A Real Doozy

Federal policies today are increasingly of the win-lose genre, reinforcing the Primary Trend…and setting the US for a real doozy of a downtrend.

Thursday, May 2nd, 2024

Bill Bonner, reckoning today from Dublin, Ireland 

I have long been convinced that institutions purely democratic must, sooner or later, destroy liberty or civilization or both. Either some Caesar or Napoleon will seize the reins of [the American] government... or your republic will be as fearfully plundered and laid waste by barbarians... as the Roman Empire was... with this difference — that your Huns and Vandals will have been engendered within your own country by your institutions.

— Thomas Babbington Macaulay 

It was a wild ride on Wall Street yesterday. In keeping with the chaos caused by the feds, the Dow shot up 500 points after Fed chief Powell said that the next move would be a cut in interest rates. Then, after reconsideration, investors sold... with the Dow giving back most of its gains. 

This commotion had nothing to do with the actual earnings of the actual companies which make up the actual market (aka Wall Street). It was just speculation about what the Fed will do. And it’s another of the markers of change that we’re watching... from a win-win economy, in which success comes by providing goods or services, to a win-lose economy dominated by politics. Perhaps overstating our case, the former is what you have on the way up... the latter is what you get on the way down. 

In other words, there are patterns to everything. What we’ve been looking at for the last few days is the overlap in the pattern of markets — notably the Primary Trend — and the patterns of public policy. Flipping ahead to a conclusion: Federal policies today are increasingly of the win-lose genre, reinforcing the Primary Trend…and setting the US for a real doozy of a downtrend.

We, jolly sorts that we are, take it for granted that politicians and career criminals never go straight. Instead, they always find ways to rip people off. 

Elite Insanity

But there’s a special kind of insanity that besets victorious elites. Corruption — deep, almost invisible, like the dry rot under a fresh coat of paint — distorts their judgement. They think they alone have the secret to success and that no other group could possibly get ahead by doing things differently. That was the idea behind the “end of history” fantasy. Innovation had come to an end. Emulation (of the USA) was the only way forward for developing nations.  

So it comes as a surprise when people with other ideas actually seem to do as well or better. Even when the US and its client kingdom, known collectively as “The West,” try to stop them. The South China Morning Post reports: 

Made in China 2025: China meets most targets in manufacturing plan, proving US tariffs and sanctions ineffective 

In 2015, China set out on an ambitious 10-year plan – dubbed “Made in China 2025” – to achieve self-reliance, innovation and strength in the manufacturing industry within 10 years. But during that time, a trade war with the United States has done its best to stop China crossing off its list of goals.  

In 2018, then-US president Donald Trump tried to upset China’s plan by initiating a trade war. The US government sanctioned Chinese hi-tech enterprises, put up high tariffs and conducted a nationwide investigation of scientists collaborating with China. After Joe Biden took over as US leader in 2021, he went a step further by imposing measures such as a chip ban on China. 

Now, with only eight months left until 2025, the South China Morning Post has investigated China’s progress. 

And the analysis confirms that more than 86 percent of these goals have been achieved, with some others likely to be completed later this year or next. Meanwhile some of the targets, such as electric vehicles (EV) and renewable energy production, have been well surpassed. 

It seems unlikely to us, too, that such a politically-sensitive economy could do so well. But there’s always more to the story.   

Italian economist Wilfredo Pareto reminds us that there are always some people who form the elite of a country. Mostly, they are benign and helpful — laying out roads, making sure the plumbing works, settling disputes and setting civilized standards.

But over time, their little, craven hearts grow dark. Rather than act like an impartial judge, making sure the rules are respected... they make the rules up to suit themselves.  Sanctions, tariffs, regulations, laws, limits on speech, deficits, bombing, killing, subsidies and payoffs — are all parts of the program. 

Power corrupts, as they say. 

The People’s Republic of China is fairly new; it was established only in 1949. Then, America’s economy was 600 times bigger than China’s. America kept growing. But after 1978, China took the capitalist path and now is responsible for 18% of world GDP. In Purchasing Power Parity terms its economy is already bigger than the US, and it is still growing two to three times faster.  

What’s going on?  

Richard Cullen with a disagreeable perspective: 

America bombs while China builds 

Today... the US is almost always at war with varied enemies right around the globe, which, in each case, delivers rich continuous profits to the US-led, Military-Industrial-Media-Complex (MIMC). However, most unlike the US, China has chosen to avoid warfare almost completely since 1979 (the year of a brief war with Vietnam) as it rebuilds itself. This is largely consistent with over 2000 years of Imperial history, where war-avoidance by China was notably more apparent than in Europe, both before and after the fall of the Roman Empire. At the most fundamental level, China doesn’t bomb — it builds and builds and builds. And the results, which are astonishing, are there for all the world to see. 

A different kind of dumb?  Maybe. 

More to come.  

Regards, 

Bill Bonner 

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Research Note

Here is a short excerpt from yesterday’s update from Investment Director Tom Dyson. Paid readers can access the full update here.

For half a century or so, US paper was “money good.” Even when inflation appeared in the 70s, they kept their promise. Volcker raised interest rates to 19% and made sure our savings had a real return.

But now? The federal government borrowed too much for the Fed to raise rates to 19% again (or whatever it would take) so they can’t keep their promise of “money good” anymore. They’ve blown it. This will not be a repeat of the 1970s.  

Bondholders can see what’s coming. Governments are going to gate them (prevent them from selling) and then force them to accept negative real interest rates. This situation is known as financial repression. More and more savers will rush to hit the bid… and seek shelter in gold and US equities instead. 

Here’s the thing…This situation has “tipping point” potential. That is, a self reinforcing cycle that turns into a stampede. Eventually it capsizes the whole paper system. 

It’s impossible to predict the timing of this. “Gradually, then suddenly” is probably the best forecast we can make. 

The Japanese run the most extreme version of this paper money idea so I assume the yen is going to be the first paper currency to hyperinflate when it goes wrong. 

Japan's currency crash is the inevitable result of using debt and interest rates to try and control the economy. It can be done, but not forever. Sooner or later you reach a limit.

In this case, Japan has piled up a Mt. Fuji of debt. The central bank and the government have supported Japanese bonds and stocks with money printing and stimulus.

The value of the currency is the pressure valve. Something has to give. Either bonds and asset prices crash. Or the currency buckles. The currency is buckling. 

Now domestic Japanese depositors and savers are getting nervous. The more the yen falls, the more the purchasing power of their savings erodes, which raises the incentive to sell. The central bank can’t raise interest rates. 

What we’re seeing now looks like the beginning of a run on the yen. So maybe we’re getting closer to the denouement.