If something very strange happens and continues over an extended period, people get accustomed to it and come to view it as normal. That’s especially so when the strange set of circumstances is the result of a policy that, as a result of devotion to a wrong theory or strategy, is widely considered to be a reasonable response to a problem.

A good example is the “Patriot Act”, which was introduced in the wake of the 911 attacks. This act dramatically increased the legal ability of the US government to violate individual property rights in the name of greater security and was widely viewed as extraordinary when it was first proposed, but in 2011 there was barely a mention in the mainstream media when President Obama signed a 4-year extension for some of the most controversial parts of the act. With some modifications forced upon the government by the revelations of Edward Snowden, another 4-year extension was approved with minimal public protest in 2015 under the Orwellian name “USA Freedom Act”. My point is, whereas 20 years ago most people would have been horrified by the provisions of the Patriot Act, today most people couldn’t care less. Today, the powers granted by the Patriot Act are generally accepted as normal.

Another good example is the downward drift into negative territory of government bond yields in Europe. As recently as two years ago it was believed by almost everyone that zero was the lower bound for a bond’s nominal yield. At that time, the idea that nominal bond yields would fall to zero was almost unthinkable, and anyone who predicted that a sizable percentage of the bonds issued by European governments would soon trade at negative nominal yields would have been perceived as a lunatic. Today, however, about one-third of the euro-zone’s sovereign debt is trading with a negative yield-to-maturity and people are becoming accustomed to this new reality. Also, the ECB just reduced its official deposit rate from negative 0.20% to negative 0.30%, which only surprised the financial markets because most traders were expecting it to be pushed even further into negative territory.

A point that deserves to be emphasised is that even though the financial world is becoming inured to the situation, it is completely absurd for interest rates and nominal bond yields to be negative. The reason is that regardless of whether the economy is experiencing inflation or deflation, having money in the present should always be worth more than having a promise to pay the same quantity of money in the future. To put it another way, it should never make sense for people throughout the economy to choose to incur a cost for temporarily relinquishing ownership of money.

But obviously it does make sense, because it’s happening! The question is why.

A number of factors had to come together to make negative interest rates possible, including persistently-low inflation expectations in the face of rapid monetary inflation. However, the overarching cause is unswerving devotion to bad economic theory. Persistently-low inflation expectations only enabled the application of bad theory to be taken to a far greater extreme than it had ever been taken before.

The bad theory is that the economy can be made stronger by artificially lowering the rate of interest. If you have the power to manipulate interest rates and you are totally committed to this theory, then a failure of the economy to strengthen following a lowering of the interest rate will cause you to bring about a further interest-rate decline. As long as you remain steadfast in your belief that a lower interest rate should help and as long as rising inflation expectations don’t get in the way, continuing economic weakness will lead you further and further down the interest-rate suppression path.

The Fed currently looks less radical than the ECB, because, while the ECB has pushed its targeted interest rate into negative territory and shows no sign of changing course, the Fed is probably about to take a small step into positive territory with its own targeted interest rate. However, the senior members of the Fed and the ECB are guided by the same bad theories, so it is certainly possible that the next time the US economy slides into recession the US will end up with a negative Fed Funds Rate. In fact, if the US economy slides into recession in 2016 then a negative Fed Funds Rate will become a good bet.

In conclusion, today’s negative interest rate situation would have been viewed as nonsensical as recently as a few years ago and will be viewed as nonsensical by the historians who write about the 2010s in decades to come. However, the financial world is not only becoming accustomed to this absurd situation, it is now common to view negative interest rates as appropriate.

To develop a popular newsletter or blog focusing on finance and investment, you don’t need to offer anything of real value. You just need to adopt all or most of the following guidelines/suggestions.

1) H.L.Mencken wrote: “The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.” The same approach can be applied to the financial writing business. Specifically, the main goal of practical newsletter-writing and blogging is to keep the readership alarmed (and hence clamorous for advice) by menacing it with an endless series of hobgoblins, most of them imaginary.

2) If your analyses and recommendations prove to be on the mark then give yourself a very public ‘pat on the back’ for having been incredibly prescient, but if your analyses and recommendations prove to be off the mark then put the blame on market manipulation and quickly move on. Never acknowledge the possibility that your analysis was wrong.

3) Grab every opportunity to re-write the history of your own performance with the aim of creating the impression that your forecasting record is much better than is actually the case. This will work because a) if you claim often enough and assertively enough that you correctly predicted a major market move, it will eventually be perceived as the truth, and b) most of your old readers won’t remember and most of your new readers won’t check what you wrote in the past.

4) Word any ‘analysis’ in such a way that you will be right regardless of what happens. Here are some examples:

a) A non-specific forecast of higher volatility is always good, because it will always be possible to subsequently find a market or a region in which volatility increased.

b) Present multiple scenarios that essentially cover all possible outcomes.

c) Present forecasts/assessments in the format: Bullish above A$, bearish below B$. When the price moves above A$ or below B$, generate a new forecast in the same format. This way you will always be 100% accurate without ever providing useful information.

5) Emphasise the forecasts/recommendations that have worked and forget to mention, or only mention in passing, the ones that didn’t work. For example, publish a list showing the large gains made by some of your past recommendations and add a note to the effect that not all of your recommendations resulted in such spectacular success. This has the advantage of creating a totally false impression of your performance without actually being a lie.

