DELRAY BEACH, Florida – The sky in South Florida is gray. A cold wind blows across the sand.…

Since the start of the year, the Dow is down about 7%. But certain stock market sectors have undergone a much harder pruning.

First, energy… then the tech… and now banks.

Shares in too-big-to-fail bank Citigroup are down almost 28% so far this year. And shares in Europe’s biggest bank, Deutsche Bank, are down by more than 36%. (More about the carnage in bank stocks… and what it means… in today’s Market Insight.)

Negative Wealth Effect

As always, we don’t know where this leads.

But as we warned at the start of the year, it could be the beginning of a serious bear market. And more!

As Nobel Prize-winning economist Paul Samuelson put it, the stock market has famously predicted nine out of the last five recessions.

Further study shows that a stock market plunge of 10% has about a 50% probability of presaging a recession… 100% of the time!

Hope that’s clear.

But a stock market plunge not only predicts trouble in the economy; it also causes it.

The Fed’s treasured “wealth effect” – in which investors, seeing the value of their portfolios rise, feel richer and rush out and spend – works in both directions.

When stock prices fall, investors pull back on spending, and the economy goes into a cold funk.

The further stocks fall… the more the likelihood that the economy will follow.

This has the central planners worried.

Pushing on a String

Here’s the chief economics commentator at the Financial Times, Martin Wolf:

What might central banks do if the next recession hit while interest rates were still far below pre-2008 levels? As a paper from the London-based Resolution Foundation argues, this is highly likely. Central banks need to be prepared for this eventuality.


The most important part of such preparation is to convince the public that they know what to do.

Good luck with that!

The one clear lesson of the last eight years is that central banks either do not know what they are doing… or they know and are intentionally not doing it.

For the benefit of today’s Diary, we will give them the benefit of the doubt. We will assume they are incompetent rather than evil.

There is no shame in incompetence, especially when it comes to managing the world economy. We don’t believe any human could do it.

So, Yellen et al can hold their heads up. They have failed, but they were on a fool’s errand anyway.

A sharp-eyed reader sent us a quote from the Wall Street Journal. It shows that the mainstream financial press is coming around to our point of view:

The failure of unconventional monetary policy in Japan and Europe is proof that central banks can’t conjure growth in economies that need major reforms to let resources find more productive uses. The old analogy of “pushing on a string” remains valid – if companies can’t find promising investments, credit creation will remain stalled no matter how cheap credit is.

Then there is the comment from governor of the Reserve Bank of India, Raghuram Rajan:

…stimulus doesn’t cut it anymore and, certainly, monetary policy has largely run its course.

And from Sean Yokota, head of Asia strategy at Nordic bank SEB:

Central bankers are running out of things to do.


Hang On to Your Hat

Not according to Mr. Wolf!

He lays out the options, prefacing them with remark that letting a correction do its work is out of the question “given the damage it would do to the social fabric.”

(He did not specify what damage a cleansing correction would do; in our view, the social fabric could use a good scrubbing, too.)

One option, said Wolf, would be to “change targets,” allowing for higher levels of inflation. He didn’t elaborate, leaving us wondering how a central bank that couldn’t get annual consumer price inflation to 2% would be able to move it to 3%.

Another option would be the “forced conversion of debt into equity,” which he said would be difficult.

Still another option would be more quantitative easing, which might be provocative.

There is also negative-interest-rate policy (NIRP). But “it is unclear how economically effective [it] would be,” he warned.

What policy does Wolf actually recommend? The nuttiest one, naturally:

A final instrument is “helicopter money” – permanent monetary emission for the purpose of promoting purchases of goods and services either by the government or by households.

If the money went directly into additional spending by government or into lower taxes or to people’s bank accounts, it would surely have an effect. The crucial point is to leave control over the quantity to be emitted to central banks as part of their monetary remit.

For the last eight years, we have seen nothing but absurd and unproductive central bank policies.

But hang onto your hat: There are plenty more where those came from!




Further Reading: Bill’s urgent warning examines the unavoidable effect of these absurd and unproductive central policies. It’s a disaster story in the making… And when it finally unfolds, every service you’ve come to depend on – from your bank to your grocery store to our federal government – will shut down.

That’s why Bill has gone to such lengths to explain what’s really going on. He knows that helping you understand the situation is the first step in showing you how to protect yourself. Find full details here.


Market Insight


Below is a chart of Deutsche Bank, one of the largest banks in the world.

Do you think all is well with the global financial system?

In 2015, Deutsche Bank booked its first full-year loss since the 2008 global financial crisis.

Featured Reads

Here’s Why Time Is Running out for Deutsche Bank
“Investors have completely lost their faith in the bank,” a top 10 shareholder told Reuters. And a quick recovery in the share price is unlikely given the magnitude of the problems weighing on the company.

Investment Guru Explains How to Invest in a Volatile Market
To be a successful investor, you have to ignore Mr. Market. In this article, Seth Klarman explains what every investor must understand about the two extremes that drive market inefficiency.

Why the Financial Market Is a Rigged Game
Most investors think they can make money depending on their luck or skill at picking winners. But they’re wrong. The game is rigged. And central banks are running the show.


In today’s mailbag… some kudos for Bill and a question about our Weekend Diary interview with Tom Dyson, editor of The Palm Beach Letter.

I wish to commend Bill for the most insightful and simple personal investing strategy explanation vis-a-vis global economic factors I have ever seen. [Paid-up subscribers to The Bill Bonner Letter can catch here up on Bill’s “Trade of the Century” issue.]

His adaption of the Gave Investment Compass was a eureka moment for me, especially after he included historical examples (e.g. Argentina in the Northwest quadrant). All the words in the world can’t replace simple graphical depiction like this.

One can start to imagine third and fourth dimensions to this chart that begin to provide further insight.

– Michael S.



I am a new subscriber, enjoying the entertaining reading while discovering “what we should do.”

I just read Chris Lowe’s interview with Tom Dyson. In it, Chris asked: “What else can investors turn to for safety in this environment? Gold? A specific stock sector? Real estate? Farmland?”

Tom answered: “Cash. I see a bull market in cash and a bear market in investments.”

My question: I keep reading “cash” in quite a few articles. What does this look like, investing in cash? Do you mean take cash (USD paper bills) from ATMs and store it in a safe place?

– Joanna


Chris comment: Tom has two ways of using the safety of cash to protect himself in this environment…

He puts money in whole life insurance policies. As he says, “It’s a way for me to bank cash at 5% annual returns… 100% outside the stock and bond markets. It’s something no bank can offer.”

He also holds long positions in U.S. dollars against the Swiss franc, the euro, the Canadian dollar, the British pound, the New Zealand dollar, and the Australian dollar.

In Case You Missed It…

Speaking of Tom, his three-part training series focused on income investing began today.

In this free series, Tom reveals his top technique for generating income in a bear market. Over the last four years, it’s been a virtually “can’t miss” strategy with a 96.2% win rate.

To register for Tom’s free training series, go here now