Dear Reader,

One of the things I love about writing The Rum Rebellion is getting your feedback each day. I read it all. Most of it is complementary, some of it is critical, and some of it is comedy gold.

I want to share with you some feedback I received in the latter category. Here it is…

‘Reading your views, opinions and analyses of matters financial, investment, precious metals and money, my assessment is that you have excellent insights into these matters and capable of offering sound advice.  I reiterate - on these matters.  Why any intelligent Australian would want to present him/her self as a red-necked, bigoted, deep-southern US Unionist with intemperate, irrational, right-wing rants totally escapes my understanding.

‘Just stick to "these matters" listed above, Greg.’

Ummm, huh?

At least you didn’t say racist. Although bigoted is a pretty good substitute.

While I think the comment is hilarious, I think you’re being serious. So perhaps I should be serious for a moment too.

I assume your insulting comments refer to my occasional delving into US politics? And because I support President Trump I am a ‘red-necked, bigoted, deep-southern US unionist with intemperate, irrational, right wing rants’.

Okay…

It’s a minor quibble, but I’m pretty sure the red-necked, bigoted types from the deep south were secessionists, not unionists.

On the whole thing though, there is absolutely no evidence to support your claim. You’ve clearly been brainwashed by the establishment media. You appear to have a bad case of TDS (Trump Derangement Syndrome).

Just because the media tell you to think that anyone who supports Trump is a bigoted idiot, you don’t have to swallow the line. Feel free to think for yourself.

Frankly, I’m impressed that you’ve found and read Rum Rebellion. And I hope you continue to do so. I promise to mostly stick to market commentary, but I’ll occasionally stick my head up and comment on US politics.

That’s because what’s going on in the US is very important for the rest of the world. If you read more widely than the establishment media, you’ll realise there is an internal coup taking place in the US right now to remove Trump from presidency.

It’s unprecedented in US political history. That’s a threat to all our liberties.

Also, characterising my comments as a ‘right-wing rant’ is just another phrase that you’ve been taught to use, without actually thinking about it.

If by right-wing you mean standing up for individual liberty and highlighting the damaging role of government and overregulation in our lives, then I’m guilty as charged. The right, amongst other things, believes in less government and individual responsibility. The left believes in big government, funded by higher taxes.

The right believes in free speech. The left believes in censorship.

The left-leaning media constantly try to demonise ‘the right’. They want people to feel embarrassed for having (shhh) ‘right-wing views’. They want to shut down opinions they don’t agree with. This is leading to a stifling debate. As author Douglas Murray writes in The Spectator:

‘Today nearly all real public discussion has become impossible. Which is why nearly all public thinking has become impossible. Which is why the thinking has gone bad on nearly every major issue now facing us.

‘It isn’t just politics that is finding it hard to operate. It is also the media and every other piece of sense-making apparatus we used to possess. The negatives accrued to any individual or institution for thinking or saying anything remotely controversial now means that they don’t bother any more. We’ve lost the art of discussion and with it the ability to find honest solutions.’

People now get ‘shouted down’ if they say something the mob disagrees with. There is no civilised discourse. Which means there will soon be no discourse.

So, no. I won’t just stick to ‘these matters listed above’. I’ll write what I believe to be true and important. And while I’d love you to read it, I’m not asking you to agree with me. But if you want to criticise, do better than resorting to boring clichés. 

Anyway, enough of that for today. But keep the correspondence coming — good or bad. As I said, I love it.

Righto, let’s take a quick look at the markets.

I mentioned yesterday how I thought the market trend was in the process of turning from bullish to bearish. That view got further confirmation overnight with a decent fall on Wall Street. The S&P 500 and the NASDAQ fell around 1.6% and 1.7% respectively.

Futures indicate that should translate into a 1% decline in the local market today.

Apparently, concerns about a trade agreement between the US and China was the main reason behind the sell-off. But that could be just an excuse for a nervous market. There are fewer excuses to buy overpriced stocks here.

The air is escaping from the unicorn IPO bubble as we speak. For example, the recently listed Uber Technologies is down nearly 40% from its 1 July peak.

The mood of the market is changing. It’s getting darker.

In Australia, the biggest casualty is the resource sector. Given the impact on China from the trade war, this is not surprising. Yesterday I showed you how the ASX 200 was still in an upward trend. That’s not the case for the ASX 200 Resources sector.

As you can see in the chart below, the moving averages crossed to the downside recently. Prices are just above long-term support levels. That support gave way briefly during the August sell-off. If it gives way a second time, I think you’ll see continued selling.

It’s one to keep an eye on. After the banks and financials, resources are the largest sector on the ASX. If this sector heads into a downward trend, it could well drag the broader market with it.

Regards,

Greg Canavan, Editor, The Rum Rebellion

Coming Soon: The Biggest Financial Calamity in US History
By Bill Bonner

Today, we turn to something no one cares much about, even though it threatens to cause the biggest financial calamity in US history: Debt.

