LONDON – It’s 5:30 a.m. We’re sitting in an airport in London waiting for a flight to Dublin. Around us are bleary-eyed businessmen, catching the first flight to Ireland.
Yesterday, U.S. stocks managed to catch a break. The Dow rose 282 points – or just under 2% – despite another 6% selloff in China.
U.S. crude oil fell a bit. But it continues to trade above $30 a barrel this morning.
What Goes Up…
A headline in the Wall Street Journal last week caught our eye: “Stocks down again. Where’s the Fed?”
That question came up several times in Mumbai, where we recently spent time on a business trip.
We were interviewed by the Economic Times of India and by Bloomberg TV. They wanted to know what we were doing in India and what we thought was ahead for world markets.
Our reply took a familiar form…
“What goes up must come down,” we said in several different ways. “What goes up a lot goes down a lot.”
This did not seem to be rocket surgery; we expected no argument. But the financial media on the subcontinent – like its sidekicks and drinking buddies in other countries – can’t imagine it.
In the minds of junior journalists and senior economists, there is nothing inevitable about up and down. They think markets only go in one direction – up – subject to occasional setbacks and policy mistakes.
And the mistake they see is the Fed’s supposed “tightening” of credit conditions.
Grizzly From Hell
“Wouldn’t you say that the Fed was premature in raising rates last month… in light of the hellish decline in equities since then?” asked one reporter.
“No. In the first place, we wouldn’t say the selloff has been ‘hellish’ at all. So far, this bear market is no grizzly from Hell. It’s a cuddly panda. And the Fed wasn’t too early. It was too late.”
The problem with this response is that it requires far too much explanation. The financial media doesn’t have time for it. They want soundbites… preferably positive ones.
After a while, we got into the spirit of it. Forget nuance. Forget irony. Forget unintended consequences. This is show biz.
“You ain’t seen nothing yet,” we told one interviewer. “This is a retest of the correction of 2008… but worse. The world has taken on $57 trillion more in debt since Lehman Brothers collapsed. So we’ll see the Dow below 6,000 before this is over.”
Just between us… that was not a serious prediction. We are pretty sure the Dow will eventually go down substantially. But we have no idea when or how low it will go.
Context creates content. The financial media is part of the entertainment industry, largely financed by Wall Street. Don’t expect to get serious commentary or analysis from it.
Commentators are expected to provide simple, snappy analyses… with as few qualifications as possible. Emphatic. Confident. Unhedged and unhinged.
Our publishing partners in Mumbai called together some of their best customers for a more in-depth conversation.
The same questions arose, but we had more time to answer them:
“The problem is debt. There is too much debt. That’s what happens when you lend for too long at rates that are too low. People borrow to consume… or to invest in things that don’t really make sense.
“Then they can’t pay it back. That was the problem with all that subprime mortgage debt in 2007 and 2008. Today, we have student debt, auto debt, corporate debt, and government debt. The world added $170 trillion in debt over the last 20 years. But the world economy grew at about only 3% a year.
“The interesting thing is the way this debt bubble originated with consumers and the finance industry in the U.S… then got shipped over to the exporters in China… and from China to its suppliers in Brazil and the other resource economies.
“Now, the bad debt ball ricochets from one economy to the next.”
Test of Nerves
We explained our hypothesis…
“Markets are myth busters. For the third time this century, they are attacking the central financial myth of our time: that a group of PhD economists can succeed where generations of central bankers before them have failed… that they can manage a paper currency – and a whole world economy – without blowing themselves up.
“Paul Volcker did it,” we conceded. “But that was when the U.S. had only a fraction of the debt it has now… and it was before the world economy had gotten hooked on debt.
“Now, as soon as we get a serious downturn – and we’re not there yet – all central banks will panic and come out with more aggressive stimulus programs.”
We did not say so. But perhaps we should now: This phase – where central banks push up asset prices with experimental policies – is probably not over.
Markets will test the Fed’s nerves. They will test their mettle with falling stock prices and a recession. Then, the Fed will react. It is, after all, “data dependent.”
“Just hold on. It’s going to be exciting. That is probably the only thing we can be sure of. It’s going to get more interesting.”
Tomorrow: Wait out the selloff in gold and cash? Or sit tight with “stocks for the long run”?
Further Reading: Bill explains exactly what he means by an “exciting” outcome in his exclusive investor presentation. He calls it the “Great American Credit Collapse.” And as he warns, it will be even bigger than 2008, 2000, 1987 – even 1929.
That’s what makes it so frightening. This time around, it will hit not only stocks but also your credit cards, checkbook, and bank account… even the cash in your wallet. The first step in protecting yourself is to understand what’s really going on. Find full details here.
The mother of all “carry trades” is unwinding…
When investors make a carry trade, they borrow at a low interest rate in one country… then use these funds to buy assets in another country that offer a higher rate of interest.
