"Fake Capital"
How fake money, lent at fake rates to
fake investors, produced fake gains...
by Bill Bonner
Paris, France - "The most important thing to happen in the financial world so far this century is the sell-off in the US bond market. MarketWatch reports: "An investment in 10-year U.S. Treasury notes has lost a third of its value, in real, inflation-adjusted terms, in just over three years. Investments in long-term Treasurys have lost about half their value. They have fallen as much as U.S. stocks did during the global financial crisis. 10-year Treasury bonds have been a worse investment than gold bullion this year, last year, the year before that, and all the way back to 2018."
US 10-year Treasury notes have actually underperformed gold for the last 33 years. According to data reported by MarketWatch, if you’d put $10,000 into 10-year Treasuries in 1990, adjusted for inflation, you’d have approximately doubled your money. Holding gold, on the other hand, would have given you a little profit – about 15% more than if you had simply held Treasuries.
Dear Imprudence: Gold enjoys no ‘full faith and credit’ of the US government. No one backs it. No grand empire issues it or guarantees to pay interest on it. It issues no press releases, pays no dividends, has no DEI director…and doesn’t give a damn what you think. And yet this ‘nothing’ of an investment has proven more valuable than the strongest credit ‘the West’ had to offer. And in America’s publicly traded businesses, an investor might have fared even worse. Stocks have roughly tripled in this century. The broadest index, the Wilshire 5,000, has risen from 13,800 in 1999 to around 45,191 today. But gold has gone from an average around $270/oz to $2,000/oz today – a 7 times increase.
What we take from this is that something went seriously wrong with American capitalism; its best stocks and bonds have been disappointments. Speculators put billions of dollars into cryptos, NFTs, and zombie stock – leading to huge losses. Prudent investors, meanwhile, tried to protect their wealth with US Treasury bonds which pretended to be ‘safe;’ they lost a third of their money over the last 38 months.
At the peak of the bond bubble, even the smartest bankers, the most experienced corporate treasurers, and the wizzy-est whizzes on Wall Street were fumbling. JP Morgan analysts, for example, said WeWork should go public at $100 million. It turned out to be worth less than nothing.
Multiply those miscalculations and nonsense speculations by millions…all up and down the capital structure…and you get one weird, fakey economy – in which real values were falsified by fake money, lent out at fake interest rates, to fund fake investments by fake entrepreneurs in fake industries that produced fake gains. This fake capitalism did not produce real prosperity; it only worked to enrich the elite.
A Whole Bag of ****: But in July, 2020, the Primary Trend of the previous 40 years came to an end. A new Primary Trend, towards lower stock and bond prices, began…one that will probably last for decades. But we have to ask some questions; what caused* the other big moves in the bond market? What caused* the fall in bond yields (rise in bond prices) from 1920 to 1945? The answer is simple: the Great Depression and World War II.
What caused* the rise in bond yields from 1945 to 1980? Another easy question: the Eisenhower boom, followed by overspending on the Vietnam war and the Great Society.
What caused* the following Primary Trend, the spectacular fall in bond yields (and the rise in bond prices) from 1980 to 2020? Easy peasy: Paul Volcker broke the back of inflation; then, Bernanke pushed real rates below zero.
You will note the asterisk*. It reminds us that this is not science. We never know what really causes events and trends of this scale. You may say with some certainty that Gavril Princip shot Archduke Ferdinand in Sarajevo in 1914. But as for what caused WWI, that is a whole different question with no sure answer.
The New Trend? So, we ask: what will cause the next Primary Trend, from 2020-? The obvious answer: too much spending, too much debt, too much inflation…and the Decline of the West. It’s that last item that will need most of the ****. The subject is so big…so slippery…so vague, it will be hard to get a grip on it. But for our amusement, if nothing else, let us push on, with a whole bag of **** at our side.
Executive summary: in 1980, America’s institutions were still vigorous enough to bring inflation under control. Today, they have been so enfeebled and corrupted by easy money policies, neither Congress, the White House, nor the Fed can be expected to make tough decisions. Budgets won’t be balanced. Wars won’t be stopped. Inflation won’t be brought to heel. The ‘West’ is in decline. Stay tuned..."
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