Convenient Beliefs

Submitted by William Bonner, Chairman – Bonner & Partners

“Massive Deterioration” – Worse Than 2008

BALTMORE – “Stocks still not finding bottom” warned a headline at Investor’s Business Daily. On Thursday, the Dow ended down 255 points – or 1.6%. The index is down by almost 9% since the start of the year.

“These developments, if they prove persistent, could weigh on the outlook for economic activity…” proffered a nervous-looking Janet Yellen in her testimony on Capitol Hill. She was signaling to investors.

Yellen_cartoon_02.27.2015Smoke signals…

“Don’t worry about us,” she may as well have said. “If we can get away with a big U-turn, we’re not going to raise rates anymore.”

On Tuesday, Maersk Group, the world’s largest container shipping company, said it was suffering a “massive deterioration” in its business.

“It is worse than 2008,” its CEO, Nils Andersen, told the Financial Times. But this is not even near the bottom for the world economy. Hedge fund manager Kyle Bass warns that the other shoe is a big one… and it hasn’t dropped yet.

The MV Maersk Mc-Kinney Moller, the world's biggest container ship, arrives at the harbour of Rotterdam August 16, 2013. The 55,000 tonne ship, named after the son of the founder of the oil and shipping group A.P. Moller-Maersk, has a length of 400 meters and cost $185 million. A.P. Moller-Maersk raised its annual profit forecast for the business on Friday, helped by tighter cost controls and lower fuel prices. Maersk shares jumped 6 percent to their highest in 1-1/2 years as investors welcomed a near-doubling of second-quarter earnings at container arm Maersk Line, which generates nearly half of group revenue and is helping counter weakness in the company's oil business. REUTERS/Michael Kooren (NETHERLANDS - Tags: MARITIME TRANSPORT BUSINESS) - RTX12NIUA Maersk container ship…the line is feeling the pinch – the Baltic Dry Index has collapsed to just 291 points (from approx. 11,800 at the 2008 peak) and container shipping rates have declined sharply as well.

Photo credit: Michael Kooren / Reuters

China’s economy is heavily dependent on capital investment. It puts its money into building factories, highways, offices, apartment blocks, railroads, ports, and airports. What do all these projects require? Rebar!

Concrete is reinforced with steel bars. As the pace of building slows, the price of rebar goes down. In 2008, a ton of rebar cost about 5,500 renminbi ($836). Now, it costs barely 2,000 renminbi ($304) – the lowest price in at least 15 years.

Steel rebar futures, weeklyShanghai steel rebar futures, weekly in RMB – click to enlarge. Continue reading

Here Come the Money Helicopters!

Submitted by William Bonner, Chairman – Bonner & Partners

Negative Wealth Effect

DELRAY BEACH, Florida – The sky in South Florida is gray. A cold wind blows across the sand. Since the start of the year, the Dow is down about 7%. But certain stock market sectors have undergone a much harder pruning. First, energy… then the tech… and now banks.

Martin Wolf

Martin Wolf, chief economics commentator of the Financial Times: easily one of the greatest monetary cranks alive today, an establishment-approved snake oil seller of a quack economist who has never seen a printing press he didn’t like. If the Soviet Union still existed, we would strongly recommend that he move there and become chief economics commentator of the Pravda. The man is positively dangerous to the free market economy and liberty in general.

Photo credit: Regina Kuehne / KEYSTONE

Shares in too-big-to-fail bank Citigroup are down almost 28% so far this year. And shares in Europe’s biggest bank, Deutsche Bank, are down by more than 36%.

1-DB, weeklyDB, weekly – this doesn’t look good. Deutsche Krank (krank = German for “ill”) is the biggest bank in Europe. If it were to fail, it would be the functional equivalent of the Creditanstalt insolvency in 1931 – click to enlarge. Continue reading

Are You Ready for a Crack-Up Boom?

Submitted by William Bonner, Chairman – Bonner & Partners

Crack Up!

BALTIMORE – The Dow rose on Wednesday morning… after Janet Yellen made soothing remarks about a “gradual” return to normal interest rates. Then investors must have realized that returning to normal is not on the Fed’s agenda. The Dow finished the day down 99 points.

