Recession Imminent?

            US Treasuries rallied slightly last week as stocks, and precious metals fell.

            Since the beginning of 2022, I have been commenting that I believed the US economy was in recession.  As many of you know, after economic data is initially reported, it is often revised multiple times.

            This time is no exception to the revision rule.  This from CNN (Source: https://www.cnn.com/2022/06/29/economy/gdp-first-quarter-final/index.html):

The US economy shrank at a slightly faster rate than previously estimated during the first quarter, the Bureau of Economic Analysis said Wednesday.

With one quarter of negative economic growth in the books, the data adds to fears that a recession may be looming.

Real gross domestic product declined at an annualized rate of 1.6% from January to March, according to the BEA’s third and final revisions for the quarter.

Previously, the advance estimate released in April showed a contraction of 1.4%. Last month, that was revised to a decrease of 1.5%.

          The Atlanta Fed just reported (Source:  https://menafn.com/1104470550/GDP-of-Atlanta-Fed-shows-that-US-economy-already-in-recession) that the estimated growth for the second quarter will also be negative:

The United States economy is already in a recession, according to data from the Federal Reserve Bank of Atlanta’s gross domestic product (GDP) model released on Friday.

In a declaration, Atlanta Fed stated that “the GDPNow model estimate for real GDP growth, seasonally adjusted annual rate, in the second quarter of 2022 is -2.1 percent on July 1, down from -1.0 percent on June 30.”

The number is lower than the 0.3 percent growth anticipated announced on June 27; the next report will be issued on July 7, it was added. On the other hand, Real gross private domestic investment growth decreased to -15.2 percent from -13.2 percent, according to the bank, whereas real personal usage expenditures growth fell to 0.8 percent from 1.7 percent.

According to the Commerce Department’s third and final reading on Wednesday, the sharp decrease in data suggests that the largest economy in the world, which shrunk by 1.6 percent in the first quarter of the current year, may see a contraction in the months of April and June of the current year.
          

          In another sign the economy is slowing, Amazon, the giant online retailer, announced the company is canceling or delaying plans to build 16 more warehouses this year.  (Source: https://www.zerohedge.com/markets/amazon-cancels-or-delays-plans-least-16-warehouses-year)

After spending billions doubling the size of its fulfillment network during the pandemic, Amazon finds itself in a perilous position.

In the first quarter of 2022, the e-commerce giant reported a $3.8 billion net loss after raking in an $8.1 billion profit in Q1 2021. That includes $6 billion in added costs — the bulk of which can be traced back to that same fulfillment network.

Amazon CFO Brian Olsavsky said the company chose to expand its warehouse network based on “the high end of a very volatile demand outlook.” So far this year, though, it has shut down or delayed plans for at least 16 scheduled facilities.

“We currently have some excess capacity in the network that we need to grow into,” Olsavsky told investors on Amazon’s Q1 2022 earnings call. “So, we’ve brought down our build expectations. Note again that many of the build decisions were made 18 to 24 months ago, so there are limitations on what we can adjust midyear.”

          There are only politicians and members of the Federal Reserve Board who are suggesting that we will not see a recession based on the research that I have done.  If history teaches us anything about the prognostications of politicians and policymakers it is that these are attempts to control or direct the narrative rather than being legitimate forecasts.

          This from New York Federal Reserve Bank President John Williams (Source:  https://www.cnbc.com/2022/06/28/new-york-fed-president-john-williams-says-a-us-recession-is-not-his-base-case.html):

New York Federal Reserve President John Williams said Tuesday he expects the U.S. economy to avoid recession even as he sees the need for significantly higher interest rates to control inflation.

A recession is not my base case right now,” Williams told CNBC’s Steve Liesman during a live “Squawk Box” interview. “I think the economy is strong. Clearly, financial conditions have tightened and I’m expecting growth to slow this year quite a bit relative to what we had last year.”

Quantifying that, he said he could see gross domestic product gains reduced to about 1% to 1.5% for the year, a far cry from the 5.7% in 2021 that was the fastest pace since 1984.

“But that’s not a recession,” Williams noted. “It’s a slowdown that we need to see in the economy to really reduce the inflationary pressures that we have and bring inflation down.”

The most commonly followed inflation indicator shows prices increased 8.6% from a year ago in May, the highest level since 1981. A measure the Fed prefers runs lower, but is still well above the central bank’s 2% target.

In response, the Fed has enacted three interest rate increases this year totaling about 1.5 percentage points. Recent projections from the rate-setting Federal Open Market Committee indicate that more are on the way.

Williams said it’s likely that the federal funds rate, which banks charge each other for overnight borrowing but which sets a benchmark for many consumer debt instruments, could rise to 3%-3.5% from its current target range of 1.5%-1.75%.

He said “we’re far from where we need to be” on rates.

“My own baseline projection is we do need to get into somewhat restrictive territory next year given the high inflation, the need to bring inflation down and really to achieve our goals,” Williams said. “But that projection is about a year from now. Of course, we need to be data dependent.”

          While some may think that Mr. Williams’ forecast of a soft economic landing, getting inflation subdued while avoiding recession, is possible, I am not among them.  Particularly when the current ‘data’ being published by the Atlanta Fed squarely contradicts Mr. Williams’ statements.

          Bottom line as far as I’m concerned is that the Fed will ultimately reverse course and once again engage in easing to try to prop up the economy.  Of course, such action will be at the expense of the US Dollar.  And consumer prices.

          This perspective from Schiff Gold (Source:  https://schiffgold.com/commentaries/rick-rule-fed-will-chicken-out-on-inflation-fight/):

            Well-known investment advisor Rick Rule said the Fed will chicken out on its inflation fight.

            Rule runs Rule Investment Media and formerly served as the president and CEO of Sprott US Holdings Inc. In a recent interview, Rule said that the Fed could get inflation under control with significantly tighter monetary policy for a sustained period of time. But he said he doesn’t think the central bank has the wherewithal to follow through when the economy starts to crash.

I think they’ll chicken out. If we had a period of real interest rates it would certainly cure inflation, but it wouldn’t cure inflation until it did amazing damage to various balance sheets.”

            Rule has warned that the Fed won’t have the fortitude to fight inflation before. In an interview with MoneyWise earlier this year, he said, “I do not believe that the broad equities market will handle multiple rate hikes.”

            Inflation has run hot for months. During the June FOMC meeting, the Fed raised interest rates 75 basis points for the first time since 1994.

            Ron Paul has made similar statements, recently noting the Fed rate hikes have only raised rates to the level they were before the pandemic.

The Federal Reserve cannot increase rates to anywhere near the level they would be in a free market because doing so would increase interest payments to unsustainable levels for debt-ridden consumers, businesses, and the federal government.”

            Jerome Powell continues to insist that the central bank can tame inflation while bringing the economy to a “soft landing,” but this promise seems dubious at best.

            As noted, I expect the Fed to reverse course in the near future and once again pursue easy money policies.

If you or someone you know could benefit from our educational materials, please have them visit our website at www.RetirementLifestyleAdvocates.com.  Our webinars, podcasts, and newsletters can be found there.

Market Analysis and Commentary on the Latest Russian Sanctions

        To begin with this week, I want to offer an update on last week’s market analysis.

        In last week’s “Portfolio Watch”, I wrote this about stocks and published a chart of the S&P 500 (which I am not reprinting here due to space limitations.  You can visit www.RetirementLifestyleAdvocates.com and download last week’s newsletter to see the chart):

Let’s begin by taking a look at stocks. 

