"Death on a Pale Horse" by Benjamin West
"Revelation"
by Bill Bonner
Dublin, Ireland - "Today is Memorial Day in America. It’s a holiday established during the Civil War to honor those who have died in military service to their country. We’ve written an entire book honoring The Idea of America. But today, we’ll leave that idea aside.
For the benefit of new readers, and ourselves, we reveal our creed…as succinctly as possible. There are dots to connect, between politics and markets. And while our beat is money, we live in a political age. We can’t ignore it.
The best we can do is try and see the big picture. That’s what we do in this musings every day at Bonner Private Research. And then, behind the curtain, for our paying subscribers, we try to give them the specific investment advice they need, first to avoid ‘The Big Loss’ and second, to make a respectable profit (more on that later from Dan).
Hidden Patterns: We believe there are patterns to just about everything. There is a deep and powerful Gulf Stream, for example; it takes warm water from the Gulf of Mexico, carries it across the North Atlantic, and makes Northern Europe habitable. But looking only at the surface waves, you wouldn’t see it.
Likewise, you can’t tell much from the day-to-day market action. But there are still hidden trends. The most important of them is what we call the Primary Trend. It marks the basic direction of prices, often for many decades.
We also think that stories have ‘morals’ – lessons, distilled from generations of experience – that are found in popular sayings, novels, the Bible, and “old wives’ tales.” Rarely are they revealed by economic theory or financial analysis.
Wealth is created by people who produce goods and services for each other. Anything the government does to interfere with this commerce reduces the total material satisfaction of the public. But wait! We recognize that material satisfaction – as in, having more wealth – is not the only motivation driving humans. Sometimes, they seem to want nothing more than to make damn fools of themselves. (The Salem Witch Trials, Napoleon’s March on Moscow, WWI, Mao’s Cultural Revolution, War on Terror etc.)
From an economic perspective, government is fundamentally a win-lose, coercive enterprise. Its many rules, regulations, taxes, debt, spending, and unnecessary wars reduce the output of goods and services that we regard as ‘prosperity.’ That’s why dynamic, productive capitalism and Big Government are largely incompatible. It takes a small government to produce big economic gains.
Curiously, government also tends to exaggerate the Primary Trend – though not intentionally. It manipulates interest rates down, for example, and makes the upswing of asset prices more powerful than ever (1980-2021). And/or it hampers needed market adjustments, thereby making the downswing worse (the Great Depression.)
The Knowledge Problem: A fundamental part of our analysis is that the world of money doesn’t work the way you think it does. The Fed cannot actually know what interest rates America needs, for example. Nor can it know what ‘full employment’ or ‘full capacity’ for the US economy is. We also think that Wall Street seriously and episodically misprices assets as investors get caught up in fads and the ‘madness of crowds.’
We further believe that the switch to a gold-free dollar in 1971 was a mistake. It made it much easier to diddle the value of the world’s reserve currency and thereby allowed and promoted large distortions throughout the global financial system. Today, for example, great swings in stock prices occur following comments by Fed officials, even though they are unlikely to affect the real value of the underlying companies.
In short, most of what you hear from economists, Wall Street or the government is likely to be BS. And generally, the more economists, Big Banks, or politicians are involved, the less productive the economy. For example, the Soviet Union had so much government control that its economy was extremely inefficient, causing its elite to abandon it entirely.
Get the Big Trend Right: The trick to successful wealth-building is to get on the right side of the major trend…and stay there. This has been the basis for each Trade of the Decade we’ve made since 2000. It’s worked each time. And in fact it’s working now, as we’re ‘long’ oil and gas and, essentially ‘short’ the US dollar, the ‘Net Zero’ crowd, and the whole idea of ‘The Energy Transition.’
For investors, every study shows that asset allocation (being in the right place at the right time) is more effective than specific investment selection. It could be stocks for one decade. Bonds the next. Or, cash, gold, and commodities. Getting the mix right has a much larger impact on your portfolio results than a single stock selection. That’s why, when we set up shop in 2021, our first report to readers was on what this mix should be. We’ve been reviewing and updating for our readers every month since.
What the Primary Trend says Now: The place to be for the last Primary Trend was in the US stock market. The Dow rose from under 1,000 in 1980 to over 36,000 in 2021. That Primary Trend came to an end as two tops were hit. First, bond prices topped out in July 2020 with the US benchmark 10-year note yielding 0.59% (bond prices vary inversely with yields.)
