“Recession Looming?”

Stocks rebounded strongly last week with the Standard and Poor’s 500 rallying 2.79% and the Dow Jones Industrial Average advancing 3.02%.

Gold took a breather after a strong move up; the yellow metal fell .52%.

Silver advanced 5.37%, moving up nearly $1 per ounce.  I believe this move in silver may be confirming my thought from earlier this summer that it is likely the asset class with the most appreciation potential.

Despite the recent, strong move in the price of precious metals, I continue to be bullish on metals moving ahead if one’s time frame is a few years or more.

The 30-Year US Treasury yield closed the week below 2% as bonds continued to rally decisively.

While the entire yield curve is not inverted, meaning shorter term debt is yielding higher interest rates than longer term debt, most of it is.

Take a look at the screenshot from the US Treasury Department’s website (Illustration One).

Notice that during the month of August, the yield on the 30-Year Treasury Bond fell from 2.44% at the beginning of the month to finish the month at 1.96%.  That’s a decline in yield of nearly one half of one percent, or a move of 19.67%.  That means bonds rallied approximately that percentage.

The other important thing to note is that the yield on a 1-month Treasury bill stands at 2.10% while the yield on the 30-Year is 1.96%.

An inverted yield curve is historically speaking a reliable recession forecaster. 

There are other signs the world and US economies are weakening.

Wealthy individuals are cutting back on spending.  A CNBC article (Source:  https://www.cnbc.com/2019/08/28/the-rich-arent-spending-signaling-a-possible-recession-ahead.html) reported (emphasis added):

The rich have cut their spending on everything from homes to jewelry, sparking fears of a trickle-down recession that starts at the top.

From real estate and retail stores to classic cars and art, the weakest segment of the American economy right now is the very top. While the middle class and broader consumer sections continue to spend, economists say the sudden pullback among the wealthy could cascade down to the rest of the economy and create a further drag on growth.

Luxury real estate is having its worst year since the financial crisis, with pricey markets like Manhattan seeing six straight quarters of sales declines. According to Redfin, sales of homes priced at $1.5 million or more fell 5% in the U.S. in the second quarter. Unsold mansions and penthouses are piling up across the country, especially in ritzy resort towns, with a nearly three-year supply of luxury listings in Aspen, Colorado, and the Hamptons in New York.

Retailers to the 1% are faring the worst, with famed Barney’s filing for bankruptcy and Nordstrom posting three consecutive quarterly declines in revenue. Meanwhile, Wal-Mart and Target, which cater to the everyday consumer, are reporting stronger-than-expected traffic and growth.

At this month’s massive Pebble Beach car auctions, known for smashing price records, the most expensive cars faltered on the auction block. Less than half of the cars offered for $1 million or more were able to sell. But cars priced at under $75,000 sold quickly — many for far more than their estimates.

Digging into this story a bit further, one finds that lower-income consumers may be funding much of their spending via credit cards.  This from “Inside ARM” (Source:  https://www.insidearm.com/news/00045388-debt-collection-and-modern-communication-/) (emphasis added):

Overall, the Bureau notes that the credit card market continues to grow. Outstanding balances continued to grow, ending 2018 “nominally above” pre-recession levels. The total credit line across all consumer credit cards was $4.3 trillion in 2018.

This statistics could be bad news for a consumer spending dependent US economy.

According to a recent article on “The Balance” (Source:  https://www.thebalance.com/consumer-spending-trends-and-current-statistics-3305916), consumer spending accounts for 68% of the Gross Domestic Product of the United States.  This from the article:

Consumer spending was at a rate of $14.24 trillion as of the first quarter of 2019. The Bureau of Economic Analysis reports consumer spending at an annualized rate. That’s so it can compare it to gross domestic product, which was $21.060 trillion. Consumer spending made up 68% of the U.S. economy. 

Two-thirds of consumer spending is on services, such as housing and health care. Almost one-quarter is spent on non-durable goods, such as clothing and groceries. The rest is spent on durable goods, such as automobiles and appliances. The Personal Consumption Expenditures Report lists more sub-categories on what consumers spend. 

Consumer spending increased by 0.9% in Q1 2019. Strong consumer spending is the main reason the GDP growth rate has been within the 2% to 3% healthy range since the Great Recession.

There is more evidence that consumers are spending via debt accumulation.  Here is a piece from “The Motley Fool” (Source:  https://www.fool.com/investing/2019/02/13/us-debt-rate-auto-loan-delinquencies-record.aspx) (emphasis added):

The Federal Reserve Bank of New York just put out its latest quarterly report on U.S. household debt and found that Americans collectively owe about $13.54 trillion, an amount that has risen for 18 consecutive quarters and is 21% higher than the $12.7 trillion owed in 2008 during the height of the Great Recession.

