A Market Perspective

          The potential double top in stocks theory that I put out a couple weeks ago is still holding after last week’s price action in stocks.

          While it remains too early to tell, there are many signs that the stock market may be ready to decline.  It is my view that most of the gain in stocks seen since the financial crisis of a dozen years ago is attributable to the artificial market environment created by the easy money policies of the Federal Reserve.

          Ironically, since the financial crisis, which was caused by excessive debt, debt worldwide has increased exponentially.  A piece published this week by Egon von Greyerz does a nice job of breaking down the numbers (Source:  https://goldswitzerland.com/coming-market-madness-could-take-70-years-to-recover/)

The year 2022 will most likely be the culmination of risk. An epic risk moment in history that very few investors will see until it is too late as they expect to be saved yet another time by the Fed and other central banks.

And why should anyone believe that 2022 will be different from any year since 2009 when this bull market started? Few investors are superstitious and therefore won’t see that 13 spectacular years in stocks and other asset markets might signify an end to the epic super-bubble.

The Great Financial Crisis (GFC) in 2006-9 was never repaired. Central bankers and governments patched Humpty up with glue and tape in the form of printed trillions of dollars, euro, yen, etc. But poor Humpty Dumpty was fatally injured and the intensive care he received would only give him a temporary reprieve.

When the GFC started in 2006, global debt was $120 trillion. Today we are at $300t, rising to potentially $3 quadrillion when the debt and derivatives bubble finally first explodes and then implodes as I explained in my previous article.

It is amazing what fake money made of just air can achieve. Even better of course is that the central banks have manipulated interest rates to ZERO or below which means the debt is issued at zero or even negative cost.

Investors now believe they are in Shangri-La where markets can only go up and they can live in eternal bliss. Few understand that the increase in global debt since 2006 of $180t is what has fueled investment markets.

          Just look at these increases in the stock indices since 2008:

          Nasdaq up 16X

          S&P up 7x

          Dow up 6X

          And there are of course even more spectacular gains in stocks like:

          Tesla up 352X or Apple up 62X.

These types of gains have very little to do with skillful investment, but mainly with a herd that has more money than sense fueled by paper money printed at zero cost.

To call the end of a secular bull market is a mug’s game. And there is nothing that stops this bubble from growing bigger. But we must remember that the bigger it grows, the greater the risk is of it totally wiping out gains not just since 2009 but also since the early 1980s when the current bull market started.

The problem is also that it will be impossible for the majority of investors to get out. Initially, they will believe that it is just another correction like in 2020, 2007, 2000, 1987 etc. So greed will stop them from getting out.

But then as the fall continues and fear sets in, investors will set a limit higher up where they intend to get out. And when the market never gets there, the scared investor will continue to set limits that are never reached until the market reaches the bottom at 80-95% from the top.

And thus paper fortunes will be wiped out. We must also remember that it can take a painstakingly long time before the market recovers to the high in real terms.

As Ray Dalio shows in the chart below, the 1929 high in the Dow was not even recovered in real terms by the mid-1960s. Finally, it was surpassed in 2000.

This means that it took 70 years to recover in real terms! So investors might have to wait until 2090 to recover the current highs after the coming fall.

So looking at the chart, the market is now at a similar overvalued level it was in 1929, 1972, and 2000.

Thus the risk is as great as at some historical tops in the last 100 years.

The chart below shows that the 1929 top in the Dow was not reached in real terms until 2000.

How many investors are prepared to take the risk of a say 90% fall like in 1929-32 and not recover in real terms until by 2090!

Again, I repeat that this is not a forecast. But it is an epic warning that risk in investment markets are now at a level that investors should avoid.

I fear that sadly very few investors will heed this risk warning.

          In his piece, von Greyerz explains that the causes of the financial crisis were excessive debts, huge derivative exposure, and massive unfunded liabilities.  In 2009 at the time of the financial crisis, the combined total was about $120 trillion.

          Today, thanks to easy money policies that $120 trillion number has risen to $300 trillion – an increase of 250%!

          That’s truly remarkable when you consider it.

          As von Greyerz notes in his article, this problem has been building for a very long time and maybe culminating presently.  Here is another excerpt from his article:

As I have pointed out many times, the US has not had a budget surplus since 1930 with the exception of a couple of years in the 1940s and 50s. The Clinton surpluses were fake as debt still increased.

But the money and market Madness started in the 1970s after Nixon couldn’t make ends meet and closed the gold window. The US federal debt in 1971 was $400 billion. Since then, the US debt has grown by an average of 9% per year. This means that the US debt has doubled every 8 years since 1971. We can actually go back 90 years to 1931 and find that US debt since then has doubled every 8.3 years.

What a remarkable record of total mismanagement of the US economy for a century!

The US has not had to build an empire in the conventional way by conquering other countries. Instead, the combination of a reserve currency, money printing, and a strong military power has given the US global power and a global financial empire.

Even worse, since the coup by private bankers in 1913 to take control of the creation of money, the US Federal debt has gone from $1 billion to almost $30 trillion.

As Mayer Amschel Rothschild poignantly stated in 1838:

“Permit me to issue and control the money of a nation and I care not who makes its laws”.

And that is exactly what some powerful bankers and a senator decided on Jekyll Island in 1910 when they conspired to take over the US money system through the creation of the Fed which was founded in 1913.

          It was this takeover of the creation of money by the private bankers that has landed us where we now find ourselves- on a path of inflation to be followed by deflation as I have been discussing. 

          While my crystal ball doesn’t work any better than anyone else’s does, it seems we are nearing the inevitable end of the cycle.          

          Are you prepared?

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.

My Thoughts on Stocks as We Begin a New Year

Last week, stocks touched their all-time high levels from November completing a “Santa” rally.  At this point, it remains to be seen what this means.  Since my long-term stock trend-following indicators are negative, I’d have to bet on a double top, which is a bearish pattern, but time will tell.

January is typically an important month in the markets.  Stock performance in January often accurately forecasts stock performance for the year.  I will continue to monitor and comment.

On the topic of stocks, commentator Harris Kupperman compared some stocks in the current market to a Ponzi scheme.  There are many publicly traded companies that have never made a profit that continue to exist via capital raises from investors.  Obviously, you don’t need to be a seasoned, savvy market analyst to realize this is a game that is only temporary.

As someone who has been around markets and analyzed them for a while, what we are presently seeing in markets is eerily reminiscent of market behavior and stock valuations as the tech stock bubble of about 20 years ago peaked.  Except this time around, the collective behavior of market participants is even more erratic and more irrational.

I think back 20 years to a company called pets.com.  The company was in the business of selling pet supplies online.  The company launched its business with a Super Bowl commercial featuring a white sock puppet.

Pets.com raised $82.5 million in an initial public offering, selling its stock for $11 per share.  Nine months later, having never turned a profit, the company declared bankruptcy, as its share price, plummeted to 11 cents.

As Yogi Berra famously proclaimed, it’s déjà vu all over again.

