Gold News

Sell-Off Inevitable in Stocks

Ready? Cos few people are...

STOCKS are still near all-time highs. Unemployment is at record lows. The expansion, which began 10 years ago, is now the longest on record, writes Bill Bonner in his Diary of a Rogue Economist.

A prudent investor should expect these conditions to change.

World trade is slowing. Bonds are signaling a recession ahead.

The entire spectrum of US Treasury bonds is now trading below 2% yields, with $17 trillion of bonds worldwide with yields below zero.

No one knows what that means, but it appears to be the largest bond bubble since the 15th century. (High bond prices = low yields.)

In the stock market, volatility has increased; each headline or tweet about the trade war with China seems to bring on a twitch.

Here at the Diary, we believe that Mr.Trump wants to settle up with the Chinese, proclaim victory, and win re-election in 2020.

But wars can take on a life of their own; Mr.Xi may not want to play along.

Meanwhile, investors have learned that it pays to front-run the Federal Reserve.

They believe the central bank will come forward with lower rates and probably quantitative easing too. This may mean another big "melt-up" in the stock market before the inevitable sell-off arrives.

But as always, nobody knows anything.

That is the immediate outlook, but let's step back further...

We began writing this Diary 20 years ago. Until then, we'd been primarily focused on building our own little publishing company.

We didn't really know much about economics.

So we simply applied common sense and tried to connect the dots between what was going on in the financial world and what we could learn from reading the great classical economists – Smith, Bastiat et al. our poor, long-suffering dear readers must have cringed as we stumbled and erred...sometimes wrong, sometimes right...and always in doubt.

Little by little, the dots came together. We didn't know any more than they did. So we discovered the world of economics together.

But it took a long time.

You can't really develop a sensible or useful view of an economy by spending a few years in school or in a library.

An economy is much more complicated than that. It's a natural thing...and like all nature's creations, it is infinitely complex...a vast and intricate tableau that can't be fully rendered in numbers nor reduced to only two dimensions.

It is not merely supply and and ask...growth or recession. Nor is the "economic man" at its center anything more than a simpleton's fiction.

In theory, he is supposed to rationally calculate where and how he will get the best deal for himself.

In practice, he is a real man...a mess of prejudices, misapprehensions, and contradictions.

Getting a handle on economics requires more than books and theories. It needs poetry, psychology, and (as Mike Tyson remarked) a punch in the face from time to time.

In our case, we still had the bruises from starting a business and working at it for more than a quarter of a century.

Raising six children and operating a small farm helped too. (You can get away with BS when talking to earnest adults, but spouses and children see right through it.)

Economies do not exist in a vacuum...nor do they take their shapes from an academic's imagination or a politician's promises.

Which is why so much of what you hear from academic economists (who often have no idea of how real wealth is created)...

...or from politicians (who have spent their whole lives destroying wealth rather than creating it)...

...or from Wall Street shills (who want to separate investors from their money) is so puerile and hollow.

One of the dumb ideas now making headlines, for example, is that governments should take advantage of extra-low interest rates to borrow money and "invest" it.

Respectable economists believe it. Democrats believe it. Republicans believe it. And the public believes it too.

"Even if it produces very low rates of return," they will say, "it will pay off in the long run."

But anyone who has been in the real business world knows that you can go broke many times before the long run finally arrives. And just because interest rates are low doesn't mean you're not going to lose a lot of money on a dumb project.

Producing a profit is hard work. Everybody is against it. Employees want higher wages. Suppliers want higher prices. Customers want lower prices. It's almost a miracle that there's anything left.

People on the assembly line are not expected to know how their employers make profits.

But often the corporate executives themselves have no idea either. Nor are even the most diligent and intelligent entrepreneurs able to recognize the obvious weaknesses in their business plans.

As for investors, when the wind is at their backs, they will put their own hard-earned savings into the most preposterous contraptions that ever got off the ground...and lose every penny when the turkeys crash.

Government employees – with no experience with real businesses or investments, no skin of their own in the game, no incentive to produce a profit, no knowledge of the industry they are entering, and conflicting goals that often have nothing to do with getting a decent return on investment – are very unlikely to succeed.

It is much more likely that the "investment" funds will be completely wasted.

"But wait," the economist will say. "When the cost of capital is zero...what difference does it make? They might as well try."

Wrong again. Real capital – savings, time, resources – is precious.

The feds may be able to print up an infinite quantity of "money", but they can't print time.

And when time (and other real resources) is wasted...there's no way to get it back.

Of course, at first the loss is barely noticed. We live in a rich country in a rich world. We can afford some boondoggles and waste.

But the nonsense tends to accumulate.

As people see others getting paid off by a foolish government, they get in line.

The payoffs increase...the claptrap multiplies...and people get poorer.

And here is another thing that you can't learn in school and almost no politician or professional economist will admit.

An economic system is not a machine. There are no levers you can pull to make it work better. There are no knobs that the PhDs at the Fed can turn.

Breakthroughs in DNA sequencing or communications technology may produce booms and busts in an economy, but they won't change the nature of the economy itself. Nor will they give humans any way to control it.

An economy is a moral system.

We don't mean "moral" in the sense that you will go to Hell if you don't save your money. It's moral in the sense of "the moral of the story".

If you spend more than you earn...borrow too much...loaf...squander your resources...falsify your prices...counterfeit people to do nothing...start wars...block trade...and overregulate, bad things will happen.

Always have. Always will.

The technical world may march forward into a glorious future of everlasting progress.

But the economic world merely goes 'round the block and slips on the same banana peel every time.

New York Times best-selling finance author Bill Bonner founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group exposed and predicted some of the world's biggest shifts since, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and the election of President Trump (2016). Sharing his personal thoughts and opinions each day from 1999 in the globally successful Daily Reckoning and then his Diary of a Rogue Economist, Bonner now makes his views and ideas available alongside analysis from a small hand-picked team of specialists through Bonner Private Research.

See full archive of Bill Bonner articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

Follow Us

Facebook Youtube Twitter LinkedIn



Market Fundamentals