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These Markets Are the Definition of Insanity – Here’s Why… and What to Do Now

9 | By Shah Gilani

Welcome to insanity, which – by a definition commonly attributed to Albert Einstein – is doing the same thing over and over and expecting a different result.

Our insanity is actually a dangerously circuitous negative feedback loop.

It’s all about “Extraordinary Popular Delusions and the Madness of Crowds,” which happens to be the title of a brilliant book published in 1841 by Scottish journalist Charles Mackay. If you haven’t read this book, you should because it provides factual, granular evidence of what happened in the past when crowds – mostly crowds of investors – went mad following popular delusions of their day.

We’re there again. Only this time the popular delusions are exponentially more dangerous and the crowds – most of the global populous – aren’t just going to go mad, they’re going to go broke.

Here’s who’s deluding us, over what, why, how they’re doing it, and how it’s going to end… and how you can save yourself from going broke.

Who’s Responsible for the Insanity – and Why

It’s extraordinary, for a lot of reasons, but we’re being deluded by the two most powerful institutions on earth – governments and central banks.

They’re deluding us into believing they can manufacture economic growth and prosperity.

And they’re insanely doing the same things over and over that haven’t worked.

Governments are essentially out of ammunition when it comes to their ability to generate meaningful economic growth.

The United States’ Congress abdicated their fiscal powers back in the 1970s to the Federal Reserve (when it gave the Fed the “dual mandate” to spur employment), so successive American administrations and legislatures have been impotent in terms of being able to generate meaningful economic growth.

European governments punted their sovereignty to the European Union and with it their individual ability to take extraordinary measures to spur country-specific growth. They too punted their fiscal powers to the European Central Bank (ECB).

China was the last giant country whose government was able to generate extraordinary growth.

Now, that’s over.

Emerging markets followed China and grew robustly, but nothing like China. And they’ve slowed, too.

With global growth behind us, on account of businesses and economies being subject to immutable cyclical realities, and the beyond gigantic byproduct of insane debt darkening the planet like a Death Star, economies across the world are all languishing, at best.

Globally, that can be seen in terms of PMIs, purchasing manager’s indexes. PMIs are sentiment indicators. Purchasing managers’ indexes (most economists and analysts prefer following manufacturing purchasing managers indexes as opposed to services indexes) are all hovering around the 50 line in the sand marker, where a reading above 50 means expansion and a reading below 50 points to a contractionary trend.

Nowhere is any PMI much above or below 50. They pop higher, then drop back.

The U.S. ISM manufacturing PMI reading in August was 49.4. In September it rose to 51.5.

Since 2008 it’s been up and down, but basically undulating around the 50 level. China’s latest PMI reading came in at 50.4, the highest it’s been since October 2014. The same is true for the rest of the world.

What that means is growth, in terms of manufacturing, is languishing.

After the Great Recession we were supposed to see a big recovery. It hasn’t happened.

As a friend of mine always says, “If you’re not going forward, you’re going backwards.”

Governments want the public to believe they are capable of generating growth by means of fiscal stimulus. They can’t – because they’re already too deeply in debt.

The U.S., for example, is swimming in debt. Public debt’s risen $1.4 trillion so far in 2016. America’s total public debt (government indebtedness) is almost $20 trillion.

Globally, according to the IMF, gross debt, including government, private-sector (excluding financial companies) and household debt is $152 trillion.

It’s delusional to expect governments to spend to stimulate growth by adding to already massive amounts of debt they can’t ever pay back.

That’s madness because increasing debt requires greater debt service payments that cancel out the net increase in GDP growth, which stagnates standards of living, ultimately depressing them.

“Excessive private debt is a major headwind against the global recovery and a risk to financial stability,” IMF fiscal chief Vitor Gaspar said in a recent speech.

Governments are once again talking up fiscal stimulus because the partner they handed off their economic growth responsibilities to, their central banks, have dropped the baton.

The Same Thing Over and Over

We’ve been deluded into believing that central banks possess some magic dust to sprinkle on economies to make them grow.

Globally, they’ve tried printing money, quack-a-tative easing, buying mortgage bonds and corporate bonds, and the Bank of Japan’s even been buying stocks.

And none of it has worked to stimulate growth.

