Economic, Investment and Money Extremes

Before I get into this week’s topics, one observation:  the financial markets are now as inverse as I’ve ever seen them.  And I’ve been a market observer and analyst for many years.

The fundamentals of the stock market are not favorable.  The “Buffet Indicator”, used to value stocks, tells us that stocks are no more overvalued than at anytime in the past, including the tech stock bubble peak.

Yet, the technical surrounding the stock market are still telling us that stocks are in an uptrend, although the uptrend is looking extremely stale.  One of my favorite technical measures tells me that stocks are now more overbought than they were oversold at the market bottom of early 2009 after the financial crisis.

Let’s just say by my measure, stocks are extremely overbought and a correction at any point would not be surprising. 

Now for the inverse part.

Today’s monetary policies of massive money creation to fund record deficits are good for gold, silver and other tangible assets from a fundamental perspective.  Yet, from a technical perspective, I have gold in a short-term downtrend.

Eventually, the technicals will have to catch up with the fundamentals.

I’d still suggest accumulating precious metals over the longer term and protecting open stock positions with sell stop losses to protect profits.

Recently though, stocks, residential real estate and crypto-currencies continue to perform exceptionally well.

Although when looking at the price data, you don’t need to be a brilliant market analyst to quickly conclude that the current trends are most probably totally unsustainable.

As I noted above, a severe decline in the value of all these assets soon seems to be the most likely outcome.  Let’s begin by looking at residential real estate in January.

According to Redfin (Source: house prices rose 14% in January year-over-year and sales surged 20% from one year prior.  Higher prices are driven largely by lower interest rates.

Interest rates are rising although they remain at attractive levels.  The average interest rate on a 30-year mortgage has risen but remains under 3%.

Stocks are also performing as if they may be approaching a blow-off top.  During the month of February, the energy stock index is up more than 17%, financials are up more than 11% and industrials are up more than 7%.

Big price moves like these are often followed by big price declines as over the long term, prices tend to revert to the mean.

Bitcoin recently exceeded $52,000 and is up more than 300% since August.  The Bitcoin price chart on this page tells the story.

While there are those who believe that Bitcoin will be the currency that replaces the world’s failing fiat currencies, I am not among them.

My take is that the Bitcoin price chart looks a lot like the tulip price chart of the 1600’s. 

Notice that from November 12, 1636 to February 3, 1637, the price of tulip bulbs increased about 12-fold before crashing and returning back to their original price.

It is my belief that Bitcoin will likely do something similar.  That doesn’t mean that Bitcoin cannot go higher – it can.

It also doesn’t mean that investors can’t make money speculating on the price of Bitcoin – they can.

Ultimately though, it’s highly unlikely in my view that Bitcoin becomes the currency of choice.  Currencies need to be stable to be widely accepted as currency.  One scan of the Bitcoin price chart above would have anyone concluding that stability doesn’t begin to describe Bitcoin.

For a long time now, in print and on the radio program, I have been talking about the fact that there will have to be a reset at some future point.  Both debt levels and currency creation are unsustainable.

Historically, when debt levels reach the heights that we now see, deflation has emerged as debt is purged from the system and asset prices collapse.  The price levels of the assets that we have briefly reviewed this week are at levels that a price decline would have already occurred.

But this price decline hasn’t occurred.

For one big reason – money creation has also reached new levels.  Last year alone, the quantity of fiat currency in circulation increased by more than 30%.  When money is created, it has to go somewhere and in this case, this newly created money has found its way to the asset classes we’ve discussed.

It seems that money creation on steroids has evolved from a ‘temporary’ measure that began after the financial crisis to a permanent policy that will now continue until a reactive reset hits.

While a proactive planned reset that would tie our currency to a tangible asset would be the preferred path in my view, such a course would require fiscal discipline at the Federal Government level and owning up to the fact that Federal programs would have to be adapted to be fiscally sound.

Instead, so called stimulus packages, laden with pork, continue to ship massive amounts of newly created US Dollars overseas.  The latest stimulus package that looks imminent would add $1.9 trillion to an existing $2.3 trillion federal operating deficit for a revised deficit of $4.2 trillion remarkably dwarfing last year’s deficit.

But it isn’t likely to stop there.  “The Washington Post” reported this past week (Source: that negotiations have already begun on a $3 trillion spending package that would come on the heels of the $1.9 trillion spending package.

Assuming that actually happens, the United States could see an operating deficit of more than $7 trillion on total Gross Domestic Product or economic output of less than $21 trillion in 2020.

Again, a PhD in economics is not required to quickly conclude that an operating deficit of more than 30% of GDP funded by money creation is a recipe for inflation on a massive scale.  A quick review of historic hyperinflations and government operating deficits when the hyperinflations began confirms this.

Argentina’s inflation rate peaked in 1989 at an annualized rate of 4,923.3%.  (Source:

  The Government of Argentina saw its operating deficit reached 35.6% of GDP that same year, a number that was alarmingly similar to the US’ operating deficit this year should the second spending package become reality.

There are other historical examples to make the point but suffice it to say that we are on a slippery slope as far as debt and money creation is concerned.

While it’s entirely possible that this profligate money creation continues for a period of time, history teaches us that the ultimate destination at which we will arrive as a result of this policy is known.

Inflation followed by deflation is now an almost certain outcome.  And the time to prepare is now.  As noted above, continuing to accumulate precious metals during this pullback in price is something to very seriously consider in my view.

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Cryptocurrencies and Other Options

Cryptocurrencies are making headlines of late.

I’ve also had many questions from clients, radio and podcast listeners and webinar participants about the advisability of storing wealth in cryptocurrencies.  In this week’s “Portfolio Watch”, I will address this topic albeit briefly due to space limitations.

For those of you unfamiliar with cryptocurrencies, they are digital currencies that use blockchain technology.

