Dear Diary,

Today… a warning concerning the new highs in the Nasdaq.

But first, an update on life at the ranch…

We spent the weekend at our “weekend place.”

That’s what we call the house we built in an even remoter area of our ranch – about two hours on horseback farther up the valley.
We built the house – out of adobe and stone – to test out some Roman-era building techniques (vaulted ceilings, arches and a dome; wood is used only for lintels) and to explore the outer limits of minimalist living.

No central heating: only a fireplace and glass facing to the sun. Off the grid: only a single 12-volt battery and small solar panel for electricity. Water from a stream, gravity-fed to the house. Hot water from a metal tank, painted black.

Total cost: about $10,000 (not including labor)

Operating costs: zero.

Biting Mood…

This weekend, the experiment looked like a failure. The valley was hot and full of flies. We couldn’t close the doors and turn on the air-conditioning. We don’t even have screens. So the flies came in… and some of them were in a biting mood.

To get away, we saddled up and rode to visit Feliz and Ilena. They are in their 80s and live alone an hour and a half farther up the valley, accessible only on foot or on horseback.

They live on a plateau, in a place called Corralito, watered by a river that seems to end at their place. They have grass for cows and horses. They have a garden with corn and squash. An orchard provides pears, peaches and apples.

One of their dogs had been chained up in a stone corral. He had been eating the peaches.

Feliz and Ilena were glad to see us; they don’t get many visitors. We sat on benches in their ancient adobe house; they served us tea and cheese and talked about the people who live in the mountains.

It was a pleasure to see them. But the flies swarmed around even worse than at our place. So Feliz kissed us on the cheek and asked us to send the nurse to visit. He’s going blind in one eye and can’t see well out of the other.

“But at least we’re not like Marta Sandoval,” he said.

“Who’s Marta Sandoval?”

“Of course, you’ve never met her. She never comes down. She must be about 90. She lives alone.”

“Where?”

“At Tacana.”

Oh, Tacana. Everyone has heard of it. But almost no one has ever been there or met Marta Sandoval.

“Doesn’t anyone ever check on her?”

“Yes… a couple times a year. She has a grandson, I think, who might visit every few months.”

“Why don’t people visit her more often?”

“There’s no road. Not even a trail. It’s very rough. About three hours… most of it on foot. And you have to know where you’re going.”

“Oh, we’ll have to visit her…”

But that’s another subject….

The Game Is Up

Stocks fell hard on Friday. The Dow saw a massive sell-off of 278 points – or 1.5%. Gold was flat.

You’ve heard by now why stocks fell – because of Friday’s Employment Situation report. Nonfarm payrolls rose 295,000 in February versus expectations of the consensus forecast of 230,000 new jobs added.

Investors took this “good news” to mean that maybe the Fed would allow interest rates to return to normal sooner rather than later. After all, the crisis that led to its zero-interest-rate policy (ZIRP) is plainly over. (More on this below from Chris.)

The stock market is where businesses are bought and sold. Prices should go up when those businesses are worth more – that is, when their prospects for earning more money improve. They should go down when the outlook darkens.

So why would the value of American businesses go down just when things are looking up?

Oh, you silly reader… where have you been?

Everybody knows the stock market now has little to do with the real value of the businesses it trades. Buybacks, carry trades, gambling, speculation – hey, this is 2015!

In the Nasdaq, for example, some valuations are now as frothy as they were in the last bubble – in 2000.

Website Zero Hedge recently reported that tech company founders were selling a record amount of shares in the companies they controlled.

Why would you sell shares in a company that was on the verge of a cancer cure… an aging remedy… or the next Apple?

Of course, you wouldn’t. The insiders know the game and when to leave the casino. And they’re getting out now.

No Place for Honest People

The stock market is no longer a place for honest people who want to exchange ownership stakes in productive businesses. It’s a gambling casino.

And now, with the “good news” that more people found jobs last month, the players are worried: Maybe the Fed will stop serving free drinks.

They can stop fretting. If a 278-point drop in the Dow follows a favorable jobs report, what would an increase in short-term interest rates do?

Or how about an increase back to its long-term average of 4.5%?

At least a 1,000-point decline for the Dow. Headlines shouting about the end of the world. And panic at the Fed and in Washington.

And… and….

…yes, and new pledges for “action”… and “whatever it takes” to avoid another crisis.

Which is why it is important to try to understand what is really going on. And how this scammy hullabaloo might end.

If you’ve been following our line of thinking, you already know we’re expecting a breakdown in the financial system.

A system that depends on ever-expanding credit cannot last forever. In the post-1971 world, credit is money. And if the Fed holds the price of credit close to zero, there is a big risk that it will set off a spate of consumer price inflation – sooner or later.

Another Volker Moment?

At least that is the common view, based on the volume theory of inflation. “When more money chases the same level of consumer goods and services, prices must rise.” That line must be in a textbook somewhere.

Then what?

Most people who’ve bothered to think about it (a small group) believe that it will end in rising consumer price inflation that forces either:

1. A Paul Volcker “come to Jesus” moment, in which the authorities come to their senses, clamp down, tighten credit and protect the dollar.2. More and more QE and ZIRP to reduce the real value of outstanding debt.

We will go with Option No. 2; it is more likely than Option No. 1, given the Fed’s commitment to avoid another correction at all costs.

But before we get to Option No. 2, we believe we will have a brief and terrifying visit with Option No. 3: a deflationary hell.

More to come…

Regards,

Signature

Bill


Market Insight:

The Market Has It Wrong on Interest Rates

by Chris Hunter, Editor-in-Chief, Bonner & Partners

Friday’s jobs report smashed expectations…

As Bill reports, the US economy added 295,000 nonfarm jobs versus consensus expectations of 235,000 new jobs.

This left the official unemployment level at its lowest since May 2008 – before the collapse of Lehman Brothers.

Also, the take “your job and shove it” indicator – the so-called “quit rate” that Janet Yellen has said she is monitoring closely – hit a seven-year high.

This measures the number of Americans who are voluntarily leaving their jobs to find better employment.

But we still don’t see a significant rate hike on the horizon in 2015.

Look behind Friday’s headlines… and you’ll see that average hourly wages rose just 0.1% month over month in February. This left the annual rate of wage inflation at just 2%.

And as Janet Yellen said last March, she’s looking for wage inflation between 2% and 3%.

So, unless we see that kind of wage inflation over the coming months, we reckon the market has it wrong on a rate hike being imminent.