Retirement Enemies

I’ll begin this week with a bit of a market update.

The biggest news from the markets last week was that long-term US Treasuries saw yields rise nearly ¼%.  By bond market standards, that’s huge.  A rise in bond yields which means a decline in bond prices was not surprising given the big advance in bond prices seen over the past couple of months.

I expect, given the massive quantity of sovereign debt yielding negative rates worldwide, that yields on US Government bonds could continue to fall as well.  A decline in stocks could be a catalyst for this anticipated move in bonds.

The Dow to Gold ratio once again rose back to 18.  I am forecasting an ultimate move to at least 2, but more likely 1, as improbable as that may seem presently.

From my perspective, it seems that stocks may be poised for a big move.  At least that is the conclusion I reach when looking at the charts.

The chart I’ve reproduced here is a chart of an exchange-traded fund that has the investment objective of tracking small-cap stocks.

The yellow, light blue and violet colored lines on the chart are moving averages of price.  The yellow line is the 5-week moving average of price, the light blue line is the 15-week average of price and the violet line is the 30-week average of price. 

To plot each line, closing prices from the past 5, 15, and 30 weeks are averaged.  Notice that presently, the moving average lines are all converging.

That means that the market’s consensus of the value of stocks over each of these time frames is approximately the same.  It is from chart set ups like this that big moves in price often emerge.

Based on this chart, I believe the probability is high that we see a big move in price.

Should that be the case, and should the big move in price be down, are you protected?

Big drawdown is the number one enemy of those wanting to retire comfortably.

There are a number of resources at if you would like some additional information as to how you might protect yourself.

This has never been more important.  The American dream of the last 80+ years has been to work a fulfilling career and then retire comfortably with no stress.  That aspiration is quickly becoming a fantasy for many Americans.

The website “Zero Hedge”, a market-focused blog that offers a wider variety of viewpoints and perspectives, recently published a piece on those of retirement age.  It seems that the data tells us that many of retirement age are not retiring.

This from the piece (Source: (emphasis added)

Forget about millennials working until they die. As we’ve repeatedly reported, there’s a far more pressing retirement crisis gripping America. And it’s the unprecedented number of contemporary workers of retirement age who are putting it off. Some are still reeling from losses during the financial crisis. Others never had enough socked away to begin with and didn’t start paying attention to their situation until it was too late.

Seniors have many reasons for lingering in the workforce, either part-time or full-time, until after the age of 66 (the age at which American citizens can start receiving full Social Security benefits). In an attempt to learn more about the reasons seniors often delay retirementProvision Living commissioned a study asking seniors about why they’re delaying retirement.

As it turns out, overwhelmingly, seniors decide to stay in the workforce after being eligible for social security for financial reasons. Though some claim they’re still working for personal reasons like boredom or because they still enjoy working. According to the survey, it’s a 60% to 40% split.

For those who are still working, a slight majority say they’re only working part-time, vs. full time. The average age of switching from full- to part-time? 61.

Out of the seniors who are still working, a whopping 47% said they wish they were retired. Another 33% said they were happy still working, while another 20% said they’re happy to work, but would like fewer hours.

Much more shocking is the average retirement savings of seniors who are still working: $133,108 – far less than the roughly $2 million people of retirement age are supposed to have socked away to ensure they won’t run out of money at the end of their life. And that’s for college-educated retirees.

The average retirement savings for non-college-educated seniors is just $80,221.

Surprisingly, when it comes to retirement income, an equal percentage of respondents said they’re relying on a 401k as pension-related payouts. 

For many, retirement is the ultimate reward after a lifetime of work. But if the baby boomers who are just reaching retirement age are struggling, just imagine what these numbers might look like when the millennial generation reaches retirement age.

The point is this.

If you haven’t saved enough for retirement, or even if you have, you probably can’t afford to experience the kind of drawdown in your portfolio that you may have lived through during the financial crisis.

The current stock chart indicates that could be a possibility.

