Wednesday, August 3, 2022

The R-Word

By Bill Bonner (View Archive)

Editor's note: Here at Empire Financial Research, we're long-term bulls and "glass half full" type investors... But it's always useful to read analysis from smart people who have different opinions, so we're switching gears today and tomorrow to share essays from Agora founder and business magnate Bill Bonner.

Bill built the largest publishing empire of its kind, with more subscribers than the Washington Post and the Wall Street Journal combined. Along the way, he has written three New York Times bestselling books. He rarely makes public appearances – preferring instead his 100,000-plus acres in South America... his two centuries-old chateaux in France... or his cottage in Ireland.

To kick things off in today's essay, Bill discusses the issues with the media's spin on whether or not we're in a recession, as well as the concept of the "primary trend." Here's Bill...

Last week, we heard from America's two most hoary financial authorities...

"I do not think the U.S. is currently in a recession and the reason is there are too many areas of the economy that are performing too well," said Jerome Powell, jefe of the Fed.

"This is not an economy that's in recession," added Janet Yellen, former Fed chief and now U.S. Treasury Secretary.

But scarcely 18 hours later, over the wires came word that the U.S. economy really is in recession. Last quarter showed negative growth of 0.9%. Combine that with the first quarter and you have annualized growth of about minus 1.25% so far this year. Those are the feds' own numbers. They show a recession underway.

Curiously, the press was eager to reframe the "recession" story in a way that made it less threatening to the Biden administration. That is, reporters aimed to distract readers and help them to miss the point.

Quack, quack, quack...

This is a new form of journalism, better suited to the propaganda industry the U.S. press has become. For example, we were told by both the New York Times and the Washington Post (they must have collaborated to get their story straight) that the latest figures risk "fueling recession fears." It is like reporting that "the flames from the second story windows caused firemen to worry that the building might be a fire hazard."

Fearing a recession is a psychological phenomenon. Experiencing one is a whole different thing. And if fear were the real risk, the recession itself must be of no importance. It also echoes FDR's famous line, that "all we have to fear is fear itself," leaving readers to believe that it must be a little unpatriotic even to imagine such a thing.

You can see how easy and useful this new journalism can be. When the stock market is crashing, reporters could chortle: "Wall Street values greatly increased yesterday."

Likewise, the technique might be useful for Baltimore's overworked crime reporters: "A mass shooting today on the corner of North and Charles has left citizens worrying about whether they have adequate life insurance."

But as they say in the legal trade, if it looks like a duck, waddles like a duck, and quacks like a duck... well, it is a duck. And it looks like a recession to us.​

Stocks have fallen.

Bonds have fallen.

Real estate is beginning to fall.

And now, the economy is actually shrinking.

Quack, quack, quack...

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No more pussyfooting...

The message has gone out, despite the media's attempt to kill the story. But it's summer and a lot of people aren't checking their e-mail. So far, there are no shrieks of panic. Investors were buying stocks last week, betting that we've seen the worst of the stock market sell-off. The Fed is still lending far below the level of consumer price inflation. Congress is still spending money it doesn't have on projects that make no sense. And the federal deficit is still over $1 trillion.

But major turns take time. Sometimes years.

In 1980, Paul Volcker made it very clear what he was going to do. And then he did it. No pussyfooting around – he raised the federal funds rate by nearly 700 basis points (7%) above consumer price inflation. (For reference, that would be a federal funds rate of 12% today, rather than the 2.5% we have.)

But investors didn't know what to make of it... and frequently guessed wrong.

The "primary trend" was up for both stocks and bonds. But investors weren't convinced. From May of '83 to July of '84, bond prices went down. It was four years after the primary trend had begun before it was clear. Then, it just kept on truckin' – with periodic backing up – until July 2020, 39 years after it began.

The 'primary trend'...

Likewise, in the summer of 1982, the Dow took off on what was to be its biggest joy ride ever. It should have been obvious, as early as January of 1980, that stocks were going up. If Volcker tamed inflation, as he promised, interest rates would come down. Stocks would be more valuable. But in January 1980 the Dow was only at 878. And instead of shooting up, the Dow wandered aimlessly. Two and a half years later, it had actually lost value, and was down to 808. And yet, there too... the cards had been dealt. And it was a winning hand for stock market investors. After 1982, stocks continued to go up, with occasional breaks, for the next 39 years. The Dow didn't finally top out until December 2021. Then, it was over 36,000, for a gain of 44 times investors' money.

That is the power of the "primary trend." Alas, like a bad marriage, it is only clearly visible in retrospect. At the time, it is noisy, chaotic – full of passion and confusion.

Which takes us back to our question... how can we be so categoric – how come it's "inflate or die?" Why not something in between? Can't you just have a little bit of inflation to help the medicine of a correction go down? Can't the most egregious investments pass away, but otherwise leave the economy intact?

Or to put it another way, are investors who "buy the dip" necessarily making a mistake?


Bill Bonner
August 3, 2022

Editor's note: Right now, Bill is going public with what he says is his "fourth and final prediction" of his 50-plus year career. Each of his other three big predictions have come true... And today, he believes that the upcoming collision of two unstoppable and inevitable trends will cause the biggest disruption to our society, our financial markets, and our way of life in more than 50 years. Get the full story here.

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