"Cometh the Flood"
The heavens open up, a lost decade for
bonds and what comes after the US dollar?
by Bill Bonner and Joel Bowman
"Apres nous, le deluge."
~ Louis XIV to Madame de Pompadour
Youghal, Ireland - "What a downpour! “I’ve never seen so much rain,” said Pat, a neighbor. At least, that’s what we think he said. Pat is from across the river. The local patois is different. It is English, but it sounds like gutter Gaelic. We called Pat in desperation. Water was running down the hill – torrents of it. It ran right into our guest cottage. The firewood, which had been neatly stacked next to the doorway, floated on a foot of water when we went in. “The mainstreet of Midleton is under water,” Pat went on. “The whole city is closed to traffic.”
The Heavens Opened: We bailed out the house as best we could, scooping up the water with a bucket and a dustpan…and then mopping up the remainder. It took all day on Saturday. Fortunately, it has a stone floor…and little furniture with no upholstery or carpets. No one lives there. But we needed to dig a ditch that would divert the flood down the hill without passing through our cottage. Pat has a backhoe. You’d think a country such as Ireland would be better prepared for rain. But roads were washed out…houses flooded…business halted.
“We’re used to a gentle rain. It rained almost every day in the summer,” Pat observed. “But we’re not used to such heavy rain. The ground was saturated by September. Now, it just runs off and causes a lot of damage.” By Sunday, things were under control – or so we thought. Then, on Monday, the heavens opened up…a “real frog strangler” as they say in Maryland. Or, as Damien would put it, “il pisse des cordes.” (No translation needed.)
After mopping up.
The Financial Climate: In came the water again. We were only partly ready for it. We’d installed a sump pump in a low area, but the water was now coming in the house from a new direction. “It’s global warming,” Pat provided a scientific analysis. “The sea heats up and gives off more vapor. It falls on us.” Maybe. Maybe not.
Meanwhile, we turn our attention back to that critical moment three years ago. In July, in the midst of the Great Covid Panic, 2020, bond yields bottomed out. Thence began a change in the financial climate. It started to rain. The bigger the delusion…the bigger the debacle that follows.
In this case, the authorities seemed to think that by lending fake money at fake interest rates they could engender a real boom. First, Alan Greenspan gave out his famous “Greenspan Put”…practically guaranteeing to lower interest rates if ever equity values were threatened.
And then, in the War on Terror, the Fed did its patriotic duty with a cut of 500 basis points (5%) of its key lending rate. It was a mistake…but not nearly as bad a mistake as the Fed would make in response to the mortgage finance crisis of 2008. Ben Bernanke cut rates again, of course…but this time the Fed cut them to ‘effectively zero.’ And there…with the lending rate lower than inflation…it pinned them there for the most part of the next 14 years.
A Lost Decade for Bonds: In the fall of 2020, it looked like we were seeing the turnaround. Finally, with the Fed still lending below the inflation rate, bonds began to sink (with rising yields). After the biggest, longest drop in bond yields ever—supported by delusions that were obviously rank nonsense – the next phase was sure to be (we resorted to the technical term) a ‘doozy.”
And so it was. Bond prices fell like rain on Noah. The next three years turned out to be the worst bear market flood in bond history. Here’s Charlie Bilello: "It’s been a lost decade for holders of long-term bonds ($TLT ETF), with a decline of 1% over the last 10 years. The 10-Year Treasury bond is down 5% this year, on pace for its 3rd consecutive annual decline. With data going back to 1928, that’s never happened before. The worst 3-year period for bonds prior to now was 1978-1980 with a 3% loss for the 10-Year. What’s the 2021-23 cumulative decline? -26%.
That is what a change in the Primary Trend does. It turns the bets made during the previous cycle into bad ones. ‘Buy the dip?’ Doesn’t work. A ‘balanced portfolio of stocks and bonds?’ Good luck. Look at the stock market. Over 36,000 at the end of 2021, it now struggles to stay over 33,000…as inflation continues to eat away at real values. This year, the S&P is down 2%. Small caps have lost about twice as much."
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Joel’s Note: Yesterday in this space we brought you the latest, post-election news from down here in Argentina. Essentially, the economy is still broken, the political scene is still a mess and the local currency, the peso, is hardly worth the paper it’s printed on. Status quo ante.
With somewhere close to 200% annual inflation, Argentina serves as a cautionary tale for other nations keen on printing their way to prosperity. Of the two remaining presidential candidates (the country will decide its leader in a second round ballotage here on Nov. 19), one has proposed dollarization as a way to snuff out rampant inflation. Which got the BPR team thinking...
Though still a long way from Argentina’s dire situation, the United States is working overtime to thrash its own greenback to death. $33.5 trillion in national debt... multi-trillion dollar deficits as far as the eye can see... funding for two wars, with another potentially on the way... and confidence in US government paper in the worst shape it’s been in living memory...
Eventually, one is tempted to ask: Where does the last buck stop? If there was suddenly a run on the dollar... if inflation north of the Rio Grande began to resemble that here on the Pampas... what might replace the once-mighty greenback?"
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