But, to complicate things, there is another retirement enemy of which you need to be aware and from which you need to protect yourself.  It is the devaluation of the currency.

The current policy response is money creation. 

Money creation saps the purchasing power of savings.  Even if you’ve saved enough for retirement, it now seems to be inevitable that the currency will continue to buy less over time.

So, in addition to managing drawdown exposure, one also needs to have inflation hedges in place to protect the purchasing power of one’s savings.

And, don’t think that Social Security’s cost of living adjustment will keep up, it won’t.  It was announced this week that current retirees receiving benefits from Social Security will get a 1.6% cost of living adjustment in 2020.

That’s far from the real inflation rate.  According to Shadow Stats, a website maintained by past RLA Radio guest, John Williams, the inflation rate calculated as it was in 1980 is presently 9.4%.

To attempt to address these possible outcomes, I suggest a two-bucket approach.  A deflation hedge to help to protect from drawdown and an inflation hedge to assist in preserving the purchasing power of the currency.

The Mother of All Busts?

This week, I want to discuss how the traditional thinking surrounding an investment portfolio looks like it is about to be turned on its head – largely due to the irrationality of many market participants and outright ludicrous central bank policy.

I’ll begin with a little investing primer, assuming you know nothing about traditional investment strategy.

Conventionally, the thinking when it came to managing an investment portfolio had an investor looking to allocate assets between stocks and bonds.  One only needs to look at the investment allocation options in most 401(k) plans to see this is the case.

If you have a 401(k) plan through your employer, take a look at your options, they probably break down into three basic categories: stocks, bonds, and cash.

Cash assets are money market accounts or perhaps a stable value fund.  Stock assets are typically in the form of mutual funds and can have many different names.  Small-cap, mid-cap, large-cap, emerging market, Pacific Rim, European, international and index funds are all stock funds.  Any fund with the word ‘equity’ in the name is a stock fund.

Bond assets can also take many forms.  A bond, if you’re totally unfamiliar with investing is simply a loan made to a company or a government.  If a fund has the words ‘fixed income’ in its name, it is a bond fund.

Cash assets typically pay a rate of interest on deposited funds although today the level of interest paid is meager.

Stock funds may pay a dividend; however, most of the returns in stock funds come from shares that are appreciating due to the shares of stock owned by the fund increasing in value.  A rising stock market means rising stock funds.

Bonds pay interest.  And, as interest rates decline, bonds appreciate in value.  The reason is simple.  If an investor purchases a bond that is paying interest of 4% and a few months later market interest rates have declined to 3%, the investor holding the bond paying 4% interest would be able to sell her bond for a premium.

As interest rates decline, bonds appreciate and pay interest.  If interest rates rise, bonds decline in value while continuing to pay interest.

Here is where traditional thinking is about to let investors down in my view.

From a time perspective, we are in the longest stock bull market in history.  And, there are signs the market may be getting tired.  At very best, this stock bull market is stale.

Looking at the bond market, there is only one rational conclusion at which one can arrive – it’s ridiculously overvalued and is in a massive bubble.

Consider this from Bill Blain this past week (emphasis added) (Source:

I’ve spent most of my career in the fixed-income markets. What I see today scares the s*** out of me.  

We are looking at 2% yields on the 30-year US T-Bond. That’s the highest bond yield in the whole developed world sovereign bond market! And the market thinks it’s a bargain because US rates are inevitable going to zero and beyond!  That is not good.  It really is not good.  It is not normal. It means something is very very wrong.   

Yet investors can’t get enough of it… delicious, yummy sub-zero percent yielding bonds…  September was a record month for corporate new issuance – more than $300 bln of issuance.  (When I started in the market back in the 1980s, a record month would be a couple of billion!)  We’ve now got governments around the globe taking about fiscal reflation and borrowing more – why not?  Yields are so low a few trillion more in debt can’t hurt… can it?  Of course not.. fill yer boots.

