Monday, 23 August 2021 — Boulder, Colorado

By Dan Denning Editor, The Rum Rebellion

[7 min read]

Dear Reader,

To distract myself from the misery and sadness of our present times, I read about the happier times of the 1930s this weekend in Piers Brendon’s The Dark Valley: A Panorama of the 1930s. It was, as Brendon describes it, ‘A low, dishonest decade.’ Capitalising on the human cost of a worldwide depression, psychopathic politicians turned radical and drove their countries headlong into another calamitous world war.

That will bring me, in a moment, to Afghanistan and the shambolic US evacuation after 20 years of failed nation building, during which Australia has been a steadfast partner. But let me begin today with a simple idea: something can appear orderly, methodical, and even successful for many years, yet still collapse in a matter of days. It’s just as true in financial markets as it is in geopolitics.

I’m talking, of course, about the stock market. Earlier this weekend, I finished the latest Bonner-Denning Letter. One of the charts I presented showed that the market capitalisation-to-GDP ratio in the US market alone was now over 200%. Another showed that real yields on non-investment grade corporate debt were under 5% — their lowest level in two decades.

These are not unrelated. In fact, they are directly related. Perhaps they’re even intentional. Let me show you how.

When you lower official interest rates and then print money to buy bonds — as central banks around the world have done with quantitative easing — you accomplish two things. First, you misprice risk in the bond market by lowering yields across all fixed income securities. That’s what the picture above shows. Effective yields on non-investment grade corporate debt are almost 18% below where they were in the peak of the Global Financial Crisis.

Remember those good old days? From day to day, you never know what company was going to get caught out with assets far in excess of its equity. More to the point, if those assets were, say, residential mortgage-backed securities (RMBS) or collateralised debt obligations (CDOs), it was possible that a write-down in the value of those assets (thanks to the American housing crash) could wipe out the thin sliver of equity supporting an overleveraged firm (this is what happened to Lehman Brothers).

But today, instead of punishingly-high borrowing costs which reflect the risk of lending money to non-investment grade corporations, we have the worst of both worlds: low yields and increased corporate borrowing. If you have a spare hour, watch this keynote speech from hedge fund investor Stanley Druckenmiller, in which he shows how corporate leverage has actually increased during the latest crisis.

As even the riskiest (and junkiest) bond yields have gone down (thanks to QE), stocks have gone up. Large institutional flows of money, plus new liquidity from retail investors on apps like Robinhood, keep pouring into stocks, no matter the price, no matter the value. Hence the market-cap-to-GDP ratio being well above the mean of 80% (going back to 1970).

Yes, revolutionary new technologies appear to be changing the world right now. And yes, the pandemic lockdowns have given rocket fuel to the earnings of the biggest tech companies like Apple, Google, Amazon, Nvidia, and Microsoft. The unusual conditions of the last 18 months have given a plausible cover story to anyone who wants to pay a steep historical premium for growth.

But what if a stock market fuelled by bogus interest rates and QE is just as much a fraud as the coalition nation-building exercise in Afghanistan? Doesn’t that mean it could collapse just as quickly once support for the charade is withdrawn? Well, yes!

However, withdrawing support for the charade means that central banks would have to taper asset purchases and let interest rates rise to whatever their natural level is. Central banks don’t have ‘boots on the ground’ or embassies, nor do they have to worry about roadside bombs or the Taliban. They don’t HAVE to taper if they don’t want to.

What then, would cause them to withdraw their support for bogus stock market valuations? After all, rising stock (and home) prices are probably a big element in keeping the upper-middle classes in Australia and the US from realising the downside of the authoritarian police state that’s been imposed on them during the pandemic.

Yes, the police have been militarised, and yes, you have to ask for permission to exercise what used to be freedoms. But have you seen the new highs on the S&P 500?! And isn’t it great that we can still have auctions for houses even if we can’t exercise our rights to freedom of speech and assembly?

Going back to the history books, and specifically to the Weimar hyperinflation of 1922, it’s worth noting that German money printing for the First World War didn’t result in a collapse in confidence (and belief) until after the war was lost. It was the military defeat that triggered the financial collapse.

Once the German middle class realised there would be no war booty coming from the defeated French, and once they realised they had foolishly sold all their gold to the Reichsbank to support the war effort, they realised they had surrendered their real money (gold) for fake money (paper) just as the paper money was about go up in flames, along with the value of their savings.

It was, indeed, a low and dishonest decade. The resulting destruction of the German middle class was the ideal emotional fuel for certain toothbrush-mustachioed Austrian house painters. The slow build of the National Socialists began. The rest, as they say, is history.

And what about our low, dishonest decade? Is it just ending after two decades of futility and misery in Afghanistan? Or is it just beginning, as governments around the world rollout the machinery of surveillance to force compliance with emergency measures that increasingly have nothing to do with public health and everything to do with power and control?

Buckle up and hang on for the ride. Speak up while you still can. Speak out against bureaucratically-organised state terrorism. And for God’s sake, don’t give up your gold.

Until next week,

Dan Denning,
Editor, The Rum Rebellion

The Bonner-Denning Letter is co-authored by Port Phillip Publishing founder Dan Denning and legendary investment writer and publisher Bill Bonner. It connects the dots between markets, politics, and history as one of the only macroeconomic, 'top-down' newsletters in Australia. For a big picture perspective on the past, the present, and your investment future, click here for details on how to subscribe. 

