Maria’s Note: Maria Bonaventura here, Rogue Economics’ senior managing editor. For today’s edition of Inside Wall Street, I sat down with Nomi for an exclusive conversation.

We talked about how Wall Street’s leverage gamble led to the 2008 financial crisis… how the resulting bailout by the Federal Reserve opened the floodgates for a distortion between the markets and the real economy… and about the opportunity Nomi sees in this distortion.

Read on below…

Maria Bonaventura: Nomi, you’re no stranger to market crises. Regular Inside Wall Street readers will know what I’m talking about…

You had a “trial by fire” moment in 1987, for example. You had just gotten your first job on Wall Street, as an analyst at Chase Manhattan Bank. And the markets crashed on Black Monday. The Dow plunged 22.6% and the S&P 500 dropped 20.4% – in one day.

A decade later, you navigated two major crises back to back.

You were a Senior Managing Director at Bear Stearns in London when the Asian crisis hit in 1997. Then the Long-Term Capital Management crisis hit a year later. You led a team of analysts through both.

And right before you left Wall Street in 2002, you started sounding the alarm on warning signs for what became the 2008 financial crisis.

Today, we’re living through a different – less obvious – kind of crisis. You call it a distortion.

For newer readers, can you tell us what you mean by that? What is the distortion? And how did we get here?

Nomi Prins: The thing about a crisis is that it moves the markets in a certain way – whether it’s for a week, a month, or a few years.

Sometimes, it’s caused by an event you can’t predict, such as a virus. But most of the time, if you know where to look, you can see it coming.

An example of that is Wall Street taking on too much debt. We call this “leverage.” Basically, it means the big players are borrowing too much to make bets on stocks.

Whether that is borrowing on their own behalf… or enabling their corporate clients or customers to borrow too much to speculate on stocks… or both.

This sets the financial system up for an obvious crisis.

That’s what happened in 2008.

In the books and articles I wrote since I left Wall Street, I was specific about what would cause that crisis. And also about the timing of the crisis.

When I wrote my 2004 book, Other People’s Money: The Corporate Mugging of America, I talked a lot about what was going on in Wall Street at the time.

I wrote about how Wall Street was setting us up for a crisis. I pinpointed how that crisis would happen with something called credit derivatives.

It was that idea of borrowing too much in different ways. I wrote that it would create a crisis. And in 2008, it did.

[For more from Nomi on that, see the December 22, 2021 issue of Inside Wall Street.]

But the 2008 crisis was different. And what we’re seeing today is a direct result of that crisis.

That’s because that crisis opened the floodgates for central banks to manufacture money out of nothing. To conjure money, if you will.

Maria: Tell us more about that, Nomi. How exactly do central banks like the Federal Reserve drive this distortion?

Nomi: The Fed was and is the biggest culprit. It’s the most powerful central bank in the world. It basically produces dollars. That’s huge, because the dollar is the No. 1 reserve currency in the world.

Since 2008, the Fed has conjured up about $8 trillion – just because it can. That money flooded into Wall Street and the markets. And that set up the first moments of what I now call a permanent distortion.

All of a sudden, we had this force outside the markets calling the shots.

It wasn’t just tweaking the cost of money or interest rates around the edges, as it had in the past.

It was dumping fabricated money into the markets, in return for buying debt in the form of government and other bonds. This effectively took debt out of the markets.

And that allowed more debt to be created. Because now, we had other central banks buying that debt.

And these non-market players, who could create money out of thin air, were suddenly pulling the strings of the “free” markets.

That distorted the value of stocks and other financial assets. Because the feds were no longer playing by the old rules.

Yes, Wall Street still has power. So do major corporations and other big players.

But now, we also have this external power – the Fed – that can just create money at will. This has really changed the game.

Maria: You used to believe the distortion would go away eventually. But you now believe it’s here to stay. It’s permanent. Why is that?

Nomi: It really comes down to the flow of cheap money from the Fed. Since 2008, the feds have kept a large book of assets. Interest rates have mostly hovered around zero.

They went to zero in December 2008. They stayed there until 2015, when they crept up a bit. Then in March 2020, they went back to zero.

And last month, the Fed raised interest rates for the first time since 2018. But at the end of the day, they’re still historically low.

Meanwhile, the amount of money that the Fed and other central banks have produced is historically high.

As I mentioned earlier, the Fed has created $8 trillion since 2008. Globally, central banks have created more than $41 trillion since 2002. The bulk of that happened in the years just after the financial crisis of 2008, and then again after the pandemic.

That, in itself, is another factor of distortion. The banking system and markets suck up this money and use it to buy financial assets.

It’s like a virus. It finds the host. The host is the stock markets, or various bond markets. The money reproduces itself there.

That money is so cheap, it’s coming in at practically no cost. It’s conjured out of nowhere. And it explodes into all of the rallies we’ve seen in stocks, cryptos, and commodities.

Even with the inevitable choppiness along the way, the markets have been in overdrive since the 2008 crisis.

The distortion has grown so much, it’s impossible for central banks to change their tune now. The Covid-19 pandemic turbocharged that.

In March 2020, when the virus hit all of a sudden, central banks didn’t just increase the amount of money they conjured. They doubled it in no time.

It was unprecedented. We didn’t even see that much money creation, so fast, in the immediate aftermath of the 2008 crash.

We’re going to live with the effects of this distortion for decades. But we’re only just waking up to it.

Maria: What effects should readers look out for in their own portfolios? And how might the distortion impact them in other ways in their daily lives?

Nomi: Well, for one, it means the real economy is always going to lag behind the financial markets.

When I say the “real” economy, I’m talking about how people really live, what things really cost at the grocery store, and how the economy really grows.

And I think everyone reading this will know that the cost of their day-to-day living has shot up over the last two years. Annual inflation, as measured by the Consumer Price Index (CPI), is now at 7.9%. It hasn’t been this high since 1982.

So we have the distortion between the soaring stock market and the plunging value of people’s money.

And it will take a long time for all that conjured money to filter back into longer-term growth for average folks. Because money will always flow into the markets first, pushing up the price of stocks and other financial assets.

Right now, we’re in this permanently distorted universe. And it’s important for investors – of any size – to recognize that.

The distortion is the driving force behind our markets. And that’s not going to change.

The four largest central banks in the world, including the Fed, have conjured close to $32 trillion since the period of the financial crisis of 2008. And that’s not even counting the other smaller central banks.

And that goes back to your question about how this distortion plays out in an investment portfolio.

This extra money increases the total value of stocks because it flows into stocks.

Plus, it helps that interest rates are so low. The big players can basically borrow money at close to zero percent interest.

Now, there’s going to be volatility in the markets. We’ve seen plenty of it already this year. And the Fed has started raising interest rates, with the threat of more hikes to come this year.

But, in general, this pool of cheap money will keep lifting assets in the long run.

That’s why I aim to take advantage of this distortion by showing my readers simple ways to play it for profit. So no matter what happens with inflation, they’ll be set up to beat it in their portfolios.

Maria: Thanks for your time, Nomi.

Nomi: Thanks, Maria.

Maria’s Note: Wednesday, April 6, is going to be a landmark day for Rogue Economics.

Right now, Nomi is busy putting the finishing touches on an urgent briefing. It relates to an historic wealth transfer she sees coming – worth $150 trillion.

And it could help you multiply your nest egg 10 times.

If you want to find out more, follow this link. With just one click, you’ll be added to our VIP list for the briefing.

And be sure to add this date to your calendar: Wednesday, April 6 at 9 a.m. ET. Nomi will tell you all about this $150 trillion wealth transfer then.

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