“There are many ways of calculating purchasing power by means of index numbers, and every single one of them is right, from certain tenable points of view; but every single one of them is also wrong, from just as many equally tenable points of view. Since each method of calculation will yield results that are different from those of every other method, and since each result, if it is made the basis of practical measures, will further certain interests and injure others, it is obvious that each group of persons will declare for those methods that will best serve its own interests. At the very moment when the manipulation of purchasing power is declared to be a legitimate concern of currency policy, the question of the level at which this purchasing power is to be fixed will attain the highest political significance.”

The above paragraph contains remarkable foresight considering that it was written by Ludwig von Mises way back in 1934 (it is from the preface to the 1934 English edition of “Theory of Money and Credit”). In particular:

1) There are now more ways than ever of coming up with a number that purportedly represents the change in money purchasing power (PP), with different groups advocating on behalf of different numbers depending on their agendas. For one example, the US government likes the Consumer Price Index (CPI), because its rate of increase has been very slow for a long time (enabling cost-of-living adjustments to be minimised) and because the calculation methodology can always be changed by the government if the result deviates too far from what’s deemed acceptable. For another example, the Fed likes the Personal Consumption Expenditures (PCE) calculation, because it tends to be even lower than the CPI and therefore shows the Fed in a more positive light and gives it more flexibility. For a third example, at the other end of the spectrum there are the perennial forecasters of hyperinflation who are always on the lookout for ‘evidence’ supporting their outlook. This group likes the Shadowstats CPI, even though the Shadowstats calculation contains a basic error that makes the result unrealistic and leads to ridiculous conclusions regarding GDP growth.

2) The manipulation of PP is most definitely now deemed to be a legitimate concern of currency policy. In fact, it is generally deemed to be the primary concern.

3) The question of the level at which PP is to be fixed has attained the highest political significance, with senior policy-makers throughout the developed world having almost simultaneously arrived at the conclusion that 2% is the correct level for the rate of annual PP loss. As a consequence, economies and financial markets are now being constantly pummeled by central-bank interventions designed to ensure that monetary savings lose about 2% of their PP every year.

It would be nice if prices returned to being indicators of genuine supply and demand, as opposed to being the effects of the central bank’s latest attempts to make an arbitrary index of prices match an arbitrary target.

I have kept an open mind over the past few months as to whether the July-September decline in US equities was the first leg of a new cyclical bear market or a correction within an on-going cyclical bull market. There were hints that it was the former, but there was nothing definitive in the indicators I follow and the price action was consistent with either possibility. The jury is still out, although there has been a probability shift over the past couple of weeks. Before I discuss this shift I’ll do a quick recap for the benefit of blog readers who aren’t TSI subscribers.

During the first half of July this year I thought that there was almost no chance of the US stock market experiencing a bona fide crash over the ensuing few months, but — for reasons outlined in TSI commentaries at the time — I thought there was a good chance of the S&P500 Index (SPX) falling by 10%-20% from a July peak to a bottom by mid-October and that a put-option position was a reasonable way to trade this likely outcome. Then, when there was a discontinuity at the start of the US trading session on Monday 24th August with prices gapping sharply lower across the board, I sent an email to TSI subscribers saying that all bearish positions should be exited immediately. My view was that the 24th August mini-panic would be followed by a multi-week rebound and then a decline to test the low by mid-October, but regardless of what the future held in store the 24th August price action created a very obvious profit-taking opportunity for anyone who was betting on lower prices.

Subsequent price action could aptly be described as noncommittal. There was a successful test of the 24th August low in late-September followed by a strong rebound to a high in early-November, none of which was surprising. Also, this price action didn’t provide any important new clues, because I considered a successful test of the August low followed by a rebound to at least the 200-day MA to be likely regardless of whether we were dealing with a bull-market correction or the early stages of a new bear market.

I’ll now deal with the probability shift mentioned in the first paragraph.

Although I was keeping an open mind regarding the nature of the July-September downturn, if someone had held a gun to my head a few weeks ago and forced me to pick a side I would have chosen the ‘new bear market’ scenario. That is no longer the case.

The jury is still out and for practical investing/speculating purposes there is no need to pick a side, but the probabilities have recently shifted in favour of the ‘bull market correction’ scenario. Displayed below is a chart that illustrates one of the reasons for this probability shift. It is a monthly chart of the S&P500 Index (SPX) with a 20-month moving-average (MA).

This chart shows that once a bear market got underway in 2000 and 2007 and the SPX had achieved a monthly close below its 20-month MA, it did not achieve a monthly close above this MA until the bear market was over. However, in 2011 and again this year, a monthly close below the 20-month MA was quickly reversed.

If a cyclical bear market was in progress then the SPX should have weakened enough in November to give another monthly close below its 20-month MA, but it didn’t. Instead, it managed a second consecutive monthly close above this MA. This is a meaningful divergence from the price action in the early stages of the preceding two cyclical bear markets and is more consistent with the bull-market correction scenario.

There is other evidence to support the ‘bull market correction’ scenario, but, as I said, the evidence is not yet conclusive. In fact, in a TSI commentary scheduled for tomorrow I’m going to show two important indicators that support the ‘equity bear market’ scenario. Moreover, the bull market is ‘long in the tooth’, valuations are high and earnings growth (on a market-wide basis) is non-existent, so even if the long-term bullish trend is still in progress there’s a high risk that it will end sometime next year.