Welcome to Bubble Land

The markets are quiet.

Stocks are still near record highs. Gold is nearing its 52-week low.

What do you think?’ asked an interviewer who reached us by phone yesterday. ‘Bank of America predicts a big bear market in the second half of the year. Should investors be worried?

Of course they should be worried,’ we replied. ‘But they shouldn’t wait until after June. They should be worried now.

All news is fake news

But before we go on, we warn readers…

As we were speaking, a thought crossed our mind, like a surfer disappearing into the foam. There is not much ‘truth’ to what we had to say. Not that we said anything we didn’t believe…and not that what we said was incorrect…

…but truth is a different matter…

It presumes real knowledge, not just guesswork and suppositions.

All the news in economics is fake news. As for the facts, we don’t believe any of them, unless we made them up ourselves. And the more you are sure that you are right, the more you are doomed.

In economic forecasting, certainty varies proportionally with ignorance: Find someone who knows what will happen and say hello to a moron.

While we’re at it, we’ll give you another principle: Truth diminishes by the square of the distance from it, the time elapsed since it happened, and the scope of it.

The farther you are from an event…the earlier it happened….and the bigger it was…the less you really know about it. This is important for real investors. It explains why investing from news reports is a losing proposition.

On the other hand, you can gain an advantage by getting very close to the companies you own. (More to come…)

Then, without any further reflection, we laid out the year ahead…

Bubble land

We continued our interview…

‘Markets don’t operate on a timetable. They go up. They go down. When they are near record highs…the best bet is that they will be lower in the near future. When they are near record lows, the best bet is that they will soon be lower.

‘The feds have been pushing credit into the markets for the last 30 years. As we get more and more of it — like a guy with a drinking problem — the markets start swaying. They become incoherent, volatile… and unreliable.

‘In the last three decades, we’ve seen three 1929-style highs. The first was in 1999 with the dot-com bubble…the second was in 2007 with the bubble in housing and finance. Now we have another bubble spread over several sectors: student debt, auto debt, some housing debt (they’re building $100 million spec houses again)…and tech stocks.

‘Just like 1999, we’re seeing another tech bubble, with just the four leading stocks — the “FANGs” (Facebook, Amazon, Netflix, and Google) — worth more than $1.5 trillion. These prices only make sense in a bubble. Earnings will never catch up.

‘And guess what? These stocks represent half of the entire gain from the stock market over the last year.

‘Yes, we’re in Bubble Land. And bubbles are always on the lookout for a pin.

‘In the next few weeks, there will be plenty of them.

‘First, they’ll brush up against a debt ceiling. Then, we’re going to see a fierce and nasty argument about medical care in the US. The Republican majority is probably going to break into factions, thanks to the deep contradictions between Trump, the conservatives, and the party hacks.

‘There is also the Fed’s rate hike coming up. And the tax cuts — which were supposed to light a fire under the economy — will most likely be extinguished by partisan swamp fighting…and a ballooning deficit.’

Here comes QE4

Hey, I thought Trump’s first order of business was to drain the swamp,’ came the follow-up question. ‘What happened to that?

Not going to happen,’ we replied. ‘That is only something you could do if you could get the entire nation behind you…right at the beginning.

You’d have to move fast, keep the insiders off-balance, and speak directly to the people about things that really matter. You’d have to go on TV…something similar to de Gaulle’s famous 1961 speech.

A coup by a quartet of retired generals began in Algeria. De Gaulle got wind of it, put on his uniform (he was in his 70s and had been retired from the army for many years), and went on TV.

He explained the threat…appealed to the French to help him protect la République…and the traitors were arrested. The coup was over.

Team Trump might have pulled off a similar feat in January or February. But the opportunity for real change was squandered with silly tweets. And that assumes they even wanted to do such a thing, which is unlikely.

Now, here’s what will happen. Sooner or later — in the first half or the second — one of these pins is going to connect with the bubble. For the third time this century, the stock market is going to fall…hard. This time will be worse than it was before…because the economy is much weaker and there’s much more debt.

GDP growth, for example, has been running at less than half the rate it was before the 2000 crash. Federal debt is three times as high. The 10-year Treasury note yielded more than 6% back then. Now businesses have gotten used to less than 1%.

Corporate earnings were growing at over 7% per year back then. Now they’re falling.

This next crisis has the makings of a real doozy. We could see US Treasury yields go negative as people rush for safety. And we’ll see stocks crash to half their prices today.

And we know what the feds will do, too. They’ll come in with QE4 and a bunch of other measures to try to trick up the market.

True? Not a word. Right? Maybe.


Bill Bonner,
For Markets and Money, Australia

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

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