Possible Economic Outcomes

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

          Stagflation is defined as inflation combined with economic contraction.

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

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

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

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

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

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

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

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

          This from “CNN Business”:

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

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

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

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

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

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

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

          Stocks are declining in 2022.

         

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

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

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

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

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

          As noted above, more easing will mean more inflation.

          There are three economic outcomes here, in my view:

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

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

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

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

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

          And that seems to be what is occurring.

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

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

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

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

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

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

            That is a trend that is also unsustainable.

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

            A reversal of these unsustainable trends is inevitable.

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

How Evolving Money Affects Investing Markets

         I just finished writing a special report for the month of May that is titled, “How Evolving Money Affects Investing Markets”.

          This week, I want to give you a preview as I think it’s important to understand how evolving money leads to economic seasons and what I believe are predictable investing conditions.

          While the whole idea of economic seasons may sound a bit crazy on the surface, a study of history has one concluding that these economic seasons have repeated themselves over and over again.

The severity and intensity of each season is affected by the currency system that is in place as the economic season changes.

There are many economists who have written extensively on the topic of economic seasons.  Mr. Ian Gordon, of the Long Wave Group, now retired, introduced me to the concepts many years ago.  It was an important “connect the dots” moment for me helping me understand why financial markets were doing what they did.

While economic seasons are predictable, the exact time at which one season ends and the next economic season begins is not precise from a forecasting perspective.  Yet, like the seasons of the year, we know that at some point, summer weather will follow spring weather.

For ease in understanding these economic seasons, we will name them after the seasons of the year: spring, summer, autumn, and winter.  Like the four seasons of the year, each economic season also has its own characteristics.

Here is a brief overview of the economic seasons and the characteristics of each one.  (These definitions are taken from the “New Retirement Rules” book.)

Spring Economic Season

During spring, an economy experiences a gradual increase in business and employment. Consumer confidence gradually increases. Consumer prices begin a gradual increase compared to the levels seen during the previous cycle (the winter cycle). Stock prices rise and reach a peak at the end of the spring cycle, and credit gradually expands. At the beginning of the spring cycle, overall debt levels are low.

Summer Economic Season

During summer, an economy sees an increase in the currency supply, which leads to inflation. Gold prices reach a significant peak at the end of the summer period. Interest rates rise rapidly and peak at the end of the summer season. Stocks are under pressure and decline throughout the period, reaching a low at the end of the summer cycle.

Autumn Economic Season

During autumn, money is plentiful and gold prices fall, reaching a gold bear market low by the end of the autumn season. During autumn, there is a massive stock bull market and much speculation. Financial fraud is prevalent, and real estate prices rise significantly due to speculation. Debt levels are astronomical. Consumer confidence is at an all-time high due to high stock prices, high real estate prices, and plentiful jobs.

Winter Economic Season

During winter, an economy experiences a crippling credit crisis and money becomes scarce. Financial institutions are in trouble. There are unprecedented bankruptcies at the personal, corporate, and government levels. There is a credit crunch, and interest rates rise. There is an international monetary crisis.

          The economist who first discovered that these economic cycles exist was Nikolai Kondratieff who outlined his work in a book first published in 1925 titled, “The Major Economic Cycles”.

          The economic winter season from 1929 to 1949 was particularly devastating.  That period of time we now refer to as The Great Depression.

          The reason the depression occurred was that debt levels were unsustainable.  During a winter economic season or a depression, debt needs to be purged from the system.

          There are only two ways to eliminate debt, pay it down by making principal and interest payments or default on it by walking away from the responsibility to repay the debt.

          It’s instructive to quickly look at each of the winter seasons in US history and then draw a parallel to today.

          Let’s begin with the winter season that began in 1837.  Like the winter season that commenced in 1929 with the crash of the stock market, the winter season that began in 1837 was catalyzed by the Panic of 1837.

          It’s interesting that the winter season of 1837 was preceded by easy money policies.  After the War of 1812, the country was dealing with mammoth levels of debt.  The politicians of the day predictably established a central bank that could create paper currency with a loose link to precious metals.

          This loose link to metals characterizes the money systems in place prior to the first three winter seasons in US history.  Policymakers reduced the backing of the paper currency by precious metals without eliminating the link and making the currency a pure fiat currency.

          This is what happened with the establishment of the Second National Bank which opened for business in January of 1817.  The bank began to issue paper notes that could be redeemed for precious metals.  As typically happens, the bank issued more paper currency than it had precious metals to back resulting in a large increase in the currency supply.

          It was the early 1800’s version of quantitative easing or currency creation.

          It was inevitable that this expansion of the currency supply would lead to a price bubble in some assets.  With the Panic of 1837, stocks and real estate crashed and banks failed.

