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A strange thing happened on the way to the stock market this week

Markets clenched, waiting to see whether the Federal Reserve would raise interest rates. Economists and brokers practically begged the Fed not to risk raising rates. The International Monetary Fund warned that a rise in rates at this precarious juncture could tip markets around the world into chaos. A few brave souls said, “Do it and get it over with. We’re sick of the drama.” Street wisdom said that, if the Fed did not raise rates, we might see a rebound from the stock-market plunge that happened early in the month — a sort of economic sigh of relief that the party was on for a little while longer.

Then a seemingly odd thing happened. The Fed announced that it would not raise interest rates, but the US stock market fell like a rock. It got the very reprieve it was begging for, and yet it fell. What happened? The anticipated sigh of relief looked and sounded more like a gasp of disbelief and concern.

What happened was that investors suddenly said — as I’ve said would happen exactly at this juncture — “The Fed does see all these headwinds from China and emerging economies, whose markets are crashing, as a concern for the United States after all. Even the Fed does not believe we are immune to these forces battering our shores. The Fed does not believe that the US economy is strong enough to raise rates, or it does believe that raising rates would put the world in turmoil as the IMF warned it could. The Fed is afraid of being the bad guy who took away the punch bowl and killed the party if they do what they have long wanted to do and everything collapses.”

This decision means those headwinds I’ve been talking about are, in fact, as serious for the US economy as I said they would be by this time of year. It means that the Fed’s stimulus practices of zero interest and quantitative easing have not created a sustainable recovery after seven years of trying (and they never will because they cannot). The Fed has shown that — as badly as it indicated it wanted to raise interest and as long as it has been warning that it will and as much as some people are saying, “Get it over with” — it is still too risky to do so.

The fact that the Fed doesn’t dare raise interest even when the job data, which the Fed said it was going by, is better than the Fed said it needed to be … means the “recovery” is, at best, vulnerable. (I use the word they would use, not the word I would use for this economic malaise.) The fact that the raise would have been a mere breath, a mere quarter of a percent increase, means the recovery must be VERY vulnerable because the Fed believes it might not even withstand such a token raise in interest — a mere whiff.

This adds strength to the arguments out there like my own that the rise in US stocks was never anything more than a bubble. It’s simply where all the new free money went because it had to be stored somewhere.

The economy has no foundational strength and, so, markets will crash as soon as all of the artificial life support ends. Even the Fed shows that it fears the stock market could collapse in a pile of rubble at the mere hint of an end. While market bulls are not ready to admit that, you can view the drop in the market as being the drop of investors’ jaws as they gave second thought to what it means when the Fed wants to raise interest but simply cannot. I think he slack jaw was people pausing to wonder, “Will the Fed ever be able to lift off its zero bound?”


The Federal Reserve has no end game


We are at that point I talked about where the Fed’s plans have failed, and the failure is becoming evident to all. The Fed is now damned if it does raise interest and damned if it doesn’t; but it has damned itself, so who cares? If it raises interest rates, it fears it will crash the “recovery,” which it will. That becomes game over for seven years of economic boosting. If it doesn’t raise interest, it now is seen as proving it really has no end game. There is no way out of this. The economy has become dependent on all that free money.

When all of this stimulus began, many people asked if the Fed had a way out at the end. Could it turn off the spigot of free-flowing money and not crash the economy that it had appeared to build back up? Now it looks like it cannot turn off the spigot. The Fed looks like it has boxed itself into a corner. Even its only end game of a very, VERY slow taper is not working. It is turning into relentless indecision and constant drag. The taper has become so long it is painful.

Worries are growing about what the Fed has left that it can do if the world slides back into recession right now when the tap for zero-interest money is already flowing as freely as it can. But it is not “if.” The world is sliding back into recession. The Fed can go back to money printing, but that surely will shake people up even more than this past week’s decision to continue zero interest. If it restarts QE, everything will look endless and hopeless to where the psychological impact could be more negative than the economic impact is positive.

