| Rational people don’t risk what they have and need for what they don’t have and don’t need. – Warren Buffett By Bill Bonner, Chairman, Bonner & Partners GUALFIN, ARGENTINA – What a week! Cohen, Kim, Powell, Xi, Putin – We could barely keep up with the excitement. But, strangely, investors were blasé… It didn’t matter to them that the president’s own lawyer accused him of impeachable offenses while in the White House… or that the Russian leader threatened nuclear war… or that Mr. Powell, the Fed chief… well, that’s a more complicated story. | Recommended Link | FREE REPLAY: Casey Research’s Biggest Event of the Year E.B. Tucker is teaming up with Doug Casey to shine the light on a group of securities that very few people know about. We call them “Premium Shares” because they offer several perks you can’t get from common stock, preferred shares, and options. Doug Casey’s used them to make millions, and this week only he’s sharing how you can learn to trade them in a free investment summit. | | | | And heck, since it’s Friday, we’re not going to get worked up about it either. But herewith a summary: Mr. Powell told Congress that he has his eye on the ball… and yes, the Fed is looking out for investors too. Here’s Powell: With our policy rate in the range of neutral, with muted inflation pressures and with some of the downside risks we’ve talked about, this is a good time to be patient and watch and wait and see how the situation evolves. In other words, it’s the same old, same old… but it’s becoming more obvious every day that this is a whole new ball game. At least, from a financial point of view. Just how new it is has yet to be discovered… but that will be our destination today. Great American Business Bonanza Warren Buffett made the point this week that you didn’t have to worry about any of this. You could have ignored the news – all of it, from 1942 to 2019… WWII, Korea, Vietnam, Cold War, Berlin Airlift, Cuban Missile Crisis, Fall of the Soviet Union, the internet, the Rise of China, dot-coms, housing collapse. All you had to do was buy the S&P 500… and thus, participate in the great American business bonanza. Buffett: If my $114.75 had been invested in a no-fee S&P 500 index fund, and all dividends had been reinvested, my stake would have grown to be worth (pre-taxes) $606,811 on January 31, 2019 (the latest data available before the printing of this letter). That is a gain of 5,288 for 1. He is right, of course. In 1942, Buffett was 11 years old and made his first stock market investment. If you had just bought the S&P, if there had been an S&P in 1942… and if you had been alive then… and if you had used a no-fee index fund, which didn’t exist in 1942… …and never read a newspaper… or watched TV… …you could have done pretty well. But you would have missed so much! Richard Nixon’s remarkable address to the nation on August 15, 1971, for example, in which he announced that henceforth the U.S. would use fake money. And you would have missed Paul Volcker’s masterful save – in which he almost single-handedly prevented inflation from getting out of control by kicking the federal funds rate to a peak of 20% in June 1981. And then, 17 years later, you would have missed Alan Greenspan’s disgraceful announcement that the Fed would be there to make sure investors didn’t lose money. Of course, you could have spared yourself all the gobbledygook and blah blah from Bernanke and Yellen, neither of which had any idea of what they were doing… and all the mindless bumpf coming from Washington, from Republicans and Democrats alike, not one of who had any more idea of why stocks were rising than Buffett himself. At least Buffett has a sense of mischief; he shows how ignorance pays off. If you had been able to look into the future in 1942 and seen all the absurd and destructive things coming down the pike (Buffett focuses on the federal debt, which was set to explode 40,000% over the next 77 years)… you might not have wanted to invest at all. That is, you might have taken Buffett’s own advice to heart… and realized that it didn’t make sense to risk what you had and what you needed, in order to get what you didn’t have and didn’t need… especially when you could see so many freight trains headed your way. Had an investor been able to foresee all the crazy things coming our way after 1942… would it really have made sense to go all in… to bet his whole wad on the S&P? American Tailwind Buffett thinks he had the “American Tailwind” moving him ahead, through crisis and bumbles… absurdity and calamity. As we opined yesterday, it was more likely that he had the Fed