LONDON – “Nothing but bad news in the paper,” a colleague saves us the trouble of reading it ourselves.

“A building caught fire here in London. Dozens dead. A guy opened fire on Republicans at a baseball field. He shot a few of them. The Fed raised rates.”

The only one of those things on our beat is the last one.

The Reflation Trade Is a Flop

We are on record: The Fed will never raise rates in any serious way. Nor will it ever willingly “normalize” its balance sheet.

So what’s going on?

Our friend may have missed the most interesting news. Among the flotsam and jetsam in the press floated a few items worth scooping out of the water and examining more closely.

For one thing, inflation is coming in below the Fed’s 2% target. In fact, the latest numbers are lower than those when Donald Trump was elected.

Inflation expectations, as measured by the bond market’s “breakeven rate,” have been going generally downward for the last 35 years. Last year, the trend seemed to come to an end when yields and inflation both bottomed out before Trump’s election.

Since then, they’ve headed down again.

Currently, the market is predicting an inflation rate of just 1.72% over the next 10 years. Which means three things…

First, so far, the “reflation trade” has turned out to be a flop. Instead of going up, inflation has gone down.

Second, it also means that instead of heating up… the economy has cooled off.

And third, the “real” interest rate, even after another rate increase from the Fed, is still negative.

…which makes you wonder. How come stocks are still near an all-time high so late in the economic cycle?

Expansions don’t go on forever. They need to take a rest from time to time. We don’t know when the next recession will show up, but we know this: It is getting closer every day.

We don’t know when the next bear market will come, either. But we know this: Bull markets don’t last forever, either. And the longer it takes to arrive, the hungrier it will be when it gets here.

And one more thing: As long as “real” rates remain negative… the Fed will not lead a return to “normalcy.” It is not master of the trend, but a prisoner of it… dragged around the city like the limp body of Hector behind Achilles’ chariot.

10-Plus Years of “Ice Age”

Years ago, we put forward an unappealing idea: that the U.S. economy followed Japan… but with a 10-year lag. Japanese stocks crashed in ’89. The U.S. Nasdaq fell in ’99.

This hypothesis soon looked weak… if not silly.

Japan – despite outrageous “stimulus” efforts – was never able to revive its economy or return its stock market to the glory days of the late ’80s. It was on-again, off-again deflation… with stocks still down 50–80%… for the next quarter of a century.

The U.S., meanwhile, was scarcely bothered. The Fed lowered rates. The mortgage industry responded.

What followed was the real estate/finance bubble of ’05–’07… the crisis of ’08–’09… and then the big boom of ’09–’16… followed by the reflation bubble of ’17.

But these bubbles may have hidden the more important trend. For while the Fed was blowing up housing, finance, and stocks… the long-term trend in the economy was down.

Growth rates fell. And bonds, in the U.S. as in Japan, remained in the same downward trend, with a 10-year lag between Japan and the U.S.

In other words, despite the fireworks in the parking lot, the real economy was growing quiet.

The shoppers were running out of money. Autos were remaining on the lots. Real wages were stagnant. Corporate profits (at least domestically) were falling.

Albert Edwards, strategist at Société Générale, announced his “Ice Age” hypothesis in 1996. He believes the U.S. economy is in the grip of a long-term cooling. People are getting older. Growth is stalling. Debt slows everything down.

As we have seen, central banks can stimulate financial markets with more debt, but not the underlying economy; it grows weaker.

In the next crisis, Edwards thinks (as we do) that central banks will be forced to react with even more retarded policies. The Fed – like Japan’s central bank – will buy more and more bonds, driving the interest rate cycle to even lower yields.

This “Ice Age” will last for years to come, he says. Good for bonds. Bad for stocks. At least for the next 10 years, stocks will probably provide investors will little safety and few gains.

Regards,

Signature

Bill

 

Market Insight: Commodities Are Getting Crushed


BY CHRIS LOWE, EDITOR AT LARGE, Bonner & partners


bill bonner

It’s been a disastrous year for commodities investors…

Today’s chart is of the Thomson Reuters/CoreCommodity CRB Index.

This tracks the prices of 19 commonly traded commodities – including aluminum… cocoa… coffee… crude oil… gold… live cattle… natural gas… and silver.