We haven’t seen normal central bank policy since the Nixon years. Normal is a currency backed by gold, not by PhD economists. Only briefly and episodically, over the last 2000 years, has the world flirted with pure paper or “fiat” money. Every time, the affair was over in a short time… and regretted for a long time.

1-Fate_of_Currencies

The result of the usurpation of money by government

Under a gold standard, credit comes from savings. Thus limited, interest rates typically stand somewhere in the 3% to 6% range. They do not roll around on the barroom floor with the spilt beer, drunks, and sawdust.

Real credit comes from money that is saved… taken out of the consumer economy so that it can be used for emergencies and capital investments. When it is paid back – usually out of increased output – the world is a richer place.

But try to trick the economy with phony credit – money that was never earned and never saved – and you are just asking for trouble. Said Jörg Guido Hülsmann, a senior fellow at the Mises Institute:

“In no period of human history has paper money spontaneously emerged on the free market. In all known historical cases, paper money has come into existence through government-sponsored breach of contract and other violations of private property rights.”

Continue reading

The Deep State’s Top Choice for President Is…

Submitted by William Bonner, Chairman – Bonner & Partners

Less Popular Than Syphilis

RANCHO SANTANA, Nicaragua – We’re traveling home to the U.S. from our recent meeting with members of our family wealth advisory, Bonner & Partners Family Office. So, we’ll make this short.

The Dow sold off again on Monday. At midday, it was down nearly 400 points. Then it recovered to end down only 178 points – or about 1%. As we’ve been warning, this market is extremely vulnerable. Watch out.

hilary-630

Leftist war-harpy Hillary Clinton – the candidate of the country’s assembled cronies and zombies, in short, the prototypical Deep State representative. We feel reminded of an aged Cersei Lannister every time we contemplate Ms.“best cattle futures trader in the world” (more). Whatever you do America, please refrain from making this harridan your president. Nothing could possibly be worse. Luckily, even syphilis is more popular than Hillary among young voters. This fills us with hope.

Photo credit: Brandon Marshall / REX / AP

Meanwhile… who’s the crony? Democrat front-runner Hillary Clinton is the Deep State’s top choice for president.  She has already received $21 million from Wall Street for her campaign. That’s 280 times more than Bernie Sanders.

This is why Sanders and Donald Trump are doing so well in the polls. People are catching on to how the system works. They know they are being taken for fools. According to a recent CNN poll, 69% of Americans are either “very angry” or “somewhat angry” about “the way things are going” in the U.S.

And according to a recent NBC/Wall Street Journal poll, the same percentage – 69% – are angry because the U.S. political system “seems to only be working for the insiders with money and power, like those on Wall Street or in Washington.” Among young voters, according to a well-watched video, “syphilis is more popular than Hillary.
But Clinton is the crony favorite, supported by Wall Street and the Pentagon. In the old days, the conservatives believed the U.S. government was the devil at home and an angel abroad. The liberals believed the government was an angel at home and a devil overseas. Hillary believes that government always wears wings – at home and abroad. Continue reading

PhD Economists Ought to Know Better…

Submitted by William Bonner, Chairman – Bonner & Partners

Meltdown

MIAMI – On Thursday, the Dow rose 79 points – or about 0.5%. Nothing proved one way or the other. We told you about our visit with President Reagan’s former budget advisor and Wall Street veteran David Stockman.

Must-should-ought-large1Ought!

Unlike almost every other analyst or investor we know, David has been a true insider. He has seen how the system really works from within. He played critical roles at critical moments – in Washington and on Wall Street.

1-SPXS&P 500 Index: David Stockman’s positions are benefiting at the moment

So he understands, maybe better than anyone, how the game is played… and how the deck is stacked to favor the insiders, the elite, the cronies, and the Deep State.

David was cheerful when we met him on Wednesday. He makes “bubble finance” trades – shorting stocks that are overpriced, overhyped, and overdue a slide. Lately, he’s been making good money. And he’s looking forward to better times.

