MIAMI – This week, we’ve been exploring how mock battles can go wrong.
In one corner, we have The American Dreamer: the Blond Bombshell himself, Donald J. Trump.
In the other, there is Xi Jinping of the Great Red Hope, determined not to be the Last Emperor of the Middle Kingdom.
Like pro wrestlers, the two have been entertaining the folks in the cheap seats with their “Mongolian chops”… “body avalanches”… and the always-popular “spinning elbow corkscrew drops.”
Pretending to do battle, both are really on the same team… working together towards the same goal – separating the fans from their money.
One spends money he doesn’t have. The other takes the fake money and pretends it is real. Both believe they are getting fabulously rich.
The Chinese now have dozens of cities and shopping malls that didn’t exist in 1982 – though these still may have no clients, no buyers, and no revenues.
The Americans have stocks they think are worth 24 times as much as they were in 1982 – even though the typical customer has not a penny more of real purchasing power.
The whole fantasy on both sides of the Pacific is based on a cluster of colossal frauds – that fake money is just as good as the real thing, that debt is as good as savings, that the feds can improve an economy by lending fake money out at real rates below zero, and that people with PhDs and claptrap theories can do a better job of guiding an economy than market-set prices.
But in order for the flimflam to work, both sides have to cooperate to keep the hustle going. If the two go off script… the whole show could turn into a flop.
Here’s more from China’s state-run Global Times:
The Chinese side will follow suit to the end and at any cost, and will firmly attack, using new comprehensive countermeasures, to firmly defend the interest of the nation and its people… China will “retaliate immediately, intensively, without any hesitation” if the U.S. releases a new list of tariffs on $100 billion worth of additional imports, Chinese Ministry of Commerce spokesman Gao Feng says, adding:
“We Chinese won’t pick fights, but if someone picks a fight, we’ll resolutely meet them head-on. We Chinese always take things seriously; we’ll act as we say.”
What happens next? It is hard to say. The two sides are improvising. Mr. Trump – the self-described “King of Debt” – doesn’t seem to understand China’s role in keeping the debt flowing.
And Mr. Xi doesn’t seem to realize that his economy rests largely on Americans’ sham money.
The American Dreamer and the Great Red Hope can exchange “flying forearm smashes” – and pretend to wallop each other in fake-news outlets. But if they begin hitting each other in earnest, the whole world economy could crash.
The reason: too many borrowers and not enough lenders.
Already, the Fed is letting its portfolio of debt “run off”… at a projected rate of $600 billion per year. The federal government, meanwhile, is selling debt (borrowing) – on a huge scale. Forbes reports:
The new U.S. normal of $1 trillion or more annual federal budget deficits will officially begin this week when the Congressional Budget Office releases its economic and budget outlook report showing that the deficit will be at least that high every year Donald Trump is president.
For the record (and before the trolls come out to play), there were indeed four consecutive trillion-dollar federal deficits during the Obama administration from fiscal 2009–2012. Those deficits were primarily caused by the Great Recession, and they were temporary.
By contrast, the trillion-dollar Trump deficits are permanent changes to the federal budget outlook caused by enacted reductions in revenues and increases in spending.
All of a sudden, the debt market is awash in supply. Between the U.S. government and the Fed alone, nearly $2 trillion a year of savings will be absorbed.
But China is the largest single holder of U.S. debt – with $1.3 trillion worth. Imagine what would happen if China, maybe in retaliation for U.S. trade war provocations, decided to dump U.S. bonds, too.
Who would buy so much debt? Where would the money come from? And what would happen to the price of debt (interest rate yields) with so many big sellers and no big buyers?
How could a world financial system accustomed to “performance art” battles adapt to a real one?
How would millions of borrowers – already maxed out at 3% interest – survive in a world of 5% rates?
The federal government, to take one important example, is already scheduled to spend more on debt service than on defense… by the 2020s.
And that assumes that rates won’t rise significantly. Raise rates back to “normal” levels… and the whole shebang blows up.
In the Pittsburgh Civic Arena in 1998, Mankind crashed into the mat in a stunt gone wrong. Bruised, broken, and battered, the pro wrestler survived. And the fans loved it.
But when the world’s phony financial system comes crashing down…
…we doubt that mankind will like it much.
By Dan Denning, Coauthor, The Bill Bonner Letter
Looking back, investors don’t always remember the catalysts for market crashes. But they certainly remember the losses…
Today, some of the old reliable indicators on bubble crashes are flashing a warning.
First up, the market cap-to-GDP ratio is peaking out.
As you can see, the total market capitalization of the Wilshire 5000 (an index often used as a proxy for “the U.S. stock market”) as a percentage of nominal GDP hit 137% as of 2017. The only time that figure has been higher was in ’99, the peak of the dot-com bubble.
Next up, margin debt as a percentage of total market capitalization…
Remember, margin debt is money borrowed to purchase more stocks. Your portfolio is used as the underlying collateral.
Total margin debt on the New York Stock Exchange as a percentage of total market capitalization recently hit 2.9%.
This means that more money is being borrowed relative to the total value of stocks than at any time since the height of the dot-com bubble.