Among the more troubling facts from the report is the record 7 million Americans who are 90 days or more behind on their auto loan payments. It’s a signal, economists say, that Americans are struggling to pay bills despite other indications of a strong economy and low unemployment. Approximately 6.5% of all auto finance loans are 90-plus days past due.

Student loan debt edged higher, hitting $1.46 trillion in the fourth quarter, and serious delinquency rates in the category continue to be much higher than any other debt type.

When delinquency rates rise, it signals that debt levels may be approaching their limit. 

As we learned at the onset of The Great Recession, when debt levels reach their limit, consumer spending soon falls since much of consumer spending is debt-driven.

2020 is shaping up to be a very interesting year.

Showing the US Dollar the Exit

The big economic news last week from my perspective was largely unreported.

For several years now, I have been reporting and commenting on the gradual, yet undeniable move away from the US Dollar around the globe. 

While the US Dollar still enjoys reserve status, meaning it is the most widely used currency in global trade, that reserve status is now being openly challenged.

This past week, during the Federal Reserve’s annual symposium held in Jackson Hole, Wyoming, the Governor of the Bank of England, Mark Carney, advocated that a new global monetary system be developed to replace the US Dollar as the world’s reserve currency.

I would suggest that those comments are nothing short of shocking.

This from “The New York Times” (emphasis added) (Source:  https://www.nytimes.com/reuters/2019/08/23/business/23reuters-usa-fed-jacksonhole-carney.html):

Bank of England Governor Mark Carney took aim at the U.S. dollar’s “destabilizing” role in the world economy on Friday and said central banks might need to join together to create their own replacement reserve currency.

The dollar’s dominance of the global financial system increased the risks of a liquidity trap of ultra-low interest rates and weak growth, Carney told central bankers from around the world gathered in Jackson Hole, Wyoming, in the United States. 

“While the world economy is being reordered, the U.S. dollar remains as important as when Bretton Woods collapsed,” Carney said, referring to the end of the dollar’s peg to gold in the early 1970s.

Emerging economies had increased their share of global activity to 60% from around 45% before the financial crisis a decade ago, Carney said.

But the dollar was still used for at least half of international trade invoices – five times more than the United States’ share of world goods imports – fueling demand for U.S. assets and exposing many countries to damaging spillovers from swings in the U.S. economy.

Carney – who was considered a candidate to be the next head of the International Monetary Fund but failed to secure backing from Europe’s governments – said the problems in the financial system were encouraging protectionist and populist policies.

Earlier on Friday, U.S. President Donald Trump said he was ordering U.S. companies to look at ways to close their operations in China, the latest escalation of mounting trade tensions between Washington and Beijing.

Carney warned that very low equilibrium interest rates had in the past coincided with wars, financial crises and abrupt changes in the banking system.

As a first step to reorder the world’s financial system, countries could triple the resources of the IMF to $3 trillion as a better alternative to countries protecting themselves by racking up enormous piles of dollar-denominated debt.

“While such concerted efforts can improve the functioning of the current system, ultimately a multi-polar global economy requires a new IMFS (international monetary and financial system) to realize its full potential,” Carney said. 

China’s yuan represented the most likely candidate to become a reserve currency to match the dollar, but it still had a long way to go before it was ready.

The best solution would be a diversified multi-polar financial system, something that could be provided by technology, Carney said. 

Facebook’s Libra was the most high-profile proposed digital currency to date but it faced a host of fundamental issues that it had yet to address.

“As a consequence, it is an open question whether such a new Synthetic Hegemonic Currency (SHC) would be best provided by the public sector, perhaps through a network of central bank digital currencies,” Carney said.

Such a system could dampen the “domineering influence” of the U.S. dollar on global trade.

“Even a passing acquaintance with monetary history suggests that this center won’t hold,” Carney said. “We need to recognize the short, medium and long-term challenges this system creates for the institutional frameworks and conduct of monetary policy across the world.”

That last quote (emphasized) from Mr. Carney mirrors what has been my approach to providing clients advice since I began my work.  It’s also the premise of my best-selling “New Retirement Rules” book.

That premise is simply:  history repeats itself.

And, history teaches us that fiat currencies have a 100% failure rate.  Given current world economic circumstances, there is no reason to think that perfect track record of failure will change now. 

Carney made another comment at which we should look more closely.  He said, “it is an open question whether such a new Synthetic Hegemonic Currency (SHC) would be best provided by the public sector, perhaps through a network of central bank digital currencies.”

