BALTIMORE – The Dow dropped 174 points yesterday, the biggest fall in six weeks.

Not the end of the world. Maybe not even the end of this year’s bounce-back bull run.

The Hard Rocks of Real Life

As you’ll recall, stocks sold off at the beginning of the year, too. Then, investors were buoyed up after central banks got to work – jimmying the credit market on their behalf.

The Fed swore off any further “normalization” until later in the year. Central banks in Europe, Japan, and China all took bolder and more reckless action… with the Bank of Japan following some European banks by going into “full retard” mode with negative interest rates.

Now, according to the narrative popular in the financial press, investors are beginning to worry that central banks are not very effective after all.

As to that last point, they’re right; central banks can only do so much. They made the situation what it is. Now, they can only make it worse.

How? By adding more of what made it bad in the first place. All they can do is add more debt to a world already drowning in it.

If anyone knows of a different way this story might unfold, we’d like to hear it. But for all the puzzling and preposterous guesswork and wondering, it is still the same tale: Debt builds up; debtors can’t pay; they go broke. It happens all the time.

In a healthy economy – with real money and honest banking – people make mistakes. They go broke. The bankruptcies are absorbed and disposed of in good order. Assets go on the block. Hungry investors and entrepreneurs snap them up… and put them to good use.

The system cleans out errors… taking money from “weak hands” and moving it to stronger, more capable management. But now, the whole system is mismanaged.

Thanks to credit-based money – and modern central bank guidance – the normal ebbs and flows of the credit market have become treacherous tidal waves… lifting up assets to absurd deliriums… and then crashing them down on the hard rocks of real life.

Borrowers’ Busted Boards

Here’s a group of surfers whose boards have been busted recently: young people.

In the news this week was this interesting item from the Wall Street Journal:

“40% of Student Borrowers Aren’t Making Payments”

According to the WSJ, $200 billion in loans are running behind schedule. The Journal says this is good news; last year, it was 46% of borrowers who weren’t keeping up.

And Bank of America tells us that corporate borrowers, too, are soon going to wash up on the beach. Here’s the report from Bloomberg:

When the next corporate default wave comes, it could hurt investors more than they expect. Losses on bonds from defaulted companies are likely to be higher than in previous cycles because U.S. issuers have more debt relative to their assets, according to Bank of America Corp. strategists. Those high levels of borrowings mean that if a company liquidates, the proceeds have to cover more liabilities.

 

"We’ve had more corporate debt than ever, and more leverage than ever, which increases the potential for greater pain," said Edwin Tai, a senior portfolio manager for distressed investments at Newfleet Asset Management.

 

Loss rates have already been rising… In bad times, corporate bond investors, on average, lose about 70 cents on the dollar when a borrower goes bust. In this cycle, that figure could be closer to the mid-80s [when losses approached 80 cents on the dollar], Bank of America strategists said. Those losses would be the worst in decades…

The Money Supply Contracts

In our open letter to Americans, we warned that there is a fatal “flaw” in the system.

We talked about the lack of real, physical dollars. In a credit crisis, we argued, the U.S. would quickly run out of real dollars. ATMs would shut down. The whole system would seize up. But there’s more…

We are still figuring out how it works, but this appears to be one of the most intriguing nuances of the whole cockamamie story. You see, credit has a particularity that real money doesn’t.

If I lend you a real dollar, you will have the dollar to spend, and I won’t. Then, when you pay it back, I will have the dollar to spend, and you won’t. Either way, the money supply is unchanged.

The credit dollar is different. When the banks lend you a credit dollar, they “make” it out of thin air with a few keystrokes on a computer. Then, the dollar you have to spend didn’t exist before. So far, so good. But when you pay it back, what happens?

It disappears as if… well… as if it never existed. The money supply contracts.

We should say, “even if you pay it back, the money supply contracts.” Because there are other ways the money disappears.

Negative interest rates, for example, cause people to hoard cash, or even increase bank savings, as they are doing in Japan. Either way, money disappears from circulation… reducing the “velocity of money”… and dropping the available money supply. Spending goes down, not up.

The effect – as Chris Lowe demonstrated in yesterday’s Market Insight – is the exact opposite of what the policymakers promise.

Again, we see the proof that something isn’t working. Not for Janet Yellen nor for any of her delusional central banker buddies around the world.

