Unstable Personalities

Commodities dip, housing slumps and cryptos tank as gravity has its revenge

(Rorschach Ink Blot Test. Source: Getty Images)

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

Stocks were green again yesterday… but the bounce faded far short of the 33,000 Dow half-way point. There’s probably more bounce left. As they say on Wall Street, even a dead cat bounces more than this.

We take the thud to mean Mr. Market has more work ahead – dismembering Frankensteinian businesses… de-worming the market of the Fed’s vile parasites… killing off the zombies… and generally deflating everything that gets in his way.

Steel prices have been cut in half in the last 6 months. Existing house sales and housing starts have both fallen to their lowest points since we masked up and locked down in 2020. Junk bond yields have doubled – making it very difficult for the zombies to borrow more money and survive. Fertilizer prices crested in late March and are now headed down (food prices should follow). Oil is slipping. So is copper. And even used cars are falling in price. They’re down 6% since early this year.

But when it comes to price cuts, nothing quite matches the tales of woe and worry coming out of the crypto-sphere. Trying to keep up with them is a challenge; like broken-down hulks on the side of the road, there are now nearly 20,000… out of gas, flat tires, or they just won’t start – and no tow truck in sight.

Luna Meets Terra

The whole universe of cryptos was said to be worth almost $3 trillion. But where was the value in any of them? Where were the earnings? Where was the output? What made any of them worth a damn?

The Luna coin, for example, lost 99.9% of its value over the last few weeks. Luna was part of a pair of star-cross’d lovers; it was connected to Terra (as the moon is to the earth)… so that one ‘guaranteed’ the value of the other. As if you could make one worthless thing valuable by adding another worthless thing to it!

The whole show was so preposterous… it required as much suspension of disbelief as the New Testament. It had all the mystery and magic, but no socially-redeeming message… no hope of redemption… no promise of everlasting life. It was all backward. Cryptos turned wine into water… and sane investors into lunatics.  

Even the most stable and respectable of the lot – bitcoin – got cut in half last weekend, at one point trading below $18,000. If you bought the coin when we first suggested it, back when the crypto world was Eden, you’re still way, way ahead. But fake money (money you don’t earn honestly) is always subject to the Cantillon Effect. That is, as with any Ponzi scheme, you’ve got to get in early. And then, don’t forget to leave the party before the band packs up.

But enough of crypto. And who knows? One or two of the coins might still rise from the tomb… and prove to be valuable. It might be a curiosity, like an Elvis-on-Velvet painting. Or a surprisingly successful third marriage.    

It’s axiomatic here at Bonner Private Research that real wealth comes from hard work, diligence, forbearance, innovation, saving… and all the other things we don’t especially enjoy.

If you could create real wealth by passing a law, printing money, creating a crypto, running deficits, or slathering an IPO with incomprehensible mumbo jumbo – well, there’d be a lot more rich people!

Dollar Divorcees

But the unstable coins neither began with cryptos, nor will they end with them. When gold was divorced from the dollar in 1971, all the world’s major currencies were orphaned. The pound and the still-unborn euro, for example, had no daddy to paddle their little derrieres. They were no longer subject to monetary discipline.  Instead, they could run wild.

They were connected… linked to the world’s reserve currency – the dollar. But what was the dollar linked to? Who rapped the greenback’s knuckles when it got out of line? Who taught it to say please and thank you?

Nobody.

Instead, it was ‘anything goes.’ And anything went. In the 21st century, US GDP doubled.  But the Fed’s balance sheet (serving as a proxy for the supply of dollars) was multiplied by 10.  

But what interests us especially is what will happen when the stable dollar gets the same treatment as stable crypto coins.  

Crying for Argentina

As with so many things in the financial world, Argentina has already been there and done that. Here’s Daniel Lacalle at Mises.org:

In Argentina there was no dollarization: there was a deception in which it was declared that one peso was equal to one dollar. Like the stablecoins crashing on the market today, the so-called dollarization was simply a fallacy, and when the bubble burst, policymakers went on to further destroy the currency’s purchasing power.

Oft recalled in these pages was our visit with then Argentine president Menem in the 1990s. He had ‘linked’ the peso to the dollar. Like Luna to Terra. One to one. The peso was stable because the dollar was stable. Which worked beautifully… until it came under stress. Then it didn’t work at all. People discovered that the ‘link’ was just a promise. And a deceptive promise at that. And as it turned out, that promise was broken only a couple months after Menem assured us that it would never be. And then, Lacalle continues:

In aggregate terms, money supply, including all the currency in circulation, has shot up in Argentina by 2,328.09 percent in ten years, while in the United States it has doubled. In other words, the aggregate money supply in Argentina in the last decade has increased at more than eleven times the rate of that of the United States. Only Venezuela has conducted such madness.

How’s that for a ‘stable’ peso?  

In Argentina’s case, the link that held the dollar and the peso together was no more than a political promise. But what if the gravity between moon and earth – between euro and dollar… or gold and ‘paper gold’ – were little better?

We’ll look at that tomorrow…

Regards,

Bill Bonner