Spare a Moment for the Bears

Dear Reader,

Before we start today’s Rum, please bow your head and spare a moment for the bears. We’re slowly going extinct on Wall Street. Stocks here in the US have added on $13 trillion in market capitalisation since the pandemic lows in March. Companies that make no money — like Nickola Inc, an electric truck maker, are all the rage with money managers who can’t afford to miss out on the rally (lest they disappoint their clients).

Did you see Apple hit a market cap of $2 trillion last week? It became the first US company to do so (Amazon may be next). Big US tech companies are now like countries unto themselves, with market caps larger than all but the world’s largest GDPs (China and the US). Is this a new age? A new era of distance working, distancing learning, and distance living — all of it enabled by a handful of tech behemoths?

Probably not. It’s the next in a series of a bubbles driven by low interest rates, central bank asset buying and government stimulus (especially now due to COVID). Bubbles pop. Always do. It happened in 2000. It happened again in 2007. It’s going to happen again. But how soon?

Keep an eye on the 3,500 level in the S&P 500. If and when the blue chip US benchmark reaches that level, it will mean the bull market that began in March 2009 has become the single-best performing bull market since the 10-year run between 1990 and 2000. That market went up 417% before the pop.

By the way, I’m not using the ‘textbook’ definition here. Some people would technically argue that the 35% crash in the S&P after COVID began ending the last bull market. And then, that a new one began. But that’s blather.

This recent rally is part and parcel of the one that started in 2009. And the backbone of this huge surge in the value of stocks has been the same throughout easy money from central banks and the suppression of bond prices, driving money into ‘risk assets’.

The modern central banker is one part arsonist and two parts thieves

The Fed would normally throw a party for itself this time of year in Jackson Hole, Wyoming and tell anyone who would listen how smart and brave it is for saving investors, keeping inflation low, and generally being masters of the universe. But if you’re a regular reader of Rum, you know better.

The modern central banker is one part arsonist and two parts thieves. He transfers money from the lower and middle classes to the wealthy by a monetary policy that supports stock prices but saddles the public with huge debts. At least we don’t have to suffer through their braggadocio and hubris this year.

What I’m trying to figure out in the next issue of The Bonner-Denning Letter (published on Wednesday in Australia) is what’s next for the Fed and the world. For example, in the meeting notes to the July meeting of the Fed’s Open Market Committee, participants said it might not be necessary (or desirable) for the Fed to practice ‘curve control’. Why does that matter?

The big check on runaway government borrow is interest rates. Out of control government spending would usually — if there were any bond vigilantes worth their salt — result in soaring interest rates. It would cost the government more to borrow. It would borrow less and spend less and that capital would be free for some more productive use (like business investment).

But when a central bank practices curve control (a practice the Reserve Bank of Australia is already engaged in), it puts a lid on natural interest rates and keeps government borrowing costs low. It does this by buying government bonds. The price goes up (good for speculator) and the yield goes down or at least stays flat.

Here in the US, the Fed has discussed curve control as a way of keeping borrowing costs down for the US government. You know the government I’m talking about. The one with $27 trillion in debt. The one running a $3 trillion deficit this year. The one about to run even larger deficits next year (no matter who wins the November Presidential Election).

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The main driver for the gold price

The Fed may not call it curve control. I call it ‘financial repression’, where savers and income investors are sacrificed on the altar of government deficits. But whatever you call it, US deficits are set to be so high in the coming years that the Fed will almost certainly have to intervene all along the yield curve to keep US Treasury bond and note yields from rising.

It’s all part of the decline of fiat money against precious metals. That’s the argument I made in last month’s Bonner-Denning Letter. And that’s the main driver for the gold price. It’s also the main reason we’re looking for companies with gold in the ground, not produced, that will get more valuable as the gold price goes higher.

In the meantime, as the US dollar becomes less valuable, the bonds that hold civil society together weaken and fail. Last week I asked what was next in authoritarian war on free enterprise and individual liberty. Victory? More violence? Or something in between.

Violence is the answer in the streets of US cities like Portland, Oregon, Chicago, Illinois and New York. Protesters exchanged tear gas and threw bags of faeces at each other, according to news reports. It’s been going on for weeks now.

Politically engaged modern Americans are no more advanced than their ancient brethren on the African savanna, flinging excrement at one another and howling like monkeys. Strap on your seatbelt for more of that as we head into the election.

The big question is whether, in the US, a Biden victory will cause the sudden disappearance of COVID as a serious public health threat (or the sudden appearance of a vaccine that will solve everything). If COVID is being used primarily as a bludgeon to beat up Donald Trump, it will be dropped like a hot potato on 4 November.

In Australia, the Andrews government in Victoria continues to use the pandemic as an excuse to curtail individual freedoms, attack small business, and generally enlarge the state (and the ego of politicians). When will THAT end? You tell me. Send your thoughts to with the subject line ‘Rum Rebellion’.


Dan Denning Signature

Dan Denning,
Editor, The Rum Rebellion

Dan Denning is the co-author of The Bonner-Denning Letter.

Dan was a founder of Port Phillip Publishing back in 2005, which quickly became the leading publisher of its kind for independent financial research and insights. In 2014 he left to head up Southbank Investment Research in the UK. Dan is also the author of the 2005 book, The Bull Hunter. Today, he’s based in his home state of Colorado. Each Monday in The Rum Rebellion you’ll get Dan’s unique contrarian thinking to provide insights you won’t find anywhere else.

Dan Denning’s belief in free markets, sound money, personal liberty, and small government have underpinned everything he’s done during his 23 years in the financial publishing industry.

The Rum Rebellion