The Dow rose 91 points yesterday. Gold was flat – after getting battered last week.
Today, we go even farther into the unknown… beyond eventually and past sooner or later… to what happens next.
Specifically, we don’t think central bankers are going to take the end of the world lying down. They’ve got tricks up their sleeves. These are not new tricks. They’ve been used many times in many different forms. But they’ve never been used on the scale we now foresee.
But before we begin guessing, let us tell you a bit about what is really happening here at Finca Gualfin, our ranch here in northwestern Argentina.
Three days ago, Jorge – the farm manager – came to us with a problem:
“Señor Bonner, we found two calves dead. They looked fat and healthy. I’m afraid it is a disease called la mancha. I saw it many years ago. Healthy young cows just all of a sudden fall down and die. It almost wiped out our herd.”
We still don’t know what la mancha is. But it is evidently not something to trifle with. Word went to Salta, a city about six hours away, that we had an emergency. A veterinarian advised us to inoculate the whole herd. Within hours, the medicine was on a bus bound for the hamlet of Molinos, about an hour and a half from the ranch.
The next morning, all the hands were turned out – including your editor. We mounted up and headed out to the campo – an immense valley of some thousands of acres. Our job was to sweep the valley of all the cows…driving them to the main corral, where they would be vaccinated.
The operation took three days. Your editor was probably more of a liability than a help. Driving cattle is not as easy as the local gauchos make it look.
When the Debt Bubble Pops
Meanwhile, away from the ranch…
The end of the world comes when the debt bubble pops. But before we get there, we will see more attempts by central banks to keep the debt bubble expanding. From Richard Duncan, author of The New Depression: The Breakdown of the Paper Money System:
Given that the Fed has been driving the economic recovery by inflating the price of stocks and property, it is unlikely to allow falling asset prices to drag the economy back down any time soon. To prevent that from happening, it looks as though the Fed will have to extend QE into 2015 and perhaps significantly beyond.
So far, so predictable. But there is a “sooner or later” for QE, too. There will come a time when the world can take no more debt… and at that point, the debt bubble will finally blow up.
Then we get the equal and opposite reaction. Asset prices that have been inflated by debt will be deflated by debt de-leveraging. A depression will most likely follow.
This is not a bad thing… not at all. Contrary to popular opinion, crashes and depressions do not destroy wealth. They merely tell you that the wealth you thought you had really didn’t exist.
As long as the EZ money flows freely, mistakes remain invisible. Rotten companies are kept alive. Bad speculations seem to pay off. Debts that can never be paid are still serviced. Stocks with little or no earnings shoot up.
Then when the bubble explodes the mistakes become painfully obvious. Phony gains return from whence they came. Investors reprice assets at more realistic levels. (After first going to unrealistically low levels and presenting opportunities for patient investors with plenty of cash onboard).
Only then, when the economy has been thoroughly thrashed can it get up, dust itself off and get back to work.
But central bankers are not likely to let it happen. They’ve made their careers by pretending to improve the economy. When the bust comes they will swing into action with more quack cures.
That is when we arrive at the second stage of the coming debt deflation. It is when we will wish we had bought more gold… more real estate… more old cars and new potatoes.
Most likely (but this is not guaranteed) central banks will find new and bolder ways to get money into consumers’ hands. (Remember Ben Bernanke’s “helicopter” speech?) This will be followed by a crisis of a different sort: high levels of consumer price inflation.
Put on your seat belt. It’s gonna be one helluva ride.
Regards,
Bill
Market Insight:
Wall Street’s Dirty Secret
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners
Wall Street has a dirty secret…
On average, over a five-year period, about 25% of actively managed funds outperform their indexes.
That’s just one in four funds that do a better job, on average, than an index-tracking ETF or passive mutual fund.
Another roughly 25% will underperform by a small amount. Another roughly 25% will underperform by a large amount. And another roughly 25% will shut up shop before five years is over.
In other words, by investing in actively managed funds you are giving yourself 3-to-1 odds of underperforming a passive index.
Here are the results from the S&P Indices Versus Active Funds (SPIVA) US Scorecard for 2013. It shows the percentage of active funds outperformed by the index over five years ending 2013.
As you can see, for the five years ending in 2013, small-cap funds did slightly better than usual. The small-cap index outperformed just 66.8% of them for the period. Large-cap funds did a couple of percentage points better than the average. And mid-cap funds did slightly worse than average.
This is strong evidence that you’re far better off holding plenty of diversified passive index funds in your portfolio, than chasing after elusive… and expensive… actively managed funds.
Of course, you can seek out some outperformance with a small portion of your portfolio… by stock picking or getting someone else to stock pick for you.
Just be aware that the odds are heavily stacked against your beating a passive-investing strategy over the long run.
