BUENOS AIRES – We got into Buenos Aires at about 10 p.m.

We hadn’t had dinner. So we walked out of the hotel hoping to find a restaurant that was still serving.

It was quiet in the Palermo Soho neighborhood. There were few people on the sidewalks. Even the cars bouncing over the cobblestones made little noise.

But the weather was perfect: mid-70s… stars in the sky. So we sat outside at a corner eatery, feeling lucky to find a place with a kitchen that was still open.

There were only a few people at the tables. We thought we had just caught the tail end of the dinner crowd. But then, gradually, people kept coming.

They sat down. They ordered drinks and then dinner.

The number of passersby, along with the noise level, also increased as the tables filled up.

Then we realized: We had not arrived at the end of the dinner service. It was just the beginning. This was Buenos Aires!

“Deep Subprime”

Back on our beat…

Wall Street had a good day yesterday. News reports cited “positive data.”

What we see are negative data.

Take what Morgan Stanley calls “deep subprime” auto loans. These make up about one-third of the subprime auto-loan market.

Borrowers are falling behind on repayments on most subprime auto loans. But “deep subprime” borrowers are falling behind fastest.

These loans are “surging,” according to Bloomberg.

Corporate defaults are spiking. And the last three months have seen bank lending shrink by more than 5% – the sharpest contraction in the “credit-money supply” since 2008.

Therein hangs a tale, as they say.

This is a system that depends on credit in place of real money. Over the last half-century or so, the credit-money supply has grown from $1 trillion to $66 trillion.

That was the source of much of the economy’s “growth”… and most of the price increases on Wall Street.

There’s no way to stand still in a system like this. Either the amount of new credit (debt) increases… or the old debt expires, reducing the money supply and causing a slump.

“Creditization”

Economist Richard Duncan, who keeps a keen eye on the “creditization” of the global economy, calculates that without at least 2% credit growth, recession is unavoidable.

Duncan says credit grew by 2.6% last year, enough to avoid a recession. This year, he says credit will increase no more than the 2% minimum, putting the economy in jeopardy.

For our part, we know that corrections happen – both in the stock market and the economy. We just don’t know when they happen.

We know, too, that a tightening cycle (higher interest rates) almost always seems to presage a correction.

But the Fed will never voluntarily return to a “normal” market-discovered interest rate system.

The insiders who control the system depend on cheap credit; they won’t give it up voluntarily.

Shared Secrets

We’ve lost track of where we were in our “campfire tales.” [Catch up here and here.]

We were bringing new Diary readers up to speed by going back over our most important concepts… and sharing with them our “shared secrets.”

For example, we’ve talked about how a “Deep State” runs the government. Voters don’t decide the direction of the country; the insiders do.

This explains why so many things are done by the government that don’t help most people… and why it’s so hard to change the direction of the country in a major way.

There’s one other important concept you should know about. It explains how real wealth is created.

There are two kinds of transactions.

There are win-win deals, where the two parties go into the deal voluntarily, hoping to come out ahead. And there are win-lose deals, where one party is forced into the deal by the other.

In neither case can we ever know in advance what the outcome will be; we can’t predict the future. But we can know what kind of deal it is. And we know that only win-win deals add wealth.

All value (progress… wealth… satisfaction) depends on what people want.  And a win-win deal is the only way to find out what that is.

You build a “spec” house. You invest $500,000 (including the cost of the money you borrowed). Then, the feds confiscate the house and give you $200,000 for your trouble.

How much is the house worth?

You don’t know. Only if someone voluntarily pays for it can you find out. All you know from this transaction: not to do that again!

If you sell the house for $600,000, you know that you have increased the world’s wealth by $100,000. The house is worth $100,000 more than the time and resources that went into building it.

If, on the other hand, potential buyers don’t like the house… and you are forced to sell it for $400,000… you know that you have reduced the world’s wealth by $100,000.

Either way, the transaction is still a win-win deal. The buyer believes he has a house at least worth – to him – $400,000. The seller (who had hoped for more) would still rather have the money than the house.

It is a win-win for the economy, too: It yields information that is valuable and honest.

Win-win deals are the sine qua non of a properly functioning economy. They’re the only way to know if you’re going forward or backward.

The Main Street economy does win-win deals.

One man wants bread. Another wants $3 so he can buy fuel. One wants someone to drive him to the train station. Another gladly gives up his time in exchange for $25.

But the government does only win-lose deals. One party is forced to do something it doesn’t want to do. One wins; one loses.

