By Bill Bonner
Exciting things are happening!
Virtual currency Bitcoin traded to over $700 on Monday. The Dow shot to over 16,000. And China decided to go even further down the capitalist road.
Don’t know about Bitcoin?
“The Department of Justice recognizes that many virtual currency systems offer legitimate financial services and have the potential to promote more efficient global commerce,” a Justice Department official told the Senate. Bitcoin may “hold long-term promise,” said Ben Bernanke. “If properly regulated,” added an unnamed official.
Publicly, the feds are playing it cool with Bitcoin. Privately, they must be sweating. As we told a small group of Bonner & Partners Family Office members last week at our private meeting in Nicaragua, Bitcoin has the potential to be “gold 2.0.” The new virtual money has the potential to destroy the dollar … the Fed … the banks … and the world’s fiat money system.
It could also make gold obsolete. This new money is easier to use and costs nothing to store. But regulate it? That may be impossible. Bitcoin is arguably the most disruptive monetary technology yet invented. It could be the biggest financial story since gold. Nothing like it has happened in 6,000 years – an entirely new … and better … kind of money.
In fact, it could help bring in a whole new phase of economic development … Watch this space for more details …
The Profit Mirage
The Dow rose over the 16,000 level on Monday. But it didn’t stay there. At writing, the index is at 15,967. Although U.S. stocks could go much higher – in the third stage of a major credit bubble – at Bonner & Partners we believe there is much more risk on the downside than there is reward on the upside.
Corporate net profit margins are largely a mirage – a reflection of the Fed’s red-hot QE on the barren sand of slumping revenue growth.
As our editor-in-chief, Chris Hunter, pointed out to Bonner & Partners Family Office members yesterday in a private briefing, net profit margins (profits after all operating expenses, interest expenses and tax expenses are subtracted) have been so rosy lately because interest expenses are so low, courtesy of the Fed evaporating yields in the bond market.
Once yields rise … and interest expenses with them… net profit margins will collapse. This will make U.S. stocks even less attractive on a valuation basis than they are now.
The real economy is still not recovering. And the Fed’s low rates keep debt growing … which increases the risk to the entire system …
Don’t Fight the Markets
Last week, China’s rulers met. They decided to lighten up on the country’s “one child” policy. The Chinese feds are keen to rebalance the economy – away from fixed investment (roads, bridges, airports and ghost cities) and exports to domestic consumption … and from dollar-based reserves to alternatives.
We don’t approve of central planning here at the Diary. It always makes things worse. But how much worse? That depends. If the central planners fight the markets, things will get very bad. But if they go along with what the markets want to do anyway, they will do less damage.
That’s what Paul Volcker did in the early 1980s. Back then, U.S. annual inflation rates rose to over 13%. And Treasury yields rose to over 14%.
The markets were correcting for inflation – with bond yields vaulting ahead of the CPI. The markets were tightening credit, in other words, to squeeze the CPI. Volcker had a choice: Fight the markets with more cheap credit in order to maintain full employment? Or join the markets with tighter credit of his own?
Volcker declared himself on the side of the markets. He helped drive up the 10-year Treasury yield to a peak of over 14%. Inflation rates fell … and continued to sink for the next 30 years. The US enjoyed its longest period of growth in history.
A Day of Reckoning
But things were different after the crisis of 2008-09. After almost 30 years of falling yields, the markets were ready for a correction. Too much debt had built up in the private sector.
A “day of reckoning” was at hand. First, Bear Stearns. Then Lehman Brothers. General Motors. Fannie Mae. Freddie Mac. Like dominoes, big institutions fell into default and bankruptcy. But the feds stepped in. They fought the debt liquidation. And they succeeded in halting the process of deleveraging.
Bravo? Good work?
Ben Bernanke got his mug on the front cover TIME magazine. It named him “Person of the Year” for 2009. Not only did he fight the market, he won… at least for a while. Only problem is we have more debt now than we had then. And the day of reckoning is still ahead.
Meanwhile, the Communist Party of China is loosening up. It is allowing Chinese have more children. Already, retailers are bracing for more children… getting in position to sell diapers and strollers when the babies show up, roughly nine months from now.
This will add demand for bigger houses, too. And bigger cars. And more debt! Commentators are already talking about a new Chinese baby boom. It could, like America’s baby boom, transform the economy from an export powerhouse into a consumer colossus.
Yes, the Chinese want to rock the cradle and rule the world. Dong Tao, at Credit Suisse, told the Financial Times that he thought it was “the most comprehensive and ambitious reform plan in the history of the People’s Republic.”
Chinese stocks trade at 7.6 times earnings, according to Thomson Reuters. That’s pretty cheap. And if the Communist Party makes good on its reform promises – and doesn’t blow up the country with too much credit in the meantime – Chinese stocks could make a great long-term holding.
Chinese stocks? Bitcoins? U.S. stocks? What to do with your money now?
Stay tuned …
The above article is from Diary of a Rogue Economist originally written for Bonner & Partners.
Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.