I’ll use the Standard and Poor’s 500 for the analysis.  The chart below is of an exchange-traded fund that has the investment objective of tracking the S&P 500 index.

Notice on the right-hand side of the chart, I have drawn a blue trend line that begins at the end of the calendar year 2021 and continues to the present time.

Notice also, how far below the trendline the current price is.

Also on the chart, on either side of the green and red price bars (each bar is one week of price activity with the green bars representing the weeks that the ETF price went up and the red bars representing weeks the ETF price went down), you’ll see a blue line (on the top side of the price action) and a red line (on the bottom side of the price action).  Those lines are the Bollinger Band indicator.

When prices reach outside the Bollinger Band, either on the top side or the bottom side, it often represents a price extreme and the price reverts to the mean.

Finally, if you notice on this weekly price chart that last week’s price action ‘gapped down’ leaving a space in the chart between the prior week’s price action and last week’s.  Often, gaps on a chart are closed.

For these reasons, I would not be surprised to see a rally in stocks this next week although there is another market axiom that advises to ‘never try to catch a falling knife’.  It’s sage advice.

        That rally in stocks did occur; the Dow Jones Industrial Average rallied more than 5% and the Standard and Poor’s 500 Index rallied more than 6%.  Despite the seemingly strong rally, by measure stocks remain in a downtrend.

        The recent rally is counter-trend in my view, with the primary trend remaining down.  To demonstrate how far oversold stocks were going into the beginning of last week, stocks can rally another 10% or so from here to get back to a 20-week moving average of price.

        While stocks don’t have to rally that much, a consolidation period or a continued bear market rally would be more likely than not here in my view unless there is a geopolitical shock to the markets or some other black swan-type event.

        At this point in time, US Treasuries like stocks are oversold just not to the same extent. 

        This chart is a weekly price chart of an exchange-traded fund that tracks the price action of long-term US Treasuries. 

        The faint silver line in the center of the price chart is a 20-week moving average of price.  Notice that since the beginning of the calendar year 2022, US Treasuries have been trading well below their 20-week moving average price.

        Here’s why that may be important.  The 20-week moving average of price is the market’s collective consensus of value over a 20-week time frame.  As one might expect, to calculate a 20-week moving average of price, one takes the closing price of the exchange-traded fund over the past 20 weeks, adds them up, and then divides by 20.

        If the market’s current consensus of value is lower than the market’s consensus of value over the past 20 weeks, that means the market is down trending, at least by this measure.

        The indicators at the bottom of the chart measure overbought and oversold conditions (at least that is part of what they do).  Both indicators are telling us that the US Treasury market may be poised for a rally here although the indicators are not at extreme levels.

        In other news, the G7 announced this past week that Russian gold imports would now be banned.  This from “Zero Hedge” (Source:  https://www.zerohedge.com/markets/biden-g-7-will-ban-russian-gold-imports) (emphasis added):

“The United States has imposed unprecedented costs on Putin to deny him the revenue he needs to fund his war against Ukraine,” Biden tweeted on Sunday, the first day of a G7 meeting in Germany; a formal announcement is expected later on during the summit.

“Together, the G7 will announce that we will ban the import of Russian gold, a major export that rakes in tens of billions of dollars for Russia” he added.

The official talking point here, encapsulated by the pro-Biden outlet, The Hill, is that “while it does not bring in as much money as energy, gold is a major source of revenue for the Russian economy. Restricting exports to G7 economies will cause more financial strain to Russia as it wages the war in.”

That, of course, is incorrect: the biggest buyers of gold in recent years have not been G7 countries (United States, France, Canada, Germany, Japan, the United Kingdom, and Italy), many of whom naively sold much if not all their gold in the recent past and have refused or simply don’t have the funds to restock; instead, purchases have all been by developing-nation central banks (like India and Turkey, and of course China which however has a habit of only revealing its true gold inventory every decade or so) who have been quietly preparing to do what Russia is doing by dedollarizing and instead allocating capital into a counterparty-free asset.

As for Russia, its central bank has been an aggressive buyer of gold, not seller, and if anything Biden’s decision will only make the gold market the latest to follow the example of oil and bifurcate: cheaper for Russian-friends and much more expensive for Russian enemies.

        This decision, like the prior Russian sanctions, will backfire.  Russia and its allies will benefit and the west will suffer.

        Thinking critically about this policy decision, one has to conclude that the US has decided to prohibit the trading of US Dollars, which are rapidly devaluing, for Russian gold an asset that, at worst, has maintained its purchasing power.

        In other words, Russia gets to keep her gold and will not be allowed to exchange her gold for devaluing US Dollars.  That’s punishment?

        The reality is Russia and China, as the chart above shows, have been dumping US Dollars and adding gold as far as their reserve assets are concerned.  The countries have reduced their US Treasury holdings by 25% since mid-2015 and have increased their collective gold holdings by nearly double over the same time frame.

        The data unequivocally suggests that Russia (and China) has already made the decision to slow the exchange of US Dollars for gold.

        Ultimately, I expect this will be bullish for gold and will continue to be bearish for the US Dollar and other western fiat currencies.

        We live in economic times unlike any that anyone alive today has ever seen.  Yet, the ultimate destination is completely predictable. 

        Fiat currencies eventually fail or are redefined.  Unsustainable debt levels eventually cause a deflationary collapse and massive currency creation leads to inflation or hyperinflation before the deflationary crash begins.

        If you are not using Revenue Sourcing™ to plan your retirement income, now is the time to look into it.

If you or someone you know could benefit from our educational materials, please have them visit our website at www.RetirementLifestyleAdvocates.com.  Our webinars, podcasts, and newsletters can be found there.

Market Analysis

This week, I want to offer some market analysis. 

Last week stocks fell hard, US Treasuries declined as did gold and silver.

One of the money management strategies that has proven itself over time was developed by Harry Browne who began publishing a financial newsletter in the 1970s and authored many best-selling books up through the 1990s.  The strategy was dubbed “Permanent Portfolio” by Browne and it had the investment objective of getting absolute returns (not losing money) while keeping pace with inflation.

When one examines the hypothetical performance of such a portfolio going all the way back to 1971 when the US Dollar became a fiat currency, the track record is very sound with 7 years of slightly negative returns and 44 years of positive returns.

This year, at the present time, this strategy is struggling as all asset classes are down or flat mid-way through the year.

Let’s begin by taking a look at stocks. 

I’ll use the Standard and Poor’s 500 for the analysis.  The chart below is of an exchange-traded fund that has the investment objective of tracking the S&P 500 index.

Notice on the right hand side of the chart, I have drawn a blue trend line that begins at the end of calendar year 2021 and continues to the present time.

Notice also, how far below the trendline the current price is.

Also on the chart, on either side of the green and red price bars (each bar is one week of price activity with the green bars representing the weeks that the ETF price went up and the red bars representing weeks the ETF price went down), you’ll see a blue line (on the top side of the price action) and a red line (on the bottom side of the price action).  Those lines are the Bollinger Band indicator.

When prices reach outside the Bollinger Band, either on the top side or the bottom side, it often represents a price extreme and the price reverts to the mean.

Finally, if you notice on this weekly price chart that last week’s price action ‘gapped down’ leaving a space in the chart between the prior week’s price action and last week’s.  Often, gaps on a chart are closed.

For these reasons, I would not be surprised to see a rally in stocks this next week although there is another market axiom that advises to ‘never try to catch a falling knife’.  It’s sage advice.