It might not be what you want to hear, but you just don’t get bull markets from these levels. Returns are going to be much lower from here on out.
For investors expecting – or even depending on – massive gains in the years ahead, consider yourselves warned.
– Dan Denning
P.S. A crash is coming. And when it happens, I believe it won’t be an accident. The next great financial crisis may be orchestrated by a group right here in America. That may seem too incredible to believe. But I recently published a new book that shows you who this group is, what its plans are for your money, and what you can do to prepare. If you haven’t already, check it out right here.
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In the mailbag, a trade war is on readers’ minds…
The problem with your analysis is your complete failure to document America’s total prohibition of other sovereign nations trading peacefully without dollars in key areas. Let us be clear, free trade is not free trade if the two parties are not free to determine between themselves their chosen medium of exchange. It could be gold, silver, greenbacks, renminbi, rubles, rupees, euros, or whatever; but it must be freely chosen. So there was no free trade in oil in the 20th century, nor the 21st. There was coercive trade using dollars.
Hussein wished to use euros; he was exterminated. When he gassed Kurds, the U.S. was okay with it because genocide is ACD to U.S. mobsters. But peacefully trading in euros? Death sentence. Gaddafi in Syria wanted an African Union controlled by Africans and oil not traded in dollars. The result: BOMB LIBYA! China now launches the petro-yuan. It will be interesting to see if Bolton calls for the bombing of the Three Gorges Dam or not, ultimately brave soldier that he is.
Russia and Iran have posed no geostrategic threat, but refuse to become vassals. No problem in a world of free trade, but a reason for war for America. Because Putin shut down the U.S.-Russian oligarch-led looting of Russia. That looting was not free trade; it was grand larceny.
So no, the U.S. does not believe in free trade; it believes in trade controlled by the U.S. And it believes in grand larceny by Americans and their allies. I think you know this well, but cannot voice it without being targeted by the Swamp.
– Rhys J.
Dear Bill, I enjoy every moment of reading your newsletter. Keep up the good work. You have an A+ in my books. Have a wonderful day.
– Dawn M.
When President Trump makes a big move, it is better to let the move ripen. After declaring a possible retaliation, the Chinese have already came back proposing a negotiation instead of pursuing a trade war. Negotiations with North Korea are supposed to take place in a few months, according to Trump.
– Gerald K.
Living in the state that elected Jesse Ventura as governor (and wishing we could do it again), I do love your metaphor here for the Swamp Wars. I also think that, “Then, things can get out of hand…” And it’s not just because I spent too much of the weekend watching a Jurassic Park marathon – in which, of course, chaos theory was introduced to the mass market. Too bad so few understood it. Keep it up!
– Margaret T.
I follow your Diary and appreciate your knowledge, diligence, and point of view. I also enjoy your tongue-in-cheek comparisons to try to illustrate your point, in an understandable manner, of complex interactions. I agree with a “free trade” economy, and I also would state that I don’t really understand the intricacies of the discussion between Trump and these other countries. However, hypothetically, what would you think is the best way to approach a trade deal with another country, one we currently engage with, that employs a win-lose strategy which we are on the losing end of?
– Don S.
Bill, you are definitely a great storyteller, but to keep saying that the doomsday is coming without saying anything else that could help your followers take preemptive actions is not helping much. It is only increasing the level of concern, and may be incentivizing us to do things that are not the most appropriate ones to help us defend what we have already for our retirement years. Could you also try to add some timing guess into your comments such as, “Sell before summer and then sit and wait.” Or maybe, “Wait until Q4 before making any major moves.” Keep enjoying Argentina.
– Paulo R.
I always make time to read your missives, and find that often, I agree while at other times, I don’t. In today’s column, you stated a comment about the “crackpot economist, Peter Navarro.” It is a shame that you descend into name-calling. I don’t know Peter Navarro from Adam, and doubt that I would agree or disagree with all his opinions, but then, that is just what they are: opinions.
I was in business – most of it in management – for more than four decades, and learned that when putting the same raw data – especially economic data – in front of 10 people, one should not be surprised to see 10 related or totally different answers. That is just the nature of the beast. I was brought up to be civil, even in criticism. I know you have stated in the past that often, you say things to spark interest or thought, and you do that very well. But I think you would be even more effective without the name-calling.
– Thomas S.
Bill, how can you connect the dots when you ignore the very powerful unseen forces on our economy and our lives? From what I read, we are being controlled by several cycles that have come together for the first time since 1929. They had a great negative influence on investors in the stock market that led to the Great Depression. That could happen again any time now. Another cycle that the world has entered is the 206-year solar cycle, where the sun goes into a period of hibernation, causing bad things to happen around the world. This is compounded because nobody is telling the world’s population about it and how to prepare for it.
Bill, you need to inform your readers about these dots and how they connect to alter our lives. At least, all your readers need to look up the grand solar minimum and learn as much about it as they can.
– Joseph M.
We recently had a conversation with Jeff Brown, Bill’s top technology expert. What he said shocked us…
There is a technology being tested that has the potential to permanently cure thousands of diseases. It could even guarantee America’s energy independence for decades to come. It sounded too good to be true. But then we watched this presentation.