Democracy is the theory that the common people know what they want, and deserve to get it good and hard.

– H.L. Mencken

BALTIMORE, MARYLAND – This week, the French are taking the democracy flimflam to new levels.

They’re holding a nationwide “town meeting”… with leaders hoping that the voters’ anger exhausts itself in endless and pointless wind.

The legerdemain of modern popular government is that it is “the people” who make the big decisions. They elect – after suitable scrutiny and much grave reflection – representatives, who then turn the wishes of “the people” into the law of the land. At least, that’s the theory.

As Hillary Clinton once described this fantasy: “The government is all of us.”

But everywhere and always, it is nothing of the sort.

Wall Street Comedy

We’ll come back to that… and the comedy now taking place in France… in a minute. First, we check in on the comedy on Wall Street.

There, investors are waiting to see what happens next… in the wall/shutdown standoff… in the Brexit countdown… in the U.S./China trade war… in the bond markets… and at the Fed.

Jim Cramer, he of Mad Money fame, says the bear market ended at Christmas. But investors aren’t so sure.

In October, the Dow made a new all-time closing high at 26,828. It’s been down ever since. And it could go down a lot more.

Stocks, like bonds, follow long, cyclical patterns that the feds can’t control. Yes, they can influence them, delay them, and distort them. But in the end, it’s Mr. Market who has the last laugh.

You can see the patterns best by looking at the Dow in terms of gold. From the top in 1929 to the bottom in 1933 was only a 4-year period.

But it took another 27 years – until 1960 – for the Dow to recover relative to the price of gold. The high came six years later, marking a span of 37 years, peak to peak.

The next bottom came in 1980, 14 years later… along with another loss, inflation-adjusted, of about 80%. Then, it took another 19 years to hit the next top, in 1999, for a 33-year cycle, peak to peak.

In gold terms, stocks have been going down ever since… and still have not reached their ultimate low. When that happens, our guess is that you’ll be able to buy the entire Dow again for less than 5 ounces of gold. But when? [Refer to today’s Market Insight for more.]

Nobody knows… but neither Mr. Trump nor Mr. Powell wants to find out. The president is talking up the economy… and preparing to blame Fed chief Powell if anything goes wrong.

For his part, Mr. Powell is playing it cool. He says he’ll be “patient” about normalizing interest rates. In other words, he’ll cut and run if stocks take another dive.

Little Room to Run

The trouble is, neither of them has much room to run at all. The Trump team has already stretched the budget with a trillion-dollar deficit. And the federal funds rate is already closer to the bottom of the plausible range than to the top.

Normally, the Fed’s Mistake #3 (dropping rates in a panic when markets crack) requires a 500-basis-point cut. But Powell only has 250 of them (the current federal funds rate is 2.5%).

But the problem is not just a U.S. problem. All over the globe, governments are running out of time and money.

They used EZ money to increase spending and debt. Now, with interest rates rising, growth rates falling, and populations aging – they face a challenge. What to do now?

Will they admit that they made a mistake… that they can’t really control Mr. Market? Will they stand down, and allow a correction to cleanse the system of excess debt and unaffordable expenses?

Oh, Dear Reader… sometimes your naïveté surprises us! No way! The elites depend on that money.

Instead, using debt (the U.S.) or taxes (France), they will put the hurtin’ on their fellow citizens.

Myth and Malarkey

Government, always and everywhere, is a way for the few to exploit the many. It used to be more obvious. When the Vikings conquered Normandy, for example, they took the best land, built castles, and became the ruling class.

But modern democracy depends as much on fraud as force. Elite conquerors pretend to respond to the “will of the people.” But the real game is the same – they use myth and malarkey (rather than mace and crossbow) to get control of the government and use it to extract what they want.

The trouble is, as the elites take more and more, the rest of the population begins to chaff and grouse.

The “government is all of us” myth looks counterfeit when 10% of the population gets nearly 100% of its economic gains. Then, too, the people of Flyover Country don’t take kindly to the elites’ experiments with transgender pronouns, uncontrolled immigration, and global temperature control.

In America, the forgotten people rose up and voted for Trump. In Britain, they voted for Brexit. And in France, they put on yellow vests and set cars on fire.

Great Discussion

Each group of malcontents has its flare-up issues. In France, discontent is focused on the automobile, which is why they wear the yellow safety vests in protest.

The gap between the elite and the rest is more geographical in France than it is in the U.S. The insiders are literally intra muros… concentrated in Paris… where you can barely drive a car anyway.

