A Remote Ranch in Argentina, the Debtberg and Betting Against the Consensus

Debt Disaster Coming!

In the 1970s, after President Nixon changed the world’s monetary system, your editor was deeply involved in a quixotic, but remarkable, effort to stop the US government from wrecking the country.

After Nixon cut the last link between the dollar and gold – the saving grace of every monetary system since Hammurabi – your editor saw the handwriting on the wall. It said: Debt Disaster Coming!

As director of the National Taxpayers Union, he worked on two major initiatives to stop this disaster from occurring. One was an amendment to the US Constitution. The “Balanced Budget Amendment” would have blocked the feds from running deficits except in times of war or national emergency.

Thirty-two states approved the amendment – two short of those needed to implement it. (Now we see how easily the feds could have gotten around this amendment anyway: We have a state of war all the time!)

The other effort was a lawsuit. On behalf of America’s children, we sued the US government in Bonner v. Baker. The “Baker” was James Baker, who at that time was the US secretary of the Treasury.

National debt was a tax on future generations, we argued. Laying on this sort of inter-generational obligation amounted to taxation without representation and should be banned. The court threw out our suit.

Ronald Reagan and James Baker (who became treasury secretary after Donald Regan switched to the chief of staff position in 1985)

Photo credit: Discovery Channel

How the GOP Went to the Dark Side

It was while we were thus engaged in protecting the republic that Ronald Reagan won the 1980 presidential election. We went to his inauguration and celebrated; it appeared that the battle had been won, neither in the courts nor in the states, but in the national election.

Somehow, and against all odds, Reagan was a fiscal conservative. He would restore order to America’s finances. Or so we believed …

But at that moment, the Republican Party went over to the Dark Side. Under the influence of Dick “Deficits Don’t Matter” Cheney … and Reagan’s first secretary of the Treasury, Don Regan… the Gipper started to run up some of the biggest deficits in US history.

Readers may not be aware of this, so we felt this was a god opportunity to point out that there is more to Dick Cheney than meets the eye. In fact, he is not only an incredibly life-like android sporting a perpetual frown as WWN informs us above, he is also the Highlander! This was – possibly inadvertently – revealed by John Oliver in 2008, who remarked: “Dick Cheney exists neither in the executive branch nor the legislative, yet simultaneously in both. He is neither man nor beast, yet has elements of the twain. He is at once everything and nothing, substance without form, shape without motion, time without reason … he is the Highlander.”

Reagan’s budget director from 1981 to 1985, David Stockman, documented it all from the inside in his excellent book The Triumph of Politics: Why the Reagan Revolution Failed.

That is when we decided that trying to save “the system” was a lost cause. We decided, instead, to try to save ourselves. We left the National Taxpayers Union and began building a group of independent researchers, analysts and advisers who could help folks survive and prosper in what we thought would be a difficult and dangerous world. (This group became Agora Inc., the publisher of this and many other newsletters.)

Incidentally, Dick Cheney soon proved that he was indeed the Highlander, by surviving what appeared to be a serious heart condition with consummate ease . Like a jack-in-the box, he popped out of his proverbial coffin again, as lovingly depicted by Steve Bell above. The awed look of surprise on GW’s face seems quite appropriate to the occasion (if you’re not au fait with Highlander lore, the Highlander can only die if someone cuts off his head, preferably with one of those incredibly sharp Highlander swords. Heart conditions cannot do a proper Highlander in at all).

Cartoon by Steve Bell

An Unchanged Message

As it turned out, the world wasn’t so dangerous at all. Instead, it appeared benign. A stock market boom took the Dow up to 18 times its 1982 level. And the Fed’s “Great Moderation” made it appear that the good times were here to stay. Nevertheless, we persevered…

Our message has been unchanged for 30 years: You can’t build a healthy economy on debt. And when things go wrong, you can’t fix it with more debt. That is what we’ve been saying for three decades. And for three decades, we have looked like a fool.

Total credit market debt vs. GDP (nominal). Naturally, this chart never gets old. There is a certain probability that it will one day step across the divide between “benign” and “interesting” – click to enlarge.

But to a growing readership, the analysis made sense and the advice made money. In America, our list of readers and subscribers grew. And in the 1990s, we took our message overseas – to Britain first… then to France. For 20 years, we lived overseas, where we were starting and nurturing satellite businesses.

Now, we have offices in 10 countries. We publish in Chinese, Spanish, Portuguese, French and German. And our readership continues to grow. Currently, we have 2.4 million subscribers – more than the Wall Street Journal, the New York Times and Bloomberg put together.

But apart from our readers, few people have heard of us. Your editor has never been a candidate for mayor of New York. Nor for anything else. And if by some fluke he were elected to public office, he’d claim voter fraud.

He doesn’t live in Manhattan or Malibu. His name never appears in the paper. He goes to no power lunches. He attends no board meetings. And he hobnobs with no one you’ve ever heard of.

Instead, here he is… a nobody … on the high plains of South America, with a group of gauchos, a laptop computer, an unreliable Internet connection and nothing between him and God but a $12 sombrero. What gives?

Although only remotely contextual, here we are juxtaposing the outcome of an honest election with “voter fraud”. The artist who drew the cartoon actually meant to criticize voter apathy, but underneath the superficial finger wagging a deeper meaning is hidden: most people regard the State as akin to a mafia don, someone best avoided. Voting only serves to indirectly legitimize the don and his army of zombies.

Cartoon by John Cole

Betting Against the Consensus

Our experience inside the Beltway left us with a profound distrust of the media, the politicians and their cronies in the “private” sector. The system is corrupt and self-serving. It turns jackasses into celebrities and makes claptrap sound respectable.

But when you are in the middle of it, you can’t help it: You start to believe what everyone else believes – mostly guff and bugaboos provided by a dumb, lackey media. After you’ve read the 50th article about how the Fed saved America from Armageddon, for example, you may even begin to believe it!

In most of life, going along with the popular malarkey is merely pathetic; in financial life, it is fatal. Let us explain …

If you believe that Hillary Clinton is a populist… or that Obamacare will make us healthier… or endless wars in the Middle East protect us from terrorists… it probably doesn’t matter very much. Your life goes on more or less as usual despite these delusions.

But if you think central banks can hold interest rates down indefinitely… or that the burden of debt doesn’t really matter… or that present stock market valuations are reasonable and sustainable, you’re probably going to lose a lot of money. Not necessarily sooner, but definitely later.

Market prices reflect delusions too – but never forever. Eventually, markets take a cold, hard look… and adjust to reality. Our business model is simple: Every day we take a cold, hard look and try to stay ahead of the markets. Our motto: Sometimes right. Sometimes wrong. Always in doubt.

The simplest expression of our financial and business strategy is something investors call “contrarianism.” It is the recognition that you can never make more money than everyone else by believing and investing in what everybody else already knows.

When everyone comes to believe in something, it is bound to become fully priced… if not overpriced. You make real money in the markets only by investing against the consensus. There is never any way to know what is true and what is not. But sometimes, if you can keep your wits about you, you can identify what can’t be true.

That is why you don’t make money by investing in truth. You make money by investing against what most people think is true… but isn’t. As billionaire speculator George Soros put it, “Find the trend whose premise is false, and bet against it.”

Contrarianism, a concept closely related to the notion of “buy low, sell high”. This seems to have been forgotten by many market participants, who mostly appear to be “buying the dip” these days, if there actually is one – click to enlarge.

That is why it is good spending a few months here at the ranch. There is much less “noise” from the media. We have no TV. No radio. No newspapers. No telephone. Up in the high sierra, we seek no favors. We ask for no recognition. We have no truck with popular fantasies or convenient prejudices.

Maybe we are wrong. Maybe the cronies, the central planners, the zombies and the manipulators are right after all. Maybe you can build a healthy economy on debt. And maybe you can build and secure your wealth by doing exactly what everybody else is doing.

Then again, after 30 years of being wrong, maybe we will be right after all. Stranger things have happened. In any case, we like being here. The air is thinner here. But it is also clearer.

End of the road: the finca Gualfin, in Salta province Argentina – where unperturbed contemplation can happen and is in fact happening. Clear air and freedom from noise make it possible.

Photo via lasfincasdelcalchaqui.com

Image captions by PT

Charts by: St. Louis Federal Reserve Research, BigCharts

The above article originally appeared as “The True Reason We’re on a Remote Ranch in Argentina“ at the Diary of a Rogue Economist originally written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.