Monday, 16 August 2021 — Estes Park, Colorado

By Dan Denning Editor, The Rum Rebellion

[9 min read]

Dear Reader,

What was it Dickens wrote in the opening paragraph of A Tale of Two Cities? Not that ‘it was the best of times and the worst of times’. That ‘it was the epoch of belief and the epoch of incredulity’. So true. People today are willing to believe anything at all, or nothing at all. Why is that?

I’ll come back to that in a moment. But first, did you know that between 1997 and 1999, the S&P 500 made 127 new all-time highs? I remember that epoch of belief well. It was the first coming of the Internet revolution. Every week it was a new story, a new world-changing technology, or a new business model that, miraculously, didn’t involve making any money.

The S&P 500 closed at a new all-time high on Friday. It’s the 117^th time that’s happened since 2019. And even more impressively, the blue chip benchmark has nearly doubled from the March 2020 pandemic lows. That would be the fastest double from a low since the 1940s, according to Dow Jones Market Data.

That makes sense from a psychological point of view. If you can hold your nerve when everyone else is losing theirs, if you can be greedy when others are fearful (as Warren Buffett famously says), you can get some great results. Of course, there’s no real science to knowing whether you should be afraid too, or whether everyone else has simply got it wrong.

The simplest thing of all to do is to follow the money. We knew a wall of liquidity would hit financial markets and the economy once the fiscal and monetary policy responses to COVID got underway in earnest. Those responses have yielded two specific things: inflation in consumer prices and even greater inflation in asset prices (stocks and negative-yielding government bonds).

Which brings me to another aspect of Buffett, his famous market capitalisation-to-GDP indicator. Thanks to the huge expansion in global central bank balance sheets, the total market capitalisation of the world’s equity markets is now just under US$119 trillion. That’s 140% of world GDP.

That’s a lot. But compared to the Buffett Indicator for just the US alone, it’s peanuts. The mcap/gdp ratio for the US is now over 200%. Its long-term average is 86.82%. Conclusion? US stocks are massively overvalued, relative to the economy. World stocks too, for that matter.

Buffett’s indicator is based on a simple observation which would seem to be logically foolproof: the value of publicly traded stocks can’t be permanently greater than the value of the goods and services traded in the real economy. How can companies infinitely generate earnings greater than the underlying economic transactions in the economy?

The answer is: they can’t. But investors can value those earnings at whatever multiple they see fit. And since last March, they’ve seen fit to value those earnings richly. Yale Professor Robert Shiller’s cyclically adjusted price-to-earnings ratio is 38.81. The only time it was higher was in December 1999, when it peaked at 44.19.

Why do people become the most optimistic precisely at the moment of maximum danger? Is it because they’re drunk with euphoria? Do they cease to be rational? Or are they so emotional that they can no longer accurately perceive real risk, even when it’s about to punch them in the nose?

Who knows? Maybe it’s because investors are sitting at home in front of their screens during lockdown with nothing to do but buy and sell stocks (mostly buy). Or maybe it’s just simple liquidity.

The total assets of the four major central banks — the US Federal Reserve, the Bank of Japan, the European Central Bank, and the People’s Bank of China — are now over US$30 trillion, according to Yardeni Research. The first three alone have increased their assets held on the balance sheet by US$10 trillion since the COVID crisis began.

With central bankers pushing down official interest rates so low that real rates (adjusted for inflation) are negative in many bond markets, it doesn’t pay to invest for income. Go for growth! Go for stocks! In a momentum market driven by liquidity, it pays to keep things simple.

But simple isn’t the same as safe. Which brings me back to being fearful when others are greedy. Wall Street hasn’t been this bullish in almost 20 years, according to Bloomberg. It found that 56% of S&P 500 stocks are rated as a ‘buy’ by analysts. Which makes sense. Wall Street is in the business of selling stocks. The more, the merrier.

Beware analysts bearing buy recommendations. Things can change faster than the Greeks can bring you a gift horse. Just look at the unfolding strategic collapse of the US’ military industrial complex in Afghanistan.