          The second winter season in US history occurred after the Civil War.  In order to fund the Civil War, President Lincoln and congress changed the banking rules to allow US Dollars to be backed by gold, silver, and US Government debt.  Prior to these changes being made, gold and silver were money.

          These changes resulted in a huge increase in the currency supply and predictably, bubbles formed in real estate and stocks. 

          Stocks and real estate collapsed and banks failed during the Long Depression of 1873.

          The country once again returned to a currency system that was more sound, using gold and silver as currency.

          The Federal Reserve, the nation’s third central bank and the same central bank that controls monetary policy today, was founded in 1913.

          Almost immediately, the Fed reduced the backing of the US Dollar by gold from 100% backed by gold to only 40% backed by gold creating a large increase in the currency supply.

          Predictably, the Roaring Twenties followed this evolution to more loose money policies.  Stock prices, fueled by extremely loose margin requirements, soared.  As did real estate prices with the State of Florida being the site of wildly increasing real estate values.

          The Great Depression followed.  Stock prices fell as did real estate prices and banks failed.

         In each of these historical, U.S.-based winter economic seasons, easy money allowed for the building of debt-fueled bubbles that eventually collapsed.

          It’s also important to point out that in each of these historical examples, the US Dollar was still linked to gold to some extent.

          That brings us to where we now find ourselves.

          There has been no link between the US Dollar and a precious metal since 1971 making the US Dollar a full fiat currency for more than 50 years.  That has allowed debt levels in the private and public sectors to soar.        

          Around 15 years ago, real estate prices began to fall and stock prices followed.  The Federal Reserve’s response has been currency creation literally out of thin air.

          That action has reinflated what I call the “everything bubble”. 

          At some point, the everything bubble will deflate resulting in what I believe could be the worst economic winter season in US history.

          Why do I theorize this?

          Simple, debt levels are far more extended presently than at any time historically.  That will have to make the debt purging process more painful.

          We may now be seeing the beginning of the effects of debt excesses.  Stocks are falling and interest rates are rising.

          I fully expect the Fed to reverse course and ease in a last-ditch effort to avoid a deflationary outcome but history teaches us that is where we will ultimately end up. 

          The question is how much inflation we endure in the meantime.  And, the answer to that question lies with the Fed.

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

Inflation Heats Up, Are Price Controls Coming

            The big economic news the week before last week was the big decline in US Treasuries.  Last week, the big economic news was once again the big decline in US Treasuries.

            While the US Dollar Index is higher once again this week, as I discussed last week, it’s important to remember that this measure of the US Dollar’s purchasing power is a relative measure and compares the purchasing power of the US Dollar to a weighted basket of 6 other fiat currencies.

            On an absolute basis, the US Dollar’s purchasing power is declining as the official inflation rate rose to 8.5% last week.  The real inflation rate is much higher than this heavily manipulated Consumer Price Index number.

            John Williams, the economist at www.shadowstats.com, uses the inflation rate calculation methodology that was used pre-1980 to determine the inflation rate.  Using that calculation methodology, which was used the last time we had inflation at these levels, the current inflation rate is 16.77%.

            That feels more like what we are all experiencing.

            Inflation levels are now either at or approaching levels that will cause more inflation.  When inflation levels get high enough, the inflation cycle begins to feed on itself, creating even more inflation.

            In today’s inflationary environment, it’s nearly impossible for a builder to comfortably and confidently quote a proposed building project.  Assuming a building project will take a year or two to complete, the prices of the materials needed to complete the project will likely rise enough by the time the materials are actually needed to render any current quote attempts fruitless.

               The same could be said about farming.  Input costs have risen a staggering amount.  Many farmers are not planting the same crops or the same quantity of crops as in past years due to uncertainty about the ability to make a profit.

            And, of course, there is always the concern about what politicians might decide to do about inflation.  That concern is rightfully heightened in an election year like this one.

            In past posts, I have forecast that we will likely see price controls or perhaps even rationing of certain products, especially as the election approaches.

            While history unequivocally teaches us that price controls never work, that fact has never kept self-serving politicians from implementing price controls on an uninformed public to make it seem like the politicians are doing something to address the problem.

            In the 1970’s, after stating that “the (expletive deleted) things don’t work” referring to price controls, President Nixon reversed course and implemented price controls when his advisor reminded him he needed to navigate re-election. 

            Ironically, Nixon was right.  Price controls didn’t work.  As always happens price controls lead to empty store shelves as producers stop producing when the profit incentive is gone.

