Bound for Collision

The problem with free lunches, diversity and equity for all...

[Ed. Note: You’re receiving this because you chose to keep up to date with Bill Bonner’s daily market missives. Thanks for joining us! Contrary to public reports, Bill is both alive and well and reckoning from Ireland. If you notice something different about these emails, it’s because they’re advertisement free. It's part of our new experiment. We hope you enjoy it. Please note that paid subscribers will get their first briefing from Investment Director Tom Dyson later this week. See his note below for more. But first, over to Bill…]

Bill Bonner, reckoning today from Youghal, Ireland...

It could be almost anything, of course.  

A stock market crash. A sharp rise in bond yields. Extreme weather. A new ‘variant.’  

The omicron variant, for example. An internet search this morning turned up a total worldwide death count of 8 people, 7 in the UK and 1 in Texas. Not exactly the end of the world.  

But when you have a degenerate empire sinking into an abyss, you go with the emergency you have on hand.  

And those are just the known unknowns. As for the unknown unknowns, the woods are full of them. Today, we return to one of the most plausible… and most alarming.

The Fed claims it has begun a tightening cycle. That means, it will be throwing less gasoline on the inflation fire than before – but still about $3 billion per day of new money. It says it will reduce the amount of new money creation gradually, and then stop it altogether in March of next year. Then, it will consider raising its key lending rate - the real rate, adjusted for inflation, is currently 6.5% below zero.

No serious person believes these baby steps will relieve the upward pressure on prices. Certainly, investors don’t believe it. Yesterday, shaking off Monday’s shivers, they bid up stocks… as if they hadn’t a care in the world.

And the Biden Administration, backed by the Democratic party, and the whole elite establishment, says what is needed is more spending, not less. There are more emergencies that need to be met – with money, of course. ‘Social infrastructure.’  Covid. Climate change. A record Pentagon budget… and maybe even war with Russia, China, North Korea, or Iran.

Fitter, Happier, More Productive

According to the fantasy, more boondoggles will contribute to growth, which as we all know, is the same as progress - with a chicken in every pot… free lunches all around… diversity, equality and equity for all, necking in the parlor and dancing in the street.  

As to ‘growth,’ the idea that a group of politicians can create real economic progress by printing up money and passing it out to their cronies, friends, and pet projects has been around for a long time. But if they could really do that... what have they been waiting for?

Of course, they haven’t waited at all. In this century, the US government, aided and abetted by the Federal Reserve, stimulated ‘growth’ more than any time in America’s history. US debt has grown by more than $23 trillion since 1999 – a 300% increase.

Source: US Federal Reserve

But look out the window. Do you see dancing in the streets? Are people more prosperous than they were in 1999? Happier? Freer?

We didn’t think so either.

Instead, the rich got richer… growth rates fell… and markets became more bizarre and erratic. Wall Street had to be bailed out… in the emergency of the housing debt crisis of 2008-2009. 

And then, the whole economy had to be bailed out in the Covid shutdown emergency of 2020 and on... and on... 

And now, the public, betrayed by its leaders and now bearing the cost of so much ‘emergency’ spending, in the form of higher consumer prices, is becoming surly and ill-tempered.

But steeped in the holiday spirit, as we are, we are loath to sink into a pit of despair and spoil Christmas. We’ll save that for January…

This week, we’ll just keep rolling merrily along, doing our best to keep a straight face and a positive attitude.

But just to give us all a fair warning, we see a very dangerous intersection ahead – and a new emergency.

Out of Energy

From one direction come 7 billion people… almost everyone of whom depends on the traditional fossil fuel that made our modern economy possible.

From the other comes the feds’ inflation…distorting the prices that the energy industry needs to keep supply in balance with demand.

And there… at the crossroads itself… is the US government directing traffic!

We hardly need to say so, but in today’s world – distributing food, providing shelter, and delivering energy – with its factories, trucks, tractors, electric lines – runs mostly on fossil fuels. Take them away, suddenly or haphazardly, and the result is likely to be widespread misery.

The delivery mechanism for energy, as for other things, is exceedingly complex… with millions of components all working together, all over the world, with different climates, different religions, different languages… and all guided by prices. If prices go up… supplies generally follow. If they go down, so too go supplies.

But now, a menace we haven’t seen, in the USA, for nearly half a century – inflation – is corrupting price signals. Suddenly, prices are going all over the place.  The price for a gallon of gasoline, for example, gained more than 50% over the previous year. And last week, Goldman Sachs’ head of energy research said the price of oil could go to $100 a barrel next year.

But instead of going up, in response to higher prices, energy supplies are headed down. Rystad Energy:

Global oil and gas discoveries in 2021 are on track to hit their lowest full-year level in 75 years should the remainder of December fail to yield any significant finds, Rystad Energy analysis shows. As of the end of November, total global discovered volumes this year are calculated at 4.7 billion barrels of oil equivalent (boe) and, with no major finds announced so far this month, the industry is on course for its worst discoveries toll since 1946. This would also represent a considerable drop from the 12.5 billion boe unearthed in 2020.

After working so fluidly for more than a century, with only very few problems, all of a sudden it looks like supply and demand are bound for a collision.

That will be a genuine emergency.

Stay tuned...

Bill Bonner

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[Ed note: We received this on Tuesday from our Investment Director Tom Dyson. Tom, as you may know, has been on the road with his wife Kate and his children Dusty, Myles, and Penny for the better part of the last two years. 

We know many readers want to keep up with the adventures of the Dysons as chronicled in Tom’s previous postcards. You’ll hear from him, from time to time, in this space. But most of his time and energy is now focused on investment research. That will show up in weekly briefings for paid-up subscribers and in a monthly research report. 

It’s the kind of research Tom has been providing privately to Bill for the last two years. In our new venture, you have access to exactly what Bill’s getting too. Look for Tom’s first research note later this seek. In the meantime…]

From Investment Director Tom Dyson,

I can’t believe it…

I have quit my job at a big publishing house and now I’m an independent writer, working for free… alongside a group of esteemed colleagues I’ve known for almost 20 years. 

It’s so exciting. 

As I see it, my job at Bonner Private Research is to read every SEC filing, research report and investment book I can get my hands on… and come up with a way to make 8% a year, year after year, over the long term. 

I almost feel I was born for this challenge and for the next chapter of my life, it’s going to be all I think about. 

(Yesterday I spent six hours trawling through investment ideas.)

I don’t have anything else to share today. So I’m going to return to my desk and continue my research. 

(We’re in Florida, visiting my in-laws for Christmas.)

A very merry Christmas,

Tom

P.S. Why did I choose 8%? It’s just an arbitrary number. But I picked it for my goal as it seems both achievable… yet ambitious. (If a magic leprechaun offered me a guaranteed 8% compound return on our wealth over the next 5 years, I’d accept it without any hesitation…)