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March 02, 2007

Normal Markets
by Bill Bonner

"You can't always get what you want, but...you get what you need." - The Rolling Stones

"Bernanke's words lift investor sentiment," said the headline in the Financial Times article on the subject.

According to the report, the head of the U.S. central bank wished investors to know that there was no cause for alarm, because the markets were working 'well' and that they were functioning 'normally'.

On this point, we have no doubt. It is normal for prices to rise to unrealistic levels. It is normal for a correction to follow, when they fall back down to more ordinary heights. It is normal even for asset prices to crash occasionally...after having run up too far too fast.

Our doubts arise when we consider the circumstances. Mr. Bernanke told investors that his economic forecasts were unchanged. His soothing words and professorial demeanor led them to believe that they had nothing to worry about. But a normal market is like a normal tornado. Both can whip things up and tip over the outhouse.

Let us turn to Zimbabwe for a little instruction and entertainment. You will recall our dictum: A normal correction is equal and opposite to the deception that precedes it. Thanks to the scheming of the Mugabe government, the prices of consumer items are soaring. The inflation rate was 600% a year ago. Now, it's 1,600%. "This means that on average, goods and services normally purchased by households for final use in Zimbabwe were about 17 times as expensive in January 2007 as they had been 12 months before," said the man in charge of distorting the figures.

Readers who want to keep up with the rate of inflation in Zimbabwe are invited to go to mukuru.com where they can get a quote. According the figures on the website, the Zimbabwe dollar has lost 16% this week alone...and now sits about 10,000 to one against the U.S. model.

Meanwhile, Gideon Gono, Zimbabwe's central bank chief, said that 'new farmers' were the cause of the problem. These new farmers are unlike the old farmers in that they don't actually grow anything. This came about because the government decided to confiscate white farmers' land - in the name of 'justice' - and turn it over to political hacks and cronies.

We only mention this to show how 'normal' markets work. They tolerate fools and knaves for a very long time, but never forever.

But the nice thing about the markets is that the punishments tend to fit the crimes. The greater the deception and scheming...the harder the punishment. The farther out-of -the-ordinary prices go...the more they have to move to get back into the ordinary. The greedier investors become, the more they lose.

If the markets are really functioning as well as Ben Bernanke thinks, they will soon correct the foolish and absurd bubbles blown up by today's excess liquidity. Even after the mini-collapse of this week, Chinese shares are up 34% this year. Investors, quoted in the Financial Times, say they are not worried. They expect to continue investing in the stock market and are confident they will make money. Little wonder; over the last 12 months, Chinese stocks re up more than 100%.

Stocks in Vietnam - another Marxist paradise - are up 51% this year, again after this week's price slippage. Over the last year, they're up 200%. Again, reports tell us that speculators have no intention of getting off this gravy train until it comes to a full stop. Junk bond investors are just as bullish. Even after openly threatening default, Ecuadorian bonds still yield only 11%. And in the former Soviet republic of Latvia, real estate agents say property prices went up 40% between July and September of last year (according to the FT). GDP growth in that tiny Baltic nation hit 12% in 2006 - faster even than China.

All over the planet, people working in the money shuffling industry are making more money than they ever made before, financial assets are more expensive than they've ever been before, and more money and credit is being added than was ever added before.

Normally, you'd expect a correction.

Ben Bernanke tells investors to relax. Markets are functioning normally, he says. He might as well tell sinners not to fear because God is just. But that's what they should be worried about.

Regards,

Bill Bonner
The Daily Reckoning

Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons).

In Bonner and Wiggin's follow-up book, Empire of Debt: The Rise of an Epic Financial Crisis, they wield their sardonic brand of humor to expose the nation for what it really is - an empire built on delusions. Daily Reckoning readers can buy their copy of Empire of Debt at a discount - just click on the link below:

Empire of Debt: http://www.dailyreckoning.com/empireofdebt.html.

Copyright © 2002-2007 Bill Bonner

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