            Now, as I predicted we would see earlier this year, there is talk among some Washington politicians to implement price controls.  Here is an excerpt from an op-ed piece written by Stephen Moore in “The New York Post” (Source: https://nypost.com/2022/04/06/threatened-price-controls-wont-curb-biden-flation/)

Now the Biden administration complains that producers are taking advantage of product shortages and supply-chain constraints by jacking up their prices. He wants to penalize the meat packers for the high beef prices, the poultry industry for the rising expense of a chicken dinner, the drug companies for the high cost of pharmaceuticals and the oil and gas industry for recording record profits while gas prices soar. 

He wants the Federal Trade Commission and other regulatory agencies to impose price ceilings to be monitored by an army of federal price-control police.

This is economic amnesia. We tried all these government manipulations in the 1960s and 1970s. The ruinous price regulations on industry made inflation worse. Back then we had Soviet-style central planners imposing price limits on everything: long-distance phone calls, oil and gas, airlines, rail service, trucking and banking services.

This was supposed to protect consumers, but by making it illegal for prices to rise, we got hit with empty shelves, shortages and gas lines.

The price ceilings became de facto price floors. Inflation shot up from 5% to 8% to 10% by 1980.

Even Democrats Jimmy Carter and Ted Kennedy realized that things were going haywire. They took the lead in ushering in an era of decontrol of prices. And when President Ronald Reagan was elected, his first executive order was to end oil and gas price controls.

What was the result? A famous study by the Brookings Institution found that the airline prices collapsed by one-third (ushering in an era of everyday Americans being able to afford to fly here, there and everywhere) and banking charges fell by half, as did trucking and rail costs. The price of oil briefly rose when the price controls were lifted, but then as energy supplies were unleashed, prices fell by more than 60%.

Brookings found “in every industry” in which price controls were lifted, “prices fell and service quality improved.”

Why is this history lesson so hard for the modern Democrats to learn? 

Just this week, Bernie Sanders called for a backdoor form of price controls with his proposal of a 95% windfall-profits tax on such firms as oil companies, pharmaceuticals, and meat producers. No one told the senator that when you tax something, you get less of it. This will only make supply-chain problems worse and fuel even higher prices.

Businesses aren’t charities. And it’s not “greed” or price gouging to make a profit. Adam Smith taught us in 1776 that it’s profit, not “benevolence,” that induces companies to produce more of the things we want at prices we can afford. That eventually brings prices down. 

How depressing that here we are 250 years later and our politicians in Washington still don’t understand that enduring economic lesson.

            Hopefully, price controls don’t get taken out of the tired bag of tricks, but this is an election year and inflation is continuing to accelerate.  I’m hopeful but not holding my breath.

            The reality is that inflation is a result of extremely loose, I would argue reckless, monetary policy.  Paul Volcker ended the inflation in the 1970s by raising interest rates to nearly 20 percent which caused the money supply to meaningfully contract.

            Here’s the problem with following Volcker’s plan of action today – the Federal Reserve is indirectly monetizing government deficit spending.  To tighten monetary policy permanently, the federal government’s budget will also have to be tightened.

            That’s why I believe the Fed’s current actions to tighten will be reversed at some future point citing another economic emergency that requires more currency creation.

            Meanwhile, following increasing yields on US Treasuries, mortgage rates rose as well with interest rates on a 30-year mortgage now rising past 5% for the first time in more than 10 years.  This from “The Guam Daily Post” (Source:  https://www.postguam.com/business/real_estate/mortgage-rates-hit-5-ushering-in-new-economic-uncertainty/article_396d6358-bc70-11ec-b78e-8b82b1f2f504.html)

Mortgage rates swelled above 5% for the first time in more than a decade – an unexpectedly rapid ascent that has begun to temper the U.S. housing boom and could usher new uncertainty into an economy dogged by soaring inflation.

The 30-year fixed-rate mortgage, the most popular home loan product, hit the threshold just five weeks after surpassing 4%, according to Freddie Mac data released Thursday. The average has not been this high since February 2011.

The run-up comes as the Federal Reserve has launched a major initiative to rein in the highest inflation in 40 years. Fed officials are betting that higher interest rates will slash inflation and recalibrate the job market. But their plan also rests on the assumption that higher rates will cool demand for housing, especially while homes themselves are in such short supply.

Low rates fueled the revival of the U.S. housing market after the Great Recession and have helped drive home prices to record levels. But after two years of hovering at historical lows, rates have been on a tear: In January, the 30-year fixed average was 3.22%. It was 3.04% a year ago. And while mortgage rates had been expected to rise, they’ve done so more quickly than many economists predicted.