Glorious Valhalla

Total US debt — public and private — now approaches $74 trillion. The economy that supports this debt has grown steadily, but nowhere near fast enough to keep up with it.

As we remarked yesterday, money is time. So when you owe money, what you really owe is time. And time is not something you can fool around with. It comes and it goes…no matter what you think or what you do.

Historically, Americans have owed 1.5 days of work in the future for every day of work in the present. That is, the ratio of debt to GDP averaged about 1.5 to 1 for the first eight decades of the 20th Century.

Then, debt went up, and now stands at 3.5 days of future GDP for every day of present output.

Have we arrived in some great and glorious Valhalla, where the old rules no longer apply, where debt no longer matters…or where time is no longer our master, but our servant?

More debt, no problem

Whoa…we’re going a little too fast. Let’s slow down.

There are two reasons why debt is said to be no problem. The first, given by economist Paul Krugman et al, is that ‘we owe it to ourselves’. The second, proposed by Donald Trump, economist Gale Pooley, and others, is that we will ‘grow our way out’ of it.

The first we can easily toss into the wastebasket. That ‘we owe it to ourselves’ is merely an accounting identity. For every debtor, there is a debtee. For every dollar of debit, there is a dollar of credit. For every negative number on the left side of the ledger, there is a positive one on the right side.

But so what? That is just how accountants keep track. In the real world, the ‘we’ is deceptive. Some people owe. Other people are owed.

John works for 20 years. He saves his money. He lends it to Tom. John has a credit equal to Tom’s debit. ‘We’ are even.

John thinks he has 20 years’ worth of work and saving coming back to him, on which he intends to retire. And assuming Tom is able to earn and save money at the same rate as John, the former will have to devote 20 years of future work and saving to settle up with the latter.

Even-Steven

All debt is essentially a contract between the past and the future. Money can be lent only if it has been earned in the past. Then, it can be repaid only if it is earned again…in the future.

But what if Tom can’t pay? 20 years of work and saving will be lost. The world will be poorer as a result, and poor John will have to keep working as long as he is able.

On the books, Tom may still owe John exactly the same amount that he borrowed…and John may have a credit exactly equal to the amount that he lent.

But it is meaningless. A debt that can’t be repaid, whether owed to ‘ourselves’ or to the King of Siam, is worthless.

But wait. John will write off the debt. He will lose his money. But Tom will be released from his obligation to pay. John will be poorer. But Tom will be richer. Even-Steven, right?

Nope. Tom took John’s life savings and spent them. That wealth no longer exists. ‘We’ are poorer.

Soothing lie

Now let’s look at the other soothing lie — that we’ll ‘grow our way out’ of debt.

As Krugman points out, in the emergency of the Second World War, the US government borrowed a huge amount of money. But over the following decades, the economy grew faster than the debt. So like an aging movie idol, the Second World War-era debt faded.

In 1948, it measured 126% of GDP; by 1980, it had shrivelled to 42% and was scarcely recognisable.

But growing your way out works only if the emergency passes and GDP grows faster than debt.

Currently, with no Japanese bombers overhead…and no Wehrmacht tanks rolling down the Champs-Élysées…US GDP is growing about 2% per year. US debt, however, is growing at about $1 trillion per year…or about 5%.

And as we pointed out yesterday, this explosion of debt is happening less than two years after a big tax cut was supposed to boost GDP growth…and while we are at the tail end of a 10-year boom.

What will happen when the boom ends?

We’ll get to that in a minute. First, what about Mr Pooley’s argument?

He says GDP measures fail to account for technological improvements…and that because of so much progress, the debt will be no problem. After all, the new iPhone is 120 times more powerful than the first one, and the new F-150 has 600 microchips. Surely, that will help Tom pay his bills, no?

Let’s see…how does that work?

In theory, the technophiles will say, innovation and invention will give Tom a higher rate of return for his time. But you can’t pay debts with computing power. You pay them with money. And where does money come from? Time on the job.

Inflate or die

Wage growth rates have been coming down for the last 40 years. And despite more innovations than ever in history, real wages today are no higher than they were in the 70s.

Now, at the end of the cycle, wages are said to be growing at nearly 5% per year. But come the crisis, and that wage growth will quickly disappear…just as debt shoots up even more.

And then what? Everybody knows what will happen.

No matter who is president, the US is in an inflate-or-die trap. And nobody wants the boom to die. So, they’ll inflate more…

Bring on the quantitative easing, the shovel-ready programs…the tax credits…the student debt forgiveness…the Social Security increases…and all the other boondoggles that are supposed to make it easier for Tom to pay his bills!

In the coming crisis, US deficits will increase to $2 trillion or more per year. Government debt will rise to $40 trillion…and beyond. Total debt — including corporate and household debt – will go over $100 trillion.

Little by little…and then suddenly…consumer prices will rise. And then, it will be a whole new ball game…

Stay tuned…

Regards,

Bill Bonner, For The Rum Rebellion