As bond yields continue to fall, the investment banks are churning out new deals as fast as they can type out the term sheets.  It’s even more manic in High Yield.  Investment banks make higher fees from junk issues – so guess what.. the market is flooding with paper.  And investors are hoovering them up – they just love the yield (ie positive), the investment bank analysts are telling them to buy, and they figure that because there is a global recession coming and Central Banks will ease rates – then why not ride the next leg of the Great Bond Rally?  

Whoa. Stop. Think. There is a little word…. Risk.

Remember Blain’s Market Mantra Number 1: “The Market has but one objective – the inflict the maximum amount of pain on the maximum number of participants.”

If there is a global recession, what happens to bonds in a recession? Sovereign bonds and most investment-grade bonds tighten. Tick. (Well, they would tighten if they weren’t stupidly tight already..)  High Yield Issuers go bust. Big X.  

One of my European chums was amazed a BB junk French laundry firm he’s never heard of, Elis, was able to raise 5-year debt at 1% last week.  This would be the same company no one had previously ever heard of that caused some eyebrow raising earlier this year when it launched a covenant-lite junk bond. This time around no one even blinked.  The reality is issuers are getting deals done with less investor protections and lower yields than ever.  

A bubble never seems like a bubble until it bursts and, as Blain hypothesizes, inflicts the maximum amount of pain on the maximum number of (market) participants.

Since 1971, when the link between the US Dollar and gold was eliminated, there have been a series of boom and bust cycles with each bust inflicting more damage on investors than the prior one.

From my perspective, the next bust cycle has the potential to be the mother of all busts.  What happens if stocks correct like in 2001 and in 2008, falling by 50% or more and, at the same time, the bond bubble bursts and yields move up?

The typical 401(k) investor or IRA investor sees his dreams of a comfortable, secure, stress-free retirement evaporate.

I believe there is a very high probability that’s where we are headed.

Putting a plan in place to address this now, before the bust, may be the only way for many aspiring retirees to hang on to their dream of a comfortable retirement and make it a reality.

So, what should you consider?

It depends on your own, individual situation.  You should always seek the advice and counsel of a reputable professional with a solid knowledge of economic cycles. 

That said, during The Great Depression the number one, best performing asset was an individual corporate bond. 

While owning bond funds has a high degree of risk as I’ve discussed, holding individual corporate bonds to maturity allows an investor to know her annualized return in advance for each year the bond is held provided the company that issued the bond is solvent.

Corporate bonds are backed or ‘collateralized’ by the real, tangible assets of the company that issues them.

The risk in holding highly rated corporate bonds is that the central bank policymakers not only continue to reduce interest rates but also print money as they have over the past decade.

There is currently a grand experiment taking place.  Policymakers are trying to determine how far below zero yields can actually fall.  My take is that on a global basis, yields can continue to fall for a little while yet, but the bottom can’t be far away.

When the bottom hits and bond investors panic, that may very well be the catalyst that drives stocks and bonds lower.

At that point, the policy response may be more money creation.  Since that is a real possibility, owning some tangible assets like precious metals along with highly rated corporate bonds might be a good idea.

You May Think I’m Crazy, But…..

For a long while now, I have been putting forth this long-term forecast.  The Dow to Gold ratio will eventually fall to 1.

If you’re not familiar with the Dow to Gold ratio, it is calculated by taking the value of the Dow Jones Industrial Average and dividing by the price of gold per ounce.

On Friday the Dow closed at 26,820.25 and the price of gold per ounce ended at $1496.90.  That puts the Dow to Gold ratio at 17.92.

My ultimate forecast puts the Dow and the price of gold per ounce at the same approximate level.

That may seem like an extreme forecast to new readers, but looking at the numbers and studying history, it’s easy to reach that conclusion.

Deflation will have to occur driving down stocks and the policy response will be bullish for gold.

Let me explain.

There are two words to describe today’s financial situation world wide and the inevitable economic outcome that is approaching.  Those two words are debt excesses.