Synthetic Hegemonic Currency;  let me break that down by pulling out the dictionary.

The definition of the word “synthetic” according to Webster (that’s Noah if you’re under 35) is “a substance that imitates a natural product”.

Hegemonic is defined as “ruling or dominant in a political context”.

The definition of currency is a “system of money”.

Putting those definitions together, we get a dominant system of money that imitates a natural one.

Dare I say it?

Fake money.  Or should I say more fake money?

Here is the reality of today’s money.

Today’s money is not wealth.

Today’s money is a claim on wealth.

Money is a vehicle in which one can store economic energy until ready to deploy it.  If you go to work and expend economic energy, you are awarded money which can be used to claim real wealth.  That real wealth is typically physical assets; food, automobiles, real estate, etc.

When you get the money, you can spend it or deploy its economic energy immediately or save the money and deploy the reserved economic energy later.

Countries store economic energy just like people do.  The economic energy stored by countries is used in trade with other countries.

For most of history, money was not a claim on wealth, money was wealth with assets like gold and silver serving as money.

After World War II, through 1971, the US Dollar was wealth.  It had a direct link to gold.  US Dollars could be redeemed for gold at the rate of $35 per ounce.  At that point in time, the US Dollar was transformed from real money and real wealth to a claim on wealth.  That’s when President Nixon eliminated the direct link between the US Dollar and gold.

Since that time, as Mr. Carney indicated in his remarks delivered at Jackson Hole, much of the rest of the world still stores its economic energy in US Dollars, although there is an ever-growing, intensifying movement away from the US Dollar.

And, in Mr. Carney’s view, it’s time to think about accelerating that move.  He floated the idea of central bank controlled digital currency; a Bitcoin-like currency that is controlled by the central bankers.

While a Synthetic Hegemonic Currency (SHC) will likely be developed and implemented, it is my view that such a system will not survive long term unless there is a direct link from the SHC to real wealth like gold or silver.

And, there is talk of such a gold-backed cryptocurrency being developed.

In May of this year, Elvira Nabiullina, governor of the Bank of Russia said that she and her colleagues were reviewing a proposal to develop a cryptocurrency.

Nabiullina said this in a speech at Russia’s lower house or Duma:

“As for mutual settlements, we will consider, of course, the proposal on a gold-backed cryptocurrency.  But, in my opinion it is more important to develop settlements in national currencies.”

History teaches us that currencies evolve over time.  The “New Retirement Rules” book describes what we call the Currency-Money Cycle.  In essence, that cycle has money moving from real wealth to a claim on wealth back to real wealth again.

Presently, it is my belief that we are nearing the next transition. 

Money will be moving back to real wealth again at some future point.  That change is perhaps not imminent, but it is, in my view, inevitable. 

It’s time to take the appropriate steps to put yourself in a position to profit from the transition.

More Craziness and Where It Might Lead

Gold and US Treasuries continued their rallies last week as stocks declined.  The yellow metal rallied 1.11% while the usually more volatile silver advanced .88%. 

The Dow Jones Industrial Average fell about 1.5% while the Standard and Poor’s 500 declined 1%.

The chart below is a chart of an exchange-traded fund that tracks the price action of the US Treasury Long Bond.  Note from the chart how parabolic the run-up has been.

We have drawn Bollinger Bands on the chart.  This indicator was invented and refined by John Bollinger.  It is a useful indicator to provide an analysis of a particular market.

When prices reach or exceed the upper Bollinger Band, they are overbought.  Conversely, when prices reach or exceed the lower band they are oversold.  Observe from Chart One that the US Treasury long bond is really overbought as prices no exceed the upper Bollinger Band.

Another observation from Chart One.  The wider the spread between the upper Bollinger Band and the lower Bollinger Band, the greater the volatility in a market.  Examining Chart One, given the spread between the upper Bollinger Band and the lower, we conclude that this market is very volatile.

Narrow Bollinger Bands, reflecting periods of low volatility, often precede breakout moves in price which can be either up or down. 

In this case, the move was a dramatic upward one.

The US Government Bond market, along with the gold market are in breakout rallies, as I have been suggesting would likely occur for most of this year.

While predicting when a breakout might occur is precarious, the market fundamentals have been favoring this for a long while.

Interestingly, the yield curve is now almost completely inverted.  The 30-Year US Treasury Yield fell to a record low last week, falling below the 2% threshold before closing the week just above 2%.

The one-month US Treasury bill closed the week yielding 2.05%, higher than the 2.01% yield on the 30-year bond.  Historically speaking, a yield curve inversion has been a reliable predictor of a looming recession.