The illusion of recovery is now starting to break up, and it will break up quickly because it never was more than an illusion. When illusions give way and denial ends, panic usually sets in for those who are facing a much different world than they thought they would be by now. It is disconcerting to learn that the world you believed in is not what you thought it was. People feel lost. Lost people tend to panic.

The fact is, we have more than thirty years of economic foolishness to unwind. We have an economic structure that is deeply flawed in its design. We have re-inflated imploding bubbles into even larger bubbles to avoid the huge costs and arguments involved in restructuring the economy. We have piled debt up to the heavens — personal, corporate, municipal, state and national. We have damaged the middle class by making a small number of people outlandishly rich while making the great mass of people a little bit poorer.

We have some major rebuilding to do, and no one wants to do it, nor do we come close to agreeing on what needs to be done. Few people will admit their dogma has failed. Even those who know that fundamental restructuring is necessary know it will be painful. Such great pain means it is unlikely to happen until reality forces itself upon us, but it will force itself upon us.


My past predictions of total economic collapse


I have stayed consistently with predicting a devastating economic fall in the fall. Fall, the season, begins this week, and things everywhere will begin to fall apart. They are already beginning to fall apart. What you’ve have experienced in the last few weeks, however, are the foreshocks of a much greater earthquake. The rumbling has begun. The big one is no longer far off.

The jolt that just happened in the stock markets when the Fed announced what has for years been good news (to investors) of continued life support is one of those foreshadowing moments near the start of a horror movie that tells you all is not well. The Fed’s plans are no longer functioning; life support no longer brings hope and a lift.

The cold economic headwinds that I said would impact us are howling all around the world now. Small economies are blowing apart. Big economies are blowing apart. Europeans are slamming their doors shut. The change of seasons is upon us. The fall of our fears will give way to the winter of our discontent as the world moves into a time of momentous change and chaos.

If you turn away from this site now because you see this as nothing more than alarmist, then you also know where to turn back to when events unfold as I’ve been saying they will. Denying reality because you don’t like what is happening will never empower you. Learn to see it clearly and face it bravely because it will happen whether you do or don’t. I personally believe those who face reality for what it is do better than those who live in denial, and I have been as careful to state in my years of writing this blog which years we would not see collapse as I am now in stating that it is here.

It is not that I have no belief that I can be wrong. Last fall I was wrong in the scale of what I predicted, but I was also completely right in saying the bull market would end that fall. The market traded sideways from that time until now. If I’m wrong again on the scale of collapse, it will be time for me to go away. I have no problem with making that decision.

This is not to say the Fed will not try QE4 or pull some new trick out of its hat to pretend it can save us all, but anything it tries at this point will have very little power. We already saw last week how little lift the Fed now gets from its old tricks. You’ll see fractures continuing to grow, in spite of the tricks, and will know the whole structure is giving away. You’ll know the world is not what is was and not what you will probably be told it is.

I believe that if you understand what is to come, it may be less fear-inducing. And, if I’m wrong, I will go away, as I’m not trying to create fear and am of no service to anyone if I cause fear about things that don’t happen. I almost went away after last fall when I was wrong about the scale of what would happen, but then I began to see that the US stock market had, in fact, fundamentally turned over with that September-October plunge and that the crash happened more in bonds than in stocks and was labeled by all economists as the “flash crash.” So, there was a crash agreed on by all, though it was quick and short-lived for the time.

Enough happened to say, I think the plates shifted deep below us. While it didn’t release the big one at that moment, the stock market has not been the same ever since, and recovery has continued to elude us, and now things really do look like they are falling apart everywhere.


[If you want to see the tough medicine that real economic recovery requires, read here. When you realize what really needs to change, you’ll see there is not a chance in the world that the Federal Reserve can create lasting economy when the economic structure, itself, needs seismic retrofitting, and we have not even begun that discussion as a nation.]

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