As you can see, the CRB Index has plummeted 8% so far this year.

And it’s now down 61% since its peak in 2008.

Chris Lowe

Featured Reads

A Strategy for a Market on the Edge
As Bill wrote above, nobody knows when the next bear market will hit. But it will come sooner or later. Colleague Jeff Clark reveals how investors can start preparing.

Banks Are Still Too Big to Fail
Neel Kashkari is the president of the Federal Reserve Bank of Minneapolis. In 2008, he helped oversee the bailout of America’s biggest banks. And now, he’s sounding the alarm on a new crisis.

Can Sustainability ETFs Make Money?
Sustainability ETFs are funds that invest in socially progressive companies that are easy on the environment. These investments are popular with millennials. But can they make any gains?

Mailbag

In response to yesterday’s Diary on the POTUS, the mailbag is all Trump today…

Does anyone really think Trump is interested in taking down the Deep State or draining the swamp? Wake up!

There is one group of foxes in the henhouse. Then there is another group of foxes that wants to replace them. Trump’s only interest is getting his group of foxes in the henhouse. He wants to establish the Trump State as the new Deep State!

That’s how it has always been and how it will always be. All you can do is hope you’re one of those foxes on your way in.

– Leo G.

I’ve read the responses in the Diary, and I have to just say that some of your readers don’t have a clue about what’s taking place. One of your readers, Edmund S., says that “there is nothing false” about the way the media treats Trump.

Do some research on the media. Cross-check with banks and stock ownership data. Come out of your coma and smell the reality. It’s a civil war between communism and capitalism. I’ve been writing about this for over 40 years. You are just now seeing it. Donald is fierce. I only hope he can take all the hits and survive.

– Rob L.

It seems the Trump supporters can’t connect the dots. They are:

  1. Putin has $150B to $200B.
  2. Trump is probably almost bankrupt and won’t release any financial data.
  3. Trump also won’t release the log of who visits the White House like other presidents.
  4. Putin has many family connections to Trump and his companies and has loaned them at least $1B, which is pocket change to Putin.
  5. There is a Putin messenger every few days sending in instructions to Trump about what he is supposed to do.
  6. People who cross Putin die and Trump knows that. For that reason, Trump has praised Putin and the Russians over and over again.
  7. Look at the Syria attack, 60 cruise missiles and no damage to the airfield? That was Putin’s plan sent in to help make Trump look tough.
  8. Trump likes dictators.

The point is that if you like living in a country run by the Russians, Trump is your guy!

– Paul L.

Donald Trump has been flying by the seat of his pants, some would say fabulously, his entire career, using every tax code and political leverage he can muster to keep his show on the road. And it has worked for him! But I am a bit concerned how this brand of “wielding” power is going to translate to the general overall good of the economy and the American people.

Last time I checked, there is a price for everything… even power.

– Michael C.

We have spent quite a bit of time in Argentina and see many similarities between the U.S. and Argentine governments. Argentina, like most Latin American governments, is just more open about their corruption. Argentine presidents make their millions while in office. American presidents make their millions when they get out of office. Otherwise, there is not much difference. They both distort the economy and massage the government statistics beyond any recognition. Politicians in both governments spend their time lining their pockets and concentrate on elections.

Argentina was one of the great nations of the world at the turn of the last century. They have been in decline ever since. The U.S. seems to be following a similar trajectory on about a 60-year lag. The story you told yesterday in your Diary needs to be told over and over because the U.S. populace does not seem to get it. You simply presented the facts and I thank you for that.

By the way, my wife (a Porteña) and I love your commentary from your ranch in Argentina. Seems like we have had many of the same experiences. But mostly, we appreciate your honesty. You don’t just tell us about your successes. You also tell us about your failures which are actually more interesting. We seldom hear about the failures from most other newsletters and authors, which of course, everybody has.

– Daniel and Inés

In Case You Missed It…

If you’re over the age of 55 and own a cell phone, then there’s something you need to know.

A recent study by the Centers for Disease Control and Prevention found that cell phones have become the source of a rapidly spreading, misunderstood epidemic. And the risk of falling victim to this health crisis increases significantly as you age.

Get the full story here.