By Bill Bonner Editor, The Rum Rebellion

Poitou, France

‘The Afghan army wasn’t real. The Afghan Civil Authority was never real. They never collected taxes. There were no courts outside of police robbing people. None of it ever existed it was just a big jobs program funded by American money, and the moment it looked like the money would go away, everyone went home.’

Former US soldier Graham Platner,
interviewed by The Jerusalem Post

What a jolly, schadenfreudian week.

The American elite have had their noses rubbed in their most precious delusions and pretensions.

They spent US$2.2 trillion, equal to US$55,000 for every person in the nation, building a modern, democratic Afghanistan (and coincidentally, enriching themselves).

And now, instead of receiving polite ‘thank you’ notes, they are chased from the country in appalling scenes of disorganisation and incompetence.

And this was not just the ‘military-industrial complex’ that President Dwight D Eisenhower warned against.

If this was a ‘ship of fools’, the universities, think tanks, media, liberals, conservatives…Republicans as well as Democrats…do-gooders and world improvers — all were in the first-class cabins.

They imagined that they were bringing the indisputable virtues of the American way of life — with its unlimited fake-dollar spending, Prozac, and transgender bathrooms — to the ancient lands south of the Hindu Kush.

And it was all a fraud, marked by lies and deceit over 20 years.

Meanwhile, the rest of the nation begins to wonder. If the elite could be so wrong for so long about that…

What else are they wrong about? And when will the next appalling collapse occur?

Infallible Dr Fauci

But today, we give up on earnest analysis and turn to reckless sarcasm.

If only the infallible Dr Anthony Fauci had directed the withdrawal, rather than the Pentagon’s maladroit crisis managers.

Yes…Dr Fauci is someone we can trust. A man of science and facts.

He’s a public servant you can trust to give you the lowdown…to tell it to you straight. Except, of course, when he’s lying.

In December 2020, he famously admitted that he fibbed about herd immunity. The New York Times reported at the time:

‘“When polls said only about half of all Americans would take a vaccine, I was saying herd immunity would take 70 to 75 percent,” he said. “Then, when newer surveys said 60 percent or more would take it, I thought, ‘I can nudge this up a bit,’ so I went to 80, 85.”’

Earlier, he admitted to a ‘noble’ lie — telling the public it didn’t need to wear face masks in March 2020 because (he claimed later) he was afraid the face masks would disappear from the shelves, leaving health professionals without them.

Emails from Fauci allegedly show that while telling the public that face masks didn’t matter, privately, he was telling others to put them on.

And the only hard evidence we have (comparative death rates) suggests (nothing can be proven) that mask mandates didn’t make much difference anyway.

Kaboom and Kabul

So, is the COVID-19 response — the shutdowns, masks, vaccines — the US’ next Afghanistan?

Or how about the whole ‘green’ agenda? Are the experts wrong about global warming? Are the elite telling ‘noble’ lies to bend the public in its direction?

We don’t know. Our beat is money.

What we do know is that the US’ economic elite are at least as malign…and at least as dumb…as its warmongers. And like those responsible for Afghanistan, they are wrong about almost everything…

The fake stimulus…the fake money…the fake interest rates…the fake growth and fake Wall Street stock prices…the fake 2% inflation target — the whole fake shebang, in other words.

And when their errors and lies are finally revealed…it will be a far more disgraceful and painful mess than the debacle in Afghanistan.

In the stock market alone, the loss is likely to be nearly 10 times the loss in the Afghan adventure. The loss to the economy — in the coming scenes of crash and inflation — will be many times that amount.

And if the chaos leads to a political/social breakdown, as often happens when the public realises it has been betrayed…well…prepare for kaboom…and Kabul!

Antediluvian beasts

Yes, Afghanistan is now in the hands of brutish, religious fanatics, well-supplied with US arms and materiel.

This week, we saw the photos…a whole bunch of gun-toting, nightshirt-wearing ruffians in the presidential palace in Kabul…and not one with a face mask!

Unbelievable…don’t they know they might be spreading the dreaded disease?

And there are other shocking photos, too — of them driving all over the countryside in their Toyota trucks…and filling the air with CO₂.

Don’t they know about global warming? Don’t they know that they need to switch to electric vehicles?

But wait…there’s more…yes, a revelation so outrageous…so barbaric…we can hardly believe it.

Sit down, dear reader. Are you ready for this?

The Taliban are NOT feminists! They think there are two types of humans — men and women — and that they are meant to play different roles.

Heaven forfend…what kind of antediluvian beasts are these? Do they have tails? Do they walk upright?

Stern warning

The Biden Administration has surrendered to them. But at least one member of Congress is holding onto her gun. House Speaker Nancy Pelosi issued a stern warning:

‘The Taliban must know that the world is watching its actions. We are deeply concerned about reports regarding the Taliban’s brutal treatment of all Afghans, especially women and girls.

‘As we strive to assist women, we must recognize that their voices are important, and all must listen to them for solutions, respectful of their culture. There is bipartisan support to assist the women and girls of Afghanistan.

‘One of the successes of U.S.-NATO cooperation in Afghanistan was the progress made by women and girls. We must all continue to work together to ensure that is not eroded.’

So, you see…it was worth it after all. Progress was made. (Ms Pelosi neglected to say that approximately 25,000 girls and women were killed in the war, by our estimates.)

And now…watch out, you Talibanos. If one of you so much as lays a hand on a bare shoulder…or pinches a single derrière…

Well…you’ll have the US army to reckon with!

Regards,

Bill Bonner,
For The Rum Rebellion