Maximum Safety Mode

Tom Dyson explains the BPR investment strategy and what to do when "everything's on the line"...

(Vedauwoo rock formations near Laramie, Wyoming. Source: Getty Images)

Dan Denning, checking in today from Bonner Private Research HQ, Wyoming…

Greetings from the windswept plains of Laramie, Wyoming. It snowed for the first time this fall on Sunday. They were only brief flurries. But the Winter Nightmare our founder Bill Bonner has been warning about is one step closer. How will you prepare? 

Hold that thought for a moment! Speaking of our fearless leader, he wrote to you yesterday from Florida, where he has decamped to plot the next phase of our project. We began Bonner Private Research almost a year ago, as a small, cozy, personal enterprise where we could write to you about the single biggest threat to your financial security: the implosion of the largest credit bubble the world has ever seen.

That implosion is now well underway. And we haven’t even seen the worst of it. Bill will spend the next two weeks working behind the scenes to coordinate several new projects. For example, you’ll be invited to attend a second ‘Winter Catastrophe’ webinar, where our friends Rick Rule and Byron King analyze global energy markets and investment opportunities. That will be in early December. Stay tuned.

In the meantime, we’ve been having a conversation with you all year over some key ideas for understanding where the market is at, and where it’s going. Long-time readers will be familiar with those ideas: Maximum Safety Mode, The Fed’s Wrecking Ball, the Dow/Gold Ratio, and the Controlled Demolition of the Middle Class to name a few.

But if you’re a new reader to Bonner Private Research, you may feel like you’ve joined a conversation that’s been going on for over a year. That’s because you have! So this week and next we’re going to revisit and refresh those key ideas for all our new readers. We begin with a revised research note our Investment Director Tom Dyson sent on February 9th. But before you get stuck in, have a look at the chart below. 

Source: www.stockcharts.com

The S&P 500 is down just over 3% since Tom first published the note below. But it’s been a wild ride–up as much as 22% and then all the way back down to the June lows. Those lows have been retested and broken before the rally that began last week. And now?

We remain in Maximum Safety Mode. But Google and Microsoft report earnings today. Apple and Amazon report on Wednesday. That’s $6.6 trillion in market capitalization reporting over two days. If tech stocks blow it out, it may be ‘risk on’ for the rest of the week. And next week?

The Federal Reserve’s Open Market Committee is scheduled to meet on November 1st and 2nd. The market expects a rate hike of 75 basis points. And then another 75 bps when the Fed meets December 14th and 15th. And then? A pivot!

Tomorrow, Tom will present his ‘Fed Wrecking Ball’ analysis. But as you read the note below, keep in mind that in March 2000, Warren Buffett’s famous market-capitalization-to-GDP indicator was at 145%. Buffett uses that ratio to make a general assessment of whether stocks are overvalued or undervalued. 

The good news is that the ratio has declined from 198% in November of last year. Stocks peaked at a market value of close to $50 trillion. They’ve lost $11 trillion since then. That would be a normal bear market for most investors–by which I mean painful but mercifully short.

The bad news is that today’s ratio of 145% is STILL higher than when the dot.com bubble burst in March of 2000. That peak was 140%. And now you know why we’re calling it the bursting of the greatest credit bubble of all time. By our calculations, a return to the historic mean of 85% in the Buffett Indicator would wipe another $17 trillion off the value of publicly traded stocks–or a loss of 44% on the S&P from these levels. Read on to see what Tom wrote in early February about how to deal with this kind of financial threat.

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Maximum Safety Mode

By Tom Dyson, Investment Director

I’m pleased that the first in-depth Research Report we’re publishing as part of our new venture is my work on The Dow/Gold ratio. There’s no more important indicator to tell you what is likely to happen over the next ten years. And exactly what to do about it if you want to protect your money so that you can put it to work when the next cycle begins. 

Looking back at the 34-page report, I can say that the stock market’s rotation between “cheap” and “expensive” seems to be one of the most stable cycles in all of finance. When stocks are expensive, as they are now, the strategy recommends gold. And when stocks are cheap, as they were in the early 80s, the strategy recommends stocks. 