If you are a trader, you are best to trade with the trend and wait for a good opportunity to do so. 

Long-term, as noted in my mid-year market forecast published this month, I look for more downside in stocks.  I also expect the Fed to reverse course sometime soon and continue with easing.

That brings me to precious metals.

Gold and silver have not reacted the way one might expect of late with the high levels of inflation that exist.

The chart is a chart of an exchange-traded fund that tracks the price of gold.

Notice that the weekly price chart is forming a bullish ‘cup and handle’ pattern with the handle about to be completed.

I expect that the uptrend in gold will resume by year-end and silver will follow suit.

US Treasuries have also been a poor performer this year.

This chart is a chart of an exchange-traded fund that tracks the price of US Treasuries.  Keep in mind that as bond prices fall, bond yields rise.

The trend line on the chart is clearly down since the beginning of 2020.  A down trend over that time frame is not surprising given that the Fed expanded its balance sheet by trillions over that same time frame.

Now, as is the case with stocks, it would appear that bond prices are oversold and may be ready for a rebound.  The Bollinger Bands on the weekly price chart seem to indicate that as does the MACD indicator at the bottom of the chart.

To summarize, both stocks and bonds are extremely oversold here and a rebound would not be surprising although the primary trend of both stocks and bonds remain down.

Gold and silver are forming a bullish pattern that may see prices rise by year-end.

I expect that Browne’s permanent portfolio will continue to outperform the stock market as it has year-to-date and I expect some recovery in returns from here.

If you or someone you know could benefit from our educational materials, please have them visit our website at www.RetirementLifestyleAdvocates.com.  Our webinars, podcasts, and newsletters can be found there.

1929 Parallels

I have often discussed the parallels between 1929 and the Great Depression that followed and the present time.

The most notable similarity between the early 1930s and the present is massive debt levels in the private sector.

Private sector debt in 1929 when measured as a percentage of the economy was about 240%.  In other words, there was $2.40 in private sector debt for every $1 of economic output. 

Today, private sector debt levels are at the same approximate levels.  (Source:  https://tradingeconomics.com/united-states/private-debt-to-gdp).

There are differences between economic conditions at the onset of the Great Depression and the present time as well.

The two most glaring variances are the currency system in use and the levels of government debt.

In 1929, the currency that was in use had a link to gold.  Currency was linked to real money and there was a limit to the amount of currency that could be created.  While that changed in 1933 when President Roosevelt made it illegal for American citizens to own gold, when the depression began, currency had a link to ‘real’ money.

In 1929, the US Government wasn’t broke.  That’s not true presently.

          In 1929, the US Gross Domestic Product was $1.06 trillion (Source:  http://stats.areppim.com/archives/insight_us_deficit_debt_29x19.pdf).  Government debt outstanding was about $170 billion.  That is a debt to GDP ratio of about 16%.

          As a side note, by 1933, US economic output fell to about $777 billion.  That’s a decline of almost 27%!

          Today, US Government debt stands at more than $30 trillion, or about 130% of the economy.

          The image on this page is a snapshot taken from the US debt clock website.

          So, let’s summarize.  Private sector debt levels are about the same as when the Great Depression began but US Government debt is about 8 times greater when measured as a percentage of GDP.

          In 1929, to use an analogy familiar to many, the US Government still had some room on its credit card to engage in deficit spending.  That is likely not true today.

          How did US Government debt get so out of hand?

          That brings me to the second glaring difference – the currency system in use then and now.

          Presently, the US Dollar is a pure fiat currency as is every other currency in use around the world.  The term fiat currency simply means that the currency has no tangible backing, it is currency by decree or fiat.  The US Dollar is legal tender ‘for all debts public and private” because the government says it is.

          Fiat currencies can be created at the will and whim of politicians and central bankers.  Fiat currencies make it easy to fund huge deficits that could never be financed if “honest” money were used.

          It is this monster level of US Government debt that will have to make the ultimate outcome that we experience a painful deflationary environment as well.  The question is as deflation kicks in, will the Federal Reserve, the nation’s central bank, reverse course and begin another round of currency creation?

          As I have forecasted previously, I believe they will.  That will lead, in my opinion, to more inflation, perhaps hyperinflation before the deflation sets in.

          There is a fundamental economic principle that has been completely left out of the prevailing narrative.  Ignoring this principle doesn’t make it any less relevant.

          This principle is best described by a statement that was made by the late economist, Herbert Stein.  If you’ve been a long-term reader of my work, you know that I am a big admirer of Mr. Stein’s simple, yet profound wisdom.

          Stein said this, ‘if something cannot go on forever, it will stop.”

          That is totally the case when it comes to deficit spending and debt accumulation funded by currency creation.

          Applying a little common sense and critical thinking to the whole notion of creating currency to fund deficit spending brings one to the inescapable conclusion that it can’t continue forever as Mr. Stein succinctly stated.

          It will end.  And it will end with a deflationary environment unlike any that anyone alive today has ever seen.

          When does this occur?

          As I have also often stated, the ‘what’ is easier to predict than the ‘when’.  So, the short answer to that question is that no one knows for sure.  But we do know that at some future point, we will have to deal with the debt and it will be an ugly, unpleasant time.

          The current rate of debt accumulation worldwide has me thinking that we are nearing the day of reckoning faster than many may think.  In last week’s “Portfolio Watch” newsletter, I reprinted a chart of the global debt bubble that was originally published by Gold Switzerland.

          I’ve reprinted it again this week for your reference.

          It took 2000 years to get to the equivalent $100 trillion in debt worldwide.  Then, it took only another 21 years to triple that debt level to $300 trillion.

          At the present trajectory of debt accumulation, the world will see debt of $2 quadrillion in just 4 to 9 years.

          While I don’t have a crystal ball that works, I simply cannot fathom getting to $2 quadrillion in debt before the deflationary period sets in with a vengeance.

          That’s why I am such an advocate of using the “Revenue Sourcing™” planning strategy to position one’s assets.

          As an interesting side note, I was walking through an antique store recently and stumbled upon a collection of “Life” magazines from the 1930s.  Ever curious, I began to peruse them.

          I found an issue from December of 1931.  It sold for 15 cents and featured a drawing of a very sad Santa on the back of a single skinny, overworked reindeer with its ribs visible through its fur.

          In the issue, there are many references to the depression that was raging at the time.  Thought I’d share a few with you.

“The one man who came through the depression without worrying was a member of a nudist cult who was on a diet.”

“Experts say the bottom has been reached.  Nevertheless, they think the bottom has been reached.” Then there was the David Letterman style list (WAY pre-Letterman) of the top 10 benefits of the depression:

  1. Judge I. L. Harris of San Francisco reports that the number of divorces has fallen markedly.
  2. The US Officers of Aviation were informed they will no longer be required to make three dress changes daily.
  3. Col. R. I. Randolph head of “The Secret Six” reports that he can now get anyone in Chicago bumped off “for from two to three hundred dollars”.
  4. Mrs. Frank Kravitz of New Haven reports a decided improvement in her business of “renting wedding gowns”.
  5. Judge Calvin Stewart if Kenosha, Wisconsin announces he will reduce fines for intoxication from three dollars and costs to one dollar and costs in order to line up with the nationwide economy drive.
  6. Ely Culbertson declares that twenty million people in America have taken to bridge playing, in order to help forget financial worries.
  7. Judge George Dunkel of Denver announces that he will reduce alimony rates during the present depression.
  8. The president of Colgate University finds a marked improvement in scholastic standing, due to the students taking things more seriously.
  9. Carl Hoerman notified the Los Angeles Court that he wanted to call off his divorce suit, as his barber business was too dull to finance the action.
  10. The Crusaders report that the price of gin in Washington has dropped to one dollar per quart.

