Editor’s Note: In February, the Dow experienced its largest one-day point drop in history. And just last Thursday, the index shed over seven hundred points in one day of trading.

For our weekend Diary, we asked Bill’s coauthor on The Bill Bonner Letter, Dan Denning, to share what’s causing today’s volatility. Below, Dan shows the source of today’s trouble and reveals how you can protect your wealth from what’s coming next…

In late January, I wrote to you and warned that the stock market was an avalanche in the making. All it needed was a gunshot to set it off.

That gunshot went off four trading days after I wrote to you. I’m talking about the “trigger” that led to a 10% correction in the S&P from an all-time high. It was the fastest such correction ever, according to Ryan Detrick of LPL Financial Research. And the Dow’s 10% correction was the fourth-fastest since 1897.

If there’s one point I could make to you today, it’s this: You ain’t seen nothing yet.



Dress Rehearsal

The kind of move Bill and I are expecting isn’t a correction. It’s a cyclical peak, the crumbling of a great mountain of leverage (margin debt), and an even greater mountain of speculation (not to mention a whole continent of mindless buying of overpriced tech stocks via passive index-tracking and exchange-traded funds). It’s a complete reset of the American financial system.

This is a system burdened by massive and unpayable public debts and governed by inept and corrupt policymakers. While you weren’t looking, they added another $1 trillion to the national debt in the last six months.

And in case you missed it, both houses of Congress were presented with a 2,300-page “omnibus” spending bill for the federal government earlier this week. They were given less than 24 hours to read it before voting. What’s included?

  • There’s a total of $1.3 trillion in spending, more than in any single year in the Obama era…
  • …$700 billion in spending on defense in 2018 and $716 billion in 2019, which is more than 36% of the global total, according to Forbes, and more than the combined spending of China, Russia, Saudi Arabia, India, France, the UK, Japan, Germany, South Korea, Italy, Australia, and Brazil…
  • …a $200 million INCREASE in funding for the Internal Revenue Service for a total of $11.43 billion (in 2018 alone); $300 million in funding is dedicated to implementing simplified forms and procedures from last year’s tax cut…
  • …and the border wall? It’s funded to the tune of $1.6 billion for a 30-mile stretch.

Does that sound like draining the swamp to you?

Perhaps not coincidentally, and also related to fears of a coming Trump trade war, the Dow Jones Industrials fell over 700 points on Thursday and closed near the session low (typically a bad sign for the next day’s open, especially going into the weekend).


This is the chart of a troubled financial system. A system where phony quantitative easing (QE) money has pumped up stock values by no less than $10 trillion over the last 10 years. A system where sound money is a dead concept and cash is headed to the gallows.

The 10% correction in February and the almost 3% drop in the Dow on Thursday are small previews of how quickly something more severe could happen. The speed of the moves proves how fragile the market is. There’s more where that came from.

Think of this as a dress rehearsal.



Not to beat a dead bull, but the February correction was easy to see coming. And we’re not out of danger yet. If you look back at stocks in February, you see that all of the valuation metrics were off the charts.

They still are.

It’s why I told you in January that the market was like an avalanche in search of a gunshot. That gunshot came on February 2 in the form of a report on rising wages.

The conventional wisdom is that the wage report stoked fears of higher inflation in 2018.

Higher inflation would give the Federal Reserve wiggle room for three or even four small interest rate rises this year. Both stocks and bonds shuddered at the thought.

The Big One

If February’s 10% correction was a dress rehearsal, then the big one is still to come. And there’s plenty of reason to think there is room to fall.

For instance…

The market-cap-to-GDP ratio peaked on January 26 at 150.8%. Even after the correction, it stands at 143%.

Robert Shiller’s Cyclically Adjusted Price-to-Earnings (CAPE) ratio, which looks at the current price of the S&P and compares it to average earnings over the past ten years, is at 31.8. The all-time high is 44.19, reached in December 1999. Stocks are still expensive by historical standards. Very.

And margin debt hit $642.8 billion in December 2017, according to the Financial Industry Regulatory Authority (FINRA). I told readers of The Bill Bonner Letter back in August 2017 that total margin debt stood at $540 billion. But that was just for margin debt of NYSE member firms. The FINRA data includes other firms in addition to the NYSE.

The NYSE, incidentally, no longer keeps margin debt data on its website. But net margin debt, or margin debt as a percentage of the total market value of NYSE-listed stocks, hit 1.31% in December 2017. That was a new all-time record. The previous record was 1.27% in 2000, according to Goldman Sachs. The data goes back to 1980.

By the way, there are several versions of what’s called “the Buffett Indicator.” The one I prefer is dividing the market capitalization of the Wilshire 5000 (around $28 trillion) by the most recent nominal GDP number from the Bureau of Economic Analysis ($19.3 trillion).


No matter which one you use, they all show markets being overvalued.

Source of Trouble

They may be boring, but if you want to know where trouble is coming from, you’re going to have to watch interest rates. The meeting notes from the January 30–31 meeting of the Federal Open Market Committee (FOMC) were received “hawkishly” by investors.

By that I mean there was nothing in them to change the belief that the Fed could hike interest rates three or four times this year (presumably by a quarter point, or 25 basis points, each time).

And during his first FOMC meeting on Wednesday, Fed chair Jerome Powell did announce a quarter-point rate hike.



Goldman Sachs reckons if the 10-year rate gets to 4.25% by the end of the year, stocks could fall by 25%. That’s an overly complicated way of saying that debt is a drag on growth. When credit growth slows and rates go up, debt gets more expensive (and outstanding debt gets more expensive to service).

If that sounds gloomy, the below chart from the Fed confirms it. The grey lines on the chart are recessions. You can see that nearly all of them are preceded by a cycle of rate rises by the Fed.

We’ve had six quarter-point rises in the Federal Funds Rate since 2015. How many will it take to cause a recession?


Definacialize Your Life

Now is the perfect time to start “definacializing” your life. That means reducing your exposure to an overly complicated financial system that, either because of outside attack or its sheer complexity, is prone to collapse.

One way to do that is to review the asset allocation strategy that I shared with you recently. Bill and I are calling it the “new permanent portfolio.” It’s designed to prepare you for any scenario the markets can throw at you.

Also, check back on the five tips for preparing for an uncertain future that I also shared with you recently. This isn’t strictly investment advice, but it’s a way to help you prepare for the unknowable future. I practice these habits in my own life, and I find myself all the better for it.

Don’t wait for the bang. Use this time to implement what we’ve suggested. As I mentioned above, February’s correction was just a dress rehearsal. The main event is yet to come…


Dan Denning
Coauthor, The Bill Bonner Letter

P.S. Thursday’s 724 point plunge on the Dow left it just 97 points above the “correction” low it hit in February. But as I’ve shown, another correction is coming. It will be even bigger. And when it happens, it may not be an accident. The coming crisis may be orchestrated by a group right here in America. I call them “the Oathkeepers.”

The mainstream media won’t pick up on this. But I recently published a book with the whole story. I reveal who the Oathkeepers are, what they’re planning for America, and what you can do about it today. Get the details here.