The cronies have gone about as far as they can, he said. He expects the markets to melt down and the credit bubble to burst – soon – marking the end of the Bubble Epoch. We’re not so sure…

The Deep State depends on bubble finance. It won’t give it up without a terrific fight. If the Bubble Epoch goes, it will be over the Deep State’s dead body. Which is the way we’d like it. But it won’t be smooth, easy, or fast.

Negative rates? A ban on cash? Helicopter money? Direct intervention in the markets? Depression? Hyperinflation? Dow 36,000? We’ll probably see it all before this is over.

And now… a Friday classic from the archives… Continue reading

The Era of Bubble Finance

Submitted by William Bonner, Chairman – Bonner & Partners

Debt Curse

NEW YORK – “Not a bad view. That’s the mayor’s house right beneath us.”

We were on the 16th floor of a new apartment building, looking out over the East River. With us was President Reagan’s former budget advisor and Wall Street veteran David Stockman – a man who has been closer to the Bubble Epoch than almost anyone.

The Dow rose 183 points on Wednesday – or just over 1% – after starting the day in the red.

SALOMON_3142495bWilliam Salomon in Salomon Bros. & Hutzler’s trading room in 1965. Salomon Bros. sold the first ever mortgage-backed bond on Wall Street in the 1980s

Photo credit: Arthur Brower / The New York Times

“I was there at the creation,” said David.

“After leaving government, I went to Salomon Brothers in the late 1980s. We were just starting to put together packages of mortgage-backed debt.”

Bubble finance has taken many shapes and sizes. Mortgage-backed derivatives. Private equity. Junk bonds. Student debt. Subprime auto loans. Stock buybacks. This debt was a curse to most Americans. But it blessed Manhattan.

The weekend’s Financial Times included real estate listings from New York City. There was a penthouse apartment for sale on the Upper East Side for $60 million. Luxury digs on the West Side were going for $30 million… another for $16 million.

You don’t make that kind of money parking cars… or making them. So, if you want to buy one of these places, you almost have to work in finance. Most people have no idea how the financial world works. They think investments go up or down and you make money depending on your luck or your skill – just like any other game. They don’t know the game is rigged.

Central banks make credit available to the big banks at preferential rates. The banks then earn a fat “spread” by making loans to government, industry, and households. They make money lending… and then, they make money again by packaging and selling the debt to investors, pension funds, and insurance companies.

Everything is fine until the credit cycle turns down. Then marginal debtors can’t pay and marginal (sub-prime or junk) debt loses value. Stocks and real estate go down, too. Everybody loses money. And everyone wants the Fed to “do something.” What can it do? Make credit even cheaper!

JNKYo Fedheads! It’s that time again! Cheaper credit needed! Liquidity junkies are out there dying of thirst! – click to enlarge. Continue reading

The Federal Reserve – the Deep State’s Central Bank

Submitted by William Bonner, Chairman – Bonner & Partners

Fighting to Lose

BALTIMORE – Where are we now? Dow down 296 points on Tuesday – or just under 2%. Cruz and Clinton win the Iowa caucuses. Oil is back below $30. An election has been described as two wolves and one lamb voting on what to have for dinner.

 

Sheep-On-Voting-For-a-Lion-Or-a-Wolf-On-Election-DayWe’re going to make a difference on election day! Or maybe not…

 

Actually, there was never any doubt about what was on the menu. An election is really when the wolves scrap over who gets the choicest pieces. To bring new readers fully into the picture… It doesn’t matter who won in Iowa. Major policies are not determined by the voters but by the more or less permanent elite who run the government, aka the “Deep State.”

The Fed is an instrument of the Deep State, not of the people. This sounds conspiratorial. But it doesn’t require any hidden agenda or secret handshakes. Most people want power, money, and status. If you can get control over the government – the only institution that can steal and kill, legally – you’ve got it made. That’s why so much money is spent trying to get elected or to influence public policy.

The U.S. presidential campaign has seen surprisingly strong showings from two “outsiders”: Donald Trump and Bernie Sanders. Why? As former Congressional staffer turned Deep State whistleblower Mike Lofgren recently told Bonner & Partners Investor Network editor Chris Lowe, it’s because each in his own way warns voters about the wolves. The insiders, according to Trump and Sanders, are predatory and incompetent.

