We’re the Turkeys, Not the Farmers |
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By Bill Bonner, Chairman, Bonner & Partners
As our friend Nassim Taleb reminds us, there’s a downside to being a turkey. It’s called Thanksgiving. Every day for 1,000 days, it gets its food. The turkey gets used to it. It feels pretty good about things. Around the feed trough, it is common knowledge that the food “always” comes. And there is no turkey alive who can contradict it. The more intellectual turkeys spin out theories to explain their good fortune. One says it’s because of turkey exceptionalism: “The food always comes because we’re turkeys, not starlings or pigeons. We are special. We don’t have to peck around on the ground trying to find crumbs or scratch in the dirt to find worms. We’re a superior bird; we have access to unlimited food.” Another has a different hypothesis – better leadership: “We always get fed because our president has figured out how to make the farmers feed us. He’s the best turkey president ever. If the farmer is a little late, he knows how to make turkey life great again. Didn’t you notice? He takes three steps backward and makes a loud gobbling noise. That usually does it. If it doesn’t, he just keeps gobbling until the food comes. Always works. Always.” And yet another pipes up: “Oh, enough with your fancy theories. We always get fed because that’s just the way it is. It’s nature.” “No, it’s not nature,” offers another. “It’s because the fix is in. The farmer has to feed us, or he’ll be charged with animal abuse. He has to keep the food coming; he has no choice.” But then, as the fourth Thursday of November approaches, the theories are put to the test. All are proved incorrect. The food doesn’t come. Instead, the turkeys are ushered into a special part of the farm complex where they’ve never been before. There is something disquieting about it. The turkeys begin to whisper among themselves. One says he hears cries coming from the next room. All of them notice the sounds of machinery… heavy machinery… and a few soft feathers floating through the air. “What’s going on…?” they wonder, one to another. And then, they begin to panic, running helter-skelter, hoping to escape. No Exit Up until that day, the food came every day. Day after day… the sun shined… and along came the farmer with more grain. And then, without warning, everything changed for the turkey. Worse than a bad feather day… it was the final scene. The curtain fell. The court adjourned. Meanwhile, over in the stock market, the sun still shines. Heck, the more danger signs we see, the more the market goes up. Yesterday was no exception. CNBC: Stocks rose slightly on Tuesday as retail shares outperformed, lifting the major averages to fresh record highs. But as the SEC is quick to add: Past performance is no guarantee of future performance. You may flip a hundred coins and get heads every time. That doesn’t mean that the next one won’t come up tails. Not All Gravy We see the turkey’s life from the farmer’s perspective. It is not all gravy and sweet potatoes. But it is very predictable, with a definite beginning and a certain end. And a purpose. We’re tempted to make an analogy to the stock market. But there is nothing definite about the stock market. It can famously stay irrational a lot longer than you can stay solvent. But it can also stay solvent longer than you can stay irrational. We assume that as long as the Federal Reserve is adding money to it, it will continue to go up. The total now of its supposedly “not-QE (quantitative easing)” repo market funding is up to more than $300 billion. And it’s no longer just the overnight lending market that the Fed is pumping up. It now funds a 42-day repo facility too. In other words, with the Fed adding so many fake billions, the turkeys might think higher prices are “rational” and “normal”… and that only rug-chewing doom-and-gloomers would expect it to go down. And yet… in the stock market, we’re the turkeys, not the farmers. We spin out our own theories. “Stock prices always go up over the long run,” says one simpleton. “Now, with the enlightened management of the Fed and a very money-savvy president, we’re pretty much assured that nothing will go wrong,” says another. “Dow 30,000,” adds a third. “The fix is in… They have to keep pumping up the stock market or the whole shebang will fall apart.” “We’re the U.S.,” opines the president, as if the gods looked with especial favor upon us. But backstage, Mr. Market is sharpening his blades. He’ll decide for himself when we all get plucked. Have a nice Thanksgiving. Regards, |
Win-Lose Is Making a Dramatic Comeback
BALTIMORE, MARYLAND – In our new book, A Modest Theory of Civilization: Win-Win or Lose, we argue that human history is largely a story of the long march from violence to cooperation. We learned the lesson thousands of years ago. Win-win pays; force does not.
We probably didn’t give the old win-lose enough credit. It never goes away… and as Dan details below, it is now making a dramatic comeback.
This is partly just a normal cyclical change of direction. And it is partly the consequence of deliberately falsifying the money system…
Money Culture
Money is what we use to keep track of where we stand. One owes; the other is owed. One can buy the other’s time; the other must sell his time in order to pay his bills. One is rich; one is poor.In the natural world, order is established by force. The herbivores eat the plants… and the carnivores eat the herbivores. The lion does not lie down with the lamb; he devours him. And he doesn’t bother himself about whether it is the “right” thing to do. He just does it.
But the agricultural revolution in the Neolithic age brought a new way of surviving and of establishing status. Cultivated plants and domesticated animals left people with food surpluses that could be traded, which created a need for a medium of exchange – money. Instead of killing, enslaving, and stealing, you could simply buy another’s time… or his output.
Since then, a whole money culture has developed with win-win exchanges as its central, guiding principle. Wall Street, with all its debentures, exchange-traded funds (ETFs), and butterfly straddles is merely an elaboration of the basic deal.
But the march of win-win progress is neither smooth, nor continuous. Instead, we stumble, trip, and backslide. One generation learns; the next forgets. One saves; the next spends. One increases its wealth; the next goes broke.
Nutcases and Stick-Up Men
Below, Dan shows us how even the richest, most advanced, and most win-win country in history is now backsliding.Its people still claim to be for free enterprise. They say they respect the Constitution… and, of course, they’re all in favor of honest money and paying for what they get.
But politics is beguiling… the promise of “free money” is fetching… and the ability to bully others is irresistible.
A few years ago, a candidate who proposed to add $97 trillion to America’s debt would have been a joke; now, he’s a vote-getter. And as the financial system becomes more and more complicated, it is easier for the voters to imagine that the money might just grow on trees after all.
As we explored in the Diary this week, even leading economists claim there is a ‘magic money tree’ (aka Modern Monetary Theory) that will allow us to enjoy wealth we never earned.
But the “funny” money is used like a handgun. One group is robbed. Another is rewarded. Status becomes more suspect… Most people still have to earn it. But many get it by colluding with the feds.
Running for president on the democrat side, as Dan surveys the pack, are a bunch of nutcases and stick-up men, candidates who promise to pay for huge new programs with other peoples’ money.
As Dan shows, politics has taken over. It dominates our news cycles. Our attentions. And our economy. It is insidious… and expensive; it shifts energy and resources from creating wealth… to taking it away.
And now, year after year, the U.S. becomes less free market (win-win) and more political (win-lose). And the gods must laugh; the president who has moved the nation furthest towards politics is the one who pledged to take it in the other direction – Donald J. Trump.
Begging the Feds
Alas, once you get going down that road, you tend to pick up speed… as well as a lot of fellow travelers and hangers-on.The Trump team attacked China, for example. China retaliated, leaving farmers with less income.
Seeking reelection, Team Trump offered to make up some of the lost income with taxpayer money.
The state that gets the most is Iowa, which also happens to be where they hold the early, influential caucuses.
Tariffs on steel, meanwhile, leave steel users feeling like someone has cut in line ahead of them. What can they do but wade into the swamp themselves… hire lobbyists, and beg the feds for an exemption?
By July of this year, reports The Wall Street Journal, 836 U.S. manufacturers had submitted 62,797 requests for exemptions. About half of them were approved.
Then, the steel manufacturers – who had hoped to sell their produce to these manufacturers at higher prices (protected by the tariffs) – filed 22,210 objections. All together, these protests involved 154 million metric tons of steel. But U.S. output is only 87 million.
In other words, the manufacturers must import steel in order to stay in business. The tariffs, along with the associated paperwork, lobbyists, and lawyers, simply add to the price… and slow down the process.
Invitation to Disaster
America learned in the Smoot Hawley fandango of the ‘30s that win-lose tariff wars are easy to lose and almost impossible to win. But everyone who learned that lesson is now in his grave.We learned in the 18th century… and re-learned countless times since… that fake, “fiat” money, with no fixed backing in gold, was an invitation to a financial disaster.
And we will, no doubt, sooner or later learn, once again, that win-lose doesn’t work very well.
In the meantime, strap on your seatbelts; the ride is going to get a little bumpy. Read on…
Bill BonnerChairman, Bonner & Partners
The Inflated States of America: How the triumph of politics over markets will lead to a stock market crash, the destruction of the middle class, and soaring inflation (especially in gold)
By Dan Denning, Coauthor, The Bonner-Denning Letter
In the United States, the future of financial
failure is now… It might be unwise to forget the French Revolution.
Breaking the social compact between government and its citizens…could
cause irreparable damage.
– William Goetzman, Money Changes Everything
It is often forgotten that money creates a unique
link between citizens and their government, which holds the exclusive
right to print money. The blatant abuse of this powerful right by many
governments accompanies the story of many inflations throughout
history...
– Bernd Widdig, Culture and Inflation in Weimar Germany
Sometime before the year 2025, America will pass
through a great gate in history, commensurate with the American
Revolution, Civil War, and twin emergencies of the Great Depression and
World War II. The risk of catastrophe will be very high. The nation
could erupt into insurrection or civil violence, crack up
geographically, or succumb to authoritarian rule...
– William Strauss and Neil Howe, The Fourth Turning: What the Cycles of History Tell Us About America’s Next Rendezvous with History
Something isn’t right.
We’ve known that for a while now. But it’s worth reminding you as markets make new highs. Intervention from the Fed, plus the growth of automation in daily trading has removed price discovery in the markets. For investors and retirees, the danger of a big crash isn’t diminished one iota.
What about politics? Is there a sea change taking place in American society, one that will usher in an era of European-style socialism? An era of bigger deficits, a $40 trillion debt, and a world where you can’t eat meat, can’t drive a car that burns gas, or use a plastic straw?
By the time you read this, it will be around 340 days before the 2020 presidential election. Our long national nightmare will be over, or just beginning, depending on your political point of view. Between now and then, though, you’ll have to suffer through an endless number of debates, primaries, and speculations about what it all means.
We’re going to save you that trouble and tell you exactly what it means this month. But here’s a trigger warning for those of you who take politics seriously: we think it’s a joke. A bad joke.
However politics IS dangerous, mainly because the nation seems to be in the mood for a more powerful and invasive central government. This trend toward a more authoritarian America is bi-partisan. And we believe it’s driven by the huge distortions in the real economy caused by our fake money system. But we’ll get back to that later.
For now, please keep in mind what Bill has written in his new book, Win-Win or Lose, A Modest Theory of Civilization (which you can read here as a Bonner-Denning Letter subscriber). There are only two ways to get what you want in the world: force or persuasion. Markets encourage persuasion through specialization and voluntary and mutually beneficial trade. Politics are all about force (violence).
The triumph of politics in American life is a disaster for markets and liberty. As the journalist H.L. Mencken once wrote, elections are an advance auction of stolen goods. Politics is the essence of win-lose deals. Because government produces nothing, all it can do is take, redistribute, and punish.
There’s a whole lot of stealing and punishing coming up for the American people. And that’s regardless of who wins a year from now. But take a look at this chart…
And what will happen now that Nanny State New York billionaire Michael Bloomberg has entered in the race? Will America fall in love with the kind of soft socialism he brought to New York City? Or have we had enough of billionaires from the Big Apple in the Oval Office?
Time will tell. In a moment, we’ll take a look at the main four candidates at the moment: Warren, Vermont grumpy old man socialist Bernie Sanders, creepy Joe Biden, and Mayor Pete Buttigieg from Indiana.
What would each mean for America and the stock market? And what will it mean for you?
Our job at The Bonner-Denning Letter is to “connect the dots,” as Bill would say. That means identifying the big changes coming down the line, revealing how they will affect your wealth and your liberty, and showing you ways to prepare for them.
Our first dot this month is at the Eccles Building in Washington, D.C. – the heart of the Federal Reserve’s operation to destroy price discovery in the stock market and lure investors into a trap…
Another Month, Another High
Another month, another high in the stock markets. The Dow is over 28,000 as I write, and the S&P 500 finally broke 3,000.The Fed has added at least $300 billion to its balance sheet since the “repo” crisis first began. (We covered the repo crisis in more detail in the September issue.) That balance sheet is now back over $4 trillion.
What happens when you pump in liquidity to financial markets? Prices rise! In response to the spike in overnight lending rates in September, the Fed committed to buying $60 billion worth of T-Bills (short-term government bonds) through the spring of 2020. Since then, it’s conducted over $300 billion worth of repos.
Not coincidentally, both the Dow and the S&P 500 have added on nearly 10% in that time. The Fed clarified its intentions to keep the taps open in a statement released on October 11. Since then, the S&P 500 is up 7% and the Dow 6.5%. But remember, this isn’t quantitative easing (QE) according to the Fed. Why not?
The original QE programs (1, 2, and 3) were designed to keep long-term borrowing costs low. They did this by buying longer-term bonds. That pushed interest rates down (and stocks up). And it also had the added benefit of keeping borrowing costs low for the U.S. government (financial repression), which is now borrowing billions of dollars each week to finance $1 trillion annual deficits.
Which brings us back to the problem in the plumbing of the global financial system that we wrote about in September. The plumbing is broken. It’s why the Fed had to step into the “repo” market to buy U.S. bonds that banks can’t or won’t buy. What’s more, those banks are back in 2008 mode, distrusting one another and hoarding cash. Think I’m exaggerating?
Just before I sent this letter off to the home office, we learned that the Fed offered a 42-day repo facility to banks. That number matters (not because it’s the secret to life, the universe, and everything) but because it’s not the number one. When markets function normally and liquidity and trust are abundant, the “repo” market is an overnight market. It’s a one-day facility.
A 42-day “repo” facility allows financial firms to cash up through the rest of 2019 and to get through the end of the year safely. This ensures there will be no inconvenient financial crisis to discuss over your Thanksgiving or Christmas dinner.
But even extending the facility out to six weeks wasn’t enough for Wall Street. The Fed offered $25 billion in cash for the 42-day facility and received $49 billion worth of bids.
As I say, something isn’t quite right. Whatever’s broken has not been fixed. You know that, and we know that. But the Fed has stabilized the repo market enough to divert investors’ attention to other subjects… like politics.
Which brings us back to the main task of this month’s letter: who will win the Democratic nomination for the presidency? The main four candidates at the moment are: Warren, Vermont grumpy old man socialist Bernie Sanders, creepy Joe Biden, and Mayor Pete Buttigieg from Indiana. What would each mean for America and the stock market?
Sen Elizabeth Warren (D-MA)
There’s a lot to dislike about Warren. Let’s start with her tax plan. She wants to tax wealth rather than income or capital gains. That itself reveals the greedy and covetous nature of most big government spenders (Democrats AND Republicans). But she’s slippery too. How?When Warren first unveiled her “wealth tax” it was as follows: 2% on net worth between $50 million and $1 billion and 3% on net worth above $1 billion. Later, she upped the top wealth rate to 6%. If you’re reading this and you’re not a billionaire (or even a millionaire) you may think it doesn’t matter it to you. You’re wrong (I’m sorry to be so blunt but I’ll explain why).
By raising the top rate to six percent she proved an important point: once you establish the principle that it’s okay to tax a person’s net worth, lowering the threshold where it kicks in is just a matter of time.
The tax may not apply to you now. But when the federal government has a $40 trillion debt and entitlement spending soars, and the Feds get desperate, it would be easy enough to apply the wealth tax to anyone who has “too much money.” Remember, the income tax was designed to be temporary.
These taxes are nearly impossible to kill once they put roots down under your skin.
Warren has a host of other policies that are anathema to anyone who favors limited government, low taxes, the rule of law, and sound money. But then, she recently unveiled a proposal to “fundamentally transform our government.” The proposal was specifically about corruption at the federal level. But it also captures the essential nature of Warren.
On the outside she looks and sounds like a “do-gooder.” But the intellectual heart of her argument about how government should work is based on win-lose. They win. You lose. Join “them” – especially in how you think – or be a loser.
It’s fruitless to predict how the country would change or where the stock market would go with Warren in charge. Higher taxes would lead to lower growth – but growth is low already (lower than Trump predicted when he ran for office). And if the corporate tax is raised, you’d expect lower earnings on Wall Street, too. Bigger government is bearish for markets.
But if there’s one point you can take away from this month’s letter it’s that it doesn’t really matter who wins next year. Whoever sits in the Oval Office is going to preside over a country in deep trouble. A country where the Deep State really runs things (and tries to bring you down with a coup or impeachment if you don’t tow the line). A country where voters want more handouts and wars, not less.
In that situation, it doesn’t really matter who the president is. The dollar will eventually lose its status as the global reserve currency. All paper money around the world will devalue relative to real money (gold and silver). And the tremendous debt that’s kept markets afloat since 2008 will sink them like a stone. Financial markets will deflate and in response, fiscal and monetary police will unleash a holy hell of inflation.
Senator Bernie Sanders (I-VT)
Last month I mentioned “the Overton window.” It’s a political theory about how once unthinkable and radical ideas become public policy. You have to get an idea into the public’s imagination first. You “normalize” it through debate and research issued by think-tanks. And eventually, some version of the idea becomes public policy.Bernie Sanders has shifted the entire Democratic party to the far left with his socialist vision of the United States. By his own admission (and fuzzy math) his spending plans would add $97 trillion to the federal debt over the next 10 years. Medicare for All alone would add $30 to $40 trillion. But he wouldn’t stop there.
Sanders wants to spend $16.3 trillion in the war on climate change (the sun must be stopped!). His mandatory nationwide $15 minimum wage would cost $15 trillion and have nearly half of all employed Americans working for Uncle Sam (the ultimate in dependency). He’d spend $3 trillion forgiving student loan debt (sure to be popular with college kids who have paid inflated tuition prices to learn nothing, or worse, come out of four years of studying knowing nothing about the real world and LESS than they started with). He also has several trillions for infrastructure and low-cost housing.
The national debt is now $23 trillion – Sanders would more than triple it
This kind of blow-out in spending, with annual deficits equal to 30% of GDP, is only possible by “normalizing” something like Modern Monetary Theory (MMT). In theory, there’s no limit to the amount of government bonds the Federal Reserve can buy. Crank up the presses and finance the deficits!
But to get the kind of America Sanders wants, you have to fundamentally transform the monetary system. You have to give the man credit. By suggesting things no one in America has seriously thought about doing, he’s encouraged a lot of very stupid people to take those ideas seriously. That’s how the Overton window works.
America is not ready to jump off the socialist cliff yet, we think. But some version of Sanders-lite may be what the Democrats eventually offer up on their platform. If Sanders manages to do well in Iowa and win New Hampshire early next year, markets will certainly “feel the Bern.”
Mayor Pete Buttigieg (D-IN)
This is a name (pronounced Boot-edge-edge) I didn’t expect to be writing about, mostly because the fresh-faced former solider and Mayor of South Bend, Indiana is just 37 years old – barely old enough to run, according to Article II, Section 1, Clause 5 of the Constitution. But that may be part of his appeal: he’s not an old Washington retread (Biden is 77, Sanders 78, Warren 70 and Trump 73).By the way, this is not an “ageist” argument. With age comes experience, even if that experience is a legacy of fiscal failure and warmongering. And also, career Washington politicians who’ve been in the Swamp for one decade (Warren), two (Sanders), or even four (Biden) are hypocrites for blaming the current president for the country’s woes. Donald Trump didn’t spend the last 40 years in Washington running huge deficits and starting wars. He was in New York building skyscrapers and going bankrupt. Sad!
But back to Buttigieg. Like Warren, he’s also slippery. He’s a self-professed Christian, which I didn’t think was allowed in the Democratic party anymore. But he supports abortion and he’s gay. This may be just the right mix of social liberalism and conservatism to appeal to “centrists” and “independents” who think Warren and Sanders are too radical.
Fiscally, Mayor Pete is anything but conservative. He’s proposed raising the top income tax rate to 49.9% (because 50 is nearly half)! He wants to end new oil and gas drilling on all federal lands. And he’d also abolish the Electoral College. (He hasn’t said how, however. And, not surprisingly, the Constitution does not allow the executive branch to unilaterally change a provision which determines how the president is elected.)
Buttigieg’s rise in the polls is the Overton window in action. Sanders and Biden dominated the early stages of the campaign with their wacky ideas about fundamentally transforming America. By comparison, Mayor Pete sounds sensible. If he wins in Iowa he may at least knock candidates like Corey Booker and Kamala Harris out of the race. But if young former Navy man and Catholic John F. Kennedy had trouble with voters south of the Mason Dixon line, so will Mayor Pete.
Joe Biden (D-DE)
Why do we still call Joe Biden the vice president? Why do any former presidents and vice presidents get called that after they’ve left office? One of the greatest things President Trump has done for the country is reduce the public’s respect for elected officials. He’s done it mostly by example. But it’s a real accomplishment.In a perfect world, Vice President Biden would just be “Creepy Uncle Joe” – a moniker he’s earned for his weird penchant of touching women in photo ops. But I digress. Back to politics.
There’s no doubting Biden’s Deep State credentials. He was elected to the United States Senate at the tender age of 31 in 1973. He’s been a committed Swamp Creature ever since, chairing the Judiciary and Foreign Relations committees in the Senate and, of course, serving as wingman to Barrack Obama for eight years as vice president.
If you were to pick a poster-boy for all that is wrong with careerist Washington insider types, it would be Biden. With his fake teeth and botoxed forehead, he’s primed and ready for at least another four years besmirching the national stage. (Yes, it’s mean-spirited, but none of these people deserve our respect or admiration.)
Still, despite all his obvious flaws (cosmetic AND substantial), what Biden has going for him is that he’s not Sanders, Warren, or Trump. To the extent that mainstream baby boomers determine the outcome of this election, they might be the most comfortable voting for Biden. He’s a known and relatively likeable commodity, if buffoonish and increasingly inept on stage. If he can survive the primaries (literally and in terms of performance), he’s got a chance.
Like the rest, though, Biden would be captain of a sinking ship. He’d probably relish the chance to announce that America was reneging on debt owed to foreigners (take that, China!). And he may be exactly the man the country needs to do the inane things demanded by the people at this stage in our history. Cometh the moment, cometh the man.
The Most Significant Election in American History?
If you’re a Republican or a Democrat, it’s likely I’ve offended you with my comments above. Good! Don’t get caught picking sides and looking for a political solution to America’s problems. Politics IS the problem.It’s not noble or patriotic to “get behind” a lying psychopath and put him/her in charge of the country’s nuclear codes. No one is on your side but you. And the only way to “save” the country is to start by saving yourself, your family, and your wealth.
When has a politician NOT said that this is the most important election of your lifetime? They say it every four years. Because when the government gets bigger and we get more wars and spending, politics becomes more deeply entrenched in our private lives.
I want to live in America where elections don’t matter and no one is asking for “unity.” And in an America that doesn’t spend $6.4 trillion on endless foreign wars. (You can see the $6.4 trillion breakdown for yourself in the nearby table.)
Summary of War-Related Spending, Fiscal Year 2001-2020 (Rounded to the nearest $billion)
| Billions of Current Dollars | |
| Overseas Contingency Operations (OCO) Appropriations | |
| Department of Defense | 1,959 |
| State Department/USAID | 131 |
| Estimated Interest on Borrowing for DOD and State Dept OCO Spending | 925 |
| War-related Spending in the DOD Base Budget | |
| Estimated Increass to DOD Base Budget Due to Pos-9-11 Wars | 803 |
| "OCO for Base" a new category of spending in FY2019 and FY2020 | 100 |
| Medical and Disability Care for Post-9/11 Veterans | 437 |
| Homeland Security Spending for Prevention and Response to Terrorism | 1,054 |
| Total War Appropriations and War-Related Spending through FY 2020 | $5,409 |
| Estimated Future Obligations for Veterans Medical and Disability FY2020-FY2059 | >1,000 |
| Total War-Related Spending through FY202 and Obligations for Veterans | $6,409 |
Source: The Watson Institute for International and Public Affairs at Brown University
All that said, there is, indeed, a transition in the balance of power
in American politics. It is tempting to see that change as purely
generational. (You can see the generational breakdown in the below
graphic, “American Voters by Age Group.”)As the boomers age and retire, the millennials rise, take control of Congress, and “fundamentally transform” the country into a socialist shithole full of fake meat, fake cars (Tesla’s Cybertruck), and fake money.
As always, it comes down to their relationship with money and the impact the money system has on the economy and society. Let’s take a closer look at that relationship.
The Financial Crisis Before the Political Revolution
You could argue that the financial crisis of 2008 has never really gone away. In fact, the response by Washington and Wall Street to the crisis – to bail out bankers with taxpayer money and then rig the stock market – is what threw the Overton window wide open for socialism in America. I’ll say more about what that means for the future of the country in a moment.But what happens next? And what should you do with your money in 2020? What will the changing generational composition of Congress mean for the stock market and your retirement?
These are all questions we’re going to have to follow in the coming months. You already know our “big-picture” analysis. We believe the stock market will eventually revert to the mean. Whether that’s a fast crash or a slow-motion one, we don’t know.
We believe you’ll see deflation in financial assets and that in response to huge government deficits, you’ll see massive money-printing by the Fed and/or MMT from a radical Congress that unleashes inflation in consumer prices and real assets. All of this should be good for gold.
Next month, we’ll reveal our “10 Predictions for the Next 10 Years.” And along with it, “10 Things to Do Before the Bubble Pops” (these are things you won’t be able to do anymore in America once the money system has changed – such as places you should visit or experiences you should have).
Of course, it’s foolish to predict anything. Much less 10 years out. But in our ongoing effort to connect the dots and stay one step ahead, we have to try! Here’s a sneak peek with three of our predictions now:
- Boomers and millennials make common cause in Congress. Defying
predictions of generational warfare (at least for now), the 117th
Congress unites to embark on massive federal deficits to fund
infrastructure spending, student debt forgiveness, and some version of
Medicare for All.
This new spending is “paid for” with a rash of new taxes including: a higher payroll tax, a federal value-added tax (VAT), wealth taxes, a financial transactions tax, and other forms of financial repression that target asset owners, retirees, and what’s left of the middle class. - MMT goes mainstream. MMT is, in fact, a form of
fiscal policy. It means control over the nation’s money – including the
creation of it – shifts from the Fed and commercial banks to Congress
and the Treasury (the executive branch).
The Fed will expand its balance sheet (crank up the printing press, in other words) as much as necessary to finance U.S. deficits in 2020. But in the long term, for the nation to pay for the kinds of things Republicans and Democrats want, you’re going to have to change the money system. MMT does that. - Texas goes blue. There are 538 votes in the
electoral college. You need 270 of them to become president. Did you
know you can secure 171 votes (or 63% of the required total) by winning
just five states? California has 55 votes, Texas 38, New York and
Florida 29, and Pennsylvania 20. Win those fives states, and all you
have to do is find 99 votes in the remaining 45 states.
Even with former Texas congressman Robert (“Beto”) O’Rourke out of the race, we predict Texas – on the strength of urban, minority, and youth votes, plus normal corruption and vote-rigging – goes blue in 2020.
Before then, we have the Iowa caucuses on February 3, New Hampshire on February 11, Nevada on February 22, South Carolina on February 29, and then “Super Tuesday” on March 3, where voters go to the polls in Alabama, Arkansas, California, Colorado, Maine, Massachusetts, Minnesota, North Carolina, Oklahoma, Tennessee, Texas, Utah, Vermont, and Virginia.
By then, you’ll have a pretty good idea of who the Democratic nominee is and who their pick is for vice president. If the greatest stock market in American history has crashed (or begun correcting) by then, it will make the general election even more interesting. Trump is certain to produce great theater in the presidential debates.
But in the big picture, we don’t think anyone can alter the trajectory of the country politically and economically. We’re too far down the rabbit hole. The people have learned how to vote themselves politicians who have found new ways to spend money.
Take the recent debate about the Electoral College, for example. Many of the Democrats have called for it to be abolished. The fact that someone (a loser like Hillary Clinton) can win the popular vote nationwide but lose in the Electoral College seems unfair and undemocratic.
Well, yes. That’s exactly the point. If you read Federalist No. 68, Alexander Hamilton argues precisely against the popular election of the president. The founders knew the public couldn’t be trusted, or could be easily manipulated by a lying, deceptive press. That’s why they made the election of the president and, at the time, senators, dependent on smaller groups of representatives who would be better informed and exercise better judgement than the public.
You can argue about whether the members of the Electoral College are better informed. They probably aren’t. But that is beyond the scope of this month’s newsletter.
Politicians are talking about getting rid of the Electoral College right now because it’s an obstacle to more control and centralization of power and money in Washington. If they can just shut up the over represented rubes in “flyover country,” they can get on with the project of turning America into a European country, or in Sanders’ case, the USSA.
No matter who wins, how they win, or what they promise to do, we believe that expansion of U.S. debt and deficits (by QE or MMT) is bearish for stocks, government bonds, and ultimately the U.S. dollar. Fed balance sheet expansion may be pumping up markets now. But while gold is resting below $1,500 an ounce, now would be a good time to add more.
The Godless Times of Inflation
But what if we’re wrong? What about Japan? It’s had low nominal GDP growth and inflation for years now, despite low (and negative) interest rates and huge government deficits. Why are we so confident inflation will show up in the U.S. when it hasn’t (infamously) in Japan? The quality of life in Japan – low crime, clean streets, respectful people – seems very high.And while we’re at it, let’s be consistent and remember history. Predicting inflation now goes against the 800 years of lower real interest rates I wrote about in August. In fact, despite a notable episode in the former Habsburg Empire (which included Germany, Austria, and Hungary), the historical trend has been toward lower rates. The episode in the 1970s in the U.S. – where we had low growth AND inflation – was the other exception.
But it’s what the two exceptions had in common that makes them relevant right now. I hope you’ll bear with me here, because it’s probably the key point Bill and I write about it. It explains why we’re so worried about inflation. (And, if you read Tom Dyson’s Postcards From the Fringe e-letter, you know Tom is also worried about it.) It gets to the heart of our understanding of how money influences values, culture, the economy, and politics. Money changes everything!
The two exceptions to the historical trend of lower interest rates were both fundamental monetary regime changes:
The first – the blowup of the multilingual, multiethnic Habsburg Empire – was directly linked to Germany’s defeat in World War One. In that case, the resulting inflation created the political conditions for the rise of Nazism.
The second – the de-linking of the dollar to gold in 1971 – kicked off the inflation of the 1970s and the rise of oil and gold (most real assets rising in dollar terms). But it was more than just an inflationary episode. It was the culmination of years of debasement of the currency.
The creation of the Fed in 1913, Roosevelt’s Executive Order 6102 in 1933 (which outlawed the ownership of gold by American citizens), and then Nixon’s 1971 closing of the gold window… these were all deliberate attacks on sound money in America. To what end?
To break the link between sound money and small government. To attack individual liberty and promote centralization and state control. To replace the checks and balances of the Constitution with a Deep State committed to warfare abroad and political and financial repression at home. And where are we now?
We are on the verge of a regime change in the global order. Financially, asset inflation will turn into asset deflation. Consumer price inflation will come roaring back with massive government deficits. The social and political stability created by that inflation – which has in fact been brewing since asset prices began inflating in 2008 – will “fundamentally transform” America as you know it.
Don’t take my word for it. Here is none other than John Maynard Keynes in The Economic Consequences of the Peace. Keynes was writing after the war and between monetary regimes. He understood well the consequences of distorting the value of money. He wrote (emphasis added is mine):
Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but [also] at confidence in the equity of the existing distribution of wealth.
Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become “profiteers,” who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
At the risk of sounding arrogant, we believe we HAVE diagnosed the existence of deadly inflation in the United States. If you have as well, you are that one man in a million.
The trick Wall Street pulled off in 2008 was making the confiscation and transfer of wealth from the public to the insiders nonarbitrary. Instead of accidentally blowing a bubble in tech stocks (2000) or in the housing market (2007), they made sure they knew where the money was going this time so they could get there first. They changed the laws, monkeyed with the money and tax code, and engineered an inflation in the place where most of the public would notice it but not benefit from it: the stock market.
But in so doing, they’ve unleashed disastrous consequences. First, their distortions in the market mean that prices no longer communicate accurate information. This has given investors a false sense of security about the stock market and future expected returns. Because the computers are doing all the thinking and buying on Wall Street, the vast majority of the investing public is blind to the risk of both a ‘flash crash’ (or ‘flash depression’) or ten years of flat returns in the stock market.
The second consequence is even more damaging. And it’s why we focus on inflation so much. By breaking the money system and rigging it to work for an elite group of thieves and con artists, they’ve broken the relationships between citizens and government. This is why people now openly talk about another Civil War in America.
The even bigger danger is that the entire country will slide into the open arms of an authoritarian ruler who promises revenge against those responsible for gutting the middle class and destroying the American dream. (I’m assuming that’s not what already happened in 2016, but it may have.)