As a measure of how insane the delusional game is getting, the Federal Reserve is even considering buying stocks. In an exchange during Janet Yellen’s testimony before the House Financial Services Committee last week, when South Carolina Republican Mick Mulvaney said to Fed Chair Janet Yellen, “there’s been some attention in the last few months about the resent decision by the Bank of Japan to start purchasing equities and my question to you is fairly simple. Is the United States Federal Reserve looking at the possibility of adding the purchase of equities to its tool box as it looks at monetary policy?”

Her response was (emphasis mine):

Well, the Federal Reserve is not permitted to purchase equities. We can only purchase U.S. treasuries and agency securities. I did mention in a speech in Jackson Hole, though, where I discussed longer term issues and difficulties we could have in providing adequate monetary policy. Accommodation may be somewhere in the future, down the line that this is the kind of thing that Congress might consider, but if you were to do so, it’s not something that the Federal Reserve is asking for.

If you clear away the smoke and mirrors from Yellen’s answer, she’s saying if Congress gave the Fed more power they’d be buying stocks.

The delusion is that governments and central banks can mastermind growth with gimmicks.

Only free markets, left to their ups and downs, can create growth.

What’s not working is government and central bank interference in global deleveraging. Their efforts to stem natural deflationary cycle lows facing economies on the heels of the 2008 blow-off of leveraged indebtedness, cut off the free market’s salutary course.

The same thing is going to happen. There’s going to be a day of reckoning. Only this time it’s going to be the real deal.

There’s only one way to play the end game.

Ride stocks up, as long as they go up. Ride bonds up, as long as they go up. And get out and short them with both hands when they start slipping.

And, by the way, we’re almost there.

Sincerely,

Shah

9 Responses to These Markets Are the Definition of Insanity – Here’s Why… and What to Do Now

  1. ron goddard says:

    we live in an interesting world wherein internet ‘education’ provides us with info that wasn’t available maybe even ten years ago. spooky double sided wars, mainly on terrorism(lol), drugs and anything else the wolfpack decides on.

    forget the nuclear stuff, the biggest threat to us is brexit (apparently) say you have a three legged chair (i have actually sat on one yeas ago) and one removes one leg. well thats how the world economy is ‘sitting’. albert einstein would have had a field day with this circus. elections aside, who really believes it will be a real ‘election’? the winner was declared a long time ago. many tales about the health of the ‘winner’ abound. how long will humanity put up with this state of affairs? maybe forever if one believes the mainstream press. but then there could be an awakening, a ground swell so powerful that the elite may/might get a shock. is it possible? no, never really because people all over the place are followers and always have been. there must be leaders. and if some leaders get corrupt one can see the result . forever as history has shown us the way..but the fog sets in and we become blind to the obvious. hiding in sight? make the most of your life while you still have it. and keep a sense of humour. i can’t change the world i think.

    • Joshua Lizard says:

      Is it possible? No. It is inevitable. The entire history of mankind has been a chronicle of our struggles and eventual triumphs against the oppressive practices, and restrictive policies of corrupt, self serving, tyrannical leaders. With each setback, the accepted definitions of a working law of liberty have been perverted into further mandates for tyranny. And with every new triumph, the scope and breadth of mankind’s freedom has of a necessity, been redefined to counteract those corruptions.
      Even the doctrine that all men are created equal and endowed with certain inalienable rights was, a mere three centuries ago, akin to the most astonishing heresy the world had ever known. But that was the cry of our founding fathers when they orchestrated the political revolutions that would topple the despotic empires of France and England and establish republics founded on the principles of Liberty, Equality and Fraternity., So too did they orchestrate the scientific revolution of thought that ushered forth the Age of Reason which in turn overcame the tyrannies of the papal authorities in the Vatican who had perverted religion into an instrument of oppression.
      Now it is time for another such revolution.
      And don’t worry. No one worth listening to would ask that you to change the whole world on your own and rid our nation of those tyrannies unassisted. The Pillar of Fraternity is all that stands between Liberty and ruin. This knowledge alone should be enough .harmonize all mankind in the recognition that despite our unspeakable variety and countless differences, we are all of the same origin, all share common interests and all must work together to ensure that no one is ever permitted to subvert the free growth and expression of our individual brethren or the market and trade of our global economy.