“I’m not surprised that rates have hit 5%, but I am surprised that everyone else is surprised,” Curtis Wood, founder and chief executive of Bee, a mobile mortgage app, said via email. “If you look at historical action by the Fed in a high-rate environment and compare that to what the Fed is doing today, the Fed is underreacting to the reality of inflation in the economy.

“I’m surprised that rates aren’t at 6% right now,” he added, “and wouldn’t be shocked if they’re at 7% by end of year.”

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

Are Currency Changes Imminent? – Part 2

          The big news in financial markets last week was the big decline in US Treasuries.  Not surprising given the news I discussed last week; Russia has now loosely tied its currency, the Ruble, to gold and required any country that Russia deems to be unfriendly to use Rubles or gold when trading with Russia.

          As I noted last week, this move will likely be bullish for gold and negative for the US Dollar.  Many readers could be looking at the performance numbers in the databox above and noting that the US Dollar moved significantly higher last week.  It’s important to understand that the US Dollar Index is a relative measure of the purchasing power of the US Dollar, not an absolute measure.  The US Dollar Index measures the US Dollars purchasing power relative to the purchasing power of the Japanese Yen, the Euro, the Swedish Krona, the British Pound Sterling, the Swiss Franc, and the Canadian Dollar.

          All one needs to do is visit a grocery store or purchase any consumer item to quickly realize that the US Dollar is losing absolute purchasing power.  The other fiat currencies used in the US Dollar Index are simply performing more poorly than the US Dollar on a collective basis.

          This move by Russia, I believe, is the biggest economic news of our time.  As big as when Nixon eliminated the convertibility of the US Dollar for gold.

          Interestingly, at the time Nixon made that move, the ultimate implications of the action were not widely understood by the populace.  I think one could reasonably state that the same could be said about this move by Russia that could be the catalyst for big currency changes globally moving ahead.

          From my perspective, currency changes typically occur slowly.  It’s taken more than 50 years for the US Dollar to lose 98% of its purchasing power.  The US Dollar has been the preferred currency for international trade since the Breton Woods agreement of 1944.  After Nixon eliminated the US Dollar redemptions for gold in 1971, an agreement was struck with Saudi Arabia to sell its oil exports in US Dollars in exchange for military favors.

          Now though, as has happened many times throughout history, currencies are beginning to evolve more rapidly.  Many years from now, looking back, I believe this move by Russia will be viewed as the catalyst for major currency changes that are yet to come.

          Past RLA Radio Guest, Peter Schiff, recently commented (Source:  https://schiffgold.com/key-gold-news/russia-is-quietly-making-the-case-for-owning-gold/):

The head of the Russian Parliament, Pavel Zavalnymade comments recently addressing the subject of economic and financial sanctions. It’s clear that gold is playing a large role in protecting Russian wealth. That role may get bigger and it could create a paradigm shift in how the world does business.

Russia has a lot of natural gas and oil. And it sells a lot of natural gas and oil to the world. Zavalny made it clear that Russia is happy to sell — in hard currency. And what is hard currency? Not dollars.

“If they want to buy, let them pay either in hard currency, and this is gold for us, or pay as it is convenient for us, this is the national currency. As for friendly countries, China or Turkey, which are not involved in the sanctions pressure. We have been proposing to China for a long time to switch to settlements in national currencies for rubles and yuan. With Turkey, it will be lira and rubles. The set of currencies can be different and this is normal practice. You can also trade bitcoins.”

Zavalny said Russia has no interest in dollars, saying “this currency turns into candy wrappers for us.”

In an op-ed published by “MarketWatch”, Brett Arends said this might not mean anything. But it could mean a lot if other countries like China and India follow Russia’s lead. As Arends notes, a lot of countries aren’t thrilled with the United Sates’ ability to control the global financial system with a monopoly on the reserve currency.

Arends also says this adds to the argument for having gold in a long-term investment portfolio.

Not because it is guaranteed to rise, or maybe even likely to. But because it might — and might do so while everything else went nowhere, or went down. Like in a geopolitical or financial crisis where the non-western bloc decides to challenge America’s financial hegemony and ‘king dollar.’”

Arends calls himself “gold agnostic,” but he said there is no question “it has its uses.”

Gold is completely private. It is completely independent of the SWIFT or any other banking system. And despite the rise of cryptocurrencies, it remains the most widespread and viable global currency that is not controlled by any individual country.”

Moves made by Russia in recent weeks could represent a huge paradigm shift in global finance. Many countries have been building toward this for years as the US has weaponized the dollar.

In effect, Russia put the ruble on a gold standard that is now linked to natural gas.

