GUALFIN, Argentina – Stocks have been wiggly-waggling along for the last few days.

Just like the tail on a happy dog.

Investors don’t know what to do…

And everyone is on the edge of his seat in anticipation of whether the Fed will raise interest rates at its policy meeting this week.

This must be the most anticipated move by a central bank in all history.

All Eyes on the Fed

In a few days, Janet Yellen and her central banking cronies will decide whether to begin raising short-term interest rates.

Supposedly, the six-year emergency is over.

It’s time to help those interest rates up off the floor.

If the Fed does anything at all, it will probably do so little that it won’t make any real difference. Maybe an increase in the federal funds rate of one-quarter of a percentage point!

(This rate is the “base” interest rate in the economy. It’s the rate at which banks lend reserves – aka federal funds – to each other, usually overnight.)

But most likely, the Fed will do nothing… because nothing is the safest thing to do.

Yellen is well aware that there is always a last straw that breaks the camel’s back. Her main goal as Fed boss is to avoid being the one who puts it there.

Over the last six years, we’ve seen that fiddling with the price of credit does not really improve the economy. Japan taught us this a long time ago.

And just as dropping interest rates to the floor doesn’t really help, raising interest rates by a trifling amount won’t hurt much either. That should be a comforting thought.

But we say this with a bit of caution… Because it is also true that the Fed has put so much effort into backstopping asset prices, it may not be a pretty sight when investors realize that zero interest rates can’t go on forever.

In theory, an economy is indifferent to the quantity of money. It merely adjusts prices – rapidly – to the volume and velocity of money.

But some prices adjust more quickly and easily than others. Stock prices, for example, are adjusted every second. In a few days of trading, stocks may lose half their value. Housing takes longer. And labor costs – wages – can be particularly “sticky.”

It is much easier to raise wages than to lower them. Employment contracts and compensation levels are rarely set more than once a year.

So, when the money supply falls, labor rates tend to remain stuck at high levels. This means that labor is too expensive relative to output (and the money supply)… forcing cuts in employment.

Nobody – not even us – wants that to happen.

Trees Don’t Grow to the Sky

The more immediate fear is simply that – if the Fed were to raise rates – investors would panic out of stocks…. or throw another “tantrum.”

We’ve had a little hint of that in the last few weeks. It must be on Janet Yellen’s mind.

What puzzles us is why investors haven’t already panicked. Corporate earnings have plateaued in 2015. World trade is declining.

And so is what friend and economist Richard Duncan calls “excess liquidity.” (More on what that means for asset prices here.)

Even if you believe the official statistics, this recovery has been the weakest since the end of World War II.

Sooner or later, the bull market that began in March 2009 has to end.

“Trees do not grow to the sky,” say the old-timers.

Nope. There are limits to everything. And surely, there is a limit to the prices investors will pay for stocks.

In this go-round, we suspect we have already passed it.




Further Reading: How can you protect yourself from the next bear market? In our Weekend Edition of the Diary, we ran an essay from friend and colleague Alexander Green. It outlines the three steps you should take now to protect your profits. Catch up here.


Are gold mining stocks a good alternative to owning gold?

Value investor David Einhorn of Greenlight Capital thinks so.

He’s been accumulating shares in the big gold miner ETF, theMarket Vector Gold Miners ETF (NYSE:GDX).

Gold miners are widely seen as leveraged plays on gold bullion.

That’s because it makes current production… as well as future production… more valuable without raising gold miners’ operating costs.

But as you can see from today’s chart, which tracks the performance of gold bullion versus GDX, that hasn’t worked out over the past seven years.

091415 Gold vs Gold Miners

Over that time, the price of gold has risen by 30%. And gold mining stocks have fallen by 75%.


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The cost of borrowing physical gold in London has risen sharply in recent weeks. That has been driven by dealers needing gold to deliver to buyers in India. Chinese demand is also rising.

Six Timeless Investing Lessons from David Tepper
David Tepper manages about $20 billion for his fund, Appaloosa Management. It returned a record 42% in 2013 and has had only three down years in its history. Here’s how he did it…



Today, a question on Bill’s forecasting record.

You have maintained that in the past you predicted the collapse of the dot-com bubble as well as the housing bubble.

It would be interesting to find out if you would admit to making a past prediction that did not come about.

– Andy F.

Bill comment: Nobody can predict the future. But we all have to try. Otherwise, we will be paralyzed. So we do our best.

Our motto: “Sometimes right. Sometimes wrong. Always in doubt.”

In a recent speech in Vancouver I talked about how I’d been wrong for 40 years about the fiat dollar system. I thought it would blow up in the 1970s. And it’s still around…

And longtime readers will recall how wrong I was about Amazon’s share price.

If there is one thing you can count on from us, it’s errors. We make them all the time.

But although we are weak at soothsaying, we are strong at humility.

We’re proud of our humility. When it comes to humility, we’re Numero Uno. No one is more humble than we are. We like being humble, because it gives us a big advantage.

Most of the worst errors are made by people who think they know something that they really don’t. We don’t know anything. And even as to that we have our doubts.

You will find no prediction in the Diary that we are 100% sure of. This is our big edge.

In Case You Missed It…

Yesterday’s note from our managing director, Amber Lee Mason, has already caused a stir among readers.