Manipulated Markets: The Next Phase of QE Will Shock You

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It’s cold here in Manhattan. We’ve never lived in New York. And every previous visit had left us unenthusiastic.

The city is not pretty…at least not compared to Paris. And Lower Manhattan always seemed gritty, dirty and unkempt. Like a homely man or a homeless woman.

But a lot has changed. New York is now full of foreigners. Enter our hotel lobby and you hear a din of strange and familiar accents: English, French, Russian…and many we’ve never heard before. (We make a small contribution to the cacophony by taking Portuguese lessons in the tearoom.)

Soho is full of young people — often dressed in country duds. Almost all the men below 40 have facial hair. One man at a fancy restaurant we were eating in wore a plaid shirt and had a full beard. He looked like a lumberjack.

‘That’s the style,’ said our 26-year-old son, Jules.

Here on the Bowery the pace is fast…and there are new shops, luxury stores and chic restaurants on every street.

Just a few blocks away is Wall Street. Thanks largely to the feds, more and more of the world’s wealth runs through the US financial industry.

Money moves around

‘Isn’t nature marvellous’, we began, obscurely, a monologue directed at our wife, Elizabeth.

‘What do you mean?’

‘I mean, it never would have occurred to me that I should pay $10 for a cup of coffee and a cookie…or $200 for a theatre ticket…or $500 a night for a hotel room…or $1,200 for what looks for all the world like a 1970s Danish Modern chair.

‘Of course, I never thought people would pay ‘2 and 20’.

‘That’s what hedge funds charge — 2% of invested capital and 20% of profits — for money management. But when you hang around in New York for a while it all begins to seem normal.’

Uptown, developers are putting up the most expensive condos in the history of the world. From Forbes:

The 54-story condominium tower at 520 Park Avenue is scheduled to begin rising by February 2015, says Arthur Zeckendorf of Zeckendorf Development. Set on 60th Street two blocks east of Central Park, 520 Park Avenue is designed to rival another, wildly successful Zeckendorf project: 15 Central Park West, now a billionaire enclave and one of New York’s most prestigious addresses.

Robert A.M. Stern Architects designed the 520 Park Ave tower, which will contain 31 homes. The tower’s seven 9,100-square-foot duplexes are priced at $67 million; its 23 4,600-square-foot single-floor apartments, dubbed "simplexes," start at $16.2 million.

Downtown, Wall Street takes money from people who want to think of themselves as clever investors. Then developers take money from Wall Street’s cleverest pitchmen.

Goldman Sachs CEO Lloyd Blankfein bought at 15 Central Park West, as did hedge fund multibillionaire Daniel Loeb.

Money moves around. As soon as you get some, you find things to do with it. Or someone else does. Rarely does it stay put.

A 1,000-point drop in the Dow?

Readers have complained we are negative, cynical and ‘always gloomy’. We deny the allegations. We feel chipper and positive. Even about the stock market.

It’s just that, in our view, it is not the way to get rich (not in the way most folks think, at least). It is just a way to keep the money circulating.

Yes, we expect a 1,000-point drop in the Dow. But that is not the end of the story. It may be just the beginning.

It probably won’t even be the end of this bull market.

This is a manipulated market. And the manipulators aren’t going to go to sleep in the face of collapsing stock prices. Instead, they’ll wake up fast — and rush in with a stimulus program that will knock our socks off.

That’s when ‘you ain’t seen nothing yet’ will be the appropriate remark at cocktail parties, family reunions and investment conferences — no matter what the subject.

We’re just guessing, of course. But our guess is that — after a scare — the feds will get to work in a majorly reckless way, recirculating money.

Today’s excesses will seem modest in retrospect.

The route forward for the feds is being mapped by Krugman, Stiglitz, the Financial Times…and now Bloomberg.

Clive Crook, formerly with the FT and now with Bloomberg, offers advice on ‘QE for the People’ to European policymakers:

Of the roughly 275 million adults with social-security numbers in the euro zone, some 90% are on the electoral register.

Extrapolating from America’s experience in 2001, when a $300 per person social-security rebate boosted spending by about 25% of the total amount distributed, a €500 ($640) check from the ECB could increase spending by about €34 billion, or 1.4% of GDP. The extra tax revenue that such a rebate would produce would reduce government deficits significantly.

Beyond lifting the euro-zone economy out of deflation, such an initiative would have massive political benefits, as it would reduce resentment toward European institutions, especially in struggling countries like Greece and Portugal, where an extra €500 would have a particularly strong impact on spending.

In this way, the ECB could prove to disgruntled citizens and investors that it is serious about meeting its inflation target, and even help to stem the rise of nationalist parties. […]

On the face of it, though, this approach would be legal. It would make Milton Friedman proud. Best of all, it’s a good idea. Fire up the helicopters!

His advice was intended for Europeans. American policymakers are paying attention too.

Regards,

Bill Bonner
for The Daily Reckoning Australia

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Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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