GUALFIN, Argentina – Stocks are going up all over the world.

Meanwhile, it appears to us that the U.S. economy is going down. Go figure.

For instance, a labor-market index created by Fed economists… and closely watched by Fed chief Janet Yellen… has fallen for three straight months. It’s the first time that’s happened since 2009.

And the Atlanta Fed adds that GDP growth in the first quarter of 2016 was only 0.3%.

That’s not quite recession territory (commonly defined as two back-to-back quarters of negative growth)… but it’s not far off.

 “Prepping” for Recession

If the recession doesn’t appear this year, it won’t be the first time we’ve been wrong… or early.

But despite claims that the feds have mastered the business cycle, a recession is bound to come someday.

And when it does, we’ll be ready… at least, here at the ranch.

We still have 700 head of cattle – tough, but edible. We have a couple hundred bottles of Malbec wine stocked in the depósito (store room). We have corn and tomatoes in the garden.

What else do we need?

We don’t know. But we’d rather not find out.

And neither does anyone else. But bad stuff still happens. And it is unlikely that recessions have been completely banished.

Then again, recessions are not bad things – not in our book.

They are nature’s way of clearing out mistakes. Recessions are when the destruction part of economist Joseph Schumpeter’s “creative destruction” comes into play.

The “creative” part follows. But you can’t have one without the other. Marginal businesses… bad investments… weak competitors – they all need to get out of the way so better uses can be found for the capital at work.


Believe it or not, capital is limited. If you use it for bad projects, you get poorer, not richer.

Which projects are good? Which are bad? Typically, a rise in real interest rates (increasing the cost of funding) is the way to find out. Higher rates “put the hurtin’” on company finances. The weak give way. 

Recessions are not necessarily pleasant. But they are as necessary as growing pains and family budget discussions.

Debt Bubble

But we are in a minority. Most economists fear recessions; they want to avoid them in the worst possible way.

What’s the worst way to avoid a recession?

Just throw some more money at it!

Most serious economists realize that we have a problem on our hands. Debt goes up and up… much faster than the economy that has to pay it.

It is a “debt bubble,” floating around in a knife store.

In the last eight years, for example, the U.S. federal government added $9 trillion to the public debt – more than it had amassed in the previous 246 years.  

And total debt increased in the U.S. last year by $1.9 trillion… while GDP only went up $599 billion. For the corporate sector, it was worse. Companies took on $793 billion of extra borrowings against just $161 billion of extra output – five times as much debt as growth.

Some analysts, such as our friend Richard Duncan at Macro Watch, believe we have no choice but to keep inflating the credit bubble.

He likens our situation to a man who has gone up in a hot air balloon. Suddenly, he realizes that the hot air is not taking him where he wants to go.

But what can he do?

If he releases the hot air, the balloon will fall and he will die. To survive, he has to keep putting in more hot air.

Other economists, such as Paul Krugman, believe in hot air, too.

“Demand,” they call it. They cling to the balloon, hoping that more credit will increase growth and can make the debt more bearable.

More Hot Air

We think both Duncan and Krugman are wrong.

An economic boom, based on nothing but hot air (phony credit, with no real resources behind it), is fraudulent. It will never take us to real growth. Just the contrary.

The best thing to do is to pop the bubble… and then pick up the pieces. Besides, it will pop whether we want it to or not.

Heck, we believe in magic as much as the next guy.

But the magic act is wearing a little thin. The smoke is dispersing. The rabbits have disappeared. All the glam and sparkle, the shock and awe, the claptrap and hokum – they’re all giving way to economic reality.

We are beginning to see more clearly: the Fed’s theory is nothing but hot air. Now, its funny money is doing something even funnier than it imagined: the exact opposite of what the central planners intended.

In yesterday’s Market Insight, Chris showed how the “velocity of money” is plummeting.

This is serious. The velocity of money tracks how often each dollar is used to buy something in the economy. Falling velocity shows that consumers and business are pulling back… becoming more reluctant to spend and invest… downsizing… and holding onto dollars rather than spending them.

This has a similar effect as reducing the supply of money bidding for goods and services. Prices drop. Deflation, in other words.

The bubble has developed a leak. The hot air is gushing out.

Look out below…



Bill Bonner

Further Reading: With so many economic uncertainties right now, we’re turning to Bonner & Partners’ Chief Investment Strategist, Chris Mayer, for how to profit.

Tomorrow at 1 p.m. Eastern Time, Chris and Bonner & Partners Managing Director Amber Lee Mason will hold a live Q&A to field your questions about the investment strategy Chris is using to beat this topsy-turvy market. Register here for free.

Market Insight


Another classic sign of deflation is the rush into bonds…

Bonds tend to rally in deflationary cycles. That’s because the fixed-income payments investors receive on their bonds buy more as consumer prices fall.

Today’s chart is of the iShares 7-10 Year Treasury Bond ETF (IEF).

It tracks the price performance of U.S. Treasurys with maturities between 7 and 10 years.

As you can see, since its low in June 2015, IEF has rallied 6%.

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Lots of great feedback today on yesterday’s issue about the tearful farewell party for Bill’s faithful ranch foreman, Jorge.

Wonderful piece. Thank you.

I’m an agronomist and cattleman. I can connect you with regional people who may be able to make a huge difference in what’s happening there. I also speak Spanish with near-native fluency because my grandfather came from Argentina when I was three years old. Precious place.

You probably have more upside there than you realize.

– Bart H.

I enjoy your comments on the ranch, perhaps more than the financial comments.

I have gone to Chile every year for a few weeks since 1990. I love Chile, and wish I was young enough to immigrate. But, at 73, all things seem to contract – my muscles, my ambition, my health.

Oh well. I am trying to get my sons – 28 and 32 – to consider a pied-à-terre in South America.

– Bob R.

I felt myself welling up a bit reading your account today of the retirement party held at the ranch for Jorge, your retired ranch foreman.

You are blessed to have had such a wonderful man looking after your interests there, but he is equally blessed to have had you and Elizabeth as ranch owners.

Thank you for sharing snippets of life on the ranch. And to reader Robert M., who found it necessary to comment: “In case you don’t recognize it, your ‘ranch’ is a desert. Sorry. Climate matters when you buy property.”

I don’t believe such snarkiness is insightful or enlightening for other readers. Nor do I think the Bonners have any delusions about their Argentine property… it was a bargain. It is a beautiful escape from the wider world, and the people there have become wonderful friends.

You should count yourself lucky if you are ever fortunate enough to have any of those things in your life.

– Tao J.

Robert M said: “In case you don’t recognize it, your “ranch” is a desert. Sorry. Climate matters when you buy property.”

Couldn’t you have a helicopter plop down a drill rig… get lucky and hit a free flowing underground river… raise the property value to $500.00 an acre… laugh all the way to the bank, and bathe more often?

– J.C.

In Case You Missed it…

In just eight days, Bill will invest $250,000 of his family trust’s money in Chris Mayer’s first Bonner Private Portfolio stock recommendations.

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