First to Go: The Money

On a long enough timeline... every bubble becomes a bust

(Source: Getty Images)

Bill Bonner, reckoning today from Baltimore, Maryland…

Yesterday, we took a look into the murky past, to see what lurked therein. Today, we turn our minds to the future, which may prove murkier still.

As we saw in China, during the 1930s and ‘40s, the government printed money to pay its bills. It ran up debt it couldn’t pay. And then, the hyperinflation of the 1950s opened the door to Mao’s communists. After that, it was one disaster after another.

Americans think they can continue to borrow and spend forever. Investors are trained to believe that stocks always bounce back. They think that if they just hold on, soon they will be making money again.  

And if they owe money, they think they’ll soon be able to refinance at even lower rates.

But all that has changed. Now that we have inflation, it’s a whole new ballgame.  The Fed can still print money, but now it will cause consumer prices to rise even faster. Your stocks may go up, as they did from 1966 to 1982, but inflation will wipe out your gains. And when you go to refinance your house, you will be hit by a double-whammy. Falling house prices may have erased your ‘equity’…while rising mortgage interest increases your monthly payments. 

The Bubble Epoch, RIP 

Everybody knows you can’t just print money and expect to get rich. Every nation that tried it turned into a complete disaster. In Germany, Russia, and China…high inflation led to the rise of the Nazis, the Bolsheviks, and Mao’s communists. High inflation destroyed the economy of Argentina in the ‘90s, of Zimbabwe in the ‘00s, and Venezuela in the teens.  

They could call it “stimulus” or “quantitative easing,” but it was nothing more than the old trick – spending too much and trying to cover up the excess by printing more money.

Eventually, the bubble becomes a bust.

We’ve already seen nearly $100 trillion in losses – stocks, bonds, real estate and private businesses – worldwide.  

And here’s the important thing – this is not just a typical market sell-off. Stocks will go up and down…but the Bubble Epoch won’t come back.  

Already, inflation is the worst we’ve seen in 41 years…and with no relief in sight…

Gasoline went to $6 a gallon…and then back down to $4. Now, inventory levels are at multi-decade lows. And winter looms large. Natural gas bills this season are expected to be 28% higher than last year.  

Meanwhile, mortgage interest is at a 20-year high. New house prices are already down 10%

US total debt now stands at $93 trillion…and the federal government’s portion of that, $31 trillion, is growing at $3.8 billion PER DAY.

A vicious ‘culture war’ rages at home…while overseas, a war with a nuclear-armed adversary spirals out of control. Who knows where they lead?

Down…Down… Down…

As for stocks, companies that led the charge higher have plunged since Jan. 3, 2022:

• Nvidia: Down 45%;

• Apple: Down 17%;

• Google:  Down 31%;

• Microsoft: Down 26%;

• Facebook/Meta:  Down 67%.

• Netflix: Down 51%.

Facebook’s Mark ‘Meta’ Zuckerberg has lost $100 billion in the tech rout – more than any human ever has. House buyers have seen their monthly payments double in the last 6 months. Millions of homeowners will probably lose their homes in the debacle ahead.  

Over in the go-go digital world, cryptos, meme stocks and many high-risk assets have been all but wiped out….many investors won’t get back a penny on the dollar

The Wall Street Journal says it’s the “worst bond market since 1842.” Remember,  US Treasury bonds are the bricks and mortar of the entire US financial system.  When they crack-up, you may lose your pension, your savings, your insurance coverage – everything.  Yes, even the Social Security system depends on US bonds. All are now in danger.

What we’ve lost so far is just a hint of what is coming… 

Mark Mobius, CEO of Mobius Capital Partners says, "We probably have another leg down as the Fed continues to raise rates, I expect rates to go much higher…."

Billionaire investor Leon Cooperman told CNBC he thought the S&P 500 would fall 40% from its January peak in total…or another 25% from here.

JP Morgan CEO, Jamie Dimon, said stocks could fall ‘another easy 20%’ adding that the next drop will be ‘much more painful than the first.’ 

And Stanley Druckenmiller warns, “There’s a high probability in my mind that the market, at best, is going to be kind of flat for 10 years, sort of like this ’66 to ’82 time period.”

