The markets are acting as though it was already summer. They are wandering around with little ambition in either direction. Meanwhile, we’ve been wondering about… and trying to explain… what it is we are really doing at the Diary.
We expect a violent monetary shock, in which the dollar – the physical, paper dollar – disappears. But why?
Credit Bubble, the Sequel
As you know, we tend to take the side of the underdogs… as well as half-wits, dipsomaniacs, and unrepentant romantics. But currently, we are standing up for the young, the poor, and all the others the credit bubble has hurt and handicapped. It’s not that we are saints or do-gooders. We are just trying to make a living, like everybody else.
But we come at it from a different direction than most. Almost all the movers and shakers have the same bias: They want to see the credit extravaganza continue.
The Federal Reserve has already “invested” (if that’s the right word for throwing phony money down the drain in a futile and jackass effort to hold off the future) $4.5 trillion to protect the balance sheets of the elite. This money has been amplified by zero-interest-rate policies to something like $17 trillion of stock market gains… and umpteen trillion in bond and real estate profits. Naturally, the people who own these things – and not coincidentally provide early stage funding for congressional and presidential candidates – do not want to see a new movie. They want to see the sequel, Credit Bubble 5. Then Credit Bubble 6. And so on…
And the show goes on! They buy their candidates. They place their ads. The newspapers they support voice their opinions. Their corporations wheel and deal on Wall Street, spinning off bonuses, fees… and even higher stock prices. And the pet economists appointed to run central banks do their bidding.
Eyes Wide Open
We’re not complaining about it. We’re just calling attention to it. Because we believe there is a lot of money to be lost by not recognizing what is going on… and perhaps a little money to be made too by following the plotline carefully. Most people do not recognize what is going on because they are paid not to recognize it.
As we’ve pointed out many times, no central bank is going to hire a guy who thinks it should mind its own business.
Few investors are going to dispute the happy ending. And nobody is going to be appointed secretary of the Treasury who quotes Andrew Mellon’s famous advice to President Hoover following the 1929 Crash to “liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate.”
The credit bubble causes an extreme bias to the upside. Almost no one wants to see it end. Except us.
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Is that because we are smarter or more virtuous? Not at all. It’s just that we are not paid to ignore things. And neither is any member of our team of worldwide analysts at Bonner & Partners – the small, independent publishing business behind the Diary. We are not beholden to the elite; we get no money from them. And our business model (and maybe our natural contrariness) tells us to open our eyes and try to see what others have missed. Yes, we own stocks. But capital gains take a back seat – far behind our desire to connect the dots.
Beating Mr. Market
Since we founded Agora Inc. – the parent company of Bonner & Partners – in 1980, we have published thousands of investment reports and recommendations. We now have analysts and economists in 10 different countries. Our advice and recommendations appear in French, German, Mandarin, Spanish, and Portuguese… as well as English.
Is the advice good? Do the recommendations always go up? We recently commissioned an outside accountant to study them. The conclusion? Some good. Some not so good. Some do very well – with several of our paid-for advisories outpacing the S&P 500 over the last 10 years.
Our personal experience is similar: Sometimes we do well. Sometimes we don’t.
This generally confirms what we know about the way the investment markets work: If you are lucky and work hard you can do a little better than the market.
But Mr. Market is always hard to beat. The Efficient Market Hypothesis – which tells us that financial markets do not allow you to earn above-average returns without taking above-average risk – may overstate the case. But probably not by much.
“Black Swan” Hunting
On the other hand, when we look at the big macro events of the last 30 years, we find our team does very well.
There were five major events that marked the period:
1. The collapse of the Soviet Union
2. The fall of the Japanese miracle economy in 1990
3. The bursting of the dot-com bubble in 2000
4. The attack on the World Trade Center in 2001 and the “War on Terror”
5. The financial crisis of 2008 and the subsequent non-recovery
These things are important because they were unanticipated. As our friend Nassim Taleb puts it, they were “black swans.” People weren’t ready for them. And most authorities said they wouldn’t happen.
In the 1980s, for example, the CIA believed the Soviet Union was going from strength to strength. Until 1990, investors were betting heavily on a continuation of the Japanese boom. Same thing for the dot-com bubble. It was accompanied by the most delirious “this time it’s different” talk we’ve ever heard. And on the morning of September 11, 2001, nobody expected such a dramatic attack on Manhattan – especially not the people we paid billions of dollars to stay on top of it.
And Fed chairmen Alan Greenspan and Ben Bernanke both admitted that the 2008 global financial crisis was unforeseeable. But the crash in real estate and finance of 2008 wasn’t unforeseeable at all.
In 2003, my Agora colleague Addison Wiggin and I wrote a book called Financial Reckoning Day: Surviving the Soft Depression of the 21st Century. The foreword to that book, penned by our friend Jim Rogers, summed up our thesis:
As this book you hold in your hands demonstrates, artificially low interest rates and rapid credit creation policies set by Alan Greenspan and the Federal Reserve caused the bubble in U.S. stocks in the late 1990s.
Now, policies being pursued at the Fed are making the bubble worse. They are changing it from a stock market bubble to a consumption and housing bubble.
And when those bubbles burst, it’s going to be worse than the stock market bubble, because there are many more people involved in consumption and housing. When all these people find out that house prices don’t go up forever, with very high credit card debt, there are going to be a lot of angry people.
And our analysts were all over the story years before the crisis hit. (As one reader commented: We are often very early.) As for the other big events, our analysts were on top of three out of four of them. The only one we missed was the attack on the World Trade Center. In the interest of full disclosure, it is also true that we saw many other things coming – such as the Y2K computer glitch in 2000 – that never happened. Still, we were able to see many of these events coming when so many others – including those responsible for keeping an eye on them – failed.
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How We Get to Hyperinflation from Here
How did we do it? Our customers pay us to notice things that others are paid not to notice. Bear markets, crashes, credit contractions… governmental, technical, and social catastrophes – nobody wants to look carefully for these things. Nobody wants them to happen. They make people poor, not rich. And yet, they do happen.
It seems part of nature’s system that mistakes are punished, errors are corrected, and “bad” things happen from time to time. But like forest fires, they have a useful purpose: They clear away the dead wood and allow future growth.
Currently, we are predicting a credit crisis – much worse than the 2008 meltdown.
No one wants it – especially not the deadwood. But we put a high probability factor on this forecast. It is unavoidable… even if we don’t know exactly what form it will take.
And we believe it will be foreshadowed by something even rarer and more unexpected – the disappearance of cash dollars.
Just to be clear, our prediction is that the “Ice Age” of low rates and low growth for a long time – as predicted by many analysts and economists – won’t happen.
Instead, a crisis will cause a crash on Wall Street. The banks will go broke. The credit system will seize up. People will line up at ATMs to get cash and the cash will quickly run out. This will provoke the authorities to go full central bank retard. They will flood the system with “money” of all sorts.
The ice will melt into a tidal wave of hyperinflation.