It’s a no brainer as long as rates stay low in the country you’re borrowing money in and stay high in the country you’re investing in.
The big carry trade over the past seven years or so has been to borrow money at near zero rates the U.S. and invest it in higher yielding emerging market stocks and bonds.
But as investors started to anticipate higher rates in the U.S., this trade began to unwind.
As you can see, last year, about $750 billion got sucked out of the emerging markets – the biggest annual net outflow on record.
This deflationary outflow of capital puts further pressure on already struggling emerging market economies.
In Case You Missed It…
Despite yesterday’s rally, the Dow is still down almost 1,000 points this year. And the analysts at Dent Research claim it’s got another 10,000 points to go in the near future.
But their top expert explains how you can be one of the few to sidestep the carnage… Watch here now.
Mailbag – Extended Edition
Bill has stirred the pot yet again with yesterday’s Diary on Sarah Palin.
To try to accommodate as many reader emails as possible, we’re running an extended edition of the mailbag today.
I don’t see how ridiculing Sarah Palin has anything to do with what you claim to be doing. It’s just a cheap shot. You are far too stuck up about yourself for me. I am bailing out.– Bill V.
In praise of this loser who took an elected position as governor of one of our 50 great states and then quit in the middle of her term?
Do you know how much money this “quitter” wasted to get elected?
I guess I won’t be subscribing to your phony baloney newsletter anymore, your true colors shine through. Thanks for saving me the headache of finding out in the long run.– William E.
Hyperventilation at its best, Mr. Bonner. She probably cares less than I do about what you think of her. But you had to write something nasty and elitist. I’ll give you that – it was nasty and elitist. We’re yet to see just what an effect it has on anyone’s viewpoint.– Jim H.
Lovely how you have so much criticism of Ms. Palin’s grammar skills yet don’t point out our Commander-in-Chief’s frequent flubs.
Oh, how liberals preach tolerance, yet show little to those that don’t share their opinions. If you disagree with the message, then fine, point out the facts that counter it. I believe her point was that the socialism of the past seven years has been a disaster ¬– what say you on this point?– Mark D.
So you don’t like Palin. I’m not surprised because you are weird, but I suppose that’s what makes you interesting.– Ron S.
I just wanted to let you know today’s Diary gave me full lift off. I mean you had me laughing out loud all by myself. I could hardly stop. The only time I laughed this much at printed material was the book M*A*S*H.– Charles F.
That bit on Palin was priceless. I so needed that laugh today. I often reflect – sheepishly – on my tender years as a very self-assured (i.e. naive) young Army officer.
I held staunch rightwing views, was addicted to politics, Rush Limbaugh and liberal-bashing, and was completely convinced that the U.S. military’s continuous global force projection was for the GOOD of everyone.
Good Lord, was I deceived. So much so that I am careful not to hold any view today too strongly – or without constant testing – lest I fall back into the role of ideologue.
Thanks for helping me to see the light. Hormegeddon [Bill’s latest book] granted me perspective, and perhaps even a touch of wisdom.
Keep it coming! There are actually reformed conservatives out here in the hinterland that appreciate your work.– Drew K.
Most of the time I find your writing interesting. However, in this piece slamming Sarah Palin I found it a personal affront that you slammed the “rural right wing” while you were at it.
I espouse to conservative values, but I don’t appreciate being ridiculed, simply because of where I live and that I have conservative values.– Sharon H.
Always amazed at who Bill chooses to sneer at. Sneering isn’t that attractive but I have never seen it directed by Bill at Hillary Clinton or Barrack Obama who both have dozens of pages worth of confused thoughts disconnected from reality.– Scott I.
Bill, I love you – don’t get me wrong, but if you didn’t understand Sarah’s talk, even with interpretations you, sadly, fall into the elite, intellectual group that doesn’t understand what the average American is going through.
God bless you anyway!– Teresa S.
Laugh of the day! I read what Sarah Palin said and I wondered if I was getting Alzheimer’s because I did not understand a word of it!
But then finding out that you folks didn’t know what she was talking about just made my day.– Diane C
I don’t know if anybody is going to read this, but I have an emotional need to say it.
Palin hit the nail on the head. If you don’t understand it, it’s because the arrogance of your predisposition toward her won’t let either you, or your English teacher, with the big words, step down from your high post on Mount Elitism.
She is saying that what Trump’s candidacy has accomplished has exposed the results of Obama’s dastardly attempts to transform this country into a western European counterpart, and the fact that both Democrats and Republicans have helped him to accomplish those results.
Simple, yes. Also, accurate. Perhaps if you read the paragraph again, sans the attitude that those who have not achieved your level of success, or experience, are knuckle dragging Neanderthals, you might understand it.– Ron S.
What do you think?
Is Bill an elitist snob? Or is he an “equal opportunities” offender?
Send your thoughts to [email protected]
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