Russia holds the fifth-largest gold reserves in the world. After pausing during the COVID-19 pandemic, the Central Bank of Russia resumed gold purchases in early March before suspending them again a couple of weeks later. The Russian central bank resumed buying gold from local banks on March 28 at a fixed price of 5,000 roubles ($52) per gram. Since Russia is insisting on payment of natural gas in rubles and they’ve linked the ruble to gold, natural gas is now indirectly linked to gold. The Russians can do the same to oil, as ZeroHedge explained.

If Russia begins to demand payment for oil exports with rubles, there will be an immediate indirect peg to gold (via the fixed price ruble – gold connection). Then Russia could begin accepting gold directly in payment for its oil exports. In fact, this can be applied to any commodities, not just oil and natural gas.”

So, what does this mean for the price of gold?

“By playing both sides of the equation, i.e. linking the ruble to gold and then linking energy payments to the ruble, the Bank of Russia and the Kremlin are fundamentally altering the entire working assumptions of the global trade system while accelerating change in the global monetary system. This wall of buyers in search of physical gold to pay for real commodities could certainly torpedo and blow up the paper gold markets of the LBMA and COMEX.”

“The fixed peg between the ruble and gold puts a floor on the RUB/USD rate but also a quasi-floor on the US dollar gold price. But beyond this, the linking of gold to energy payments is the main event. While increased demand for rubles should continue to strengthen the RUB/USD rate and show up as a higher gold price, due to the fixed ruble – gold linkage, if Russia begins to accept gold directly as a payment for oil, then this would be a new paradigm shift for the gold price as it would link the oil price directly to the gold price.”

We could be seeing a slow unwinding of the petrodollar. And the petrodollar is one of the foundations of the dollar’s position as the world currency. We’ve already heard rumblings of Saudi Arabia accepting yuan for oil.

The US and other western powers have tried to lock down Russia’s gold. But as Arends explains, that is virtually impossible in effect.

“Despite some laughable suggestions that the West might somehow sanction ‘Russian gold,’ there is no way of tracing the identity, nationality, or provenance of bullion. American Eagle coins or South African Krugerrands can be melted down into bars. Gold is gold. And someone will always take it. Carry a Krugerrand to any major city anywhere in the world and you will find people willing and eager to take it off your hands in return for any other currency you want.”

            Back in 2011, when I wrote the book “Economic Consequences”, I noted that the Federal Reserve would ultimately determine whether the United States experienced deflation or inflation followed by deflation.  I reasoned that the outcome would depend entirely on monetary policy.

          It now seems that the latter outcome is inevitable and perhaps even imminent.

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

Are We on the Verge of a Crack-Up Boom?

         Stocks rallied and gold fell last week.  At this point, I don’t view these developments as trend-changing, rather as counter-trend rallies.  The Dow to Gold ratio continued to fall last week.  As currency devaluation continues, this is an indicator that becomes more meaningful in my view.

          At its last meeting, the Federal Reserve increased interest rates by .25%.  As I have been stating, I expect Fed action to counter inflation will be more form than substance.  This increase of .25% certainly fits in that category in my view.

          There is more to this inflation story than meets the eye.  While an increase in the currency supply leads to inflation, it also creates other undesirable side effects, particularly when the currency is the world’s reserve currency.

          As long-time readers of “Portfolio Watch” know, I have often discussed the concept of a ‘crack-up boom’ put forth by Austrian economist, Ludwig von Mises.  For newer readers of “Portfolio Watch”, a crack-up boom is defined as currency inflation or hyperinflation coupled with a simultaneous recession or depression.

          Current monetary policy and credit expansion, if it continues, could lead to such an outcome.  Arguably, we are on the fringe of such an outcome presently.

          Larry Lepard, manager of the EMA GARP fund recently commented on the probability of such an outcome in light of the Russia-Ukraine situation.  (Source:  https://www.zerohedge.com/markets/fiat-currencies-are-going-fail-spectacularly-lawrence-lepard).  Here are some excerpts from his excellent analysis piece:

What just happened in the last two weeks is enormously important and misunderstood by many investors.

The Russian invasion of Ukraine and the corresponding Western sanctions and seizure of Russian FX reserves are nothing short of a monetary earthquake. The last comparable event was Nixon’s abandonment of the gold standard in 1971. 

Russia, with the backing and support of China, just told the world that it is no longer going to sell its oil, gas, and wheat for Western currencies which are programmed to debase. 

The West in its response just said to all countries around the world: “If you have foreign exchange reserves, held in our system, they are no longer safe if we disagree with your politics.” 

It is similar to what the Canadians did when they moved to seize the bank accounts of Canadians who had demonstrated support for the truckers without due process of law.

Both of these political moves are blatant advertisements for what I call “non state controlled money without counterparty risk”, like gold and bitcoin. If governments can weaponize their money when they do not like what you are doing, what is the natural defense?

