Public life bumbles along under a combination of false pretenses and self-imposed delusions.

At the start of last week, it was widely reported that US central bankers had gone as far as they were willing to go. There were voices in the Fed, said the news, urging caution. There would be no further monetary stimulus measures, said the commentators.

Investors grew cautious.

But by the end of the week, they were rolling the dice again. The Fed was working hard to fight the impression that it had either lost its nerve or recovered its senses. From The New York Times:

The Federal Reserve said Wednesday that its economic stimulus campaign would press forward at the same pace it has maintained since December, putting to rest for now any suggestion that it was leaning toward doing less.

The Fed emphasized that it was ready to increase or decrease its efforts to spur growth and reduce unemployment as necessary, a more balanced position than it took earlier in the year, reflecting the reality that a strong winter has once again yielded to a disappointing spring.

It was the first time that the Fed had explicitly mentioned the possibility of doing more in a policy statement, although officials, including the Fed’s chairman, Ben S. Bernanke, have made the point repeatedly in public remarks.

With the wind of the Fed at their backs, investors put out full sail. On Friday, they were skimming along nicely, riding high on a tide of “EZ” money. “Don’t fight the Fed,” said the analysts. The Fed is pumping… stocks are going to rise.

Of course, it’s not that simple. Zimbabwe pumped. Stocks rose… for a while. But ultimately, it takes more than cheap money to make businesses more valuable. And too much cheap money is contagious; stocks become cheap too.

The Rich Get Richer

Some investors are cynical about it. They know the Fed’s easy money will have negative consequences for almost everyone. But they also know how the game works – money printing may be bad for the economy and the little guys, but it can be good for the rich guys. They’re the ones who own stocks! From Bloomberg:

The world’s 200 richest people added $44.6 billion to their collective net worth this week as the Dow Jones industrial average reached 15,000 for the first time.

Alisher Usmanov, 59, whose fortune rose $61.2 million during the week, according to the Bloomberg Billionaires Index, said in an interview at Bloomberg’s Moscow offices that he recently spent about $100 million buying Apple Inc. shares in anticipation they will rise.

Cynical investors know it’s a game. But a lot of people believe the claptrap. They think that the Fed – through some magic never fully explained or demonstrated – helps make people better off.

The Fed did not exist for the first million or so years that proto-humans have been walking on two legs. It is only in the last 100 years – a blink of an eye, in evolutionary terms – that the Fed has been around… and only little more than half a century since it took up today’s activist theories. And it’s been scarcely four years since it began to apply them so aggressively.

Is there any evidence that modern central banking makes things better over the long run? Has one sou or farthing been added to the world’s wealth as a result of the Fed’s policies? If so, everyone is keeping quiet about it…

Instead, central banks seem to have done something that most people would have considered impossible: They seem to have stopped progress.

Maybe it’s a coincidence. But it’s as though time stopped dead when the Fed took up its role of improving the economy.

If you adjust GDP to inflation and calculate it the way the federal government did when Jimmy Carter was president, you see that the real, disposable income of the average American has not improved since the first Eisenhower administration.

That’s more than 50 years with no real economic progress… almost exactly the same 50 years in which the Fed has been so actively trying to make the economy work better.

Go figure…

Regards,

Bill

Bill Bonner started Diary of a Rogue Economist to share his over 30 years of economics and market experience with as many interested readers as possible.

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Chinese Stocks Slump Most in Three Weeks as Manufacturing Slows – Bloomberg Reports:

China’s stocks fell, dragging the benchmark index down the most in three weeks, as data showed the country’s manufacturing growing at a slower pace. 

The Shanghai Composite has slumped 9.7 percent from a Feb. 6 high, on concern slowing growth will hurt earnings. China’s economy expanded 7.7 percent in the first quarter, missing estimates, as industrial production and fixed-asset investments in March fell short of forecasts. Rising Chinese home prices may limit scope for stimulus as President Xi Jinping seeks to prevent a real-estate bubble. 

“This has been a very narrowly based recovery, predominantly driven by infrastructure investment, but now even infrastructure investment is also apparently slowing down,” said Tao Dong, head of Asia economics excluding Japan at Credit Suisse Group AG in Hong Kong.

CHINA PMI BARELY ABOVE CONTRACTION

As I have said on numerous occasions, China’s infrastructure build-out is both ridiculous and unsustainable. Yet that does not stop for one second the cheerleading. 

For example please consider the Markit report headline for China Manufacturing that shows Operating conditions improve marginally in April

It is really tough to spin that stagnation, assuming you even believe it (I don’t), into something positive. Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC managed to do just that.

Qu stated “The HSBC Flash China Manufacturing PMI came in at a two-month low, but still managed to expand modestly in April, albeit at a much slower pace. However, new export orders contracted after a temporary rebound in March, suggesting external demand for China’s exporters remains weak. Weaker overall demand has also started to weigh on employment in the manufacturing sector. Beijing is expected to respond strongly to sustain the economic recovery by increasing efforts to boost domestic investment and consumption in the coming months.”

Really?

50.5 is “modest expansion”?! Would 49.5 have been “modest contraction?”

Let’s at least be honest about this. At best China is stagnating and this is in spite of an unwarranted and unsustainable infrastructure build-out.

Mike “Mish” Shedlock
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About Mike “Mish” Shedlock

Last night, six of us went out to dinner at one of the nicest restaurants in Salta. We ordered two bottles of good Laborum cabernet sauvignon. We had beefsteaks, dessert and coffee. The bill came to 1,058 Argentine pesos (about $200).

Was that a lot… or a little?

It depends. If you traded your money at the official rate, the meal would have been priced at around $200. Very reasonable.

But if you had traded your money at the rate quoted yesterday on the black market, the dinner would have been even more reasonable – barely more than $100.

This morning, the cab ride from the airport into Buenos Aires cost 50 pesos. At the official rate, that’s about $9. At the “blue” – or free-market – rate, the ride cost only $5.

The alert shopper can save a lot of money. The dull one gets ripped off.

All governments engage in larceny and fraud, using their authority to transfer wealth and power from the outsiders to the insiders. But the clever government does so by deception… while the clumsy one does so with no pretense or excuses.

In the US, for example, the feds deny savers any financial return from their economies under the pretense of “economic stimulus.” Wage earners get nothing, while bankers, speculators and zombie grifters are rewarded with ultra low-cost financing, capital gains, bailouts and giveaways.

The scale of this wealth transfer is the greatest in all history. Trillions of dollars are changing hands… But not one voter in 1,000 understands what is happening to him.

Writes Tyler Durden of Zero Hedge:

Curious where the always elusive “wealth effect” is going? It’s going here:

PORSCHE REPORTS BEST SALES MONTH IN HISTORY; DELIVERIES UP 29%

The typical American is not buying a Porsche. Relatively, he’s getting poorer. But his brain has gone soft, shrunken by TV news, elections and deadhead commentaries.

He believes Hillary Clinton when she says, “The government is all of us.” He thinks the Fed really is bringing a “recovery.” And he imagines that an economy can get richer when it prints more money and gives it to other people.

Sharpened by Adversity

Here on the pampas the Argentines know better. Their brains have been sharpened by adversity and enlarged by necessity.

“Every day, it is a struggle to keep up with it,” says a friend who runs a small business in Salta. “You have to figure out what the peso is worth… and you have to decide if you’ll do a deal in pesos or dollars. And if you do it in pesos, you have to figure out how to trade dollars for pesos… or vice versa.”

This week, the peso dropped to nearly 10 to the dollar. Officially, the rate is only 5.5 to the dollar. Big difference.

We need to buy a new hay baler. The price is quoted in dollars – about $50,000. You pay in pesos at the official rate… so that’s about 250,000 pesos. But wait – if you have dollars and can trade your money on the black market, you will save $25,000.

“The trouble is, the government is watching,” says our informant. “They’ll want to know where you got the 250,000 pesos… it can get very nasty if you don’t have your paperwork in order.

“But there are ways.”

The Argentines know they’re getting ripped off by the government. They find ways to protect themselves.

“There are invoices… and there are invoices. You can get an invoice at the official rate… or one at the unofficial rate. Or one that is not at any rate at all. The government rigs the system to cheat us. We rig it right back. You just have to make sure you have the right invoice for the right transaction. At the end of the year, people buy and sell invoices…

“I bought a new truck recently. But I made a bargain with the dealer. He delivered a new truck to me. But then he waited eight months to write up an invoice. By then, he was able to call it a used truck… and cut the invoiced price by half. It looked like I was paying full price for a used truck… I was actually paying full price for a new truck, but with money traded at the unofficial rate.

“Everybody’s got a trick or two. You have to. Otherwise, you’re a sap.”

The Argentines know they can’t trust their money… or their government. In comparison, Americans are saps. They don’t know whom to trust.

But we’ll make a prediction: Americans will be a lot less sappy… and a lot less wealthy… when they finally realize what the feds are doing to them.

Regards,

Bill

Bill Bonner started Diary of a Rogue Economist to share his over 30 years of economics and market experience with as many interested readers as possible.

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Inside Investing Daily

Tming is everything in financial markets.— Among the many lessons to take from former New Jersey Governor and banker Jon Corzine’s fall from grace….or Consider your position when the music stops.

If Corzine had merely delayed his forays into euro-zone markets, he might now be celebrated as a hero by shareholders of MF Global rather than hounded by their lawyers. That hypothetical helps put into perspective the profound shift in investor sentiment now sweeping through Europe.

MF Global’s bankruptcy in October 2011 was triggered by a panicked rout in Italian bonds, in which Corzine had concentrated most of a $6.3 billion bet he’d built up in euro-zone debt over the preceding year. Yet if he had placed that same bet a month later, MF Global’s Italy play may well have gone down as a truly savvy bet.

…..read more HERE

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Fed Holds Stimulus Steady, but Leaves Door Open for More 

In the past two weeks, we have seen disappointing durable goods and regional Federal Reserve Board reports, indicating that manufacturing activity remains weak relative to the larger economy. Source: Chad Moutray, Chief Economist, National Association of Manufacturers

With each successive major economic report, it increasingly appears as if the U.S. economy is inching over a cliff. The latest of these reports includes Friday’s 1st-Quarter GDP report, today’s Dallas Fed Manufacturing Survey and Q1 earnings reports. If I’m right and the economy is quickly headed south, then the stock market has become significantly overvalued relative to fundamentals and could also be headed for trouble.

First-Quarter GDP

…..read more HERE