One thing is sure.  The financial and economic times in which we live are quite simply crazy.  If you don’t think so, perhaps you don’t have a clear understanding of current world financial and economic facts and circumstances.

As I have discussed in the past, more than $15 trillion of world government debt is currently yielding negative interest rates.  That means that when you loan the government money for a period of time, at the end of that period, you get back less than you loaned or invested initially.

In the Country of Denmark, the second and third largest banks are now offering mortgages at negative interest rates.  (Source:  https://www.cnbc.com/2019/08/12/danish-bank-is-offering-10-year-mortgages-with-negative-interest-rates.html)  This from the CNBC article reporting the development:

Jyske Bank A/S, Denmark’s third-largest bank, announced on Monday, Aug. 5, that it is offering 10-year mortgages at a rate of negative 0.5%.

Another Danish bank, Nordea Bank Abp, also said that it will begin offering 20-year fixed-rate mortgages with 0% interest, as well as 30-year mortgages at 0.5%.

No, the banks are not working for free, loan fees still allow for a banker to make a profit.

No matter how you slice it though, this is crazy.  It goes completely against the basic rules of finance.  Which means it won’t go on forever. 

If you’re looking for a prediction, I’ll reference the words of the late economist, Herbert Stein, who said: “If something cannot go on forever, it will stop.”

Yet, at the present time, negative interest rates are the “new normal”.

Even former Federal Reserve Chairman, Alan Greenspan, is jumping on the negative interest rate bandwagon.  This from another CNBC article (Source:  https://www.cnbc.com/2019/08/13/greenspan-says-there-is-no-barrier-to-negative-yields-in-the-us.html):

Former Federal Reserve Chairman Alan Greenspan said nothing is stopping the U.S. from getting sucked into the global trend of negative-yielding debt, Bloomberg reported Tuesday.

“There is international arbitrage going on in the bond market that is helping drive long-term Treasury yields lower,” Greenspan said in a phone interview. “There is no barrier for U.S. Treasury yields going below zero. Zero has no meaning, besides being a certain level.”

With global central banks engaging in unprecedented monetary easing, a record $15 trillion of government bonds worldwide now trade at negative yields. As uncertainty reigns, investors are looking for a safe haven for their money, even if it means getting back less than they gave.

If you’re looking for a reason for the gold market rally, that’s a good one.

In an investing climate like this one, owning some tangible assets makes sense.

But why would an investor even consider making an investment in a government bond when that government is fundamentally insolvent only to get back less than they invested?

A piece published on “The Daily Torch” offers a plausible explanation (Source:  http://dailytorch.com/2019/08/why-we-should-be-worried-about-alan-greenspans-negative-interest-rate-prediction-it-might-mean-the-end-of-capitalism/):

So, then a better question might be, under what circumstances would holding a negative interest rate bond be a good idea?

During the high inflation period of the 1970s and 1980s, high-interest-rate bonds were used as a safe haven asset to guard against inflation.

So, in a deflationary environment, the reason to hold bonds would be to offset even greater asset price decreases elsewhere. For example, if inflation was at -4 percent, holding a -2 percent bond could make sense in order to offset the deflation. Or if you purchase the bond with a -2 percent yield, and then the going rate drops to -3 percent, you could make money by selling the -2 percent bond, because it had increased in value.

That validates a forecast that we have made for a long time.  Ultimately, negative-yielding bonds would only make sense to own if the purchasing power of the currency were to increase.  That happens when there is deflation.

History teaches us that high debt levels lead to deflation.  That’s where we were headed when the Fed engaged in quantitative easing or money creation after the financial crisis.

Bottom line:  As Thomas Jefferson predicted more than a couple of centuries ago, we will have inflation, followed by deflation when private banks control the issue of our currency.

 “If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered.”

                                                          -Thomas Jefferson

Why Gold Is Rallying?

The big news in the markets last week was the continued breakout in gold prices to nearly $1500 per ounce and the continued rally in US Treasury Bonds.

Gold spiked nearly 4% last week while silver rallied nearly 5%. The yield on the 30-Year US Treasury Bond fell to 2.26% from 2.39%.

The US Dollar declined slightly.

For several years, I have been suggesting to clients that they consider accumulating gold and silver since world economic fundamentals favor metals in my view.

Not so much because metals are worth more, but because there is massive devaluation of world currencies currently taking place.

Given existing public debt levels around the globe (see below), we expect this trend to continue and for metals and other tangible assets to be a good place to store wealth in order to preserve purchasing power.

Over the long haul, this has proven to be a good strategy.

Take gold for example. 

In 2000, gold was selling for about $290 an ounce.  Today gold is selling for nearly $1500 per ounce.  In US Dollar terms, that’s an increase of about 500%.

