Bill Bonner said it best…
It’s “Inflate or Die” for governments and central banks.
If you don’t already know him, Bill is coauthor of The Bonner-Denning Letter along with Dan Denning.
He also writes one of your editor’s all-time favorite e-letters, Bill Bonner’s Diary.
Bill has been warning for years that central banks would never be able to return to “normal.”
Instead, he predicted that the emergency footing they began after the 2008 crash would be impossible to exit.
As he put it in the December 9, 2014, issue of his Diary e-letter:
This is a manipulated market. And the manipulators aren’t going to go to sleep in the face of collapsing stock prices. Instead, they’ll wake up fast – and rush in with a stimulus program that will knock our socks off.
That’s when “you ain’t seen nothing yet” will be the appropriate remark at cocktail parties, family reunions, and investment conferences – no matter what the subject.
We’re just guessing, of course. But our guess is that – after a scare – the feds will get to work in a majorly reckless way, recirculating money.
Today’s excesses will seem modest in retrospect.
Recent events have shown that Bill’s insight was spot-on.
Washington has rolled out a $2 trillion stimulus package to combat the coronavirus panic. It’s going to use helicopter money to get money directly into Americans’ bank accounts.
As Neel Kashkari, the president of the Minneapolis Fed, told 60 Minutes, America’s central bank is using an “infinite amount of cash” to prop up the system.
That’s why, here at the Cut, we’ve been urging you to own gold and bitcoin as a way to preserve your buying power.
As colleague Teeka Tiwari put it in today’s edition of our Palm Beach Daily e-letter:
The biggest danger of all from this money-printing is this new currency is being put into the global economy at an alarming rate – with no plans to remove it.
As more and more currency units are added to the global economy, they’re worth less and less. It’s simple supply and demand… the more you have of something, the less it’s worth.
With central banks flooding the world with currency – and Congress turning on its fire hose – the potential for runaway inflation looms large. And we may see the world’s currency bubble pop.
Which tees up our first question nicely…
Reader question: Hi, I understand bitcoin will go through another “halving” in May, which will (if history repeats itself) produce an extreme multiplication of bitcoin. My question is: How will this affect other cryptocurrencies, such as Litecoin, Ethereum, Ripple, etc.?
– Doug L.
Chris’ answer: Thanks for writing in, Doug. I’m not sure what you mean by “extreme multiplication.” Without getting into the weeds, the halving cuts the supply of new bitcoin. It’s one of the reasons world-renowned crypto investor Teeka Tiwari is so excited about bitcoin right now.
I’m not an expert on the crypto market. But Teeka is. So check out the Q&A Teeka hosted last night about bitcoin… the halving… and what’s ahead for the crypto market here.
Next up, a related money question… this time about government-issued currencies…
Reader question: Every country in the world talks about increasing debt to deal with the effects of the virus. Where does the money come from?
– Donald M.
Chris’ answer: Thanks for writing in, Donald. It’s a great question.
The thing to keep in mind is that the government is the issuer of the U.S. dollar. Only it, and the banks it licenses, is allowed to create dollars. If you or I tried creating dollars, and the government found out, it would put us in jail for counterfeiting.
When the government spends, it doesn’t get that money from anywhere. It’s all data on a spreadsheet. Someone at the Fed marks up bank-account balances using keystrokes at a computer terminal.
It’s important to remember that about 97% of the U.S. money supply is in the form of electronic bank balances – 0s and 1s, basically. Let me give you an example…
Imagine you’re waiting for your coronavirus stimulus money to hit your bank account. Let’s say the payment is $1,000. And let’s say your bank balance is $10,000. When your payment hits, your account statement that read $10,000 now reads $11,000.
How did the government do it? Someone at the Fed changed the number in your account using data entries on its own spreadsheet.
Most people have a hard time wrapping their heads around the fact that money is just record-keeping. But when you think about it, that’s exactly how bitcoin operates, too. It uses a decentralized ledger. Banks and central banks use centralized ledgers. But otherwise it’s the same.
Despite its name, there aren’t any physical bitcoins. All that changes when you spend a bitcoin is an entry in a ledger that keeps track of who owes what to whom. Same goes for the U.S. dollar. We tend to think of dollars as the green bills in our wallet. But it’s all just ledger entries, with a small amount of physical cash mixed in.
Next up, Dan Denning fields a question about bonds. Now, I know a lot of folks’ eyes roll over when someone like me mentions bonds. But it’s a huge mistake to ignore what’s going on in the bond market… especially in a financial panic.
If you’re over 60… and following mainstream financial advice… you’ll likely have about two-thirds of your savings in bonds. That’s because the typical portfolio split is 60/40. It calls for you to put 60% of your nest egg in bonds and 40% in stocks.
But Dan has a different suggestion…
Reader question: Hello, I appreciate your extensive coverage of stocks, gold, crypto, etc., in the current crisis.
But what about bonds? And what about bond funds? I have some exposure to bond mutual funds in my 401(k), but I have never understood the bond market very well.
I do know that, generally speaking, the value of bond funds goes up as bond yields go down. In the present financial crisis, the Fed is driving the yields of all bond classes to nearly nothing.
However, some analysts are predicting a bond market bust. And, in fact, bond funds have been performing erratically along with most other financial assets. So is this a good time to be invested in bond funds? And if so, what kinds?