Let’s break that down.  Digital simply means that these currencies exist online; they are not physical nor are they typically backed by anything physical.

Blockchain technology is best described as a time-stamped, unalterable series of data managed by a cluster of computers not owned by any single entity or person.  Each of these blocks of data are linked together using cryptographic principles (chain). 

The blockchain network has no central authority; it is a democratized system.  It is a shared and unalterable ledger, the information is open and available for anyone to see.  On the blockchain, everything is very transparent.

To help understand blockchain, think about it this way, blockchain is a spreadsheet that is duplicated thousands of times across a network of computers. Then imagine that this network is designed to regularly update this spreadsheet and you have a basic understanding of the blockchain.

Information held on a blockchain exists as a shared — and continually reconciled — database. This is a way of using the network that has obvious benefits. The blockchain database isn’t stored in any single location, meaning the records it keeps are truly public and easily verifiable. No centralized version of this information exists for a hacker to corrupt. Hosted by millions of computers simultaneously, its data is accessible to anyone on the internet.

The common denominator among digital currencies is that they pretty much all use blockchain technology.  Each unit of digital currency exists on the blockchain.

I believe the popularity and extreme price movement in Bitcoin demonstrates that the population is actively and intensely seeking an alternative to fiat currency when it comes to storing and protecting wealth.  The chart shows the historical price of one Bitcoin.

Note the current value of about $36,000 after a recent high of more than $40,000.

A little more than 3 years ago, in the November 2017 issue of my client newsletter, I offered my opinion on Bitcoin.  At that time, Bitcoin had nearly quadrupled from $2,500 to nearly $10,000.

Often, as time passes and more research is conducted, an opinion can change, or, at the very least be somewhat modified.  Despite the passage of time and conducting more research relating to Bitcoin, my opinion today remains the same as my opinion in November of 2017.

I view Bitcoin as a speculative investment with no intrinsic value that will never be fully embraced as a currency.  I view nearly every other major cryptocurrency the same way.

There are three reasons for this opinion.

Reason One:  Cryptocurrencies don’t solve all the problems inherent to fiat currencies.

As noted above, although there may be a stated limit on the amount of a crypto currency like Bitcoin that may be created, on a very fundamental level, cryptocurrencies are really just another fiat currency.

While there is an argument to be made about cryptocurrencies being better than fiat currencies because there is a limit on the amount of the cryptocurrency that can be created, the fact of the matter is that cryptocurrencies are not backed by anything tangible like gold, silver, land or industrial goods.

That means they have no real value just like a fiat currency.

It was Voltaire who said that all fiat currencies eventually return to their intrinsic value.  I believe that there is a good chance that will ultimately be true for most cryptocurrencies too especially if there is a proactive reset at some future point which has currency, even a digital currency developed that would be backed by something tangible.

Reason Two:  Cryptocurrencies have become too speculative to be used as everyday currency.

Currency that is used to buy and sell things needs to be stable.

Consider this.

If you are selling something to someone, don’t you want to ensure that the form of payment you receive has value that is relatively stable?

Would you want to sell someone a $20,000 car today taking cryptocurrency as payment knowing that there is a real risk that the $20,000 you received for the car sale might only be worth $15,000 the very next day?

That’s why, at this point in time, cryptocurrencies are a speculative investment vehicle rather than a viable alternative currency.

When you consider what motivates someone to buy Bitcoin or another cryptocurrency, it’s speculation, not an intent to use the Bitcoin in commerce at some future point.

Reason Three:  When one reviews the chart above, it’s fairly obvious that Bitcoin is in a bubble.

Like the bubble that existed in Bitcoin 3 years ago that ultimately burst, this one will probably burst too.

It’s no secret that fiat currencies are being severely devalued and citizens are looking for alternate stores of value.  Despite the allure and novelty of fiat currencies to protect against currency devaluation, I expect that that more tangible assets will ultimately prove to be the best way to protect and preserve purchasing power.

When observing the behavior of one of the world’s richest men, this conclusion seems to be validated.  Bill Gates is now the largest holder of farmland in the United States according to “Forbes” although other individuals own more land, just not farmland.  This from “Summit News”  (Source: (emphasis added):

Indeed, Gates is now the biggest owner of farmland in America, according to a Forbes report.

“After years of reports that he was purchasing agricultural land in places like Florida and Washington, The Land Report revealed that Gates, who has a net worth of nearly $121 billion according to Forbes, has built up a massive farmland portfolio spanning 18 states.”

“His largest holdings are in Louisiana (69,071 acres), Arkansas (47,927 acres) and Nebraska (20,588 acres). Additionally, he has a stake in 25,750 acres of transitional land on the west side of Phoenix, Arizona, which is being developed as a new suburb.”

Gates now owns 242,000 acres of farmland across the U.S., mostly “through third-party entities by Cascade Investments, Gates’ personal investment vehicle.”

According to Forbes, it is not known what Gates is doing with the land and Cascade Investments refused to comment on the issue.

In terms of individual land owners, Gates is still far behind media mogul John C. Malone, who is in top spot with 2.2 million acres of ranches and forests and CNN founder Ted Turner, who owns 2 million acres of ranch land.

Amazon’s Jeff Bezos is also “investing in land on a large scale,” according to the report.

Other billionaires are investing in gold (Source:

Billionaires Ray Dalio, John Paulson, David Einhorn and Stanley Druckenmiller are all buying gold and publicly stating they are doing so.

I would make the point that Gates, Malone, Turner, Bezos, Dalio, Paulson, Einhorn and Druckenmiller are all storing wealth in tangible assets.

If you are tempted to buy cryptocurrencies other than for speculation, I would resist the temptation and follow the lead of these billionaires with the assets you are using to protect yourself from inflation.