Hard Country, Soft Money

When sales go down, prices go down, and real interest rates go up...

(Source: Getty Images)

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

A cab driver in Dublin:

“Are ye from America?

“I went there once. In the 1980s, that was in New Jersey. In Hoboken. I only intended to stay for a while, but they were paying up to $300 per day for people to work there. On construction.

“It was a rough place.

“One time, I was out at a bar until after midnight. As I was walking home, I got a tap on my shoulder. It was a policeman.

“Don’t you worry, Paddy, he said to me. “But check your pocket…that man over there (he pointed out a man on the opposite side of the street) just picked your pocket.

“So, I checked. And my money was gone. But I only had $11 in my pocket.

“The policeman arrested him. And then they were going to have a trial. And they wanted me to testify. But I didn’t want to give up a day’s work for the $11 that was stolen from me…which I had already gotten back.  

“But they told me it was my duty. So, I went to the trial and testified. And the man was convicted of petty theft. And then I got a shocker.

“The judge gave him an 11 month sentence. One month in jail for every dollar he had stolen.

“I knew then that it was time to go home. America is a hard country. ”

“I’d Rather Be A Hammer…”

All week long we’ve been puzzling over how hard America has become. Its military/industrial/prison…etc…complex controls the government. Look in its pockets and you will find almost every member of Congress – Republican or Democrat. Check the list of donors to prominent US think tanks…there, you will find our most prominent  ‘defense companies.’  

The press and the universities are in on it too – convinced that every nail needs a hammer. At home and abroad, we pound away…targeting ‘terrorists’ in wheelchairs…and locking up dimwits for unauthorized visits to the nation’s Capitol.

How that fits into the deep currents of history…and the Primary Trends of our markets…is our main concern. So, let’s see. 

The Fed pauses…the Stansberry Wire reports:

After 15 months of consecutive interest rate hikes, Federal Reserve officials decided to pause at their recent meeting. However, they indicated that they are likely to resume tightening measures in the future to address concerns about inflation. In a statement released by the Federal Open Market Committee, they mentioned that keeping the target range steady during this meeting allows them to evaluate additional information and its impact on monetary policy.

Cracked Rear View

What is this ‘additional information’ that the Fed is likely to receive? The whole idea of being ‘data dependent’ is a fraud. The ‘data’ is history. It is only the future that the Fed can influence. And so far, the Fedsters have proven very bad at forecasting.  

That’s why we have 5% inflation… because the Fed’s 1,000 economists didn’t see it coming.  Expecting 2% – they kept its key lending rate far too low for far too long…resulting in far too much debt…and an economy that is far too fragile to survive honest interest rates.

So, it ‘pauses’ – with its key rate only about even with inflation…the real yield on the 10-year Treasury bond still negative…and the S&P 500 still more expensive than it was in 1929. In other words, the Fed is still encouraging people – especially the government and its aforementioned military/industrial…etc…complex – to borrow, spend and invest. And it is hoping that the inflation rate keeps coming down so it can go back into Full Inflation Mode.

But today we will guess about what it is that the Fed has not seen coming this time.  The country may be hard. And the money may be soft. But it’s not nearly as soft as it used to be.

Here’s Fortune:

Deutsche Bank puts U.S. recession chances near 100%—avoiding hard landing “unprecedented”     

“Avoiding a hard landing would be historically unprecedented,” warned group chief economist David Folkerts-Landau in a research report entitled The Clock is Ticking published on Wednesday.

What happens in a recession? Sales go down. Prices go down. And real interest rates (after inflation) go up. The higher real rates, along with lower sales and profits, make it harder for companies to pay their bills. Zerohedge tells us what comes next:

The End Of Easy Money: Bankruptcy Filings Pile Up At Fastest Rate Since 2010     

A cleansing process, long overdue, to whittle down the corporate debt overhang and clear out deadwood, at the expense of investors...     