It’s a very simple strategy. It’s also an excellent guide for doing exactly what we’re trying to do here for you–connect the dots, look at the big picture, and then chart the best path forward for your money. Using the Dow/Gold ratio as an indicator has generated compound annual growth rates of 12.5% over the last century, when you look at the back testing.

But it’s not easy to follow, mainly because it requires a lot of inactivity, and most of us don’t have the patience for it. We want to DO something. To trade. Or overtrade. And based on your extensive and thoughtful responses to Dan’s question about more trading research last week, that’s not something most of you want. So what next?

When everything is on the line

The strategy is currently recommending gold. At the end of the report, I have appended my practical guide to buying gold, including contact information of a variety of dealers I trust and have done business with in the past. (I do not receive any kickbacks or commissions for recommending these businesses, nor does Bonner Private Research. I recommend them only because I’ve used them before over the last two decades and I liked them or trusted them.)

For me personally, this strategy represents more than just an interesting theory. My family and I have bet almost our entire life savings on it. We consider it to be our ticket to financial freedom. What do I mean by that?

That one day, in a few years, the stock market will have collapsed in gold terms, and we’ll be able to trade our gold for a basket of the highest quality, buy-and-hold-forever, dividend paying stocks… the sort Warren Buffett likes… and then never worry about checking our brokerage statement ever again. 

This is a key part of our strategy–having capital to put to use when there are great companies to be had at great prices. In my report, I show why this has worked so well in the past. And why it’s so hard for so many investors to do it–even when the facts show how well it works. 

Maximum Safety Mode

The message of our Dow/Gold strategy is unmistakably clear: sell stocks, buy gold. We think (based on things like the Market-cap-to-GDP ratio, Robert Shiller's cyclically-adjusted price/earnings ratio, and other macro indicators) that global markets need a drastic re-balancing. That begins with a much bigger adjustment…to lower stock prices.

Accordingly: we have set the dial on our investments to “maximum safety mode.” 

And we’ll remain there until after the correction. Said another way, we have “checked out” of the risk markets and we’re sitting on the sidelines. We’re happy to leave the speculation to others (although we do have friends who are looking forward to higher energy and gold prices as a chance to leverage returns with ‘risk capital’ and will be arranging for you to hear from them when the time is right).

Here in our new venture, any trades or investments we make at this point are purely to help us preserve purchasing power until we’re through the correction. As the old timers say, in a bear market, “he or she who loses the least, wins.” 

The authorities have made such a mess of things, even holding cash isn’t safe anymore. Real interest rates are sharply negative, they’re printing currency and bank accounts don’t pay interest. It’s frustrating, but not unmanageable. Managing it for you is why I gladly took on the role of Investment Director. For example…

Old Economy Value 

We launched our subscription newsletter on January 1. Since then, I have introduced you to three hard asset, industrial ideas I really like at current prices. They are safe income ideas and they’re tactical trades. My hope is, we’ll make a little income and capture a little growth while we remain in maximum safety mode. 

I’ll introduce another new idea later this month. Remember, the monthly newsletter is published on the fourth Wednesday of every month, after the stock market is closed. [Ed note: The October newsletter will be published this week.] 

Now, let’s move onto this week’s mailbag. Your feedback is an integral part of this project and we value every comment, message, and email you send. Please keep ‘em coming. Write to me at research@bonnerprivateresearch.com

QUESTION:

Are all your recommendations going to be US-centric? You also have an audience outside the US (e.g. I am British but living in Germany) so will you be able to mention non-US alternatives. For example, buying physical gold?

MY RESPONSE:

I’ll do my best to include everyone. I’m sure you’d be able to use bullionvault.com, for example, to buy physical gold. And there must be many reputable gold dealers in Germany and Switzerland. If anyone knows of any competitive gold dealers on the continent, I’d love to hear from you. 

QUESTION:

Will you mention a price up to which you are happy to buy the stock? Will you tell us your average buy in price? 