behind him. And some very peculiar and unrepeatable circumstance of the 1942-2019 period. First and foremost, the U.S. won WWII! If it hadn’t won, the whole thing might have turned out very differently. And it won the Cold War too… And Richard Nixon introduced a new, cheap money system… and Paul Volcker tamed inflation… and interest rates headed down for 36 years… and Alan Greenspan gave out the “Greenspan put” to investors… and the Fed added $4 trillion to the nation’s base money since 2000. In 1942, the U.S. was on its way to fabulous successes… breakthroughs in technology… great achievements in every sector. After the war, the U.S. had the strongest economy in history… the biggest trade surplus ever… a declining national debt… a balanced federal budget… …interest rates set by the free market… money that was backed by gold (as solid as a real dollar!)… the freest, most-open society and most competitive businesses… and a stock market that reflected the actual value of the businesses traded on it. The U.S. was No. 1 in almost every category. In the intervening years, all those things have degraded, degenerated… turned around and slipped away. The tailwind has turned into a headwind. Today, the U.S. is again No. 1… but in the wrong categories. It owes more money to more people than any country ever did. And it spends more money on its military than all its plausible enemies – if there were any – put together. Its interest rates are abnormally low and its assets are artificially high. Its government is controlled by a smallish group of insiders, the Deep State, and both political parties are dominated by self-serving hustlers. Its most important price signal – the cost of money – is no longer determined by the free market, but by a group of 12 hacks. And if interest rates go up – which they surely will – many of its households and businesses, as well as its government, will all go broke. Our advice to 11-year-olds: The U.S. markets may repeat the experience of the last 77 years; but we wouldn’t bet on it. It really is a new ball game. Regards, Bill INVESTING INSIGHT: DON’T GET TRAPPED AT THE GATES OF THE BEAR MARKET By Dan Denning, Coauthor, The Bill Bonner Letter When Vanguard Group founder Jack Bogle died at age 89 in January, Warren Buffett said that Bogle had “done more for the American investor than any man in the country.” With over $5 trillion in assets under management, Vanguard (which Bogle founded in 1974) charges an average expense ratio on its family of funds of just 0.11%. The industry average is 0.62%. And American investors are $1 trillion richer thanks to Bogle, according to numbers calculated by Bloomberg’s Eric Balchunas. How? Two ways… First, lower fees allow investors to generate higher returns over the long term, by having more capital invested in the markets while paying less for performance. Second, by seeking “beta” (average market returns) over “alpha” (above-average market returns), investors get better performance. Bogle created an investment vehicle that passively tracked the market, discouraged trading (due to taxes and transactions costs), and took full advantage of the compounding power of the stock market. In other words, Bogle is the man chiefly responsible for the massive trend toward passive, index-tracking funds we see today. If you’re having your doubts that the fake-money system is rigged… that gold is real money… and that we’re headed for the mother of all crashes (in which civilization itself has its knees buckled), then the simplest thing to do is to unsubscribe to the Diary today and shift most – if not all – of your money into an S&P 500 index-tracker. Then, let time, the stock market, and compounding interest do the rest. Our publisher will probably cringe to read that. But if Bogle is right, why would you do anything differently? It’s not a trick question. But my suspicion is that history will not be kind to Vanguard’s passive strategy after the next crash. Here’s the problem: The concentration of investor capital in the same big stocks virtually guarantees that the next mean-reverting crash in markets will be swift and severe. Why? Passive, index-tracking investing strategies value liquidity over everything else. In the pursuit of low fees and beta, passive strategies favor big-cap stocks, regardless of how expensive they are. This “bias to bigness” only concentrates more of the public’s money in mega-cap companies, which deprives small- and medium-sized businesses of capital.
Now, Bloomberg reports that nine out of the 10 largest funds (by asset value) are index-tracking or passively managed (see below).