Then, in December 2021, when US stocks hit a high of 36,388, the ‘top was in,’ as they say on Wall Street. Note that while the Dow has subsequently gone up, it has still not surpassed its high – in real, inflation-adjusted terms. Nor has it gone up when priced in gold, which is how we prefer to measure our gains. Gold doesn’t lie.
If we are right about the new Primary Trend, the simplest thing for an investor to do now is simply take cover. We are in “maximum safety mode” – emphasizing cash and gold over stocks and bonds.
Most of our subscribers are over 55 years old. At that age, losing money is a bigger threat than failing to make more of it. A younger person may take a loss, learn from it, and then recover the money…and more. But over 55, it becomes more and more difficult. You just don’t have the time to recoup a major loss. So, our program is designed primarily to avoid the Big Loss while still participating, safely and prudently, in market gains. In short, we buy stocks when they are cheap. We sell them when they are expensive.
Using the Dow/Gold Ratio:
How do you know when stocks are too cheap or too expensive? We use a very simple model based on gold. Ultimately, gold has proven the safest, surest way to inventory wealth over the last 3,000 years. So, we look to the price of stocks – in gold terms – to tell when they are really cheap or expensive. And since we never know for sure, we allow for a generous ‘margin of error’ to keep us from taking the “big loss.”
Briefly, when you can buy the entire 30 Dow stocks for 5 ounces of gold, or less, it is time sell gold and buy stocks. When the price goes over 15 ounces of gold, it is time to go in the opposite direction; sell stocks and buy gold. Currently, with the Dow/gold ratio at about 17, our recommendation is to keep the bulk of your wealth in cash or gold, while holding only a few stocks that you believe are fairly priced. We’ll stick with that position until the ratio falls to 5 or below.
The last Primary Trend was set in motion when Paul Volcker quashed inflation and saved the post-1971 money system. Thereafter, the feds amplified and extended the trend by dropping interest rates too low and keeping them there – below zero, inflation-adjusted – for far too long.
Our intuition tells us that they will amplify the current Primary Trend too – towards lower asset prices and higher inflation and interest rates – by running large budget deficits, involving the US in unnecessary wars, undermining the US dollar with sanctions and seizures, and draining more and more capital out of real investment and squandering it on government boondoggles.
The point will come soon enough, however, when rising interest rates trigger a panic flight from the bond market, driving up the government’s cost of borrowed funds to impossible levels. That is when the ‘inflate or die’ trap snaps shut. Then, the government will be forced to choose: either ‘print’ more money or let the debt-drenched bubble economy die.
A Mountain of Debt: The effect of the government’s ultra-low interest rate policy prior to 2022 was to create a mountain of debt. Worldwide, that debt has reached beyond $300 trillion. US government debt alone is nearly $35 trillion, while total US debt – government, business and household – now approaches $100 trillion, or nearly 4 times GDP.
This is more debt than can be carried or managed in a high interest rate environment. Paul Volcker pushed the fed funds rate to 20% to stifle inflation in the 1970s. That is no longer possible. Even a 10% rate would fall upon the financial markets like a hammer on an egg.
But the government has only two choices. Inflate or Die. Either it continues to inflate (with low real rates and high deficits). Or, it radically cuts spending – triggering major bankruptcies, defaults and a depression…effectively killing the bubble economy that its ultra-low rates created.
What Next? We think we know which direction it will go. You see, great empires follow patterns too. They rise. They fall. Every one of them. In 1992, the US had the chance of a lifetime. The Soviet Union disbanded. Oligarchs took over and began selling raw materials, in bulk, at low prices. The Chinese, meanwhile, had already decided to take the ‘capitalist road.’ By the 1990s, they were lowering costs on finished products.
Its enemies out of the way…its consumer costs falling…the US could have cut it's military budget (a ‘peace dividend’) and used the money to shore up its domestic industries and infrastructure.
Instead, it invaded Iraq. And went to war in Afghanistan. And then, supported wars in the Ukraine and Gaza. Its military budget exploded to the upside. Its reputation slid to the downside. And its debt soared – adding $25 trillion, so far, in the 21st century.
We believe this failure will prove fatal to the empire. It will exaggerate the now-in-motion Primary Trend and send asset prices to shockingly low levels (in real terms.) This financial failure, combined with the social and political chaos it brings, risks creating a major debacle. With elections in both the UK and the US coming up, you might think things will change. Unlikely.
Instead, we advise you to buckle up. Get on the right side of the Primary Trend. Learn to look at market prices in real terms, not fake terms. And surround yourself with friends who will see the world for what it is...and figure out how to navigate it together. Stay tuned."
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