GUALFIN, ARGENTINA – We made two bold predictions, about a year ago.

Today, we make another one.

The Flood

Our first prediction was that the Fed would never normalize interest-rate policies, allowing the free market to set short-term rates, rather than the Fed itself.

Our second was that Donald J. Trump would never follow through on his threat of a Full Retard trade war with China.

The two are related in an important way. Fed policies, and the fake money system behind them – not tariffs – caused the trade deficit with China. Prior to the introduction of fake money, not connected to gold, in 1971, the U.S. ran a trade surplus, the biggest in the world.

Now it runs the world’s biggest deficit. Why the difference? Because now it can simply print the money to pay its foreign creditors.

Before 1971, trade imbalances never got too far out of whack. They were reconciled by shifting gold from the deficit country to the surplus country. Gold is limited, so it had the effect of lowering the money supply in the deficit country, forcing up interest rates, and reducing spending on imports.

That is, the feds – and their money system – created the world that we live in… with $250 trillion of debt… and some of the lowest interest rates since The Flood.

Had America stuck with real, gold-backed money… and/or had the Fed not supported Wall Street with ultra-low interest rates and $4 trillion of new money… the situation would be much different.

There would be no trade deficit with China. There would be no $250 trillion in debt. An F-150 would probably cost less than it did in 1971, not more. The working class would have nothing to grumble about… And Donald Trump would not be president.

The Fed would not be “normalizing,” because it never would have un-normalized. The rich would not be so rich. The Dow would not be over 25,000. The government would not have $22 trillion of debt itself. And we wouldn’t be up at 6 a.m. writing this Diary.

All of these things, of course, are going away. But not soon. And not without even more outrageous and lunatic efforts to keep the jig up.

Which is where our third prediction comes in.

Common Sense Substitute

On Tuesday, Jerome Powell pronounced judgment on MMT (Modern Monetary Theory).

Recall that MMT has become very popular after AOC (Alexandria Ocasio-Cortez) proposed it as a substitute for common sense.

While logically coherent, the theory suggests that governments can – and perhaps should – print as much money as they want, until something bad happens. Since a government can print the money to pay its debts, it never has to go broke. Therefore, the idea goes, debt doesn’t matter.

Powell, in Tuesday’s testimony, said the idea was “just wrong.”

We predict he – or his successor – will change his mind.

People come to think what they need to think when they need to think it. Right now, Mr. Powell is doing just fine.

With such low rates, unemployment supposedly at its lowest level since the 1950s, and the stock market near its all-time high, he can afford to tell the truth… at least about MMT.

But the whole shebang rests on lies. Fake money. Fake interest rates. Fake “us vs. them” battles. Tax cuts without spending cuts. Social programs that we can’t afford. Military adventures that make us less safe.

In Warren Buffett’s latest letter to shareholders, for example, he described the stock market’s run-up over the last 77 years as the result of “American mettle.” That was a lie too.

American entrepreneurial mettle is measured in GDP figures, not the S&P 500. And GDP growth has been running at only 2%-3% for decades, while Buffett’s portfolio was compounding about six times that rate.

How come? It was a meddle, not mettle. The aforementioned meddling by the feds twisted the world’s finances into a grotesque shape, making the rich richer than ever… and making the common man howl.

And it is that shape that the insiders are desperate to preserve. Which is why neither the trade deficits, nor the policies that brought them about, are going away anytime soon.

Know why? Simple. It’s “us versus them.” There are those who go through life honestly – voluntarily giving and taking as best they can… and there are those who cheat and steal, or use the muscle of the government to get something for nothing.

That’s the “us vs. them” fight that really matters.

Greenspan Put

The elite began to rely on the Fed to boost its asset prices in 1987, when Alan Greenspan first rushed to counter a correction (the Crash of 1987) with a sharp cut in interest rates.

The “Greenspan put” assured investors that the stock market had been tamed. Since then, they’ve counted on the Fed to keep moving wealth from Main Street to Wall Street. (The value of stocks went up, while the working man’s time did not.)

But it’s getting harder and harder to do. Stocks are already at the top of their range. And the debt burden is so heavy, it is cracking the pavement on Main Street. Consumers and businesses cannot borrow more. That leaves only the federal government, whose credit is, according to MMT theorists, almost unlimited.

But the federal government is already adding $100 billion a month to its debt – and we’re still in a boom. And it won’t be long before the boom ends, interest rates rise, tax receipts fall… and the feds can’t pay the interest on their existing debt, let alone add more.

What are the PhDs… cronies… and hustlers to do? Admit defeat? Let asset prices collapse… dragging down their wealth and reputations? Let the stock market correct? Let the economy go into recession… or even depression… as it cleans out the mistakes built up by 30 years of phony, EZ money policies?

Imagine Mr. Powell explaining his new “hands off” policy to the hinds in Congress:

“You know,” begins Mr. Powell, “we can’t really tell you what interest rates should be. Or what stocks should sell for. And all that fake money… and that 2% inflation target… well… it was all nonsense, wasn’t it?”

Nope. We can’t imagine it either.

Instead, we see Mr. Powell changing his mind about MMT. Maybe the government should borrow and spend more, he begins to think. And then, under a dense smokescreen of theoretical MMT claptrap, the Fed will follow Japan’s central bank, buying U.S. bonds by the trillions.

Regards,

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Bill

MARKET INSIGHT: DOOM INDEX HEATING UP

By Joe Withrow, Head of Research, Bonner & Partners

The Doom Index is heating back up…

As regular readers know, the Doom Index is our proprietary system designed to alert us when stresses are mounting within the credit markets, the stock market, and the Main Street economy. We use it as a big-picture tool for measuring tension in the system to get a better idea of when a stock market crash is likely to come.