We can begin by examining the official debt of the US Government.  It stands at $22.63 trillion according to  Looking at the debt calculator on the site, that amounts to debt per taxpayer of $183,625.

But, the official US debt doesn’t count the unfunded liabilities of federal programs.  Let’s forget that many of those programs don’t exist for our brief discussion here and focus only on the two biggies – Social Security and Medicare.

According to the most recent report published by the trustees of the Social Security program, the underfunded liabilities of the program are now $43 trillion (Source:  That includes a not-hardly-even-reported-on $9 trillion deficit just last year!  That’s another $348,912 per taxpayer.

Then, there is Medicare.  Former Dallas Federal Reserve Bank President, Richard Fisher, stated that Medicare has total unfunded liabilities of about $85 trillion.  Add another $689,709 per US taxpayer.

When adding the liabilities per taxpayer numbers together for the national debt and the unfunded liabilities of Social Security and Medicare, one gets a total cost per taxpayer of $1,222,246.

How does that get paid?

The harsh reality is that it doesn’t.

But, unfortunately, debt excesses don’t stop there.

The majority of US states also have significant liabilities.  Only 10 states have a per taxpayer surplus according to “Truth in Accounting”.  The other 40 have per taxpayer deficits.

The chart on this page illustrates.

According to “Truth in Accounting”, there is now $1.5 trillion in state debt.

Last week, here in “Portfolio Watch”, we took a look at pension underfunding problems at the state level.  This is still another debt factor that adds to the burden.

Changing our focus to private sector debt, we find still more debt excesses.

Student loan debt now exceeds $1.5 trillion and affects 44 million Americans according to a recent “Forbes” article.  (Source:  11.5% of student loans are now 90 days past due.

The same article reported that total US credit card debt now tops $1 trillion. 

“Motley Fool” reports that US automobile debt is also now over $1 trillion.  And, mortgage debt is now over $9 trillion.

Overall, comparing these private sector debt levels to the private sector debt levels at the time of the financial crisis, it’s worse now.

At the height of the Great Recession, total household debt was $12.7 trillion, presently it stands at $13.54 trillion.

So what does all this mean?

To state the obvious, if there is too much debt to be paid, it won’t be paid. 

As far as public debt and underfunded liabilities are concerned, liability of $1.2 million per taxpayer is totally unmanageable.

Raising taxes as some in the current crop of political aspirants would advocate, can’t solve the public debt problem.  The numbers are simply too large.

Based on the level of total household assets reported at, confiscating 100% of household assets wouldn’t provide enough money to meet the obligations.

Cutting spending is an option if a deflationary depression is the desired outcome.  Although, eventually this will have to be the outcome.  Debt defaults are deflationary and cause the money supply to contract.

Seems that for the time being, world policymakers are intent on money creation. 

Outgoing European Central Bank Chair, Mario Draghi, just cut the deposit rate from -.4% to -.5%.  The deposit rate is the interest rate that commercial banks earn on deposits with the central bank.  A negative interest rate means that commercial banks pay to park money with the central bank.

On top of cutting interest rates, Draghi announced that the central bank would once again be cranking up the money creation machine committing to buy 20 billion Euros per month in bonds from banks in an effort to inject more cash into Europe’s faltering economy.

History teaches us that money creation always ends badly.  Best case scenario is considerable inflation; worst case is the destruction of a currency.

Whether considerable inflation causes policymakers to reverse course as far as policies are concerned or a currency is ultimately destroyed, eventually deflation sets in because money creation doesn’t make the debt disappear.  Money creation just adds to the debt, making the eventual deflationary event more intense.

The current political environment is reminiscent of the tale penned by Hans Christian Anderson titled, “The Emperor’s New Clothes”.  In it, the emperor hires two tailors to make him some new clothes.  The tailors make no clothes at all, instead they tell the Emperor that anyone who is unfit for their position, is stupid or incompetent won’t be able to see the clothes.  But, anyone who is competent and smart will be able to see them.