MY RESPONSE:

I probably won’t use explicit buy-up-to prices on the stocks I cover. Instead, I’m going to be stalking the companies I cover and updating you on their progress frequently. I will advise you when I think an idea no longer offers good value. To make this possible, I am only going to follow a very select group of my favorite stocks. 

QUESTION:

Do you do any kind of valuation on the ideas you’re following? For example, "forward cash flow" multiple? If you do then can you share this more numerical side of your analysis? When you say a share is "cheap" it would be interesting to see how you value it intrinsically. Also, I am interested in learning how to value companies by looking at their financial statements. Maybe you could share some of your knowledge of this?

MY RESPONSE:

I always use some kind of fundamental valuation in my analysis. Generally, given our strategy of maximum safety, I’m looking for high but reliable free cash flow yields, and businesses where the stock market is offering steep discounts to the actual real-world value of assets they own. I will include more details of my valuation methodologies in future issues.  

QUESTION:

As part of the Trade of the Decade, are you going to be looking at fossil fuel companies e.g. oil and gas? I have read that many have incredible cash flow and are undervalued due to ESG disincentives…

MY RESPONSE:

Yes, oil and gas will definitely be a rich source of prospective “safe income” ideas for us and I’m tracking quite a few of them closely, and watching for good entry points. Oil seems a bit overbought this week, so I’ve got something safer lined up for this month. Stay tuned. My colleague Dan Denning will be updating the Trade of the Decade report in its entirety before the end of the month. Look for that when we add the ‘Research Report’ section to our website soon. Dan will let you know when the new report is done.

QUESTION:

I am curious about your comments regarding Fed actions and the effects on lesser quality markets, particularly those referred to as Emerging Markets and their high yield/income investments. Am I reading you correctly in that you feel those markets will suffer a serious capital drain as our rates begin to rise and, thus, it might be wise to exit things like Emerging Market high yield ETFs earlier rather than later? Thanks in advance for all the good work being done by all of you.

MY RESPONSE:

The entire global bond market is at the top of a massive speculative bubble, and the Fed is talking about popping it. Do I think holding junk-rated debt at the lowest yields in history during a wave of inflation is a wise investment? No I do not. It’s going to be a bloody massacre… 

QUESTION:

I know that your main investment strategy is gold. I own some gold and silver bullion through BullionVault. I was wondering if you believe the SPDR Gold Share GLD ticker to be a reasonable vehicle for holding gold. Secondly, are you also bullish on silver? Lastly, if you advise to own silver as well, are gold and silver mining company stocks and gold and silver mining ETFs currently a reasonable risk in your opinion? My research shows that during the pandemic crash in 2020, most of these stocks went down as much or more than the S&P 500; therefore, I am assuming that you would prefer to hold the metal as opposed to the mining stocks. Is this correct?

MY RESPONSE:

Please read my gold report which I just published today. Hopefully it answers these questions.

QUESTION:

Another reputable investment letter I subscribe to often applies "Buy up to prices" and also establishes a "stop" for the stock. Is there a reason, such as volatility, that you haven’t applied them here?

MY RESPONSE:

The short answer: I’ll announce when I think a stock I’m covering no longer offers value at current prices or if I’m going to drop the company. The long answer: The new Substack platform we’re using allows me to keep in much closer contact with you than I could when I wrote newsletters for my prior publisher. So while I intend to only cover a select group of companies, I also intend to cover them much more closely, and keep you constantly updated on their progress. 

Until next time,

Tom

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PS Dan here again. Tomorrow we’ll publish Tom’s original research on ‘The Fed Wrecking Ball.’ It’s key to understanding what’s happening in markets right now. And what has to happen before we get back to anything like normal.

Also, please note that while we can answer general questions, we can’t give any specific or personal investment advice. Tom started taking reader questions each week earlier this year. Since then, the ‘mailbag’ has proven to be one of the most popular features of our research service.

Tom is working on the Monthly Report for October as we speak. But while Bill is away, Tom will be front and center next week to write to you. If you have any questions for him, please send them to research@bonnerprivateresearch.com.