 

2016-Presidential-Election11Bernie and the Donald – voters like them because they are seen as the anti-establishment choices. The press decries them as “populists” and “nutcases”, which means they must be doing something right. As an aside, the European press is completely apoplectic over Trump, to our unending amusement.

 

But the Deep State is more predatory and less incompetent than it appears. It fights wars, for example, not to win them… but to lose them. The War on Poverty has been going on for more than 50 years. Still no sign of victory. But it has financed countless careers and retirements of government operatives. Continue reading

The War on the Credit Cycle Has Only Just Begun…

Submitted by William Bonner, Chairman – Bonner & Partners

Socialism is for Simpletons

RHINEBECK, New York – We spent the weekend up north… where people put “Feel the Bern” bumper stickers on their Subarus. In a tavern in Rhinebeck – where we are writing – the “socialist” slap seems to have lost its sting. There is a reverential portrait of FDR near the bar.

“He’s the only candidate who makes any sense to me,” said a local. “You can’t trust Hillary. And the Republicans are all nuts.”

 

sanders_2016He seems to make a lot of sense… provided your horizon ends roughly at the edge of your plate.

 

He’s right. You can’t trust Hillary. The Republicans may all be nuts. And socialism “makes sense”… in a simpleton kind of way. Most voters want more stuff. Sanders offers to take stuff from other people and give it to them. That “makes sense,” doesn’t it?

Too bad. Because as Maggie Thatcher pointed out, you soon run out of other people’s money. But the voters of Dutchess County don’t seem to be concerned. Back to the markets… Continue reading

Military Misadventures

Submitted by William Bonner, Chairman – Bonner & Partners

No Coincidence

BALTIMORE – The Dow rose 126 points on Thursday – just shy of 1%. Not enough to reverse the market’s apparent downward bias [ed note: the rebound gathered pace on Friday].

Stocks are most likely headed down because the thing that sent them up has come to an end. Here is a chart that tells the tale:

 

1-stocks vs. Fed balance sheetFederal Reserve assets vs. the S&P 500 Index

 

As you can see, over the last six years or so, gains for the S&P 500 have closely tracked the ballooning of the Fed’s balance sheet under QE. After shelling out almost $4 trillion on bonds, the Fed’s QE is on pause. And stocks are struggling. Coincidence? We don’t think so.

 

Deep State Cronies in Action

We stuffed a few copies of the Hindustan Times in our bag before boarding the plane back from Mumbai. On the front page, French president Francois Hollande is receiving an awkward hug from India’s top man, Narendra Modi.

Over in the entertainment section is another note of interest. Actress Julie Gayet has put together a film production company. And lucky for her – she has backing from one of India’s biggest conglomerates, the Reliance group.

Nowhere does the paper mention that Ms. Gayet is Mr. Hollande’s main squeeze. She is the woman for whom he snuck away on a motor scooter from the presidential palace, where he lived with his then First Girlfriend, journalist Valerie Trierweiler. Continue reading

Forget About “Stocks for the Long Run”

Submitted by William Bonner, Chairman – Bonner & Partners

No Shame in Cash

BALTIMORE – After a year of wandering the globe, we are back in the homeland… and ready to turn in our passport. Travel can be fun. It can also be “broadening.” But the most interesting thing about it is not so much what you find out about other places. It’s what you discover about your home.

You return to the land you once knew, as T.S. Eliot put it, and know it for the first time. So, we are ready to rediscover Baltimore – a place where children refer to handguns as “school supplies.”

 

back-to-school sale-1The new school year begins in Baltimore…

 

And what’s this? Judging by yesterday’s mailbag, many of our dear readers are Sarah Palin fans. Several helped us decipher Ms. Palin’s gnomic remarks about Donald Trump, which we covered in Tuesday’s Diary. Several more canceled their subscriptions. They must have thought our admiration for the former Alaska governor was insincere.

But, let’s move on. First, we return to questions put to us in Mumbai two days ago.

“What should an investor do?” asked an old man in a Nehru jacket.

