And now for some more Fatal Conceits…
“I think those people at the Nobel Committee must have a sense of humor,” quipped Bill Bonner, in response to the questionable judgement that resulted in Ben Shalom Bernanke being awarded the Nobel Prize for economics earlier this week.
“They're either very dumb or very cynical,” Bill continued. “And I'm not sure which it is because, if you remember that time, Ben Bernanke was wrong about everything. And no major issue came to him that he was not wrong about.”
Alas, 14 years after Mr. Bernanke’s preposterous “we may not have an economy on Monday morning” speech, in which he presented one of the most galling false dichotomies of the modern era (pass this unprecedented – and lately unread – stimulus bill… or the sky will fall), and we are now reaping the whirlwind of his profligacy.
Over the course of a half hour or so, Bill shared with us his thoughts on the end of the Age of Abundance, the reason our current financial predicament differs greatly from what Volcker faced in the ‘70s (Hint: It begins with D and rhymes with “regret”) and why those born after 1980 cannot know, first hand, what a return to the “Old Normal” will entail…
All that and plenty more on Ep #74 of the Fatal Conceits podcast. Please enjoy and, if you have a moment, share with a friend…
Also, if you’re interested in purchasing some of Bill’s wine, which we talk about towards the end of the episode, their Tacana 2020 vintage is now available to select buyers.
The first half of the allotment (reserved for the Bonner Wine Partnership’s private Tacana buyer’s list) sold out in a day. The rest probably won’t be around for long, so if you want to grab a few bottles… for the cellar or the bunker… don’t dilly-dally. More information here:
And for those of you who are less audio-inclined, you’ll also find a full transcript of today’s interview, below. Until next time…
Cheers,
Joel Bowman
TRANSCRIPT:
Joel Bowman:
Welcome back to another episode of the Fatal Conceits Podcast dear listener. It's the show, as you know, about money markets, mobs and manias. If you have not already done so, please head on over to our Substack page. You can find us at bonnerprivateresearch.substack.com.
On that page, you'll be able to find hundreds now of essays authored by today's guest, Bill Bonner, in the daily section. We've got plenty of research reports from Dan Denning and Tom Dyson. And of course, many more conversations like this under the Fatal Conceits Podcast tab at the top of the page. So without further ado, I think you can probably see in your screen there, framed by gilted cornices, remnants of a bygone era of abundance, Mr. Bill Bonner, welcome to the show. How do you do sir?
Bill Bonner:
Thank you Joel. It's a pleasure to be with you.
Joel Bowman:
You're up there in Baltimore at the moment, that's correct?
Bill Bonner:
In Baltimore. And you're right, it is the bygone remnants of an ancient civilization. Baltimore was by the way, the richest city in America in say the early 19th century because it had such a great harbor. And it was also connected, through the Cumberland Gap, it was connected to the whole Ohio Valley and all that area over there on the other side of the Appalachian Mountains. So it was a big important port for people coming from Europe and a big important port for people making mostly food things that they exported it to Europe. And people got rich. And movies from say the 1920s or so, maybe a little bit later, they will frequently have a rich person as somebody from Baltimore. And that all seems so unlikely now. It's hard to even imagine.
Joel Bowman:
To be rich like a Baltimorean is like to be rich like an Argentine.
Bill Bonner:
Same thing.
Joel Bowman:
Exactly. And I'm racking my brain here, but how on earth were they able to get rich without ESG governance and diversity boards and equity programs…?
Bill Bonner:
That was before the foundation of the Federal Reserve. I mean, how did they know what interest rates to charge? They were building in the early 19th century here in Baltimore. They had huge factories. They made things, made things that they exported out of profit. How did they know how to do that without the feds showing them what interest rates to charge and so on, without the Fed printing money to stimulate them? Nobody stimulated them at all. They were stimulated by the desire to make money I guess. And they did quite well with it in that. But now we have, thank God, we have the Fed to stimulate the economy when it's needed to support the stock market when it seems to be falling and to provide us with the interest rates that we need. How they know what interest rates we need has never been clarified. But that's one of mysteries of the Fed.
Joel Bowman:
Yes, we certainly couldn't rely on the market for any, shall we say, “self stimulation”?
Bill Bonner:
No
Joel Bowman:
Top down only. Speaking of which, that dovetails into news this week of, I don't know whether you would call him our colleague, but another economic luminary, Mr. Ben Bernanke, who was awarded the Nobel Prize in economics earlier this week. This of course is the man who had the “courage to act," at least according to himself, and who saved us from “not having an economy on Monday” as he warned us with such certainty...
