Dear Diary,

The Dow rose 185 points on Friday. Gold lost $1.50 an ounce.

We spent the weekend here at our place in France painting old windows, while observing the customs and culture of young adults.

Several of our children have come to visit, bringing friends with them. We ended up with a group of a dozen or so twenty- and thirty-somethings.

One of the young men here reminds us of the French film star from the 1960s Alain Delon. Tanned. With dark, cropped hair. Dark eyes. Wearing a silk scarf.

One of the young women looks as though she could be a move star, too. Dark, curly hair. Beautiful eyes. Flirtatious. Perhaps “flighty,” too.

Our first observation is that these young people get up late. We rarely lay eyes on them before noon. Sometimes, late-night parties and jet lag combine to produce bat-like schedules. They sleep all day and come out after the sun goes down.

Last night, they all went down to the pond and made a campfire. They were still there when we went to bed.

“Oh… come sit down. How nice to see you for breakfast,” we said to one this morning. “Glad you got up early.”

“Uh… no… I was just talking with Henry. Now I’m going to bed.”

“You mean, you’ve been up all night?”

“Yeah… ”

Sketchy Lending

We have been exploring how the feds’ funny money policies have corrupted our society in remarkable and unexpected ways… and lulled investors asleep.

Could these strange sleeping habits be a result of artificially low rates?

Unable to get a purchase on the idea, we conclude that not everything is a feature of monetary policy.

Still, it is amazing how much of what we take for granted is a consequence of this exceptional monetary system. So, we’re devoting the upcoming month’s issue of our new project, the Bill Bonner Letter, to discussing scams, hustles and hoodwinks of the EZ money era.

After we finished writing this month’s “beta” issue, E.B. Tucker, our lead researcher, sent us yet another example:

Remember Dionne Warwick’s late night infomercials offering the answers to all life’s problems for a $3.99/min psychic consultation? That was the Psychic Friends Network.

Now it’s entering peer-to-peer lending! It bought 321 Lend, Inc. this month.

Last year was a $5 billion year for P2P lending… and there’s huge upside.

The longer the fed keeps rates at 0%, the more “investors” will be willing to fund loans to sketchy borrowers.

And here’s the Wall Street Journal with more:

Governments and companies around the world are borrowing cash they won’t have to repay for at least three decades, seizing upon this year’s unexpected fall in interest rates to lock in cheap financing for as long as possible.

Global sales of sovereign and corporate bonds that mature after 30 years have reached $142.5 billion this year as of Tuesday, a 22% rise from the same period last year and a 55% jump from the same period in 2012, according to data provider Dealogic.

Their growth far outpaces sales of government and corporate bonds due in 30 years or less. Those bond offerings totaled $5.236 trillion so far this year, a 4.6% increase from the same period in 2012.

Why the rush to ultra-long durations?

Borrowers want to take advantage of low rates. For their part, investors want to get a little more yield.

Typically, the longer a bond’s duration, the higher the yield. Because time multiplies risk. The longer into the future you go, the more likely it is that the issuer will go broke… and rising rates will push down the price of your bond.

In the world of super-low rates and super-easy money, over the short run few debtors go belly up. In the long run all of them do. The credit cycle turns against them. Financial shocks bash them. And geopolitical disasters catch them unaware.

In a world of zero-interest rates, investors stretch for yield. It is just a matter of time until they pull a ligament.

Regards,

Bill

Market Insight:

One of the Few Investments That Will Survive the Coming Downturn

From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners


One of the questions we’ve been asking ourselves at Bonner & Partners is how to take advantage of the Fed’s ultra-low interest rates.

It’s a question I put to Bill when I interviewed him for the August issue of Bonner & Partners Investor Network.

If you’re not yet familiar with Investor Network, every month I sit down with one of the investment gurus in Bill’s “inner circle.” We talk about the influences that made them the master investors they are today… and about their approach, and their philosophy, for making money in the markets. (We’ll add you as a subscriber to Investor Network when you claim your free copy of Bill’s book The New Empire of Debt.)

Then we share it with subscribers as a print Q&A. (If you’ve read Jack Schwager’s Market Wizards books, you’ll know what I’m talking about.)

Last month, Bill talked about his new book, Hormegeddon, and why he believes the world’s financial system is headed for an even bigger meltdown than the one that struck in 2008.

I asked Bill the same question I ask all the investment gurus I interview: Is there any specific investment or strategy you like right now? Here’s what he told me:

In theory, I want to take advantage of artificially low lending rates… and use the money in a way that will bring real growth and real wealth. The idea is to take the Fed’s EZ credit and use it to build assets that won’t be wiped out when the cheap money disappears. Things like real estate, farmland, gold, etc.

You can do this in any number of ways. What you want is a company that is using cheap funding to add real output capacity. A mining company, for example, that is expanding its production. Or a timber company that is planting more trees. Or a housing company that is adding units.

But a word of warning to your readers. These are hard to find right now. Because the central bank-fueled global asset-price bubble has forced up asset prices to the point where these sensible companies are too expensive.

But one investment Bill reckons might actually benefit from the current situation is pawnbrokers. That’s because pawnbrokers are perfectly suited to surviving the prolonged downturn that Bill sees ahead.

According to Bill’s lead researcher, E.B. Tucker:

Pawnbrokers are like financial firms, but with none of the risks most lenders face. Payday lenders have to make sure the borrower doesn’t get fired. Subprime auto lenders face a different problem: Their collateral has wheels.

Pawnbrokers still cater to folks further down the economic ladder. But as Bill told me, he sees that as a “big advantage.” Because the number of potential customers is growing…