NEW YORK – “Not a bad view. That’s the mayor’s house right beneath us.”
We were on the 16th floor of a new apartment building, looking out over the East River.
With us was President Reagan’s former budget advisor and Wall Street veteran David Stockman – a man who has been closer to the Bubble Epoch than almost anyone.
The Dow rose 183 points yesterday – or just over 1% – after starting the day in the red.
“I was there at the creation,” said David.
“After leaving government, I went to Salomon Brothers in the late 1980s. We were just starting to put together packages of mortgage-backed debt.”
Debt Curse
Bubble finance has taken many shapes and sizes.
Mortgage-backed derivatives. Private equity. Junk bonds. Student debt. Subprime auto loans. Stock buybacks. This debt was a curse to most Americans. But it blessed Manhattan.
The weekend’s Financial Times included real estate listings from New York City.
There was a penthouse apartment for sale on the Upper East Side for $60 million. Luxury digs on the West Side were going for $30 million… another for $16 million.
You don’t make that kind of money parking cars… or making them. So, if you want to buy one of these places, you almost have to work in finance.
Most people have no idea how the financial world works. They think investments go up or down and you make money depending on your luck or your skill – just like any other game.
They don’t know the game is rigged.
Central banks make credit available to the big banks at preferential rates. The banks then earn a fat “spread” by making loans to government, industry, and households.
They make money lending… and then, they make money again by packaging and selling the debt to investors, pension funds, and insurance companies.
Everything is fine until the credit cycle turns down. Then marginal debtors can’t pay and marginal (subprime or junk) debt loses value.
Stocks and real estate go down, too. Everybody loses money. And everyone wants the Fed to “do something.”
What can it do?
Make credit even cheaper!
Bubble Finance
Stockman was present at the creation of the whole Bubble Epoch. In 1981, President Reagan appointed him to be his first budget director. Four years later, he quit in disgust.
“Funny, isn’t it? I was alarmed by a national debt of $900 billion. Yesterday, it went over $19 trillion. And nobody cared.”
President Nixon made the Bubble Epoch possible by going off the gold standard in 1971.
No “golden anchor”: no limit on how much money and credit you could create.
But the Bubble Epoch didn’t really begin until 10 years later under “The Gipper.”
Stockman battled the big spenders in the Republican Party – and lost. After he was out of the way, Reagan ran some of the biggest deficits ever.
Soon, debt was out of control everywhere – in government, industry, and private consumption.
“We must be nearing the end of this,” said Stockman. “I expect the whole world economy to plunge into deflation and recession.”
Regards,
 |
Bill
Further Reading: Bill’s urgent warning lays out the full details of how the deflation and recession predicted by David Stockman will unfold.
It’s a story so remarkable that you’re unlikely to believe it at first. But when it finally hits, every service you’ve come to depend on – from your bank to your grocery store to our federal government – will shut down. This may sound outrageous. But it’s simply the logical conclusion of Bill’s decades of research.
And that’s why he’s gone to such lengths to explain what’s really going on… Because understanding the situation is the first step in protecting yourself. Find full details here.
Market Insight
The U.S. dollar is the major driver in emerging market boom and bust cycles.
Just look at the chart below. It tracks the U.S. dollar against emerging market equities over the last 35 years…
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The dollar bull market in the 80s caused the Latin American crisis. It also caused the Asian financial crisis in the 90s.
The dollar bull market today will cause another emerging market crisis. The iShares MSCI Emerging Markets ETF (NYSE:EEM) is already down 34% since September 2014.
Editor’s Note: Next week, Tom will host a three-part training series focused on income investing.
In it, he’ll reveal his top technique for generating income in a bear market. Developed over eight years of testing, it’s a virtually “can’t miss” strategy that has shown to be successful 96.2% of the time.
To register for Tom’s free training series, go here now…
Featured Reads
What to Expect From Oil Prices in 2016
Yesterday, oil prices soared 8%, passing $32 per barrel. One longtime energy expert thinks it’s the sign of things to come, and he’s laid out a calendar of oil’s key benchmarks over the 12 months.
Update on the War on Cash
Germany has banned cash transactions over €5,000 and eliminated the €500 note. According to government officials, the drastic measures were necessary to fight terrorism.
U.S. National Debt Surpasses $19 Trillion
Last Friday, the U.S. national debt surpassed the $19 trillion mark for the first time in history. That’s just over 13 months since it crossed the $18 trillion threshold.
Mailbag
A bit of a mixed feelings today as readers weigh in with their cheers and jeers – certainly more of the latter – for Bill’s recent Diary issues about the Iowa caucuses and Sarah Palin.
This is the best article I read in my whole life!
Love you, Bill Bonner. Blessings and long life for you.
– Sally B.
I’m always entertained by your articles and the analogies, clichés and sayings you use, but I never heard of an “election” defined as “two wolves and one lamb voting on what to have for dinner.” I’ve always heard that definition applied to “democracy.” Could be both I guess.
– Joe S.
“Hayseed cronies from the corn state”… Methinks you’ve been riding your horse too high into the Andes. It’s affecting your brain.
Or do you just enjoy pissing people off?
– Eddie M.
Calling the citizens of Iowa “hayseeds” is not worthy of a fellow citizen –not worthy of you.
Individually we are but one small voice – perhaps even a squeak – but the story of America is that collectively we have a powerful, self-governing voice.
Don’t discount us. It makes you present yourself as a… well… snob.
– Doug S.
You might want to be more careful of what adjective you use to describe farmers. “Hayseed” is not complimentary.
– Bill P.
If you can’t understand what Sarah was saying, I sure wouldn’t take your advice on anything.
– Robert C.
Thanks for your “In Praise of Sarah Palin” piece, it lets me know what a left-wing idiot you really are.
– Darryl D.
Does Bill owe two more apologies, or was he just expressing his opinions? Let us know what you think. Write to us at [email protected].
In Case You Missed It…
Intelligence and investing expert Jim Rickards is urging everyone to watch his video update. In it, he reveals the secret method that Washington has been using to predict market moves… one that he’s now using to take the guesswork out of investing.
