Paul B. Farrell: Six new ‘critical warnings’ confirm 2013 is topping, at turning point. Now we have arrived at Critical Warning No. 12: The “dramatic shock,” a black swan expected later in 2013.


By Paul B. Farrell, MarketWatch

Yes, another dark “shocker” before the end of the year, an unexpected “black swan.” And sadly for Fed Chairman Ben Bernanke — who hopes his “I saved America from economic collapse” illusion stays intact till he leaves office — he’s not going to get a dream ending to his Fed career.

Why? The shocker will happen before his scheduled exit in January, damaging Bernanke’s egocentric “hero’s legacy.”

The big shocker that economist Gary Shilling sees coming will hit before year-end. And it’s what we see as “Critical Warning No. 12” for 2013.

So let’s put all this in context, a quick survey going back four years when Bernanke was reappointed and he began his grand ego trip as the Great Savior of the American Economy, believing he was destined to do the job our dysfunctional politicians were incapable of doing.

True, Wall Street banks love Bernanke’s non-stop cheap-and-easy-money printing presses, even if bad for the rest of America. We called him the “Most Dangerous Man on Earth,” and “Black Swan’s” Nassim Nicholas Taleb was so shocked by the reappointment of Bernanke — certain to become Obama’s “greatest domestic blunder” — that Taleb went into isolation.

Now, four years later, Bernanke is even more rigid and dogmatic, hanging onto former Fed Chairman Alan Greenspan’s failed ideology pumping out bank QE stimulus while creating the illusion that he’s saving America from a dysfunctional gridlocked Washington that does nothing.

History will prove he’s made the economy worse, delaying the inevitable, blowing a new bubble, making the next crash ever bigger.

Benanke is Greenspan’s clone, repeating the same ideological mistakes

Why is Bernenke so uncompromising? It’s wired in the brain and DNA. The position as Fed chairman turns men into demigods who believe their own press, believe they alone have the answers. This happened to Greenspan who finally had to admit to Congress after 18 years he “found a flaw” in the “free market ideology” that he relied on in guiding America’s monetary policy for his tenure as Fed chairman.

This same psychological phenomenon has turned the thoughtful scholarly Prof. Bernanke into Bernanke the Savior, Hero and Leader of the Free World Monetary System. It’s a syndrome seen so often by psychologists, behavioral economists and neuroscientists. As a behavioral economist and U.S. Marine veteran I imagine Jack Nicholson as Col. Jessup on the stand in “A few Good Men,” barking “you can’t handle the truth” at Bernanke.

Few investors wanted to hear the warnings for years before the 2000 crash. Nor the warning before the 2008 crash.

Back then, so-called gurus on Wall Street, Main Street’s 95 million naive investors and our clueless politicians in Washington were lost in denial. Humans too often prefer delusions and wishful thinking to the truth. That was Greenspan’s downfall.

And that’s also Bernanke’s sad mental pattern, what Taleb, a behavioral -finance expert, meant when he said about Bernanke, “he doesn’t even know that he doesn’t understand how things work,” that he can’t handle the truth if it doesn’t fit into the ideology he and Greenspan before him have imposed on the American economy for 26 years.

When he returns to civilian life, like Greenspan, Bernanke wants a $10 million book deal, huge lecture fees and a high-paying cushy consultancy with Wall Street. A big price that will be paid many times over by Main Street Americans.

Six new ‘critical warnings’ confirm 2013 is topping, at turning point

In the years leading up to the 2008 meltdown we reported on a couple dozen major warnings. Turns out that most leaders “can’t handle the truth.” Paulson, Bush, Greenspan, Bernanke were all in denial: “Best economy in my professional life,” said Paulson.

Today we see how Bernanke does the same, just keeps on ignoring new warnings, stuck in his rigid ideology. He seems to have reverted to the professor doing research, pulling together eight years of data, as if working on a book about his grand legacy. Greenspan did it. Unfortunately that will end the same, as Icarus’s flight to the Sun.

