YOUGHAL, IRELAND – It is a typical May day here in Ireland. The temperature is 48 degrees this morning. It is cloudy and gray.

We are staying over here in Youghal… pronounced “yawl”… so that we can keep up with our renovation project.

Scaffold is up. The floors and roofing have been taken off so that we can inspect the “timbers” and replace those that need it.


Renovations begin on Bill’s new Irish home

“It is in remarkably good shape for a house that old,” said the architect.

We are putting a small, glass conservatory next to the kitchen. We asked what it would be like in the summertime. Will it be too hot?

“This is the summertime,” said he.


Trough to Trough

We’ve been keeping our eyes on the important news: the yield on the 10-year Treasury note. It hit a seven-year high yesterday, 10 basis points above 3%.

Who cares?

Well, there’s more than $230 trillion of debt all over the world. And most of it is related by marriage or blood to the U.S. Treasury market. Even if it is not quoted in terms of U.S. debt, it is heavily influenced by it.

Yields on the 10-year note have risen nearly 200 basis points since hitting a bottom in July 2016.

But they’re still far below the historical “norm.” The last time bonds traded at such high prices (low yields) was around when your editor was born – a couple of years after the end of World War II.

The full cycle, from trough to trough, lasted almost a lifetime… 68 years. And now, it looks (because you never know for sure) like we are set to begin again.

We are reborn… at the very beginning of a new cycle.

Two Camps

Already, the financial geniuses on TV are preparing for 4% yields. From what we can see, they are split into two camps.

One says that 4% will hurt stocks. They predict that stocks could be down 20% when 4% yields are reached.

The other, including Mad Money host Jim Cramer, says that 4% yields will be no problem; the economy is strong enough to survive them.

Both are probably wrong.

The first point of view is consistent, more or less, with the “Fed model.”

Investors compare what they can get from Treasuries to dividend yields in the stock market. When Treasury yields rise, stocks must fall to provide competitive yields.

No, no… says the other side… In real terms, 4% is just 2% (adjusted for inflation)… and this great economy can handle that, no problem.

After all, unemployment is almost nonexistent. Inflation is under control. And there’s a boom coming from the big stimulus of the tax cut.

The idea here is that the economy is strong. Corporate profits should rise, followed by stocks.

A corollary to this hypothesis is that yields are rising, not in response to inflation fears or “crowding out“ by the Fed, but in reaction to a stronger economy. (The “crowding out effect” describes how increases in government borrowing force up interest rates for everyone.)

Interest rates should go up as businesses and individuals bid for loans so they can increase investment and consumption – both of which spur the economy to even faster growth.

This reminds us of a joke we once heard…

An engineer, a doctor, and an economist went hiking in the Alps.

After a while, they realized that they were lost. They studied the map.

The engineer suggested retracing their steps. The doctor suggested taking a break to rest. But the economist stood up triumphantly, pointing to a distant peak.

“There… see that mountain? That’s where we are.”

The problem with both points of view is that we’re not where they think we are.

We’re at the top of a very steep mountain of debt and asset prices, with an economy that is addicted to super-low rates… and stocks that are priced for Everest.

Floating on Bubble Finance

The Dow was below 8,000 when it hit bottom in the last credit crash in 2009. Now, it’s over 24,000.

This was not a natural or normal climb. While the Dow has more than tripled, the economy that supports it has not.

GDP was nearly $15 trillion in 2008. It’s only $20 trillion 10 years later. That is not a triple… not a double… not even a 50% increase. It’s just a 33% boost.

In other words, the hikers didn’t get up there by putting one foot in front of the other… following the economy.

Instead, they floated up on bubble finance – about $12 trillion has been pumped into the markets by the world’s leading central banks.

Getting down the mountain won’t be easy. Some necks will be broken. And some hearts, too.

Super investor Warren Buffett’s favorite indicator is the stocks/GDP ratio. It compares the price of America’s capital assets – its large, publicly traded businesses – to output.

Logically, asset prices ought to reflect what they produce. And Buffett says that as long as the value of stocks is 80% (or less) of GDP, investors can safely buy.

When stock prices go above that level, watch out.

Today, U.S. GDP is the aforementioned $20 trillion. And the value of all equities is about $28 trillion (no point in trying to be precise… this isn’t science).

That gives us a ratio of 1.42. (It is so high for an obvious reason, mentioned above – stocks have gone up a lot faster than GDP.)

This is the second highest the indicator has ever been… higher than in 2007.

The previous record – set in the first quarter of 2000 – was 1.51, which was nearly twice the long-term average.

So here’s the big picture:

Interest rates are going up. As for assets, our guess is that when the stock market gets a load of what 4% rates will do, it will panic… and drop more than expected, faster than expected.

When prices get back in Warren Buffett’s buy zone of 80% (or less) of GDP – which they must sooner or later – stocks will have lost about 45% of today’s value. Dow 13,000, in other words.

When they get to that level, buy!





