POITOU, FRANCE – The Dow rose another 100 points yesterday. Can anything stop this bull market?

At least we know the answer to that question: Yes.


Longtime Diary sufferers know better than to trust our market timing advice. So rather than rely on our instincts, the Bonner & Partners research department has developed a Doom Index to guide us.

What is it saying now?

Mixed Bag

For an update, we turn to our ace analyst in the back room, Joe Withrow.

But first, a bit of background…

The Doom Index is made up of 11 indicators:

  1. Bank loan growth

  2. Credit downgrades

  3. Junk bond prices

  4. Stock market valuations

  5. Margin debt

  6. Investor sentiment (contrarian indicator)

  7. Manufacturing sentiment

  8. Railcar traffic

  9. Nonfarm payrolls

  10. Household debt to disposable income

  11. Quarterly building permits

Joe and his team update these on a quarterly basis. And each quarter, they award Doom Points based on what these indicators are saying.

When the index hits six or seven Doom Points, it’s time to be cautious. When it hits eight or nine Doom Points, it’s time to raise the tattered “Crash Alert” flag.

Anything over a nine means stocks – and the economy – are in deep trouble.

So what’s the latest? Joe:

Most second-quarter data has come in. But we are still waiting for railcar use and building permit numbers. The ISM Manufacturing Index came back with another relatively strong reading. I expect we won’t see much of a drop-off with these yet.

The Doom Index stands at six now, which is our “soft warning” level.

Here are the highlights from the second quarter: The Fed reported credit growth at 0.8%. This number is down from the Fed’s first-quarter report of 1.5%.

We also saw an uptick in corporate bond downgrades this month. You can almost feel the tension in the credit markets. But junk bond prices are still holding up strong.

Stock valuations remain high relative to historic levels. But our bullish investor sentiment indicator is coming back relatively low. The euphoria that precedes a major crash is not there.

Household debt-to-income numbers are still at moderate levels as well. On the other hand, auto loans and student loans are through the roof.

So, all in all, the data coming in for the second quarter is a mixed bag.

Permanent Loss

We’re no better than anyone else – and perhaps worse – at telling you when the next crash will come. Or even how. But that it will happen… we have no doubt.

And when it does, the loss – judging by similar events in the past – is likely to be more than 50%.

Worse, the loss could be almost permanent – as it has been in Japan.

The Japanese central bank has used every trick in the book to try to get its stock market back in the black – ZIRP (zero-interest-rate policy), NIRP (negative-interest-rate policy), QE (quantitative easing), and the biggest government debt burden in the world.

But stock market prices are still less than half of what they were in 1989… 28 years ago.

As an investor, your goal is to try to get a decent return on your money without giving it up in a downturn. U.S. stocks come with a big risk. You want to avoid it.

This week, companies with a total of $3 trillion in market value will announce their results. Unless there are some surprises, they will show modest increases in earnings.

But wait; there’s something fishy here. Since 2009, earnings per share for U.S. companies have increased a spectacular 265%. Sales, however, have gone up only 32%.

How is that possible? Another miracle?

Easy Money

When the cost of borrowing is low, companies prefer to get financing from debt. When it is high, they switch to equity – they issue stock.

Debt financing costs are as low as they have ever been; naturally, shrewd CFOs have borrowed heavily, increasing corporate debt by more than $1 trillion – a 50% rise – since the bottom of the last crisis.

What do they do with the money?

The economy is barely expanding. The typical American has no more real buying power than he had 35 years ago. It’s hard to justify investments in extra goods and services when your customers have no more money to buy your output.

So what do you do?

You buy back your own shares and cancel them. This removes shares from the market, increasing earnings per share for the remaining shares. (Each remaining share then represents a higher portion of the company’s earnings.)

Since 2009, the open market share count has gone down as earnings have gone up. According to Real Investment Advice, this has added $1.60 per share to the earnings of the average company.

Instead of investing its money to produce more at a lower cost, corporate America has used debt financing to buy back shares at the highest prices in history.

Corporate chiefs get stock option bonuses (because share prices go up). But now the company is deeper in debt and floating on a tide of easy money.

Tides go in and go out. This one will be no exception. And when this one goes out, corporate buyers will disappear – along with everyone else.

Dogs of the World

So what’s an investor to do?

Again, we are incapable of giving investment advice. But we can tell you what we do.

For our own family account, we have money in stocks, gold, cash… and real estate.

Since we think we are nearing a financial catastrophe – this post-1971 credit bubble must pop sometime – we keep nearly half our liquid wealth in cash and gold, more than we would normally want.

As for stocks, we are never “in the market,” merely hoping that it will go up. Instead, we have two main strategies.

First, we rely on colleague Chris Mayer to find “special situations,” companies we want to own regardless of the up and down trends on Wall Street.

[Editor’s Note: Bill recently committed $5 million from his family trust to following Chris Mayer’s recommendations. Bill explains why right here.]

Second, we also follow a strategy based on Michael O’Higgins’ “Dogs of the Dow” approach.

O’Higgins found that simply buying the cheapest stocks can pay off.

The problem is stocks are often cheap for good reason. Companies go broke. Their stocks go to zero and never come back. That almost never happens with entire stock markets.

Which is why O’Higgins’ modified this approach to create his “Dogs of the World” strategy. Instead of buying the cheapest stocks on the Dow, he bought the cheapest country stock markets around the world.

