YOUGHAL, IRELAND – The Dow turned down a bit yesterday. The 10-year Treasury yield held at 3.07%.

As long as neither revisits its recent top and bottom, respectively, we presume the “primary trend” for both the bond market and the stock market is down.

Everything else is just noise.

Bad Guy Syndrome

We have been exploring the “bad guy” syndrome. The U.S. has invaded 70 countries since its founding. Modern Iran: zero.

The U.S. has weapons of mass destruction and has proven that it is ready to use them; it dropped an atomic bomb twice – both times on civilians.

Iran has no atomic weapons. The U.S. has troops in Afghanistan and Iraq, within easy striking distance of Iran… and now makes demands that no self-respecting sovereign nation would ever accept.

Iran has no troops in Mexico or Canada… no way to attack America… and makes no demands of it.

So who’s the bad guy? It doesn’t matter what we think. But what do the gods think?

We’ll come back to that question tomorrow.

Rabble-Roused

In the meantime… let’s stick with the primary trend. If the primary trend for equities really is down… we are unlikely to make any money in stocks for the next 10 or 20 years… at least.

It takes that long for a bear market to run its course. Individual stocks may go up. But, unless you are lucky or very well-advised, they won’t be the stocks you own.

Nominal prices may go up, but after you adjust for inflation, you will see that you have lost money.

And if the primary trend in bonds is also down, you should get out of the credit market… and stay out… for the rest of your life.

It takes a lifetime for the credit market to complete a full cycle. So we are unlikely to see another top. We’ll be lucky if we live to see another bottom; it might come in 10, 20, or 30 years.

Investors take a beating in a primary bear market in stocks. But a primary bear market in bonds is like being a prisoner in Guantanamo – painful, humiliating, and frightening.

A Fed report out yesterday tells us that 40% of households cannot raise $400 for an unexpected emergency. One out of five cannot pay its monthly bills.

What will happen to these people when interest rates rise and easy credit disappears?

Businesses close. Households go broke. The desperate rabble gets roused and the feds panic…

And then, the torturer gets out the torch and pliers.

Swimming Naked

Yesterday came more revealing news. The Financial Times was on the story:

China’s shadow banking sector has been a major source of speculative lending to the global economy. But 2018 has seen it entering its endgame, collapsing by 64 percent in renminbi terms in January to April from the same period last year (by $274 billion in dollar terms)…

Mr. Xi clearly knows he faces a tough battle to rein in leverage, given the creativity that has been shown by the banks in ramping up their lending over the past decade. The stimulus programme has also created its own supporters in the construction and related industries, as large amounts of cash have been washing around China’s property markets, and finding its way into overseas markets.

But Mr. Xi is now China’s most powerful leader since Mao, and it would seem unwise to bet against him succeeding with his deleveraging objective, even if it does create short-term pain for the economy as shadow banking is brought back under control.

Essentially, therefore, China’s lending bubble is now history and the tide of capital flows is reversing. It is therefore no surprise that global interest rates are now on the rise, with the U.S. 10-year rate breaking through 3 percent. Investors and companies might be well advised to prepare for some big shocks ahead. As Warren Buffett once wisely remarked, it is “only when the tide goes out, do you discover who’s been swimming naked.”

Asset prices float on a sea of liquidity… credit pumped into the markets by central bankers.

But now, all of the world’s major central banks – with the exception, possibly, of the Bank of Japan – are taking their hands off the pump handle or actually draining out cash and credit.

The Fed is tightening up… raising its key rates in quarterly 0.25% mini-steps.

The Europeans are preparing to end their quantitative easing program as control of the bank moves to the Germans.

The Bank of England has shifted to a neutral policy.

And China, as seen above, is turning off the cash and credit.

Patrick Artus, an analyst with Natixis, puts the world’s total monetary base at about $24 trillion. It’s been growing for the last 10 years at a double-digit rate.

As of March of this year, it was still increasing at a 13% annual rate over the previous 12 months. This is the money that has kept the Dow riding high and that sent it over 26,000 in January.

But now, the 38-year-old tide has turned.

Over the next 12 months, Artus estimates liquidity growth of only 3%, not nearly enough to sustain financial markets or the economy.

So cover your eyes, Dear Reader. The water is receding. You are about to see some hideous sights.

Regards,

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Bill

MARKET INSIGHT: AMERICA’S STUDENT DEBT BUBBLE

By Joe Withrow, Head of Research, Bonner & Partners

The U.S. government now owns 75% of all student loan debt outstanding in the United States…

That’s the story of today’s chart, which tracks the government’s ownership of student loan debt from January 2000 through today.

Chart

As you can see, the amount of student loan debt owned by the U.S. government has exploded 2,094% higher since the turn of the century.

And with more than $1.1 trillion in student loan debt on the books, the feds now own 75% of all student loan debt outstanding.

Now think about this: 11% of the student loans outstanding are in outright default, according to the Federal Reserve. And a recent study by the Washington-based think tank Brookings Institution suggests that 40% of student loans will be in default by 2023.