The US Dollar has been the reserve currency of the world since WW II and the Bretton Woods agreement. This has given the US an enormous advantage and subsidy from the rest of the world because everyone else needs to produce goods and services to obtain dollars and the US can simply produce dollars at no cost by printing them.   

Putin is now cast in the role of Charles de Gaulle who complained about the “exorbitant privilege” of the US with its dollar hegemony. As we all know, de Gaulle demanded gold in exchange for France’s US dollar FX surpluses and this outflow forced Nixon to close the gold window.   

Recall that post this event, gold went from $35 per ounce to $800 per ounce (23x).  Russia’s move will lead to a similar move in favor of gold. Putin could see that the US fiscal and monetary situation was becoming untenable and he decided to use this to create an existential threat to the US and the world financial system. 

He undoubtedly knows that the West has artificially suppressed the price of gold and that is why he has been building his gold reserves steadily for the past 20 years.

Putin just shot “King Dollar” in the head. 

We can see it in the financial markets, as the price of everything commodity-related is going up relentlessly in dollar terms. 

Russia is long commodities, long gold, and doesn’t need fiat currency. His debt to GDP ratio is low and taxes are low. If the world financial markets collapse on a relative basis, the position of Russia will be improved significantly. This is what I believe he is playing for. If investors do not recognize this, they will be caught wrong-footed as I believe many are today.

The implications for investors are quite clear. None of us own enough gold, real assets or commodities. Fiat currencies are going to fail spectacularly, and soon, in my opinion.

        In the April issue of the “You May Not Know Report”, I report on another potential development that, should it occur, will be another blow to diminishing US Dollar dominance.  “The Wall Street Journal” ran a story (Source:  https://www.wsj.com/articles/saudi-arabia-considers-accepting-yuan-instead-of-dollars-for-chinese-oil-sales-11647351541) reporting that Saudi Arabia is now in serious discussions with China to price the kingdom’s oil sales or at least part of the oil sales in the Chinese currency.  Here is an excerpt:

Saudi Arabia is in active talks with Beijing to price some of its oil sales to China in yuan, people familiar with the matter said, a move that would dent the U.S. dollar’s dominance of the global petroleum market and mark another shift by the world’s top crude exporter toward Asia.

The talks with China over yuan-priced oil contracts have been off and on for six years but have accelerated this year as the Saudis have grown increasingly unhappy with decades-old U.S. security commitments to defend the kingdom, the people said.

The Saudis are angry over the U.S.’s lack of support for their intervention in the Yemen civil war, and over the Biden administration’s attempt to strike a deal with Iran over its nuclear program. Saudi officials have said they were shocked by the precipitous U.S. withdrawal from Afghanistan last year.

China buys more than 25% of the oil that Saudi Arabia exports. If priced in yuan, those sales would boost the standing of China’s currency. The Saudis are also considering including yuan-denominated futures contracts, known as the petroyuan, in the pricing model of Saudi Arabian Oil Co., known as Aramco.

            As I discuss in detail in the April “You May Not Know Report”, since 1974, all of the oil exports of Saudi Arabia have been priced in US Dollars.  Should that change, it will be more bad news for the US Dollar and more inflation as there will be another reason not to inventory US Dollars by other countries around the world.

          Of course, none of these developments is at all surprising or shocking.  History teaches us that fiat currency systems have a 100% failure rate.  We are not debating the ‘what’, we are only debating the ‘when’.

          In the meantime, we will probably continue to see accelerating inflation or hyperinflation which will be coupled with an economic slowdown as von Mises described the ‘crack up boom’.

          There is growing evidence that we are now in a recession or, at the very least, moving toward one.  The Federal Reserve Bank of Atlanta recently revised 1st quarter growth projections to 0%.  This from “Seeking Alpha” published prior to the Fed’s ¼ point rate hike (Source:  https://seekingalpha.com/article/4492503-stagflation-warning-atlanta-fed-cuts-q1-gdp-projection-to-zero_):

On Tuesday, the Atlanta Fed cut its GDP estimate for the first quarter of 2022 to zero.

Just a few days ago, the estimate was for 0.6% growth. That was down from 1.3% just a few days before that.

This is not an encouraging trend.

Keep in mind, Atlanta Fed GDP estimates tend to start high and then fall as the quarter progresses. We’re still early in the quarter.

Just a few weeks ago, a collapse in economic growth seemed impossible. We’re coming off 7% GDP growth in Q4, capping off the fastest growth year on record.

But here we are.

Stagflation is defined as little to no economic growth coupled with high inflation.

And here we are.