Here is a bit of what Mr. Kupperman had to say on the topic last week (Source:  https://wolfstreet.com/2021/12/26/the-problem-with-ponzis/)

Over the past few years, I’ve been highly critical of the Ponzi Sector. This is a whole grouping of companies that has no ability or desire to ever become profitable. Instead, these businesses have focused on rapid revenue growth because the stock market has rewarded them for this growth—especially if there are no profits. In reality, stock promotion is the core business of the Ponzi Sector—it allows the companies to raise capital and fund unprofitable growth, while insiders dump stock at insane valuations. Now, as the Ponzi Sector equities go into free-fall, a problem has emerged.

Let’s look at Peloton, the overpriced clothes rack with a built-in iPad. We just witnessed the best possible 6-quarter environment that the company will ever experience. The whole world was locked down, gyms were closed, and work was canceled. People literally sat at home, bored out of their wits, armed with massive government stimulus checks, fixated on buying products. Despite every possible tailwind, Peloton lost $189 million in the year ended June 2021. As the stimmies wore off, losses exploded to $376 million in the most recent quarter. If this business cannot make money in this perfect environment, what is the operating environment where it earns money?

Investors will say that the goal at Peloton is to lose money on the hardware and make it back on the subscription product. Sure, I can see how investors may fixate on the growing subscription business, but this is a fad fitness business, churn will be high and accelerating now that gyms have re-opened. The expected monthly annuity will underperform, and marketing will always be necessary to bring in more customers.

If you cut SG&A and marketing to a level where the annuity business revenue stays constant, this thing probably still loses globs of money or at best ekes out a small profit. Could you put this into run-off and harvest some residual value from the current membership base? Of course, you can, but that residual value is a tiny fraction of the current valuation. Instead, management is fixated on continuing the Ponzi Sector model of subsidizing consumers to grow revenue.

Unfortunately, the market psychology is changing and the whole Ponzi Sector is melting down—just look at the ARK Innovation ETF [ARKK], which is a well-curated basket of the largest listed Ponzi Schemes. As inflation accelerates, the market is losing patience with unprofitable growth that never seems to inflect.

          The ARK Innovation ETF contains many technology and innovation stocks that have negative earnings.  Two examples are Teladoc and Zillow.

We’ve gone over this in the past, but it’s worth a refresher here. Ponzi Schemes are inherently unstable. They’re either inflating or detonating. They cannot exist in a state of equilibrium. Once past the peak, they tend to unravel rapidly, as many participants know it’s a Ponzi Scheme and dump when the shares stop rising. The collapse is then accelerated by corporate action.

When a Ponzi is appreciating, stock option exercises can fund the business. Once below the exercise price, there are no cash inflows from options. Instead, you need to issue equity to fund the business. Except, there’s a shrinking pool of investors who will buy into financing at a value-destructive company.

You see, investors want to believe that there won’t be another financing in a few quarters. They’ll want spending to be reined in. They’ll want a path to profitability.

Except, when you cut spending, growth collapses, yet the business will still be nowhere near profitable. When it was growing fast, it was easy to claim you were the next Amazon and profits don’t matter. When you’re not growing, or even shrinking, what exactly is your justification for losing money? It’s a typical death-spiral conundrum. Burn capital to show profitless growth, or cut spending and show smaller losses while the business shrinks.

Returning to Peloton, I get that there’s a loyal customer base and I’m absolutely convinced that there’s a residual business here on the subscription side. However, it’s likely to be a few hundred million of shrinking annual cash flow per year. Put a mid-single-digit multiple on that and what do you have? Exactly!! The stock could drop 90% and still be overvalued.

As a result, no one wants them to shrink towards profitability. Instead, investors are demanding that Peloton use the proceeds of down-round financings to incinerate capital, trying to outgrow the problem. Except, they likely cannot outgrow the problem as everyone who wanted a Peloton has one by now. Spending on growth will have diminishing returns. Yet, what choice do they have, besides losing more per unit and hoping to make it up in volume?

I remember seeing a similar problem in 2000 and into 2002 as internet companies tried to continue their prior growth, buying banner ads, convinced that if they could just show revenue growth, eventually the shares would recover, allowing them to issue more shares and fund more unprofitable revenue. As investors grew tired of this, the down rounds were more drastic, until the companies ran out of suckers and the businesses were wound up.

The same will happen to everyone in the Ponzi Sector. First, they’ll try and out-grow the problem by throwing equity capital at it, then they’ll resort to cost cuts, which will send revenue growth negative, which will make it even harder to raise capital and fund losses. Once investor psychology changes and no longer rewards profitless market share growth, the feedback loop only accelerates the problems for these companies.

The most recent capital raise by Peloton at $46, is indicative of how painful this will be. The shares are now at $39 and everyone who bought at $46 is underwater. Do you think they’ll step up as aggressively for the next down-round?

What if the whole Ponzi Sector is doing down-rounds at the same time? Will there be enough suckers to fund all of these Ponzis? They’ll all need someone to cough up more capital in a few quarters.

Now, I’m not saying Peloton has done anything illegal or immoral. I singled it out because it doesn’t seem to fit the model in most people’s minds of a Ponzi, yet it is. Many of the most successful Ponzi Sector stalwarts have been well-loved consumer products, led by people who genuinely believe they’re improving the world. Investors rewarded them for growing fast, so they did. Now, patience is running thin. Especially when investors are losing money on multiple Ponzi Sector investments simultaneously. Logic says that Peloton cannot grow into profits, it needs to shrink its way there, but that’s going to be a nasty and highly dilutive journey.

            At the outset of this week’s “Portfolio Watch”, I compared the current stock market conditions to the stock market conditions that existed 20 years ago at the time of the tech stock bubble.

          Longer-term readers of this publication know that I often use Warren Buffet’s favorite stock market valuation measure when looking at stock valuations.  It’s the market capitalization to gross domestic product ratio which takes the value of all stocks and divides it by economic output.

          The chart below uses the Wilshire 5000, a broad stock market index in the analysis.  Notice from the chart that in 2000, at the tech stock bubble peak that we have been discussing the market cap to GDP was about 150%.

          That simply meant that the total value of stocks was about 150% of the total economic output.

          At the time, that level of stock valuation was a historic high given that the average valuation of stocks over time had been about 65% of the total economic output.

          Fast forward to the present.  Stock valuations are now more than 200% of economic output or about three times the long-term historic average.

          While there may be some additional upside in stocks, for many investors the downside risk far outweighs the reward potential.

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.

Inflation and Deflation Perspectives

          Despite last week’s rally in stocks, the highs of mid-November remain the market’s high point.  As I have been noting, my long-term, trend-following indicators remain negative.

          This past week, I began to read the most recent book by James Turk, a past guest on my radio program.  Mr. Turk’s book is titled, “Money and Liberty; in the Pursuit of Happiness and the Natural Theory of Money”.

          In the book, Mr. Turk offers a perspective similar to the perspective I have offered in the past regarding money and currency and the difference between the two.  Currency is used in commerce and money is a good store of value over time.  Sometimes in history, currency and money have been the same thing, other times, including the present time, they are not the same thing.

          Mr. Turk offers the example of West Texas Intermediate crude oil.  When a barrel of oil is priced in US Dollars, Euros, or the British Pound, one concludes that the price of crude oil has risen significantly since 1950.

          However, when priced in gold grams, the price of a barrel of crude oil hasn’t changed since 1950.

           Fiat currencies, over time, are devalued by central banks or governments.  That makes fiat currencies poor measuring units.

          Economic output, or gross domestic product, is measured in fiat currencies.  Devalued currencies make the reported economic output number look better than it is in reality.

          The same is true when it comes to stock values.  Stock prices reported in fiat currencies move up as the currency is devalued.  The same devalued fiat currencies that make the price of consumer goods like groceries rise also make the price of stocks increase.

          Historically speaking, this devaluation of currency is controlled and gradual initially, but then the politicians and policymakers lose control of the devaluation process and inflation gets out of control.

          Economist John Meynard Keynes, the father of the loose money policies that are being pursued worldwide today, knew that control over the devaluation process would eventually be lost with dire consequences. 

          In 1923, Keynes wrote a tract on monetary reform.  The second chapter of the tract is titled, “Inflation as a method of taxation”.  Keynes, in his writing, discusses devaluation of a currency or inflation as a method of taxation that allows a government to survive when there is no other means of survival.  This from his tract (Source:  https://delong.typepad.com/keynes-1923-a-tract-on-monetary-reform.pdf):

A government can live for a long time, even the German Government of the Russian Government, by printing paper money.  That is to say by this means, secure the command over real resources – resources just as real as obtained through taxation.  The method is condemned, but its efficacy, up to a point, must be admitted.  A government can live by this means when it can live by no other.  It is the form of taxation which the public finds hardest to evade and even the weakest governments can enforce when it can enforce nothing else.” 

          Keynes indirectly states that the positive effects of currency printing diminish over time when he states that “its efficacy, up to a point, must be admitted.”

Keynes clearly understood that in the long run, the point is reached when currency devaluation doesn’t work and the adverse consequences of currency creation emerge.  One of Keynes’ most infamous quotes is “in the long run, we are all dead.”  Keynes clearly understood that eventually, this monetary policy would fail but it would be long after he and his cohorts exited the planet.

          Mr. Turk, in the aforementioned book, has this to say about Keynes’ statement.

“These words, which are frequently quoted, are among the most grossly irresponsible statements ever spoken by an economist.  Actions have consequences and planning for the next generation is an essential element of economic activity.  What is important to society and indeed our civilization is not just how we live, but what we leave for future generations.  That the planet’s environment has become so scarred is an indication of how much we have accepted the ills of progressivism, socialism, and authoritarian control by the State and moved away from capitalism, private property, and individual liberty.  The State today rarely leaves people alone.

Keynes’s comment is typical of socialists and progressives who focus on satisfying their innate yet perverse need to control others rather than where their attention should be directed, which is the consequence of their actions.  For example, they proclaim their vision that forces the world to drive electric cars so that we do not inhale the emissions from exhaust pipes, yet they are blind to the number of plants needed to generate the electricity to power all those new cars.  Decisions cannot be made on emotion.  In our world of limited resources, they must be made based on sound economics and that requires trustworthy money spent and invested at a true cost of capital.  These are requirements that only gold can provide.  Further, to achieve the best possible outcome decisions need to be unfettered by government involvement and their market interventions.

For Keynes, the long-run has arrived, and he wrote his own fitting epitaph:

‘Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.  Madmen in authority, who hear voices in the air are distilling their frenzy from some academic scribbler of a few years back.’

It’s time to bury Keynes, Keynesianism, and socialism.”

          I agree with Mr. Turk.

          But abandoning currency creation will come at a cost.  A deflationary period of time will materialize.  Continuing with the Keynesian policies of currency creation will not avoid the deflationary period, it will only make the eventual deflationary period worse.

          The choices are grim; an ugly deflationary period, or an uglier deflationary period.  The longer currency creation continues, the more severe the resulting deflationary period will be.  Keynes touched on this in his 1923 tract:

“In the first place, deflation is not desirable because it effects, what is always harmful, a change in the existing Standard of Value, and redistributes wealth in a manner injurious, at the same time to business and social stability.  Deflation, as we have already seen, involves a transference of wealth from the rest of the community to the rentier class and to all holders of titles to money; just as inflation involves the opposite.”

“But, whilst the oppression of the taxpayer for the enrichment of the rentier is the chief, lasting result, there is another more violent disturbance during the period of transition.  The policy of gradually raising the value of a country’s money to (say) 100% above its present value in terms of goods, amounts to giving notice to every merchant and every manufacturer, that for some time to come his stock and his raw materials will steadily depreciate on his hands and to everyone who finances his business with borrowed money that he will, sooner or later, lose 100% on his liabilities.  Modern business, being carried on largely with borrowed money, must necessarily be brought to a standstill by such a process.”

          If you’re not familiar with the term ‘rentier’ class, it refers to someone who relies on a pension, rents, or other fixed-income sources.

          These people benefit from a currency that buys more over time.

          On the other hand, borrowers benefit from a currency that buys less over time.  Mortgage holders, business owners with debt, and the government all benefit from a currency that is being devalued.  In this scenario, dollars borrowed, buy more than dollars that are used to pay back the debt.

          When Keynes fails to acknowledge in his 1923 tract is constant money.

          Gold is constant money.

          When we go back and revisit the example of West Texas Intermediate crude oil that Mr. Turk used in his book, we find that the barrel of crude oil that sold for $2.57 in 1950 now costs more than $70 to purchase when using US Dollars in the transaction.

          That barrel of oil purchased with gold grams in 1950 and today would cost the same amount.  Gold has historically been constant money.

          At different times in history, the paper currency has been only partially backed by gold which allows for more currency creation and is inflationary.

          Today, there are zero currencies in the world with any level of gold backing.  Currency creation worldwide has been expanding and consumer price inflation is now manifesting itself in earnest.

          In response, many world central banks are raising interest rates to attempt to suppress inflation.  Wolf Richter (Source:  https://wolfstreet.com/2021/12/22/end-of-easy-money-global-tightening-in-full-swing-fed-promises-to-wake-up-in-time/)  reported last week that the central banks of Czechoslovakia, Russia, England, Norway, the European Central Bank, Mexico, Chile, Hungary, Pakistan, Armenia, Peru, Poland, Brazil, Korea, New Zealand, South Africa, Iceland, and Japan have all increased interest rates.

          The Fed has kept interest rates at zero; look for more inflation before we see deflation. 

          As for Keynes, he was right about being dead in the long run.  Keynes passed away in 1946.

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.

About Stocks and Bonds

          The stock market highs of November have not yet been taken out and my long-term trend-following indicators continue to become more bearish.  At this point, a “Santa” rally looks less likely especially given the Fed’s recent statements about accelerating the taper or slowing the rate of currency creation.

          As the longer-term readers of “Portfolio Watch” are aware, I believe the Fed’s taper talk is just that.  The math doesn’t lie; the federal government cannot fund its deficit spending without currency creation.  While the Fed may taper officially, liquidity will have to be made available in order to close the budget gap.

          Of course, common sense dictates that this process of currency creation will have to cease at some future point.  When it does, it is my belief that a reset will have to occur that will affect many assets including stocks and real estate.

          Both stocks and real estate are in a bubble in my view.

          David Stockman, former budget director, penned an article last week that examines just how extended stocks likely are.  Here is a bit from Mr. Stockman’s piece (Source:  https://internationalman.com/articles/david-stockman-reveals-the-truth-about-the-stock-market-and-what-it-means-for-you/)

The fundamental consequence of 30 years of Fed-fueled financial asset inflation is that the prices of stocks and bonds have way overshot the mark.

That’s why what lies ahead is a long stretch of losses and investor disappointment as the fat years give way to the lean.

These will hit hard the bullish investor herd and aggressive buyers of calls who can’t imagine any other state of play. They will be shocked to learn — but only after it is way too late — that the only money to be made during the decades ahead is on the short side of the market by buying puts on any of the big averages: the FANGMAN, S&P 500, NASDAQ 100, the DOW and any number of broad-based ETFs.

The reason is straightforward. The sluggish, debt-ridden Main Street economy has been over-capitalized, and it will take years for company profits and incomes being generated to catch up to currently bloated asset values. Accordingly, even as operating profits struggle to grow, valuation multiples will contract for years to come, owing to steadily rising and normalizing interest rates.

We can benchmark this impending grand reversal on Wall Street by reaching back to a cycle that began in mid-1987. That’s when Alan Greenspan took the helm at the Fed and promptly inaugurated the present era of financial repression and stock market coddling that he was pleased to call the “wealth effects” policy.

At the time, the trailing P/E multiple on the S&P 500 was about 12X earnings — a valuation level that reflected a Main Street economy and Wall Street financial markets that were each reasonably healthy.

The US GDP in Q2 1987 stood at $4.8 trillion and the total stock market was valued at $3.0 trillion, as measured by the Wilshire 5000. Back then, Wall Street stocks were stably capitalized at 62% of Main Street GDP.

Over the next 34 years, a vast unsustainable gulf opened up between the Main Street economy and the Wall Street capitalization of publicly traded stocks.

During that three-decade period, the Wilshire 5000 market cap rose by 1,440% to $46.3 trillion. That’s nearly four times the 375% gain in nominal GDP to $22.7 trillion.

Accordingly, the stock market, which was barely three-fifths of GDP on Greenspan’s arrival at the Fed, now stands at an off-the-charts 204% of GDP.

If we assume for the moment that the 1987 stock market capitalization rate against national income (GDP) was roughly correct, that would mean that the Wilshire 5000 should be worth $14 trillion today, not $46 trillion. Hence, the $32 trillion of excess stock market valuation hangs over the financial system like a Sword of Damocles.

In fact, we believe that the gulf between GDP and market cap has been growing wider and more dangerous since the Fed sped up money printing after the Lehman meltdown. To wit, since the pre-crisis peak in October 2007, the market cap of the Wilshire 5000 is up by nearly $32 trillion, while the national income to support it (GDP) is higher by only $8 trillion.

The stock market’s capitalization should be falling, not soaring into the nose-bleed section of history. After all, since the financial crisis and Great Recession, the capacity of the US economy to generate growth and rising profits has been sharply diminished. The real GDP growth rate since the pre-crisis peak in Q4 2007, for instance, is just 1.5% per annum, which is less than half its historical trend rate of growth.

Back in October 2007, the stock market’s capitalization was 106% of GDP and in just 14 years it has soared to the aforementioned 204%. So even as the growth rate of the US economy has been cut in half, stock market capitalization has doubled.

Given that the stock market has gotten way, way ahead of the economy, the longer-range implication is a long spell during which financial asset prices will stagnate or even fall until they eventually recover the healthy relationship to national income.

Looking at this from a different angle, the current $46 trillion market cap of the Wilshire 5000 would not return to 62% of GDP until US GDP reaches $75 trillion. At an average of 3.3% per annum increase in nominal GDP since Q4 2007, it would take 38 years to get there!

That’s right. The massively over-valued stock market is currently capitalizing on an economy that might exist by the year 2060… if all goes well.

            Mr. Stockman offers a terrific perspective on where stock valuations have moved since the Fed began the ‘temporary’ policy of currency creation.

          Real estate has followed a course similar to the course tracked by stocks.

          The Case-Shiller Housing Index is the commonly used metric of housing values.  The chart illustrates housing values for the past 25 years.

          Looking at the chart, one can see the decline in housing values at the time of the financial crisis.  The index fell from 200 to about 150. 

          Notice that housing values began to increase in earnest after the Fed began quantitative easing.  Since that time, housing prices have nearly doubled.

          And, as inflated as housing prices were at the time of the financial crisis, they are far more inflated presently – they are about 50% higher than they were prior to the collapse that began in 2007.

          Of course, as we have demonstrated many times in the past if real estate and stocks were priced in gold rather than depreciating US Dollars, one gets a completely different perspective.  In 2007, gold was about $650 per ounce.  Today, the spot price of gold is about $1800.  That’s an increase of about 275%.  Priced in gold, both stocks and real estate have declined in value which one would expect given the massive levels of debt that exist.

          The reality is that the US Dollar and every other fiat currency around the world is no longer an accurate metric when examining economic data and asset pricing.

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.

A Predictable Pattern

          Stocks rallied last week although they remain off their highs of about one month ago.  Unless these prior highs are taken out, we view the current stock trend as down.  We will have to wait and see if a year-end Santa rally can bring the market to new highs.

          Longer-term, I am bearish on stocks.  As I have been discussing, in early fall, my monthly chart indicators turned bearish.

          We have been recently discussing the math behind the federal government debt and deficit.  The reality is that the fiscal problems of the United States are too large to be solved via higher taxes and across the board spending cuts of 41% would be required to balance the budget.  And spending cuts of that magnitude simply balance the budget; they do nothing to pay down the debt or close the fiscal gap.

          The Federal Reserve is now the buyer of last resort when it comes to government debt.  The total debt held by China and Japan would now cover the operating deficit for only a matter of months.  Until the budget issues are addressed, the currency creation will have to continue.  The math contradicts the rhetoric.

          As the currency creation continues, we will see inflation rise, but then at some future point, the inflation will be followed by deflation.

          While no one knows WHEN inflation will be followed by deflation, we know from studying history that inflation will be followed by deflation.

          There is no doubt that we are now seeing inflation.

          Historically speaking, when inflation has reached a point that the reported, ‘official’ inflation rate was too high to be considered palatable, the policymakers changed the way the inflation rate is calculated.

          Adjustments to the Consumer Price Index have included hedonic (pleasure) adjustments, substitution, and adjustments to weightings.  Each time an adjustment has been made to the inflation calculation methodology; the reported inflation rate has been more favorable.

          According to economist, John Williams, of www.ShadowStats.com, if the inflation rate is calculated using the same methodology that was used prior to 1980, the current inflation rate would be about 15%.

          The ‘officially reported’ inflation rate is now at a 39-year high.  This from “The Wall Street Journal” (Source:  https://www.wsj.com/articles/us-inflation-consumer-price-index-november-2021-11639088867?mod=Searchresults_pos7&page=1):

The Labor Department said the consumer-price index—which measures what consumers pay for goods and services—rose 6.8% in November from the same month a year ago. That was the fastest pace since 1982 and the sixth straight month in which inflation topped 5%.

The increase in prices for new vehicles, which came in at 11.1% in November, was the largest on record, as were those for men’s apparel and living room, kitchen, and dining room furniture. A 7.9% surge in fast-food restaurant prices last month marked the sharpest on record too.

The steady rise in restaurant prices during the past few months is a sign of pass-through from wages into higher prices, economists say. That dynamic is increasingly showing up in other industries. Wages tracked by the Atlanta Fed climbed 4.3% in November, up from 4.1% in October and the highest since 2007.

The latest strong inflation report strengthens the case for Federal Reserve officials to commit to hastening the wind-down of their stimulus efforts, paving the way to raise interest rates in the spring to curb inflation.

“I think the Fed already got ahead of today’s data by pre-announcing that they will accelerate the taper next week,” said Aneta Markowska, chief financial economist at Jefferies LLC. 

          Inflation, as I predicted is intensifying.

          The Fed is talking taper, i.e., talking about slowing the rate of currency creation.  The evidence suggests they won’t as we will discuss in a moment.

          But the BLS is doing their part too.  They announced that beginning next month, in January of 2022, the way the inflation rate is calculated will also change.

          As you can see from the screenshot of the press release below, beginning in January 2022, the weightings used to calculate the official inflation rate will change and be based on consumer expenditures during 2019 and 2020.

          Here is why that is significant.

          As prices rise, consumers make different spending choices.

          If the cost of a ribeye steak rises, a consumer may opt for a sirloin steak or hamburger.  As consumers opt for goods they can afford, the weighting will now change which will make the officially reported inflation rate more favorable.

          Interestingly, the notice stated that the BLS considered interventions but decided to refrain without mentioning what those interventions might have been.

          This change is an often use play from a playbook that has only one play left.  If you don’t like the outcome of the game, then just change the rules of the game.

          Now for the evidence that suggests the Fed won’t slow the rate of currency creation.  First, the math unequivocally concludes that the Fed can’t slow the rate of currency creation despite their statements to the contrary.

          Second, it seems that while the Fed is talking taper, or slowing the rate of currency creation, on the one hand, the Fed is using other methods to continue currency creation with the other hand.  This from Matthew Piepenburg (Source:  https://goldswitzerland.com/fear-and-inflation-the-timeless-policy-tools-of-discredited-systems/)

Perhaps more “exciting” was his not-so-subtle announcement that the Fed plans to begin a discussion at its next meeting to accelerate the Fed taper by a few months.

Hmmm…

Despite the fact that any Fed Taper will in substance be a “non-taper” given backdoor liquidity tricks from the Standing Rep Facility and FIMA swap lines, the optics of such continued taper-talk will be negative for almost all assets save for the USD, the VIX trade, so-called “safe-haven” Treasuries and possibly gold.

            Mr. Piepenburg’s point is this; the Fed, despite the taper talk, will not taper.  As he states, they have already put other liquidity tricks in place.

          They have to.  The math doesn’t lie.

          So, we are looking at inflation followed by deflation as we have so often stated.  And, the inflation is here and the inflation is worldwide.

          Japan (Source:  https://www.reuters.com/markets/asia/japan-nov-wholesale-inflation-spikes-rising-raw-material-costs-2021-12-10/) is experiencing inflation unlike any time in the last 40 years, paralleling the inflation in the United States:

Japan’s wholesale inflation hit a record 9.0% in November, pushing gains for a ninth straight month, a sign of upward pressure on prices from supply bottlenecks, and rising raw material costs were broadening.

The rising cost pressures, coupled with a weak yen that inflates the price of imported goods, add to pain for the world’s third-largest economy as it emerges from a consumption slump caused by the coronavirus pandemic.

“Japan imports a lot of goods, so prices may rise for a range of products. That could dent consumption,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

The year-on-year rise in the corporate goods price index (CGPI), which measures the prices companies charge each other for their goods and services, was the fastest pace since comparable data became available in 1981.

          Brazil and Mexico are also experiencing inflation.  This from Wolf Richter (Source: https://wolfstreet.com/2021/12/09/central-banks-in-latin-americas-largest-economies-grapple-with-raging-inflation-brazil-with-shock-and-awe-mexico-with-an-eye-on-the-fed/)

The Central Bank of Brazil has embarked on a series of shock-and-awe rate hikes in order to not fall further behind. The Bank of Mexico has largely mirrored the Fed’s rhetoric, expecting this raging inflation to go away on its own somehow, but it has started to raise rates in June, very gingerly. And the Fed has made a verbal U-Turn, but is still running the money-printer nearly full blast and is still repressing its policy rates to near 0%.

Consumer price inflation in Mexico spiked in November even more than the already high expectations, to 7.4%, from 6.2% in October, the red-hottest inflation since January 2001, according to Mexico’s INEGI today.  Consumer price inflation in Brazil in October jumped to 10.7%, approximately matching January 2016, which had been the highest since 2003.  

          Historically speaking, this pattern of inflation followed by deflation repeats over and over again.  If you’ve not already done so, take steps to protect yourself.

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 the Fed Taper?

          Stocks continued their rough stretch last week.  While we could see a Santa Claus rally this month as we often do as the year comes to a close, given how extended stocks are from what would be considered to be more ‘normal’ levels, we may not experience the traditional year-end rally.

          Last week, I examined the math behind the colossal national debt, the gigantic federal operating deficit and concluded that since the Federal Reserve, the nation’s central bank controlled by private bankers, is now the buyer of last resort of US Government debt, the Fed would have no choice but to continue to create currency further fueling the inflation that is now here.

          What that means, in a nutshell, is that the Fed is creating currency out of thin air and then using that newly created currency to fund the federal government’s operating deficit.

          Despite the public talk of tapering, or slowing the rate of currency creation, unless the Federal government cuts spending, the Fed will have no choice but to continue to create currency.

          This past week, I found an article written by Matthew Piepenburg of Matterhorn Asset Management that articulated this idea that I put forth last week quite articulately.  Here is a bit from the article (Source:  https://goldswitzerland.com/latest-treasury-fed-and-bis-reports-confirm-all-twisted-paths-lead-to-gold/)

History’s patterns confirm that the more a system implodes under the weight of its own self-inflicted extravagance (typically fatal debt piles driven by years of war, wealth disparity, currency debasement, and political/financial corruption), the powers-that-be resort to increasingly autocratic controls, distractions, and automatic lying.

The list of such examples, from ancient Rome, 18th century France, and 20th century Europe to 21st century America are long and diverse, and whether it be a Commodus, Romanov, Batista, Biden, Franco, or Bourbon at the helm of a sinking ship, the end game for bloated leaders reigning over-bloated debt always ends the same: More lies, more controls, less liberty, less truth, and less free markets.

Seem familiar?

As promised above, however, rather than just rant about this, it’s critical to simply show you. As I learned in law school, facts, alas, are far more important than accusations.

Toward that end, let’s look at the facts.

Earlier this month, the Fed and Treasury Department came up with a report to discuss, well, “recent disruptions”

The first thing worth noting is the various “authors” to this piece of fiction, which confirm the now open marriage between the so-called “independent” Fed and the U.S. Treasury Dept.

If sticking former Fed Chair, Janet Yellen, at the helm of the Treasury Department (or former ECB head, Mario Draghi, in the Prime Minister’s seat in Italy) was not proof enough of central banks’ increasingly centralized control over national policy, this latest evidence from the Treasury and Fed ought to help quash that debate.

In the report above, we are calmly told, inter alia, that the U.S. Treasury market remains “the deepest and most liquid market in the world,” despite the ignored fact that most of that liquidity comes from the Fed itself.

Over 55% of the Treasury bonds issued since last February were not bought by the “open market” but, ironically, by private banks which misname themselves as a “Federal Open Market Committee”

The ironies (and omissions) do abound.

But even the authors of this propaganda piece could not ignore the fact that this so-called “most liquid market in the world” saw a few hiccups in recent years (i.e., September of 2019, March of 2020) …The cabal’s deliberately confusing response (and solution), however, is quite telling, and confirms exactly what we’ve been forecasting all along, namely: More QE by another name.

Specifically, these foxes guarding our monetary hen house have decided to regulate “collateral markets and Money Market Funds into buying a lot more UST T-Bills” by establishing “Standing Repo Facilities for domestic and foreign investors” which are being expanded from “Primary Dealers” to now “other Depository Institutions going forward” to “finance growing US deficits” by making more loans “via these repo facilities (SRF and FIMA).”

Huh?

Folks, what all this gibberish boils down to is quite simple and of extreme importance.

In plain speak, the Fed and Treasury Department have just confessed (in language no one was ever intended to understand) that they are completely faking a Fed taper and injecting trillions more bogus liquidity into the bond market via extreme (i.e., desperate) T-Bill support.

Again, this is simply QE by another name. Period. Full stop.

The Fed is cutting down on long-term debt issuance and turning its liquidity-thirsty eyes toward supporting the T-Bill/ money markets pool for more backdoor liquidity to prop up an otherwise dying Treasury market.

Again, this proves that the Fed is no longer independent, but the near-exclusive (and rotten) wind beneath the wings of Uncle Sam’s bloated bar tab.

Or stated more simply: The “independent” Fed is subsidizing a blatantly dependent America.

          Mr. Piepenburg brilliantly deciphers how the Fed is claiming to be seriously considering slowing the rate of currency creation, but in reality, it is not.  It is simply changing the way that newly created currency is subsidizing the deficit operations of the US Government.

          That is congruent with the deficit and debt math that we have been analyzing.  It now seems that the Fed will create currency until the consequences are too severe to bear.

          Mr. Piepenburg’s associate, Egon von Greyerz, had this to say on the topic last week (Source: https://goldswitzerland.com/evil-is-the-root-of-all-fiat-money/):

The US government is currently spending $7 trillion annually but the tax revenue is ONLY $4 trillion. So there is a net annual deficit of a mere $3 trillion or 43% of the US budget.

How can anyone believe that the US can repay a debt of currently $29 trillion and rising to $50 trillion with an annual deficit of $3 trillion – a deficit which is rising exponentially. The simple answer is that they never will repay it. Instead, it will increase uncontrollably.

As I said at the beginning of the article – Evil is the root of all fiat money as a 50 fold increase in the US debt since 1981 can only be achieved through corrupt means.

And don’t believe that the Fed will really taper the $120 billion a month that they are printing. They have declared a $15 billion tampering programme but that is a FAKE TAPER as my colleague Matt Piepenburg wrote about.

As expected they are cooking the books, giving with one hand and taking back with the other one – Plus ça change….. (the more it changes, the more it stays the same). 

          I believe that we find ourselves at the point in time, as others throughout history have found themselves, that the politicians and policymakers of the last 50 years have collectively brought us to the point that the only possible way to postpone a titanic deflationary collapse is to continue to create currency.

          Notice that I used the word postpone rather than the word avoid.  Debt levels dictate that they are too high to ever be paid with honest money – so they won’t be.  Instead, the politicians and policymakers will continue with currency creation until they can’t.  At that point, the deflationary collapse will occur.

As I stated last week, in my view, it’s never been more important to have an income plan that’s funded with some assets to help preserve assets in a deflationary environment and some assets that will help to act as an inflation hedge.

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.

Math Doesn’t Lie – Why Taper Talk is Just Talk

          Stocks had a rough day on Black Friday.  Even though markets were only open for half a day, on an intraday basis the Dow Jones Industrial Average fell 1000 points.  The Industrials closed down 905 points for the day.  The S&P 500 and the NASDAQ had ugly days as well.

          In the “Positions” paid newsletter that I do for some clients and advisors, I have been suggesting that our long-term stock charts were showing weakness.  Perhaps that weakness is now arriving.

          The million-dollar question, or should I say trillion-dollar question, remains what will the Fed’s response be?  Will they continue the taper (the slowing of currency creation) or abandon that effort to attempt to prop up markets?

          I have said repeatedly that I believe any taper will be more form over substance.  I reach this conclusion for reasons that I will outline in this issue of “Portfolio Watch”.  I will examine it in more detail in the December issue of the “You May Not Know Report”.

          This dialogue has to begin with the current state of US Government finances.  Since the Fed’s currency creation is largely subsidizing the US Government’s deficit spending, if the Fed is going to eventually cease currency creation, the US Government will have to eventually balance the budget.

          There are only two ways to balance a budget – increase revenues (taxes) or reduce spending.

          No matter your political persuasion or leanings, we can all agree there is virtually no evidence that spending cuts are being seriously contemplated – quite the opposite is actually happening which is quite remarkable given the numbers I will review with you briefly.

          Let’s begin with the federal operating budget.  The screenshot below is from USDebtClock.org.

          For discussion’s sake, and ease of math, let’s assume an annual operating deficit at the federal level of $3 trillion.  Let’s take that $3 trillion and divide it by the 126 million tax returns that are filed each year with an average federal income tax liability of $9,118.  (Source:  https://www.fool.com/retirement/2016/10/31/heres-what-the-average-american-pays-in-taxes.aspx)

          Some simple math concludes that each of these taxpayers would need to increase their tax payments by 261% to balance the budget.  That means the average taxpayer would have to pay $23,809 in taxes rather than $9,118.

          But this is just to balance the budget.  It does not address paying down the debt or funding the unfunded liabilities of Social Security, Medicare and other government programs.  According to Professor Lawrence Kotlikoff, a past guest on the RLA Radio Program, the fiscal gap of the United States is more than $200 trillion.  (Source:  https://kotlikoff.net/wp-content/uploads/2019/03/The-2019-U.S.-Fiscal-Gap-Calculated-by-Laurence-Kotlikoff-and-Nils-Lehr.pdf)

          That means that to solve these fiscal issues, in addition to paying 261% more in taxes, each taxpayer would have to ante up about $1.587 million over time.  If one were to amortize that number over 30 years at 3% interest, that would require each of these taxpayers to part with another $80,292 annually FOR 30 YEARS!

          Let me attempt to put that into perspective.

          If we assume that the average taxpayer is married, filing jointly, in order to have a federal income tax liability of $9,118 in 2021, their taxable income would be $79,300.  Assuming these taxpayers took a standard deduction on their tax return, and they were younger than age 65, their adjusted gross income would be $104,400.

          Assuming a state income tax rate of 4.25% (which is the income tax rate in Michigan, the state in which I reside), current taxes paid by these taxpayers are:

Social Security/Medicare Tax    $ 7,987

Federal Income Tax                    $ 9,118

State Income Tax                       $ 3,370

Total Tax                                   $20,475

          Now, to balance the budget, total taxes paid will need to be $35,166.  But that does nothing to address the unfunded liabilities of government programs like Social Security or Medicare or to pay down the debt.

          As noted above, based on a 30-year amortization and 3% interest, each taxpayer is now on the hook for another $80,292 annually as remarkable and unbelievable as that might sound.

          Add the $80,292 to the $35,166 and one gets $115,458 or more than this household earns!

          While I’m at it, let me dispel the notion that this problem can be solved by taxing the wealthy via a wealth tax or a tax on unrealized capital gains.  Once again math trumps rhetoric.

          Total wealth of all US billionaires is a little more than $4 trillion (Source:  https://ips-dc.org/u-s-billionaire-wealth-surges-past-1-trillion-since-beginning-of-pandemic/).  Adopting the radical policy of just confiscating all the wealth of all the billionaires only funds the deficit for 1.3 years and does nothing to address the debt or the unfunded liabilities of other government programs.

          No matter how you slice it, these problems simply cannot be solved via increased taxation.

          What about cutting spending as unlikely as that seems politically at the present time?

          If you look at the numbers on the debt clock screenshot above carefully, you see that the deficit is about 41% of spending as ridiculous as that is.

          In order to balance the budget by cutting spending, ALL spending would need to be cut by 41% across the board.  That action alone would lead to a deflationary collapse.

          And, once spending was cut 41%, the debt and the unfunded liabilities of government programs would also need to be addressed.

          Taking the fiscal gap and amortizing it over 30 years at 3% interest, one quickly realizes that annual payments of more than $10 trillion are required AFTER spending has been cut by 41%!

          Take a look at this screenshot again, where can you find an additional $10 trillion BEFORE you cut spending by 41%?

          Bottom line is you can’t and there will, eventually, have to be government programs that don’t pay out all of the promised benefits.

          The recent Social Security trustees report informed us that the underfunding of Social Security reached $59.8 trillion.  That represents the gap between promised benefits and future payroll revenue and is $6.8 trillion larger than just one year ago!  (Source:  https://starkrealities.substack.com/p/social-security-steams-closer-to)

          This is just one example but suffice it to say that the fiscal gap continues to grow.

          If these problems cannot be solved via increased taxation and if cutting spending to the level it would need to be cut would lead to a deflationary depression, then policymakers and politicians are most likely to continue on their current course of action – create currency.

          As noted in the past, creating currency works until it doesn’t work.  Once confidence in a currency is lost as a result of inflation or hyperinflation, the deflationary crash occurs anyway.

          In my view, it’s never been more important to have an income plan that’s funded with some assets to help preserve assets in a deflationary environment and some assets that will help to act as an inflation hedge.

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.

Pension Plan Problems?

          In this weekly post, I comment frequently on Federal Reserve policies largely because Fed policy is the primary driver of economic and investing conditions.

          Over the past dozen years or so, the Fed has created currency literally from thin air, a process known as quantitative easing, and has kept interest rates at artificially low levels.

          History teaches us these policies create a prosperity illusion for a while but, in the end, reality emerges and the price for such reckless policy is paid.

          An astute observer who is doing his or her own research can now see the beginning of reality emerging.  One such reality is the extremely difficult position in which pension managers now find themselves as a result of the Fed’s low-interest-rate policy.

          During this week’s RLA Radio Program, I discuss this in detail.

          There are two types of pension plans – a defined contribution plan and a defined benefit plan.  A defined contribution plan is the retirement plan with which you are probably most familiar.  One example of such a plan is a 401(k) plan.  This type of pension plan is known as a defined contribution plan because the contribution to the plan or investment in the plan is what is ‘defined’ or determined.

          For example, in a 401(k) plan, you determine the contribution, and the ultimate benefit received at retirement is dependent on the amount of the contribution and the investment results of the plan.

          The other type of retirement plan is a defined benefit plan.  This is most commonly a pension plan where the monthly benefit at retirement is defined.  The plan is then funded by the employer to an extent as to ensure that the plan can meet the monthly retirement payment obligations to the retiree.

          There are several variables that determine the level of employer funding to a defined benefit plan; the number of years until the covered employee retires, the amount of monthly retirement income the employee is to receive (usually determined by a formula involving a number of years of service and employee salary) and the investment results of the plan.

          As you might imagine, pension assets need to be invested in a way as to maximize safety as well as returns.  In a low-interest-rate environment like the one we’ve seen for the past 12 years or so, it’s exceptionally difficult for a pension fund management team to get reasonable returns and maintain safety.

          This is an adverse side effect of the Fed’s artificially low-interest-rate policy and it’s now beginning to take its toll on pensions in earnest.  So much so that some pension plans are now forced to either fund the pension plan to a greater extent to compensate for lower interest rates or subject plan assets to more investment risk.

          This past week, “The Wall Street Journal” published an article that reported the nation’s largest pension fund, CALPERS, has now decided to take more investment risk to attempt to get the pension plan closer to being more fully funded.

          The article headline and an excerpt follow (Source:  https://www.wsj.com/articles/retirement-fund-giant-calpers-votes-to-use-leverage-more-alternative-assets-11637032461?mod=Searchresults_pos2&page=1):

The board of the nation’s largest pension fund voted Monday to use borrowed money and alternative assets to meet its investment-return target, even after lowering that target just a few months ago.

The move by the $495 billion California Public Employees’ Retirement System reflects the dimming prospects for safe publicly traded investments by households and institutions alike and sets a tone for increased risk-taking by pension funds around the country.

Without changes, Calpers said its current asset mix would produce 20-year returns of 6.2%, short of both the 7% target the fund started 2021 with and the 6.8% target implemented over the summer.

“The times have changed since this portfolio was put together,” said Sterling Gunn, Calpers’ managing investment director, Trust Level Portfolio Management Implementation.

Board members voted 7 to 4 in favor of borrowing and investing an amount equivalent to 5% of the fund’s value, or about $25 billion, as part of an effort to hit the 6.8% target, which they voted not to change. The trustees also voted to increase riskier alternative investments, raising private-equity holdings to 13% from 8% and adding a 5% allocation to private debt.

Borrowing money to increase returns allowed Calpers to justify the 6.8% target while maintaining a more-balanced asset mix, concentrating less money in public equity and putting more in certain fixed-income investments, fund staff and consultants said.

A staff presentation noted, however, that the use of leverage “could result in higher losses in certain market conditions,” a possibility that raised concerns for board member Betty Yee, the California state controller.

“Ultimately the question is, does the risk outweigh the benefit?” Ms. Yee asked.

Retirement funds around the U.S. have been pushing into alternative assets such as real estate and private debt to drive up investment returns to pay for promised future benefits. Funds have hundreds of billions of dollars less than what they expect to need to pay for those benefits, even after 2021 returns hit a 30-year-record.

            Pledging pension plan assets as collateral to borrow money to invest in alternative assets after a year that has seen the prices of most every asset class reach record highs, what could go wrong?

          While my crystal ball doesn’t work any better than anyone else’s does, you don’t need to be an investment guru to see that this decision is desperation on the part of this pension to get the returns the pension needs to meet retirement payment obligations to the pension plan’s participants.

          As long as the investments in which the pension plan invests the borrowed money continue to rise to new highs, the pension management board’s decision will make them look brilliant.

          A more likely outcome in my view would be that at some point in the near future, the investments in which the borrowed money is invested will lose value and the pension will be in worse shape than it is now.

          That’s when the fund looks to the government and begins to beg for bailouts.

          Trouble is, also at some point in the fairly near future, the government will be forced to rein in spending or risk the integrity of the currency.  As Alasdair Macleod noted in his recent piece titled “Returning to Sound Money” (Source:  https://www.goldmoney.com/research/goldmoney-insights/returning-to-sound-money):

The growth in the M1 quantity since February 2020 has been without precedent exploding from $4 trillion, already a historically high level, to nearly $20 trillion this September. That is an average annualized M1 inflation of 230%. It is simply currency debasement and has yet to impact prices fully. Much of the increase has gone into the financial sector through quantitative easing, so its progress into the non-financial economy and the effects on consumer prices are delayed — but only delayed — as it will increasingly undermine the dollar’s purchasing power.

            Those are remarkable numbers when you pause and consider them.  The M1 money supply has expanded by 230% per year since February of 2020.  Given that economists are in near-universal agreement that the time lag between currency creation and the subsequent inflation is 18 months to 24 months, we haven’t begun to see the full effects of this currency creation.

          The inflation that we are now experiencing is, in my view, a preview of coming events.

          This will create a problem for pension plan investments as well as an additional problem.  Pensions that have borrowed money to invest will likely see those investments perform negatively because of inflation and those pension participants who ultimately get a monthly income from the pension will see that pension buy a lot less.

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.

Inflationary Death Spiral – Part Two

          The economic news continues to concern.

          As anyone who has been a long-term reader of my posts knows, when the Federal Reserve began quantitative easing programs, a.k.a. currency creation, I suggested we would ultimately have inflation followed by deflation or should the Fed be tempered in its approach to currency creation, we could move directly to a deflationary environment.

          Technically speaking, inflation is an expansion of the money supply while deflation is a contraction of the money supply.  Since all currency presently is debt, when debt levels reach unsustainable levels, the money supply contracts.

          Since shortly after the time of the financial crisis, the Federal Reserve has been engaged in currency creation.  When studying history, one discovers that currency creation initially results in prosperity.  A better term to use to describe this prosperity is prosperity illusion since currency creation doesn’t solve the debt excess problem; instead, it temporarily masks the effects of too much debt on the economy.

          History teaches us that eventually, the debt excesses become the dominant economic force and because the central bankers and policymakers have only one response to the recessionary impact of debt excesses, they resort to more currency creation.

          This is the beginning of something that I wrote about last week – the inflationary death spiral.

          If you missed last week’s issue of “Portfolio Watch”, you can read it at www.RetirementLifestyleAdvocates.com.

          For reference, I am reproducing the inflationary death spiral chart here again.

          Notice from the chart, that the death spiral begins in earnest when the politicians began to promote the rhetoric that deficits don’t matter. 

          Obviously, with the proponents of the non-sensical Modern Monetary Theory are gaining in number and while their collective voice is getting louder, this theory is being advanced because any theory based on sound economics would require that government spending deficits be eliminated, and reliable currency being adopted.

          Massive deficit spending with existing debt levels automatically eliminates the adoption of reliable, sound money.  Policymakers have two choices – one, act responsibly when it comes to finances, or two, promote a theory that validates your collective irresponsible behavior.

          The current crop of policymakers has chosen the latter.

          But, as the inflationary death spiral illustrates, eventually, this theory will be proven to be erroneous as inflation accelerates in earnest.

          For context, let’s review the first few stages of the inflationary death spiral.

          One, the politicians and policymakers advance the theory that deficits don’t matter.  Two, government spending picks up speed and rises far faster than tax revenues.  The increasing deficit is funded via more currency creation.  Three, consumer price inflation kicks in.  Four, interest rates begin to rise in response which throws the economy into recession.

          I believe that is where we now find ourselves as interest rates began to increase last week and I believe that the economy is already in a recession although not officially.  While its highly doubtful that interest rates will rise from here in a straight line, over time, interest rates will move higher exacerbating the economic difficulties.

          The response to recession will be more currency creation…..and the cycle continues.

          Michael Snyder penned a terrific piece last week that brilliantly describes where we find ourselves economically speaking currently.  (Source:  http://themostimportantnews.com/archives/they-have-lost-control-and-now-the-dollar-is-going-to-die)

          Michael begins with some context:

All throughout history, there have been many governments that have given in to the temptation to create money at an exponential rate, and it has ended badly every single time.

So, our leaders should have known better.

But it is just so tempting because pumping out money like crazy always seems to work out just great at first.  For example, when the Weimar Republic first started wildly creating money it created an economic boom, but we all know how that experiment turned out in the end.

          He then continues by discussing some of the recent economic news beginning with consumer price inflation.

Very painful inflation is here, and on Wednesday we learned that prices have been rising at the fastest pace in more than 30 years

The consumer price index, which is a basket of products ranging from gasoline and health care to groceries and rents, rose 6.2% from a year ago, the most since December 1990. That compared with the 5.9% Dow Jones estimate.

On a monthly basis, the CPI increased 0.9% against the 0.6% estimate.

If inflation continues to rise at about 1 percent a month, it won’t be too long before we are well into double digits on a yearly basis.

Of course, I don’t actually put too much faith in the inflation numbers that the government gives us, because the way inflation is calculated has been changed more than two dozen times since 1980.

And every time the definition of inflation has been changed, the goal has been to make inflation appear to be lower.

According to John Williams of shadowstats.com, if inflation was still calculated the way it was back in 1980, the official rate of inflation would be close to 15 percent right now.

This is a real national crisis, and it isn’t going away any time soon.

One of the factors that is driving up the overall rate of inflation is the price of gasoline.  If you can believe it, the price of gas is almost 50 percent higher than it was last year at this time…

Gasoline prices last month shot up nearly 50% from the same month a year ago, putting them at levels last seen in 2014. Grocery prices climbed 5.4%, with pork prices up 14.1% from a year ago, the biggest increase since 1990.

Prices for new vehicles jumped 9.8% in October, the largest rise since 1975, while prices for furniture and bedding leapt by the most since 1951. Prices for tires and sports equipment rose by the most since the early 1980s.

Even Joe Biden is using the term “exceedingly high” to describe the current state of gasoline prices.

Other forms of energy are also becoming a lot more expensive

The price of electricity in October increased 6.5% from the same month a year ago while consumer expenses paid to utilities for gas went up 28%, according to numbers released Wednesday by the U.S. Bureau of Labor Statistics. Fuel oil rose 59%, and costs for propane, kerosene and firewood jumped by about 35%, the data show.

It is going to cost you a lot more money to heat your home this winter.

          Price increases are occurring while real wages are declining.  More from Michael’s piece:

The Labor Department’s own numbers show that real average hourly earnings are going down

The Labor Department reported Friday that average hourly earnings increased 0.4% in October, about in line with estimates. That was the good news.

However, the department reported Wednesday that top-line inflation for the month increased 0.9%, far more than what had been expected. That was the bad news – very bad news, in fact.

That’s because it meant that all told, real average hourly earnings when accounting for inflation, actually decreased 0.5% for the month.

What this means is that our standard of living is going down.

          Americans are increasingly resorting to taking on more debt to make ends meet.  Household debt is now more than $15 trillion, a record high while credit card usage is increasing, and debit card usage is declining.

          The death spiral is in full swing.

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.