After 20 years, trillions of dollars, and thousands of lives, the military is leaving. The country has fallen to the Taliban in less than two weeks. US helicopters hovering over the embassy in Kabul to evacuate personnel look eerily similar to photos from Saigon in 1975.

What’s worse, you can expect the US Air Force to begin bombing supplies left behind when ground forces evacuate. That’s what you get when you run an empire on borrowed money and deficits. You get a massive waste of blood and treasure.

The entire American foreign policy and national security establishment failed. It’s a bipartisan strategic failure backed by the Bushes, the Clintons, the Cheneys, the Bidens, CNN, Fox, and The New York Times. It would have been cheaper to take US$10 trillion, pile it in the desert, pour gasoline on it, and set it on fire. It would have saved thousands of American lives and tens of thousands of Afghani lives.

Instead, the contractors and defence companies got a world-historical gravy train. And now we have a world-historical mess. And a whole generation of American servicemen and women who left blood, limbs, and friends behind in Afghanistan but brought back with them physical scars and mental trauma that will last a lifetime.

Here’s another fact. The Soviets left Afghanistan in February of 1989. By the end of 1991, the Soviet Union itself no longer existed. This is a subject I’m looking at in the next Bonner-Denning Letter. The point? When things collapse, it can happen a lot faster than you think.

Regards,

Dan Denning,
Editor, The Rum Rebellion

PS: Why are people willing to believe anything? Or conversely, why do they doubt everything? It’s partly because our growing addiction to mobile phones and television has flooded our brains with more information than they are evolved to process into a story that makes sense. Most of the information is irrelevant anyway. But there’s a lot of it. And it’s very loud.

That is, there are many stories to choose from that might turn random noise into a pattern that makes sense, a story we can tell ourselves. Hence the term ‘narrative’. Different people look at what are, objectively, the same set of facts, and then walk away with a different story that makes sense. Another way of saying it is that people see what they want to see.

Or, as Bill has often said, people come to believe what they believe when they need to believe it. When enough of them believe in something — like a bull market or the conquest of Afghanistan — you get one set of ‘facts’. When they come to believe it is necessary to cut losses and quit wasting lives and money, you get a bear market, a strategic retreat, and a new set of ‘facts’. Of course, it’s not the facts that have changed. It’s our perception of them, and the conclusions we draw.

PPS: Did you celebrate the anniversary of the event that unofficially marked the beginning of American decline? That criminal Richard Nixon ended the gold standard in the US on 15 August 1971. The US was hemorrhaging lives and money in another war of conquest (Vietnam). International holders of dollars (mostly the French) began trading them for real money (gold).

Nixon put a stop to that. It’s been a fiat money world ever since. The world money system, not anchored to a reserve currency backed by a real money, has floated along on a sea of fake dollars.

Here’s the big question: How long will THAT monetary regime last, now that the government backing it has shown how feckless, incompetent, and bankrupt it is?

By Bill Bonner Editor, The Rum Rebellion

Poitou, France

‘Homo homini lupus’

Latin proverb, meaning ‘Man is wolf to man’

We saw a strange beast early this morning. Driving to the train station, an animal slouched onto the road ahead of us. At first, we thought it was a wild boar. There are a lot of them in the area.

Then, it saw us coming and dashed back into the woods. But it was taller and longer than the typical boar, and it moved more like a dog than a pig.

‘It was a wolf,’ concluded a neighbour.

‘We found one dead on the railroad tracks a few months ago. They’re all over France now.’

In the mid-20^th century, this area became a major producer of sheep. But only after wolves were exterminated. Now with the wolf making a comeback, will the sheep be next to go?

Readers may want to keep that in mind…as we consider the affairs of men in the next few hundred words. In short, the wolfman is back…

Lunar lunacy

Usually, civilised life goes on in a give-and-take, live-and-let-live kind of fashion.

But sometimes, when the Moon is full, people go a little mad; they grow furry ears and long teeth.

That’s what happened in the early 20^th century…first with the Bolsheviks…then the National Socialists (Nazis).

