Skip to content


October 27, 2016

Not that you really care (because truth be known, I don’t really care), but I thought I would give you a brief explanation for my year and a half silence on this blog.

First, I have never wanted to predict a time frame for when another financial correction might occur. Second, I never wanted to give investment advice. And third, I never wanted to depress people. I discovered that the more I blogged, the more all three of these began to occur. I always intended for my writings to be more of a big-picture, long-term view — very long term. My thesis is simple: you can’t implement the monetary and financial policies we have implemented in our nation (and now around the world through coordinated central bank actions) and not have some very serious consequences. It is what I refer to as the “Grand Experiment,” because no one really knows how this will ultimately end. However, human nature is to want to know the how and when because so much is at stake. That results in pressure to make predictions.

The funny thing about writing this blog is that I found I did not heed my own advice. I have made the comment to never underestimate what the Fed would be willing to do or how that might impact events that impact our economy. By late 2013 and 2014, I felt the central banks had used up all their tools for stimulating a stubbornly stagnate economy; that they really had only delayed the inevitable correction and in so doing, had actually created an even larger financial bubble. Since they had no more ammo to artificially stimulate markets, I felt gravity would soon take over and there would be some type of economic event in 2014. I was wrong on two fronts. Remarkably, our central banks found they could implement negative interest rates and the world did not implode. So there was no correction in 2014.


My way of analyzing things is quite simple — simple mind, simple analytics. The first thing I like to consider is what will history write about the decisions and actions we are taking today —  what will our kids and the history books say about the central bank grand experiment in 20 years, 50 years or 100 years from now? This is always an interesting exercise for me as I have kids in their early 20’s who will be stuck with the consequences of the decisions we are making today. I am not optimistic about a legacy of debt, greed, leverage and crony capitalism. We have sucked the life out of free markets.

The second exercise I like to consider is what would I have thought about our central bank and government actions half my life ago; a little less than three decades ago. In other words, if I was told in 1987 that by the end of 2016 that  central banks would be approaching ten years of a zero interest rate policy, with some central banks ($4 trillion in bonds) actually imposing negative rates, that our nation would be $20 trillion in debt and well over a $100 trillion in unfunded liabilities, that we actually had a program where our government (your tax dollars) paid people to destroy their cars (cash for clunkers) to revitalize the auto industry, or that we actually encouraged subprime home loans and then used taxpayers dollars to buy those same loans from the financial institutions that they predictably blew up on, that we would have somewhere around a quadrillion dollars in derivatives and where we were monetizing our own debt (Quantitative Easing) among many other unprecedented actions and policies. What might I have thought back then, or what might I have thought even ten years ago?

If someone had told me these things 29 years ago, I would have thought they were absolutely insane. Moreover, if I thought even one-tenth of what they were saying could be true, I would have thought that our nation would be experiencing the second coming of the Weimar Republic! It fascinates me that we find a way to accept these extraordinary actions as somehow being even remotely logical. I guess my fear is that one day we will wake up and find that we are the proverbial frog who wonders how we ended up in boiling water when we thought we were just relaxing in the hot tub.

But this is an essential part of keeping the whole game afloat. How can we go further and further down this monetary policy hole (abyss)? It is because the entire game/experiment relies on a general confidence that our central planners actually know what they are doing. And so far, we have not raised our hand and said, “This is absolute insanity, what is your grand escape for your grand experiment?”


What I believe is currently happening in our economy is a very interesting equilibrium. It seems the economy has not reset or collapsed, but it is also very different and few, with the exception of central bankers, Wall Street and politicians, would claim that our economy is healthy. It seems we are creating a new majority of workers who hold one or more part-time jobs and live paycheck to paycheck.

By artificially manipulating interest rates to zero and holding them at zero, we have affected the foundation of free markets. By affecting free markets we have affected supply and demand. By affecting supply and demand we have created substantial dislocations in our markets, particularly financial markets. In fact, by infusing massive sums of free money into our financial markets we have essentially implemented supply-side economics and we have stimulated demand outside the normal supply and demand curve. One might argue, “Well isn’t that good?” I would argue that it is artificial and it is temporary.

There are many examples, but let me just cite three simple examples of how monetary policies have created dislocations. Hedge funds with excess liquidity needing to find a return better than zero offered by bonds moved into buying single family homes to rent or flip. This was traditionally something very small investors did and they were forced to compete with investors who have nearly unlimited resources, driving prices back into bubble territory.

If you have kids you might be interested in this example. When I went to college, I paid my own tuition, books and other expenses and felt very fortunate that my parents helped with some of my rent, about $200 per month if I remember right. I graduated from college with no debt, except the debt of gratitude for my parents’ help. Student loans were nearly nonexistent in those days and I would have never expected my parents to take out a second mortgage on their house to pay for my college. Today both of these practices are common and the result is a hyperbolic increase in the cost of sending kids off to college. It is expected that both the student and the parents will go in debt to be able to send little Johnny to the best college he gets accepted to. And somehow if we don’t do that we are bad parents! This affects the supply and demand curve, because there is little more important to us than being viewed as good supportive parents, even if it means hawking both our future and our kid’s future. This is why the price of college has gone up so ludicrously.

I will try to keep this final example short, but it is a pet peeve. If you live in California you may have noticed that your water bill has gone up quite a bit lately, even if you have reduced your usage and don’t water your yard anymore. The excuse is that because of the drought, they are attempting to discourage water usage through increased prices. There are two main reasons for increased water prices. First, your water company is a monopoly, so they really can charge whatever they want. Second, they probably have loaded up on huge amounts of debt and you are getting stuck with that bill. Just wait until interest rates go up; then you will really see inflation —  in everything.

You may ask, “Are there no checks and balances on central banks?” There isn’t, really, except for supply and demand. For example, if only one central bank implemented the crazy policies we referenced above then funds would flow away from the country that that central bank represented to countries whose central planners maintained more reasonable and sound approaches. The fact that central banks seem to be coordinating their experiment and in many cases seem to be racing toward the bottom of a currency war, has allowed their policies to go unchecked — there simply is nowhere to run to. With the easy monetary policies there is more money than ever to chase after the few investments that still pay some type of return; that, my friends, creates an extremely skewed supply and demand curve in our financial markets. It invokes unprecedented risk taking, leverage and debt.


If you noticed, I did not predict a time frame for the day of reckoning. I have learned that Ms. Economics will always make a fool out of anyone who thinks they can predict her. Second, I did not give any financial advice. And well, as for not depressing anyone, I say two out of three is not bad.

  1. Amado permalink
    October 27, 2016 7:32 pm

    Thank you Brother Jon, as always sage advise.

  2. John permalink
    October 28, 2016 1:47 pm

    Great post!

  3. Wayne Heine permalink
    October 30, 2016 8:49 am

    Welcome Back! Look forward to reading more blogs in the future. I hope to provide some future writings for you to post. Be well my friend!

Comments are closed.

%d bloggers like this: