NORMANDY, FRANCE – We continue our work with the bomb squad.

Myth disposal is dangerous work: People love their myths more than they love life itself.

They may kill for money. But they die for their religions, their governments, their clans… and their ideas.

Great Cause

Some people think that even an idea as abstract as “freedom of speech” is worth dying for.

It was Voltaire who said: “I disapprove of what you say, but I will defend to the death your right to say it.”

Most people jump onboard the train of a Great Cause with enthusiasm and conviction. But many have the good sense to hop off quietly before their lives are in real danger.

We suspect that Mr. Voltaire would have done the same.

That’s why the deadliest myths are those that you can ride along with at no personal risk. Foreign wars, for example, are always a favorite.

When Pericles proclaimed that the honor of Athens was at stake, and that it must take up the imperial burden and continue its war with Sparta, he was not offering to invade Sicily himself.

Nor was George W. Bush, in announcing his War on Terror, suggesting that he would personally march into Mosul. 

But when you act on a myth, you are soon hostage to it; if you cannot win, you will lose.

As it happened, Pericles died in his bed; Athens was destroyed; its population was either killed or enslaved.  

The War on Terror, meanwhile, has cost about $3.6 trillion so far (according to the latest estimates from Brown University), and has left more than 7,000 U.S. soldiers dead.

But George Bush, Dick Cheney, Michael Ledeen, Elliott Abrams, Paul Wolfowitz, and John Bolton are still alive.

In fact, as far as we know, not a single one of those killed was a leading proponent of the war. Anywhere between 60,000 and 1.2 million people died on the other side (so many… and so difficult to verify… a whole industry has arisen trying to count them all).

Saddam Hussein, who had kept a lid on Islamic terrorism, was executed. Now there is a terrorist government in the area – ISIS – with U.S.-made weapons and a U.S.-trained head-of-state.

Recession Warning

But today we turn back to the world of money (pausing only to wonder if $3.6 trillion would have been squandered so readily had it been real money).

Markets are rousing from their summer sleep. We need to pay attention.

Here’s the situation:

The U.S. economy is still growing. But barely. And the pattern is clear. Instead of gathering strength, it is weakening… with lower GDP growth, quarter after quarter.

“Nominal” GDP growth is now 2.4% – the lowest rate, outside of recession, since World War II.

To get “real” GDP growth, you need to subtract inflation (the GDP deflator)… which, according to one official measurement, is 2.2%, not including food and energy. If those numbers were correct, it would mean the U.S. economy is essentially stagnant. Dead in the water.

Most likely, official inflation is understated.

President Reagan’s budget advisor, David Stockman, recalculates, taking out much of the statistical hocus-pocus from the feds’ numbers. He figures the real rate of price increases that most Americans suffer – his “Flyover CPI” – has been averaging 3.3% for this entire century.

Using that number, we see the real economy is now in recession, with a growth rate of MINUS 0.9%.

Most likely, the downward drift of output will continue. If so, you should expect an official recession before the end of 2017.

And most likely, that will sooner or later lead to a sudden sell-off in the stock market, when the myth of “recovery” finally dies.

This will lead to more intervention – “Drone Money” – from the feds… and to higher rates of consumer price inflation.

Inflation Threat

But wait… Inflation is already stalking the whole capital structure.

Bonds, for example, now depend on low rates of consumer price inflation… as far as the eye can see.

That’s because bond prices fall when interest rates rise. And interest rates rise along with inflation.

At today’s ultra-low yields, even a small uptick in interest rates will wallop bondholders.

That’s why investors pay such close attention to the Fed’s hints and teases. They know that today’s elevated bond prices depend on the lowest rates in 5,000 years.

If the rate of annual CPI growth is 3.3%, as Stockman calculates, and you have put your money into U.S. 10-year Treasuries yielding 1.5%, you are losing 1.8% a year in terms of purchasing power.

And if your money is in stocks paying a 2% dividend, you are losing 1.3% a year (more than that when you include taxes) in purchasing power.

Cockamamie Myth

In today’s markets, with such low yields everywhere, almost everyone must be losing money!

Let consumer price inflation move up just a little, and you will see a mass flight from both stocks and bonds.

It may have already begun. Since the middle of July, U.S. stocks have been bouncing up and down… with no clear trend, higher or lower.

But look at what has happened to the bond market. Ambrose Evans Pritchard, in the Telegraph:

Yields on 10-year Treasuries – the benchmark borrowing cost for international finance – have jumped 19 basis points to 1.7% since the middle of last week. [With bond yields rising, prices are falling.]

The amount of global government debt trading at rates below zero has suddenly fallen from $10 trillion to $8.3 trillion, with parallel effects for corporate bonds.

Investors, businesses, and households are now hostage to their debts. Their debts are hostage to interest rates. Interest rates are hostage to inflation. And the Fed is hostage to its cockamamie myth: that it can control and improve a market economy.

The Fed can mint new money to buy stocks and bonds… driving up asset prices. But the more money it creates, the closer the day approaches when consumer prices rise, too.

