A Multi-Stage Disaster
"Transitory" inflation remains persistent as investors look for the next shoe to drop...
Bill Bonner, reckoning today from Baltimore, Maryland...
A lot of red on the screen this morning.
The latest inflation readings were worse than expected. The Dow dropped 500 points.
Remember, we’re only in the very first stage of what we believe will be a multi-stage disaster, like a traffic pile-up on I-95 during a foggy morning rush hour.
After the Bubble Epoch, created by misters Greenspan, Bernanke, (Ms.) Yellen, and Powell, came consumer price inflation. It is still with us. Bloomberg:
US Core Inflation Seen Returning to 40-Year High as Rents Rise
CPI excluding food, energy probably rose 6.5% from year ago
Report expected to keep Fed on path to big November rate hike
A key US inflation measure due Thursday is set to return to a four-decade high, underscoring broad and elevated price pressures that are pushing the Federal Reserve toward yet another large interest-rate hike next month.
And here’s CNBC with the latest on wholesale prices:
Wholesale prices rose more than expected in September despite Federal Reserve efforts to control inflation, according to a report Wednesday from the Bureau of Labor Statistics.
The producer price index, a measure of prices that U.S. businesses get for the goods and services they produce, increased 0.4% for the month, compared to the Dow Jones estimate for a 0.2% gain. On a 12-month basis, PPI rose 8.5%, which was a slight deceleration from the 8.7% in August.
The Next Shoe
The inflation numbers guarantee that we will stay in this deflation stage of the disaster at least a bit longer. Then, something will give. It could be a major pension fund, such as Calpers, with half a trillion in assets. It could be a Wall Street finance house, such as BlackRock, with $8.5 trillion in assets. Or it could be a big corporation forced into bankruptcy by rising interest payments.
The longer the Fed remains on course – to exterminate inflation – the closer we get to the ‘pivot,’ when a financial shock keeps it from getting the job done.
The big questions are: when will the Fed do its pirouette? And what happens then?
Most people think the Fed will soon go back to normal – which, for them, means rising stock prices, with inflation subdued.
Maybe it is just our imagination. But we notice a big difference between how young people look at the situation and how older people do. Anyone younger than 60 has no adult recollection of any financial world other than the one we’ve had since 1980. They think that was normal. And after this hissy fit is over, and the Fed turns around, they believe things will go back to the ‘normal’ they have known.
But there was nothing normal about the 1980-2020 period. Is it normal for stock prices to multiply 36 times – as the Dow did between 1982 and 2021? Is it normal for real bond yields to drop from the high teens down to under zero? Is it normal for the Fed to “print” more new money 18 months than it had in nearly 100 years… or for the federal government to multiply its debt by 30 times… even as its carrying cost (interest payments) went down?
Back to the Future
We could go on. There were more freaks in this show than in Barnum and Bailey’s circus – zombie corporations, goofy cryptos, billion-dollar valuations for companies with no plausible way to earn money.
And yet… for so many callow investors… that was Planet Earth – the way things have been… the way they are… and the way they shall ever be. They think stocks always go up “over the long run.” Yes, there may be sell-offs, they admit, but a balanced portfolio of stocks and bonds will always pay off.
Maybe. But not necessarily in your lifetime.
You’ve got to go back before the ‘80s… and you’ve got to look at it in terms of real money – gold – to see what ‘normal’ really looks like.
If you’d bought stocks in the late 1920s, you would have gotten all 30 Dow stocks in exchange for 16 ounces of gold. Then, by 1933 you would have lost 90% of your money… and waited another 26 years to break even again.
Yes… prices move in cycles… but they are long cycles.
Same thing in the 1960s. Inflation was dogging the economy then, as it is now. And then, a stockbroker would have told you what he will tell you now – “don’t worry about market timing; just get good companies and hold on.”
If you’d owned stocks in the mid-60s, your 30 Dow stocks would have been worth as much as 24 ounces of gold. Then, it took 15 years for the market to hit a bottom, in 1980… and you’d be down 93%.
Then what? You would have waited another 17 years to breakeven. Altogether, if you’d bought stocks at age 40 in 1965, you’d be 72 years old in 1997… with not a penny of capital gain to show for it.
