Our Financial Reckoning

"The eternal sunshine of the spotless mind" is where all bad things are forgotten. In this sanitized world all things will work out fine. For investors this means that just keep putting more money in mutual funds and you’ll be rich.

Bill Bonner told his audience at the Las Vegas Money Show last month that he had just titled his speech "The eternal sunshine of the spotless mind" five minutes before going on, borrowing from the Jim Carey movie of the same title currently in theaters.

The Money Show and FreedomFest that followed, allowed investors and freedom lovers the opportunity to see and hear one of the finest financial wordsmiths in person, not just once, but three times.

Unlike the mainstream financial media on CNBC, FNN, Fox and Bloomberg, Bonner hasn’t forgotten history. He remembers that only 25 years ago, the stock market’s price/earnings ratio and dividend yield were the same at six. He remembers that at the same time, the Dow Jones Industrial Average and the price of gold per ounce were the same near 850. Government bonds yielded 15 percent in those days. The budget hasn’t been balanced since Nixon was in office, and the trade balance has been negative since the early 1980’s. The investment balance was positive in 1986 but now stands at a minus three trillion. Yet government bond yields today are in the four to five percent range. "Is it three times safer to lend money to the government now?" Bonner asked the crowd rhetorically.

Investors have forgotten the old adage "buy low and sell high." Stocks and real estate are both expensively priced yet people are still buying, expecting a happy ending. But, we don’t always get happy endings in real life, Bonner reminded the crowd. Investors expect that Alan Greenspan can control things and ensure eternal sunshine — that central bankers know more than they used to. But as Bonner eloquently pointed out: "In science and technology knowledge is cumulative, but in central banking, finance and romance knowledge is cyclical."

People used to have a deep distrust of paper money. This was learned over many generations. Governments will always print too much money, to the point of making it worthless. But, who today distrusts paper money, despite the fact that Greenspan has created more money than any central banker in history?

The common wisdom used to be that a person shouldn’t go into debt. This view was based upon centuries of experience. Bad things can happen, thus money should be saved just in case, not borrowed. But, now people follow the government’s lead, the government will never get out of debt and neither will the people. "There is no virtue to being debt free anymore," Bonner told the audience, "there used to be mortgage burning parties, because paying off a mortgage meant you were free — a cause for celebration."

People have also forgotten what it means to save. The savings rate has dropped from ten percent to nearly zero. Instead of working hard, saving and prudence, the new investor class, what Bonner affectionately calls the "lumpeninvestoriat" believes that they can get something for nothing. Instead of distrusting Wall Street like their ancestors wisely did, the lumpeninvestoriat believes that they can "get rich in their sleep." These people believe that by merely buying stock they are investors. They know nothing about these stocks other than they want the prices to go up. Yet polls say that the uninformed and ignorant, with no historical experience, expect 10 to 20 percent annual returns. These people, says Bonner, have become Wall Street’s patsies.

Bonner believes that the U.S. will have a "slow motion slump" or as he describes in his best-selling book, Financial Reckoning Day, a soft depression. Near the end of Financial Reckoning Day provides what he believes to be the trade of the decade. As Bonner writes: "Investors do not need to make many decisions. Studies have shown that allocation decisions are what make or lose the most money." Bonner goes on to write that if an investor simply bought gold in 1970 and sold it in 1980, he would have made a 1,708 percent profit. In 1980, Japanese stocks should have been bought, and sold in 1990 for a smooth 549 percent profit. Of course in 1990, the trade was to buy U.S. stocks and sell them in 2000 for a 426 percent profit.

In 2000 the trade of the decade was to buy gold and sell the Dow, a trade that is looking good so far. "Should he stay with the trade?" Bonner asks, "We cannot say, but it’s best not to look until 2010."

Bonner told the FreedomFest audience at Bally’s Hotel that gold is a good thing to hold "when the Vigoro hits the Mixmaster."

Anyone who reads Bill Bonner, or has read Financial Reckoning Day knows he imparts financial wisdom with an uncommon way with words.

"Bonner sometimes makes me feel like a house painter staring at a Rembrandt," writes John Mauldin, author of Bull’s Eye Investing. "He is that good."

The investors, who were lucky enough to hear Mr. Bonner in Las Vegas, left with minds not so spotless and, much more wisdom than they came with.