Then the whole shebang explodes.




Further Reading: Our friends over at Casey Research published a great essay that explains why the government could “terminate” your Social Security money without warning. It’s titled, “You’re Not Legally Entitled to Social Security,” and you can read it here.

Investor Focus

By Chris Mayer, Chief Investment Strategist, Bonner Private Portfolio

Editor’s Note: In a few days, Chris will host a free event for Diary readers. He’ll explain how to put today’s lesson to work for you… and vastly improve your investment results. See below for details…

Track records are one of the most misunderstood things in finance.

Many people think that a great investor is (or should be) great all the time by putting up great numbers. But that is not the case.

Berkshire Hathaway, the investment firm founded and run by legendary stock picker Warren Buffett, held its annual meeting in Omaha recently. And I was there. I mention it because I heard Larry Pitkowsky, the co-manager of the $277 million GoodHaven Fund, give a talk that touched on this idea.

“If you invest for decades, you will look like a fool on multiple occasions,” he said. “Get used to the concept.”

Then, he talked about an internal study GoodHaven did of great investors. These investors handily exceeded the market average over the last couple of decades, Pitkowsky said. But there was something else in the study that may surprise you.

GoodHaven found that these investors trailed the market roughly one-third of the time.

This mirrored a famous study by Eugene Shahan in 1986. Shahan looked at a number of great investors and investment firms and ranked them by their total annual return during their investing career (as of the 1986 study):

Those are numbers that any investor would be delighted to achieve. And yet, these investors under-performed the market average about a third of the time!

Pacific Partners had six years in a row in which it trailed the market. And yet, its total annual return was just a shade below Buffett’s.

This is not uncommon. Pitkowsky also mentioned the Templeton Growth Fund, a top-performing fund for 30 years, which underperformed 36% of the time. There are plenty more like it.

This reminds me of an example from Nassim Taleb’s book Fooled by Randomness. (If you haven’t read this book, buy a copy immediately. You can’t think seriously about markets until you understand the concepts in this book.)

He imagines a dentist who is also an exceptional investor. This dentist earns 15% per year with volatility of 10% per year. Statistically, this means his chance of earning money in any given year is 93%. (I’ll spare you the math.)

Over shorter time intervals, though, his odds of success drop a bunch, as Taleb showed:

The point is… investment results are, by their nature, uneven and fickle. Superior results come, not by trying to beat the market all the time, but by trying to find ways to tilt the odds in your favor and then by being patient. And not being afraid to look like a fool.

As Pitkowsky said, “Get used to the concept.”

Editor’s Note: Over a decade that spanned the 2008 crisis, Chris exceeded the market handily himself… His recommendations returned an average of nearly 29%, beating the market 3 to 1, and Warren Buffett’s returns 2 to 1.

Starting this Monday, September 19, Chris will hold a brand-new investment masterclass. He’ll explain how to focus your portfolio on stocks that can return 100x your money… the kind of stocks that can fund your retirement. We’re talking about buying the next Apple, the next Starbucks, or the next Berkshire Hathaway… long before Wall Street is paying any attention to them.

Chris’s new masterclass is absolutely free. And you don’t want to miss it. To sign up, click here.

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Could Bill get in trouble with the feds over his claim, in yesterday’s issue, that the real “terrorists” are in Washington? Some Diary readers certainly think so…

I think that not too many people can express themselves as Bill is doing right now. Freedom of speech has been more limited than ever. I think that, at some point, our government will take action against Bill…

– Christian V.

You were very brave to tell the truth about this present and, no doubt, future government. I expect you are on some government watch list. We went through a civil war and two world wars, to mention others, without a Patriot Act. Our liberties vanished with this devilish act.

I fear, as my father once said over 50 years ago, that someday we will be “worse than the Communists.” People are so ignorant and dumbed down.

– Dave C.

No threat from terrorists? Obama is about to allow thousands of Syrian refugees into our country. You can bet that there a many terrorists among them. Further, the Iranians are on the verge of making nuclear weapons. They probably will not hesitate to use them against us.

– Helga M.

Your email regarding the “real terrorists” brought to mind one of my favorite quotes: “War is when the government tells you who the enemy is. Revolution is when you figure it out yourself.”

– Arthur S.

We also got a lot of great feedback on the book review by Bill’s wife, Elizabeth, that recently went out to lifetime members of Bill’s monthly publication, The Bill Bonner Letter. (Lifetime subscribers can find it here.)

What a wonderfully talented wife. You are blessed. I now understand your success with a more nuanced understanding.

– John R.

Bill, you are one lucky man! Your wife is a gem.

Mrs. Bonner – thank you for taking the time to write and to let Bill know again why he is indeed wealthy!

– Kerry D.

In Case You Missed It…

Next Monday, Chris Mayer, the only analyst Bill follows with his own family money, will kick off an investment masterclass. The aim is to show you how to find tomorrow’s biggest stock market winners today… before anyone on Wall Street is paying attention to them.

This invitation-only event is free for Diary readers, so don’t miss your opportunity to learn from one of the best investors in the business.