These urban sophisticates regard non-Parisians as though they drag their knuckles on the ground and are barely able to walk upright. So they don’t hesitate to tell them what to do – in the name of progress, of course!

And thus, supposedly to reduce the country’s carbon footprint, the poor folks outside the city are forced to drive under 50 mph on rural roads and buy gasoline at more than $6 a gallon.

And woe to the driver who is not fully loaded with flares and yellow vests! A few speeding tickets (given by electronic sensors) and an unsnapped seatbelt, and he’ll lose his license.

Ten weeks ago, the common folk began to resist. And now, the Macron government has initiated what it calls a Great Discussion or a Grand Debate on the future of the nation.

The French feds say they will “revitalise democracy” by holding blabfests all over the country. Thus, is the stage set for one of the greatest comedies of modern politics.

People from all over the nation have been invited to join local conferences and give voice to their worries, their doubts, their complaints, and their fondest hopes for the future.

You may wonder what the hell the paid members of the French Assemblée Nationale have been doing all these years – if not listening to their constituents bitch and moan?

And why, you might ask, will the French federales suddenly be moved to action by the earnest plaints of ordinary citizens… whom they seem to have ignored successfully since the Reign of Terror ended in 1794?

But of course, nothing will change. The Grand Debate is merely a media stunt. For there is no chance that these outsiders will be allowed to steer the elite away from their real objective – which is to get more power, money, and status for themselves!

In the end, the little guys will not get what they want or what they expect, but what they deserve… and as Mencken reminds us, they’ll get it good and hard.

Regards,

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Bill

MARKET INSIGHT: PREPARE FOR A MARKET REGIME CHANGE

By Dan Denning, Coauthor, The Bill Bonner Letter

The market, like the Fed, works in cycles.

Interest rates go down and financial asset prices go up.

Now, interest rates are going up (Quantitative Tightening) and asset prices are going down. As $20 trillion in liquidity gets drained from the global financial system, it’s hard to see how financial asset prices can’t go down.

We are witnessing a market regime change. We’re moving from an era of low rates, high valuations, and high expectations of future returns to one of higher rates, lower valuations, and lower expectations of future returns. Psychology, liquidity, valuations… all these forces are working against the market in 2019.

Yet investors have begun 2019 ignoring the facts. You have an entire generation of traders and asset managers on Wall Street who’ve never seen a bear market. They believe the Fed has their backs. They believe stocks always go up. They believe you should buy the dip.

Your key challenge now – especially if you’re at or near retirement age – is to avoid a big loss. Am I talking about 95% one-day losses in the S&P 500 or the Dow Jones Industrial Average? Of course not. The indexes won’t fall that far… in a day.

But history shows that a typical bear market at the end of a huge credit boom (and we’ve just had the biggest credit boom ever) takes indexes down 70-80%. The truth is: The bear market has only just begun.

You won’t hear that from the professional investment industry. It uses long time horizons and historic returns of around 8% a year to justify buying stocks all the time.

But if you’re reading this and you’re human (not an Artificial Intelligence), you don’t have 100 years to make money on your stocks. You may not even have 30. That means you have a different investment problem.

That problem is: When do I stop accumulating stocks? And how do I preserve the value of my portfolio from the Big Loss?

Bill and I recommend you have only 25% of your wealth in equities (the rest to be divided between cash, real assets, some fixed-income investments, and a very small allocation to cryptocurrencies).

That’s far fewer stocks than most professionals recommend. If you have more than that, reducing your allocation to stocks means selling the rallies and NOT buying the dips.

At the very least, try that. That is, try not dollar-cost averaging when the market goes down.

If you’re looking for an indicator to help you decide when to get in and out of stocks, recall that late last year, Bill unveiled our own easy-to-use signal for whether to buy or sell stocks and gold.

It’s the Dow/Gold ratio (the value of the Dow Jones Industrial Average divided by the current U.S. dollar price of an ounce of gold). When the ratio is below 5, you buy the Dow. When the ratio is above 15, you sell the Dow and buy gold. Why?

Chart

Since the creation of the Federal Reserve, we’ve seen an acceleration in the frequency and amplitude of boom-bust cycles. The Fed lowers rates to create booms, then raises rates, which triggers busts.

This artificial business cycle creates a relationship between the price of financial assets (stocks and bonds) and the price of real assets (best illustrated with gold). During the boom, financial asset prices (and valuations) soar and the ratio climbs (right now, it’s higher than it was before the 1929 crash). In the bust, financial asset prices crash, credit tightens, and the ratio declines.