The index is made up of 11 key indicators, which feed into a scoring model scaled 1-10. When the Doom Index is within the 1-5 range, that means we expect smooth sailing in the stock market. When the index is within the 6-7 range, that’s a signal that we should be cautious with our stock investments. And when the index hits 8 or higher, that’s when we will raise the tattered Crash Flag.

Chart

As you can see, the Doom Index hit 7 this quarter – up from a 6 during the previous quarter. There were several reasons for this move…

For one, corporate bond downgrades accelerated to close out 2018, and junk bonds cracked… Though they have caught a bid during this snap-back rally we have seen in recent weeks.

Remember, corporate debt tends to be a leading indicator for the stock market. If corporate bonds are falling, it doesn’t bode well for U.S. stocks.

And, as we suspected would happen, manufacturing numbers fell hard in the fourth quarter after Trump’s tariffs took effect. This lends credence to our idea that the relatively strong manufacturing numbers we saw during the previous quarter were inflated by businesses front-loading orders to beat the trade war.

As evidence, the ISM Manufacturing Index fell 10% – its largest quarterly drop since the end of 2014. And railcar utilization fell 6%, which was its largest quarterly fall since early 2017.

Remember, we monitor railcar utilization and manufacturing activity as a proxy for Main Street economic health. A fall in these indicators could eventually translate to lower stock prices.

What’s especially interesting is that, even with these indicators falling, we saw the largest quarterly expansion of credit since 2015. Credit growth is an important indicator of modern economic health. A big spike in credit growth is typically viewed as beneficial for economic growth… and stock prices.

There are many moving parts in the credit growth number… But the cynic has to look at that suspiciously. Given Fed Chair Jerome Powell’s recent about-face on the Fed’s tightening policies, it appears the big bump in credit expansion was reactionary in the face of falling stock prices and a slowing economy.

Lastly, what kept the Crash Flag in storage for another quarter was the delayed data on U.S. building permits that just came out. We saw a 3% uptick in private building permits – suggesting that things are still moving in the housing market. Given where our other indicators stand, a poor reading here would have triggered our crash alert.

To sum up, the Doom Index isn’t saying a crash is imminent… But we are getting closer. We continue to advise caution in the market.

– Joe Withrow

FEATURED READS

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Peak Car
The American automobile… Was there ever a clearer sign of status and independence than owning your own set of wheels? That’s the way it used to be. But with ride-hailing services like Uber and Lyft now ubiquitous, some drivers are looking at their ride and wondering: Who needs it?

The Best Way to Hunt for Gold
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MAILBAG

In the mailbag: How to help the guy in Milwaukee… maybe the economy needs some price controls… and “the government comes after the little people first!”

Bill, how do you square “if the guy in Milwaukee were competitive there would be no need for a tariff” with “but the working stiff can’t compete against the pro”? If he were competitive, there would be no need to lament the inequality. I am just connecting the dots. I see the latter situation easily solved by teaching kids practical economics and finance in high school.

For the guy in Milwaukee to compete with a Chinese, Mexican, or Vietnamese worker requires him to lower his living standard to theirs. Unfortunately, that is precisely what has kept American workers’ wages dropping over the last 40 years in real terms. It is anything but win-win in this situation.

– Erich K.

The big issue right now is not whether or not you tax the rich, it is how the less well-off get enough money in their banks to consume more, and thus, stimulate the economy. Everyone knows that the rich save the most, because there are only so many yachts, properties, and fast cars you can own. Everyone knows those on under $50,000 a year spend much more, as there are certain basics you have to spend on.

The elephant in the room: Putting more money into generation rent is pointless if landlords and utilities can just hike prices. That is stealing from the rich then giving it to the landlords. So, despite shrill screams of evil about “socialism,” without some form of price controls for housing and utilities, you cannot stimulate the economy through ordinary folks spending more. Because however you give them more money, greedy landlords and utilities will hoover it all up.

– Rhys J.

I hesitate to invoke The Cosby Show, in light of his fall from grace, but today’s Diary reminded me of a scene that I happened to catch while channel surfing one day. I don’t remember the scene word-for-word, but Dr. Huxtable (Bill Cosby) was arguing with his son, who wanted to forego an advanced education for the purpose of securing success and wealth. The son stated that he wanted to be “one of the little people” whom the government would ignore. Dr. Huxtable responded, “The government comes after the little people, first!” Truer words were never spoken.

– Dale A.

Some people seem to think Trump is wealthy? I think he is in debt up to his eyeballs and won’t release any financial data because it would show he is running a scam. He is dumping taxpayer money on his golf clubs, week after week, by not going to government-run golf courses like Obama. Why do you think he won’t go to Camp David?

– Paul L.

Bill… Having owned 200 head of mama cows for years, I can relate to your roundup. I enjoy your tales of the ranching life, including your telling of the economic struggles you have experienced in the ranching operations. My advice to anyone desiring to enter the cattle business is it requires a large capital investment for what, in most years, is a marginal return. Yet, it was one of the most enjoyable businesses I was ever involved in and I loved every minute of it. So keep on losing your money because the entertainment and fun of it justifies the losses! I am not kidding.

– Bryan H.

Meanwhile, after Bill recounts the story of a horse falling on one of the gauchos, a dear reader offers some… interesting… advice.

Shoot the horse and send the saddle to Vladimir Putin.

– Robert P.

IN CASE YOU MISSED IT…

Did you attend last night’s event?

Thousands of dear readers showed up to hear what E.B. Tucker believes is the single best way to potentially make a small fortune this year.

Legendary speculator Doug Casey has used this method in the past to help him make millions. You can get all the details right here.

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