Pampered Pooch

Last week, we reported that the U.S. stock market is now the world’s most expensive, judged by a range of different tried-and-tested valuation metrics.

That makes the U.S. the least-attractive country market right now.

In our Dogs of the World portfolio, we look for the world’s cheapest country stock markets and update it annually. One choice. Once a year. Easy-peasy.

Of course, this is not for people who check their portfolios daily… or even monthly.

Among the world’s cheapest now, for example, are Turkey and South Korea.

Turkey is cheap because its government just narrowly survived a coup d’état in which military jets tried to shoot down the president’s plane.

South Korea is cheap because North Korea aims its missiles in that direction.

Maybe these dogs will turn out to be good investments. Maybe not. But by our reckoning, they are safer bets than the pampered pooches of North America.






Editor’s Note: Today’s insight comes from Bill’s friend and longtime colleague Porter Stansberry. Below, he shows the inevitable outcome of decades of financial manipulation.

Economic Insight: The Biggest Hurricane in the History of Capitalism


The inevitable outcome of the policies around the world’s central banks is unprecedented amounts of global overcapacity. Why?

Well, just follow the money.

When credit is too cheap (or free… or better than free), vast amounts of new money will be borrowed. Look at the huge amounts of capital that have been invested over the last decade in discovering new oil resources – about $700 billion annually since 2006, or about 10 times more than what has ever been invested in any previous 10-year period.

Can all these projects succeed?

Of course not. It was only a matter of time until increases to production and additional capacity caused prices to collapse and weaker producers to fail.

The same thing is now taking place across vast portions of the global economy – not just oil and gas. Super cheap (and even free) capital has caused massive distortions in capital spending around the world. Economists from the so-called Austrian school call these “malinvestments.” They’re made with “funny money,” not legitimate savings. These artificial booms don’t produce lasting prosperity. They’re merely a kind of inflation… And they’re always followed by a sharp collapse.

That’s what we’re about to see. It’s obvious that far too many capital projects have been started. Too much risk was taken in industries and countries all around the world. Now we see profit margins and earnings falling because there’s far too much supply. We see defaults rising as weaker producers fail. And we see production stop growing and begin to decline. Employment will decline next… And then defaults will really begin to grow.

So… do we actually see these trends playing out around us? Absolutely.

Even if you don’t really understand why, I know you’ll understand this…

Governments around the world have brewed up the biggest economic hurricane in the history of capitalism. They’ve printed so much money that they’ve warped the entire global economy, financing absurd surpluses in markets all around the world. That is crushing profit margins, causing default rates to rise and production to fall.

Look at China’s debt expansion. Total private debt grew from $5 trillion to $25 trillion in just the last 10 years. And no surprise, you’ll find tens of thousands of empty apartment buildings all over China. You’ll also find huge stockpiles of raw materials.

Look at the United States’ $80 billion auto bailout. You’ll find record car sales through last December (though they declined in the first half of 2017) but falling earnings for some of the major carmakers.

Over the last several years, governments and central banks around the world have created a bubble that’s bigger and more dangerous than any other in the history of capitalism. It has grown so large that investors have come to believe that bonds should have a negative yield… that falling production doesn’t matter… and that companies that can’t even repay their debts should be worth tens of billions.

Eventually, the enormous consequences of this huge global bubble are going to be recognized. The storm is on its way. We know it because rising default rates will cause bond investors to panic. Bond prices, which are now at all-time highs, will plummet. That will cause the cost of capital to soar, sending equity prices crashing.

The die is cast.

Porter Stansberry

Editor’s Note: We can’t be sure when exactly the bull market will end. But a certain group of companies has borrowed nearly $1 trillion in debt that it has no chance of ever repaying. And when the bubble pops, many clueless investors will be wiped out… That’s why Porter has reopened the door to one of his most exclusive advisories – Stansberry’s Big Trade – and is showing readers how to make 10 to 20 times their money as these companies inevitably go to zero. Learn more here.

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In today’s mailbag, more debate on “win-win” trade

You recently wrote that, “Mass murder is never a good idea. Neither is starting a war. Or restricting trade.”

This view of trade restriction is overly simplistic. Consider a simple “win-win” trade: A willing person sells his house to another willing buyer. But the buyer turns the property into a pigsty with old cars and old appliances littering the yard and never mows what remains of the lawn. This trade needed some restrictions because even though the two traders were happy with the result, the neighbors were certainly not. These neighbors needed protection which usually occurs with city or HOA restrictions, regardless of whether the two traders did a win-win deal or not.

– Richard K.

It’s all well and good to buy the cheapest lumber from Canada, but who is paying the unemployment benefit of the lumberjack down the road? Maybe cheapest isn’t always best, at least for those unable to choose which country they live in.

– David H.

As a globalist, you don’t appear to understand or care about the lumberjack (my family). Nor do you seem to care about the logging industry. But I suppose the working man is not who you are pulling into your circle of “dear readers.”

I have been learning quite a bit by reading you. Finance is not how my brain is wired. I’m an artist. I see President Trump in a very different light than you. Then again, I’m looking up and you’re looking down. Since he is my president, but apparently not yours, I am unsubscribing immediately.

In my opinion, you really should be doing the plumbing at Lake Geneva.

– Jacquelin S.