An Important Lesson from Tony Soprano
By Bill Bonner - June 25, 2013

"All due respect, you got no f—-g idea what it's like to be Number One. Every decision you make affects every facet of every other f—–g thing. It's too much to deal with almost." – Tony Soprano

Whew! The Fed is number one in central banking. And it's finding out just how tough it can be to meddle with a $16 trillion economy.

On Wednesday, Ben Bernanke came out with a public statement. He said that if all went well… and he didn't change his mind… and nothing unexpected came up… and the Fed's Open Market Committee felt like it… the Fed would begin tapering its bond buying sometime soon.

That was all it took to send a shiver up investors' spines… and a sell signal to Wall Street. Everything sold off – stocks, bonds, commodities, gold… you name it.

Over the next two days, the Dow sank more than 500 points, before stabilizing on Friday. From Adrian Foster, head of financial markets research for Asia-Pacific at Rabobank International in Hong Kong:

"Clearly, the Fed tapering is on the table now. There is a reversal of perception in liquidity and it will take some time for investors to digest, rebalance and what not."

When the Fed's EZ money programs end, there will be Hell to pay. We're not sure that bill has come due yet. We'll have to wait and see.

But Mr. Market wants a correction. Mr. Bernanke wants to avoid it.

In the long run, we don't have any doubt about who will win. Mr. Market always wins.

But rarely in the way you expect. He might play with Mr. Bernanke for years before administering the coup de grâce. Investors might be deceived, surprised and completely faked out once… twice… three times before the curtain finally falls.

Tokyo… Then Buenos Aires

Do you want our best guess?

Here it is: Tokyo… then Buenos Aires.

We suspect that the Great Correction is intensifying. Stocks will fall. Bonds will fall. Real estate will fall. Just like they did in Japan.

But unlike Japan, yields will rise. Yes, that's the most interesting thing that is happening. After 30 years, the bull market in bonds appears to have finally come to an end. Yields are rising. Bond prices are falling.

And this is happening at the worst possible time. Just what you'd expect, in other words.

Let's go back a bit further to get more perspective.

Aided and abetted by the Fed, for 60 years America's private sector loaded itself with debt. Then, in 2007, the weakest link – subprime mortgage debt – broke apart. The end of the cycle was at hand.

We estimated that the process of de-leveraging – paying down, writing off, defaulting, going broke, inflating away and otherwise shucking debt – would take 7 to 10 years. We're now in year 6.

We knew the feds would fight the correction, but we didn't realize how reckless they would be about it. Their interventions, worldwide, have cost $7 to $12 trillion, depending on whose tally you believe. These meddles make it very hard to know what is really happening. The Fed rigs the most important price in the most important economy in the world – the price of credit. All other prices are affected. You can study price movements, but it's impossible to know what they really mean.

One thing is sure, the Fed – and not a real recovery – was responsible for the big run-up in stock prices from 2009. So, it's reasonable to expect that when the Fed backs off… so will stock prices.

Then, instead of the 'wealth effect' helping to hold up the economy, we'll have a negative wealth effect – falling asset prices – pulling it down.

A correction is meant to correct mistakes. The Fed has tried to stop it. It has kicked the can down the road. But over the last 6 years… we have gone further down the road.

And there is the can again! And now, it appears that the Great Correction must intensify. It must continue its work: correcting the foolish mistakes of the bubble period AND the foolish mistakes of the last five years, too.

But if the bond market has turned against the Fed, falling bond prices will make it harder for borrowers everywhere to keep going. And the biggest borrower in the world is the Fed's own boss – the US government.

Fed governors know they have to "taper" sometime… or risk a bigger calamity. But they can't back off now… not with the bond market falling. They'll have to increase their buying… and cause even more distortions.

That's how we get to Buenos Aires. Deflation Now, Inflation Later.

Hold on tight!

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