Next to language, money is the most important medium of communication in modern society. When you get deliberate dilution and debasement in the value of legal tender money, you eventually get social disorder, rebellion, or even revolution. When you worship money for its own sake, you get godless inflation.
The more degraded the money gets, the more degraded the people feel. And the more degraded they feel, the more degraded they’ll behave. This explains the rising use (and tolerance) of drugs and alcohol in America. It’s a way to medicate the depression that has set in from living in a world in which there are two sets of rules: one for the very rich and powerful and one for the rest of us.
The common belief is that the Weimar inflation planted the psychic seeds for the rise of the Nazis and Adolf Hitler. In America today, the financial asset inflation since 2008 has planted those seeds. When asset prices crash and consumer prices soar, those seeds will bloom and it will be a bitter fruit indeed.
Dan Denning
Coauthor, The Bonner-Denning Letter
P.S. The goal of this month’s letter was not to depress you right before your Thanksgiving dinner with family. In fact, let me take a moment to thank YOU for your support of the work Bill and I do in the letter each month and to wish you and your family a happy Thanksgiving.
Our goal here at the letter is to help you improve your quality of life by giving you better information and analysis about what’s really going on in America and the world. (Tom Dyson will be bringing you his own take on that next year, once he settles down from his 18-month trip around the world.) We can’t cook you a turkey. But we might be able to help you avoid a big financial loss.
But to do that means that sometimes we have to tell hard truths. Or at least try to. This was one of those months where the truth about the utter avarice and greed that dominate American politics needed to be repeated. Politics will not solve the problems you face in the coming years. We believe your best defense against them is financial independence.
And you can only acquire or keep your financial independence if you’re armed with the right information at the right time. That independence will give you the freedom and mobility to protect yourself and your family no matter who wins the White House in 2020 or what policies they pursue. If you want to save the country or your family, you need to save yourself first.
P.P.S. We tried to be as bipartisan in our contempt of the political establishment as possible this month. Luckily, they helped us out. Just a few days ago, the Senate passed a bill funding the government through December 20. It was yet another “temporary” spending bill that makes the deficit and debt larger, and kicks the can down the road for future generations (your grandchildren) to deal with. But it gets worse!
Buried in the spending bill was a reauthorization of the Patriot Act for three months, including a key provision which allows for the mass surveillance of Americans’ phone calls by the National Security Agency (NSA). Section 215 of the Patriot Act, which permits that bulk collection, was set to expire on December 15. The House approved the bill by a vote of 231-192. The Senate vote went 74-20.
There you have it in a nutshell. A complete abdication of fiscal responsibility by both parties. And buried in a spending bill is the bipartisan approval of a program of mass surveillance on Americans by an unaccountable spy agency. If you think there’s a politician who can sit in the Oval Office and challenge the status quo, then you live in a state where smoking pot is legal. Or you’re breaking the law.
P.P.P.S. Edward Snowden revealed the extent of the NSA’s attack on civil liberties when he blew the whistle on them in 2013. Unlike whoever the whistleblower is regarding Trump’s call with Ukraine’s President, Snowden has been deemed a traitor to his country for exposing an illegal program of mass surveillance.
He ought to be celebrated as an American hero. And if you’re looking for Christmas gifts, I strongly recommend his book Permanent Record. In it, he wrote the following:
The freedom of a country can only be measured by its respect for the rights of its citizens, and it's my conviction that these rights are in fact limitations of state power that define exactly where and when a government may not infringe into that domain of personal and individual freedoms that during the American Revolution was called ‘liberty’ and during the Internet Revolution is called ‘privacy.’
Your liberty and your privacy are under attack in today’s America, by both parties and a vastly entrenched public service we call the Deep State.
Protecting your wealth and your freedom from these threats is our goal in 2020 and beyond. Next month, I’ll have more to say about how you can avoid mass surveillance (both digital and physical), and how it could be coupled with digital money and financial repression to control your life, plus what you have to do now to stay free.
Compounders
| Investment | Open Date | Open Price | Recent Price | Dividends | Returns | Stop Loss | Notes |
|---|---|---|---|---|---|---|---|
| Drive Shack (DS) | 01/24/17 | $3.77 | $3.93 | $0.00 | 4.2% | $2.63 (H) | Buy up to $6 |
| Franklin Financial Network (FSB) | 09/11/17 | $32.70 | $34.18 | $0.18 | 5.1% | $26.16 (H) | Buy up to $35 |
| Navigator Holdings (NVGS) | 06/20/18 | $11.15 | $12.06 | $0.00 | 8.2% | $7.80 (H) | Buy up to $13 |
| B. Riley Financial (RILY) | 12/12/18 | $20.10 | $29.10 | $1.49 | 52.2% | $12.06 (H) | Buy up to $21 |
(T) = Trailing Stop
(H) = Hard Stop
(H) = Hard Stop
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