Weak Stocks, Raging Inflation and Where We Probably Go From Here

            Financial markets continued to reflect a weakening economy last week.  Stocks, measured by the Standard and Poor’s 500 are now down nearly 25% year-to-date.  This from “Yahoo Finance” (Source:  https://ca.finance.yahoo.com/news/asian-stocks-set-fall-global-223134465.html)

US stocks suffered their worst monthly rout since March 2020 after markets were repeatedly pummeled by the Federal Reserve’s resolve to keep raising interest rates until inflation is under control.

The S&P 500 closed a volatile session lower. The index posted its third straight quarter of losses for the first time since 2009. US Treasuries dropped Friday after a late selloff into the month-end, with the benchmark 10-year yield around 3.82%.

Fed Vice Chair Lael Brainard briefly assuaged concerns on Friday after she acknowledged the need to monitor the impact rising borrowing costs could have on global-market stability. But markets continued to be on the edge as investors contended with continued strength in personal consumption expenditure, one of the Fed’s preferred inflation gauges.

Risk assets have been in a tailspin since the central bank delivered a third jumbo hike last week and officials repeatedly warned of more pain to come. UK markets added to the stress this week, after the government unveiled sweeping tax cuts that threatened to exacerbate inflationary pressures, and the Bank of England attempted to manage the mayhem that ensued.

Investors are now awaiting jobs data next week for further clues about the Fed’s rate-hike trajectory. Upcoming inflation and GDP readings will also provide details on whether price pressures are easing meaningfully. All eyes will be on the earnings season, which starts next month, for insight into how companies are managing through headwinds that include a strong dollar, rising expenses and slowing demand. Fears of a global recession are still mounting as the threat of higher rates saps growth.

            I find it interesting how perspective has changed over time.  The Fed increased interest rates by .75% to 3.25% and it’s called a ‘jumbo’ rate hike.  The fact that the S&P 500 is down nearly 25% year-to-date and the Fed Funds rate is just over 3% shows you just how addicted to easy money this market and economy have been.

            The Fed narrative is that interest rates are being increased to get inflation under control.  But, as I have often noted, it is unlikely that inflation is subdued until we get real positive interest rates.  We are still a long way from that and inflation is not yet slowing.

            The July reduction in the core inflation rate turned out to be the exception rather than a new, viable trend.  This from “Wolf Street”  (Source:  https://wolfstreet.com/2022/09/30/feds-favored-inflation-index-says-underlying-inflation-just-isnt-slowing-down/):

Just briefly here: The Fed uses the “core PCE” inflation index, released by the Bureau of Economic Analysis, as yardstick for its inflation target. This “core PCE” index – the overall PCE inflation index minus the volatile food and energy components – is therefore crucial in the current rate-hike scenario, amid red-hot inflation, when everyone wants to know when inflation is finally going to cry uncle.

Some folks thought that happened in July, when the month-to-month “core PCE” inflation slowed to “0%” (rounded down).

Turns out this much-ballyhooed month-to-month “core PCE” reading in July of “0%” was just a one-off event. In August, according to the BEA today, the core-PCE inflation index jumped by 0.6%, same as the multi-decade records in June 2022 and in April 2021 (all rounded to 0.6%). As Powell had said during the FOMC press conference: Underlying inflation is just not slowing down.

This “core PCE” is the lowest lowball inflation index the US government provides. But it is crucial in figuring out where the Fed’s monetary policy might go, and how far the Fed might go with its rate hikes, and when it might pause.

Compared to a year ago, the “core PCE” price index rose 4.9% in August, up from 4.7% in July.

This year-over-year measure is what the Fed uses for its 2% inflation target. But given the huge volatility in inflation last year, Powell said that they would be looking at month-to-month developments to get a feel of where inflation might be headed. They’re looking for “compelling” evidence that inflation is headed back to the 2% target.

            Seems we now find ourselves in a place where financial assets are losing value, but inflation is still a huge economic factor.  The question remains if the Fed will maintain its resolve to continue to increase interest rates until the 2% target is reached, or if they will capitulate and once again look to support the financial markets and the economy via easy money policies. 

            I believe the latter is more likely by sometime next year which will likely mean a continued wild ride for financial markets.

            The Bank of England just reversed its tightening program, doing an about face and once again beginning to create currency in order to buy gilts, or bonds issued by the British government.

            Past guest on the RLA Radio Program, Alasdair Macleod, had this to say on the topic (Source:  https://www.goldmoney.com/research/the-crisis-is-upon-us)

The big news was the collapse of the UK gilt market’s long maturities, which required the Bank of England to intervene, buying £65 bn in long gilts on Wednesday.  The situation arose out of pension funds leveraging their gilt portfolios through interest rate swaps and repurchase agreements up to seven times in an attempt to match their actuarial liabilities through liability-driven investing (LDI).  With over £1 trillion outstanding, a doom-loop of selling to meet margin calls was an emerging crisis which had to be stopped.

It’s been a wake-up call for investors who were not even aware of LDI’s, let alone the Lehman moment they brought about.  LDI’s are also common in the EU and the US so the problem is unlikely to be confined to London.

            The pension funds in the UK had taken on a lot of leverage to attempt to get returns that would allow them to meet their obligations.  Pension funds in the US have done the same thing as I have written about previously.

            It would not be surprising to see something similar happen here.  That would force the fed to reverse course and begin easy money policies once again.  While the crisis even here in the US may not be pensions, there are a number of other crisis-type events that could trigger the Fed’s policy reversal.

            While I don’t know what that event might be, I expect it will happen and we will once again see the Fed pursuing easy money policies.

            Ultimately, we will not avoid a deflationary event that will be unlike anything any of us have ever seen in my view. 

            As I write this the sage wisdom of Thomas Jefferson keeps running through my mind (if you’re a long-time reader, you’ve heard this before):

“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 very continent their fathers conquered.”

            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.

Will Russian Sanctions Mean Higher Inflation?

Stocks continued their decline last week as metals rallied strongly.  While many analysts blame the rising geopolitical tensions for the decline in stocks and the rise in gold and silver prices, the reality is that stocks went into calendar year 2022 extremely overvalued, and metals were undervalued in light of the massive currency creation that has been taking place over the past couple of years.

          Moving ahead, I expect more upside for metals as central banks around the world continue to create currency despite their talk to the contrary.  Past guest on my radio program, Mr. Alasdair Macleod put it this way in his excellent article this week (Source:  https://www.goldmoney.com/research/goldmoney-insights/when-normality-is-exposed-as-a-ponzi) (emphasis added):

Today, this is the situation with the whole fiat hypothesis. It has been going in its current form since 1971, when President Nixon took the dollar off from the Bretton Woods fig leaf of a gold standard. With a few ups and downs since now we have all bought into the dollar-based fiat Ponzi. Everyone committed to it not only “sincerely wants to be rich” but believes we can be without having to work for it.

Since the 1980s the currency Ponzi was bankrolled by the expansion of bank credit aimed at consumers and their housing until the Lehman crisis. Since then, it has been financed by central bank QE, credit expansion, and the odd helicopter drop. Today, in the wake of covid lockdowns central banks are scrambling to keep the illusion alive by printing currency even more aggressively while screwing down interest rates and bond yields.

Meanwhile, the political class has become complacent. For them, their central banks will continue to fund the state’s excess spending while maintaining monetary and financial stability. And one can easily imagine that in dealing with matters of state, central banks are no longer consulted; their support is simply assumed.

          The Federal Reserve and other world central banks that are now indirectly monetizing deficit spending cannot end loose monetary policies until government spending is reined in; an event that is highly improbable at this time.

          We are living in an interesting time, to say the least.  Stocks and bonds are in a bubble.  Regardless of the reason given for the decline in stocks by the pundits, overvalued assets eventually return to their real value.

          The stock and bond bubbles have been created by the fiat currency bubble.  Or, as Mr. Macleod describes it, the fiat currency Ponzi scheme.  Mr. Macleod also points out that this fiat currency Ponzi scheme may be about to be exposed.  Here is another excerpt from his terrific article (which I would encourage you to read in its entirety by clicking the link to the article above):

Now we face an aggressive Russia. In the West it is unwisely assumed that America, the EU, UK, and their allies can just shut Russia down by isolating it from international financing facilities. By denying access to Western currencies at the central bank level, they believe that the Russian economy will be ruined rapidly. The rouble is rubble and prices are rising. ATMs are empty and bank runs are everywhere. Putin will be forced to give in in a matter of days, or a week or two at the outside.

Putin has responded most alarmingly by announcing the mobilization of his nuclear capability, threatening to liquidate Ukrainians and/or his Western enemies. We can only assume that won’t happen because if it does, including Putin we are all dead anyway. Instead, escalation to world war levels should be more seriously considered as being financial and economic in nature. Last weekend we saw the first financial salvos being fired by the West: sanctions against prominent Russians, withdrawal of SWIFT access for Russian banks, and cutting off Russia’s central bank from access to its currency reserves.

The risk, which is barely understood even by central bankers let alone the politicians, is that Russia has the power to reverse the flows that keep the West’s currency Ponzi alive. In this article, we look at the situation on the ground, estimate how the financial war is likely to evolve, and how the fifty-one-year fiat Ponzi we are complacently accustomed to is likely to finally collapse.

          Mr. Macleod points out that the sanctions being imposed on Russia have not been thoroughly considered and will probably serve to continue the devaluation of the US Dollar.

It appears that SWIFT payments and currency transfers from the Russian Central Bank’s accounts with other central banks will be permitted only for oil and gas payments. The message to Putin is “we are going to do all we can to make your life impossible, but we expect you to continue to supply us with oil and gas”. This only makes sense if the financial sanctions being put in place rapidly bring Russia to its knees, making Putin desperate for the revenue from energy exports.

What is not clear is how Russia can spend the dollars and euros earned from energy exports if payments for imported goods and services are prohibited. If that is really the case, then foreign currency is valueless in Russian hands. The thinking behind these sanctions does not, therefore, make sense. But in practice, SWIFT does not really matter, because there are alternative means of settlement communications between banks. What matters more is guidance for Western banks from their regulators, forcing them not to accept payments from Russian sources. And that is also bound to threaten oil and gas-related transfers. “If in doubt, chuck it out…”

Furthermore, it isn’t clear why Russia needs more dollars and euros anyway. Western leaders and the financial media merely assume that the Russian kleptocracy relies on foreign currencies. This is not true. The Russian economy is reasonably healthy and stable. Income tax is a flat 13%, business regulation is light, public-sector debt is less than 20% of GDP, and the banking system is considerably healthier overall than that of its neighbors. Libertarians in the West can only dream of these conditions. The loss of all oil and gas revenue is about the only thing which would hurt Russia, but that has been exempted in the sanctions. Anyway, depending on the exchange rate, Russia’s break-even oil price is said to be below $45, less than half the current level. Or put another way, Russia can more than halve its total oil exports at current prices and still get by. The margins on natural gas are probably similar.

          SWIFT is an acronym for Society for Worldwide Interbank Financial Telecommunications.  It is a messaging system that banks use to securely send and receive information like money transfer instructions.  Russia has been cut off from the SWIFT system with the exception of payments for gas and oil.  The question that Mr. Macleod raises is an important one – how does it benefit Russia to export oil and gas and take Dollars and Euros as payment if they can’t spend the Dollars and Euros?

          Russia will likely respond to the sanctions in a way that will be unfavorable to consumers in the west.  It will likely accelerate inflation which is already causing pain.  One more excerpt from Mr. Macleod’s piece:

In any event, Russia still has China as a major market for its energy and commodities. By switching extra supplies to China, China would simply cut back on its imports from the rest of the world. Admittedly, the pipeline network to China cannot handle oil and gas volumes on the European scale, but any revenue shortfall can be made up to a degree by additional sales of other commodities.

Therefore, while obviously painful, the sanctions against Russia are unlikely to undermine its entire economy. But Russia’s response might.

Putin will have calculated that with continuing commodity sales to China and other Asian states within the Shanghai Cooperation Organisation (which represents roughly half the world’s population) that they can squeeze Europe on energy supplies for as long as it takes. European nations will have found their economies are in a vice-like grip that threatens to get even tighter. Pepe Escobar’s tweet above refers.

But as Escobar suggests, even if that is not enough, being cut off from spending or selling euros for goods and settling through SWIFT, Russia would be reasonable to request payment in gold because there would be no point in accumulating valueless Western fiat currencies. The Central bank of Russia could then exchange some of the gold for roubles to supply the economy’s need for currency as necessary without undermining its purchasing power, adding the balance to its gold reserves. This would be edging towards a de facto gold standard, which could have the merit of stabilizing the rouble and putting it beyond the reach of foreign attacks. Russia’s gold strategy and its consequences are discussed more fully below.

          Ironically, the Russian sanctions may move the world closer to a gold standard.  China and India, two major trading partners of Russia, have noteworthy gold holdings.

          Looking at the recent performance of precious metals, it seems that much of the world may understand this.

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.

Financial Markets, the Economy and Currency Creation

            My ‘double top’ theory from last week is holding true so far, but we will wait and see.  If you missed last week’s post, a double top is a bearish formation where prior market highs are approximately reached but no new highs are made.

            At this point, it’s too early to tell.

            Bonds had a simply dismal week last week.

            The yield on the 30-Year US Treasury Bond spiked from 1.90% to 2.11% as bond prices fell hard.  An article that was reprinted in “The Detroit News” titled “Global Bond Rout Intensifies as Fed Prompts Bets on Faster Hikes” explains: (Source:  https://www.detroitnews.us/2022/01/06/global-bond-rout-intensifies-as-fed-prompts-bets-on-faster-hikes/)

The Treasury selloff that started the year is rippling across the globe as investors scramble to price in the risk that the Federal Reserve raises interest rates faster than currently anticipated to contain inflation.

Yields on U.S. 10-year notes climbed to 1.73% on Thursday, just shy of the 2021 high of 1.77%. The yield has spiked 22 basis points this week, set for the steepest increase since June 2020. The jump sparked a sell-off in bonds and equities across Asia and Europe and widened divergences in rate expectations across markets. 

“Gone are the days investors bought bonds with their eyes closed, confident in central banks’ eventual support for the market,” wrote Padhraic Garvey, head of global debt and rates strategy at ING Groep. “A key driver is a Federal Reserve on a mission to tighten policy, and the latest minutes show they mean business.”

Federal Open Market Committee members also discussed starting to shrink the central bank’s swollen balance sheet soon after their first hike, the minutes showed. That would be a more aggressive approach than during the previous rate-hike cycle in the 2010s, when the Fed waited almost two years after liftoff to begin trimming the stockpile of assets built up as it injected cash into the economy.

            In other words, the Fed is threatening to take away the punch bowl and the markets are reacting.  Higher interest rates will be detrimental to an economy that is already fragile.  The most recent jobs report is another bit of evidence that the economy remains weak.  This from “Yahoo Finance” (Source:  https://finance.yahoo.com/news/job-growth-disappoints-biden-says-233412951.html)

Non-farm employment grew by 199,000 in December, the U.S. Labor Department announced Friday, a disappointing result that fell well short of expectations for the month.

            Should the Fed stay the course and complete the taper (totally cease currency creation), the financial markets and the economy are sure to suffer.  On the other hand, should the Fed change course and continue currency creation, the risk is that already high inflation turns hyperinflationary.

            Ironically, at a certain point, rather than helping the financial markets, inflation will hurt them.  This from Steve Forbes (Source:  https://www.forbes.com/sites/steveforbes/2022/01/07/will-inflation-cause-a-stock-market-crash-in-2022/?sh=36eb67e35a44)

This could well be the year that inflation starts to smack the stock market. The current episode of What’s Ahead explains why. 

Investors need to understand that there are two kinds of inflation: monetary and nonmonetary. 

Last year most of the increases in prices came from pandemic disruptions, made worse by Biden Administration blunders. This is nonmonetary inflation. 

The other type of inflation comes from the Federal Reserve printing too much money. Our central bank has been using a certain gimmick—reverse repurchase agreements—on an unprecedented scale to keep this mountain of money from cascading into the economy. But these kinds of ploys always end badly.

Moreover, the Fed has announced that come spring it will no longer be adding to its holdings in government bonds—which means higher interest rates than even the Fed anticipates. 

And that’s bad news for the economy—and the stock market.

            The easy money policies that the Fed has been pursuing always end badly.  Steve Forbes knows it and past radio show guest, Alasdair Macleod knows it.  Here are some excerpts from a piece that he wrote last week.  (Source:  https://www.goldmoney.com/research/goldmoney-insights/money-supply-and-rising-interest-rates)

            Keynesian hopium, as Mr. Macleod calls it, is the belief that the central bankers will be able to continue to create currency to keep the economy chugging along all while keeping inflation under control.

The establishment, including the state, central banks, and most investors are thoroughly Keynesian, the latter category having profited greatly in recent decades from their slavish following of the common meme.
That is about to change. The world of continual Keynesian stimulus is coming to its inevitable end with prices rising beyond the authorities’ control. Being blinded by neo-Keynesian beliefs, no one is prepared for it.
This article explains why interest rates are set to rise substantially in this new year. It draws on evidence from the inflation crisis of the 1970s, points out the similarities and the fact that currency debasement today is far greater and more global than fifty years ago. In the UK, half the current rate of monetary inflation for half the time — just for one year — led to gilt coupons of over 15%. And today we have Fed watchers who can only envisage a Fed funds rate climbing to 2% at most…
A key factor will be the discrediting of this Keynesian hopium, likely to be replaced by a belated conversion to the monetarism that propelled Milton Friedman into the public eye when the same thing happened in the mid-seventies. The realization that inflation is always and everywhere a monetary phenomenon will come too late for policymakers to stop it.
The situation is closely examined for America, its debt, and its dollar. But the problems do not stop there: the risks to the global system of fiat currencies and credit from rising interest rates and the debt traps that will be sprung are acute everywhere.

            The smattering of evidence presented so far in this week’s issue pokes holes in this argument.  Yet, many in the financial industry are still clinging to this hopium.  Mr. Macleod explains:

Clearly, the outlook is for higher dollar interest rates. The Fed is trying to persuade markets that it is a temporary phenomenon requiring only modest action and that while inflation, by which the authorities mean rising prices, is unexpectedly high when things return to normal it will be back down to a little over two percent. There’s no need to panic, and this view is widely supported by the entire investment industry.
Unfortunately, this narrative is based on wishful thinking rather than reality. The reality is that over the last two years the dollar has been dramatically debased as part of an ongoing process, as the chart in Figure 1 unmistakably shows.

Since February 2020, M2 has increased from $15,470 to $21,437 last November, that’s 38.6% in just twenty months, an average annualized inflation rate of 23.2% for nearly two years on the trot. And that follows unremitting expansion at an accelerated pace since the 2008 Lehman crisis, an inflationary increase of 175% since August 2008 to November 2021. If the CPI is the relevant measure, then its current indicated rate of price inflation at 6.8% is only the beginning of upward pressure on prices.
For now, markets are ignoring this reality, hoping the Fed is still in control and can be believed. But we can be sure that it will soon become apparent that the monetary authorities have a major problem on their hands which will no longer be satisfied by jaw-jaw alone. Interest rates will then be destined for significantly higher levels, not because there is demand for capital against a background of limited savings supply, but because anyone holding dollars will require compensation for retaining them. A similar error is to think that with economic growth slowing from its initial recovery and with concerns that the world may be entering a recession, demand and supply will return to a balance and prices will stop rising.
These errors aside, the 10-year US Treasury, which is currently yielding 1.7% cannot continue for long at these levels with CPI prices rising at 6.8% and more. And in the next few months, with higher producer prices, energy, and raw material costs in the pipeline the pressure for a substantial upwards rerating of bond yields (which is a catastrophic fall in prices) is only going to increase.

            I, like Mr. Forbes and Mr. Macleod, am of the firm belief that 2022 will see the proverbial rooster come home to roost as far as Fed policy is concerned.

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.

Currency Devaluation or Market Crash

          This week, I want to share excerpts from and some of my comments on an insightful article penned by past RLA Radio guest, Mr. Alasdair Macleod.  Undoubtedly, many of you recognize Alasdair as the head of research at Gold Money. 

          Mr. Macleod’s article is titled “Waypoints on the road to currency destruction – and how to avoid it”.  (Source:  https://www.goldmoney.com/research/goldmoney-insights/waypoints-on-the-road-to-currency-destruction-and-how-to-avoid-it)

          I discuss this article in detail and offer additional proof of Mr. Macleod’s theory on the most recent “Headline Roundup” webinar that is presented live each Monday at Noon Eastern Time.  To get an invite to the webinar, just give the office a call and we’ll be glad to get you an e-mail with all the “Headline Roundup” login information.

          You can also visit www.RetirementLifestyleAdvocates.com and view the “Headline Roundup” webinar replay.

          This, from Mr. Macleod’s piece:

-Monetary policy will be challenged by rising prices and stalling economies. Central banks will almost certainly err towards accelerating inflationism in a bid to support economic growth.

-The inevitability of rising bond yields and falling equity markets that follows can only be alleviated by increasing QE, not tapering it. Look for official support for financial markets by increased QE.

-Central banks will then have to choose between crashing their economies and protecting their currencies or letting their currencies slide. The currency is likely to be deemed less important, until it is too late.

-Realizing that it is currency going down rather than prices rising, the public rejects the currency entirely and it rapidly becomes valueless. Once the process starts there is no hope for the currency.

          In essence, Alasdair is observing that central banks are painted into a corner and have two choices; one, protect their currencies and let their economies crash and burn or two, attempt to prop up their economies and markets via additional currency creation at the expense of their currencies.

          Mr. Macleod also notes in his piece that currency destruction and further devaluation can be avoided (emphasis added):

The few economists who recognize classical human subjectivity see the dangers of a looming currency collapse. It can easily be avoided by halting currency expansion and cutting government spending so that their budgets balance. No democratic government nor any of its agencies have the required mandate or conviction to act, so fiat currencies face ruin.

          The solution to currency devaluation is simply to balance government budgets so that currency creation becomes unnecessary.  In today’s world, this is much easier to say than to do.

          Despite the rhetoric from the Washington politicians that the nation’s fiscal woes can be corrected by taxing the billionaires, simple, basic math proves this doesn’t come close to solving the problem.

          A wealth tax far more draconian than the one being presently discussed does little to fix the deficit spending problem.  The truth is that the politicians could confiscate 100% of the wealth of all the country’s billionaires and the deficit spending would begin again within a few, short months.

          No matter how you slice it and no matter how many additional taxes you levy, the deficit problem cannot be solved by raising taxes.  Current levels of spending are just too far out of control.  And that’s the case before any new spending occurs which seems like an inevitability at this juncture.

          Mr. Macleod, in my view, correctly observes that ‘no democratic government nor any of its agencies have the required mandate or conviction to act, so fiat currencies face ruin.’

          The question that every “Portfolio Watch” reader should be asking is what does this ‘ruin’ look like and what steps can be taken presently to potentially protect one’s self?

          Mr. Macleod gives us some idea as to what this ruin may look like based on what has happened historically. 

If we consider the evidence from Austria before the First World War, we see that the economic prophets who truly understood economics became thoroughly despondent long before the First World War and the currency collapse of the early 1920s. Carl Menger, the father of subjectivity in marginal price theory became depressed by what he foresaw. As von Mises in his Memoirs wrote of Menger’s discouragement and premature silence, “His keen intellect had recognized in which direction Austria, Europe, and the world were pointed; he saw this greatest and highest of all civilizations rushing toward the abyss”. Mises then recorded a conversation his great-uncle had had with Menger’s brother, which referred to comments made by Menger at about the turn of the century when he reportedly said,

“The policies being pursued by the European powers will lead to a terrible war ending with gruesome revolutions, the extinction of European culture, and destruction of prosperity for people of all nations. In anticipation of these inevitable events, all that can be recommended are investments in gold hoards and the securities of the two Scandinavian countries” [presumably being on the periphery of European events].

          The events of the 1920’s led to the depression of the 1930’s.  An article, written by Richard Timberlake for the Foundation for Economic Education in 1999 (Source: https://fee.org/articles/money-in-the-1920s-and-1930s/) explains (emphasis added):

 Other observers, for example, many Austrian economists, believe that all the trouble started with a central bank “inflation” in the 1920s. This “inflation” had to be invented because it is a necessary element in the Austrian theory of the business cycle, which seems to describe most Austrian economic disequilibria. Austrian “inflation” is not limited to price level increases, no matter how “prices” are estimated. Rather, it is an unnatural increase in the stock of money “not consisting in, i.e., not covered by, an increase in gold.”

Once the Austrian “inflation” is going, it provokes over-investment and maladjustment in various sectors of the economy. To correct the inflation-generated disequilibrium requires a wringing-out of the miscalculated investments. This purging became the enduring business calamity of the 1930s.

The late Murray Rothbard was the chief proponent of this argument. Rothbard’s problem is manifest in his book America’s Great Depression. After endowing the useful word “inflation” with a new and unacceptable meaning, Rothbard “discovered” that the Federal Reserve had indeed provoked inflation in the 1921–1929 period. The money supply he examined for the period included not only hand-to-hand currency and all deposits in commercial banks adjusted for inter-bank holdings—the conventional M2 money stock—but also savings and loan share capital and life insurance net policy reserves. Consequently, where the M2 money stock increased 46 percent over the period, or at an annual rate of about 4 percent, the Rothbard-expanded “money stock” increased by 62 percent, or about 7 percent per year.

          Money stock increasing at 7% per year resulted in inflation in the 1920’s followed by a painful deflationary period in the 1930’s.

          Here is why that is interesting.

          The chart above illustrates the Fed’s assets.  It’s important to remember that the Fed creates currency to buy these assets.  As you can see from the chart, the Fed has more than doubled the money it’s created in less than 2 years.

          By comparison, the 7% increase in the money supply from 1921 to 1929 is very mild yet the painful deflationary period of the 1930’s followed.

          What lies ahead given the current level of debt and currency creation?

          Mr. Macleod gives us an idea.

          My question for you is this:  have you adopted the Revenue Sourcing approach to managing your assets?

          Do you have assets that may perform well in a deflationary environment like the 1930’s as well as the inflationary environment that is likely to precede it?

          If not, time may be running short.

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

Stocks and the Fed

As I was doing the research this week that I do every week, it struck me as to how tightly correlated the performance of stocks is to the balance sheet of the Federal Reserve.

          The chart on this page is a chart of an exchange-traded fund that tracks the performance of the Russell 3000, a very broad stock market index.

          The most recent low on the chart is the market bottom of March of 2009.  Since that time, as you can see from the chart, stocks have moved up significantly; the chart pattern is nearly vertical.

          Each bar on the chart represents one month of price action.  The green bars on the chart are the months during which the Russell 3000 moved higher and the red bars on the chart represent the months during which stocks moved lower.

          Since March of 2020, stocks have moved lower only 4 months with the balance of the months seeing stocks move higher; significantly higher in many months.  Since the market low of March of 2009, stocks have moved higher by 213%.

          The second chart is a chart from the Federal Reserve representing total Federal Reserve bank assets.

          Notice the correlation between currency creation by the Federal Reserve and the parabolic rise in the price of stocks.

          On my radio program, I’ve gone on record stating that it is my belief that the Fed’s taper talk is just talk.

          In the September issue of the “You May Not Know Report”, I reference an article published by Ryan McMaken about the political realities of the current fiscal situation.  I’d encourage you to check out the piece in the “You May Not Know Report”.

          In short, McMaken points out that the Fed’s “dual mandate” of keeping prices stable and maintaining full employment is really not the point any longer.

          Here is a bit from his piece (Source: https://mises.org/wire/how-fed-enabling-congresss-trillion-dollar-deficits) (emphasis added):

If all this spending were just a matter of redistributing funds collected through taxation, that would be one thing. But the reality is more complicated than that. In 2020, the federal government spent $3.3 trillion more than it collected in taxes. That’s nearly double the $1.7 trillion deficit incurred at the height of the Great Recession bailouts. In 2020, the deficit is expected to top $3 trillion again.

In other words, the federal government needs to borrow a whole lot of money at unprecedented levels to fill that gap between tax revenue and what the Treasury actually spends.

Sure, Congress could just raise taxes and avoid deficits, but politicians don’t like to do that. Raising taxes is sure to meet political opposition, and when government spending is closely tied to taxation, the taxpayers can more clearly see the true cost of government spending programs.

Deficit spending, on the other hand, is often more politically feasible for policymakers, because the true costs are moved into the future, or they are—as we will see below—hidden behind a veil of inflation.

That’s where the Federal Reserve comes in. Washington politicians need the Fed’s help to facilitate ever-greater amounts of deficit spending through the Fed’s purchases of government debt.

When Congress wants to engage in $3 trillion dollars of deficit spending, it must first issue $3 trillion dollars of government bonds.

That sounds easy enough, especially when interest rates are very low. After all, interest rates on government bonds are presently at incredibly low levels. Through most of 2020, for instancethe interest rate for the ten-year bond was under 1 percent, and the ten-year rate has been under 3 percent nearly all the time for the past decade.

But here’s the rub: larger and larger amounts put upward pressure on the interest rate—all else being equal. This is because if the US Treasury needs more and more people to buy up more and more debt, it’s going to have to raise the amount of money it pays out to investors.

Think of it this way: there are lots of places investors can put their money, but they’ll be willing to buy more government debt the more it pays out in yield (i.e., the interest rate). For example, if government debt were paying 10 percent interest, that would be a very good deal and people would flock to buy these bonds. The federal government would have no problem at all finding people to buy up US debt at such rates.

But politicians absolutely do not want to pay high interest rates on government debt, because that would require devoting an ever-larger share of federal revenues just to paying interest on the debt.

For example, even at the rock-bottom interest rates during the last year, the Treasury was still having to pay out $345 billion dollars in net interest. That’s more than the combined budgets of the Department of Transportation, the Department of the Interior and the Department of Veterans Affairs combined. It’s a big chunk of the full federal budget.

Now, imagine if the interest rate doubled from today’s rates to around 2.5 percent—still a historically low rate. That would mean the federal government would have to pay out a lot more in interest. It might mean that instead of paying $345 billion per year, it would have to pay around $700 billion or maybe $800 billion. That would be equal to the entire defense budget or a very large portion of the Social Security budget.

            McMaken makes a great point.  Politically speaking, it would be a major problem for the Fed to taper and/or raise interest rates.

            So, the Fed will likely continue on their current unsustainable course until things blow up.

            Going back to the ‘dual mandate’ of stable prices and maximum employment, it’s now obvious that the first objective of stable prices is out the window.  The inflation genie is now fully out of the bottle.

            Prices are rising across the board in nearly every category of spending.  Looking past the heavily manipulated inflation reporting metric most often used to report the headline inflation rate – the Consumer Price Index – one finds the actual, real-world inflation rate is 12% or 13% per annum.

            With the Fed staying the course as far as easy money is concerned, look for the real inflation rate to continue to accelerate and look for the Fed to continue to say that inflation is transitory or come up with some other narrative to explain away the rising inflation rate as attributable to something other than reckless Fed policy.

            The Fed may have gotten some cover this past week for staying the course.  The jobs report was a huge disappointment to the downside.  This from “Zero Hedge” (Source:  https://www.zerohedge.com/markets/goodbye-taper-huge-jobs-miss-us-adds-just-243k-jobs-august):

Moments ago the BLS reported that in August just a paltry 235K jobs were added, far below the 725K expected below even the most pessimistic forecast; the number was not only a huge drop to last month’s upward revised 1.053MM but was the weakest print since January.

While we expect that the pundits will quickly blame the resurgence of covid in August, manifesting itself in zero jobs added in leisure and hospitality, with Bloomberg already busy spinning by saying that “the deceleration in hiring likely reflects both growing fears about the rapidly spreading delta variant of Covid-19 and difficulties filling vacant positions” the reality is that the US economy is rapidly slowing even as inflation continues to soar, positioning the US squarely for a stagflationary crash and putting the Fed’s tapering plans squarely in doubt.      

          The economy is slowing. 

            Even mainstream forecasters are revising economic growth estimates downward.  In the “Zero Hedge” article referenced above, it was noted that Morgan Stanley cut its 3rd quarter GDP growth estimate to 2%.

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.

Higher Education and Hyperinflation

In this week’s update, I’ll look at a couple of topics that I’ve examined in previously.

          I’ll begin with my forecast from earlier this year that at least 1/3rd of colleges and universities would close within five years.  While COVID has impacted enrollment at institutions of higher learning, problems existed in the higher education world prior to the lockdowns imposed in response to COVID.

          For several years I have been forecasting big changes in higher education.  The primary reason for this forecast was the huge amount of student loan debt that existed and continued to build.  Once one understands the anatomy of a price bubble, they become easy to recognize.  Tuition rates at colleges and universities have been rising at rates much faster than prices for just about every other category of spending. 

          This rapid rise in tuition rates has been fueled by access to easy credit in the form of student loans for virtually any student who wants one.  Easy credit is rocket fuel for price bubbles.

          While price bubbles are easy to recognize, the timing of when these bubbles burst is much more difficult to predict.  Bubbles can often build for a much longer time frame and to much higher levels than one would ever think is possible.

As I have stated, COVID simply exposed where weakness already existed, not just in higher education, but in many areas.

          As far as higher education is concerned, there is evidence that the bubble may be about to unwind.

          A recent “Zero Hedge” piece (Source:  https://www.zerohedge.com/personal-finance/fall-enrollment-slides-coronavirus-threatens-higher-education-bubble) explained:

Take, for example, the 2020 fall semester, the number of first-year undergraduate students are in freefall across the country, down 16%, when compared to 2019 fall semester, according to a new report by the National Student Clearinghouse Research Center (NSCRC). Overall undergraduate enrollment slid 4%  from this time last year, mostly because of the 13.7% drop in international students.

Naked Capitalism’s Yves Smith points out that virus-related enrollment declines are happening at a time when colleges and universities’ revenues were already slumping, potentially creating a perfect storm of campus closures. 

“Empty seats are inflicting financial damage on colleges already reeling from the pandemic. Earlier this year, when the virus began spreading, many schools cleared their campuses of students and refunded housing costs. With enrollment warning, revenue from tuition, dormitories and dining halls is being hurt at a time when some institutions are posting low endowment returns,” Bloomberg said. 

Jack Maguire, the founder of the enrollment-consulting firm Maguire Associates and former dean of admissions at Boston College, warned that “colleges are losing billions of dollars” as the virus continues to rage across the country. 

 “It may not be the end of it if this new wave hits and students are sent home again,” Maguire said. 

NSCRC showed enrollment slumps were the most drastic at community colleges, down 9.4% overall, and 22.7% for first-year students. Undergraduate enrollment at four-year public colleges and universities fell 1.4% overall, and down 13.7% for first-year students. As for private nonprofit colleges, overall enrollment was down 2%, and -11.8% for first-year students.

Despite undergraduate enrollment down across all types of institutions, private for-profit colleges recorded a 3% increase. 

          Rapidly declining enrollment numbers will make it difficult for many colleges to survive.

          In past posts, I have also been taking an in-depth look at the ultimate end result of the massive money creation now taking place.  If you’ve been a longer-term reader of this site, you know that I have forecast a future reset which will be reactive as occurred in Zimbabwe and Weimar, Germany or proactive like the worldwide currency reset in 1944 as a result of the Bretton Woods agreement.

          This week, I wanted to draw your attention to an article penned by past radio guest, Alasdair Macleod.  In the article (Source:  https://www.goldmoney.com/research/goldmoney-insights/hyperinflation-is-here), Mr. Macleod states that hyperinflation is already here.

          Here is a bit from his piece (emphasis added):

The progression of annualized monetary inflation from under 6% before the Lehman crisis, to 9.6% subsequently until March this year, and 65% in the thirty weeks since is clear from the chart. If the monetary authorities have the knowledge, the mandate, the authority, the ability, and the desire to stop inflating the currency, we would not describe it as hyperinflation, instead deeming it to be no more than a brief period of exceptional inflation before a return to sound money policies.

But sound money was emphatically discarded in 1971, when the post-war Bretton Woods agreement was finally abandoned — not that the monetary regime at that time was in any way sounder than Adam’s fig leaf was an item of clothing. For the fact of the matter is that sound money in America was arguably abandoned long ago, with the founding of the Fed at Jekyll Island before the First World War.

As a means of funding government deficits, inflation is capable of being stopped by cutting government spending and/or raising taxes. But now, a one-off increase of 65% of narrow money is to be followed by another massive expansion already in the wings. The hope is that that will be enough, just as the original 65% increase in M1 was hoped to be enough to ensure a V-shaped recession would be followed by a return to normality.     

          The chart above is telling.  The trajectory of money creation from 1980 to 2008 was rather tame.  From 2008 to earlier this year the trajectory of money creation, when charted, was about a 45-degree slope.  Earlier this year, the trajectory went parabolic.

          You don’t need to be an economist to forecast this outcome, you only need to view a few price charts that went parabolic to quickly conclude that parabolic price charts always reverse because parabolic price charts reflect bubbles.

          Mr. Macleod notes in his article that senior Fed economist, Michael T. Kiley concluded in August that quantitative easing (money printing) in an amount equal to 30% of US Gross Domestic Product (GDP) would be needed to deal with the Coronavirus.  In rough terms, the Fed has already created about $3 trillion in new money this year; that means there could be another $3.5 trillion coming to fund additional stimulus.

          In his article, Alasdair points out that the US Government’s annual operating deficit when calculated since March of 2020 is about $4.4 trillion.  That’s a number that is significantly more than tax receipts.

          Mr. Macleod notes in his piece that these already scary numbers are likely to get worse (emphasis added):

If these conditions persist in the new fiscal year — which seems increasingly certain, Kiley’s calculation of the further $3.5 trillion stimulus underestimates the problem. According to an op-ed by Allister Heath in today’s Daily Telegraph, Larry Summers, the US economist and arch-inflationist, believes that the cost of covid-19 will reach 90% of US GDP, substantially more than Kiley’s estimate of 30%. Over-dramatic perhaps; but can we envisage that the forthcoming stimulus package, and then undoubtedly the one to follow that, will restore normality and set the budget deficit firmly in the direction towards a balance? If the answer is no, then we already have hyperinflation. 

          Alasdair notes that people hold a certain level of personal liquidity or cash.  When money is stable, this level of personal liquidity doesn’t vary much.  But, when people sense that the price of items will fall, the level of cash they hold rises and when they expect the price of items they wish to buy to fall, they exchange their cash for tangible items.

          He also notes that hyperinflations tend to end quickly (emphasis added):

The effect of changes in the general level of personal liquidity is potentially a more important influence on the level of prices than the quantity of money itself. It should be evident that if the increased quantity of money in circulation is simply hoarded, there will be no effect on the general level of prices. Alternatively, if the public decides to abandon a state-issued currency, irrespective of the quantity in circulation it will lose all of its purchasing power.

The abandonment of a state-issued currency by the public terminates all hyperinflations and once the process is underway it tends to be rapid. In Weimar Germany, it was said this flight into goods and out of money began in May 1923 and lasted to mid-November. In the other European nations, which suffered collapses of their currencies in the early 1920s, the final process was equally swift.

Is Your Currency Going to Change?

Every day that passes we are seeing changes as far as currencies are concerned globally.  Given the rest of the news and the tendency of the mainstream media to report with bias, many of these changes have gone largely unreported and consequently unnoticed.

          For a long time, recognizing that the current financial system is highly stressed, and the current level of money printing and debt accumulation is unsustainable, I have been forecasting a future ‘reset’ of some kind.

          In the October “You May Not Know Report” newsletter distributed to my clients, I noted that there are two ways for this reset to occur – either reactively or proactively.  I offered the example of Zimbabwe as a reactive reset and the example of the Bretton Woods agreement as a proactive reset.

          If you’re not a reader of the “You May Not Know Report”, I’ll briefly summarize here.  In the case of Zimbabwe, due to overspending and massive money printing by Robert Mugabe, a reactive reset took place.  Once the citizens of Zimbabwe woke up to the fact that holding currency versus tangible assets didn’t make sense, the rush to own tangible assets created massive price inflation.  In this reset, the government simply opted to allow the citizens to use stronger currencies like the US Dollar.

          The Bretton Woods agreement created a new monetary system in the 1940’s.  This system was anchored by the US Dollar which was redeemable for gold at a rate of $35 per ounce.  This was a proactive reset of the monetary system.  This system remained in place until 1971 when the link between the US Dollar and gold was broken.

          Shortly after the link between the US Dollar and gold was eliminated, a deal was struck with Saudi Arabia to sell oil only in US Dollars and the Petro-Dollar was born.  Now, due to profligate spending and reckless money printing by the Fed, the writing is on the wall.  This trend will have to end.

          You don’t need to be an economist to recognize this.  More than $3 trillion was created out of thin air this year alone.  This week’s RLA radio guest, Rob Kirby contends that there is more money being created than is admitted by the Fed.  He provides compelling evidence to back up his claim.

          During the interview, Rob borrows an analogy he borrows from past RLA Radio guest, Chris Martenson.  The analogy:  imagine that you begin by putting one drop of water in Yankee Stadium and then every minute you double it.  One minute after placing the one drop of water in the stadium, you place two drops.  After another minute passes, you place four drops.  And so on.

          At the end of 45 minutes, the water level in the stadium is just covering the bases, but after 50 minutes, the stadium is completely full of water.  The point is simply that all the action happens in the last five minutes.       

          Past RLA Radio guest, Alasdair Macleod, made this point as well.  Mr. Macleod has suggested that hyperinflations occur quickly, over a period of months rather than years.

          So, the bottom line is that money creation is occurring at a level that is not sustainable, and the trillion-dollar question is what will the reset look like?  Will it be reactive, or will it be proactive and how will you be affected?

          There is growing evidence that there is activity occurring presently that may lead to a proactive reset although, at the present time, there is nothing concrete.  Trying to figure out what this reset might look like based on the information that is available is a lot like putting a puzzle together.

          As I have reported previously, the idea of a “Digital Dollar” has been floated twice already this year.  Although the idea is still an idea at this point in the United States, other countries around the world are testing digital currencies.  The Bahamas, Ukraine, Uruguay, and parts of China are testing digital currencies presently.

          At the end of September, the European Central Bank applied to trademark the term “Digital Euro” which can be abbreviated to DE.  Perhaps a move to get the Germans more comfortable with the idea?

          Now, just about 2 weeks after the European Central Bank applied for the “Digital Euro” trademark, the Bank of Japan is getting in on the act.  This from Zero Hedge (Source:  https://www.zerohedge.com/markets/circle-complete-boj-joins-fed-and-ecb-preparing-rollout-digital-currency) (emphasis added)(official excerpt from the BOJ’s statement in larger font):

On Friday, the Bank of Japan joined the Fed and ECB when it said it would begin experimenting on how to operate its own digital currency, rather than confining itself to conceptual research as it has to date.

Digitalization has advanced in various areas at home and abroad on the back of rapid development of information communication technology. There is a possibility of a surge in public demand for central bank digital currency (CBDC) going forward, considering the rapid development of technological innovation. While the Bank of Japan currently has no plan to issue CBDC, from the viewpoint of ensuring the stability and efficiency of the overall payment and settlement systems, the Bank considers it important to prepare thoroughly to respond to changes in circumstances in an appropriate manner.

The bank explained that it might provide general-purpose CBDC if cash in circulation drops “significantly” and private digital money is not sufficient to substitute the functions of cash while promising to supply physical cash as long as there is public demand for it.

            Interesting that the Bank of Japan states, “while the Bank of Japan currently has no plan to issue CBDC”.  From my experience, whenever a politician or a central banker floats an idea with such a disclaimer, that is exactly what they are planning.

          “Reuters” also reported on the development (Source:  https://www.reuters.com/article/japan-economy-boj-digital/boj-to-start-central-bank-digital-currency-tests-next-fiscal-year-idUSKBN26U0RA) (emphasis added):

The Bank of Japan said on Friday it would begin experimenting next year on how to operate its own digital currency, joining efforts by other central banks to catch up to rapid private-sector innovation.

The move came in tandem with an announcement by a group of seven major central banks, including the BOJ, on what they see as core features of a central bank digital currency (CBDC) such as resilience and a clear legal framework.

            When digital dollars were proposed previously, it was suggested that the Federal Reserve would maintain a digital wallet for each American.  The reason given for the development of a digital dollar wallet was that it would be easier and more efficient for citizens to receive their stimulus payments, a.k.a. “helicopter money”.

          And, while the Bank of Japan stated there would be physical cash available if there was public demand for it, my cynical side questions this statement.

          While physical cash would likely be available for a period, one can’t help but wonder for how long.  Once a population gets comfortable with digital currency and largely quits using cash, it’s easy for a central bank to justify pulling the cash and using only the digital currency.

          Once the cash get pulled, it then becomes far easier to impose negative interest rates across the board.

          I remain hopeful that we will ultimately see a proactive reset with a digital currency that is linked to gold or silver.  History suggests that when fiat currencies fail, the population typically demands a return to some form of gold or silver-based currency.

          No matter when or how a reset might occur, holding gold and silver in a portfolio makes sense for many investors.

          Many traditional money managers are now jumping on the gold and silver bandwagon.  While this doesn’t guarantee anything as far as the price of gold and silver are concerned, it’s interesting at the very least.

          Kelvin Tay of UBS Global Wealth Management had this to say, “We like gold because we think that gold is likely to actually hit about $2,000 per ounce by the end of the year.  In the event of uncertainty over the US election and the COVID-19 pandemic, gold is a very, very good hedge.”

          Wells Fargo’s head of real asset strategy John LaForge had this to say about gold, “The fundamental backdrop looks good.  Interest rates remain low, money supplies excessive and we are doubtful that the US Dollar’s September rally has long legs.  We view gold at these prices as a good buying opportunity and, as evidenced by our 2021 year-end targets, expect higher gold prices.

          I will revisit this topic as information warrants.

Precious Metals Price Manipulation and Looming Inflation

In my October client newsletter, I discussed the recent payment by JP Morgan Chase to settle criminal and civil charges that the company manipulated the precious metals markets.  This is a preview from the October “You May Not Know Report” newsletter that will be mailed next week.

JP Morgan Chase agreed to pay $920 million to settle civil and criminal charges after Federal agencies alleged the firm made fake trades in the precious metals markets6.  This from an article published in “The Daily Mail” (emphasis added):

JPMorgan Chase will pay a record $920million to settle US civil and criminal charges over fake trades in precious metals and Treasury futures designed to manipulate the market, US agencies announced Tuesday.

The settlement comes as the US banking giant reached a deferred prosecution agreement with the Justice Department to resolve criminal fraud charges over the long-running schemes.

In one of the schemes, JPMorgan traders in New York, London and Singapore between 2008 and 2016 commissioned tens of thousands of orders for gold, silver, platinum and palladium futures that were placed in order to be canceled to deceive other market participants, the Department of Justice (DOJ), one of three agencies involved in the case, said in a press release.

As a recent “Zero Hedge” article pointed out, it wasn’t that long ago that if anyone even mentioned the possibility of a market being manipulated, they would quickly be branded a conspiracy theorist.  This from the piece (emphasis again added):   

There was a time when the merest mention of gold manipulation in “reputable” media was enough to have one branded a perpetual conspiracy theorist with a tinfoil farm out back. That was roughly coincident with a time when Libor, FX, mortgage, and bond market manipulation was also considered unthinkable when High-Frequency Traders were believed to “provide liquidity” when the stock market was said to not be manipulated by the Fed, and when the ever-confused media, always eager to take “complicated” financial concepts at the face value set by a self-serving establishment, never dared to question anything.

All that changed in November 2018 when a former JPMorgan precious-metals trader admitted he engaged in a six-year spoofing scheme that defrauded investors in gold, silver, platinum, and palladium futures contracts. John Edmonds, then 36, pled guilty under seal in the District of Connecticut to commodities fraud, conspiracy to commit wire fraud, commodities price manipulation, and spoofing, a trading technique whereby traders flood the market with “fake” bids or asks to push the price of a given futures contract up or down toward a more advantageous price, and to confuse other traders or HFTs which respond to trader intentions by launching momentum in the other direction. As FBI Assistant Director in Text Box:  Charge Sweeney explained at the time, “with his guilty plea, Edmonds admitted he intended to introduce materially false and misleading information into the commodities markets.”

A little more than a year later, former Deutsche Bank precious metals trader David Liew sat in a federal courtroom telling a jury about how he learned to ‘spoof’ markets from his colleagues, and that he considered the behavior to be “OK” because it was “so commonplace.” Unfortunately for him, federal authorities didn’t see it that way, and have aggressively prosecuted the big dealer banks for market manipulation across a variety of markets. His testimony led to convictions for two of his former coworkers. A few days later, JP Morgan agreed to settle similar allegations with a record $1 billion fine, netting another major victory for the government in the nearly decade-long campaign to root out manipulation from the precious metal markets.

I have discussed my belief that there has been manipulation in markets for several years.  Given the easy money policies in which central banks have been engaging, it’s logical that outside sources have at the very least influenced precious metals’ prices.

The fundamentals for precious metals are strong.  Radical easy money policies dictate that some of a prudent investor’s portfolio be allocated to metals.

Past RLA Radio show guest, Alasdair Macleod published an article this past week in which he updated his views on the ultimate outcome of these policies.  This from his piece (emphasis added):

The purpose of monetary inflation is always stated by central banks as being to support the economy consistent with maximum employment and a price inflation target of two percent. The real purpose is to fund government deficits, which are rising partly due to higher future welfare liabilities becoming current and partly due to the political class finding new reasons to spend money. Underlying this profligacy has been unsustainable tax burdens on underperforming economies. And finally, the coup de grace has been administered by the covid-19 shutdowns.

The effect of monetary inflation, even at two percent increases, is to transfer wealth from savers, salary-earners, pensioners, and welfare beneficiaries to the government. In no way, other than perhaps from temporary distortions
does this benefit the people as a whole. It also transfers wealth from savers to borrowers by diminishing the value of capital over time.

Mr. Macleod published a chart in his piece that shows how the money creation trajectory has gone “almost off the chart”…..literally.

One can study any chart pattern with such a vertical or parabolic pattern and quickly ascertain that such patterns always reverse.  While the timing of such a reversal is impossible to determine, we can say with a high degree of confidence that such a chart pattern is not sustainable for any longer period of time.

Mr. Macleod comments (emphasis added):

It can be seen that the rate of FMQ’s growth was fairly constant over a long period of time — 5.86% annualized compounded monthly to be exact — until the Lehman crisis when the rate of growth then took off. Since Leman failed in 2008 FMQ’s total has grown by nearly 300%.

Since last March growth in the FMQ has been unprecedented, becoming almost vertical on the chart, triggered by the Fed’s response to the coronavirus. And now a second wave of it has hit Europe and the early stages of a resurgence appears to be hitting the land of the dollar as well. With lingering hopes of a V-shaped recovery being banished, a further substantial increase in FMQ is all but certain.

Already, FMQ exceeds GDP. If we take the last time things were normal, say, in 2005 when the US economy had recovered from the dot-com crash and before bank credit expansion and mortgage lending become overblown, we see that in a functioning relationship FMQ should be between 35%—40% of GDP. But with the US economy now crashing and FMQ accelerating, FMQ is likely to be in excess of 125% of GDP in the coming months.

What is the source of all that extra money? It is raised through quantitative easing by the central bank in a system that bends rules that are intended to stop the Fed from just printing money and handing it to the government.

FMQ, or fiat money quantity, if things were normal, should be 35% to 45% of the nation’s economic output.  By Mr. Macleod’s calculations, FMQ is now between 300% and 400% of that level.

This action by the Fed will, we believe, be bullish for tangible assets like gold and silver.  In a prior issue of “Portfolio Watch”, we noted that China has begun to reduce her US Dollar holdings and exchange these dollars for tangible assets.  Mr. Macleod again comments (emphasis added):

China has already declared a policy of reducing her dollar investments in US Treasury bonds and is selling her dollars to buy commodities. Few realize it, but China is doing what ordinary people do when they begin to abandon a currency — dumping it for tangible goods which will cost more in the future due to the dollar’s declining purchasing power. And as the dollar’s purchasing power declines measured in commodities more nations are likely to follow China’s lead. 

Credit and Currency Realities

As longer-term readers of this blog know, I have long advocated for a “Two-Bucket Approach to managing assets.  Over the past few years, as I have been forecasting the events that are now occurring, other individuals and companies in our industry have begun to promote what they label a two-bucket approach to managing assets.

The best-selling book “Revenue Sourcing” clarifies my approach which is unique.  To a casual observer, the differences between other approaches to asset management and the one described in the “Revenue Sourcing” book, may seem trivial; however, they are not.

In this short piece, I will explain the premise of the two-bucket approach described in “Revenue Sourcing”.  From my experience, this premise goes unnoticed and unrecognized by most in the financial industry, advisors, and analysts alike.  Sadly, this means that their clients miss out on this particularly important principle as well.

The evidence points to the fact that we are nearing the end of a credit cycle and a currency cycle. 

Here is the point of this week’s post, once the currency cycle busts and resets, traditional asset management and planning strategies will fail those who use them.

A credit cycle ends when the system has reached its capacity to service debt.  Credit cycles peak and then subsequently bust much faster than currency cycles.  Digging deeper into credit cycles we find that private sector credit cycles boom and then bust more frequently than public sector credit cycles primarily because the private sector is comprised of individuals and businesses can only accumulate debt to the point that they have the income to service the debt.

The same thing was once true for the public sector or government credit cycles.  When governments operate under a balanced budget, debt can only accumulate to the point that there are tax revenues to service the debt.

Once the noble pursuit of fiscal responsibility is abandoned and the policymakers resort to money creation to paper over budget gaps, the currency cycle bust begins.  The currency cycle bust progresses slowly at first but then, over time, it feeds on itself accelerating dramatically into the final bust and reset.

There is additional evidence that we are moving closer to a reset.  While predicting the exact timing and character of a reset is impossible, there are now statements being published about monetary policy that were but speculation a few months ago.

Alasdair Macleod discusses some of these statements in his most recent article titled, “China is Killing the Dollar”.  Mr. Macleod reports that on September 3, 2020, the state-owned Chinese newspaper “Global Times” ran a front-page article featuring a quote from Xi Junyang, a professor and the Shanghai University of Finance and Economics.  The professor stated, “China will gradually increase its holdings of US debt to about $800 billion under normal circumstances.  But of course, China might sell all of its US bonds in an extreme case, like a military conflict.”

As Alasdair correctly states, the professor’s statement was obviously sanctioned as front-page news by the Chinese government.

Mr. Macleod comments, “While China has already taken the top off its US Treasury holdings, the announcement (for that is what it amounts to) that China is prepared to escalate the financial war against America is very serious. The message should be clear: China is prepared to collapse the US Treasury market. In the past, apologists for the US Government have said that China has no one to buy its entire holding. The most recent suggestion is that China’s Treasury holdings will be put in trust for covid victims — a suggestion, if enacted, would undermine foreign trust in the dollar and could bring its reserve role to a swift conclusion.  For the moment these are peacetime musings. At a time of financial war, if China put her entire holding on the market Treasury yields would be driven up dramatically, unless someone like the Fed steps in to buy the lot.”

Should China take this bold step, the country would have about $1 trillion in US Government bonds to sell.  And should China take this step, they would not be alone.  It would likely mean that just about every other country holding US Government bonds would follow suit.

The result of such action, now being openly discussed, would be either the Federal Reserve printing more money to buy the discarded bonds or a rapid and likely increase in interest rates on the bonds as new bond investors would be looking for a higher return on their investment in order to properly compensate them for the increased risk of holding US government debt.

The likely course of action would be the Fed printing more money which, at a certain future point would mean reaching a tipping point where confidence in the US Dollar is lost.

Mr. Macleod points out in his piece that we may be closer to reaching that tipping point.  China has been accumulating more tangible assets since March of this year when the Fed changed bank reserve requirements to 0% and openly stated that it would pursue easy money policies.  Subsequent to that announcement, the Fed has printed about $3.5 trillion out of thin air and more recently changed it’s inflation targeting policy to allow inflation to run above the 2% target for as many months as it runs below the target.

It’s important to note that the Fed is using an extremely flawed metric to measure the rate of inflation.  As I have discussed in past posts, neither food prices nor fuel prices are included in the official inflation measurement.  The officially reported inflation rate is also seriously understated using subjective adjustments like hedonic adjustments, substitution, and weightings.

The Fed allowing inflation to continue at a rate over 2% when the real-world inflation rate according to private, credible, third-party sources is between 8% and 10% likely translates to 1970’s style inflation or greater.

Since March, when the Fed made its initial announcement, China has been accumulating tangible assets.  This from Mr. Macleod’s article (Source:  https://www.goldmoney.com/research/goldmoney-insights/china-is-killing-the-dollar)  (Emphasis added):

China is now aggressively stockpiling commodities and other industrial materials, as well as food and other agricultural supplies. Simon Hunt, a highly respected copper analyst and China-watcher put it as follows:

“China’s leadership started preparing further contingency plans in March/April in case relations with America deteriorated to the point that America would try shutting down key sea lanes. These plans included holding excess stocks of widgets and components within the supply chains which meant importing larger tonnages of raw materials, commodities, foods stuffs and other agricultural products. It was also an opportunity to use up some of the dollars which they have been accumulating by running down their holdings of US government paper and their enlarged trade surpluses.

It is apparent that the Fed’s policies are accelerating a move away from the US Dollar which was already underway.  It’s a sign that we are moving ever closer to the end of the currency cycle while we arrive at the conclusion of the credit cycle simultaneously.

The two-bucket approach outlined in the “Revenue Sourcing” book attempts to account for this.  Once one understands the currency cycle, one also understands the ‘dual realities’ that exist.

This dual reality is that unless Federal Reserve policies are suddenly and dramatically changed, we will have inflation in US Dollar terms but deflation in terms of gold which has historically been money.

Here’s my take:  as prices in US Dollars continue to rise, prices in gold will continue to decline.

This has been abundantly evident over the past 50 years, 20 years and even 1 year.  I’ll examine housing as an example although similar conclusions could be reached using food, automobiles or most any other item.

Almost 50 years ago, in 1971, then President Richard Nixon eliminated the link between the US Dollar and gold, reneging on the promises the US made as part of the Bretton Woods agreement which guaranteed an exchange of the US Dollar for gold.  At that time, gold was $35 per ounce and the median home sale price was about $25,000.  That meant that it took about 714 ounces of gold to buy a home.

By calendar year 2000, the median home sale price was about $135,000 and the price of gold was about $250 per ounce.  At that time, it took 540 ounces of gold to buy a new home.  While it took 5.4 times more in US Dollars to buy a home, it took only 75% of the gold.

Fast forward to today.  The median price of a new home is $278,000 and gold is selling for about $1950 per ounce.  That means a new home can be purchased for about 142 ounces of gold.  Compared to 1971 when the US Dollar officially became a fiat currency, it now requires roughly 1,100% more US Dollars to buy a new home.  Priced in gold, a home can be purchased for only 20% of the gold that was required to make the same purchase in 1971.  The 685 ounces of gold that would have purchased one home in 1971 purchases nearly five new homes today.

The two-bucket approach recognizes this trend and adapts a plan accordingly.  This is especially important as we near the end of the currency cycle while at the same time reaching the end of the credit cycle. 

Get your copy of the #1 best-seller “Revenue Sourcing” at Amazon.com.

Gold, Stocks and the Economy

Metals continued their breakout last week.  Gold advanced another 3.85% while silver jumped more than 7.5% on price.  As I stated last week, we expect that this trend will continue over the long term as the Federal Reserve will likely continue its easy money policies.

Given the big run up in price in the metals, it would not be surprising to see a pause in the rally or even a fairly significant pullback.  However, I would suggest that many investors consider using pullbacks as a purchase opportunity.

Since the economy just officially experienced the worst quarterly decline in US history, I expect that there will be more stimulus coming from Washington.  It’s already being discussed.  As we all know, there is no money to fund another stimulus package so it will be funded the same way as the last economic rescue bill was funded – more money will be created from thin air.

That will continue to be bullish for metals and be bearish for the US Dollar.

The US Dollar Index, which measures the purchasing power of the US Dollar against other fiat currencies has declined notably as the Fed has been engaging in money printing.  On March 20, the US Dollar Index stood at nearly 103.  Presently, it stands at 93.46; that’s a decline of more than 9% in 4 months.  Huge when looking at currency valuation from an historical perspective. 

It’s important to remember that the currencies against which the US Dollar is being measured are also fiat currencies that are also being devalued.  The US Dollar is just presently winning the “race to the bottom”.

It seems clear to us that the current policy of money printing will now continue until confidence is ultimately lost in the currency.  Since the financial crisis, I have always taken the position that money printing to the point of currency failure was one possible economic outcome.  The other potential end result was a deflationary depression like the one experienced in the 1930’s.  The deflationary outcome would be the result of ceasing to print money and allowing the debt to be purged from the system.

While there are many analysts whose opinion I respect who still hold to the view that the deflationary outcome will be the most likely outcome, it seems to me that we may be past the point of no return when it comes to money creation.

In either scenario, a reset will have to occur.  Resets occur when unsustainable economic conditions exist.  Presently, debt levels in the private sector and on the balance sheets of every level of government are totally unmanageable.  At the federal level, debt and unfunded liabilities are well in excess of $100 trillion.  Third grade math concludes that this debt and these liabilities will never be paid.  And yet, the federal government continues to spend at levels never before seen.


Reversing the spending trajectory results in the deflationary, 1930’s style reset.

So, the politicians and the federal reserve are doubling down in an effort to avoid that outcome doing the only thing they know how to do.  Spend and print.

This course of action, should it continue, assures that the reset will be an inflationary, or hyperinflationary outcome.

Since 2014, I have been suggesting to many clients that they begin to add precious metals to their portfolio.  As time has passed, and the likelihood of an inflationary outcome increased, I have recommended that metals holdings increase.  For many investors, holding 20% of a portfolio in precious metals may be advisable.

So, what will the coming reset look like?

Every area of the economy will be affected in my view.

As I discuss in my August client newsletter, I expect to see anywhere from 1/3rd to nearly half of all colleges and universities cease to exist.  While top-tier universities with large endowment funds will be fine financially, many second-tier universities and colleges with limited endowments will fall by the wayside.  There are already entire campuses for sale at what would have been considered to be bargain basement prices just a year or two ago.

The American Alliance of Museums published the results of a survey that was conducted among 760 member museums.  One-third of the museum directors reported a high likelihood of the museum closing permanently within the next 16 months.  (Source:  https://www.zerohedge.com/markets/third-us-museums-not-confident-they-will-survive)

Many small businesses, devastated by lockdown orders, have closed.  Now, with lockdown orders again being imposed in many states, small businesses that weathered the initial round of lockdown orders, are now closing permanently.

As many as 1/3rd of New York City’s businesses will never reopen (Source:  https://nypost.com/2020/07/20/a-third-of-nycs-small-businesses-may-never-reopen-industry-report/).

Of the businesses listed on Yelp as being temporarily closed due to government imposed lockdowns, 55% now convey they are permanently closed (Source:  https://www.marketwatch.com/story/41-of-businesses-listed-on-yelp-have-closed-for-good-during-the-pandemic-2020-06-25).

These developments are all deflationary and will contribute to another collapse in the banking system which I believe is inevitable and is quickly approaching.  Ironically, as past RLA Radio guest Alasdair Macleod suggests (https://www.goldmoney.com/research/goldmoney-insights/the-path-to-monetary-collapse) it is this event that will lead to a loss of confidence in the currency which is always the ultimate cause of an inflationary currency failure.  This from Mr. Macleod’s piece “The Path to Monetary Collapse” (emphasis added):

Governments and central banks can be expected to cooperate with each other to stop their currencies collapsing, but ultimately it is a matter for the general public. While inflations have persisted for considerable periods, the final collapse, when the public realizes what is happening to money, in the past has typically taken between six months and a year. The German inflation 97 years ago started before the First World War, but its catastrophic phase can be identified as starting in May 1923 and ending the following November. John Law’s monetary collapse, the closest parallel to that of today, ran from approximately February 1720 to the following September.

In the run up to its collapse, Law’s Mississippi experiment depended increasingly on money-printing to support financial asset values. The same inflationary policies apply today. The end point of Law’s inflationary stimulation is lining up to be identical with our neo-Keynesian experiment, and on that basis alone is increasingly likely to come to a rapid conclusion.

It’s generally accepted that the Fed’s policies are propping up stocks as Mr. Macleod points out.  JP Morgan CEO, Jamie Dimon had this to say on the topic (Source:  https://needtoknow.news/2020/05/jp-morgans-dimon-admits-fed-liquidity-is-propping-up-stocks/) (emphasis added):

The Fed’s liquidity, bringing out the bazooka, is propping up stock prices as well as all other asset classes.”

I track the Dow to Gold ratio since it is, in my view, a better way to determine the true value of stocks.  Since the year began, stocks priced in gold have become more affordable.  Earlier in the year, the Dow to Gold ratio was around 19 and the ratio presently stands at about 13.  That’s a decline of more than 30% in the value of stocks when priced in gold.

New readers should be aware that the Dow to Gold ratio is simple to calculate.  One takes the value of the Dow Jones Industrial Average in US Dollars and divides by the value of an ounce of gold in US Dollars.

Since the value of US Dollars is rapidly changing but an ounce of gold is unchanged, pricing stocks in gold is a much more accurate way to determine the real value of stocks.

As long-term readers know, my forecast is for the Dow to Gold ratio to reach 2 or more likely 1.

A Dow to Gold ratio of this level is not historically unprecedented.  In the early 1980’s. gold was selling for $850 per ounce and the Dow was at 850.

A similar relationship (with different numbers) is a likely outcome this time around too.