Bill Bonner:
October the fifth, 2008. He went before Congress and he said, Look, if you guys don't pass this act, which I think was what was known as the TALF Act, it was a lot of spending to try to stimulate the economy, that if you don't pass this, we may not have an economy on Monday. He was talking on Friday. And thank God he rose to the challenge and showed that courage to act because otherwise we still wouldn't have an economy.
Joel Bowman:
Incredible. It does seem so "through the looking glass," the up is down back is forwards, when we see that not only did the man who failed to foresee the bubbles that had been created during the Greenspan era and that had led to these enormous imbalances and malinvestments, in particular the housing market. I remember yourself writing about huge irregularities in the mortgage back securities markets and Eric Fry writing about that. Our colleague Dan Denning was on the case of course. So it seemed like everybody except Federal Reserve economists were on the case. What does it say that 14 years later, having stimulated, it seems now, an even a larger bubble, that we not only look back and have not learned our lesson, we're gifting the guy the highest prize there is in the dismal science?
Bill Bonner:
Well, I think those people at the Nobel Committee must have a sense of humor. That's all I can think of.
Joel Bowman:
That's big sense of humor.
Bill Bonner:
They're either very dumb or very cynical. And I'm not sure which it is because Ben Bernanke, if you remember that time, he was wrong about everything. And no major issue came to him that he was not wrong about it. He was the one who said the subprime problem before the crisis of 2008, the subprime problem crisis was "contained." Of course it wasn't contained at all. He had all these things that were idiotic, like zero rates. He came up with that QE, he didn't invent it, it was the Japanese who developed it. But a lot of these things which now we see clearly are the cause, the proximate cause, not the only cause, but the proximate cause of our inflation and our economy, which is now melting down in order to try to contain inflation, those stemmed from policies put in place by Ben Bernanke. And not the only one because Janet Yellen kept doing the same thing and Powell came along and followed right in their footsteps.
But for the Nobel Committee to award him a Nobel Prize is really quite remarkable. And it calls into question our whole elite process. Why do they think that he should get a prize for that? And then to have the hubris, the conceit, the unmitigated gall to write a book called The Courage to Act. I thought it was a joke when I first heard about it. I said, no sensible person would do that. Even if he believed that he had the courage to act, even if he believed that he had saved the economy, you still wouldn't put it out there. That makes you sound like an utter fool. What it does is it invites the wrath of the gods. There's someone way up there they must be after him. Now I don't know what they're going to do, but they're going to be after him.
Joel Bowman:
Pride before the fall. And for a man with a legacy unblemished by, as you said, a single success in the real world. So it does beg a lot of questions. But let's fast forward then 14 years after that fateful October Friday to where we are presently. And as you look across the landscape, I know you spent a lot of time down here in Argentina and then split between both sides of the Atlantic. When you look forward to what has happened in Argentina, they've been at the forefront of every boneheaded economic and financial policy known to man, real pioneers in the dismal art. When you look from here to where you are now in the United States, you look over to what's happening with the Bank of England or in the Japanese bond market. It does seem that there are enough signs that sort of point to this time maybe actually being different and this time maybe being the end of what you and Dan and our colleague Tom Dyson have called the Greatest Financial Experiment in History?
Bill Bonner:
Well, I think that's exactly right and I think people are having a very hard time coming to grips with it. Even people in the financial industry, they're so used to what they think as 'normal.' I was just speaking to some of my colleagues here in Baltimore about it and trying to explain it from my standpoint. And I realized that everybody I was talking to was born after 1980. I mean they were literally not born in any time other than the boom that we have known for the last 40 years. In 1980, of course then Paul Volker got control of inflation. Interest rates came down ever since. And there were a lot of things going on. Most important was the entry of like 500 million Chinese people into the market. And those people produced things at a low price.
But for these people, I'm talking about people who were born after 1980, it's very hard to get to understand that the whole circumstance of your life, the whole circumstance of your life has been phony. Faith been synced up by the Federal Reserve to give the impression that everything is always up. The stocks and financial advisors will tell you this to these young financial advisors say, Well yeah, stocks go down, but they always go back up. And so what you have to do is buy the dip. Now they're all out there looking for the bottom. The bottom is the point in which they don't go down anymore. Now they're going to go up, so you got to buy. And they have these charts and graphs that show that you buy it every dip, it always goes up.
But it's not that simple at all. If you had bought stocks in 1966, which was a good year for a stock market, you would've held them for the next 16 years until 1982 really. And the prices would've been about the same. But because inflation was happening, you would've lost 75% of your money. That was a long time to lose 75% of your money. And to talk to somebody and say, Well, you just hold on, they'll go back up. Well maybe they'll go back up, but it could be after you're dead. You're not going to have an infinite amount of time here.