Their tricks no longer work. They just make the tidal wave higher.

Surf’s up…

Regards,

Signature

Bill

Further Reading: Hundreds of thousands of people have already listened to – and learned from – Bill’s open letter to Americans. It’s an urgent warning for anyone who wants to protect themselves from the fatal “flaw” in the money system. Listen here now.

Market Insight


BY CHRIS LOWE, EDITOR AT LARGE


The massacre in Chinese stocks could finally be over.

From June 2015 to February 2016, Chinese equities, as measured by the Deutsche X-trackers Harvest CSI 300 ETF (ASHR), fell 65%.

As you can see in the chart below, ASHR has made higher highs and higher lows since February – suggesting a new uptrend.


Featured Reads

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Artificial intelligence is already 10 years more advanced than all the top experts predicted… and one iconic tech company is shocking the world. Here’s what it means for you…

“Most Painful” Wave of Defaults Is Heading Our Way
With corporations taking on historic amounts of debt to fund marginal investments, increase dividends, and buy back stock, the coming wave of defaults, will hurt bond investors worse than expected.

JPMorgan CEO Fears Economic Tragedy
In his latest annual letter, Wall Street icon Jamie Dimon warns of serious issues facing the U.S economy. And it has nothing to do with credit or market risks.


Mailbag

Today in the Mailbag, an outpouring of well wishes in response to yesterday Diary titled “No Cure for Old Age.”

Beautiful story about your Mother and old Baltimore. You and she handled it perfectly.  Congrats on saving her. Regards.

— Brad R.

I LOVE this piece, which speaks volumes!

Thank you, Mrs. Anne Billard Bonner. Thank you for sharing Mr. Bill Bonner.

— Greg J.

Well done your Mum! Great that you have those genes!

— Roger S.

Great article. Blessings to your Mom. 

Hope it is just a passing spell. My Mom was the same way… All the best.

— Robert T.

I truly enjoy reading the Diary and especially today’s entry about "Mother" Bonner.

It brought back very similar memories for me with my dear Aunt at 89 years old. She answered the doctor’s question #3 almost exactly the same as Bill’s Mom.

What a heritage they leave us to carry faithful forward!

— Renee A.

I enjoyed your letter concerning your mother. Sounds like a neat lady. Thanks.

— Dave W.

Bill, all the best to you and your Mom, and bless you for honoring her wishes.

What a pity that agents of the State (in your case, federally compensated doctors) feel the obligation, actually the right, to take control of the destiny of another soul without that soul’s permission.

I have, and still do, enjoy your work so much. Pardon me for not thanking you years ago… your daily letter is like a message from an old friend you haven’t seen in years. You can’t wait to read what has happened in their life.

And your books are always a wonderful read. I have gifted many copies to friends and family. Thanks again.

— Dick W.

Heh! I see you inherited your mother’s sense of humor!

— John M.

Tell your mom that my wife and I really enjoyed the story, and we feel the same way.

— Richard P.

Mr. Bonner, what an incredible talented mind that mother of yours gave you! I laughed and cried with this episode!

My prayers and best wishes for your dear mother and best friend, my dear!

— Maria D.

I deeply appreciated today’s heartfelt diary.

It reminded me of my favorite attribute of Dickens’ writings, and like Mr. Jarvis Lorry, the fact that you are a “man of business,” instead of disguising your care, makes it palpable.

Please accept my sincere “Best Wishes” for you and your family.

— John W.

I love Bill’s recent article about his mother, the medical system, and all of his personal commentary as the story unfolds. Nobody does it better.

I look forward to your return to Gualfin. When will visitors be allowed to come to visit Gualfin? I saw an unfinished website where you were planning on it. Thanks for all the great information.

— Michael P.

Editor’s Note: The website you mentioned just went live. So feel free to try it again.

For those readers who haven’t seen it yet, the site is www.gualfin.com. It’s full of information about Gualfin – the ranch… the history… the wine… and how readers can plan a custom-tailored visit to Bill’s legendary retreat.


In Case You Missed it…

If you missed Porter Stansberry’s emergency gold briefing on Wednesday, it’s not too late to catch up on what he said.

His new online presentation details exactly why he believes gold and gold stocks will soon be worth 10–30 times what they are today.

Check it out here.