mumford-portrait
Are We Watching The Central Bank Era End?
Reading Time: 4 minutes

Are they going to peg all the banks? Why, they could buy ground and build a new Mississippi cheaper. They are pegging Bulletin Tow-head now. It won’t do any good. If the river has got a mortgage on that island, it will foreclose, sure, pegs or no pegs.

— Mark Twain quoting Uncle Mumford, Life on the Mississippi

When I last checked the Internets last night, markets were booming in Asia, and US futures were soaring. All in response Turkey’s central bank, which raised its interest rate benchmark to north of 12 percent. Unheard of territory.

From ZeroHedge,  on 01/28/2014 18:09 -0500

Judging by the reaction from SocGen and JPY crosses (and thus global equity markets), the Turkish Central Bank’s decision – to tighten aka ubertaper – has solved all the tapering, tantruming, turmoiling problems in markets. JPY crosses instantly exploded higher, automatically lifting US (Dow +60) and Japanese (NKY +110) stock futures markets before they closed.

The rate hike was meant to attract capital to into Turkey. With interest rates on “safe” investments–government bonds–remaining at historic lows, an offer 12 percent would seem like a windfall for people sitting on globs of cash (borrowed from governments).

But today’s bull market didn’t last. Again, from ZeroHedge.com:


The Carnage Continues In Asia As China PMI Confirms Contraction Deepening

Submitted by Tyler Durden on 01/29/2014 – 20:50

Sharp change in just over 24 hours, wouldn’t you say?

No one seems to know why the markets so quickly reversed, but continued bad news (often spun as proof of recover) from earnings and government reports didn’t help. The “experts” have told us for months that there is no stock bubble. The Dow’s going to 20,000 and beyond. Get used to it!! Get your butts to Costco, and buy, baby, buy!

On November 24, one of the greatest minds alive–Ben Hunt–noted that two mega-bears threw in the towel and joined the “markets will rise forever” camp.

I started this note with quotes from two prominently bearish money managers – Jeremy Grantham and Hugh Hendry – both of whom are throwing in the towel on the upward trajectory of the market in the face of inexorable government bond-buying. Their change of heart reflects (finally and begrudgingly) the overwhelmingly dominant Narrative of Central Bank Omnipotence, that for better or worse it is central bank policy (particularly the Fed’s QE policy) that determines market outcomes.

Meanwhile, I’ve been warning: when the experts agree on the future, bet the other way.

Experts Tamed the Mississippi 130 Years Ago, Don’cha Know

In Life on the Mississippi, Mark Twain takes readers up and down the Mississippi. He takes us on this trip as a historian, then as a young man in love with the river, and, finally, as an old man on a nostalgia trip to New Orleans. 

We learn that between Twain’s last trip as a pilot on the Mississippi and the time of his later voyage, the Army Corps of Engineers has tried to tame the mighty river. But an old pilot, Uncle Mumford, offers Twain his opinion. The engineers are smart fellows, Mumford admits; smarter than he. And West Point taught them more about the river than Mumford could comprehend.

But the engineers didn’t live on the river the way Mumford had. They didn’t know the river. The learned about the river.

Mumford’s warning, “If the river has got a mortgage on that island, it will foreclose, sure,” foreshadowed the floods of 1993.  That’s what inspired me to read the book, and that quote was the main learning I took from it. Warning of foreclosure stuck with me.

Question Expert Consensus

When all the experts agree, expect the opposite.

From a rooftop smoking lounge at work, we could see the price at QuikTrip. Every day in 2008, the price went up. Every day, we expected to see it fall. Finally, we all gave up because, according to the USAToday headline of June 12, 2008: “Oil Experts Contend High Energy Prices Are Here To Stay.

But the experts were wrong. And shortly after those experts reached consensus, the market reversed. By the time trees were turning in the fall, that QuikTrip sign dropped under $1.50.

This chart shows gasoline prices in the US at key points during 2008. Remember, the experts reached consensus in June.

US Gasoline Prices 2008
US Gasoline Prices 2008

Here’s the chronology of US gasoline prices of 2008 from Treehugger.com:

July 7, 2008—Crude oil prices settled-in at a new record of $147 per barrel. The U.S. average price for regular gasoline climbs to an all-time high of $4.11 per gallon. Road trip style vacations are put on hold for many summer travelers.

Aug. 5, 2008—Oil prices fall below $120 a barrel. Treehuggers search for the good within the escalating gas prices.

Sept. 15, 2008—The barrel continues to drop below $100 a barrel for the first time in six months. The idea of a serious financial industry recession is discussed as the market literally begins to melt down!

Oct. 16, 2008—Oil prices fall below $70 a barrel, which is less than half of its July peak. Signs of $1.99 a gallon gas brings celebration to the masses. Some consumers begin to talk about dragging out their gas guzzling SUV’s and Winnebago’s for the first time in months.

Nov. 3, 2008—U.S. Gas prices drop to $1.72 a gallon. Some gas stations even roll out a $.99 cent promotional deal. Treehuggers question whether the sudden drop is as good as most consumers seem to think it is.

Dec. 17, 2008—OPEC removes 2.2 million barrels from its daily production. Crude oil collapses to $40 a barrel, becoming the lowest price in almost 4 years.

I Am NOT An Expert And This Isn’t Investment Advice

I own four stocks that I bought on my own through Sharebuilder. Three trade at less than a penny a share, and I paid at least $10 a share for each.

But I do pay attention to expert consensus. And I have looked into the phenomenon of experts being wrong. It’s not a difficult field to study, because it happens often.

In the present case, the experts are central bank planners. They want to control the world’s economy. They believe their expertness allows them manipulate the economy any way they want.

But they can’t. No more than the Army Corps of Engineers could keep the Mississippi from foreclosing on its mortgage. No more than oil experts could keep the price of gasoline rising. No more than the Soviets could command a robust and growing economy with toilet paper for all.

Yes, power allows central planners to control aspects of the economy for periods of time. But the forces underlying the economy don’t stop moving. Pressure doesn’t stop building. It’s simply contained, like the water of a giant river, or the cap on a super volcano.

When outside forces that the planners can’t control or didn’t know about strike the planned economy, the dam bursts, the cap ruptures, the economy crashes.

I’m not sure we’re witnessing the rupturing of the central banks’ plan. This could be just a temporary blip.

Even if this isn’t “the big one,” though, the big one’s coming.

The central bankers have run up a massive mortgage that all the people alive on earth cannot repay in a lifetime.  No central planner in history ever kept control forever, and no pegs ever kept a river in its banks for good.

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