If you or someone you know could benefit from our educational materials, please have them visit our website at www.RetirementLifestyleAdvocates.com.  Our webinars, podcasts, and newsletters can be found there.

Is the Fed About to Lose?

            One of the points of my “New Retirement Rules Book”, last updated in 2016, was that an economy that had accumulated far more debt than was sustainable would eventually experience a deflationary climate as debt was purged from the system.

            Prior to that deflationary environment emerging, I suggested that depending on the policies pursued by the Federal Reserve, we could see inflation prior to deflation.

            Since that book was published, the Federal Reserve, the central bank of the United States, has created trillions in new currency.  The result of that reckless policy is now evident – accelerating inflation in all areas of the economy but perhaps now most evident at the gas station and the grocery store.

            The Federal Reserve is now trying to engineer a soft economic landing.  That simply means the central bank wants to get inflation under control while avoiding a recession.

            In my view a snowman has a better chance of surviving from now until the 4th of July.

            In my conversations with many radio show listeners and New Retirement Rules class attendees, I find that there is confusion around the terms ‘inflation’ and ‘deflation’.

            Inflation is technically defined as an increase in the currency supply and deflation is defined as a decline or contraction in the currency supply.

            Increases in consumer prices are a symptom of inflation.

            In a deflationary environment, currency disappears from the financial system as debts go unpaid and stock values and real estate values plummet.

            It’s somewhat ironic that inflation can set off deflation.  But history teaches us that it happens time and time again.

            In Weimar, Germany, after the infamous hyperinflation destroyed the currency, deflation set in and an economic environment emerged that allowed a fringe political leader like Adolph Hitler to rise to power.

            Due to the monetary policies of the Federal Reserve, we are now experiencing inflation but we will not avoid a painful deflationary environment. 

            As I’ve discussed in the past, this is due to one major reason – the currency system that we are presently using and have been utilizing since 1971.

            Prior to 1971, the US Dollar was backed by gold. 

            In 1944, after World War II and the deflationary period of the 1930s, an international agreement made the US Dollar the world’s reserve currency.  At that time, the United States had more than 20,000 tons of gold reserves making the rest of the world comfortable that the US would be able to make good on her promise to redeem US Dollars for gold at a rate of $35 per ounce.

            It took about 25 years for the US to back out of this agreement.  In 1971, the US’ gold reserves were reduced to 8000 tons and President Nixon eliminated the link between the US Dollar and gold.  Since that time, US Dollars have been loaned into existence.

            Many of you reading this know that back story extremely well.

            Since all world currencies are debt today, when debt levels reach unsustainable heights and debt goes unpaid, the currency supply contracts and deflation sets in.

            Note from the chart on this page from Gold Switzerland (Source:  https://www.gold-eagle.com/sites/default/files/images2020/evg081821-5.jpg) that worldwide debt levels now stand at $300 trillion.

            Based on the current spending trajectory, within 4 to 9 years, global debt could reach $2 quadrillion!

            That is an increase of more than 600%!

            At some point, debt levels collapse under their own weight, and deflation sets in.

            The Federal Reserve and other world central banks are trying to avoid this deflationary outcome by creating currency.

            The chart shows the expansion of the currency supply.

            Notice the currency created by the Federal Reserve has been literally off the charts in an attempt to avoid this deflationary outcome which is inevitable in my view.

           History tells us this policy will not work.

            There cannot be an economic ‘soft landing’ in my view.

            And, it seems the economic data is starting to bear this out.

            Michael Snyder, wrote a piece last week in which he cited much of this data.  (Source:  http://theeconomiccollapseblog.com/here-are-11-statistics-that-show-how-u-s-consumers-are-faring-in-this-rapidly-deteriorating-economy/)

According to a Harvard CAPS/Harris Poll that was recently conducted, 56 percent of Americans say that their financial situations are getting worse, and only 20 percent of Americans say that their financial situations are improving.

Another new survey has just discovered that 66 percent of Americans “have avoided social events because they’ve felt embarrassed or uncomfortable” about their financial situations.

The housing bubble appears to be bursting.  At this point, sales of new single family homes are falling at a very frightening pace

Sales of new single-family houses in April plunged by 16.6% from March and by 26.9% from a year ago, to a seasonally adjusted annual rate of 591,000 houses, the lowest since lockdown April 2020, according to the Census Bureau today. Sales of new houses are registered when contracts are signed, not when deals close, and can serve as an early indicator of the overall housing market.

(Editor’s note:  I’ve been warning of an inevitable correction in real estate prices)

-After breaking the all-time national record in March, the average price of a gallon of gasoline in the United States has gone 42 cents above the old record and is now sitting at $4.59.

The average age of a car on U.S. roads has reached an all-time record high of 12.2 years.  Many Americans continue to delay replacing their current vehicles because new vehicles have become so unaffordable.

Millions of American families are struggling with rapidly rising food prices

The index for food away from home increased 7.2% over the last year, the Labor Department reported earlier this month. Food prices were up 9.4% in April from the same time last year — the biggest jump since April 1981, the Bureau of Labor Statistics recently reported. And grocery store prices increased 10.8% for the year ended in April.

U.S. natural gas futures just crossed the nine dollar threshold – the highest level that we have seen since the financial crisis of 2008.  That means that much higher energy costs are on the way for U.S. consumers.

Multiple Fed surveys are showing that manufacturing activity in the U.S. is really slowing down

The slowdown in manufacturing activity on display in reports from the Federal Reserve banks of New York and Philadelphia was confirmed by a survey from the Richmond Fed indicating that factory activity contracted in the mid-Atlantic region in May.  The Fifth District Survey of Manufacturing Activity index dropped 23 points from a positive reading of 14 in April to a minus nine, the lowest reading since May 2020, when much of the economy was still reeling from the onset of the pandemic and lockdowns.

-Zero Hedge is reporting extremely depressing news about U.S. macro data: “Other than April 2020 – when the entire economy was closed – May’s serial disappointment in US Macro data is the worst since Lehman”

-Thanks to plunging stock prices, approximately 20 trillion dollars in household net worth has been “wiped out” so far this year.

-A new CBS News/YouGov survey has found that 74 percent of Americans believe that things are going badly in this country and that 51 percent of Americans actually believe that Joe Biden is “incompetent”.

            In my view, we are likely seeing the beginning of the transition from inflation to deflation.

If you or someone you know could benefit from our educational materials, please have them visit our website at www.RetirementLifestyleAdvocates.com.  Our webinars, podcasts, and newsletters can be found there.

The Current State of Stocks

          About one week ago, I completed the June Special Report which is titled “Mid-Year Market Update:  What to Consider Now for Your Money”.

          This week’s holiday issue of “Portfolio Watch” is a preview of that Special Report.

          As I have often stated, the potential problem with a time-sensitive special report written 3-4 weeks before delivery, is that so many things can change by the time the delivery happens.

        The June Special Report examines the state of many markets and offers a forecast as to where they go from here.

          Interestingly, the stock forecast offered seems to be playing out already.  Here is a bit from that report which can be ordered next week for those with an interest in reading the entire report.

          Last year, when we forecast a high probability of a stock market correction, we pointed to a commonly used piece of fundamental data, something known as “The Buffet Indicator”. 

          The Buffet Indicator is actually a measure of the total value of stocks as compared to economic output.  Put another way, this indicator is a measure of market capitalization (the total, combined value of stocks) divided by Gross Domestic Product (total economic output).

          Last year, we published this chart, noting that the indicator showed that stocks were extremely overvalued.

          There are three important points of reference on the chart.  The first is the calendar year 2000 when the Market Cap to GDP indicator stood at 159.2%.  That means that in approximate terms, the total value of stocks was about 1.6 times the economic output of the United States.

          From those levels, stocks fell more than 50%.

          The second important reference point is in 2007 when stocks peaked just prior to the financial crisis.  At that point, stocks were valued at 110% of US economic output.  From that point, stocks once again fell more than 50%!

          Then, late last year, the Buffet Indicator rose to 216%, a level never seen previously.  The total value of stocks was more than twice the total economic output of the United States.  At those levels, it was easy to predict a stock decline was inevitable.  As a side note, for stocks to return to the historic average of the Buffet Indicator, they would need to fall 70% from those lofty levels.

          As of this writing, we have now seen about a 20% correction.

          Technically speaking, as long-term readers of our newsletters and special reports know, we called the top in the market in December.  While forecasting where stocks go is dangerous business in an artificial economy abundant with newly created currency, it seemed like a December 2021 top was likely for a couple of reasons.

          The chart above is a chart of an exchange-traded fund that tracks the movement of the Russell 3000, a broad stock market index

          There is another technical indicator that we use to potentially detect major turning points in the market.  While the indicator itself isn’t unique, the way that we use it is unique.

          The indicator is something called a MACD, often pronounced, “mac – dee”.  It is a technical indicator developed by Gerald Appel in the 1970s.  MACD is an acronym that stands for moving average convergence-divergence.

          The MACD is often used with a daily or a weekly chart to determine trend changes.  The chart above is a weekly chart and the MACD indicator has been drawn across the bottom of the chart.

          The MACD indicator has two lines moving up and down across the bottom of the chart.  These lines, one orange and one blue occasionally cross each other.  It is these crossovers that many traders use to trade and determine potential trend changes.

          The orange line on the bottom of the chart is drawn by taking the 12-period moving average of price and subtracting the 26-period moving average of price.  If you look closely at the labeling on the right-had side of the MACD indicator, you’ll see a zero line.  When the orange line crosses the zero line, it is at that point that the 12-period moving average of price and the 26-period moving average of price are the same. 

          Here’s what one can discern using a moving average of price:  the 12-period moving average of price is the market’s consensus of value over the 12 periods.  On the chart above, which is a weekly chart, the 12-period moving average of price is the market’s consensus of value over the past 12 weeks.  The 26-period moving average is the market’s consensus of value over the past 26 weeks.

          When the orange line on the chart above is over the zero line, it tells you that the 12-period moving average is higher than the 26-period moving average.  That means that if the moving average of price over the past 12-periods is greater than the moving average of price over the past 26-periods, the market may be bullish.

          The blue line on the chart is a 9-period average of the difference between the 12-period moving average and the 26-period moving average. 

          When the orange line on the MACD chart crosses over the blue line to the upside, it means that the trend may be turning positive or bullish.  When the orange line crosses over the blue line to the downside, it means the trend may be turning negative or bearish.

          This indicator, like any other indicator, is far from perfect.  In a market that is not solidly trending, the MACD line and average line crossover can lead to false signals.

          Notice also within the MACD indicator above, there are some vertical lines drawn.  These vertical lines are known as a histogram.  They plot the difference between the MACD line (the 12-period moving average line minus the 26-period moving average line) and the average line.

          On a longer-term chart, like a monthly chart, the ‘ticks’ up or down of these lines can signal a strengthening or a weakening market.

          Looking at the chart above, I’ve drawn a downtrend line on the chart.  Notice how far the current price (as of one week ago) is from the down trend line drawn on the right-hand side of the chart.  If this Exchange Traded Fund (IWV) doesn’t close over about $253 (from a present price as of this writing of $225), the trend will remain down.

          That means that stocks could rally by up to 12% or so from here and not change the primary trend from down to up.  Last week, stocks made up half that gap.  I look for the trend line to hold and the downtrend to remain intact.

          That means stocks can rally from here by another 5% or more without a trend change occurring. 

If you or someone you know could benefit from our educational materials, please have them visit our website at www.RetirementLifestyleAdvocates.com.  Our webinars, podcasts, and newsletters can be found there.

Fed Revelations

        Stocks continued their losing ways last week.  The major stock market indices are now in a bear market officially.

        Stocks are following the script from 2018, the Fed tightens, and stocks fall.

        The big question here is whether the fed stays the course and continues to tighten.  Count me among the doubters.

        Peter Schiff, a past guest on my radio program, had an interesting take on Fed options and also reported on some past Fed discussions that are nothing short of eye-opening.  Here are some excerpts from his piece (Source:  https://schiffgold.com/commentaries/peter-schiff-the-fed-girds-for-battle/) (emphasis added):

It’s the Fed’s “hold my beer” moment.

After more than a year in which Federal Reserve leadership appeared clueless, pollyannish, and indecisive, the Fed is conducting a full-throated messaging campaign to show that it is as serious as cancer about the inflation surge that is scaring the bejesus out of consumers, investors, and economists.

Their public pronouncements in recent weeks go something like this: “Out of a good faith misreading of post-pandemic data we had concluded, mistakenly as it happens, that the inflation wave, which began in 2021, was transitory. But now that we know it is not, we are moving with great speed and resolve to bring the problem to heel. Given the power of our tools, the underlying strength of our economy, and our hard-earned credibility, we are confident we can get the job done quickly, and without inflicting undue harm on the economy. We will continue until inflation gets closer to our 2% target. And so, if you don’t mind, kind sir, please step aside and let us do the job we were created to do. We got this!”

This newly found resolve may assure many that at least the Fed is no longer in denial and has a plan to get us out of this mess. In reality, these open-mouth operations are simply a desperate Hail Mary designed to convince us that the Fed can do what it clearly has no stomach or power to do. I would suggest that Fed officials hold onto their beers and drink. They are going to need it.

While most observers have focused on Chairman Jerome Powell’s press conference last week as the clearest insight into the Fed’s thinking, I think more can be gleaned from the extensive conversation two days later in Minneapolis between Christopher Waller, a member of the Federal Reserve Board of Governors (a current voting member of the FOMC) and Neel Kashkari, the President of the Federal Reserve Bank of Minneapolis (and an FOMC alternative member). In particular, Waller offered a very clear assessment of the Fed’s battle plan.

Right off the bat, he confronted mounting criticism that the Fed failed to read the economy accurately over the past 18 months, thereby grossly miscalculating policy, which let the inflation genie out of the bottle. His defense, which essentially boils down to “don’t blame us, no one with mainstream credentials in government, economics, or finance saw this coming,” is both bizarre and inadvertently illuminative. Not only does this ignore the 2021 predictions of former Treasury Secretary Larry Summers, who used to have at least some mainstream credibility, but it completely ignores all those like me who had been shouting from the rooftops that this danger was lurking. Waller’s admission, which shows how deeply embedded Fed leaders are in their own echo chamber, is more of an indictment of the entire economic elite rather than an excuse for their errors.

Waller then admitted that inflation data that was released way back in September 2021 revealed to them that the “transitory story’ that they had been spinning since the beginning of 2021, would no longer hold water. He explained that members of the FOMC were so alarmed that they immediately responded with plans to roll out new messaging that hinted strongly at tighter policy. Say what?

They determined nine months ago that very high inflation had been running rampant for the better part of a year, that it showed no signs of slowing, that the Fed Funds rate (which was then at 0%, and likely 800 basis points below the rate of inflation) was adding fuel to the fire, and the only thing they were prepared to do was to start talking tougher?

The Fed did not implement its first rate hike (25 basis points) until March of this year, fully seven months later! And during that entire time, it continued to expand its balance sheet by hundreds of billions of dollars through quantitative easing rather than immediately stopping the program or, better yet, reversing it. That’s insane. Captain, there is a huge gash in the hull of the ship but rather than try to repair the damage now, let’s think about how we are going to word our next few press releases!

Instead of taking bold steps back in the fourth quarter of last year to get ahead of the curve, or to at least not fall far further behind, the Fed irresponsibly took a slow and muted path. Given its admitted understanding of the conditions nine months ago, its actions seem hard to justify.

Despite these past missteps, Waller claims that the Fed is well-suited to make up for lost time. Emboldened by what he sees as a “historically” strong labor market, Waller believes the current economy can absorb the negative effects of higher interest rates without succumbing to recession. As a result, he predicts the Fed will not be deterred by weaker jobs or economic reports that may emerge in the coming months. In fact, he claims such data would be welcome developments. In his view, the economy needs to lose jobs to be put back into balance. Reduced hiring, he argues, will diminish upward wage pressure, which he sees as the root cause of inflation.

To justify his confidence that higher rates will kill inflation but not the broad economy, Waller took pains to draw a sharp contrast between today’s conditions and those that predominated in the late 1970s/early 1980s, which was the last time the Fed confronted nearly double-digit inflation with bold monetary tightening. Back then, the sharp rise in interest rates brought down inflation AND plunged the country into a recession. But as he views the current economy as benefiting from a “historically strong” labor market, he believes that fate will be avoided.

But Waller is looking at the rear-view mirror. He assumes that the economy that arose during the last decade of almost zero percent interest rates and historically stimulative fiscal policy will persist after those props are removed. But now, as rates increase and stimulus is removed, the economy must contract and change. We are already seeing such a change in the more speculative end of the economy. That’s where the problems are usually first manifest.

In case you hadn’t noticed, the wheels are coming off the technology and the cryptocurrency sectors. The technology-heavy Nasdaq composite index is down more than 25% thus far this year. The ARK Innovation ETF, which tracks the highest-flying growth-oriented technology, and “new economy” stocks are down 56%. E-commerce bellwethers such as Netflix and Shopify are down even more. The carnage in the crypto space is also spectacular. Although bitcoin is down about 60% from its high, that’s the good news. Lesser-known cryptos are down 70% or 80%. Some have been nearly wiped out completely, even those “stable” coins that were supposed to be pegged to the dollar. The pain extends to the businesses that worked in the crypto space. Financial firm Microstrategies, which borrowed to invest in bitcoin, is down 60% year to date while Coinbase, the crypto trading platform, is down 72%. (Bear in mind that all the losses listed above are just this calendar year. If you started measuring from the November 2021 highs, the losses are significantly greater.)

Recall that the Recession of 2001 and 2002 largely resulted from the implosion of the dot-com bubble when the pain in Silicon Valley rippled through the broader economy. But this time the outsized gains were even bigger and less tethered to reality. Many tech firms have already announced large-scale layoffs. Hundreds of thousands of highly paid workers may suddenly find themselves looking for jobs. Falling stock prices may also encourage recent retirees, who may have been coaxed out of the labor force by oversized stock market gains, or millennials who’ve been trading meme stocks and cryptocurrencies on Robinhood for a living, to join former Netflix, Twitter and Peloton employees in looking for work. Boom will go bust, and the unemployment rate may rise much quicker than Fed models suggest.

Here is the big takeaway from the piece.  The fed knew inflation was not transitory yet did nothing for months.  Then, when the Fed did take action, it was anemic and more form than substance. I would encourage you to read the entire piece; it is very well done.

If you or someone you know could benefit from our educational materials, please have them visit our website at www.RetirementLifestyleAdvocates.com.  Our webinars, podcasts, and newsletters can be found there.

An Inevitable Outcome

          Last week, I discussed that stagflation was the most likely immediate economic outcome in my view.

          Just in case you missed last week’s post, stagflation is defined as price inflation combined with a shrinking economy.

          Ultimately though, I believe we will see a very painful deflationary environment that may rival the 1930s.  This past week, Mr. Egon von Greyerz, whose work I follow and admire, analyzed the current situation.  Excerpts from his piece follow: (Source:  https://www.silverdoctors.com/headlines/world-news/viscous-cycle-of-self-destruction-gold-outperforming-all-asset-classes/)

The current fake monetary system will collapse under its own worthless weight…

“The first panacea of a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permeant ruin. But both are the refuge of political and economic opportunists.”

-Ernest Hemingway

As the West is standing on the edge of the precipice, there are only unpalatable outcomes.

At best, the world is facing a hyperinflationary depression later followed by a deflationary depression.

But sadly, there is today much more at stake as the West is frenetically escalating the sound of war drums against Russia’s invasion in Ukraine.

As the global economy reaches the point of collapse, countries get the leaders they deserve. There is today no leader or statesman in the West who can stand up to Putin in order to negotiate peace. Biden sadly neither has the vigor nor the ability to play any significant role in solving the conflict. Also, he has the neocons pressuring him to attack and defeat Russia. And Biden’s rhetoric against Putin is certainly not conducive to peace, with words like war criminal and genocide. Biden mustn’t forget that just like in the Vietnam war, the North Vietnamese and Viet Cong are estimated to have lost one million soldiers and two million civilians. Unprovoked wars are, of course, always senseless, whoever starts them.

President Zelensky is doing all he can to involve the rest of the world militarily by demanding more money and more weapons from the West rather than putting his efforts into peace negotiations. Ukraine can, of course, never win the war against Russia alone. And dragging in the US and NATO can only lead to a war of incalculable consequences and potentially a WWIII which could be nuclear.

And in the West, not a single leader is making a serious peace attempt. From Biden to Johnson, Macron, and Scholz, we only hear talk of more weapons and more money for Ukraine. This is terribly tragic and a sign of totally incompetent leadership in the West.

So the US and the West have no ability or desire to achieve peace. And Boris Johnson has welcomed the war as a diversion from his domestic “Partygate” political pressures and therefore has taken an aggressive position against Russia rather than finding a peaceful solution.

Macron is an opportunist who stands with one foot in each camp by being chummy with Putin and at the same time condemning him.

And Scholz, the German chancellor, is in an impossible position caused by Merkel’s poor management of Germany’s energy position. The three remaining German nuclear power stations will be closed down, and fossil fuels are politically unacceptable. Nearly 60% of German gas imports come from Russia. German industry would not survive without Russian gas. So Scholz wants to have his cake and eat it, sanctioning Russia on the one hand and simultaneously spending billions of Euros buying their energy and other natural resources, including food.

Quite a precarious position for Germany to be totally dependent economically on its war enemy. At the same time, this is good for the world as Germany has a vested interest to achieve peace.

But we must remember that only a minority of countries are backing the actions of the US and Europe.  Africa, South America, and most of Asia are not taking sides and continuing to trade with Russia, and these regions represent around 85% of the world population.

So the vast majority of the world has no desire for war with Russia, but their voice is seldom heard in the Western-dominated media.

Politics and money cannot be separated, and the geopolitical situation that has now arisen will act as a perfect catalyst to the end of the monetary era since the creation of the Fed in 1913.

But what we must remember is that it is primarily the Western-controlled monetary system  (including Japan) which will come to an end.

America’s and the EU’s final desperate attempt to save their broken system by sanctions on world trade will eventually fail as the Western economies gradually decay in an economic and social breakdown brought about by a quagmire of currency collapse, deficits, debts, and history’s most epic of asset bubbles.

The Phoenix emerging will clearly be the East, led by China, with Russia as an important partner. China is, population-wise, the biggest country in the world and will soon be the biggest country in GDP terms. With total US assistance in the form of know-how and technology, China has built up a strategic and advanced manufacturing base with dominance in many sectors.

For example, 18% of all US imports come from China, including 35% of all computers and electronics. Chinese sellers represent 40% of all top brands on Amazon and 75% of all new sellers.

The US and the rest of the world criticize Germany for being dependent on Russian energy, but the US folly of shifting much of its manufacturing to China certainly qualifies for joint first prize in commercial and strategic idiocy.

Since gold is the ultimate money and the only money that has survived in history, it will have a very important role in the coming years as the fiat currency system collapses.

Empires normally suffer a drawn-out and painful death. The fall of the US and the West has certainly been long, starting over half a century ago. But the fake prosperity has benefitted a small elite and lumbered the masses with colossal debts.

In 1971, US debt was $1.7 trillion, and 50 years later, it is $90 trillion, a mere 53x increase. 

As the finale of the debt and currency collapse approaches, the desperation rises exponentially. Consequently, increasing amounts of money need to be created and wars initiated to justify the debt explosion, all in a vicious cycle of self-destruction.  

For over half a century, the US has destroyed its currency and initiated unprovoked military actions in numerous countries – virtually all of them unsuccessful.

Yes, the US has certainly experienced a temporary false prosperity. But that could only be achieved with deficits, debt, and printing fake money.

The massive cost of the failed Vietnam war led to Nixon closing the gold window in 1971.

As Nixon said at the time, “the strength of the currency is based on the strength of the economy”! 

          Hmmm, half a century later, that currency has lost 98% in real terms (GOLD), and the Federal Debt has grown 75-fold from $400 billion to $30 trillion. It took 22 years, from 1971 to 1993, for the debt to expand by $15 trillion. Just in the last 2 years, the debt is up by the same amount of $15 trillion.

            This debt will ultimately have to be dealt with.  Simple math has one concluding that this level of debt can never be paid. 

          It is the massive defaults on debt that will have to come that will ultimately lead to a painful deflationary environment.

          Stocks will fall, real estate prices will collapse, and unemployment will soar.

          It’s ironic that the currency creation that has taken place on such a reckless scale since the financial crisis has allowed the debt to build.

          Worldwide, at the time of the financial crisis, total debt was $120 trillion.  Today, worldwide debt stands at $300 trillion.  That’s an eye-popping increase of 250%!

          This can’t possibly end well.

If you or someone you know could benefit from our educational materials, please have them visit our website at www.RetirementLifestyleAdvocates.com.  Our webinars, podcasts, and newsletters can be found there.

Possible Economic Outcomes

          From where I sit, it seems that stagflation is the most likely economic outcome near term.

          Stagflation is defined as inflation combined with economic contraction.

          The official inflation rate is 8.5%, but any long-term reader of “Portfolio Watch” knows this official number is highly manipulated.  The actual inflation rate, absent favorable adjustments to make the reported number appear more palatable, is higher, likely mid-teens, depending on whose data you want to believe.

          No matter, inflation is rampant.  The Fed is ever-so-incrementally increasing interest rates to ostensibly fight inflation.  The reality is that the level of increase so far will probably not subdue inflation.

          The economy is still growing officially, but from my perspective, once the ultimate revisions are made, we are probably in a recession presently.

          On my weekly “Headline Roundup” webinar, I discussed the opinion of Mr. Peter Grandich, founder of Peter Grandich and Company, relating to inflation.  Grandich is of the opinion that the Fed is well behind the curve when addressing the inflation problem.  Long-time readers of “Portfolio Watch” know that I agree completely.

          Grandich says that inflation today is a completely different animal than it was in the 1970s which was the last stagflationary environment experienced by the country.  Grandich says “the situation is beyond what the Fed can do now”.

          “Social and political disharmony is at the highest level since the onset of the Civil War in the U.S.,” Grandich said, “and with the world suffering economic challenges, it does not paint a good picture for the future.”

          Grandich added, that he is investing only in the gold market presently.

          As far as the topic of economic contraction is concerned, Deutsche Bank recently became one of the world’s first major banks to forecast a recession.

          This from “CNN Business”:

“Deutsche Bank raised eyebrows earlier this month by becoming the first major bank to forecast a US recession, albeit a mild one.

Now, it’s warning of a deeper downturn caused by the Federal Reserve’s quest to knock down stubbornly high inflation.

‘We will get a major recession,’ Deutsche Bank economists wrote in a report to clients on Tuesday.

The problem, according to the bank, is that while inflation may be peaking, it will take a long time before it gets back down to the Fed’s goal of 2%.  That suggests the central bank will raise interest rates so aggressively that it hurts the economy.”

          As I have often stated, the Fed is between the proverbial rock and a hard place, all of their own making.  If the bank increases interest rates in a meaningful manner, recession will have to be the ultimate outcome.

          On the other hand, if the economy officially enters a recession and the Fed reacts by easing once again, the inflation monster will be further fueled.

          There are already signs that the economy, addicted to the artificial stimulus of the Fed is reacting negatively to the very modest tightening to date.

          Stocks are declining in 2022.

         

          The chart is a weekly chart of the Standard and Poor’s 500.  Each bar on the price chart represents one week of price action in this market.  The green bars represent weeks the market finished up, and the red bars represent weeks that the market finished lower.

          Note the uptrend line drawn on the chart from the most recent market bottom in 2020 to the end of 2021. 

          That trend was broken as we entered 2022.  And, since the trend was broken, we are now seeing the market ‘stair-step’ lower with a series of lower highs and lower lows.

          In this report, shortly after the first of the year, I suggested that the top in stocks might be in.  At this point, that seems to be the case, and I expect the series of lower highs and lower lows to continue.

          At this juncture, the Fed is continuing with its modest program of tightening.  The question will be how they react if stocks fall harder and go much lower.

          As noted above, more easing will mean more inflation.

          There are three economic outcomes here, in my view:

          One, the Fed stays the course, raising interest rates modestly and intermittently.  This course of action means that inflation may accelerate more slowly, but we also have a recession.  This is the stagflation outcome I discussed above.

          Two, the Fed, fearing recession, reverses course and begins currency creation once again while reducing interest rates.  This could mean more inflation, even hyperinflation, which will ultimately transition to a severely deflationary environment, perhaps after a currency event of some type.

          Three, the Fed, to get inflation in hand, increases interest rates so we have net positive interest rates after factoring in inflation.  This course of action likely leads almost immediately to the deflationary outcome.  In order to pursue this option, the federal budget would also have to be balanced or be a lot closer to balanced.

          Near term, I expect option one or a stagflation outcome. 

          However, it would not be surprising to see the Fed revert to option two when the economy worsens.

          And that seems to be what is occurring.

          Credit card debt that Americans are carrying increased almost unbelievably last month.  This from “Zero Hedge” (Source:  https://www.zerohedge.com/economics/shocking-consumer-credit-numbers-everyone-maxing-out-their-credit-card-ahead-recession):

While it is traditionally viewed as a B-grade indicator, the March consumer credit report from the Federal Reserve was an absolute shock and confirmed what we have been saying for months: any excess savings accumulated by the US middle class are long gone, and in their place, Americans have unleashed a credit-card fueled spending spree.

Here are the shocking numbers: in March, one month after the February print already came in more than double the $18 billion expected, consumer credit exploded to an absolute blowout of $52.435 billion, again more than double the expected $25 billion print, and the highest on record!

And while non-revolving credit (student and car loans) rose by a relatively pedestrian 21.1 billion (which was still the 6th highest on record)… … the real stunner was revolving, or credit card debt, which more than doubled from the already elevated February print of $14.2 billion to a stunning $31.4 billion, the highest print on record… just in time for those credit card APR to start moving higher, first slowly and then very fast.

            Yes, you read that correctly; credit card debt doubled and then some from February to March. 

          The best explanation, in my view, is that consumers are forced to borrow money or use credit to meet their household living expenses.

            That is a trend that is also unsustainable.

            There are many unsustainable trends; consumer debt levels, government debt levels, government spending, overvalued markets, and currency creation, to name a few.

            A reversal of these unsustainable trends is inevitable.

If you or someone you know could benefit from our educational materials, please have them visit our website at www.RetirementLifestyleAdvocates.com.  Our webinars, podcasts, and newsletters can be found there.

Has a Stock and Real Estate Price Correction Begun?

            The premise of my best-selling book “Revenue Sourcing” is that an aspiring retiree needs to plan for one of two economic outcomes, either inflation followed by deflation or just deflation.

            As time has evolved, it has become increasingly apparent that we are seeing inflation soon to be followed by deflation.

            Deflation occurs when debt in the financial system exceeds the level that the financial system can effectively purge using ‘honest’ methods.  Easy money strategies feed inflation and allow debt levels to build.

            When debt is purged from the financial system and deflation emerges, stock prices and real estate prices fall.  There is now, in my view, a growing amount of evidence that deflation as a result of debt purging may be beginning to show up.

            Stock prices took a big hit last week.  This from Yahoo News (Source:  https://news.yahoo.com/us-stocks-crater-dow-sheds-202007420.html)

US stocks fell Friday, as each of the three major indexes capped off losing months. The tech-heavy Nasdaq closed out its worst-performing month since 2008, shedding more than 3% for the day as investors fled the e-commerce giant after downbeat earnings.

“Some investors may be hoping for May flowers after these April showers, but historical tendencies suggest bulls should remain vigilant — down Aprils tend to be followed by down Mays,” Chris Larkin, Managing Director of Trading at E*Trade said. “And on top of that, May’s average return is even worse when the SPX is red for the year heading into the month.”

Mixed tech earnings have weighed heavily on investors, as many pandemic winners begin to deflate in the face of tighter monetary policy from the Federal Reserve. The Federal Open Market Committee is set to meet next Tuesday and Wednesday. It is widely expected that the central bank will hike rates by 50 basis points, with markets also pricing in a chance of a 75 basis point hike at the June meeting.

Bank of America trimmed its S&P 500 forecast from 4,600 to 4,500, and its analysts said markets are pricing in a one-in-three chance the US economy will enter a recession.

Cathie Wood’s Ark Innovation is about to cap off its worst month ever, with a 29% decline in April. That puts Wood’s flagship fund roughly 70% below its record-high in 2021 when pandemic stars like Zoom and Teladoc were surging.

            But it may not be just stocks that are feeling the pinch of debt excesses.  Real estate may be on the ropes as well.  This from Wolf Richter (Source: https://wolfstreet.com/2022/04/26/the-most-splendid-housing-bubbles-in-america-april-update-raging-mania-on-the-eve-of-the-spike-in-mortgage-rates/):

Home prices spiked in crazy leaps – including by about 30% or more in Phoenix, Tampa, and Miami year-over-year – according to the S&P CoreLogic Case-Shiller Home Price Index today. But this raging mania took place with mortgage rates of late last year, given the long lag of the Case-Shiller Index.

The long lag of the Case-Shiller Home Price Index.

The home price data released today was called “February” and represents the three-month average of closed sales that were entered into public records in December, January, February, reflecting deals that were agreed to a few weeks earlier, roughly in November, December, and January.

But wait… Many of these homebuyers were pre-approved and had rate locks from prior weeks and months. In November and December last year, the average 30-year fixed-rate hovered at around 3.2%, according to Mortgage Bankers Association data, which is when homebuyers got the rate locks for most of these deals in today’s data (green circle in the chart):

 The home price data in the charts below (Editor’s Note:  Will be showing only a few of the many charts Mr. Richter published in the article referenced above) does not yet reflect any part of the spike in mortgage rates that commenced in January. But it reflects the crazed run-up beforehand when buyers were desperately trying to buy a home with their still low rate locks.

The mad scramble at the time.

During the time reflected in today’s Case-Shiller home price data, there was a mad scramble to get the deals done before mortgage rates would rise, and this mad scramble is splendidly reflected here with some crazy spikes.

The overall National Case-Shiller Home Price Index for “February” (average of closed deals entered into public records in December, January, and February, and made in prior weeks and months) jumped 1.7% from the prior month and 19.8% year-over-year.

San Diego metro: Prices of single-family houses spiked by a holy-moly 4.5% in “February” from the prior month, and 29.1% year-over-year. The index value of 401 means that home prices exploded by 301% since January 2000, when the index was set at 100.

This price growth amounts to 4.3 times the rate of CPI inflation (+70%) over the same period, crowning San Diego the Number 1 most splendid housing bubble on this list:

Los Angeles metro: The Case-Shiller index spiked by 3.2% in February from January and 22.1% year-over-year. With an index value of 397, house prices exploded by 297% since January 2000, crowning the Los Angeles metro as the Number 2 most splendid housing bubble on this list.

It’s just house price inflation: the dollar losing purchasing power.

The Case-Shiller Index’s “sales pairs” method – comparing the price of a house when it sells in the current period to the price when it sold previously – tracks how many dollars it takes to buy the same house over time. The index includes adjustments for home improvements. By tracking the purchasing power of the dollar with regard to the same house, the index is a measure of house price inflation.

All charts here are on the same index scale, going just past 400.

Seattle metro: House prices spiked a holy-moly 4.4% for the month, and 26.6% year-over-year. Since January 2000, house price inflation in the Seattle metro amounts to 281%, four times the rate of CPI inflation:

Miami metro: House prices spiked 2.3% for the month, and 29.7% year-over-year, the fastest since January 2006, on the eve of Miami’s can-never-happen-here epic Housing Bust:

            While stocks may already be well on their way to deflating with the S&P 500 stock index down 13.31% YTD, it seems that there are signs the real estate market may soon follow suit.

            Should the real estate market and the stock market both see big price declines, we will see inflation subside to some extent (although food prices and energy costs may still rise), but we will then be looking at a different set of economic problems.

            The signs of deflation are now coming into view even as inflation is the primary economic trend.

            I see asset prices falling and consumer prices continuing to rise moving ahead.  That will inevitably lead to a recession.

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