Not So Fast

Inflation over? Stocks to the moon? Debt debacle done and dusted?

(Source: Getty Images)

Joel Bowman, checking in today from Buenos Aires, Argentina...

Well, isn’t that a relief! 

Markets came up for air this week, gulping like a kitten that had fallen in the deep end and spent the last seven consecutive weeks thrashing underwater. 

The blue chip Dow Jones Industrial Average closed the week higher by 5.1%. The broad S&P 500 ended up 5.9%. And the tech-laden Nasdaq rose 6.7%.

The indices are nevertheless down 9.2%, 13.3% and 23.4% respectively for the year (and similar percentages from their all time highs). 

Gold finished the week right around $1,850/oz. It’s down 2.25% on the month (measured in US dollars) but up slightly for the year (1.1%). 

And what of the once mighty greenback? After having put on a brave face against a fistful of foreign fiat over a solid spell through March-April – including euro, pound sterling, Japanese yen, Canadian loonies and Aussie dollars – the dollar index slid for the second straight week. 

According to Reuters, the recent dollar decline comes “as traders pared expectations for U.S. Federal Reserve interest rate hikes and as improving inflation and consumer spending data eased recession fears.”

So that’s it, right? Inflation back in the bag? Stocks to the moon? Back to the department stores to give the ol’ credit cards a good flogging?

Not so fast... 

As BPR Investment Director Tom Dyson points out, “Our debt-based, fiat-based, speculation-based monetary system doesn’t work in reverse.” 

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Here’s a choice snippet from his monthly issue, which Tom mailed to subscribers this past Wednesday... 

(Ed. Note: If you’re not already receiving all our paid research, including Tom’s monthly issues, he and Dan’s twice-weekly market updates and invites to private Zoom calls with Bill’s personal network of analysts and experts, you can join now for as little as $2/week. It won’t always be available at such a low price – wink, wink – but it remains so today. Get on board here.)

The only reason stocks look cheap is because their earnings have been inflated by years of cheap credit and liquidity. When earnings crater in the recession and liquidity contraction that’s coming, current stock prices won’t look so cheap anymore. Nor will the millions management wasted on buying back overpriced stock. 

This isn’t a monetary system run by economic fundamentals. It’s a monetary system fueled by leveraged speculation and managed by the Federal Reserve, all based on liquidity. The entire system has been inflated artificially. 

To ward off deflation in 2002, 2009, 2018 and 2020, the Fed created a series of bubbles – a bubble in real estate, a bubble in earnings, a bubble in bonds, a bubble in stocks, a bubble in investor optimism and most dangerous of all, a bubble in government debt. 

That’s the problem with bubbles. They burst when they run out of speculative energy. And our debt-based, fiat-based, speculation-based monetary system doesn’t work in reverse. 

In reverse, the markets turn into runaway trains – or as economists say, they become disorderly, which is what we’re beginning to see now, and what we’ll continue seeing until the Fed reverses policy. 

As we say here at Bonner Private Research, monetary policy is a switch, not a dial. It’s labeled “Inflate or Die.” 

So you can count me in the extremely bearish camp. Except for occasional short covering rallies, I can’t see any relief coming for the major stock market averages until the Fed begins injecting liquidity again, in truly face-peeling quantities, which doesn’t seem imminent.

Besides a select few “tactical trades,” which Tom has outlined in detail to Bonner Private Research subscribers, he’s set the dial to “Maximum Safety Mode.” That means plenty of cash, plus gold (and some silver) on the sidelines, ready to deploy when the timing is right. 

There will be opportunities for prudent investors, reckons Tom. Right now, though, it’s time for patients and discipline. For more on the BPR Asset Allocation Strategy, and for details on Tom’s stock watchlist, consider becoming a member today...

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And now for Bill Bonner’s missives from the past week...

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And that’s all from us for today. Tune in tomorrow for your regular Sunday Sesh, where we check in on your Dear Leaders in Davos and offer up our own little Ode to Oil...

We’ll also have the transcript for your latest Fatal Conceits Podcast, in which we caught up with Bill’s top real estate scout, Ronan McMahon. All that and more, mañana. 

Until then...

Cheers,

Joel Bowman