In other words, the ratio tells you when stocks become too decoupled from real assets like gold (sell stocks). Then, it alerts you when the valuation for equities gets “back into whack,” as Bill would say, with the price of precious metals (buy stocks).

Even accounting for dividends, it delivered 11.19% annualized returns over the past century. That would have turned the initial $206 (10 ounces of gold in 1918) into $8.4 million. Compare that to a 10.44% total (including reinvested dividends) annualized return from a “buy-the-Dow-and-hold” strategy, which would give you $4.26 million from the initial $206 investment.

Again, you don’t have a century to let this strategy play out. But as a valuation metric, it’s spot-on. As Bill wrote recently, it’s more important to protect the wealth you have than to risk it in a shifting market.

Critics of our indicator might say it’s too simple, or not active enough. But that’s fine. We’ll take it. Doing nothing IS doing something. And often, it’s better than doing something for its own sake.

Dan Denning

P.S. If you have years, perhaps decades, to wait out a bear market in stocks, then a shifting market regime might not worry you. Fair enough. But if you plan to retire in the next 10 years and live off the wealth you generate from your stock investments, you need to give serious thought to what I showed you.

As Bill wrote, your first responsibility is to ensure you miss the “Big Loss.” If you’re unsure how to do that, I encourage you to go right here. Bill and I recently released a report that will show you how to shelter your wealth when stocks fall. It won’t protect you from 100% of what we see coming, but it will shield you from the worst of it. Go here.

FEATURED READS

Falling Stocks Will Drag GDP
Lower stock prices are bad news for investors. But the damage won’t stop there. A new report from Goldman Sachs outlines why lower equity prices will be a sledgehammer to GDP growth.

How to Survive the Bear
Bill sees tough times ahead for U.S. stocks. Investors could be sitting on losses for years. If our editor is right, nobody will be able to fully escape the bear market. But a proper asset allocation strategy can save you from the worst of it…

The Chinese Iron Curtain
China is undertaking one of the most ambitious infrastructure projects in history. The “One Belt One Road” initiative involves a vast expanse of land, naval, and digital infrastructure projects that would span 68 countries. The official reason given by the Chinese government is to “embrace a brighter future.” But some suspect an alternative motive: Complete control over half of the global population.

MAILBAG

In the mailbag, dear readers continue to discuss a variety of topics: Alexandria Ocasio-Cortez (AOC)… “The Wall”… and who to trust your wallet to:

AOC is not telling all the facts to the American people. It is impossible to pay for free healthcare for all, free state college education, and only green energy. You could take 80% of everyone’s earnings and savings, and it wouldn’t pay for even one of the three aforementioned items.

The U.S. will go totally under, financially, under these Democratic plans. However, that’s how the Democrats get elected: by promising everything for free! It’s not free, taxpayers will pay, and it won’t work.

– Gretha E.

What troubles me about this whole conversation about immigration and the wall is that it ignores an underlying principle. That principle is the rule of law. Bill has written many times about how the rule of law has contributed to our prosperity, to the benefits of win-win negotiations. If people in our country and people entering her disrespect our laws, where does that take us?

– Kent F.

Aloha Bill. I am a World War II Vet, and one of your fans. I must take issue with you on your “Wall article.” Congress, in the past, and The Donald have NEVER proposed a 2,000-mile wall. There are many miles of terrain that do not need a wall. They are impassable. And I don’t think a wall is proposed on many miles of the Rio Grande. You need to pay closer attention to your “facts.”

– Tom G.

A reader [John B.] asks, “Who would you trust with your wallet? Pence or Schumer?” They are both politicians; therefore, they both lie or tell half-truths whenever it suits their purposes. And they think they can get away with it. Of course, most of us do the same thing, so they are merely a reflection of us all. Whoever gets away with the biggest lie is usually the most successful. Remember that the next time you are in a voting booth. Always vote for candidates who are NOT incumbents. At least you’ll get new lies.

– Chuck B.

IN CASE YOU MISSED IT…

Are you prepared for the bear market? Do you have too much of your wealth in stocks? If the market crashed, would you be able to retire?

These are very real questions you need to ask yourself. If you don’t know the answers, we encourage you to read Bill and Dan’s newest report: America’s #1 Portfolio Protection Plan. It details an unseen threat to U.S. stocks, and shows what you can do to protect yourself today. Get it here.

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