The Real (inflation adjusted) Story

But as we explained, stocks weren’t ‘flat’ during that 1966 -1982 period. During those 16 years they lost 72% of their value in real terms (that is to say, thanks to inflation). 

Yes, dear reader, dead ahead is a ‘Dark Cluster Decade,’ when one crisis brings on another one. Prices shoot up. Shortages of food and fuel develop. Stocks crash. Recessions and or depressions begin.  

Your savings…your retirement…your investments…your job…your house – the whole shebang, is in danger.  

There are not many things in life where age is an advantage. But some things take time. It takes time to figure things out. And it takes experience to put them in perspective.

Most people today have neither.  But if you were born before 1960, you might remember…

…how you could work two jobs in the summer and finish college with no debt...

…how you had to get up at 4 am to get in line to buy gasoline during the ’73 Oil Shock...

…or how mortgage rates hit 16% in 1981.  

Most people today can’t imagine it. Financially, most couldn’t survive it.  

Could we suffer another ‘energy shock?’ Yes, we could.

Could stocks go nowhere for the next 31 years? You bet they could.

Might you have to pay a 16% interest rate to refinance your house? Yep.  

And it could be far worse...

Back in the ‘70s, the US economy and its major institutions hadn’t yet been corrupted by 4 decades of “funny money.”  Federal debt was still under $1 trillion until 1980. There was no bubble in the stock market back then. Or in the bond market. People still considered themselves either men or women. And not being a ‘racist’ was easy; all you had to do was to treat others with respect.  

Democrats and Republicans were still talking to each other. We were not in a proxy war with Russia. China was still a ‘third world’ nation. We didn’t have more than half the population relying on money from the government. And back then, if you had mentioned a “new civil war” in the USA people would have thought you were nuts.  

Today, it’s a very different situation….and a much more dangerous one.

Regards,

Bill Bonner

Joel’s Note: For readers just joining us, who might be tempted to think we’re all about “the problem” and not enough about “the solutions”…

Bonner Private Research’s Investment Director, Tom Dyson, gave a pretty good summary of what he and our macro analyst, Dan Denning, are looking at for members.

Based on the outlook Bill describes above – the end of cheap and abundant energy, labor, goods and credit – Tom and Dan have devised an asset allocation strategy designed to a) preserve capital through the deepening recession and b) offer tactical trading opportunities when special situations arise to make profits and/or bank income along the way…

Here’s Tom’s summary, for new and seasoned readers alike:

As regular readers know, we’ve battened down the hatches. There’s too much debt in the world and not enough real income to support it, now interest rates are rising. The Day of Reckoning has arrived.

We’re positioned for long bear markets in stocks, bonds and real estate. We’re forecasting a sort of lost decade for investment assets as society wrestles with energy, copper and food shortages, bad debts, price hikes, trade imbalances, war and unemployment.

I’m no permabear. I just think there are times when it pays to take risks and there are times when it doesn’t. I think now is one of those times. “Set the dial to maximum defense” we’ve said all year. 

I continue to suggest subscribers hold lots of cash and lots of physical gold. The cash hedges you against nominal price declines. The gold hedges you against a depreciating currency. It’s essential to hold both.

We’re also going to try to profit from shortages in energy and other basic materials. Our Trade of the Decade is long oil, short dollars. And for making shorter term trades, we use a model we call “inflate or die” which says the economy is now so leveraged, it functions with an “on-off” switch.

Either the Feds keep inflating the bubble… or the economy collapses chaotically. The switch is currently set to “off” which is why we’re being so cautious in our short term outlook for investments. We’ve also described this as “inflation volatility.”

Finally, we’re always on the lookout for any special situations we can take advantage of to earn a little safe income from our savings... 

If you’re concerned about what‘s coming down the pike… if you’re interested in preserving your capital through the deepening recession… you might find a membership to Bonner Private Research worth your while. Find a subscription program that works for you, here…

P.S. The specific proxy for the Trade of the Decade is up over 130% since Tom and Dan alerted BPR members to it back in January, 2021. But they reckon it has a long way left to run yet. Get your in-depth Trade of the Decade report when you become a Bonner Private Research Member, today.