“Is this the most frightening chart in finance?” 

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So began Bonner Private Research’s Investment Director, Tom Dyson, in yesterday’s research note to members. We’ll get to that, and much more from Tom, in just a second. But first, let’s take a quick look at the week in the markets...

The Dow popped 700 points (2.1%) yesterday after a mixed jobs report from the Bureau of Labor Statistics. The broader, S&P 500 index climbed 2.3% while the Nasdaq rallied 2.6%. 

On the week, the major indices were higher by 1.5%, 1.4% and 1%, respectively. 

Gold was seen around the $1,870 /oz range at time of writing. Oil (WTI crude) was sitting tight at $73/barrel.

But let’s go back to that jobs report for a second. MarketWatch has the raw numbers...

The U.S. Bureau of Labor Statistics said Friday that 223,000 jobs were created in December, with the unemployment rate edging down to 3.5%. That was above expectations for 200,000 new jobs, though the pace of job creation slowed from 256,000 in November. Meanwhile, wages grew by 0.3% in December, slightly less than expected and down from 0.4% a month earlier.

Investors read slowing wage growth as a sign of cooling inflation, taking that as a sign that pressure may be easing on the Fed. Meanwhile, the Fed insists it’s “not for turning.” 

Here, a couple of key snippets from the minutes of the Federal Open Market Committee’s December meeting...

“No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023.”

“In view of the persistent and unacceptably high level of inflation, several participants commented that historical experience cautioned against prematurely loosening monetary policy.”

~ From FOMC’s December meeting, 2022.

All eyes will be on the next Consumer Price Index report from the BLS, due out this coming Thursday, January 12. 

But while investors speculate on the “will he or won’t he” game, trying to guess the Fed’s next move, there are larger forces afoot...

Which brings us back to what may well be the “most frightening chart in finance.” Here’s Tom Dyson to explain...

This chart shows the money supply going back 65 years. Notice that little hook at the top right. That’s monetary deflation starting. 

(Source: Board of Governors of the US Federal Reserve System)

They blew up a gigantic debt bubble… the biggest of all time… the first debt bubble that engulfed the entire world. 

And now it has popped. 

Last week we showed this chart of Apple’s (AAPL) stock. It shows the same thing. The peak of a giant speculative bubble that’s now collapsing. 

(Source: TradingView)

Buckle up. 

I’m already starting to see the subtle cues in the journals and feeds I follow. A bankruptcy here… a missed payment there… a fund limiting withdrawals… a bank run… a canceled contract… a big cut in headcount...

2022 was the year the bubbles burst. 

2023 is the year the broad economic decline begins.

“But Tom, stocks have just had one of their worst years in history and everyone’s talking about the coming recession. This isn’t a contrarian take at all. Shouldn’t we be betting on something more surprising… ?”

I’ve thought about this too. But here’s the thing: trading against sentiment sometimes works in the stock market. But it doesn’t apply to the economy. In fact, it’s the opposite. 

Psychology is self-actualizing. When businesses and individuals start cutting expenses and tightening wallets, it can CAUSE a recession. Once a deflationary mindset takes hold, it can be self-fulfilling and very hard to turn around. 

This is why I wouldn’t buy stocks in the hope that the Fed makes a pivot. By the time the recession arrives and the Fed realizes it overshot, it’ll be too late to turn things around and re-inflate the bubble. The negative psychology will have set in. 

Nothing can stop this bear market now. 

Thanks, Tom. Now, if you’re like most investors, you’re probably wondering where this leaves you. The situation recalls Warren Buffett’s famous phrase, “When the tide goes out, you see who’s been swimming naked.” 

As the bubble bursts, and the flood of liquidity on which stocks have floated ever higher for the past half a century continues to recede, ripples will be felt through the broader economy. Most economists are already forecasting a recession this year, if indeed we are not already in one. 

So, what to do? 

(Still) Maximum Safety Mode

Readers of these pages will be familiar with our macro themes from the past year, as well as some oft-repeated words of caution from our investment director. As we kick off the new year, it’s worth revisiting our position vis-à-vis the economy. 

Again, here’s Tom:

At Bonner Private Research, our core hypothesis is that the U.S. economy is laboring under a massive weight of unproductive debt, zombie companies, and bad speculations... all financed with cheap credit, fake liquidity, and government backstops.

"The greatest financial experiment in history," we call it. It's like the tulip bubble, the South Sea bubble, the railroad bubble, the tech bubble, the housing bubble, the leveraged-buyouts bubble, and the IPO bubble all rolled into one.

Now the forces of deflation are immense. And without intervention, they will quickly overwhelm the economy and lead to a disorderly liquidation and economic depression.

Knowing this, the Federal Reserve and the other important central banks must operate in a near continual state of inflation. We call this dynamic "inflate or die."

Right now, we are in one of the rare moments when (most) central bankers are not inflating. Instead, they are raising interest rates and unwinding quantitative easing ("QE"). If our core hypothesis is right, big chunks of the economy are about to self-liquidate.

Our advice – which we repeated to our subscribers throughout 2022 – has been to hold lots of cash, lots of physical gold and silver, avoid stocks and bonds, and prepare your portfolio for a recession and bear market...

• "You can count us in the 'batten-down-the-hatches' camp." (January 2022)

• "Our investment strategy can be summed up in three words: "maximum safety mode." (February 2022)

• "There's a huge storm brewing and we're sailing right into the heart of it." (March 2022)

• "I don't know what more I can do or say to convince subscribers that we are in the initial stages of a bear market and recession." (March 2022)

• "Stay away from bonds and stocks in general." (April 2022)

And finally, "Set the dial to maximum defense," we've repeated here, again and again.

While the S&P 500 was down 18.1%, gold was nearly flat... falling from $1,828 to $1,823. Silver gained 2.84%. Cash was a winner too, with T-bills now yielding nearly 4%.

I'm happy with these calls. If you were with us for all of 2022, I hope you are too. And if you are just joining us recently, looking at the charts above, you can see these were the right sentiments.

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