True Wealth

As opposed to the Fed's flimsy, flimflam fiat...

(Source: Getty Images)

Bill Bonner, reckoning today from San Martin, Argentina...

"Money is gold. Everything else is credit." 

~ J.P. Morgan

Yesterday, late in the evening, we arrived at the farm.  

It was a happy homecoming. Ojito, Elgardo, Antonio, Sulma…much of the ‘family’ – including several generations – was there. Hugs and kisses were exchanged.  

But there was no time for extended conversation. Night was falling, best to get across the river before dark. This time of year, you can’t drive across the river – not even with a 4-wheel-drive. Our luggage was loaded onto a trailer, hitched behind a tractor. Then, we mounted up too, using the tailgate of the pick-up as a giant step to get onto the high trailer.

The trailer bounced and trundled along…across the river and up through an allee of Lombardy poplars to the house, where we were warmly greeted by Ines, who had a warm meal waiting for us.

This afternoon, we will saddle up and go to look at the farm. More to come…

Flimflam Figures

Meanwhile, we were trying to understand the meaning of numbers. More specifically, the numbers used by economists and policymakers. Do they really mean anything at all?

Here’s a tweet that came in yesterday:

Michael Nicoletos @mnicoletos

When a country builds a bridge or a building, this activity is added to the GDP. When the bridge or the building is demolished, this activity is not subtracted from the GDP. You can understand now what happens to China's GDP if #China constantly repeats this activity.

Fascinating @fasc1nate

China destroying unfinished high-rises https://t.co/f0UWjN0itd

This is not just an ‘academic’ discussion. The fishy-est number of all is the one followed by a dollar sign. It is also one of the most important. Exploring its fishy-ness helps us understand what is going on…and where it is likely to lead. 

Our view is that there will be no ‘soft landing.’ Because the Fed can’t stop raising rates “until something breaks.” Here’s a headline from MarketWatch:     

Fed Wants ‘Substantially’ Lower Inflation Before Easing Interest Rates—And Some Officials Backed More Aggressive Hikes     

With inflation continuing to run hotter than expected, the Federal Reserve is showing no signs of backing down on its aggressive monetary policy, according to notes from the Fed's policy-setting committee released Wednesday, an unwelcome sign for investors clinging to hopes of a less hawkish central bank.

Inflation is now embedded in the financial system. Household, corporate, and government debt are still going up. Some people borrow because they need to.  Some borrow to speculate. And some (the feds) borrow never intending to pay it back. As long as the cost of money is below the inflation rate, people will continue borrowing…thus increasing the amount of (borrowed) ‘money’ in circulation.

What they borrow is money. And it’s fake. It is born as credit…and matures as debt. You get rid of it (and the extra ‘money’ that came with it) only when it dies. And it only dies when it is 1) paid…2) repudiated…or 3) inflated away.

For both political and practical, financial reasons, #3 is the obvious choice.

Which means, inflation won’t go away…and the Fed can’t stop raising rates. It will keep at it… until something really bad happens. Then, and only then, can it ‘come to the rescue’ by ‘pivoting’ to lower rates.

That is the ‘short story.’ But, dear reader, you’re not getting away that easy. Here’s the longer story…or at least the beginning of it.

Midas Money

Real money – gold – can’t be lent into existence. It has to be dug out of the ground….slowly, and at great expense. And then, gold money can’t be ‘printed’…it has to be earned, by producing goods or services. So, there’s a limit on how much ‘money’ is available…and how much of it can be lent out as credit.  Speculators can still get excited, make mistakes and blow themselves up. But since debt is limited, they can’t blow up the whole world economy.    

When the money is fake, all the financial numbers fall under suspicion. Mr. Nicoletas, above, is describing a suspicious ‘churn,’ for example. The rush of new money increases transactions…that the feds measure, tax, and use to justify their policies. But nobody knows what is really going on. Dan elaborates:

Buying and selling taken by themselves don't create  value….

Think of the stock market. Does the huge daily volume of transactions create any additional value? Does it aid in price discovery? Does it make each publicly listed company exactly as valuable as it should be, given everything we know right now, and based on the present value of future earnings?

Of course not. It's activity for the sake of generating commissions for Wall Street. No real value was created. Much of GDP is like that now too. It measures transactions, not value.

Worse for Wear

Imagine that you bought a nice coat that would last the rest of your life. You add a one-time purchase to GDP. But imagine that the quality was so bad that you needed to buy a new coat every year. Voila…now you’re giving a boost to GDP every year.

And good for you! Sales and profits go up. Commissions are paid. Salaries are paid. Taxes are paid.

And nobody is any better off. Au contraire, you’re worse off, because now you must buy a new coat every year. 

But almost all public policy decisions are based on these fake numbers, faddish categories, and crackpot theories. The Fed, for example, takes its (largely phony) inflation statistics seriously. With them, it deflates nominal wage gains and (largely meaningless) GDP numbers. Then, it imposes a completely ersatz interest rate… and thereby jumbles and fumbles the economy.   

Just as imposing ‘racial equity’ on the basis of skin color and statistics is fake and futile…so is trying to control a $24 trillion economy with phony measures and scam formula. It is like flying an airplane with fake instruments…or hiking in the Canadian wilderness with a faulty compass. 

It’s not that you won’t get somewhere…it just won’t be where you wanted to go.

Regards,

Bill Bonner

Joel’s Note: As Bonner Private Research members know, Tom and Dan have been urging caution over the past year, just as stocks and bonds returned their worst combined year (as measured by a 60/40 ‘balanced’ portfolio) in… well, ever.

While many investors were losing their shirts, or being suckered into bear market rallies, BPR members were sitting safely on the sidelines, engaged in “maximum safety mode.”

That means a healthy store of cash, to hedge against nominal price declines, and solid gold (and silver) holdings to protect against currency debasement. These two backstops provide the weights on the barbell. In between, Tom’s been trawling through investment ideas, looking for opportunities to grow capital along the way through earning income and investing in ‘special situation' opportunities.

Of course, no bear market (or bull market) lasts forever. There WILL be a time when stocks become cheap enough to entice prudent investors (as opposed to optimistic speculators) back into the market. As Tom wrote to members in Wednesday’s research note:

“When this bear market has run its course, and the stock market is much lower than where it is today, I’m going to write to you and urge you to move all your spare capital into a dozen or so of the highest quality compounding stocks in the market – dividend aristocrats and insurance float aristocrats – and then NEVER SELL. (You’ll live off the dividends and capital gains.) I’m going to do the same with all the capital I have saved up – every penny.”

The key, of course, is patience. Continued Tom…

“We’re not there yet. We’ve got a few more years to wait. In the meantime, we’ll keep collecting safe income and preserving our capital. And I’ll keep working on my wishlist of the world’s greatest compounding stocks…”

If you’re not already enjoying all of Tom and Dan’s research, including twice-weekly market updates and a growing archive of in-depth special reports (on Gold, The Dollar and the BPR Trade of the Decade, among others…) now’s a great time to get on board. Find a membership plan that works for you, here…