OUZILLY, France – Both our daughters have now arrived at our place in the French countryside.

One brought a grandson, James, now 14 months old. He walks along unsteadily… big blue eyes studying everything around him.

He adjusted quickly to the change in time zones. And he has adjusted to the French culture, too – he likes gnawing on a piece of tough local bread.

But when she has trouble getting the little boy to sleep, our daughter asks Grandpa for help.

His technique is simple. He takes the boy on his knee. Then he begins by explaining the role of money in the economy, subsequent to 1971. If that fails to do the trick, he follows with a discourse on Fed policy mistakes.  

Within minutes James has fallen fast asleep… 

Secular Stagnation

The stock market is usually quiet in August.

Investors, speculators, and manipulators tend to be on vacation. They’re applying sunscreen or swatting mosquitoes rather than paying attention to their equity positions or Fed policies.

The Dow has been gently falling for the last six days. But the index still trades near its all-time high.

Friday’s GDP report brought no joy… but little worry either. The numbers showed only half the growth economists expected. Plus, the authorities revised downward the numbers from the previous two quarters.

The result: The U.S. economy grew at a pace of roughly 1% for the past three consecutive quarters. And even that is doubtful.

We explained to grandson James that the calculation of economic growth depends on something called the “GDP deflator”… which tracks changes in consumer prices, and which is subject to guesswork and manipulation.  

Given the range of error and the tendency of the feds to flatter growth, the economy may actually have been in a depression for the last several years.

“Secular stagnation” is what former Treasury secretary Larry Summers calls it. But this is just an excuse – designed to disguise the real cause of the slump he and his fellow insiders caused.

They believed they could improve the system – by managing its money supply, its interest rates, and its bank lending policies. Now, they’ve made a mess of it.

James’s face twitched when we mentioned Summers. Perhaps he inherited from his grandfather an instinctive skepticism of Summers, Bernanke, Krugman, Reich, Rubin, Yellen, Draghi… and all the other know-it-all world improvers.

He appeared to be sound asleep. But we continued anyway. (Dear readers are advised to turn down the lights and get in a comfortable, horizontal position.)

Jumping the “Hurdle”

In a healthy economy, interest rates naturally follow – very roughly – economic growth.

Little growth means little demand for savings. Companies are not expanding. Consumers are not buying. Investors are not speculating. Interest rates fall in response to the lower demand.

Then as the economy heats up, interest rates should rise, reflecting the greater demand for capital.

You will note that this is a self-correcting, cyclical system. Higher interest rates raise the “hurdle” that new ventures must face. They must be more profitable to clear the hurdle.

So, business leaders and investors must be more careful. If their project fails to produce enough new revenue (wealth) to pay the costs of the resources devoted to it – including the cost of money (the interest rate) – they will lose money.

This is the essential truth of a real economy. Capital is always scarce. You must use it wisely. Interest rates just tell you how scarce it is.

Typically, rising interest rates pinch off new ventures, cool down the economy, and then turn down themselves. Then, as the hurdle is lowered, entrepreneurs take on new projects. And the economy warms again.

From this simple description, PhD economists like Summers leapt to absurdity.

If high interest rates cool an economy… and low interest rates heat it up… all we have to do, they reasoned, is lower interest rates. Then the economy will run hot all the time!

What Recovery?

Eight years ago, the Fed – not for the first time – put this plan into service.

It lowered interest rates to the “zero bound” in an attempt to stimulate a recovery.

This way, the Fed signaled to entrepreneurs that capital was available in almost infinite amounts at negligible cost.

No need to be careful. No need to use it wisely. Just go ahead and buy… invest… speculate!

But wait… what’s this?

Where’s the recovery?

President Reagan’s budget director David Stockman calculates that the average American now earns 40% less – properly adjusted for increases in living costs – than he did at the beginning of this century.

What happened?

The feds gave the economy enough “stimulus” to raise the dead. But instead of raising GDP growth, the economy seems to have followed the Fed’s phony interest rate – down.

It must seem impossible to the childlike minds at the Fed. But depressing interest rates seems to have depressed the economy, too.

How could that be?

James stirred a little. We thought he might be waking up. So, we continued…

Dangerous Noise

In a healthy economy, interest rates mark the balance between the availability of surplus capital and the demand for it.

They contain valuable information, like the number of seconds you can hold a hand grenade before it blows up.

The same goes for money. Money is not the same as wealth any more than a claim ticket for an automobile left in a parking garage is the same as the car. The claim ticket is information, not wealth.

This is why an economy does not magically produce more wealth simply because you falsify interest rates to make more fake dollars available.

You might as well print up more claim tickets! The number of cars in the garage will not increase.

Real claim tickets are valuable information. Phony claim tickets are dangerous noise… misleading and fraudulent.

They do not make the economy run more smoothly, efficiently, and productively. They just make a mess of it… as Summers et al have done… and make people poorer.

More to come…




P.S. Here’s a photo of the water-damaged wallpaper we mentioned in yesterday’s edition of the Diary.

Portfolio Insight


The drama unfolding in Italy could shake out some major bargains for investors.

