"Confessions of a Doomsayer"
by Bill Bonner
YOUGHAL, IRELAND – "A dear reader writes to say we are wrong. “What these doomsday prophets like Bonner fail to explain is the efficiency of today’s supply chain that can quickly produce goods and services to meet demand. The market continues to roar in the face of his daily diatribes. If we were keeping score, we would say Fed: 40; Bonner: 0. I do enjoy reading the columns as I find them highly entertaining.” – Mike C.
And yes, of course, we are wrong about a great number of things. This is partly because the odds are so heavily against us. If we say “The bond market topped out on August 4, 2020” (which we think it did), we are guessing that it won’t go higher and finally top out on any of the 365 days in this year. And now, in our constant rehearsal of the “sky is falling” forecast, we will be wrong again… until it finally hits us in the head. When might that be? Well, we don’t know. It could begin any day now… or not. In the meantime, the Federal Reserve will be right… and we will look like an idiot.
Lesson Learned: Today, we enter the confessional. And let’s begin by warning new readers that they should never pay attention to our stock market suggestions. Publicly traded stocks don’t interest us; we don’t do any serious research on them. And on the rare occasions when we comment on any particular company, we are as likely to be wrong as right. (Full disclosure: We do own stocks! They’re managed for us by our trusted old friend, Chris Mayer.)
Just this week, we were reminded that, some months ago, in this space, we laughed at investors who were buying Hertz (HTZGQ). The company had gone bankrupt. But somehow, it had found favor with the young traders who spend their time chatting about such things. They were so eager to buy the stock that the company – then in bankruptcy – decided to issue new shares. It would have been a first in the history of finance… had not the U.S. Securities and Exchange Commission (SEC) put a stop to it.
“When you’re young… in love… at war… or in a bubble…” we concluded, “there’s no time to think straight, or even think at all.” Well, wouldn’t you know… we’re in a bubble. The used car market turned up… and Hertz – like a sleeping beauty, kissed by its Reddit suitors – came back to life. The company is back in business. The whippersnappers turned out to be right. We turned out to be wrong. We take no lesson from the Hertz story but that there are a lot of things you can be wrong about. We’re working our way through them, slowly.
A Costly Lesson: Take Amazon (AMZN), for example… please. One of the most spectacular things we were wrong about was Jeff Bezos’ creation. When it came out – this was more than 20 years ago – we called it “The River of No Returns.” The title was clever. But the prediction was poor. Amazon’s business strategy was a classic formula for failure. The company cut its margins so thin, it lost money on every sale. Then, it aimed to make up for the losses by increasing volume. That was never going to work, we opined.
And it never really did. Amazon’s retailing business has never made enough money to justify the huge “investment” (losses) necessary to reach its present scale. So its core business is still a river of no returns – not worth a fraction of its current market price. But how were we supposed to know that a virus would come along… so that people would stay home and be almost forced to order from amazon.com? Boom! Amazon’s net sales rose by more than $100 billion last year. And how were we to know that its huge data processing needs would get it into a whole new line of business that would be so profitable? Yes, the cloud computing business. That’s where the money is. Amazon Web Services (AWS) accounts for a bit more than 10% of the company’s sales… but more than 60% of its profits.
AMZN gave our dear readers their first big opportunity to get rich. Those who were smart enough to ignore our advice could have bought the stock for under $50. Today, split adjusted, it is over $3,000, giving the company a market value of about $1.7 trillion. Jeff Bezos got so rich, he could go through the most expensive divorce in history and still have a net worth estimated at almost $200 billion.
Mechanistic Approach: So let’s turn back to the Federal Reserve, which is clearly ahead of us – as our dear reader tells us – on points. There – on the big picture, the macro view – we do pay attention. And maybe there, we are less of an idiot than we appear. Ours is a “moralistic” view. That is, we assume that if we leave the dishes unwashed, sooner or later, they’ll attract cockroaches. But, of course, that could happen any time.
Almost all other observers today use a more mechanistic approach. They believe you can understand an economy – and are able to predict its next moves – by looking at dials and instruments, as if you were flying an airplane. Losing altitude? Give the machine more throttle! The trouble with the mechanistic approach is that an economy is not a machine. It is more like a living thing… infinitely complex, with purposes and prejudices we can’t possibly know. As for adjusting the throttle, forget about it. You can’t plot a course… or determine the correct speed or altitude… because you never know where you’re going. You won’t know until you get there. And you don’t know how to fly a plane, anyway.
Moralistic Approach: But the “moralist” is always wrong… before he is right. He notices when things seem out-of-whack. But he has no way of knowing when or how they will go back into whack. That is what happened in 2000 and again in 2008. Each time, the stock market was in a boom and the mechanics were proclaiming a New Era. The moralists denied it. “How could investors make money from unprofitable companies?” they wondered in 1999. Eight years later, they wanted to know how people could get rich by “taking out equity” from their own homes.
Both times, the doomsayers (including us) were way too early, anticipating crashes years before they ever happened. Then, when the crises came, the Fed gave the plane full throttle – “printing” record amounts of new money. The mechanics saw a recovery. The moralists saw more trouble ahead. And now, in the greatest bout of money-printing in U.S. history, we doomsayers see another calamity coming – the third major crisis of the 21st century. Will we be right or wrong?
Bad Ending: The Fed has set off a boom. Everything is flying through the air. The mechanic sees sales increasing… unemployment going down… stocks near record highs. Even things with no apparent value – NFTs, money-losing businesses, Dogecoin – can be worth billions. Dogecoin, created as a joke in 2013, is now said to be worth $42 billion… or just slightly less than Hewlett-Packard, for example. We try not to pretend to know things we don’t know. And we have no idea why Dogecoin is worth more than HP. But we believe this boom is going to end badly… like the other two. Only worse. Boom… boom… Ka-boom!"