– John W.
Dan’s answer: There may be some value somewhere in bond funds. But I’d be wary of corporate bonds.
There is $66 trillion in corporate debt globally. In the U.S., half of all investment-grade corporate debt is rated BBB or lower. A third is BBB. That’s one level above “junk.”
How do you think those bonds are going to perform if GDP crashes by 20-30% in a pandemic?
In the early 1990s, there were more than 60 U.S. companies with AAA ratings. But the Fed’s low interest rates incentivized an extravagant corporate debt binge for share buybacks and other nonsense.
Today, there are only two U.S. companies with AAA credit ratings: Microsoft and Johnson & Johnson. Microsoft bonds yield 1.3%. And Johnson & Johnson bonds yield 3%. Hardly generous.
Bill and I prefer gold as a safe haven right now. Bonds and cash are at risk of seeing their value inflated away. Gold is a natural reserve. It’s liquid. And it holds its value over time.
Your fellow readers don’t have just pressing financial questions on their minds.
We’ve also gotten a bunch of great comments on the health situation right now. First off, some potentially good news on the spread of the virus…
Go to last week’s Jerusalem Post and check out this article about Dr. Levitt, an Israeli physician and Nobel laureate.
His statistical research on the virus’ spread indicates to him that 80% of the world’s population is immune to it. That’s why, after a couple of large jumps, it starts to decline rapidly, as has already happened in China and Italy.
The same should happen here in another week or two. Dr. Levitt based his initial research on China’s experience, but also cited the cruise ship that had been quarantined off Japan for so long. Despite the ship’s central ventilation system and communal dining, the virus infection rate on the ship never rose past 20%. Despite weeks of exposure in the worst of circumstances, 80% of passengers came through unscathed.
Don’t join the hysterical politicians and mass media in worsening this situation. Governor Cuomo, for example, said New York will have more than 100,000 cases and only has a little more than 50,000 hospital beds. Apparently he’s unaware that the hospitalization rate for those who contract the virus is 13%, while he’s shooting off his mouth trying to panic his population.
As I’m writing, this is the third day in a row he’s been featured on national news saying something erroneous or stupid or both. The nation does not need that.
– Kurt H.
Another reader takes issue with our base case here at the Cut for how bad this virus is…
Chris, I know you are a numbers guy, but I have to question some of your coronavirus numbers.
First of all, you are relying on WHO [the World Health Organization]. The same group that said the virus had a death rate of 3.4%. Now we know that the death rate when factoring in those that probably have the disease but have not been tested is probably below (maybe well below) 0.5%. Very few countries are testing people with mild symptoms.
You quote WHO saying that the R0 of the virus is 2.25 on average. Yet the R0 in WHO’s study on the Diamond Princess, where everyone was in close quarters for two weeks on the dance floor and at buffet tables, was about 2.2.
Logically, the Diamond Princess would be the worst-case scenario for the spread of the virus. So how can WHO (which gave us the original 3.4% death rate) have any credibility in coming up with 2.25 as the average R0? It does not pass the sniff test.
Japan has proven that a vigilant population can squelch the virus with very little disruption to the economy. Let’s face it… the mainstream press is cheering for the virus to crash the economy. By quoting WHO without giving it the sniff test, you are not doing anyone a good service.
– Joseph R.
Joseph isn’t the only one who’s skeptical of the official figures…
Deaths from regular influenza annually exceed 25,000 to 50,000 in the U.S. It would appear COVID-19 is not even a real contender for the championship belt.
This is yet another government intrusion into its citizens’ lives. A PERFECT example of how the media controls its citizen puppets. Smoke and mirrors, gentlemen… Keep your eyes on the magician’s hands at all times!
– Jim C.
As for this lockdown, I have to wonder if it will make the future worse…
If we want true immunity, we get it by exposure. And the virus dies out. No new hosts. But you can’t tell the media that. Sensationalism makes news. We will ruin the economy. We will not develop national immunity for ourselves and our children…
More people are hurt by what is happening. Ban the media, and I would have no idea what was going on. We’d go on with our lives. I’m rambling on because I simply don’t get it. Why are we bringing the country to a standstill? The treatment is worse than the disease.
– Allen B.
We’ll finish with a reader email that came in for Bill (who’s hunkering down on his ranch in Argentina) about a lockdown essential – toilet paper…
Dear Bill, your hideout on the farm sounds so romantic. “A step away from eternity.” Very poetic. Wish I had such a place. Wish I had a farm.
Riverside, California, is too close to the madness. My toilet paper (TP) supply is dwindling. The only place I could get TP is from Amazon. And the only rolls available in the next two weeks are TP with Trump’s picture on it under the headline of “Dump Trump.”
Boy, was I happy to find the TP. All other regular TP is scheduled to be delivered in May! Even Dump Trump TP is restricted to only two rolls per order. Hope I can manage ’til May. How can civilization continue without toilet paper?
– Michael K.
Are the lockdowns the way to stop the spread of the disease… and save lives? Or is there another path forward?
Don’t be shy. Tell us what’s on your mind.
Send me your most pressing questions about the markets, too. I’ll make sure to pass them on personally to your favorite analyst.
As always, you can write me at feedback@legacyresearch.com.
Stay safe… and take care,
Chris Lowe
March 27, 2020
County Kilkenny, Ireland
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