DELRAY BEACH, FLORIDA – Stocks got off to a rough start yesterday.

Heavy equipment maker Caterpillar reported punk numbers; investors took it as a sign that the world economy is slowing.

That’s our guess too.

Night Is Day

After a 38-year boom, the fundamentals have reversed. Day is night; night is day. From lower and lower interest rates, we see rising ones. From sunny, clear skies, we see dark storms approaching.

Already, the benchmark 10-year U.S. Treasury Note is yielding twice what it did at the bottom in July 2016. And all the credit that was so free and easy in the boom years, is suddenly getting tight.

China’s economy is slowing down too. The big story of the last 40 years was China’s race into the modern world. In the space of a single generation, 500 million peasants sprinted into the world economy – with real jobs and money incomes.

Of course, China did a lot of very dumb things, too – spending outrageous amounts of money on factories, apartment buildings, and infrastructure that were either never needed or never used to capacity.

So doing, China became the world’s leading buyer of raw materials. And it was also the world’s leading seller of cheap finished products.

But everything has a price – especially stupid central planning. Chinese stocks are down 20% from their peaks… and the economy, properly measured, may be effectively stalled with $40 trillion total in unpaid bills.

And now, with China in decline, the rest of the world will make less money selling basic materials to the Chinese. And it will have less disposable income to buy gadgets and gizmos from them.

Reversing Course

The world’s central banks, too, are reversing course. They’ve made the biggest Mistake #1 (lending too much for too long at rates that were too low) in history. Now, they’re struggling to make Mistake #2 (trying to correct the damage of Mistake #1 by raising rates).

The U.S. Fed, for example, is now in “tightening” mode – raising interest rates and unloading its stock of bonds (which reduces the money supply).

Frightened by falling stock prices, it is now being “patient” with future rate hikes. But it can’t abandon the normalization project altogether, not without giving up its only policy tool. So, it will continue tightening until it brings on the inevitable crisis.

And foreign central banks will have little choice; they followed the U.S. down into the debt hole. Now, they too will try to figure a way out of the deepest pit ever dug – some $230 trillion in world debt.

And talk about stupid central planning, the Christmas tax cut of 2017 borrowed from the future so corporate insiders would have more money today.

But today is already yesterday… and tomorrow will be here any minute. And now, borrowing itself is becoming a big problem.

Thanks to tax cuts and spending increases, the feds alone will have to borrow more than $1 trillion again this year. And without the central banks adding credit, borrowing becomes more and more expensive.

Borrowers compete for the little credit available, and eventually give up; they can’t afford the interest payments, much less to borrow more.

Don’t Fight the Tape

Financial trends may currently appear random… later, like a life examined in old age, the wrinkles tell a story. Etched in the lines, long-term trends appear; as they become clearer we see the story that dominated the market’s mood for decades.

Recognizing those trends is the key to making investment profits and protecting them. “Don’t fight the tape,” is how the old-timers put it. Figure out the trend, in other words, and go with it.

The long credit cycle is the most important one. It lasts a lifetime – about 70 years. That is why it is so hard to see; we rarely live long enough to become familiar with it.

The downswing of the current yield cycle (a bull market in bonds) began in 1982, when the 10-year Treasury yield was over 14%.

Since then, yields and interest rates came down, down, down… to a low of 1.39% in July 2016.

You never know for sure until much later, but that looks like the bottom has been hit. And if so, we are in a bear market in bonds… which will probably last for the rest of our lives. The last one began in 1949, and continued for the next 33 years, until 1982.

What Goes Up

Credit acts much like real money. As it expands, so does the amount of spending. The whole economy expands, pushing up asset prices, too. That’s why almost everyone loves a credit expansion.

But credit is not the same as wealth… or real money. It is just a loan… which must be paid back (or otherwise extinguished).

That’s why we have credit cycles, because the credit that goes around, comes around as debt – and it must be repaid. Nobody likes that part of the cycle.

And that is the part that is beginning now. In China. In the U.S. In stock markets. In bond markets. In real estate. In postage stamps and baseball cards. In almost everything and almost everywhere… what went up so delightfully is coming down… painfully.

So, get ready for the whining, the wailing, and the gnashing of teeth. Get ready also for political and social kvetches… and crackpot “remedies” such as higher taxes on the rich… and larger fiscal deficits.

And, oh yes, much higher rates of inflation… bankruptcy, defaults… and of course… more claptrap.

Regards,

signature

Bill

INVESTING INSIGHT: THE REAL REASON TO BUY GOLD

By Dan Denning, Coauthor, The Bill Bonner Letter

Last week, in the latest issue of The Bill Bonner Letter, I made the argument that now is the time to buy gold bullion and, if you’re a speculator, gold mining stocks.

