The Index of Evil

By Bill Bonner on June 12, 2015

Today, we’re introducing our new Index of Evil…

But first a quick look at what our proprietary stock market indicator is telling us about future returns.

Our lead researcher, Stephen Jones, developed it for us. Stephen is a former stock market analyst at Value Line and the president of financial planning firm String Advisors.

The question today: When past stock market conditions have been similar to today’s, what have subsequent returns been like over the next 10 years?

 

Another Lost Decade

The indicator looks at the price of stocks relative to the economy that supports them.

It’s like looking at real estate prices compared to household income. The two are connected, like a junkyard dog to a chain link fence. The dog can move around… but only inside the fence.

The biggest factor that determines long-term stock market returns is your entry price.

High prices tend to leave little room for upside. Low prices tend to leave little else but room for upside. That means always looking at the stock market’s price-to-earnings ratio.

But over the long term, studies have uncovered two other factors that have a big influence on stock market returns: debt and demography.

Old people and large debt loads rein in stock market returns. When we add those two factors into our model, we see that the most likely average annual rate of return during the next 10 years is – appallingly – negative 9.8% a year.

So, if you have money in the U.S. stock market… your prospects look bleak. There is very little chance of a satisfactory outcome over the next 10 years.

Bullies, Chiselers, and Zombies

We’ll come back to that on Monday.

But now, let us finish our series, “The Good, the Bad, and the Ugly.” We’ve been looking at how, when everybody’s a lawbreaker, it’s hard to spot the real criminals. (To catch up, here’s Part I, Part II, Part III, and Part IV.)

You’ll recall that we imagined a conversation between two German soldiers on the Eastern Front in 1943.

“Klaus, are we the bad guys here?” one might have asked the other.

Yesterday, we mentioned a few “bad guys.” It was no trouble to find them. Just check the lobby of the Four Seasons Hotel in Washington, D.C.

But today we move on – beyond the two-bit bullies, chiselers, and zombies – to the really ugly guys.

Who are the evil ones?

It’s easy to see evil in dead people. Stalin… Hitler… Pol Pot… people who tortured and killed just to feel good. The jaws of Hell must open especially wide to let them in.

But who should go to the devil today?

 

Counting the Bodies

It is not for us to say. But we can make some recommendations:

Paul Wolfowitz, Richard Perle, and Lindsey Graham come to mind, along with John McCain, Dick Cheney, George W. Bush, and all the other clownish warmongers.

Of course, we want to be fair and respectful. Each should definitely get an impartial hearing… and then his own lamppost.

But everybody has his own idea about who should swing. So, let’s try to look at it objectively.

Things governments do are quantifiable. We can follow the money. We can count the bodies.

We’re going to make it easy to tell the good from the bad and the ugly with our new Index of Evil.

Which are good? Which countries really are evil?

Russia? Iran? North Korea? The Islamic State? How do we know?

We put our trusty researcher, Kelly Green, on the case.

“Kelly,” we asked, “can you quantify ugliness? Can you help our readers figure out who is good and who is bad? Can you identify who really should be included in the Index of Evil?”

Kelly was not put off by the magnitude and gravity of the job. She went to work on it. What are the marks of evil in a nation? Murder. Assassination. Wars. Torture. False imprisonment.

We’ll forgive theft. All governments steal. (Some more than others.) But we’re talking about “ugly” not just “bad.” So let’s stick to capital crimes and mortal sins, not just venial sins and misdemeanors.

Who kills? Who puts people behind bars? Who tortures?

Kelly added it up, creating the world’s first objective standard.

Who’s the Bad Guy Now?

Three decades after the U.N. Convention Against Torture, torture still happens in 141 countries.

Alas, torture, says Kelly, is not reliably quantifiable. The CIA, for example, calls it “enhanced interrogation techniques.”

To his credit, Senator John McCain – a prisoner of war in Vietnam – has consistently opposed torture and introduced new legislation to ban it just this month.

We also had to take out countries for which data was unavailable. North Korea, for example, is a mystery. ISIS, too, is such a special case that the numbers won’t mean much.

You’ll notice that we included many numbers that were not clearly evil. Military spending, for example, is not necessarily a bad thing. And the homicide rate is not always the fault of an evil government.

Nevertheless, the numbers are there; make of them what you will.

And we included the U.S. for comparison:

061215 table

So, Klaus, who’s the bad guy?

Regards,

Signature

Bill
June 12, 2015
London, England


 

Market Insight

Oil Prices Hit New High for the Year

by line

 

Oil prices hit a new high for the year this week, as you can see from the chart below.

061215 DRE WTI


On Wednesday, the price of a barrel of U.S. crude hit $61.43 – its highest level in 2015.

This is being driven in part by rising demand.

The International Energy Agency says global demand for crude oil will increase by 1.4 million barrels a day this year. That would bring daily average demand to 94 million barrels.

Last year’s average was 92.6 million barrels a day.

But what’s really interesting is that oil prices are climbing despite news that OPEC production just hit its highest level in three years.

I recently talked to resource investing expert and chairman of Sprott U.S. Holdings Rick Rule about the long-term outlook for oil.

The full interview was included in the May issue of Bonner & Partners Investor Network. But today I want to share with you one of the key takeaways…

Rick told me that if oil prices fell back into the $40 to $50 range… and hold there for two or three years… capital investments in oil wells would fall. This would significantly impair their production capabilities.

In that case, any increase in demand will likely take the oil price to the $125 or $150 level.

But if oil prices stay in the $60 to $65 range for the next two or three years any demand response would likely only take the oil price up to $70 to $80.

That’s a consequence of our ability to increase production from well-maintained oil fields.

As Rick put it:

It reminds me of the old Purolator oil filter commercial. A mechanic is on the TV screen saying, “You can pay me now,” holding up a $10 oil filter, “or you can pay me later,” holding up a $1,500 blown engine.

Rick also explained why today’s beaten-down resource markets offer contrarian-minded investors a rare opportunity to capture “explosive” gains when the next bull market in commodities takes off.

More important, he passed on his top speculative recommendation for how to profit in the next commodities bull market.

To read my full Q&A with Rick, sign up for a risk-free trial ofInvestor Network at 60% off the regular price.