  2. randy a says:

    The sun is shinning. Theres not a cloud in the sky. The flag is wrapped around the flagpole. A beautiful day to longe on the beach sipping mint juleps Why should I be concerned about an earthquake out in the middle of the ocean??.

  3. Alan Steinbronn says:

    I wish I knew how to get through to my fellow Americans the fact that our government is the SOURCE / CREATOR of our currency, and therefore we cannot possibly EVER be unable to repay ANY debt made in own currency.

    The fact is that every penny our government creates goes into our economy as NATIONAL SURPLUS – not as ‘national debt’. If our government DIDN’T create and spend-distribute its currency then there wouldn’t be ANY cash in your pocket or our nation! Only taxation can remove our national surplus.

    Our United States is no longer beholding to the old method of creating wealth – going to the wealthy (GOLD OWNERS) and selling one’s soul, begging to borrow, and being indentured servants/slaves to the wealthy and their whims.

    Those days were officially TERMINATED when then-US president Nixon ended the ‘Gold Standard’ and freed our nation from commodity based money.

    Since 1971, we the people of the United States create our OWN wealth by simply telling our servant-government ‘CREATE MONEY’ – and how much of it we need.

    We look around at the state of affairs of our communities and we tell our elected federal representatives what we want done to improve our communities. It’s their job-responsibility to get OUR MONEY created for OUR NEEDS.

    That’s the entire purpose of having a SOVEREIGN CURRENCY.

    It’s ALWAYS money that generates the improvements we all need – and all we need do is tell our politicians ‘DO IT’ and it will be done – because it’s their job to make our nation prosper.

    It’s as simple as that, people. There is absolutely NOTHING that exists to stop us from doing this. In fact, EVERY sovereign nation has this power and ability and does this.

    When do you know that we’ve created TOO MUCH cash in our nation? When EVERYONE has their pockets stuffed with so much cash that we’re buying the most ridiculous and petty trinkets instead of the basics that are necessary to have a good decent standard of living for everyone.

    I claim that it’s only pure ignorance – not knowing that we the people are truly in control of our nation’s health, wealth, and national purpose – that is the true ‘problem’ we face as a nation.

    Until we the people realize that we can literally TELL our political-public servants to create OUR MONEY for OUR NATION, then we will continue to suffer unimaginable pain and misery – and yes, may even lose our nation.

    I COULD say that the political machinery doesn’t want us to realize and understand that it’s we the people who are REALLY in control because the political machinery enjoys living their ego-maniacal lifestyles SO much – but I won’t say that.

    Ignorance and Stupidity be damned.

    • ALAN MORCOMBE says:

      Sure that will work, until the day finally comes when the paper rubbish dollar eventually has nil value.

  4. Alan Steinbronn says:

    To ALAN MORCOMBE –

    The ‘paper rubbish’ that you think will become worthless ‘one day’ – will NEVER become worthless. It is the very ‘vehicle’ we as Americans use to interact with each other to buy/sell and exchange goods and services with each other.

    If you’re thinking Commodity money is what we need, I have to point out the fact that a nation’s currency must NEVER have ANY value outside of its use within its nation.

    Commodity money spawns loose relationships to one’s nation. The rebel knows that they’re free to take their commodity money wealth and go wherever they please.

    Not so with TRUE currency – State/Fiat money. Each and every member of their nation must use a ‘vehicle’ that allows them to make their NATION healthy, wealthy, and prosperous and keeps them committed and determined TO their nation – and not merely to THEMSELVES.

    Fiat currency promotes NATIONAL PRIDE – Commodity money promotes nothing but SELFISHNESS.

    I find your position regarding how our monetary system REALLY works to be the norm – among the general population AND politicians. Ignorant.

    Politicians claim were ‘running out money’ – or – we have a ‘budget’ that controls what we can spend.

    All of this is absolutely and totally FALSE!

    How can the ‘creator’ of currency EVER ‘run out’? It’s IMPOSSIBLE and will NEVER happen.

    Look around you and tell me that the United States isn’t STARVING for currency. Yet, it’s our own politicians who are the very people HOLDING BACK OUR MONEY.