So it’s time to add the new shocker, a black swan of global macroeconomic events, to our list of critical warnings. Here are 2013’s prior warnings:

  • Begin with January’s “Critical Warning No. 7: Banks Crush Economy Again” on how Wall Street banks’ relentless war against all reforms has blown a new bubble, setting up a huge meltdown to rival 2008. Since most American investors and leaders are in denial, since Congress won’t bailout the banks again, the next one will be a long, rough one.
  • Then in February came what we’d now label Critical Warning No. 8: Bill Gross’s “Global ‘Credit Supernova’ Turns 2013 Bull into Bear” exposing more about the Fed’s nonstop cheap-money schemes digging the taxpayers deeper into debt. Gross’s Pimco manages $2 trillion, has so much in the game and can be trusted.
  • Later in February came what was in effect, our Critical Warning No. 9, a lead-in to economist Nouriel Robini’s loud alarm siren to America: “Prepare for the Perfect Storm,” a powerful echo of Robert Prechter’ earlier 100-year bear market warnings. Yes, Dr. Doom said that a “Perfect Storm” was coming.
  • In March Critical Warning No. 10 took shape as “Your Sequestered Brain Can’t See The Next Crash Coming,” where we focused on the brain biases and flaws that make it impossible for investors, gurus and politicians to either see or stop a crash, again proving the wisdom of Profs. Carmen Reinhart and Kenneth Rogoff’s brilliant “This Time Is Different: Eight Centuries of Financial Folly,” called the “best empirical investigation of financial crises ever published” by Harvard financial historian Niall Ferguson. Get it? In 800 years humans have been unable to stop themselves from repeating the same bull/bear cycles and crashes, and losing tons of money.
  • This sequence of critical warnings evolved unplanned. We realized it earlier this week with what’s now our Critical Warning No. 11: In our column “Bond Crash Dead Ahead: Tick, Tick … Boom!” we covered a dark warning from InvestmentNews, perhaps the most trusted news source for America’s 90,000 professional financial advisors. INews predicts a bond crash coming that will rip though the stock market, Fed rates and the American economy. As one expert put it, “investors have no idea what’s about to happen.” Besides, they can’t handle the truth.

Now we have arrived at Critical Warning No. 12: The “dramatic shock,” a black swan expected later in 2013.

In his recent Insight newsletters Gary Shilling, contrarian economist, long-time Forbes columnist and author of the “Age of Deleveraging,” made fascinating observations about investor denial: “investors are paying little attention to weak and declining economies around the world, and concentrating on the flood of money being created by central banks.”

That’s Shilling “The Grand Disconnect” driving “stocks around the world while the zeal for yield, amidst low interest rates, benefited junk bonds and other low-quality debt. The recent rush into equities by individual investors, after consistently liquidating them since 2008, suggests an expanding bubble.”

Get it? Wall Street is now blowing a bigger, nastier new bubble, repeating the mindless run-up to the 2008 crash. And Shilling sees the shift, a black swan, a grand shocker coming before year-end 2013, not after Bernanke retires.

And after the shocker Shilling warns of 11 sectors to avoid: commodities, developed-country stocks. home builders, your own home, big-ticket consumer-discretionary equities, consumer lender stocks, selected bank stocks, junk securities, developing-country bonds, developing-country stocks and old-tech capital-equipment producers.

One final word: Timing is critical at a turning point. We warned of the coming crash well in advance in 2008. We picked the bottom in March 2009. We are in the fifth year of an aging bull.

These six Critical Warnings tell of a hard turning point dead ahead. Wake up. It takes time to restructure a portfolio. If you think you can do nothing and just wait for another year, you are like most investors: You just “can’t handle the truth.” Or you “have no idea what’s about to happen.” Or you believe “this time really is different.”

Paul B. Farrell is a MarketWatch columnist based in San Luis Obispo, Calif. Follow him on Twitter @MKTWFarrell.

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