In calendar year 2000, had you taken $1500 and put it in your sock drawer, today you’d still have $1500.  But, that $1500 would buy a lot less than it did in the year 2000. 

Here is an example to make the point.

The base price of a 2000 Ford Mustang Coupe was $16,710.  By comparison, the present base price of a new Ford Mustang Coupe is $26,395.

That’s an increase in the base price of a Mustang over 19 years of 57.96%!

However, if we price the Ford Mustang Coupe in gold, we get a completely different picture.

In 2000, it took about 57 ounces of gold to buy a base model Ford Mustang Coupe.  In 2019, with gold at nearly $1500 per ounce, it takes about 18 ounces of gold to buy a base model Mustang.

If you possess 57 ounces of gold today, the amount of gold it would have taken to buy a Mustang in 2000, you can now buy 3 Mustangs and still have about 3 ounces of gold, or $4,500 leftover.

Over the long term, over many time frames, gold has been a better place to preserve purchasing power than US Dollars and even better than stocks.

In 2000, the Standard and Poor’s 500 was about 2200.  Today, as of this writing, the S&P 500 stands at 2918, an increase of about 33% in terms of US Dollars.  By contrast, as we’ve already discussed, gold has increased by 500% in terms of US Dollars over that time frame.

According to Charlie Bilello (Source: https://kingworldnews.com/formerly-vocal-gold-bears-are-in-hiding-a-world-of-bubbles-plus-the-road-to-1800-gold/), over the last 20 years, gold has outperformed Berkshire Hathaway with Berkshire Hathaway returning 387% and gold returning 488%.

My forecast is for this trend to continue.

The current global monetary policy is currency devaluation.

Recently, President Trump labeled China as a currency manipulator alleging that the Chinese were manipulating its currency to gain a trade advantage.

The reality is that all fiat currencies are being devalued via manipulation. 

Worldwide, there is a race to the bottom as far as currencies are concerned with currencies losing absolute purchasing power as time passes.

 Each week, I track the value of the US Dollar Index.  While the US Dollar Index has held up well recently, it’s important to remember that this index measures the purchasing power of the US Dollar relative to the purchasing power of the fiat currencies of the six major trading partners of the US.

Just because the US Dollar Index rises, it doesn’t mean that the purchasing power of the US Dollar is increasing on an absolute basis. 

It’s not.

As we’ve just demonstrated, to calculate the absolute purchasing power of the US Dollar, one needs to use a tangible asset comparison.  Gold is the most commonly used and widely accepted tangible asset comparison.

In a recent piece published on “King World News” (Source:  https://kingworldnews.com/greyerz-most-people-dont-understand-the-scale-of-the-collapse-that-is-in-front-of-us/), Egon von Greyerz wrote:

Most people don’t understand that the value of their money in the pocket is deteriorating all the time. They live under the illusion that prices are going up, which is totally erroneous. It is not prices that are going up but the value of money which is declining rapidly. The example of the house above going up 50x in 48 years is a good illustration. In real terms, the house has not gone up in value at all. It is the value of the money that has collapsed in all countries since Nixon closed the gold window. 

If governments and central banks were honest, every year they would publish a table illustrating how much value the currency has lost in relation to gold, which is the only money that maintains its purchasing power. But since governments never do this, I will do it for them. Below is a table of the gold price for a selection of countries. 

Note from Mr. von Greyerz’s table that since 1971 when then US President Richard Nixon closed the gold window, world currencies have lost 90% to 99% or more of their purchasing power in real terms.

Since 2000, the best fiat currency in which to store wealth has been the Swiss Franc which has lost only 68% of its purchasing power.  The US Dollar, as evidenced by this chart and the Ford Mustang example above has lost 80% of its purchasing power.

History teaches us that currency devaluation is a slippery slope.  Once it starts it doesn’t stop until faith in the currency is ultimately, eventually and inevitably lost.

And, based on our research, there has never been a fiat currency that has lost more than 90% of its value that has ever reversed direction.

Looking at the numbers, this won’t be the first historical example of a fiat currency recovery either.

Global debt levels presently are simply staggering.

This chart suggests that global debt levels are now approaching $250 trillion, rising by $3 trillion in the first quarter of 2019.

Those debt levels cannot be paid with ‘honest’ money which leaves only two options:  one, default on the debt or two, create currency.

Since easy money and currency creation have been the preferred policies to this point, I expect that they will continue to be the preferred policies.  That is until they won’t work anymore.  Then, the reset will come.

At the reset point, tangible assets and assets with links to tangible assets will be needed to survive and prosper.