But imagine that you followed your broker’s advice… and you just stuck with the program. Today, you’d be 97 years old. And instead of stocks worth 24 ounces of gold, as they were in 1965, they would be worth 17 ounces! Congratulations, your stocks lost 30% of their value over the last 57 years. (Not including dividends).
Is there a better way? Maybe.
Tune in tomorrow...
Regards,
Bill Bonner
Joel’s Note: We asked Bill yesterday what he sees coming down the pike next, now that the three sources of modern superabundance are, in their own ways, coming to an abrupt end?
That is, if we’re witnessing the end of cheap and abundant energy… as the situation in Europe, vis-a-vis Russia, plus news of a 2 million bpd reduction in output from OPEC Plus countries, seems to be indicating…
And the end of cheap and abundant manufactured goods, now that China is weaponizing its supply chains and the geopolitical world order has been pitched into disarray as sovereign nations scramble to ink energy and strategic alliances…
And, arguably the grand daddy of them all, the end of cheap and abundant credit… which has been gushing forth from the spigots of the world’s central banks now for decades, inviting malinvestments and price distortions of truly epic proportions… the kind that beckon, and even deserve, commensurately epic repricing, potentially to the tune of trillions of dollars in losses…
Look out later this afternoon for our full conversation with Bill on Ep #74 of the Fatal Conceits podcast…
Meanwhile, Bonner Private Research’s Investment Director, Tom Dyson, has been on the case since the inception of this humble, Substack project, warning readers about the end of what he calls the “Greatest Financial Experiment in History.” Here he was yesterday, bringing members up to speed with the latest…
Over the last 30 years, the Feds inflated a gigantic bubble. Every time the bubble burst, they doubled down, bailed out Wall Street and blew an even bigger bubble, culminating in a post-pandemic Everything Bubble. Not only did this Everything Bubble go global, but it seeped into every area of finance, including the government bond market and the savings of nations.
And as we’ve seen in the UK, the low interest rates which enabled the bubble also encouraged bad risk taking. Hedge fund managers, pension funds, and banks all resorted to massive borrowing at low rates (leverage) to try and goose returns. Now, you’re seeing a global margin call. To meet that margin call, you sell whatever you can (usually what is most liquid).
In short, the bubble has burst and the world economy is now deleveraging. This is just the beginning. The Fed is still in rate hiking mode. But even if the Fed relented, I’m not sure it would make any difference. Once the dam breaks…
Tom’s advice this year has been clear: steer clear of unnecessary risk in stocks and bonds and remain in Maximum Safety Mode… that is, keep a sizable portion of you net worth in cash and hard assets, including a healthy stock of gold and silver. Depending on your allocations, between cash (USD) and gold, you’re basically even for the year (even as the major indices have been crushed – down betweeen ~20-35% ytd – and investors have weathered the worst first half of the year for a balanced portfolio, 60-40 in… ever.)
It’s been the right advice for 2022, even as others have touted “buying the dip” and declared the bear market over. There will be a time for patient, prudent investors to pick through the rubble of this bear market… but that time’s not now.
If you’re not already receiving Tom’s market research, including weekly market notes, in-depth monthly reports, a stock watchlist (for special, "‘tactical trading’ opportunities) and a bevy of Special Reports he and Dan Denning have authored (and are constantly updating), please feel free to join us, here…
And if you are a member, you know what to do… (say it with us now!) Engage Maximum Safety Mode, Keep Calm and Carry On…
 | A guest post by
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Whatever your views on the Ukrainian war, what does this war in particular do to the monetary situation? Is it removing money from the system by sending it abroad or is it inflationary?
Bill, how can you make a valid comparison of gold to stocks over a 57 year period without including the effect of reinvested stock dividends? As a investor in stocks of healthy companies that pay reliable and increasing dividends for almost 50 years, I found that the reinvested dividends supercharged my investment return much more than just price appreciation. I suspect that you would be able to buy MORE ounces of gold, not less, with the DOW stocks at the end of the 57 years if reinvested dividends were included.