Nick’s Note: Regular readers know longtime PBRG friend Bill Bonner as a “big picture” thinker. When we want to connect the dots on the broad economy, we turn to him. Today, Bill explains an important concept behind his “big picture” analysis…

By Bill Bonner, chairman, Bonner & Partners

Today, we aim to develop a compass… to help us figure out where we are and where we are going.

On Planet Earth, we can find our direction by reference to the Magnetic North. For investing, we use the most reliable force in finance—the relentless return to “normal”—to get our bearings.

And searching for normal, we may have stumbled upon what could be the Trade of the Century. More on that later…

Reversion to the Mean

As economists describe it, reversion to the mean is merely a recognition of the tendency for things to stay in a range that we recognize as “normal.”

Trees do not grow 1,000 feet high. People don’t run 100 mph. You don’t get something for nothing.

Normal exists because things tend to follow certain familiar patterns, shapes, and routines.

When people go out in the morning, they know, generally, whether to wear a winter coat or a pair of shorts. The temperature is not 100 degrees one day and zero the next.

Occasionally, of course, odd things happen. And sometimes, things change in a fundamental way. But usually, when people say “this time is different”… it’s time to bet on normal.

This phenomenon—reversion to the mean—has been thoroughly tested and studied in the investment world. It seems to apply to just about everything—stocks, bonds, strategies, markets, sectors… you name it.

But let’s push on. What is unusual in the chart below? What is so abnormal that the mean is likely to revert against it?

You will note that global debt was only $30 trillion in 1994. Now it is $230 trillion. That $200 trillion in extra credit is probably the whirlwind that sent equities spinning up to the top right.

Those gusts blew stock and other asset prices up to heights never seen before. The Dow reached over 26,000. Houses went on the market for more than $100 million. Gold rose above $1,900.

But while stocks and bonds may have the wind at their backs, it seems to blow in the economy’s face… making forward progress almost impossible. The real economy—as depicted by GDP at the bottom of the chart—has grown in a rather normal way, but at a slower and slower rate.

Its steady, plodding increase gives no hint of the chaos going on above it. The real economy and the financial world are as different as the eye of a hurricane and the swirling clouds and storms around it.

Another thing you notice is that until the mid-’90s… and again between 2008 and 2012… the average investor essentially got no benefit in exchange for the added risk of putting his money into equities (the chart above includes dividends). He might just as well have left his money in U.S. Treasury bonds.

In theory, he is supposed to be able to earn some return—over pure cash—by lending his money to the U.S. government (with the 10-year Treasury bond as the benchmark). He should be able to earn even more, a premium (more than he would earn from risk-free Treasurys), by investing in stocks. The premium is supposed to compensate him for the risk that his stocks could go down at an inconvenient time.

In practice, we find that risk-free Treasurys gave him less than nothing. He has earned less from Treasurys than he would have from gold (which pays zero interest)—over the entire 48-year period.

Stocks, meanwhile, earned him nothing for the first 24 years. Then they exploded to the upside, along with debt, until the financial crisis brought them back in line with gold.

By 2008, the average investor was again earning less on stocks—despite all the risk and bother of market investing—than on gold. It continued like that until 2012, when his stock investments shot up.

But there is a time to be in stocks… and a time to be out of them. Without knowing the future, you can still know when something is not normal. And when something is not normal… it is just biding its time until it becomes normal again.


Bill Bonner
Chairman, Bonner & Partners

Nick’s Note: On Thursday at 8 p.m. ET, Bill will host the world premiere of the Legends of Finance Summit with special guest legendary speculator Doug Casey. During the summit, Bill and Doug will reveal the story behind Bill’s audacious “Trade of the Century.” Attendance to the event is free. But you must click here to reserve your seat


In his January 31 update, Palm Beach Confidential editor Teeka Tiwari asked his subscribers how they “disconnect” from volatility in the crypto space (subscribers can watch the video right here). The responses continue to fill our mailbag…

From Jess M.: I’m so used to crypto volatility at this point that I hardly bat an eye… but it’s still nice to get those comforting updates from Teeka.

In response to your question about how I disconnect from habitual “portfolio watching,” my favorites hobbies are: 1) playing guitar; 2) listening to music; 3) playing chess and solving puzzles; 4) lifting weights or getting some exercise. Thanks again for all the hard work you and your team do for us.

From Avril M.: I love gardening. And recently, when I took a break to wander through my garden during “office hours” to water some poor withering plants (we have a punishing drought in Cape Town)… I had this guilty feeling that I should be inside tending to my real work.

But now, I walk in my garden with my head held high, and a spring in my step, because—by your permission—this IS part of my real work: to de-stress from the scary crypto swings. What a win/win/win—for my health, crypto investments, and the environment!

From Nancy H.: Our favorite way to disconnect from the crypto market madness is to focus on your predictions for 2018 and listen to your updates each week. Your advice has helped us to start an amazing crypto portfolio. We would have never had the confidence to enter the crypto market without your guidance. Thank you for helping us stay grounded. It’s the adventure of a lifetime.

From Steve C.: Teeka, thanks for your pep talk on volatility. I listened to your early advice about position-sizing. Therefore, I’m cool with the recent downward volatility.

I bought bitcoin when it was $660 in July 2016. When I looked one year later, my $100 was then $2,500. So, like you said, use rational position-sizing and then “Let the Game Come to You!”

From Steven J.: Teeka, I’m not too worried about the current volatility because I’m confident that I have the best coach in my corner. I avoid listening to the news, as it just makes me emotional. The ability to stay rational is how the money is made.

From Pete R.: Chris Wood asked us if we’re interested in investing in publicly traded blockchain companies (see January 26 DailyHow to Play the Crypto Boom on Wall Street”). Yes, I am. I have been saving just for this purpose.

I’m impressed with Teeka and hopefully now, Chris. I’m retiring soon and this will help my future… so THANKS team!

From Elspeth T.: I’ve been an active investor for some years and have subscribed to numerous investment newsletters. I always end up hitting the “unsubscribe” button because their “free” content just doesn’t cut it.

But not the Daily! The few minutes it takes read your issues is always worthwhile. You rock! I’ll never unsubscribe.

Nick’s Reply: Thanks for the kind words, Elspeth. It’s readers like you who motivate us to publish the best newsletter in the business each and every day.


A new technology is about to put big pharma out of business… And an FDA anomaly this month could be the catalyst that brings this new biotech to the forefront.

For a limited time, you can watch our brief video presentation, “The Biggest Medical Breakthrough Since Antibiotics.” Click here for details