Italy is the third largest economy in the Eurozone. It is, depending how you figure it, either the eighth or twelfth largest economy in the world.

But the economy is stagnant…

Real GDP per person is lower than it was in 1999. The official unemployment rate is 11.6%. The banks are saddled with lots of non-performing assets, or “NPEs” (loans that are more than 90 days past due).

About 18% of Italian bank assets are non-performing. That’s a big problem, because banks are highly leveraged, and Italian banks especially so. You can see this by looking at equity as a percentage of assets. A 7% figure is typical. That means every $100 in assets is financed with just $7 of the bank’s own money.

It’s like a $300,000 house with a $279,000 mortgage on it. A 10% drop in the value of the house and you’re underwater. It works the same with banks.

So, even if half of those NPEs wind up being zeros, it could wipe out Italian stockholders – and cause the bank itself to fail.

That’s why Italian banks are down by more than half this year. It’s also why they trade for fractions of their book value (or the value of the bank’s assets on its books less liabilities). The market is anticipating losses.

The latest issue of Grant’s Interest Rate Observer (July 15) had a nice table summarizing the Italian banking landscape:                               


Equity/Assets (%)

Price/Book (%)

YTD Change %





Intesa Sanpaolo




Banca Monte dei Paschi di Siena




Banco Popolare




Unione di Banche Italiane








Banca Popolare dell’Emilia Romagna




Banca Monte dei Paschi di Siena, the fourth bank on that list, is one in real trouble. It is the oldest surviving bank in the world. It opened for business in 1472 and has been in operation ever since.

As Grant’s put it:

It must say something about the present era in finance that Banca Monte, founded 20 years before Columbus discovered America, is on the rocks now. After raising capital of almost 15 billion euros since 2008, the bank commands a market cap of just 909 million euros today…

On a 10-day trip through Italy with my senior analyst Thompson Clark, we stopped at Banca Monte to get cash while in Lecce, way down near the heel of that boot:

A Banca Monte branch in Italy

Well, we got cash. But we wondered how long Banca Monte had left…

On July 25, The Street reported that shares of Banca Monte were suspended from trading after falling by almost 8% after the market opened:

The plunge comes just days ahead of results from the European Banking Authority’s most recent stress tests, which are widely expected to reveal a shortfall in Monte dei Paschi’s capital buffer.

We’re not investing in Italian banks in Bonner Private Portfolio. But the turmoil has taken the market down 30% off its highs, and shaken loose some great values in global companies. In an upcoming partner letter, I’ll share more of what we found.

Editor’s Note: The next Bonner Private Portfolio letter hits inboxes tomorrow. You’ll get Chris’s full report on his trip to Italy… plus Chris’s latest stock pick – an undervalued company with a big stake in a blockbuster new drug… a drug other big players are scrambling to get their hands on.

If you’re not a Private Portfolio member yet, it’s not too late to gain access to tomorrow’s letter. Click here to learn more.

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The controversy over whether radical Islamic terrorism poses a genuine threat continues to rage in today’s Mailbag. (For more on Bill’s views on this subject, catch up here and here.)

I suggest that you just keep your head buried in the sand. Forget the lessons of history; we are more enlightened now. And, yes, “bonne chance” living in France, but keep praying that the jihadis stay out of the countryside and old houses.

– Doug S.

It’s surprising that you say Muslims are not a threat to us in the U.S. I understand that you live in a remote area, but I did not realize that you live under a rock. You are obviously a Hillary supporter with that ridiculous view.

– Ed S.

“Is there a Muslim threat in Europe?” asks Bill today and then effectively says no. “Where is the army?” asks Bill.

They’re already here. France has the largest Muslim population in Europe. And Muslims will comprise 50% of the population of Britain by 2050, if present trends continue.

– David S.

The Muslim threat has been with this country since George Washington was president. Because we didn’t have a navy to protect our trading ships, Islamic pirates were continually attacking our trade ships when they entered the waters controlled by Middle Eastern governments.

Guess what country, in the 1790s, was responsible for attacking our ships? Modern-day Libya. And the base they attacked from was Tripoli.

Washington was having to bribe those pirates with about $1 million a year until John Adams became president and built a navy to combat them. Our navy and marines attacked the port of Tripoli and wiped out the pirates.

In the Marine song, there is a phrase “to the shores of Tripoli.”

– James B.

I’m with you on the Muslim question. Muslims aren’t any more dangerous than other groups. They’re just not as good at covering up their malfeasance as some… and are victims of political and propaganda campaigns against them.

I could do without some of the actions of a minority of Muslims, but that’s something I could say of many groups around the world. I’m much more concerned about, and affected by, some of the non-Muslim miscreants – some of whom you’ve already mentioned in your essays.

Best wishes for the family get-together and property management.

– Jess T.

In Case You Missed It…

Tomorrow, Chris Mayer – one of the top stock pickers around and the Chief Investment Strategist of Bonner Private Portfolio – will reveal his newest stock recommendation.

To hear Bill explain what sets Chris apart – and why he’s investing $5 million of his family trust in Chris’s recommendations – watch here now.