This puts the Federal Reserve in a nasty spot. The central bank would typically respond to an economic contraction with rate cuts and quantitative easing. But the Fed is supposed to be tightening monetary policy to deal with surging inflation.

          In the book “New Retirement Rules”, I wrote about the two potential economic paths that were before us.  Inflation followed by deflation or we would go direct to deflation.  The latter could only happen if the Fed ceased easy money policies.

          The Fed did not cease easy money policies but instead, doubled down on them.  The inflation followed by deflation that I wrote about, now looks a lot like a ‘crack-up boom’.

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

Will Russian Sanctions Mean Higher Inflation?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Monetary Realities

Stocks, for the most part, finished the week higher after a big rally day on Friday.  By my measure, bonds remain in a bear market.

          As a reminder, there is the last opportunity to request the February Special Report titled, “Stock Update:  Is the Crash Upon Us?”.  Visit www.RequestYourReport.com to request the report for yourself or someone else.

          With the Russian invasion of Ukraine, the Federal Reserve may now slow the taper.  As noted in an article this past week by Lance Roberts, it would not be the first time the Fed used geopolitical risk to reverse or soften monetary policy.

          Setting the news of the invasion aside for a moment, the Fed’s taper talk wasn’t going to do much to quell inflation anyway with the most aggressive Federal Reserve Board members calling for a 1% rate hike by July 1.

          As I’ve discussed, it’s my view that inflation cannot be contained unless real interest rates turn positive and we are a long way from that.

          In his article (Source:  https://realinvestmentadvice.com/geopolitical-risk-could-sideline-the-fed/), Mr. Roberts quotes “The Wall Street Journal” from 2016:

“Weak global demand and geopolitical risks also argue for going slow, Mr. Powell said, as well as a lower long-run neutral federal-funds rate and the “apparently elevated sensitivity to financial conditions to monetary policy.” – WSJ, May 2016

          Mr. Roberts then points out what the Fed did in 2018, reversing its monetary tightening policy as markets reacted unfavorably.

In 2018, the Fed was hiking rates and tapering their balance sheet. Then, with the market under duress, rising geopolitical risks with China began to soften the Fed’s more hawkish stance. Not long after, the Fed started cutting rates and bailed out hedge funds through an “unofficial QE” program. That was all before the 2020 “pandemic-shutdown” bailout of everything.

          While the consensus after the Fed’s emergency meeting on February 14 was that the Fed would raise interest rates at the March meeting, I was skeptical, and remain so.  Now with geopolitical tensions rising, it seems less likely that the Fed will take the modest action regarding interest rates it was contemplating.

          San Francisco Federal Reserve Bank President, Mary Daly is already suggesting that the Fed needs to take a softer approach moving ahead.

          As Mr. Roberts points out in his article, geopolitical risks are not the only issue that the Fed faces.

While the Fed suggests it will hike rates at its March meeting to combat current inflation, they face several challenges from falling consumer confidence, weak markets, and very bearish investor confidence.

          Financial markets are jittery, to say the least, the broad stock market using most any valuation measure remains extremely overvalued and investors are now more bearish than at any time since 2016.

          This chart illustrates the level of bullishness among investors.  Notice from the chart that investors haven’t been this bearish since 2016.

                 

           Mr. Roberts also points out that consumer confidence is lagging.  That’s a meaningful indicator since the US economy is 70% dependent on consumer spending.  Falling consumer confidence is simply bad for the economy.  This from Mr. Robert’s piece:

In the U.S., consumers drive 70% of economic growth. Such is why “price stability” is so crucial to the Fed.

To understand why confidence is so vital, we need to revisit what Ben Bernanke said in 2010 as he launched the second round of QE:

“Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.”

The problem is the economy is no longer a “productive” one but rather a “financial” one. A point made by Ellen Brown previously:

“The financialized economy – including stocks, corporate bonds, and real estate – is now booming. Meanwhile, the bulk of the population struggles to meet daily expenses. The world’s 500 richest people got $12 trillion richer in 2019, while 45% of Americans have no savings, and nearly 70% could not come up with $1,000 in an emergency without borrowing.

Central bank policies intended to boost the real economy have had the effect only of boosting the financial economy. The policies’ stated purpose is to increase spending by increasing lending by banks, which are supposed to be the vehicles for liquidity to flow from the financial to the real economy. But this transmission mechanism isn’t working, because consumers are tapped out.”

If consumption retrenches, so does the economy.

The problem for the Fed is that consumer confidence is already declining, tightening monetary policy will exacerbate the decline.

          Ellen Brown, a past guest on my radio program, has it right.  Fed policy has widened the wealth gap; the wealthy have become wealthier while low-income earners have struggled more.