“Should I stay in the stock market? After all, staying in the stock market always seems to pay off over the long term. Or should I move to gold and cash?”

We have been telling people there is “no shame in staying in cash” until the market finds a bottom. If we’re wrong and prices shoot upward, we will miss the upside. But the risk of missing substantial gains seems slight. Earnings are going down. Almost all the signals from industry and commerce seem to be pointing down, too.

Meanwhile, U.S. stocks are still expensive. The CAPE ratio looks at the inflation-adjusted average of the previous 10 years of earnings relative to stock prices. On that basis, the S&P 500 has been a worse deal only three times in the last 100 years. Those were just before the 1929 Crash… the dot-com bust in 2000… and right before the 2008 meltdown – hardly auspicious precedents.

 

1-PE10-percentilesWhere we are: the current PE/10 is in the 92nd percentile of market valuations since 1871 – exceeded only by 1919, 2007 and 2000. Continue reading

Skyscraper Mania Goes Global

Submitted by William Bonner, Chairman – Bonner & Partners

New Skyscrapers Wherever one Looks

Readers may recall our recent discussion of the construction of the Jeddah Tower (see “Soaring to Bankruptcy” for details). This skyscraper is a typical symptom of an artificial boom that has moved past its due date, so to speak. The idea behind the skyscraper index is that in light of the immensity of projects that involve the construction of the tallest building in the world (or one of the tallest), they are only realized once the notion that boom conditions will continue forever has become firmly ingrained. By the time this happens, the boom is usually quite close to giving way to a bust.

 

Central Park TowerCentral Park Tower , a.k.a. the Nordstrom Tower, which is going to be finished in 2019. At a height of 547 meters (1,795 ft.) it will be the tallest building in the United States, as well as in the entire western hemisphere

Image credit: Extell

 

It is quite costly and time-intensive to build such an enormous structure. One needs to keep in mind that the effort involves much more than just the construction phase. Planning, permitting, solving technical and logistical challenges, organizing the necessary funding, etc., all have to be considered as well. The long term nature of such projects also means that they are far more likely to be tackled when interest rates are low – and especially when they are too low, i.e., suppressed below the natural rate by central bank intervention. As we have pointed out in the article on Jeddah, from an analytical perspective real estate can be viewed as akin to capital goods.

In recent years we have noticed that a string of very tall buildings has been erected all over the world. Many of them were even briefly considered the “tallest” at the time they were conceived. There was a noteworthy concentration of such projects in China and in oil-producing nations.

Even Iraq (!) is reportedly planning to build the tallest building in the world in Basra – the 1,152 meter (3,778 ft.) tall “Bride of the Gulf”. This one would even put the Jeddah Tower in the shade. We strongly suspect that the plans were made back when oil was still trading in triple digits. We also suspect that the “Bride” will remain stuck in the conceptual stage for the time being. Continue reading

Democracy Is No Better Than a Monarchy… or a Dictatorship

Submitted by William Bonner, Chairman – Bonner & Partners

“Flaming Lunatic”

MUMBAI, India – The Dow managed a small bounce late last week. The bounce came as crude oil gushed higher, back above $30 a barrel. What next? We wait to find out…

We had dinner in London last night, before boarding a plane for India.

“A large part of the U.S. population must feel threatened by any kind of intelligence,” said a voice at a nearby table. A group of Englishmen were discussing U.S. politics. We eavesdropped.

“Can you imagine? That Trump… he seems like a flaming lunatic. His campaign is nothing but telling voters that he’s a good negotiator. He thinks it’s all just making deals with people. All that matters is getting a good deal.

 

palin-endorses-trump-cartoon-luckovichImplanting a thought…

 

“Now he thinks people will vote for him because he got an endorsement from that total idiot Palin. What is the matter with Americans? How did they get to be so stupid?”

We almost got up from our chair. It was time to straighten these Brits out. But what would we say? Besides, it is a fair question: How did Americans come to be so stupid?

Of course, the same question could be asked of almost any nation. And it being Friday as we write this, and we being laid low by an epizootic and airline travel, we dug into our archives for an answer… Continue reading