    USD’s should be POURING into our states, cities, and communities to free the productive, creative, and wealth generating activities of Americans.

    But Americans have been spoon-fed a LIE – that we ‘borrow’ our money – that we depend on ‘tax dollars” for our national income.

    Let me ask you – just WHERE do USD’s come from? WHERE to your ‘tax dollars’ come from?
    They came from the CREATOR of our currency – our federal government.

    So, there is NO WAY our fiat currency will EVER become worthless because we will ALWAYS need it for our interactions with each other and to pay TAXES.

    I think you already know our Govt only accepts dollars in payment of taxes, correct?

    NOT gold – NOT silver – NOT real estate. ONLY dollars.

    Ever wonder WHY???

    • Nick Micalone says:

      Hi, Alan –

      Check out the paper currency in your pocket. Notice across the top where it says “Federal Reserve Note” So, a non governmental agency promises to pay on demand …. what? You are aware, that the Federal Reserve is not a US Government entity. It is the banker for the large banks, and beholden to them. Check it out. Shocking, eh?

      The way it works is, and I’ll try and be brief; the US Government needs money to pay for all the wonderful programs the politicians enact into law. and to pay its huge work force, their pensions, its ever increasing debt interest payments, and so on. So, it floats bonds, bills and notes, paying interest to any buyers. The Federal Reserve Bank buys the notes of indebtedness, with – now hold onto your hat – money printed for them at tax payer expense, and loans it to the banks at a lower rate of interest. who then borrow the newly printed money from the Federal Reserve paying a low interest rate to buy the aforementioned certificates of indebtedness, that will pay them a higher rate of interest, thus making a neat profit with no risk. Sounds crazy, but it’s true. Check it out. That’s how money is created.

      Oh. one more comment; do you recall the old saw, supposedly said by Einstein, “Insanity is doing the same thing over and over again, expecting a different result.”? Er, how many tricks has the FRB used in the last decade to lift the economy out of this depression that it caused? Result, the greedy Big Banks got bailed out and became richer for their failed nefarious derivative schemes, If you recall, “Helicopter” Ben Bernanke appeared before congress, begging congress to bail out the “Too big to fail banks.” For us peasants? Zilch, nada, niente. Now that’s depressing. Of course, the taxpayer had to make good on the noncollectable loans. If I may be so bold as to remind you, “Hellicopter” Ben told congress that the home loan industry was healthy. Gee, how come it failed a very short time later, causing our present depression.. Why would he say otherwise; the banks were getting rich on high interest loans to substandard borrowers. Better a gut wrenching Big Bank fails, rather than the cataclysmic failure soon to come. Most of us will suffer tremendous losses.

      Go back as far as you’d like, examine similar schemes, notice, they all failed, some with disastrous consequences.Riots in the streets? Argentina, anyone? How about the haircut given to big depositors in Cyprus banks? In, I believe, 1986, the US Supreme court ruled that your deposits are a loan to the bank. Doesn’t get any better than that, does it?

      I am aware that nations that printed money seemingly forever, failed miserably. Review the history of the hyper inflation in the 1920’s Germany. The government actually apologized for not printing money fast enough, and that they just installed new faster printing machines. Continue researching that period. If it weren’t so pathetic, it would be funny. Sure. the populace was fed up,.

      Oh, by-the-by, I have a Zimbabwe 10 trillion dollar note. Worthless.

      Alan, you are a very intelligent thinker, and I am sure you have responses, so I won’t bother you with any more annoying facts. Have a nice day!

  5. Edd Segov says:

    Never heard of the implementation of the GLASS-STEAGALL LAW ?
    This is the most important issue in order to start reorganizing the American economy. After that follows the creation of a national credit banking system to spur reconstruction and remodeling of a new American Infrastructure. A new cult around science and art, aiming at exploring the solar system will induce optimism and future expectation inside the youth – just away from cynisism and drugs

  6. allan hamblin says:

    Hi Shah, this story is a bit old so my comment may not be seen.
    Please explain what is meant by growth. Trees, food, or what.
    Next, the $152 trillion global debt is ‘owed to who’?
    The ‘growth’ that I see exists is all in paper money held by the rich and powerful.
    Am I correct?

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