Updated: Showdown With the Bond Vigilantes – Sticking to the Basics

Posted by Bill Bonner - The Daily Reckoning

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Ouzilly, France – August 3rd

What’s new? Nothing much….

Markets still moving up…

Oil rose $2.50 on Friday…to $69. Gold rose $18 to $953. The Dow was up 18 points. And the dollar fell to $1.42 per euro.

And governments are still doing the wrong thing…trying to increase demand. It’s not possible…for reasons we describe below…

Well, it’s August…and we’re on vacation. But just because we’re on vacation doesn’t mean the world stops turning. It just doesn’t turn quite so fast.

“Why don’t you just stop writing for a while?” our mother asked this morning. She is visiting for the summer.

“I don’t know how you write every day anyway. You must say the same thing…”

Richard Russell has given a Dow Theory bull market signal. When you get a signal, he says, you don’t argue with it; you go with it. Stock prices are going up.

We don’t doubt it. The Dow would have to clime to about 10,300 just to give us a classic 50% bounce.

But we are in a depression. We don’t gamble on stocks in a depression. It’s too risky. Instead, we go with the flow. And the flow over the next 10 years or so is probably going to be down.

By our reckoning the Dow hit its high in January of 2000. Adjusted for inflation it’s been running downhill ever since. Investors have made nothing for their trouble. And if we’re right, they won’t make anything in the years ahead either. Instead, they’ll have to wait until stocks are cheap again.

You know, dear reader…investing is really very simple. Buy low. Sell high.

Okay…now that we got that figured out…let’s move on…

Sticking with the basics, what we notice is that stocks, bonds and commodities move in broad patterns that last for many years. Not to put too fine a point on it, but they go up and then they go down. Or vice versa. Just looking at the last 50 years, stocks were very expensive in 1966. Then, they dilly dallied around for a couple of years…and headed down. This bear market continued until August 1982. That was when BusinessWeek magazine declared that stocks were not merely ailing, they were dead: “The Death of Equities” was the cover story that month. Naturally, equities got up from their deathbed the very next month and entered the marathon. They ran for the next 18 years.

Well, you know the rest of the story as well as we do. It’s not complicated. The problem is that it takes patience to see it…to understand it…and to take advantage of it. The way to make money in stocks is to buy them when they are very cheap. But you may have to wait for 15-20 years. They’re not cheap towards the end of the bull cycle. Since you never know exactly when it’s going to end you don’t want to buy anywhere near the top. So you wait…and then stocks keep getting more and more expensive. Finally, the top arrives…and then you have to wait another decade or more until they reach bottom.

“Well, why don’t your write The Daily Reckoning once every 20 years?” mother wanted to know. “Just tell them when to buy…wait 20 years…and then tell them when to sell.”

But we’re going to ignore our dear, sweet momma this morning. She just doesn’t understand the complexity of the financial world!

For the last nine years, stocks have been going down (albeit with a major countertrend to the upside). We’ll probably have to wait another few years before they are cheap enough to buy. And when the end comes, stocks will be very cheap – between 5 to 8 times earnings.

When will that day come? Probably around August 15, 2018. Don’t forget to read The Daily Reckoning that day!

[While you are waiting that out, dear reader, it would probably be best to steer clear of stocks altogether. But that doesn’t mean that you’ll have to wait another ten years to turn a profit…in fact, by following one simple rule, you could double your money in three months – without touching a single stock. See how here.]

Ed Note: Check out Agora Financial’s 5 Minute Forecast HERE.

Sign up for the FREE Daily Reckoning HERE.

07/31/09 Paris, France

It’s time for summer vacation in France.

“You can forget about getting anything done in the month of August,” said colleague Simone Wapler. “The French are busy with serious things…real things…like painting shutters and picking green beans…fixing curtains and making strawberry jam. They don’t want to hear about economics or markets…”

France begins its summer vacation today. We’ve come to join them…

But we will keep an eye on the money anyways…because it’s just getting interesting…

Two interesting things are happening. First, the feds are facing a showdown with the vigilantes…you know, the people with money – $2 trillion worth of reserves, $1.5 trillion of it in U.S. Treasury paper. They’ve got to convince them that they’ll protect their investment. If they fail, the vigilantes sell their bonds…cause the dollar to collapse…and force up U.S. interest rates – which will come down like Round-Up on those green shoots of recovery.

Meanwhile, stocks are not only anticipating a recovery, they’re counting on it. And for that, they depend on stimulus from the feds. But what Bernanke gives in stimulus, the vigilantes are likely to take away…

More on that in a minute…

The other big thing that is going on is the rally in the worlds’ stock markets. On Wall Street, for example, the Dow rose 96 points yesterday. How far will this rally go? Should you try to take advantage of it?

As a rough rule of thumb, a bounce can be expected to recover half of the

…Read more HERE.

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed and internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily.

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