In each case, a determined group — often very small at the beginning — believed that it had the one and only TRUTH…and that all others must bend to it.

Or else…

Then, as the howling grows louder, and the predators get control of the government, other groups are eager to join.

The media is first; it wishes to be part of the glorious new future.

Politicians, bureaucrats, opinion mongers, view shapers — none want to be left behind.

Religious groups and non-profits join the pack; they begin to see how the new faith connects to their old one.

And business — partly trying to protect itself…and partly trying to gain special privileges — soon takes its place among the beasts.

Even ordinary people, who might otherwise get on with their own honest and dignified lives, are inspired to snarl and yelp.

And then, the whole lot of them are headed for trouble.

And now, as the Moon grows brighter…is that a dog we hear…or a wolf?

Cancel culture

Let us begin with the supposition that almost everything we hear in the news is either a lie or a fraud. Of course, we will be wrong occasionally, but probably not often.

The public has better things to do (idly scrolling through Facebook!) than trying to understand the issues in any depth. Besides, reporters are too lazy — and have little incentive — to dig beneath the popular narrative to find out what is really going on.

And anyone who dares try to put forward a contrary view is quickly censured.

Recall that Donald Trump — who won more votes than any Republican in history — was cut off from Twitter; the company didn’t like his views of the election results.

(Note that we offer no opinion as to the election results themselves…we just call attention to the extraordinary situation in which a major public figure is censured for his views.)

Just in the last few days, Senator Rand Paul was cut off from YouTube after he cited studies critical of mask mandates…and blasted the censors for cutting others off.

The video sharing platform also tried to remove Dr Dan Stock’s speech on the virus to the Mount Vernon Community School Corporation in Indiana after it went viral. That’s to say, YouTube tried to take it down because people wanted to see it…

…and because it had the wrong point of view.

You might say, ‘YouTube is a private company. It can do what it wants.’

Which is perfectly OK with us too. We’re just exploring a phenomenon here, not arguing about the law.

If we’re right, the US’ ‘private’ sector and its most important institutions have been corrupted by public sector money.

The press asks no ‘hardball’ questions. The universities no longer teach people how to think; they teach them WHAT to think. Businesses have figured out that it’s the Feds who butter their bread.

Preposterous policies

Returning to the legal issue, last year, Harvard Law professor Alan Dershowitz made the remarkable claim that people ‘have no right not to be vaccinated’.

What kind of brave new world is this? People have the right to life, liberty, and the pursuit of happiness, but not to decide what is put into their bodies?

What kind of world is it where private companies act as censors for the Feds?

And how come the press goes along with some of the most intrusive and preposterous government policies in history — the trillion-dollar deficits…stimmy cheques…the invasion of Iraq…the COVID-19 shutdowns…?

Real mischief

Yes, dear reader, people seem to go mad from time to time.

And now, you can start a war and kill thousands of women…and then go on to a comfortable retirement berth as an elder statesman (George Bush Jnr). But pinch just one woman (or more) on the derrière, and your career is sunk (Andrew Cuomo).

You can tell all the lies you want (Petraeus, Flynn, Milley, Mattis, et al)…and move on to a rich reward at Raytheon or Lockheed Martin…but tell the truth just once, and you’ll go to jail (former National Security Agency intelligence analyst Daniel Hale).

You can print trillions of fake dollars and you will become the most admired public servant since Pontius Pilate (Federal Reserve chair Jerome Powell)…

…but try to pass off just one fake US$20 bill, and the police will kill you (George Floyd).

The media condemned Floyd’s killer — even before trial! — but it never once raised doubts about the system that was fatal to him.

Instead, it went after the soft target — the alleged ‘racism’ of others, the Trumpian white trash — and gave a pass to the furry elite’s real mischief — militarising the police…the war on drugs… the war on poverty…punishing savers…eliminating good-paying jobs and shifting US$30 trillion to itself by backstopping the stock market and funding its pet projects.

Today, we come to no conclusion. We just note that the Moon, big and yellow already, is waxing…

…and trouble is afoot.

Regards,

Bill Bonner,
For The Rum Rebellion