell curves… general equilibrium models… mean reversion… Monte Carlo simulations. They might be elegant models in and of themselves. But they don’t reflect reality.

Use the correct models, on the other hand, and you’ll understand the financial world around you better than everyone else. And your investments and peace of mind will follow suit.

“I try to contribute to that paradigm shift with my work,” added Nomi last night, specifically. “But there’s no way to get to a paradigm shift except going through it,” Prins told us between bites of gnocchi.

Going “through it” means the problems will get even worse before they get better. That, by extension, according to Nomi, implies that rates stay lower for longer. A prediction familiar to you if you’ve been suffering through these missives for any length of time.

Thanks to the wine, we paraphrase our dinner conversation with Ms. Prins to the best of our ability…

“Congress and the Fed made the decision to bail out the financial institutions after 2008 crisis,” she explained. “They propped up markets with artificial money and with printing money and reducing the level of interest rates and reducing the value of currencies relative to the dollar throughout the world.

“That decision has helped no real people in the economy. Now, seven years later — all we have is heightened market volatility.”

To be clear, the current bubble can’t be inflated forever. But, like death, we know not the time nor the hour.

“But we’re seeing the transition to it popping now,” added Prins. “We’re seeing periods of volatility in the market.

“Everyone knows that if interest rates went to 5%, the markets would crash. Everyone knows that on Wall Street and at the Fed. I’ve told the officials I’ve talked to that having zero interest rates and quantitative easing for seven years is an incredibly bad policy. Now the world’s central banks are in a Catch-22.

“They’ve coddled the bank and markets while neglecting the real economies on the ground. And they’ve done it all under the guise of ‘helping the economy.’

“Meanwhile, central banks have no Plan B to unwind. And a safe exit from zero interest rates is the true mettle test for this near-decade-long monetary experiment.

“There is no way that the Fed’s going to raise rates in December,” forecast Nomi. “Jim Rickards and I are in agreement on that. They won’t. Meanwhile, expect more heightened volatility to the downside. The more uncertainty there is, the more that every tiny event exacerbates the downward cycle.

“Ultimately,” she continued, “the system has to be recalibrated to some sort of normalcy. But right now we’re there. We’re still in this transition away from what is happening today to what will be. We’re in the seventh or eighth year of that transition.

“It’s just getting very bumpy now very quickly because everyone is noticing, and every player in this market is scared but still using and squeezing whatever they can and whatever’s left for as long as it lasts in this fabricated financial system. And it is a system — and all of the relationships that comprise it are out of whack.”

But as we said, it will get worse before it gets better. “The larger banks involved in the policy decisions and that talk on a regular basis with the heads of the Fed, ECB, IMF and so forth all want another security blanket,” says Nomi.

“When things become really bad, again, the conversation will turn to bail-ins and the elimination of physical cash. You can expect it, because they’re simply looking for another way to escape the consequences of their actions…”

“It’s important to note, though, that decisions are not merely pushed by the big private bankers. It’s a fully two sided collaborative process in conjunction with central banks and governments. There are also many shades of gray in the mix. The most gray of those relationships are most indicative of a shift.”


Peter Coyne
for The Daily Reckoning

P.S. The truth,” added Nomi, “is that major financial institutions have relationships with government and the largest central banks. And vice versa. They’re all listening to each other to try to find ways to make sure that all of what was done in the past seven years to sustain the artificial financial system wasn’t for nothing.”

Nomi expands on why that means more volatility ahead… and shows you some ways to cope financially, right here.

The Daily Reckoning