Due to low capital investment since 2012, gold production is set to peak this year and begin a gradual decline. If a jump in demand comes (political risk, stock market crash, recession) supply won’t keep up and prices should rise.

Chart

But what if I’m wrong? Is that a question we ever ask around here? Do we ever test our theories and ideas against different views?

Yes! All the time.

According to Mark Yusko, gold will drop to $1,000 this year as consumer and government spending drive GDP and allay fears of a recession in 2019.

Yusko is the Managing Director of Morgan Creek Capital Management. He recently published a list of predictions for this year, one of many I read before writing the latest Letter. Could he be right? Of course he could!

Our guiding principle at The Bill Bonner Letter is “strategic ignorance.” That simply means we don’t know precisely what the future will hold. All we hope to do is understand its general direction and prepare accordingly.

With that in mind, if you’re buying gold because you hope it will go to $2,000, or holding off buying because you’re afraid it will fall to $1,000, then you’re thinking of gold all wrong.

In his report, Yusko also pointed out that only twice before, in 1968 and in 2000, were American investors as heavily invested in stocks as they were in the fourth quarter of 2018.

The Dow fell 36% from the peak in 1968 to the low in 1970. If you include the 1974 bear market low at 570, the total move down was 42%.

From the peak in 2000 to the low in 2002, the Dow fell 38%. A five-year rally drove stocks up again. At the low in March of 2009, the Dow was down 44% from the 2000 high.

My point: It can take years to recover after a big loss. Gold is a hedge against that loss. That’s what you buy insurance for. Not because you want it. But because it’s too risky to live without it.

– Dan Denning

P.S. As I said, neither Bill nor I know precisely what will happen next. Nobody does. All we can do is try to “connect the dots,” as Bill would say. And what we see right now is that something is very wrong in America…

If you care about privacy… if you care about your personal freedoms… if you believe in what America is supposed to represent, then you’re going to hate what I’m about to show you. I can’t give you all the details right now. But you owe it to yourself to learn about this threat, and what you can do to prepare, by going right here.

FEATURED READS

Wall Street’s Worst Fear: President Warren
The big banks on Wall Street are wringing their hands over the top Democratic contenders in 2020. Candidates like Senator Elizabeth Warren have vowed to slap the banks with fines and regulations. Here’s why “it can’t be Warren.”

Double Your Money When the Crash Comes
Most investors will be wringing their hands during the next big drop. But master trader Jeff Clark is ready… That’s because he’s developed a strategy that can double your money again and again when the market panics. Here’s how.

“The Goal Is to Automate Us”
Welcome to the age of surveillance capitalism. Silicon Valley companies collude with world governments with one goal: to keep a close eye on you. Orwell’s 1984 wasn’t wrong. It was just early…

MAILBAG

Yesterday, Bill wrote that the public was getting on the “tax the rich” train. In the mailbag, dear readers continue the conversation…

Most states, counties, and cities already tax the biggest asset many people hold: real estate. Some states tax investment assets or income instead of other income. If the federal government would do the same, it might make some sense. Allowing some level of holdings or income to be tax free, to encourage average people to hold property or invest, of course. Free other income from taxes below some level – say half a million or such. AOC and others might think about that. Of course they’d want the minimum wage to be half a million, in that case. Tax-em-all!


– Chuck B.

I read your letters for information. I am glad your newsletter is successful for you. My feeling and observation is that there is no more adolescent institution in this world than government. We can now maybe add multinational corporations to it. When governments and corporations coddle to the quarterly gratification of the constituency, or shareholders, then all common sense of financial responsibility gets thrown out the window. It seems also to me that our republican democracy is soon to fall prey to a dictatorial presidency like the old Roman Republic. At that point, freedom will be lost forever. God help us all.


– Ron A .

Meanwhile, who is to blame for the chaos in Venezuela? Readers weigh in…

America has a history of interfering with and overturning elections in other countries: Iran in the 1950s, Chile in the 1970s. What about Iran-Contra? We are better than some, but only to an extent. We’ve always been authoritarian, not democratic.


– Jean T.

People from Venezuela who came to the U.S. know the reality about capitalism. A dictator in Venezuela cannot tell lies anymore…

– Lindita M.

I’ve been to Venezuela. The drug cartels are just as controllable as any one in South America, Central America, or Mexico. The rich people there are as bad as the corrupt politicians and police.

– Jorge Z.

IN CASE YOU MISSED IT…

Are you ready for the crash of 2019?

Most investors won’t be. But there is a way for investors to not only survive, but thrive when the bear market hits. Use this strategy to double your money again and again while most investors are losing their shirts. Full story here.

image