The emperor and all his advisors pretend to see the clothes so they are not perceived as unfit for their positions or incompetent.  Finally, a small child yells out the emperor is wearing nothing at all.

In the current political climate, there is not one mainstream candidate on either side of the aisle talking about the fact that debt levels are unsustainable and will lead to inevitable consequences adversely affecting nearly every American.

The current budget deficit is about $1 trillion adding to the ultimate per taxpayer liability that is already more than $1.2 million. 

Paying off the national debt and fully funding Social Security and Medicare will require more than the entire, combined net worth of all US households.

When you hear about Medicare for all, billionaire taxes, increasing defense spending or new government programs of any kind, just understand that the emperor really does not have new clothes.

This debt monster will have to be dealt with at some point.  Talk of all these new programs, negative interest rates and more money printing just feeds the debt monster and makes the ultimate problem worse.

All you can do is assemble the best plan possible to prepare for the inevitable.

Artificially Low Interest Rates and More Unintended Consequences

As I have been predicting for several years, underfunded pensions are beginning to get attention. 

This is a topic that will continue to make more headlines as pension funding problems continue to get worse.

An often-ignored fact relating to pension funding is that the funding problems facing pension plans have largely been brought about by central banking policies around the world.

Many pension funds are still using extremely optimistic return assumptions; returns that are unlikely to be realized over the long term given the artificially low interest rate environment in which we find ourselves.

Given this reality, many state’s pension managers are adjusting their actuarial assumptions to make them more conservative.  This from “Chief Investment Officer” regarding the New York State Pension Fund:

In anticipation of a lower return investment environment, New York is lowering the long-term assumed rate of return on investments for the New York State and Local Retirement System (NYSLRS) to 6.8% from 7%.

New York State Comptroller Thomas DiNapoli made the announcement along with the release of the state’s annual report on actuarial assumptions.

“The long-term outlook for investors is changing and requires a more conservative approach,” DiNapoli said in a statement. “As in years past, we’re taking the responsible action of lowering our assumed rate of return now so we can better weather market volatility.”

New York is not alone in taking these steps.  In reviewing many of the news reports over the past few weeks, there are a number of states taking similar steps.

In the case of New York, the state’s pension fund has had average annual returns of 9.32% over the past three years and 7% over the past 5 years.

Doesn’t sound like a problem does it?

But it is.

In order to get returns of those levels, pension assets have to be exposed to market risk. 

This from “City Journal” (Source: (emphasis added):

It’s a basic principle of investing: the greater the risk an investor takes, the greater the potential reward. But as any experienced investor can attest, increased risk can also bring bigger disappointment. That’s the case with state pension funds. To elevate returns, public-sector pensions have taken on more and more risk for nearly two decades. The result, however, has been lower returns, higher debt, and a mess for taxpayers, according to a new study by Fitch Ratings.

Since 2001, the study found, most government pension funds have boosted their share of investments in riskier financial vehicles, from volatile stocks to real estate. During this period, pension funds achieved median annualized returns of just 6.4 percent, well below the goal of 7.5 percent to 8 percent returns. Only one pension system has met its investing goals since 2001. No wonder, then, that the indebtedness of state systems increased from $33 billion to a staggering $1.5 trillion.

Back to central bank policies.

Because interest rates have been kept artificially low, the only hope a pension plan has to achieve targeted returns is to take more risk with assets.

Given that a 30-year US Treasury bond yields only about 2%, it’s impossible for a pension to reach its return goals by using safer investment vehicles.

Adding to the problem is this fact: as existing, higher-yielding bonds held by a pension plan mature, they are exchanged for lower yielding bonds.  Since there is now about $17 trillion of government debt worldwide yielding negative interest rates, this problem is now unsolvable.

Imagine managing pension fund assets and having some of the bonds yielding 4% in your portfolio mature.  Now, you have a choice to make.

You replace those bonds with new bonds with a slightly positive or even negative interest rate or you invest those assets where you have a chance to make a positive return.

Obviously, the latter is the only reasonably rational alternative, although I would argue it’s still not totally rational given the risk to which the pension assets are now exposed.  It will take only one, overdue stock market correction to further widen the pension funding gap.

The implications and fallout of pension underfunding are severe and far-reaching.  This from “Wirepoints” (Source: (Emphasis added):

You’d be mistaken to think Harvey, Illinois has a unique pension crisis. It may be the first, and its problems may be the most severe, but the reality is the mess is everywhere, from East St. Louis to Rockford and from Quincy to Danville. A review of Illinois Department of Insurance pension data shows that Harvey could be just the start of a flood of garnishments across the state.

Harvey made the news last year when an Illinois court ordered the municipality to hike its property taxes (already at an effective rate of 5.7 percent – six times more than the average in Indiana) to properly fund the Harvey firefighter pension fund, which is just 22 percent funded. 

Now, the state has stepped in on behalf of Harvey’s police pension fund. The state comptroller has begun garnishing the city’s tax revenues to make up what the municipality failed to contribute. In response, the city has announced that 40 public safety employees will be laid off.

Under state law, pensions that don’t receive required funding may demand the Illinois Comptroller intercept their municipality’s tax revenues.  In total, 368 police and fire pension funds, or 57 percent of Illinois’ 651 downstate public safety funds, received less funding than what was required from their cities in 2016 – the most recent year for which statewide data is available.

If those same numbers continue to hold true, all those cities face the risk of having their revenues intercepted by the comptroller.

This is not an isolated issue, far from it.

The chart, from the tax foundation, illustrates pension funding levels state-by-state.  Only the States of Wisconsin and South Dakota have fully funded pensions.

Kentucky is last in the rankings with a state pension that is only 34% funded.

A stock market correction makes these already desperate looking numbers even worse.

The lesson here?

Interfering in free markets, no matter how noble one’s intent, often leads to intended, more severe consequences eventually.

Economic Red Flag: Private Sector Debt

Recently, I wrote about the fact that the wealthy were cutting back on spending and it seemed that the middle class was going into debt to fund some of its lifestyle.

An article in “The Wall Street Journal” this week confirms this trend.  (Source:

The article points out that medical care, college, houses and cars have all become more expensive, but incomes have remained relatively stationary.

Debt accumulation seems to be making up the difference.

Consumer debt, excluding mortgages, now stands at about $4 trillion.  That’s an all-time nominal high and an all-time real high after adjusting for inflation.

Mortgage debt dropped after the financial crisis, at least partially due to defaults, but is now rising again.

Student debt has been a statistic I have tracked here closely.  Total student debt is now more than $1.5 trillion.

Automobile debt has exploded over the past 10 years.  It’s up almost 40% over that time frame and is now $1.3 trillion.  According to the article in “The Wall Street Journal”, the average loan size for new cars is up 11% in the last decade even after adjusting for inflation.  Experian reports the average loan for a car is now $32,187.

Bottom line is, that’s a lot of debt.

It’s important to remember that in our banking and economic system debt is money.  One person’s debt is another person or institution’s asset.  Should debt go unpaid, money disappears from the financial system creating a deflationary event.

A deflationary event typically sees asset prices fall.  That’s usually bad news for stocks and real estate.

Increasing debt levels can be sustainable if incomes are increasing proportionately, but the data suggests that incomes are flat.

The article states that median household income in the United States was $61,372 at the end of the calendar year 2017.  That’s per the US Census Bureau.

Adjusting for inflation, that is just above the 1999 level.  Not adjusted for inflation, incomes are up approximately 135%.

Compare that non-inflation adjusted rate increase with the fact that average 4-year tuition rates at four-year, public colleges are up 549% on an inflation-adjusted basis according to the College Board. 

Personal health care expenditures increased by about 276% over the same time frame.

Average housing prices went up 188% over that time frame according to the S&P CoreLogic Case-Shiller National Home Price Index.

It’s simply become much more difficult to remain middle class.

Credit card debt is higher. 

U.S. families that have credit card debt owed an average of $8,390 in the first quarter of 2019.  That’s up 9% from 2015 after adjusting for inflation.

Moving ahead, this will have to be a drag on the economy leading to the deflationary event I described above.

When debt levels rise and incomes don’t, you have an unsustainable scenario.  That’s where we are presently.

And, while there may be more upside, unsustainable situations always change course.

Once again, the words of economist, Herbert Stein ring true, “if something cannot go on forever, it will stop.”

This will as well.

Meanwhile, as the political season is ramping up and politicians are looking to capitalize on these trends, promises are being thrown around like rice at a wedding.

It may be wise to remember the words of Benjamin Franklin:

“When the people find that they can vote themselves money that will herald the end of the republic.”

                                                                                    -Benjamin Franklin

My Interpretation of the Dow to Gold Ratio – Why Stocks Have More Downside and Why Gold Has More Upside

Stocks rebounded again last week as metals retreated slightly. 

The Dow to Gold ratio now stands at 17.78.  For those of you unfamiliar with the Dow to Gold ratio indicator, it is calculated by taking the price of the Dow Jones Industrial Average and dividing by the price of gold per ounce.

The Dow began the week at 26,797.46 while gold was at 1507.50.  That makes the Dow to gold ratio 17.78 (26,797.46/1507.50)

My long-term forecast continues to be that this ratio will reach 1 which means more downside for stocks and more upside for gold. 

Given the current level of 17.78, that last sentence may be an understatement. 

The reality is that in order to hit that target of 1, stocks will have to significantly fall, and gold will need to rally strongly.

In my view, economic circumstances that exist around the world presently suggest that is a likely outcome.

As crazy as that prediction might sound to you, her me out.

To begin with, much of the rally in stocks over the past couple of years has been due to stock buybacks of their own stock by companies.

This from CNN on August 22 (

Corporate America’s epic buyback mania may finally be succumbing to gravity.

The 2017 corporate tax cut left US businesses flush with cash. S&P 500 companies responded by rewarding shareholders with record amounts of buybacks in 2018, with each quarter setting an all-time high. 

However, that record-shattering pace appears to be slowing. S&P 500 companies executed $165.7 billion of buybacks during the second quarter of 2019, according to preliminary estimates by S&P Dow Jones Indices. Although that’s still a stunning amount of repurchases, it marks a 13% decline from the same period a year ago. 

The slowdown in buybacks, which have become a lightning rod for criticism among some in Washington and even on Wall Street, underlines the impact the tax law had last year as companies steered a sizable chunk of their windfall to investors.

As stock buybacks slow, one of the activities that has been supporting the stock market becomes less supportive making stocks more susceptible to a decline.

Secondly, margin debt is higher month-over-month.  Margin debt is debt that an investor incurs to purchase securities, usually stocks.  As long as margin debt keeps rising, it helps create more demand for stocks. 

While margin debt is near an all-time high on a nominal basis, on a real basis, adjusted for inflation, margin debt is still below all-time highs.  Perhaps there is a little more room to add to margin debt, but I wouldn’t count on it.

Thirdly, one of Warren Buffet’s favorite indicators to gauge stock valuation, market capitalization to Gross Domestic Product is inflated.

The chart printed here illustrates market capitalization to GDP.  Note that the ratio remains slightly below the levels prior to the tech stock crash but is much higher than just prior to the financial crisis about one decade ago.

Finally, “Fortune” magazine had this to say recently about stocks (Source: (emphasis added):

Robert Shiller’s cyclically-adjusted price-to-earnings (CAPE) ratio has only breached 30 three times in history. 

The first time was in 1929, just a few short months before the stock market was trounced in one of the worst crashes in history during the Great Depression. Almost 70 years later, it happened again in 1997 and stayed above that level for nearly 5 years as the dot-com bubble deflated. The most recent flirtation with a CAPE of 30 began in the summer of 2017, where it has remained in a tight range ever since.

This chart, printed with the article, illustrates.

As far as gold is concerned, central bank policies are improving the fundamentals for gold.

Money creation via quantitative easing programs worldwide are bullish for tangible assets, gold in particular.

Peter Schiff, past guest on RLA Radio, had this to say this past week about his call for gold reaching $5,000 per ounce this past week (Source:

Most investors think my $5,000 gold call is crazy. But what’s crazier negative interest rates or $5,000 gold? In the insane world of negative interest rates, $5,000 gold is the one thing that makes sense. In fact, $5,000 for an ounce of gold will likely prove to be a bargain!

This week’s guest on Retirement Lifestyle Advocate’s Radio, Mr. Michael Pento of Pento Portfolio Strategies had this to say about gold.

He explained that when interest rates are up, keeping money in cash in a deposit account makes sense.

Given a choice between depositing money in a deposit account yielding 6% interest or buying gold that yields 0, mot investors will choose the deposit account and capture the investment yield.

On the other hand, if both cash accounts and gold are yielding zero, most investors would opt for the tangible asset, gold rather than keeping assets in a fiat currency.

Today, however, for many investors the choice is even more obvious.  Given a choice between gold and a negative-yielding cash account, the gold becomes a ‘no-brainer’.

As central banks continue to pursue crazy monetary policies like negative interest rates, that will likely be bullish for gold.

The entire radio program and the interview with Michael Pento are now posted at

“Recession Looming?”

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

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

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

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

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

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

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

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

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

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

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

Wealthy individuals are cutting back on spending.  A CNBC article (Source: reported (emphasis added):

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

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

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

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

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

Digging into this story a bit further, one finds that lower-income consumers may be funding much of their spending via credit cards.  This from “Inside ARM” (Source: (emphasis added):

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

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

According to a recent article on “The Balance” (Source:, consumer spending accounts for 68% of the Gross Domestic Product of the United States.  This from the article:

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

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

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

There is more evidence that consumers are spending via debt accumulation.  Here is a piece from “The Motley Fool” (Source: (emphasis added):

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

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

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

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

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

2020 is shaping up to be a very interesting year.

Showing the US Dollar the Exit

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

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

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

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

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

This from “The New York Times” (emphasis added) (Source:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

That premise is simply:  history repeats itself.

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

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

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

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

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

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

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

Dare I say it?

Fake money.  Or should I say more fake money?

Here is the reality of today’s money.

Today’s money is not wealth.

Today’s money is a claim on wealth.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

More Craziness and Where It Might Lead

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In the Country of Denmark, the second and third largest banks are now offering mortgages at negative interest rates.  (Source:  This from the CNBC article reporting the development:

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

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

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

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

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

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

Even former Federal Reserve Chairman, Alan Greenspan, is jumping on the negative interest rate bandwagon.  This from another CNBC article (Source:

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

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

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

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

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

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

A piece published on “The Daily Torch” offers a plausible explanation (Source:

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

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

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

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

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

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

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

                                                          -Thomas Jefferson

Why Gold Is Rallying?

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

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

The US Dollar declined slightly.

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

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

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

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

Take gold for example. 

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

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

Here is an example to make the point.

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

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

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

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

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

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

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

According to Charlie Bilello (Source:, over the last 20 years, gold has outperformed Berkshire Hathaway with Berkshire Hathaway returning 387% and gold returning 488%.

My forecast is for this trend to continue.

The current global monetary policy is currency devaluation.

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

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

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

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

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

It’s not.

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

In a recent piece published on “King World News” (Source:, Egon von Greyerz wrote:

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

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

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

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

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

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

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

Global debt levels presently are simply staggering.

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

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

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

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