Wars are the ultimate win-lose deals, for example.

Win-lose deals also distort the vital price signals that make it possible for an economy to function correctly and create additional wealth.

More to come…

Regards,

Signature

Bill

P.S. Today, we would like to give a fuller introduction to our new collaborator, Dan Denning. Dan has signed on to help us with our monthly publication, The Bill Bonner Letter.

We’ve known Dan for about 20 years. We’ve shared ideas. We’ve shared information. We’ve worked together on a number of projects and have come to see the world in a similar way.

But nothing illustrates our admiration for Dan better than this anecdote.

He had just moved to Paris to join us in the office near the Opera. He had rented an apartment and settled in. But he didn’t speak French and had not yet even met his neighbors.

On a warm Sunday morning, hearing a commotion out on the street, he stepped out onto his balcony wearing a pair of flip-flops and wrapped only in a bath towel.

That was an unfortunate moment for the wind to take hold of his door and slam it shut.

Poor Dan was stranded outside, his door locked against him… and only a bath towel guarding his dignity and his modesty.

What to do? No phone. No money. No key. The only spare key was on the other side of town.

Dan rose to the occasion and knocked on the adjoining apartment door. A young woman was home. She must have been shocked to see a man at her door thus attired.

She was willing to help (once she figured out what had happened). But she had no men’s clothes to lend. All she had was a pink silk kimono.

So Dan donned the kimono and walked across Paris to retrieve the spare key.

“The amazing thing about it,” Dan reported, “was that nobody paid much attention. Maybe that’s just the way Paris is. Or maybe they thought I was criminally insane and didn’t want to risk attracting my attention.”

We’re fairly sure Dan is not criminally insane. And his thoughts are as bold as his sartorial style. Judge for yourself. Here is an excerpt from his latest essay in The Bill Bonner Letter

 

Currency Insight


BY DAN DENNING, CONTRIBUTING EDITOR, THE BILL BONNER LETTER


Editor’s Note: Dan Denning is an influential global market analyst and the author of The Bull Hunter, a personal road map to making big money in the markets while guarding against disastrous risks. Today, he shows us why a strong dollar is standing in the way of Trump reducing America’s trade deficit.


Stocks are strong. The U.S. dollar is even stronger.

A serious examination of the nature of money is probably the last thing on your mind.

But check out today’s chart…

It’s of the Trade-Weighted U.S. Dollar Index. This tracks the strength of the buck versus a basket of six major trading-partner currencies.

As you can see, it’s threatening to break out to levels it hasn’t seen in almost 15 years.

And it reveals exactly why President Trump and Fed chief Janet Yellen are on a collision course.

Big Problem

You see, dollar strength is a BIG problem for Trump…

To reduce the trade deficit – $502 billion in 2016 on $2.17 trillion in imports – he needs a weaker dollar.

A weaker greenback will make U.S. exports less expensive overseas and make imports pricier for Americans. That will help tip the balance of trade back to surplus (or at least not such a large deficit).

But Fed rate hikes will NOT weaken the dollar.

Higher interest rates drive up yields on U.S. Treasurys and pull foreign capital into America.

That makes the dollar stronger – exactly what the president doesn’t want.

– Dan Denning


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Mailbag

Yesterday’s Diary, “Jesus Was No Deep Stater,” had some readers questioning the link between religion and politics…

Politics was originally established as a means of letting the people have a say in government, but has evolved into a means of giving government leaders increasing control over the people.

Religions were originally established as a means for leaders to control the people by giving them the words of a god or gods to tell them how to behave. Politics is becoming increasingly just another form of religion, with Mammon as its god.

– C. Burton

Meanwhile, Monday’s Diary, “The Swamp Claims Its First Victim,” continues to stir up strong emotions…

Sixty-seven days into his job, and he hasn’t accomplished all of his promises.

Wow! Give a guy a break.

Not all of your endeavors have worked out smoothly. He may need a little time. Maybe he has a plan!

Maybe he is working the "art of the deal." I really doubt that everything you wanted to do came in right on schedule. Some actually failed. That’s my experience.

– G. Rose

For several years, I have enjoyed and respected the vision and problem-solving of Mr. Bonner. But he has lost it. I think the presidential election ruined his insight and perspective, and maybe his career.

He has become one of those hater/snowflakes. With his new angry and childish perspective, he no longer has an attentive clever brain. His advice is distorted by his obvious hatred of President Trump.

– E. Goett