We don’t know what the feds will do about this… But if nearly half of all student loans default, the loss will have to be made up somewhere. Higher taxes… higher inflation… and maybe even a debt jubilee of some kind…

– Joe Withrow

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MAILBAG

After Monday’s Diary, “Are Americans The ‘Bad Guys’?” responses come pouring in…

I believe you hit this one precisely on target. Excellent!

– Steve T.

Good perspective, Bill. I thank you for it.

– Frank R.

Spot-on! I am impressed that you, as an American, had the guts to write that article. It is absolutely spot-on.

– Riffat A.

There’s nothing eloquent for me to say about today’s column, it speaks wonderfully for itself. We should all reflect on it.

– Michael C.

Bill, I’ve been a reader for a few years, but have written for the first time today to beat your detractors to the punch! Bless you for your clear-headed observations regarding Israel, the sacred cow of American politics. You call them as you see them, a noteworthy and becoming-rarer attribute in this age of political correctness. Just saying.

– Dave L.

The only thing better than this essay to achieve world peace would be for it to take place in conversation between a traveler to and resident of another country, multiplied a few million times over. I’m reminded of the Saturday Night Live skit where “tourist” was confused with “terrorist.” The bad guys really should be more afraid of tourists and business travelers; and apparently, they are (building walls).

– Sandra K.

An interesting Diary today. In your “protest,” when the British fired over your head, you ran away. The Palestinians trying to tear down the fence did not. Granted, it wasn’t a peaceful demonstration – as the media has tried to portray. There were groups looking to breach the fence, and I would guess that, if they were successful, 10,000+ Hamas demonstrators were going to rush into Israel. And would they then peacefully demonstrate or turn into an angry, wild lynch mob?

I fully understand your viewpoint, but the demonstration was aimed at destroying Israel. They will never accept Israel and they want all of Israel back. Hamas, along with Iran, doesn’t want to coexist, but to take over Israel. And Hamas doesn’t want to be part of Lebanon, Syria, Egypt, or Jordan. So the question is back: What would you say if 10,000+ breached the fence and began killing (as they have) innocent Israelis? It is a slippery slope, and there isn’t an easy answer!

– Don W.

Lord Acton supposedly said, “Power corrupts and absolute power corrupts absolutely.” But there is another take on power which I think I got from Rajneesh (Osho): Man is already corrupt prior to gaining power. But he can only exert this power within his own little realm. He could browbeat his wife, scream at his children, kick his dog, and gain a few dollars fraudulently. But give this man power over a huge corporation or a huge country, and see what happens.

Now, he can steal some real money, and really kick some butt; he can even commit murder with immunity. Corporations are owned by shareholders as countries are owned by citizens, but in name only. The managers and the rulers can rape, pillage, and murder, while the ordinary man has to be satisfied with the illusion that he has some power through his vote. George Carlin says it best when he talks about “the real owners” in the American Dream. Thank you, Bill, for all your great ideas and wonderful writing.

– Rossco B.

Israelis are surrounded with people who hate them. Hamas hides under schools and hospitals, and fires thousands of (Iranian/Russian-built) missiles aimed at Israel from residential neighborhoods (behind women,children, and the like). They have a minister of propaganda (Nazi-style) that is constantly spewing hateful propaganda to the citizenry. The hateful killing in this neighborhood has been going on since before Christ was born. I doubt it will ever end. But we (the USA), at least up until now, have defended the helpless, the poor, and the downtrodden.

You bet we support Israel and flex our muscles at anyone who acts like Iran/Russia/Hamas and their ilk. Unlike our previous president, I don’t believe we have to apologize for having greatness in the world where most people would like to live. Did I read your piece wrong, or did it have Obama overtones?

– George M.

I’m sure, sure, sure you’re going to get oodles of hate mail from people who have a dog in this fight. But what you have said is right, and it needs to be said by more leaders in business and the public sector – people who have a pulpit (or platform)!

– Edmund B.

Your commentary is very interesting. But all you talk about is restraint on Israel’s part. You don’t comment that Gazanians also had guns and that they were chanting, “Kill the Jews and cut their hearts out.” Are you now also becoming part of the fake-news sources? I did not see one word by you about the terror tunnels. You should take a good look at Israel – a flourishing economy, major scientific works (both medical and technological), green fields, and farms with real grass.

Cross the border and what do you see? Desolation and poverty. Is that Israel’s fault also? One would think that if your neighbor was doing well, you would want that also. But no, instead of doing better, they want to destroy everything they see. One should look at their leaders, who want to keep them uneducated and poor – it makes them controllable. Where is everybody? Do they have their eyes shut?

– Joel G.

Yes, thank you, Mr. Bonner. Israel has become an aggressor state; of course, only with our unrestrained help. Power corrupts, as always.

– David S.

IN CASE YOU MISSED IT…

Jeff Brown, Bill’s top technology guy, was at our South Florida offices recently…

Just a few weeks earlier, he was at an invitation-only meeting in the Bahamas. Billionaire hedge fund managers, high profile CEOs, and Silicon Valley venture capitalists were in attendance.

Jeff told us about one specific meeting he had. The details could make you a fortune with a piece of emerging tech. Get the full story here.

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