We are predicting a credit crisis

Jun 2, 2015

- By Bill Bonner

Bill Bonner
Paris, France

Dear Diary,

The markets are acting as though it was already summer, wandering around with little ambition in either direction.

Meanwhile, we've been wondering about...and trying to explain...what it is we are really doing. We currently expect a violent monetary shock, in which the dollar - the physical, paper dollar - almost disappears. But why?

As you know, we tend take the side of the underdog...as well as half-wits, dipsomaniacs, and unrepentant romantics. But currently, we are standing up for the young, the poor, and all the others who have been hurt and handicapped by the credit bubble.

It's not that we are saints, nor do-gooders. We are just trying to make a living, like everybody else. But we come at from a different direction than most. Almost all the movers and shakers have the same bias - they want to see the credit extravaganza continue. The central bank has already 'invested' (if that's the right word for throwing phony money down the drain in a futile and jackass effort to hold off the future) $4.5 trillion to protect the balance sheets of the elite. This money has been amplified by zero interest rate policies to something like $12 trillion of stock market gains...and umpteen trillion in bond and real estate profits. Naturally, the people who own these things - and not coincidentally provide early stage funding for congressional and presidential candidates - do not want to see a new movie. They want to see the sequel, 'Credit Bubble 5.' And then 'Credit Bubble 6.' And so on.

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And the show goes on! They buy their candidates. They place their ads. The newspapers they support voice their opinions. Their corporations wheel and deal on Wall Street, spinning off bonuses, fees, and even higher stock prices. And the pet economists appointed to run central banks do their bidding.

We're not complaining about it. At least, not exactly. We're just calling attention to it. Because we think there is a lot of money to be lost by not recognizing what it going on...and perhaps a little money to be made too by actually following the plotline carefully.

Most people do not recognize what is going on because they are paid not to recognize it. As we've pointed out many times, no central bank is going to hire a guy who thinks it should mind its own business. Few investors are going to dispute the happy ending. And nobody is going to be appointed secretary of the Treasury who quotes Andrew Mellon's famous advice to "liquidate stocks...liquidate farmers..." etc.

The whole system is biased towards the upside, caused by credit bubble. Almost no one wants to see it end. Except us.

Is that because we are smarter or more virtuous? Not at all. It's just that we are not paid to ignore things. We are not beholden to the elite...we get no money from them. And our business model (and maybe our natural contrariness) tells us to open our eyes and try to see what others have missed.

Yes, we own stocks too. But capital gains take a back seat, far behind our desire to connect the dots.

Since we began in 1980, we have published hundreds of investment reports and recommendations. We now have analysts and economists in 10 different countries. Our advice and recommendations appear in French, German, Chinese, Spanish and Portuguese as well as English. Is the advice good? Do the recommendations go up? We commissioned an outside accountant to study them. The conclusion? Some very good. Some not so good. Some of our analysts seem to do very well - with several of our stock analysts far outpacing the S&P over the last 10 years. Few, however, are able to buck the trend in their target markets. That is, when tech stocks go down, for example, the tech analysts tend to get dragged down too. And some services we have had to shut down because the results were disappointing...or even disastrous.

Our personal experience is similar. Sometimes we do well. Sometimes we don't. This generally confirms what we know about the way the investment markets work: if you are lucky and work hard you can do a little better than the typical investor. But Mr. Market is always hard to beat. The Efficient Market Hypothesis - which tells us that is impossible to consistently outperform a 'random walk' in the market - may overstate the case. But probably not by much.

On the other hand, when we look at the big macro events of the last 30 years, we find our team does very well. There were five major events that marked the period:

  1. The collapse of the Soviet Union
  2. The fall of the Japanese miracle economy in 1990
  3. The end of the dot.com bubble in 2000
  4. The attack on the World Trade Center in 2001 and the War on Terror
  5. The financial crisis of '08-'09 and subsequent non-recovery
These things are important largely because they were unanticipated. People weren't ready for them. And most authorities said they wouldn't happen. The CIA - in the '80s -- thought the Soviet Union was going from strength to strength, for example. Until 1990, investors were betting heavily on a continuation of the Japanese boom. Same thing for the dot.com bubble, which was accompanied by the most delirious 'this time it's different' talk we've ever heard. Nobody expected such a dramatic attack on Manhattan - especially not the people we paid billions of dollars to stay on top of it. And, finally, Alan Greenspan and Ben Bernanke both said that the credit crisis of '08-'09 was unforeseeable.

But the crash in real estate and finance of '08 wasn't unforeseeable at all. Our analysts and economists were all over the story years before the crisis hit. (As one reader wrote to comment: we are often very early.) As for the other big events, our analysts were on top of three out of four of them. The only one we missed - and everybody missed - was the attack on the World Trade Center.

In the interest of full disclosure, it is also true that we saw many things coming - such as the Y2K computer glitch in 2000 - that never happened. Still, it seems impressive, at least to us, that we were able to see these things coming when so many others - including those responsible for keeping an eye on them - failed. How did we do it?

We believe it is simply that we are paid by our customers to notice things that others are paid not to notice. Bear markets, crashes, credit contractions ...governmental, technical and social catastrophes - nobody wants to look carefully for these things. Nobody wants them to happen. They make people poor, not rich. And yet, they do happen.

And it seems a part of nature's system that mistakes are punished, errors are corrected, and 'bad' things happen from time to time. And like forest fires, they have a useful purpose; they clear away the dead wood and allow future growth.

Currently, we are predicting a credit crisis - much worse than the '08-'09 event. No one wants it - especially not the dead wood itself. But we put a high probability factor on this forecast. In our opinion, it is unavoidable...even if we don't know what form it will take. And we think it will be accompanied, at the outset, by something even more rare and unexpected - the disappearance of the dollar.

Just to be clear, our prediction is that the 'Ice Age' of low rates and low growth for a long time - as predicted by many analysts and economists - won't happen. Instead, a crisis will cause a crash on Wall Street. The banks will go broke. The credit system will seize up. People will line up at ATMs to get cash and the cash will quickly run out. This will provoke the authorities to go full central bank retard. They will flood the system with 'money' of all sorts.

The ice will melt into tidal wave of hyperinflation.

Of course, we get tomorrow's news when you do...not a day early. We could be wrong. Our motto: sometimes right, sometimes wrong, and always in doubt.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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1 Responses to "We are predicting a credit crisis"

Mahesh K.Sethi

Jun 2, 2015

Certainly A Big?

Like (1)
  
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