And so there are times in history, and I think this is the key point, that if you look at anybody who is telling you they have a good track record, and of course that's everybody. And in the financial industry, they boast about what they've done and so on. All of that happened during a very special time which no longer exists. Now that's a hard thing to under for anybody to understand. And it's not that I'm saying, by the way, I'm not saying this is a new era. I'm saying this is the old era. What we've been through in mostly the last 10 years. But you could stretch it and explain that whole 40 year period was a grotesque and unusual series of things that came together, mostly including federal money printing by the Fed and QE and all the other things that they were doing. And that era is over and it ended in 2021. It ended when the bond market turned around, when actually it was 2020, it's the end of 2020. The bond market turned. When that happened, that was the end.
And since then nothing has worked very well because the fundamental aspect of our financial lives is altered. And it no longer is a market with falling interest rates. It's no longer a market that the Fed can support by driving interest rates lower. It's a different world in which now the Fed is battling inflation. And once it decides not to battle inflation anymore, which I think it will, then you're going to see worse inflation. So that won't be like the period from 1980 to 2020. Not at all. It's going to be a whole different world with a different battle going on that'll be very hard to understand. And people say, Well, your stocks are going to go up. Well, they probably are going to go up, but they're going to go up like they did in Zimbabwe. They're going to go up like they did in Venezuela and like they did in Argentina. All of those markets were once the world's top performers. But when you adjust for the inflation, they were going down, it gets more complicated.
And by the way, you have the advantage of being in the most complicated place in the world financially. And the Argentines learned to do these calculations. They have the blue dollar and they have the black dollar and they have the white dollar and they have the soy dollar. I'm not sure what that is. But now they have a new dollar. Did you know this as of yesterday, the Qatar dollar?
Joel Bowman:
Oh, I haven't heard about the Qatar dollar...
Bill Bonner:
The World Cup is taking place in Qatar and for Argentines who want to go, they have a special exchange rate.
Joel Bowman:
That's very interesting because I know I was aware, of course having lived here over the last dozen or so years, that we do have a dollar for every color of the rainbow and every gender you can imagine and pesos down here, they self-identify as all kinds of things. But I was made sort of brutally aware when I was on vacation just a couple of weeks ago to Brazil, I had forgotten that there is a clawback tax. This is part of the capital controls that happen here when you use an Argentine credit card abroad. I made the mistake of just handing it over for a hotel payment and then getting home to see my receipt and realizing that I'd had it sort of an extra 40 or 50% clawed back out of my account by the state. But this is the kind of shenanigans that happens when inflation gets out of hand.
Bill Bonner:
People, they find ways to try to obscure it, try to disguise it, try to eliminate it, but in doing everything but the one thing that really will work, right? They want to control prices. Now they're talking about controlling gas prices and states are providing people with extra money. There are all kinds of things and people find to try to overcome the fundamental reality of rising prices. And as in Argentina, they don't work, they never work.
Joel Bowman:
But it doesn't stop them from trying.
So let's go back a little further then, because I was speaking to somebody just yesterday about this, it's a common kind of rejoinder to this narrative that we present in at Bonnet Rrivate Research, and that is where people say, Well, we've seen this before. It was the 1970s. Look, we had an oil embargo where a major oil producing block took supply off the global markets. We had the Nixon shocks, we had double digit inflation, it was runaway. And then we got Volker, and he marched in and whipped everyone into shape. And then as you said, then we're off to the races for the next 20, 40 odd years, rather. So what about today is different fundamentally than that seventies landscape that people think will just kind of, well, we'll muddle through and then we'll be off for another to a moonshot again?
Bill Bonner:
Well, the fundamental difference is 30 trillion dollars. The federal debt in 1980 was one trillion. Actually, it was below, it was actually 900 billion, below a trillion. Now it's 31 trillion, 30 times as much. That's the fundamental difference. And it's added to, it's not just the federal debt, it's also private debt, household debt, corporate debt, all at record levels. So they take them together and the whole sum of debt in America now is about 90 trillion. And what happens is, in this process of rates going up to bring things back to normal, the cost of all that debt goes up. And you soon realize that you can't pay it. That is not going to work.
And that's what happened just two weeks ago in England when the traders saw what was happening and they were bidding up the yields, which is to say they're bidding down the prices on UK government bonds. And pretty soon all those big institutions, the pension funds, they rely on the price of those bonds to make their numbers work. And then suddenly it became clear they weren't going to work. And so the bank had to intervene. The Bank of England intervened with support stimulation, whatever you call it. They were buying bonds in order to save them from bankruptcy.
And so what I suspect, I expect, this is what you call a high probability hunch, that the US is in the same situation, really even a worse situation in some ways. And as the Fed stays the course raises rates to try to get ahead of inflation, as they do so, we're going to see some things like what we just saw in England that certain institutions, could be Goldman Sachs, it could be JP Morgan, it could be a state pension fund like CalPERS in California. They've got billions of dollars. And they have done the same thing because this theory was pitched to them by Goldman Sachs of what they call LDI, which was matching your liabilities to some long-term goal. But what it really meant was they were ratcheting up the risk in order to try to improve the results. You can do that if you're a young speculator. But if you're managing the pension funds for a lot of retirees, that is practically criminal.
So what's going to happen is somebody's going to get in big trouble and suddenly there's going to be that meltdown crisis on Wall Street in which the Powell and his fellow bankers, they really are part of a banking cartel in order to save themselves and their clients and their members Wall Street itself, they're going to say, Well, okay, that was a good idea. We need to get control of inflation, but not right now. Now we have to save the system because otherwise it'll go totally bad. I would say again, a high probability hunch is that that's going to happen and we're going to see a pivot from the central bank because they just owe too much.
So your question was what's the difference now than from 1980? Well, the difference is all of that debt that they didn't have. Volker could raise rates to 20%. He could do that. He was condemned. He practically had to have an armed guard. People were threatening his life. But he could do that because America could afford it. Also, by the way, in 1980, it might have been 1979, stocks had already been squeezed so hard by inflation that they were already very, very cheap. They're not yet very, very cheap here. So we have a lot to lose. Trillions of dollars still to lose till we get there.
By the way, we like to measure things in terms of gold, and in terms of gold, for a brief time you could buy the entire 30 Dow Jones industrial stocks for one single ounce of gold. And today, what is it? 18. What we're looking at is a totally different situation in which we have high deficit. The deficit was announced just yesterday for the current year of 1.4 trillion dollars. And this is at a year without really a crisis. A crisis hasn't appeared yet. They're running huge deficits. The debt is multiplying even without them. And we're in a situation where we can no longer continue on this course of action.
And so what will happen, I believe is we'll see something will come up, some Lehman Brothers moment as they say on Wall Street will happen. And then the Federal Reserve will be forced to change towards inflation. And once that happens, it'll be the next stage. The stage we're in now is deflation. We're deflating all of those, a lot of those promises, obligations, debts and so on from the bubble era. That will go on until it becomes really painful and then they'll start inflating it again.
Joel Bowman:
And so this is what sets the backdrop for something that Richard Russell wrote about maybe 10 or 12 years ago. But it's the idea, and Tom Dyson of course has written about it over on our Substack page as well, and that is the idea of "cash now gold later." So gold after the pivot when hyperinflation, is off to the races...
Bill Bonner:
And we see so far that advice has been very, very good. Nobody really took it totally because it just felt awkward. We saw inflation running at 8%. So who wants to hold cash when inflation is running at 8%? But in fact dollars have ended up being the best investment so far this year. As long as we're in the deflation stage, you want cash and after the deflation stage you want something else. Probably gold, maybe stocks, stocks go up too. But you have to adjust that price by inflation, which is then out of control for the foreseeable future. That is going to be a different world. And that's a world that you probably know better than anyone because the inflation of Argentina is about 90%.
Joel Bowman:
Officially 90%. I tell my friends down here that Americans and Brits and Australians are worrying about 9% inflation. And they asked me to repeat myself, Sorry, did you say nine? We would kill for a 9% inflation. That would be a day in the sun for them.
And so from then, from the past and the setup to where we think we are right now, I was speaking with our colleague last week, Mr. Byron King, and he and I spoke a little bit about the end of these three cheap abundant stimulants of this modern world that we've all come to just take for granted. Certainly in the last 40 years, and you've alluded to a couple of them already. But we've coming to the end, through various geopolitical kerfuffles and conflicts, of cheap energy. And we've outlined this over at Bonner Private Research. This feeds into our trade of the decade, which is long conventional energy. But that whole era of cheap, reliable local gas from various places seems to be coming to an end. This era of mass produced manufactured goods and tight supply chains unruffled by policies or global lockdowns, that seems now to be coming to an end. And of course as you've spoken about, we have potentially the end, at least for the foreseeable future, of cheap and available funny money, cheap and available discounted credit.
