Washington, DC -- (ReleaseWire) -- 09/02/2015 --"This is your last chance. After this, there is no turning back. You take the blue pill—the story ends. You wake up in your bed and believe whatever you want to believe. You take the red pill—you stay in Wonderland and I show you how deep the rabbit-hole goes."
Those words are spoken to Neo, the hero of the Matrix series of movies, by the resistance fighter Morpheus. The choice he's giving Neo is whether to continue in the artificial dream world of the Matrix or to wake up to reality and be forced to react to the world as it is. As investors and citizens, we are increasingly being presented with a similar choice, only there is no charismatic rebel figure to offer it. The Federal Reserve, the White House and much of the media offer only the blue pill: "Keep dreaming of a free market where fundamentals are at best loosely tied to asset prices, we'll protect you." We have to find the red pill of reality ourselves, to dig into the causes and consequences of what we see in the markets, to look for independent voices and the mainstream sources that are finally acknowledging the strain put on the global economy by seven years of central bank manipulation in the attempt to convince us a recovery is happening.
Let's take a look at how deep the rabbit-hole really does go. One obvious place is the roller-coaster volatility of the market recently, something I've been calling the Great American Scream Machine. Many of the downward forces are fairly obvious: uncertainty about Chinese markets and worries about increased interest rates at home, for example. But the causes of the bounceback we saw last week? A great deal seems to be central bank dreamland manipulation. Some of the resurgence can be credited to apparently better news in China toward the end of the week, but much of that can be attributed to draconian measures by the Bank of China and the Chinese authorities to paper over their crisis. Some can be credited to efforts of the so-called Plunge Protection Team to intervene and prop up the major indices. And some is certainly due to the Fed taking out their same-old PR playbook and talking up the markets by highlighting so-called strong "fundamentals" while at the same time downplaying the likelihood of an interest rate hike in the near future.
The lines between central banks and markets, which in any truly free market should be sharp and definitive, have become increasingly blurred until it's impossible to interpret the movement of asset prices without accounting for their direct and indirect actions. Fascinatingly, one of the entities attempting to point us toward the red "reality" pill seems to be a member of the central bank club. The Bank of England will be holding an open forum on November 11th with the topic, 'Building real markets for the good of the people.' In the description of the forum and the reasons for it, they write, "In order for markets to regain their social license, it is vital that public authorities and private market participants work together to reverse the tide of ethical drift." 'The tide of ethical drift': it looks like the Bank of England is admitting the possibility that the markets as they have been since the Crisis aren't really markets after all, doesn't it?
There are other voices urging us to make the choice to look at reality as it is, instead of the dream world we've been presented with since 2008. Wall Street Journal last week wrote that they were concerned about whether the Fed will have any ammo left when a downturn does finally arrive. Douglas Elmendorf, until recently the Director of the Congressional Budget Office, said that "policy makers are thinking about their backup backup plans." Economists as HSBC bank warned of "looming economic threats," and went even further to say that "The world economy is like an ocean liner without lifeboats."
The central banks are beginning to lose control of the markets they've tried so desperately to prop up. The Bank of China was first to show it: they've done everything they could think of, but to no avail. They barred short selling, froze the markets, sent short sellers to jail, even injected billions of dollars per day directly into the markets, and yet their stock market continues its implosion. One of the largest central banks in the world has simply lost control. But this isn't going to be happening only in China. In a recent discussion with Chris Casey, the Managing Director at WindRock Wealth Management, he reminded me that the Federal Reserve and many other central banks are now leveraged close to 50 to 1. We can see with all the volatility in the market, especially in the last two weeks, that these entities can't backstop an insolvent financial system.
China contributes to this threat in another way. Bill Gross, formerly of Pimco, now with Janus Capital, tweeted last week that China had liquidated more than $100 billion in long-term U.S. Treasuries just in the past two weeks. That means Beijing has sold more U.S. paper in two weeks than it had previously sold all year long. If they continue selling at this pace, that means they only have eighteen weeks before their entire holding of U.S. treasuries is gone. What happens if other countries follow China? When the bond market wakes up and starts to respond, servicing our enormous federal debt will become increasingly more onerous. This is a statement against the U.S. dollar, and a blow to the petrodollar, which has long been one of our strengths.
Whether or not there's a Morpheus to offer it to us, we are presented with a stark choice. Do we take the blue pill, remain dreaming happily on "an ocean liner without lifeboats," one that is certainly headed for a veritable fleet of icebergs? Or do we take the red pill and wake up to the reality of the rabbit hole we've fallen down? The reality is frightening, but there's no way to escape the Titanic if we're asleep.
All data sourced through Bloomberg
Securities offered through Western International Securities, Inc., Member FINRA & SIPC. Bennett Group Financial & Western International Securities, Inc. are separate and unaffiliated companies.
About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett.