Anatomy of an Inflation

         The Federal Reserve announced a $15 billion per month taper and markets rallied.

          All markets rallied as noted in the databox above; stocks, bonds, and precious metals all moved higher.

          The Dow to Gold ratio remained in the neighborhood of 20.  I stand by the forecast of an ultimate ratio value of 1 or 2.

          In the “Headline Roundup” today, I discussed the anatomy of inflation.  Despite the fact that the Federal Reserve continues to describe the high level of inflation as transitory, it seems that it is here to stay.

          The taper announced by the Fed while leaving interest rates unchanged is, in my view, more symbolic than substantive.

          I expect that at the first sign of market distress, the Fed will reverse course and make the ‘adjustments’ they stated were possible in their taper announcement.

          Assuming I am correct, today’s discussion of the anatomy of inflation could especially relevant.  In the article, “Is the World About to Be Weimared?”, the author describes the progression of inflation or hyperinflation.  (Source:

          The author also discusses the probable political outcome of such a hyper-inflationary event pointing to the Weimar, Germany hyperinflation and the rise of an authoritarian government.

          History points to this political outcome time after time.

          Extreme economic circumstances have the populace embracing extreme political solutions that often turn out to not be solutions at all.  That was the case in Weimar, Germany and we can all hope and pray that is not the solution presently should the current inflationary climate evolve into an environment that is hyperinflationary.

          To prevent such an outcome, it’s important to understand the inflationary cycle.  The author of the article referenced above published a chart that does a good job of explaining the cycle.

          As you’ll note from the chart, the first stage in what the author describes as the inflationary death-spiral is the development of the attitude that “deficits don’t matter”.

          This attitudinal change among the ruling class is almost necessary since government spending is out of control and balancing a budget would require significant pain and a huge amount of public sacrifice, both of which are politically unpopular.

          Here is a bit from the article (emphasis added):

“Given above is the typical scenario of how “well-meaning” governments end up causing depressions and high inflations.  Starting out in a benign commodity cycle where the monetary inflation does not directly translate into consumer price inflation, governments reach the absurd but very convenient conclusion that “deficits don’t matter”.  The Keynesian stimulus appears to work under these conditions and the governments get away scot-free from their monetary sins.  Albeit temporarily.”   

          In my view, this accurately describes the time frame from 2011 to 2019.  The Federal Reserve was creating currency and expanding the money supply, a.k.a monetary inflation, but the only apparent inflation was that of asset prices like stocks and real estate.

          More from the article (emphasis again added):

“When the payback time arrives, and it always does without exceptions, the monetary stimulus has the effect of pushing on the strings from a “growth” perspective.  The higher deficits translate into consumer price inflation while the growth seems to falter.  The currency weakens, there are greater trade deficits and the recessions and consumer price inflation both worsen.  Stagflation, Misery Index (unemployment + inflation) are some of the more commonly used phrases to describe these economic conditions and this is where the US, and perhaps the world at large is headed in the immediate future.”

          I would argue this is where we are presently.  The US just recorded the largest trade deficit in history due in large part to importing a lot more energy than just a year ago.  This from “United Press International”  (Source:

The U.S. trade deficit reached an all-time high of $80.9 billion in September, sparked by consumer demand for computers, electric equipment, and industrial supplies, the Commerce Department said Thursday.

The Commerce Department said year-to-date, the goods and services deficit increased $158.7 billion, or 33.1%, from the same period in 2020. Exports increased by $274.1 billion or 17.4%. Imports increased by $432.8 billion or 21.1%.

            And, even using the highly manipulated Consumer Price Index measure of inflation, consumer price inflation is at levels not seen in years while economic growth is slowing.

          The next stage of the inflationary death spiral is described in the article (emphasis added):

Of course, the US Fed neither believes in the transitory nature of the CPI nor in the “strong economy” opinion that they voice in the public domain.  The only reason why the US Fed has not raised the interest rates is that they understand the inflationary death spiral that the US economy/dollar is about to enter.  Let’s say the Fed manages to hike the rates to a very nominal 1%.  That would still leave the real interest rates negative by a massive 4%.  But this 1% interest rate would deliver a devastating blow to both the housing and bond hyper-bubble markets that the US economy cannot possibly hope to recover from.

That would indeed set off a chain reaction of a recession forcing the government to step in with a big stimulus which would lead to even higher CPI.  In fact, this is exactly the same phenomenon that we have witnessed in many banana republics but perhaps for the first time, we will witness this happening to the world’s reserve currency in the years ahead. 

          In other words, once this cycle begins, it is self-feeding.

          The reality of currency creation is quite sobering when one compares the levels of currency creation by the Federal Reserve to that of Weimar, Germany.

          The chart above illustrates the amount of currency created by the Federal Reserve.  Notice in calendar year 2020, the expansion of the money supply went nearly vertical and has continued for about two years.

          The next chart below shows the level of currency creation in Weimar, Germany after World War I.  Notice the eerily similar chart patterns with the currency creation that led to hyperinflation and the destruction of the German Mark occurring largely over a two-year time frame.

          The Fed has arguably already created enough currency for a hyperinflationary outcome.

          The difference between the German Mark of Weimar, Germany, and the US Dollar of today is that the US Dollar is still used as a reserve currency. 

          It is my view that without that status, we would perhaps already be experiencing a hyperinflationary climate similar to that of Germany after World War I.

          As I noted last week, the only way to solve this problem is a balanced federal budget so currency creation is unnecessary.  Given the recent passing of a monster infrastructure spending package that adds to the level of deficit spending, we are moving in a fiscal direction that almost ensures the inflationary death spiral continues.

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

Currency Devaluation or Market Crash

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

          Mr. Macleod’s article is titled “Waypoints on the road to currency destruction – and how to avoid it”.  (Source:

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

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

          This, from Mr. Macleod’s piece:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

          Here is why that is interesting.

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

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

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

          Mr. Macleod gives us an idea.

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

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

          If not, time may be running short.

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

Gold Price Analysis

          Stocks continued their rally last week, with many indexes making new all-time highs by the slimmest of margins.

          I noted last week that the ‘gaps up’ on the daily price chart are most often closed by falling prices.  This is still a possibility but last week’s price action muddies up the waters from a technical analysis perspective.

          We will need to see how this week’s price action plays out and assess where we are.

          By now, clients and subscribers have received the October issue of the “You May Not Know Report”.  In it, I offer an analysis of gold, silver, and oil relative to the expansion of the money supply.

          I offer that explanation here again for context before discussing a recent article published by Mr. Egon von Greyerz that validates this analysis using a completely different method of analysis.  I hope you find it interesting.

          This is from the October “You May Not Know Report”:

I’ve had conversations with many readers, radio show listeners, and clients about the recent decline in the price of precious metals.  Those conversations always lead to two topics of discussion.  One, where should the price of precious metals be from a fundamental viewpoint?  And, two, why is the current reality not reconciling with the fundamentals?

          In this update, I’d like to address both topics.  Let’s begin with the fundamentals.  I’d like to have this conversation from the perspective of the expansion of the fiat money supply and then compare the expansion of the money supply to the price of gold, silver, and another commodity – oil.  This comparison is easy to do when  The screenshot on this page is taken from that website.

          Notice from the screenshot that the dollar-to-oil ratio, the dollar-to-silver ratio, and the dollar-to-gold ratio in 1913 are all noted.

          The ratio is calculated by taking the total increase in the money supply and dividing it by the yearly production of either oil, silver, or gold depending on the commodity one is examining.  For example, the dollar to oil ratio in 1913 was calculated by taking the total increase in the money supply and dividing it by the total world oil production.  A review of the history of oil prices concludes that the actual price of oil per barrel in 1913 closely tracked the price forecast using this simple formula.

          The same conclusion is reached when looking at the formula-derived prices in 1913 and the actual prices.  Gold was $20 per ounce in 1913 and silver was between $1 and $2 per ounce.

          Here’s the point, in calendar year 1913, using the formula of taking the increase in the money supply and dividing by annual world production of oil, silver, or gold; one arrives at a forecasted number that reasonably tracked reality.

          Fast forward to September 2021 and one discovers that this forecasting tool seems to have broken for gold and silver but still works for oil.  Observe from the screenshot that taking the total increase in the money supply presently and dividing by world oil production, one gets a forecasted estimate of about $72 per barrel.  Like in 1913, that tracks reality reasonably closely.  The current price of one barrel of oil as this issue goes to publication is about $75.

          However, when looking at the forecasted price of silver and gold, one reaches a much different conclusion.  The forecasted price of silver is more than $3,000 per ounce while physical silver is presently selling somewhere in the mid-$20 range.  The forecasted price of gold is more than $21,000 per ounce while reality has physical gold selling for around $1900 per ounce.

          The article in the “You May Not Know Report” goes on to discuss why gold and silver prices have not reacted to the expansion of the money supply like oil prices have, citing one of the reasons as price manipulation via the highly leveraged futures markets.

          This past week, as noted above, Mr. Egon von Greyerz looked at this topic from a fiat currency devaluation perspective.  Here is a bit from his excellent piece (Source:

The US annual Federal Spending is $7 trillion and the revenues are $3.8 trillion.

So the US spends $3.2 trillion more every year than it earns in tax revenues. Thus, in order to “balance” the budget, the declining US empire must borrow or print 46% of its total spending.

Not even the Roman Empire, with its military might, would have got away with borrowing or printing half of its expenditure.

The most obvious course of events is continuous shortages combined with prices of goods and services going up rapidly. I remember it well in the 1970s how for example oil prices trebled between 1974 and 1975 from $3 to $10 and by 1980 had gone up 10x to $40.

The same is happening now all over the world.

That puts Central banks between a Rock and a Hard place as inflation is coming from all parts of the economy and is NOT TRANSITORY!

Real inflation is today 13.5% as the chart below shows, based on how inflation was calculated in the 1980s

The central bankers can either squash the chronic inflation by tapering and at the same time create a liquidity squeeze that will totally kill an economy in constant need of stimulus. Or they can continue to print unlimited amounts of worthless fiat money whether it is paper or digital dollars.

If central banks starve the economy of liquidity or flood it, the result will be disastrous. Whether the financial system dies from an implosion or an explosion is really irrelevant. Both will lead to total misery.

Their choice is obvious since they would never dare to starve an economy craving for poisonous potions of stimulus.

History tells us that central banks will do the only thing they know in these circumstances which is to push the inflation accelerator pedal to the bottom.

Based on the Austrian economics definition, we have had chronic inflation for years as increases in money supply is what creates inflation. Still, it has not been the normal consumer inflation but asset inflation which has benefitted a small elite greatly and starved the masses of an increase standard of living.

As the elite amassed incredible wealth, the masses just had more debts.

So what we are now seeing is the beginning of chronic consumer inflation that most of the world hasn’t experienced for decades.

This is the inevitable consequence of the destruction of money through unlimited printing until it reaches its intrinsic value of Zero. Since the dollar has already lost 98% of its purchasing power since 1971, there is a mere 2% fall before it reaches zero. But we must remember that the fall will be 100% from the current level.

As the value of money is likely to be destroyed in the next 5-10 years, wealth preservation is critical.  For individuals who want to protect themselves from total loss as fiat money dies, one or several gold coins are needed.

The 1980  gold price high of $850 would today be $21,900,  adjusted for real inflation

So gold at $1,800 today is grossly undervalued and unloved and likely to soon reflect the true value of the dollar.

          While it is difficult to pinpoint timing, from a fundamental perspective, it is my strong conviction that precious metals prices will have to reflect the real value of fiat currencies at some future point.

          Holding physical metals with part of your portfolio is critically important for many investors in my view.

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

A Stock Commentary

          Stocks continued their rally last week, extending the rally to two consecutive weeks.

          The chart on this page is a daily price chart of an exchange-traded fund that has the investment objective of tracking the Standard and Poor’s 500.

          There are two observations that I make from analyzing this chart that make me think the probability for lower stock prices is the most likely outcome in the near term.

          One, notice how the chart has ‘gapped up’ over the last two trading days of last week.  When gaps are observed on a price chart, they usually end up closing from my experience.  If that happens here, stock prices will have to go lower.

          Two, stocks are still well below their September 2 high.  This is a classic chart pattern with the recent rally being a countertrend rally before the next wave down.

          We will have to wait and see, but caution should be the order of the day in my view when it comes to holding stock positions.

          From a fundamental perspective, the economy is weakening which will create more downward pressure for stocks.

          On a real basis, adjusted for inflation, it is now totally evident to me that we are likely in a recession.  While we won’t know if that’s the case officially for a bit, the Bureau of Economic Analysis suggests the GDP is growing at an anemic 1%.  Economist John Williams, of the website, who tracks economic data using calculation methodologies that are no longer used, suggests that we are presently experiencing negative economic growth which is the definition of a recession.

          Strangely, despite the weakening economy, Americans are quitting their jobs at a record rate.  4.3 million Americans quit their jobs in August (Source:  That’s a record high by far.

          Looking at the period from April to August, 20 million Americans quit their jobs.  That is not a misprint.  And, it does not include retirements (Source:

          Many news outlets and analysts explain the record number of ‘quits’ on employees leaving lower-paying jobs to take higher-paying jobs.  This is from “Yahoo News” (Source above):

The musical chairs game that’s roiling the U.S. jobs market isn’t a blip, but rather marks a longer-lasting shift in leverage from employers to workers, experts say.

About 4.3 million Americans quit their jobs in August, the Labor Department said this week, the most on records dating back more than two decades. Many bolted to take advantage of 10.4 million job openings, often at higher pay — a historically high figure.

A large number of employees are resigning and moving to jobs that allow them to work remotely or at more flexible hours. Others are burned out after toiling away during the COVID-19 pandemic, switching careers after the health crisis led them to rethink their priorities, or opting to stay on the sidelines until the infection surges fueled by the delta variant ease.

          While some of the ‘quits’ can be attributed to 10.4 million job openings, simple math has one quickly concluding that’s no more than half the story since 20 million Americans have left their jobs voluntarily.

          So, what’s the rest of the story?

          Part of the explanation lies with the enhanced unemployment benefits that were awarded liberally.  Those enhanced benefits ceased on September 6.

          From April to August, however, workers could collect about $1,000 per week for sitting on the couch.  Certainly, that contributed to the record number of ‘quits’.

          This from Harry Wilmerding (Source:

Chris Markowski, the host of the podcast “The Watchdog on Wallstreet”, told the Daily Caller News Foundation that the record number of quits is attributed to the number of benefits being paid to workers, keeping them out of the workforce.

“Nobody wants to work, it’s everywhere,” Markowski told the DCNF.  “No one has any workers.  The government basically started universal basic income when they sent child care tax to individuals.”

The number of job openings declined to 10.4 million for August from 11.1 million in July, the BLS reported.  Experts to the DCNF that President Joe Biden’s new vaccination mandate is hurting an already thin labor market.

“We are already in an unprecedented labor market right now, and this mandate on private employers adds insult to injury because companies are already facing severe labor shortages,” Rachel Greszler, a research fellow and the Heritage Foundation, told the DCNF.

Greszler pointed to the healthcare and public safety industries who have already been hit hard by labor shortages and vaccination mandates.  Target has begun offering workers better pay and more bonuses in an effort to retain employees.

“If you look at history, there has never been a disparity between job openings and people looking for work, like we are seeing now.  It has never been that high,” Markowski told the DCNF.

          Wilmerding points out the proverbial elephant in the room that is affecting employment, the vaccine mandate.  Regardless of how you feel about the mandate or your own vaccination status, there are many workers who aren’t going to get the vaccine under any circumstances.  Those workers will quit their jobs rather than get the vaccine.  That’s another drag on employment.

          These labor factors will not help the economy recover quickly.  Instead, they will be an economic drag, adversely affecting profits and stock prices.

          Back to the chart published above.

          Stocks rallied and ‘gapped up’ this past week.  My guest on this week’s RLA Radio Program, Dr. Robert McHugh, offered this explanation of stock’s price action last week:

Stocks rose again Friday, October 15th, the exception being small caps which fell. The rise was mainly propelled by the large money center Wall Street banks, reporting strong earnings as they deployed the billions of free dollars printed by the Fed and handed over to them for their benefit. This of course comes at the expense of older Americans who saved cash for their latter days but have been robbed of a fair interest rate return on their savings due to the Fed’s decade-long policy of near-zero interest rates and profligate printing of money.

          This viewpoint validates an opinion that I’ve had for some time; we are in an everything bubble and all markets are artificial as a direct result of Fed easy money policies and massive currency creation.

          History teaches us that the bubble will burst with stocks and real estate being most affected.  I believe that stock investing moving ahead needs to be sector based or stocks held in a portfolio need to be hedged to protect from the bubble bursting.

          We discussed this in last week’s “Portfolio Watch” suggesting that stocks and real estate were just one “Lehman Moment” away from correcting.

          Finally, this week, the wealth gap created by Fed policies has never been more apparent. 

          This chart was published on “Zero Hedge” (Source: shows that the wealth of the top 1% now exceeds the middle 60%, defined as those in the 20% to 80% earnings tiers.

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

Is a “Lehman Moment” Approaching?

          Stocks rallied last week although, as I noted last week, technically speaking, stocks look weak.

          Last week, we noted that 4 stock market sectors were lagging.  That was a significant development since all sectors that comprise the Standard and Poor’s 500 were positive going into October; that changed.  It’s also relevant to note that historically speaking, many stock corrections have occurred or intensified in October.

          It may pay to be cautious moving ahead.

          There is often an event, sometimes referred to as a black swan event, that is the catalyst for a market correction to begin.  As an example, in 2007, it was the failure of Lehman.

          When one takes in everything happening around the globe politically, financially, and economically at the present time, there is no shortage of possibilities for a black swan event to serve as a catalyst to pop this bubble.

          A couple weeks ago, I wrote about Evergrande, the mammoth Chinese real estate investment company that was poised to default on its debt obligations.  I suggested that Evergrande could be the calendar year 2021 version of Lehman.  That could still be the case since the Evergrande story is far from over.

          This from “Zero Hedge” (Source: which suggests the worst-case scenario for Evergrande may now be a likely outcome:

No matter how the Evergrande drama plays out – whether it culminates with an uncontrolled, chaotic default and/or distressed asset sale liquidation, a controlled restructuring where bondholders get some compensation, or with Beijing blinking and bailing out the core pillar of China’s housing market – remember that Evergrande is just a symptom of the trends that have whipsawed China’s property market in the past year, which has seen significant contraction as a result of Beijing policies seeking to tighten financial conditions as part of Xi’s new “common prosperity” drive which among other things, seeks to make housing much more affordable to everyone, not just the richest.

As such, any contagion from the ongoing turmoil sweeping China’s heavily indebted property sector will impact not the banks, which are all state-owned entities and whose exposure to insolvent developers can easily be patched up by the state, but the property sector itself, which as Goldman recently calculated is worth $62 trillion making it the world’s largest asset classcontributes a mind-boggling 29% of Chinese GDP (compared to 6.2% in the US) and represents 62% of household wealth.

It’s also why we said that for Beijing the focus is not so much about Evegrande, but about preserving confidence in the property sector.

But first, a quick update on Evergrande, which – to nobody’s surprise – we learned today is expected to default on its offshore bond payment obligations imminently according to investment bank Moelis, which is advising a group of the cash-strapped developer’s bondholders. Evergrande, which is facing one of the country’s largest defaults as it wrestles with more than $300 billion of debt, has already missed coupon payments on dollar bonds twice last month.

The missed payments, worth a combined $131 million, have left global investors wondering if they will have to swallow large losses when 30-day grace periods end for coupons that were due on Sept. 23 and Sept. 29. A separate group of creditors to Jumbo Fortune Enterprises who are advised by White & Case, are also waiting for a $260 million bond principal repayment after a bond guaranteed by Evergrande matured last Friday, and unlike the offshore bonds, does not have a 30 day grace period (although five business days ‘would be allowed’ if the failure to pay were due to administrative or technical error).

The Jumbo Fortune payment is being closely watched because of the risks of cross-default for the real estate giant’s other dollar bonds; it would also be the firm’s first major miss on maturing notes instead of just coupon payments since regulators urged the developer to avoid a near-term default. And with the five business days up as of today, and with a payment yet to be made, it appears that this weekend we will get news of a declaration of involuntary default from the creditor group which will set in motion the Evegrande default dominoes.

          Without the “default dominoes” described in the article falling, China is already experiencing a real estate crisis.  The same “Zero Hedge” article reports that 90% of China’s top 100 property developers saw year-over-year sales decline by 36% in September.  Seems that the real estate collapse may have already begun in China and the Evergrande defaults will simply accelerate the decline.

          Meanwhile, the headlines regarding the US economy are far from positive suggesting that the combination of economic weakness and overvalued stocks may be especially susceptible to a 2021 Lehman moment.

          The September jobs report was extremely weak; this from “MSN”  (Source:

 “September jobs numbers came in lower than expected at 194,000, but it was a messy report with some big revisions to prior months and a sharp drop in the ‘household’ unemployment rate to 4.8%,” Deporre wrote on Real Money. “The market has had a minor reaction to the news, but interest rates continue to rise, so there are still concerns about inflation despite the weak employment news.”

            And this from Reuters on the topic (Source:

For a second straight month, U.S. job growth proved to be bitterly disappointing in September, coming in more than 300,000 jobs short of what many economists had penciled in. That’s after August’s report initially came in almost half a million jobs below economists’ consensus estimate.

            A weak jobs report is combined with an economy that is contracting on a real basis.  Many of you who are long-time readers are familiar with the work of John Williams of  Mr. Williams reports economic data using the methods that were used prior to those methods being manipulated to make the reported numbers look more favorable.

          The chart on this page ( illustrating the official GDP annual growth and Mr. Williams’ estimate of the actual growth rate shows that in real terms, the US economy is still contracting while the officially reported GDP growth rate barely reaches 1%.

            That at least partially explains the jobs report.

            Couple a contracting economy with increasing inflation and you have a recipe for a Lehman moment. 

            Mr. Williams also calculates the inflation rate using the methodology that was used prior to 1980.  Using that method to calculate the inflation rate, as you can see from the chart, the real inflation rate is about 13%, a lot higher than the officially reported Consumer Price Index of a little more than 5%.

            For lower and middle-class consumers in a contracting economy, rising prices are exceptionally difficult.

            Crude oil prices just topped $80 per barrel for the first time since 2014 (Source:|facebook&par=sharebar&fbclid=IwAR1lVdAgHf36bf7D3FWmj9ZppE40M5JV3GZ10k8E1qFATl4DzQsI-kUe6JQ) and food prices are up more than 30% in one year.

            While it’s possible the Lehman moment could be delayed, I believe it is inevitable.

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

Corruption at the Fed?

Stocks, by my analysis, weakened even more last week.  The first four trading days of the week were negative followed by a nice rally on Friday.  Despite the rally, technicals in the stock market are breaking down by my measure.

          4 of the 11 sectors that comprise the S&P 500 turned negative over the past month.  For many months prior, all 11 market sectors have had positive momentum.  Longer-term charts have been pointing to a potential downturn for the past couple of months and given current price action, we may be on the brink of a more major decline.

          There is no shortage of market or economic news to share with you.  Each week, I look for the one or two stories that are most likely to affect you or to be of interest to you.  This week, I will begin with a story that at best suggests that there are lax rules on trading on insider information at the Fed by Fed members and at worst confirms the level of corruption that many have suspected for a very long time.

          If you missed the story, two members of the Federal Reserve Board have resigned after their trading activities were revealed in an article in “The Wall Street Journal”.  This from “The New York Post” on September 27 (Source:

It was a “Fed letter day” as two regional Federal Reserve presidents announced early retirements following controversial stock trades that were exposed in news reports.

Monday morning, Boston Fed President Eric Rosengren announced he would retire nine months earlier than expected, citing health reasons. Hours later, Dallas Fed President Robert Kaplan said he would retire, acknowledging his recent trading activities had become a “distraction.”

Earlier this month, filings reported in the Wall Street Journal revealed that Kaplan executed multi-million dollar trades throughout 2020. Kaplan, a former Goldman Sachs executive owns millions of dollars worth of stock in major companies including Apple, Amazon, Facebook, Delta Airlines, and Tesla.

Kaplan will step down on Oct. 8, but defended his record in a statement, “During my tenure, I have adhered to all Federal Reserve ethical standards and policies.” Rosengren will retire Thursday. Both men are 64.

Following the disclosure that Kaplan and Rosengren had been actively trading while serving at the Federal Reserve, both men vowed to sell their stock by Sept. 30 and move their money to passive investment vehicles. Despite the pledge to end any controversial trades, both men still faced criticism for perceived conflicts of interest: shaping policy the monetary policy they could benefit from.

“While my personal saving and investment transactions have complied with the Federal Reserve’s ethics rules, I have decided to address even the appearance of any conflict of interest by taking the following steps,” Rosengren said in a statement earlier this month. Rosengren’s trades had been smaller than Kaplan — in the range of tens of thousands and hundreds of thousands.

          Here are a couple of Federal Reserve Bank Presidents making stock trades while making monetary policy decisions.  While the two men predictably stated that everything they did was within the rules when one considers what former Dallas Federal Reserve Bank President Richard Fisher revealed in a CNBC interview in 2016 after he’d left the post of President.  (Source:

“I spent 10 years (through last March) as a participant in the deliberations of the Federal Open Market Committee, setting monetary policy for the U.S. The purpose of zero interest rates engineered by the FOMC, together with the massive asset purchases of Treasuries and agency securities known as quantitative easing, was to create a wealth effect for the real economy by jump-starting the bond and equity markets.”

The impact we had expected for the economy and for the markets was achieved. By February of 2009, the Fed had purchased over $1 trillion in securities. With interest rates throughout the yield curve moving in the direction of eventually resting at the lowest levels in 239 years of history, the stock market reacted: It bottomed in the first week of March of 2009 and then rose dramatically through 2014. The addition of a third round of QE, which had the Fed buying $85 billion per month of securities to ultimately expand its balance sheet to over $4.5 trillion, juiced the markets.

            It’s interesting that Mr. Kaplan succeeded Mr. Fisher as President of the Dallas Federal Reserve in 2015.  (There was an interim President for 6 months between the tenures of Fisher and Kaplan)

            Fisher freely admitted that the Federal Reserve’s objective, while he was President of the Dallas Fed, was to jump-start the bond and equity markets.  Given that stocks have risen to all-time highs since Mr. Fisher left his post and interest rates have fallen to all-time lows, is there any reason to think that the Fed quit “jump-starting the bond and equity markets”?

            Something smells fishy?

            And, does anyone else think it’s interesting that both men agreed to sell their stock by September 30 only after they got caught?

            Ryan McMaken wrote a piece3 that was published on Mises Wire commenting on this topic (Source:  Here are some brief excerpts although I would encourage you to read the entire article.

Fed Chairman Jerome Powell has decided the Fed ought to “review” its ethics policies after it was revealed that high-ranking personnel at the Fed were actively trading stocks even as the Fed was busy pulling the levers on monetary policy.

Specifically, Dallas Fed President Robert Kaplan made numerous trades worth $1 million or more last year. Meanwhile, Boston Fed President Eric Rosengren last year was making large trades in real estate investment trusts, possibly in the six-figure range.1

The problem here is obvious to any normal person who watches the Fed. 

The Fed is not just an instrument of monetary policy, but a regulator of financial institutions. The Fed regulates bank holding companies, foreign banks working in the US, hundreds of state member banks, and other institutions as well. This gives Fed policymakers an enormous amount of control over the fortunes of many financial institutions.

Moreover, Fed policy can be—and, these days, usually is—instrumental in pushing up stock prices and real estate prices through monetary inflation. Since the Great Recession—and arguably since the late 1980s, with the “Greenspan put”—the Fed has been instrumental in subsidizing stock prices through an implied promise that the Fed will rush to the rescue if financial markets face any real risk of falling prices. Since the Great Recession especially, the Fed’s unconventional monetary policy has meant the Fed has sucked up trillions of dollars in bonds and mortgage debt. This means both a direct subsidy of real estate investments and also—as Fed asset purchases push down interest rates—a flight to yield in the stock market.

Not surprisingly, we can see a clear correlation between the Fed’s easy money policy and a supercharged stock market.

The information available to these regulators and policymakers also provides an enormous amount of insider information not available to outsiders. So, perhaps, Fed officials should divest themselves of their stock and real estate portfolios, at the very least?

For Rosengren and Kaplan, however, this is crazy talk, since both men insisted their actions were “consistent with their respective bank’s code of conduct policies.” This may very well be true, although this only illustrates how the Federal Reserve System is soft on potential corruption within the ranks of its leadership.

After all, Rosengren and Kaplan only offered to sell their holdings after a public scandal broke out.

The position of Kaplan and Rosengren is typical for government officials—which is what Fed officials essentially are. This is also common in Congress: what matters is finding loopholes allowing the official to maximize his personal wealth, capitalizing on his ability to affect regulations and conditions that affect the prices of his investments. All that matters is that the lawyers say it’s okay.

It’s not surprising, of course, that Congress is chock-full of millionaires. The Fed’s boards aren’t exactly populated by “regular folk.”

And this may be significant in helping us understand how Fed policy has been so lopsided in favoring the ultrawealthy while imposing price inflation and a higher cost of living on people of more ordinary means. Fed policy has been extremely successful from the point of view of billionaires and hedge fund managers holding huge stock portfolios and real estate holdings. The prices just keep going up, and at rates that outpace official price inflation rates. 

But for first-time home buyers, and the many millions of American workers who own few stocks? They just face higher prices for housing, education, healthcare, and now even food. Investing is out of the question because ultralow interest rate policy makes traditional, conservative, low-risk investments (like savings accounts) basically worthless.         

            In the past, I’ve commented on the widening wealth gap is largely attributable to Federal Reserve policy.  Here we see firsthand why that is true.

            Ron Paul, when he suggested decades ago that we should end the Fed was well ahead of his time.

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

More IRA Changes Coming

          This week’s post will be a bit different than what you are used to seeing each week.  This week, I want to bring you up to speed on some proposed changes out of Washington relating to Roth IRA accounts.

          I’ve often stated in this weekly publication and on my radio program and podcast that I am of the opinion that the tax-hungry politicians will find retirement accounts a difficult target to resist given the numbers

          According to the Investment Company Institute, at the close of the first quarter of 2021, the total assets held in retirement accounts in the United States was $35.4 trillion.  (Source:

          Given that the ‘official’ national debt is approaching $30 trillion, if politicians could get their hands on the retirement account assets, the nation’s fiscal problems could be solved temporarily.  Actually very temporarily given the downright out-of-control spending that has been characteristic of Washington politicians for the past couple of decades.  As we are all keenly aware, spending by the Washington politicians has only grown increasingly irresponsible and wild as time has passed.

          But, I digress.

          In my book “Economic Consequences”, published ten years ago, I first made this point.  At that time, the Fed had recently begun quantitative easing or currency creation out of thin air as a temporary, emergency measure.

          I suggested in the book that history taught us currency creation programs were rarely temporary, rather they become policy until the consequences of currency creation are worse than dealing with the consequences of debt excesses.  I also suggested that retirement accounts would likely prove to be a tantalizing tax target.

          In the book, I offered examples of countries that had actually taken control of some of the retirement accounts of the citizens by requiring that retirement account assets be invested in that country’s government bonds “in the interest of retirement safety and stability.”

          I also suggested that politicians could raise significant revenues at the expense of those who’s worked hard and accumulated assets in retirement accounts by changing tax laws.

          Fortunately, there has been no requirement to invest retirement account assets in government bonds, but over the past year or so, tax rules relating to IRA’s and other retirement accounts have changed.

          For example, the SECURE Act, while raising the age at which required minimum distributions need to be taken from a retirement account from 70 ½ years old to age 72, also killed the stretch out IRA.

          If you’re not familiar with a stretch-out IRA, it allowed a non-spouse beneficiary on a retirement account (typically a child), to inherit an IRA and spread the unpaid tax liability out over the beneficiary’s lifetime.  For example, a 50-year old inheriting an IRA with a 35-year life expectancy could use a stretch-out IRA by taking a distribution of 1/35th of the inherited IRA account in year one; followed by a distribution the next year of 1/34th of the remaining account and so on.

          After the SECURE Act, all taxes on an inherited IRA must generally be paid within 10 years.

          In my latest book, “Retirement Roadmap”, I do a hypothetical analysis on how this affects the beneficiary of a retirement account.  I assume a 50-year old inherits a $1,000,000 IRA before the SECURE Act became law and used the stretch-out option.  Assuming the inherited IRA account grows at a rate of 5% per year and the 50-year old beneficiary is in the 25% tax bracket, the beneficiary realizes an after-tax net of more than $1.9 million from the $1 million inherited IRA.

          If we use the same 5% growth assumption for inherited IRA assets but now assume the taxes on the inherited IRA need to be paid within 10 years, the IRA beneficiary now receives an after-tax net of about half of what the beneficiary would have received using the stretch out strategy.

          Even more interesting is the IRS’ tax take over the first 10 years after inheritance.  After the SECURE Act, based on our stated assumptions, the IRS receives more than $225,000 in additional taxes during the first 10 years!

          It’s no wonder that when the SECURE Act was proposed, “The Wall Street Journal” ran an op-ed piece titled “They’re Coming for Your IRA”.

          Now, the Washington politicians are at it again; proposing more IRA tax changes as well as limits on Roth conversions.  Here are selected excerpts from a recent article in “The Wall Street Journal” (Source:–rJ47yrItWmzPpgixmR_VxPJb8uC-iD8CgCo)

Many Americans are using a previously little-known tax method to boost their savings. Now, the government is trying to stop it.

The tax strategy at issue is the mega-backdoor Roth conversion and it has allowed some Americans to amass sizable balances in tax-free Roth retirement accounts. On Sept. 15, the House Ways and Means Committee approved legislation from House Democrats that would prohibit use of the mega-backdoor Roth conversion starting Jan. 1, 2022.

The proposal is one of a series of measures Democrats are backing in an effort to prevent the wealthiest Americans from shielding multimillion-dollar retirement balances from taxes. The move is part of a broader agenda that includes raising taxes on higher-income Americans and cracking down on tax avoidance to help pay for measures including the party’s $3.5 trillion healthcare, education and climate bill.

The legislation also proposes eliminating Roth conversions of after-tax contributions to traditional individual retirement accounts starting Jan. 1, 2022. It would require most people with aggregate retirement-account balances above $10 million to take distributions, regardless of their age. And it would ban holding unregistered securities, including private equity, in IRAs.

Starting in 2032, the legislation would prevent single people earning more than $400,000 a year and married couples with incomes above $450,000 from converting pretax retirement-account money to Roth accounts.

          Admittedly, the proposed changes won’t affect the majority of those who do Roth IRA conversions or participate in company retirement plans, at least initially.

          Color me cynical, but being a student of history and studying how taxes and tax policy come to be, tax changes and tax increases are always imposed on the high earners first.  But then, more times than not in my judgment, these tax increases, and tax changes extend to more and more taxpayers.

          For example, when the income tax was introduced in 1913, it originally significantly affected only VERY high earners.

          After a $3,000 standard deduction, the income tax rate was 1% to $20,000.  Only income earners who had incomes in excess of $500,000 were taxed at a rate of 7%.

          Let me attempt to put those numbers in context, adjusting for the diminished purchasing power of today’s US Dollar.

          Today’s dollar has lost more than 96% of its purchasing power since 1913.  That means a dollar today is the 1913 equivalent of 4 cents.

          Doing a little math, one quickly concludes that a $3,000 standard deduction in 1913 would be the equivalent of a $75,000 deduction today.

          Imagine getting a $75,000 deduction and then paying income tax of 1% on income over and above the $75,000 until your income reached the 1913 equivalent of $20,000 or about $500,000 today.

          The top tax bracket in 1913, 7% on incomes over $500,000 would be like entering the highest tax bracket today with $12,500,000 of income.

          In 1913, there was no tax withholding by employers.  However, after-tax withholding began and the Social Security Act was passed, even part-time employees were paying taxes.

          My point is this – if you have not seriously examined a Roth conversion strategy for your individual financial situation, you should do so.

          I discuss this at length in my recent book “Retirement Roadmap” which was a number one Amazon best-seller thanks to many of you supporting the book.

          Given the negative tax momentum surrounding retirement accounts presently and the fact that tax rates will increase in 2026 if Congress doesn’t change them before that, now may be the perfect time to look at the ultimate tax liability on your retirement accounts.

          Procrastinating could be costly.

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

Debt Consequences

          Worldwide debt is at record levels.  When the currency creation stops or slows, I expect to see an ugly deflationary environment emerge as the debt is purged from the system.

          It doesn’t take an economist to realize that when there is too much debt to be paid, some of it won’t be paid.  That means the lenders lose money as it disappears from the financial system.

          Reuters reported that global debt levels are now approaching a record $300 trillion.  (Source:  It’s perfectly reasonable to assume that much of that debt will never be paid, meaning financial losses for those who hold the debt.

          I fully expect to see defaults on debt all around the world in the relatively near future.  It may be these debt defaults that further spook equity markets.  One big Chinese default may already be spooking stocks as equities had another tough week last week.

          Evergrande is a Chinese company that has huge amounts of debt.  If you’re not familiar with Evergrande or haven’t heard this story out of China yet, here’s a little background about the company courtesy of Yahoo News (Source:

With a presence in more than 280 cities, Evergrande is one of the largest private companies in China and one of its leading real estate developers.

The firm made its wealth over decades of rapid property development and wealth accumulation as China’s reforms opened up the economy.

Its president, Xu Jiayin — also known as Hui Ka Yan in Cantonese — was at one point China’s richest man but has seen his wealth slashed from $43 billion in 2017 to less than $9 billion now.

What does it do?

While predominantly a real estate firm, in recent years the group has embarked on an all-out diversification.

Outside of property development, it is now best known in China for its football club Guangzhou FC, formerly Guangzhou Evergrande.

The group is also present in the flourishing mineral water and food market, with its Evergrande Spring brand. It has also built children’s amusement parks, which it boasted were “bigger” than rival Disney’s.

Evergrande has also invested in tourism, digital operations, insurance, and health.

            This past week, the big news out of China was that Evergrande had more debt than the company could pay.  The company owes more than $300 billion to creditors.  This from “Credit Bubble Bulletin” (emphasis added): (Source:

Evergrande owes over $300 billion – to banks and non-bank financial institutions, domestic and international bondholders, suppliers, and apartment buyers. It has bank borrowings of $90 billion, including from the Agricultural Bank of China, China Minsheng Banking Corp, and China CITIC Bank Corp (reports have 128 banks with exposure). Thousands of suppliers are on the hook for $100 billion.
It appears an Evergrande debt restructuring is inevitable. From a few decades of close observation, these types of situations generally prove worse than even the more bearish analysts fear. Assume ugly and messy. The presumption all along – by bankers, investors,
and apartment purchasers – was that Beijing would never allow the collapse of such a huge player. This fundamental market perception is in serious jeopardy.
Evergrande is the most indebted of a highly levered Chinese developer sector (top three in revenues). It “owns more than 1,300 projects in more than 280 cities.” Evergrande employs 200,000 – and “indirectly helps sustain more than 3.8 million jobs each year.”
Evergrande epitomizes China’s historic Credit Bubble. It has borrowed and spent lavishly, in what history will surely view as a company that operated at the epicenter of an extraordinary Bubble of asset inflation, speculation, and reckless debt-financed malinvestment. Estimates have Evergrande bondholders receiving 25 cents on the dollar in a restructuring. It borrowed $20 billion in the booming off-shore dollar bond marketplace. As a focal point of the global Bubble in leveraged speculation, China’s offshore debt market has ballooned during this protracted cycle. From the FT (Hudson Lockett and Thomas Hale): “Chinese issuers face their largest-ever wave of dollar bond maturities this year at $118bn, according to Refinitiv. But even that is dwarfed by the Rmb7.8tn ($1.2tn) of onshore debt maturing in 2021. The latter figure could have big repercussions for offshore bondholders, especially if the restructuring of onshore debt is prioritized.”

            The restructuring referenced in the article is now happening and investors are not happy.  This from “Zero Hedge” (Source:

As the collapse of Evergrande reverberates throughout the Chinese economy, pissed-off retail investors have gone from storming the company’s headquarters to taking management hostage, according to The Straits Times, citing posts ‘making the rounds’ on social media.

What we know so far: over 70,000 retail investors forked over vast sums of money, in some cases their entire life savings, after the country’s second-largest, ‘too big to fail’ property developer wooed them with promises of 10%+ annual returns. And while the company most likely is TBTF (as you can read in gory detail here, although Beijing has yet to make an official proclamation), these anxious retail investors may be in more of an “Alive” situation than a Sully Sullenberger landing when it comes to resolving this mess.

After accumulating some 1.97 trillion yuan (US$410 billion) in liabilities, the company – which became the country’s largest high-yield dollar bond issuer (16% of all outstanding notes) – sparked protests across the country earlier this week after announcing they were forced to delay payments on up to 40 billion yuan in wealth management products.

As we noted earlier Thursday, in an effort to appease its angry (and very soon, poor) stakeholders, Evergrande plans to let consumers and staff bid on discounted apartments this month as compensation for billions in overdue investment products as the embattled developer seeks to preserve cash, according to people familiar with the matter.

According to Bloombergthe company will organize an online property event by Sept. 30 for investors who opt for real estate in lieu of cash. The world’s most indebted property developer is pushing the discounted real estate as the preferred of three options for angry investors seeking repayments.

The plan, it would appear, did not go off quite as planned: in response, nearly 100 investors stormed Evergrande’s headquarters to demand their money back.

          It remains to be seen exactly how this will play out or if the Chinese Government might step in, but this story makes my point; an economy that expands via debt accumulation and currency creation is not a healthy economy.  Eventually, excessive debt levels need to be dealt with.

          The concern is that this may be a “Lehman Moment” for China.  A $300 billion default by Evergrande could affect the banking sector as well as the financial markets.

          When economies and the financial system are as fragile as they are presently, a collapse can begin with just one event.  I believe we may be at that point presently.

          While it is too early to tell how the Evergrande situation will play out, there will be other Evergrande’s given current worldwide debt levels and one of these events will be the straw that breaks the proverbial camels’ back.  It will be that event that is the catalyst for the inevitable reversal.

          As I’ve discussed here, in my opinion, there are many other reasons that a reversal will have to occur.  On top of unmanageable debt levels, there is unsustainable currency creation that has fueled speculation in financial markets and created inflation in the economy.  The policy of disincentivizing work has led to supply shortages that will further harm the economy.

          Jim Rickards, a past guest on my radio program, wrote a piece this past week titled “No Recovery Until 2045?”  (Source:

          In the excellent article, Mr. Rickards offers an interesting perspective.  He notes that when debt levels get high enough, stimulus efforts fail.  He notes that when sovereign debt exceeds 90% of the country’s economic output, the stimulus achieved is less than the new debt added to fund the stimulus.  In other words, the greater the debt of a country, the more the return on stimulus investment diminishes.

         At the present time, US national debt to GDP exceeds 130%.  We are well past the critical 90% mark.  The more debt-funded stimulus packages are attempted from this point on, the less effective they will be. 

         The current economic numbers bear this out; we have inflation and a contracting economy with both inflation and economic contraction likely to increase in the near term.

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

What Will the Next Recession Look Like?

          I have frequently commented on my belief that the economy and financial markets are extremely artificial, with asset prices rising largely due to massive levels of currency created by the Federal Reserve.

          Artificial economies and artificial markets always, eventually reverse following the basic rules of finance and economics.

          I have often quoted the late economist Hebert Stein when it comes to currency creation.  Mr. Stein stated that “if something cannot go on forever, it will stop”.  That statement is as profound as it is simplistic.

          As I’ve discussed in “Portfolio Watch” many times, currency creation will eventually cease.  It will end proactively or reactively – but it will end.

          The question is that when currency creation does stop what will the economy and financial markets look like?  How will you be affected?

          It is the answer to this question that matters.

          In this issue of “Portfolio Watch”, we will consider the answer to this question.

          John Wolfenbarger recently published a piece on this topic at  (Source:  It is a well-done article.

          In his article, Wolfenbarger notes, as I did in last week’s “Portfolio Watch” that stocks are extremely overvalued.

          In last week’s issue, I noted that the increase in stock prices is very closely correlated to the Federal Reserve’s level of currency creation. 

          Wolfenbarger utilizes the most often cited market valuation metric, the “Buffet Indicator”, to make his case.

          The chart above illustrates the Buffet Indicator, a.k.a. Stock Market Capitalization to Gross Domestic Product.  Note from the comments on the chart that stocks are now 30% higher than at the tech stock bubble peak in calendar year 2000 and pushing twice as high as at the time of the financial crises.

          Wolfenbarger also rightly observes that real estate prices are also at levels that one might consider to be nosebleed levels.  Using the most commonly referenced real estate valuation indicator, one discovers that real estate values are now 27% higher than at the peak of the housing bubble in 2006.

          The point is that when the next recession hits, asset prices are more inflated than in the past significantly increasing the likelihood of a catastrophic decline in asset values.

          Couple these abnormally high asset valuation levels with the fact that the US economy has weakened over the past two decades and we have the makings of a perfect storm when the next recession hits.

          A weaker economy should not mean higher stock prices.  I’m certain that without the extreme easy money policies that the Fed has pursued over that time frame, asset prices today would be far lower than they are presently.

          Here is an excerpt from Wolfenbarger’s article:

The US economy is not as strong as it used to be. That is certainly true in the wake of the covid pandemic, but it has also been true for the past two decades. All of the taxes, regulations, and other government interventions in the economy in recent decades have created a weaker and more fragile economy that will make the next recession even worse.

The chart below of industrial production shows it is only 8 percent higher than at the 2000 peak and 1 percent lower than at the 2007 peak. It has nearly flatlined over the past two decades. That is much weaker than the 3.9 percent annual growth in industrial production from 1920 to 2000.

          Consider that for a moment.  Asset prices are at all-time highs and industrial production has declined since the financial crises.

          That’s economic math that doesn’t add up and it goes a long way to proving my point that the current environment is artificial.

          Wolfenbarger makes another excellent point in his piece.  Debt levels are also near historical highs.  Often I have discussed the relationship between asset price bubbles and easy credit.  Briefly, asset bubbles cannot exist without easy credit.  Easy credit is “bubble fuel”.

          Wolfenbarger puts it this way:

Excessive debt has been the problem with every financial crisis in history due to prior money creation out of thin air, so the next one promises to be one for the history books, given these unprecedented high debt levels. Debt liquidation and defaults will lead to deflation, as we saw in the Great Recession and even more so in the Great Depression.

          I have frequently quoted Thomas Jefferson who noted that if the American people ever allow private banks to control the issue of their currency, first by inflation then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the very continent their fathers conquered.

          We are seeing inflation presently; extreme deflation will have to follow at some future point to purge the excess debt from the system.

          Finally, Wolfenbarger makes the point that the Fed is out of policy options.

But money created out of thin air does not create new goods and services that improve living standards. If it did, a place like Zimbabwe would be the wealthiest country in the world. However, newly created money can flow into financial assets, which helps explain why their valuation levels are so high.

The graph below shows “Austrian” money supply (AMS), the best measure of money supply that is consistent with this Austrian school of economics definition (although it no longer includes traveler’s checks, which have been discontinued in the Fed’s database due to limited use these days). AMS is up 40 percent since February 2020 and is up an astounding 225 percent since the Great Recession ended in June 2009!

This is well above the money supply growth that drove the Roaring Twenties and ultimately led to the Great Depression of the 1930s, as detailed in economist Murray N. Rothbard’s definitive history of that period, “America’s Great Depression.”          The “Revenue Sourcing” planning process hedges for inflation and deflation.  I believe it is the only way to survive the coming recession.

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

Stocks and the Fed

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

            The Fed may have gotten some cover this past week for staying the course.  The jobs report was a huge disappointment to the downside.  This from “Zero Hedge” (Source:

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

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

          The economy is slowing. 

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

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