As we get ready to kick off 2020 in a couple of days, I thought it would be appropriate to share with you a bit from my December “You May Not Know Report” 2020 forecast issue.
If, after reading this forecast excerpt, you’d like to get a complimentary copy of this report, just give the office a call at 1-866-921-3613 and we’ll be glad to provide you with one.
I don’t expect any new trends to emerge in 2020 but I do expect that existing trends will continue and intensify.
The first and, in my view, most important of these trends is that of easy money, or continued money creation by central bankers.
On December 5, 2019, the Federal Reserve reported that its balance sheet had once again topped the $4 trillion mark, up from $3.8 trillion in September.
The Fed has been adding ‘temporary liquidity’ to the repo markets since mid-September. The repo market is short for repurchase agreement.
A repurchase agreement has one bank selling a security, usually a government issued security (government debt) and then agreeing to buy that security back at a later date that is usually just a few days out.
This activity is how banks loan money back and forth to maintain the required reserves.
In mid-September, the overnight interest rate that banks charge each other for these short-term loans suddenly increased from about 2% to more than 10%. The Federal Reserve intervened, injecting ‘liquidity’ or cash into this market to stabilize interest rates.
Begs the question as to why interest rates suddenly jumped by 500% doesn’t it?
If one thinks about this rationally, there are only two reasons for this.
One, a bank loaning another bank money doesn’t trust the collateral offered for the loan which is a US Government security.
While the finances of the US Government are just plain awful, it’s hard to believe that these banks believe the US Government will default on debt overnight.
The only other reason is that the bank making the loan doesn’t trust the bank accepting the loan. If that’s the case, it would explain the sudden increase in interest rates.
While no one knows for sure what happened, we do know for certain that it happened. And, as noted above since mid-September, the Fed has been continuing to ‘inject liquidity’ into this repo market.
“Injecting Liquidity” is just another way of saying adding cash. Where does this added cash come from? The Fed creates it.
The Reality of 2020 Finances
The current, official national debt is more than $23.1 trillion (December 7, 2019). On September 30, just 68 days prior, the official national debt was about half a trillion dollars less. That means over that time frame, the United States spent nearly seven-and-a-half billion per day it didn’t have. Let that sink in.
There are just under 129 million households in the United States. However, not all households pay income tax. According to the Tax Policy Center, 44% of American households pay no income tax. Doing some straightforward math, we come to the conclusion that about 72 million households pay income taxes.
If you count yourself in the group that pays income taxes, then here is what the math means for you. Over the 68 days from September 30 to December 7, the government spent $104 on your behalf each day that they didn’t have tax revenue to cover. Over the course of a year should that trend continue, your share of the deficit is more than $38,000 and no debt has been paid down.
This is unquestionably unsustainable.
Forecast: Real Inflation Will Increase
While you may not come to this conclusion by looking at the headline inflation rate, when one examines the real inflation rate by looking at consumer prices, the conclusion is obvious. More money creation will lead to greater inflation.
Economist John Williams focuses his work in this area. He tracks economic data using methodologies that have been used in the past and compares those numbers with the numbers that are derived using current methodologies. As time has passed, the tracking and reporting structures of the most followed economic data has changed. Not surprisingly, current calculation methods make the reported economic data look more favorable.
According to Mr. Williams’ website, www.shadowstats.com, the official inflation rate is now about 2%. But, when using the 1980- based inflation calculation, the real rate of inflation is just under 10%. That means the current Consumer Price Index of about 2% is between 7 and 8 percent lower than it would be if the 1980-based calculation methodology were used. Over time, that creates a huge disparity between reported inflation and the real inflation rate which we all feel when we buy things.
Should inflation continue as we expect, moving to more tangible assets in your portfolio like gold, silver and income producing real estate could make sense.
Forecast: Stocks Will Peak in 2020 or 2021
Stocks enjoyed a terrific 2019 after a year in 2018 that was less than stellar. As this forecast issue goes to press, the Standard and Poor’s 500 is up over 25% year-to-date. Money creation helps stock prices. There is no doubt that stocks have benefitted from the Fed’s policies.
There has been another dynamic that has helped propel stock prices. Many companies have been buying back their shares of stock. Even if overall earnings don’t increase, when those earnings are spread over fewer shares of stock, earnings per share increases. Earnings per share is one of the main metrics used to evaluate the performance of a company.
One example of these massive stock buybacks is Oracle. John Freeman, a research analyst with CFRA had this to say about Oracle (Source: https://www.cnbc.com/2019/12/05/oracle-shows-buybacks-can-go-too-far.html):
“It’s staggering how much money they’ve spent buying back shares. I’d say 90% of their earnings-per-share growth the last two years has come from buying back shares.”
When looking at the different ways that stock values are measured, one comes to the conclusion that stocks are overvalued.
Warren Buffet’s favorite stock valuation metric is rumored to be the market valuation to gross domestic product ratio. This ratio takes the total value of stocks divided by the gross domestic product of the United States. This ratio is presently higher than at any time in recent history with the exception of just prior to the tech stock crash at the turn of the century.
Forecast: The Biggest Bond Bubble Ever
As this forecast issue is being finalized, there is more than $17 trillion of global sovereign debt that is yielding negative interest rates. Here’s what that means. You loan a government money and instead of earning interest on your investment and then receiving your principle when the bond matures, you instead loan a government money and get back less than you gave them when the bond matures.
Investors are no longer investing in bonds for yield; instead, they are betting on more price appreciation and interest rates that are even more negative.
For a copy of the complete 2020 Forecast Issue of the “You May Not Know Report” call the office at 1-866-921-3613.
Happy New Year! Wishing you and yours a happy, healthy and prosperous New Year!