By Joe Withrow, Head of Research, Bonner & Partners

Small-cap stocks are on a tear…

That’s the story today as we look at the Russell 2000 “small-cap” Index from its inception in 1987 through today.


The Russell 2000 is considered a benchmark for small-cap stocks – stocks with a market capitalization under $3 billion – because it measures the performance of roughly 2,000 small caps.

As you can see, the Russell 2000 just hit an all-time high of 1,616. That represents an 856% rise since the index launched in 1987.

– Joe Withrow


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In the mailbag, a question: Is capitalism a killer?

It seems to me that you nailed the problem with capitalism quite succinctly: It doesn’t care for people. It’s a theory that works on paper; but in the real world, is often at odds with social and environmental imperatives.

Economic growth increased from the 1930s through the 1960s, even as the government was regulating and assuming a larger part of the economy. It grew because a vibrant middle class emerged from the war, in part due to social programs encouraging education and home ownership, government investments in infrastructure such as the interstate highway system, and protections against abject poverty that actually encourage risk-taking by ordinary people. The recent slowing of growth is largely a result of a transfer of wealth from the middle class to the upper classes.

Finally, Bill, “cripples”? Shame on you. But again, apparently capitalism is so fragile that it can’t withstand a requirement to make work accessible to people with disabilities.

– Gary M.

Your win-win analogy is akin to a flip of the coin always ending up on edge! Nearly always, it is either heads or tails. True, it’s possible to land on edge, but it’s very seldom. The same goes for a win-win. Who is the judge? In real life, someone is always a little better than another. Now, if each “thinks” he is a winner, well that is a different “breed of cat,” as we in our ranch country would say. Have a nice stay in Ireland. I remember it as being very green when I visited.

– Jerry K.

Whether it’s a bar or a bordello (thanks to Bill, I’ve discovered the latter’s definition), I don’t like the smoking, which contaminates just about all and everything. I’m not sure if that’s some do-gooder improving capitalism, or the owners of the means of production actually making a sound business choice. Just a note.

– Rex.

Bill, you blame much of our problems on the “feds,” a nameless entity. Remember, the “feds” is really an accumulation of politicians. Politicians are the real culprits, as they do whatever they think is needed to be elected and re-elected – which is why I think the Founding Fathers, in the Constitution, were remiss in not limiting politicians to one or maybe two terms of office. Of course, they were also politicians. Enough said.

Also, like the reader’s mother, I am 89, too, and likely won’t survive the coming events to which our good politicians have condemned us. That doesn’t mean I don’t care – or that no one should care. We do, unfortunately, elect those politicians. I almost never cast my vote to re-elect anyone anymore, no matter how good a job they seem to do. Maybe it would help if more people did the same.

– Chuck B.

If someone wants to live where there’s uncontrolled capitalism with few laws, move to India. Most Indians I’ve seen and met are very self-centered and do not worry about the general welfare of the country of India or other Indians. They are, generally, nice people, but have no concern about anyone else except when it affects them personally. The streets are a mess, the trains don’t run on time, and the roads are terrible. It’s pure self-centered capitalism. Contrast India to China for the vast majority of the people.

Also note that we capitalists have ruined Iraq, a country of 40 million people, where Saddam Hussein used to keep it under control. The Iraqis used to have electric power, water, schools, and no roadside bombs. We changed all that and built the largest embassy building in the world in Iraq, which we still occupy. Nice! Libya is another example. Countries through history have done great things when there is some freedom and some cooperation. It takes both.

– Paul L.

Meanwhile, a conversation between dear readers…

In response to your recent mailbag from Gary M., I disagree with what he claims capitalism is incapable of. All these issues that he claims are actually funded more by charitable works from the profit of capitalism than he could imagine, and that government/the state is the most inefficient process for this to occur. If Mr. Bonner were to do research into the total of charitable donations made by the capitalist titans to assist the poor, he would find that it probably would surpass the total taxes paid by the bottom 30% or more of the population, taking note that this is voluntary on their part and above the already larger share they pay due to the progressive tax system.

– Larry B.

Regarding being labeled just another mainstream media personage by a dear reader, yours is the lone voice crying in the wilderness that “evil this way comes.” No one is more independent of thought or as straight shooting as you are, Señor.

How one of your readers, Jack L. concluded that you are trying to bring down POTUS, I cannot understand. Even my cursory research about Gina Haspel and her hearings discloses that she is neither forthcoming nor independent of thought enough to admit that, as a black ops’ site grand pooh-bah, she authorized “torture” and condoned “special agents” taking brown-skinned people off the streets to be shanghaied to countries to be tortured and murdered. And now, our POTUS wants her in charge of the CIA, which will be the only gorilla in the room, because he has destroyed the FBI and the State Department.

– Bill S.


If you’re easily offended, then do NOT buy this book…

Casey Research founder Doug Casey just released a follow-up to his 2013 book, Totally Incorrect. He calls it Totally Incorrect: Volume 2.

In it, Doug gives his take on genderless babies, the modern space race, and even last year’s NFL protests. This book would be banned in bookstores, but you can get your own copy right here.