It’s turning into a banner year for corporate bankruptcy filings, after years of Easy Money that caused all kinds of excesses, fueled by yield-chasing investors, in an environment where the Fed had repressed yields with all its might. Those yield-chasing investors kept even the most over-indebted zombies supplied with ever-more fresh money. But that era has ended. Interest rates are much higher, and investors are getting a little more prudent, and Easy Money is gone.

Companies that couldn’t quite make ends meet when they could borrow money at 3%, explains Wolf Richter, are now forced to borrow at 7%. Unable to refinance…or to carry more expensive debt…they are going belly up.

Dear readers, their quick minds stimulated by the emergency, will have no trouble following the balls as they ricochet across the table. Many of these companies owe money to banks as well as to bond holders. Many of these creditors have creditors of their own. And the US government too, recently released from its debt ceiling ankle bracelet, and eager to keep the money flowing to its favorite cronies, fantasies and incompetents, is now in need of nearly a trillion more dollars in funding.

Alas…“the Easy Money is gone.”

Tune in on Monday for more of the story.

Regards,

Bill Bonner

Joel’s Note: The S&P 500 is indeed more expensive than it was in 1929, but does that mean it cannot get even more expensive? And what of the recent (and much proclaimed) “death of the bear” we read about in the popular presses? Are happy days here again? Has A.I. come to save the day? To deliver us from debts, deficits and the iron-clad laws of economics forever and ever, amen?

A dear reader commented last week, under investment director Tom Dyson’s market note. The question, an important one and no doubt on many investors’ mind, bears addressing. Herewith the comment, and Tom’s answer, in full…

The Nasdaq is up 30% year-to-date. The S&P 500 is up 14%. A reader posted a comment about this, beneath my last column:   

“Anyone else watching the Nasdaq and S&P go up up up, while stop losses/taking the loss are discussed on the stuff you bought that were recommended by Dyson? Oh, that’s right: it’s a bear market rally.”

TOM’S RESPONSE:

Most investors pay way too much attention to recent moves. They hated stocks back in October when the Nasdaq was at 10,300. Now it’s at 13,550, they think a new bull market is starting. It’s crazy, but it’s always like this.

Meanwhile, here at Bonner Private Research, we aren’t speculating on short term moves in the stock market. We quietly go about our business, cashing coupons and collecting dividend checks… and slowly increasing the value of our ultra-defensive portfolio… and waiting for the bear market to run its course. 

It’s like the tortoise versus the hare. We have a hypothesis... and a long-term plan. That is, Western governments are broke and their debt is a guaranteed loser. We’re now in a new era of high inflation, negative bond returns and a bear market in stocks in terms of gold. As investors wake up to this, they’re going to be looking for the exits… and finding real assets.

Our plan: hoard energy. And physical precious metals. And liquidity. And trade cheap, dividend paying cyclicals that could benefit from a commodity spike. 

We're focused on real-world fundamentals of energy scarcity, cash flow, and getting paid dividends. The market doesn't bother to understand certain industries or businesses...and this leaves many companies mispriced. It allows us to buy them at attractive prices, and then be rewarded regularly with the dividends and buybacks. It may not be flashy or exciting... but it adds up… and doesn’t leave us exposed to a lot of risk. 

Out of eleven positions on our Official List, we're only showing one loss (of -4%). Every other position is in the black... and the average return of these eleven open positions is currently 25%.

It ought to go without saying that the work we do here at Bonner Private Research is not for everyone. Some folks have higher risk tolerance. Others feel the “need for speed.” And still others harbor no inclination to sit on the sidelines in defensive positions, FOMO-ing while the markets oscilate wildly from one extreme to another.

That said, our “Maximum Safety Mode” approach is for SOME people… those looking to safeguard their savings, protect their retirement, and generally sleep soundly at night. If that’s you, we’d like to welcome you aboard to our paid research, here…

If that’s not you, that’s ok too. Feel free to enjoy our free daily missives and to share them around if and as you please. Cheers ~ Joel