Where do we go exactly from here? And I mean is it time to just build a bunker and buy gold and do nothing? I mean, how does the average person live through this if they're in that state of mind?
Bill Bonner:
One thing that we learned from the Argentine example is that you can live with inflation at a fairly high level. And this is not the first time they've done it in Argentina. You can live, but you can't live very well. The economy falls apart and you need to have protection from the local currency, which of course is what you do and what foreigners in Buenos Ares do because they operate on dollars rather than pesos, not prisoners of the local peso economy. And in a larger scale, when the economy turns around with the pivot on the Fed and more inflation in the US, that will be a similar reality in America, which you will not want to be dependent on the dollar completely, which is why you'll probably want to move assets into things which are not dollar dependent like gold, minerals, real things, timber. I'd like to be in the timber business. It looks good to me. Farming, a lot of things which are real and don't depend entirely on the value of the dollar. So I think that's where you're going to end up.
It's not the end of the world by the way, no, it is not the end of the world if things go on, but they get more confusing. And they get a lot more confusing and people don't know what to do or what to make of them. And that's where you get the real problems because they feel cheated, and they are cheated. The whole idea of inflation is to cheat people. And so the guy who's worked all of his life, he's expecting his pension and his pension comes in and he realizes it's only worth half what he thought it was going to be worth. That guy gets pretty mad and he justifiably he gets angry and next thing you know he's out on the street or voting for somebody that he probably shouldn't vote for or whatever. People look for solutions. They want solutions. That's when they turn to the guy who has the easy solution. And that guy is almost always a fraudster.
So it's a problem. And you get a big breakdown in society. Argentina, they had that inflation of, I'm not sure if it was the eighties, which ended up in the generals taking charge and military dictatorship was very common. In Venezuela you have that puppet government. I don't know what the world they are doing, but the guy Madura said that he had a crow or something on his shoulder who was whispering in his ear channeling the Chavez who was dead.
Joel Bowman:
Sounds as reasonable. Maybe we should get the Nobel Committee to give that guy a prize for telepathy from the great beyond or something.
So speaking of the end of world and real assets, I promised our friend and our colleague Diego Samper that we would mention the solution to all of life's problems, all of the above. And that is your latest harvest of Tacana wine from your ranch down here up in the northern reaches of Argentina. I don't know how many people have looked at this on a map, but it's way up there in the north, right up close to the Bolivian border and it's really extreme country. We've been up there, we've been up there a few times.
Bill Bonner:
As you say, the solution begins with that popping of the cork.
Joel Bowman:
Around 6:00 PM
Bill Bonner:
That's the most pleasant sound of the day. You pour yourself a drink and here in the autumn, here in Maryland, in the autumn, recently it's been chilly enough. So I just had a little fire in the fireplace, and at six o'clock I sit in front of the fire with a glass of Malbec and for a while it doesn't seem too bad.
Joel Bowman:
Yeah, it's palliative. So tell readers who haven't maybe experienced it yet the difference between, and I've spoken to Will, your son Will Bonner about this, the difference between what you can expect from a high altitude Malbec grown in really unique and extreme conditions and the watery diluted over sugared dyed stuff you might pick up at the supermarket.
Bill Bonner:
You stole my thunder there. But that is the difference that the high altitude, what it's doing is it the extremes between day and night. And the extremes between day and night require a thick skin to survive. And so the grapes grown at that elevation, they tend to have these very thick skins, and in the skins is all the flavor. So when you get that, the high altitude, not just our place, but any place in the valley, because we're in the valley which is the highest in the world for wine. You get wine that is very strong. And some people don't like it because it's too strong, but you get used to it soon enough and then everything else seems weak. When I drink my own Malbec, I feel like, well, there's real wine and everything else seems to be an imitation.
Joel Bowman:
Well I think “having a thick skin to last one through” is probably a good point to end our powwow today, Bill. I'm not sure where we're going to catch up next, but I hope there's a glass of high altitude Malbec involved in it and we can get a front row seat to whatever it is about to happen next in this passing parade.
Bill Bonner:
Well thank you Joel. It's been a pleasure.
Joel Bowman:
Yeah, thank you Bill. Cheers.
P.S. Readers and or listeners wishing to grab a few bottles of high altitude Malbec will want to be nimble. Bill doesn’t sell his Tacana bottles to supermarkets or restaurants, but instead directly to his dear readers… like you! But they typically sell out pretty quickly. If there’s any left by the time you read this, you be able to secure your supplies here.
Bill Bonner on Ben Bernanke's Bubbles