On the heels of incredibly turbulent trading in key global markets, today 40-year veteran, Robert Fitzwilson, put together another extraordinary piece. Fitzwilson, who is founder of The Portola Group, warned that the world is about to see an event that will “shock the financial system,” and set the stage for a “New Financial World Order.” Below is Fitzwilson’s exclusive piece for KWN.
Fitzwilson: “1989 saw the release of a movie called “Field of Dreams” starring Kevin Costner. The film was nominated for three Academy Awards including Best Picture. In the movie, Kevin Costner is a farmer growing corn. While taking a stroll through his cornfield, he hears a voice that says “If you build it, he will come”. The “it” was a baseball diamond. While the movie revolves around baseball, the theme was really about regrets for events in the past and not following dreams….
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“Policies followed by the Federal Reserve resemble “Field of Dreams”. Crafted from a lifetime of studying the failures of the 1930s, the two most recent office holders of the Chairman of the Federal Reserve and their colleagues have been building their own financial field of dreams driven by the whispers of history and the regrets of the men who preceded them during the 1930s. The most recent version has been called the wealth effect.
The idea behind the wealth effect is that when people feel wealthier, they are inclined to spend more freely. If spread across broad populations, that will create demand for goods and services resulting in strong economic growth. Two of those important traditional forms of wealth are stocks and real estate.
The trouble with the plan is that money can be created, but controlling where it winds up is much more difficult. What we now know is that the money largely winds up blowing bubbles in the stock, real estate and art markets as well as being channeled to the proprietary trading desks of the biggest global banking institutions. A $119 million purchase of a house in Woodside, California, and a $95 million penthouse purchase in Manhattan are but just two examples. Banks reporting zero trading losses on any day in the first quarter of this calendar year is another.
The money was created, but little of it reached the people from whom the wealth effect was expected. Temporary wealth was created for holders of fixed income due to the disastrous policy of driving down interest rates, but retirees saw their income confiscated. The income lost would probably have stimulated growth more than the increase in prices given to holders of fixed income. Real estate did see a recovery in some parts of the U.S., but it was driven by financial firms buying huge blocks of properties for repackaging and securitizing.
So, the financial “Field of Dreams” created by our central banks has obviously failed. There were some positive effects, but those are now being seen as temporary. The desperate actions taken to pump up stock prices and to smash historical safe havens, such as gold and silver, signaled that the end was near. It is blatantly apparent to rational observers of markets that the policies of the Federal Reserve are broken. You can even include the Federal Reserve in that group in my opinion.
Last week may have marked the beginning of a serious reversal of any gains realized during the last four years. It was reported that the bond market had the worst week in 50 years, with the 10-Year Treasury rate at 2.50%. Having lived through the 1970s, when Treasury rates were in double digits, if we think this past week was bad, prepare to be really shocked if rates continue upward in any manner which closely resembles that period (of the 1970s). A secular rise in rates theoretically could be described as manageable, but a rapid and dramatic rise in rates will shock the financial system.
Since the first of the year, stocks were the envy of investors. The popular indexes basically went straight up with the help of official policy and company stock repurchases. Up until two weeks ago, all of the gains for the year typically came on Tuesdays. That pattern abruptly halted this past week. After Chairman Bernanke’s press conference on Wednesday, the last two days of the week showed severe damage to the sectors that had led the equity markets higher this year. The combination of rising interest rates and a key breakdown of leadership is a warning that steep declines in stocks and bonds could lie ahead.