Bogle was right that lower management fees and expenses give investors better performance over time, all other things being equal (and bullish). And in a bull market like the one Vanguard has been able to enjoy for most of its existence, buying and holding the market saves you both time and money. But what if the whole trend to passive index-tracking has done nothing more than encourage laziness? Investing is hard… or, at least, it used to be. It’s not supposed to be easy. In a Fed-backed, Bogle bull market, you have all these people owning the same narrow range of big-cap stocks – who will get their faces ripped off in a correction or crash. Bogle won’t be so popular then. Let me be clear: I’m not bashing Bogle as a person or as an investor. It would be astoundingly arrogant and ungracious for me to do so. The relevant issue here is the titanic shift in assets under management from the active stock pickers seeking alpha to the low-cost, passively managed index-trackers seeking beta. Remember normalcy bias? And let’s not forget recency bias, either… Don’t be lulled into thinking that, just because a market crash hasn’t happened yet (or hasn’t happened recently), it can’t happen at all. The Fed has created abnormal market conditions which will make the next crash worse. So hats off to Bogle for a great financial innovation. But don’t let it trap you at the gates of the next bear market. – Dan Denning P.S. If you don’t know, our mission with The Bill Bonner Letter is to protect your wealth from “the big loss.” We look for the big trends coming our way and put you on the right side of history. And right now, we’re seeing a disturbing development taking place. Call it socialism. Call it financial martial law. Call it the death of win-win capitalism. It’s all the same. And it’s coming faster than you think. Full story here. FEATURED READS Why Don’t Wall Street CEOs Go to Jail?
America is great at locking up its own citizens. As Bill has written in the past, we lock up more of our own than any other country. But you know who doesn’t go to prison? Wall Street CEOs… even chief executives involved in the Great Financial Crisis. 150 Years of American Employment
According to official data, the unemployment rate is near historic lows. More Americans are working than ever! But what type of work are Americans doing these days? Here’s a look through the years of American employment. The Best Way to Hunt for Gold
Gold is the “one thing” you need in a market like this, Bill says. But what’s the best way to buy gold? How do you know you’re getting a good price? Casey Research’s E.B. Tucker shows dear readers the way… MAILBAG In the mailbag, one dear reader weighs in on Bill’s third “bold prediction,” and another considers what comes from “us vs. them.” Spot on, Bill. The Feds already are moving toward “additional monetary tools.” Jay Powell says Modern Monetary Theory is not true, but then follows up by saying that the Fed being completely insolvent has no effect and means absolutely nothing. It’s getting pretty rich. Better get the tall rubber boots out on the farm there. Sh*t is getting deep. – Brad W. “Us vs. them” by any other name is competition. It’s the primal need to get ahead of the other guy: more money, a bigger house, a fancier car, and the prettiest companion. Governments exploit this need to achieve by force, what they can’t achieve peacefully. Best I can tell, all the many wartime slaughters that took place in the 20th century merely moved boundaries. I’m sure those who lost their lives, including the millions and millions of innocent bystanders caught up in the viciousness of those many 20th-century wars, would just as soon as had a long life with a peaceful passing, rather than a short one with a brutal death. Sadly, the many “us vs. them” wars in the first part of the 21st century suggest this century will be no different than all the centuries preceding it. When you get right down to it, we are a nasty species. – Jim R. Meanwhile, the conversation turns back to dear readers’ favorite topic: President Donald J. Trump… Your criticism of the president is totally misplaced and unwarranted. Not the way for an entrepreneur to appeal to potential clients. Save your opinions for areas in which you have some expertise! – Bill H. Trump does lots of things that I hate. Lying to the American people more than 1,000 times in half his presidency. Not paying taxes to the IRS on faulty deductions, hiring illegal immigrants at his golf clubs… and getting his New Jersey golf club from public funding and pocketing all the profits in his bank account! – Ali R. I was a Democrat for the better part of my life, but I think Donald is doing a great job. Let him work! – Anonymous I must admit, I do get tired of you harping about Trump. Give the guy credit for a speech that wasn’t a sleeper and, as to socialism, I am glad he brought it up. Anything that can be done to slow down that runaway train is a positive. It’s easy to be an armchair quarterback but I respect your chainsaw and sledgehammer orientation. I also own a farm and it is only one farm for good reason. – Thomas N. I really like your essays, Bill. I don’t even mind that you are quite wealthy. You seem like a decent man and don’t go out of your way to make less wealthy people suffer for being poor or just middle-class (what there is left of them). In particular, I think what I like most about your writing and thinking is that you are sincere in trying to disseminate truth. What is wrong with you? Don’t you know that such people are targets? Truth-sayers tend to be punished for there temerity. The liars, haters, and tribal leaders don’t want people telling the truth. Truth is dangerous to their message. That is the truth. You know it is the truth. And yet, you keep spewing the truth like it is without risk or retribution. Look, I want you to keep up the spewing. It sort of shows me the path forward more clearly. I’m just saying that there are a lot of polarized idiots and just plain nutters out in the world today. – Tom B. | 
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