          Mr. Roberts published a chart in his article illustrating consumer confidence.

          Notice that the chart makes Ms. Brown’s point perfectly.  Consumer confidence has fallen while stocks have rallied.

          It’s interesting when looking at the chart that consumer confidence is now lagging almost to the level at the height of the lockdowns.

          That’s not a good sign for the Fed.

          In my view, the Fed is trapped.  The Fed has two choices, continue to create currency and keep interest rates low and risk a hyperinflationary outcome.  Or tighten and risk recession, or worse.

          As I have discussed in “Portfolio Watch”, in the monthly “You May Not Know Report”, and during the weekly “Headline Roundup” webinars, it is my view that where we are headed economically is extremely predictable.  We will have inflation followed by deflation.

          Stated another way, we will have inflation followed by recession.

          As I have also asserted, the ‘what’ is far easier to predict than the ‘when’.  That’s why I suggest the Revenue Sourcing™ approach to managing retirement assets.

          If you are not participating in the weekly “Headline Roundup” webinars, they happen live each Monday at Noon Eastern time.  Feel free to give the office a call at 1-866-921-3613 to get an e-mail link to the weekly broadcast.

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

Inflation and the Curious Fed

          Stocks had another down week while gold and silver continued to rise.  As noted last week, all major US stock indices are now trading below their 200-day moving averages, a technically significant level.

          As a reminder, there is just one week remaining to request the February Special Report titled, “Stock Update:  Is the Crash Upon Us?”.  Visit www.RequestYourReport.com to request the report for yourself or someone else.

          Inflation remains the dominant news story.  The Federal Reserve called an emergency meeting last Monday that resulted in no action being taken regarding interest rates, a bit of a surprise to many analysts.

          With inflation raging at levels not seen in 40 years, the Fed’s inaction is curious.

          From my perspective, as I outline in the March “You May Not Know Report” real interest rates will need to be positive to make an impact on inflation.  Here is a bit from the March report:

As an aside, but for an important point of clarification, the Fed does not buy US Government debt directly.  The big banks buy the US Government debt and then the Fed buys the debt from the big banks using newly created currency.

I talk to many clients and radio show listeners who ask how much the Fed needs to raise interest rates to get inflation under control.  While there is not a universally accepted answer to that question, the answer that is often given is that real interest rates need to be positive.

Here’s an example to make the point.  Presently, the official inflation rate is 7.84%, which is the non-seasonally adjusted rate as of January.  The yield on the 10-year US Treasury as this piece is being written is 2.035%.  This means that an investor in a 10-Year US Treasury note experiences a real interest rate that is almost 6% negative!

When calculating the real inflation rate using the inflation calculation formula used in the late 1970’s and early 1980’s, rather than using the heavily manipulated Consumer Price Index, one concludes that the real inflation rate is about 16%.

In the early 1980’s when inflation was at this level, interest rates had to be increased to 20% to get inflation under control.  With interest rates at 20%, real interest rates were positive, and inflation was eventually brought under control.

In my view, that is where we now find ourselves.  With the real inflation rate at 16%, raising interest rates to 1% or 2% doesn’t make much of an impact on inflation.  However, it will probably make a huge impact on financial markets.  In calendar year 2018, when the Fed increased interest rates to a little over 2%, financial markets reacted very negatively.  It’s my view they will react similarly again.

            It’s my view that we are headed for higher consumer prices and a stagnating economy and distress in the financial markets.  While the Fed is feeling political pressure to do something about inflation, the math dictates that the central bank won’t be able to raise rates enough to get inflation under control unless the federal government’s budget is balanced or gets a lot closer to balanced.

          Since that is unlikely to happen anytime soon, the Fed’s actions with interest rates will be more form than substance.  Inflation will probably continue and accelerate while financial markets react negatively to small increases in interest rates.

          The reality is that there are many Americans feeling the pinch of rising inflation.  Michael Snyder recently commented in an article he wrote stating that 70% of Americans are now living paycheck to paycheck. (Source:  http://theeconomiccollapseblog.com/the-cost-of-living-in-the-united-states-is-rising-to-absolutely-absurd-levels/)

          This paycheck-to-paycheck existence is directly attributed to inflation.  Here is an excerpt from Mr. Snyder’s piece:

Over the past couple of years, the Federal Reserve has pumped trillions of fresh dollars into the financial system.

You just can’t “undo” that.

And our politicians in Washington have been on the biggest borrowing spree in all of human history.  I think that many of them truly believed that there would never be any serious consequences, but as Forbes has aptly noted, we “are now paying a heavy price for this magical thinking”…

Unfortunately, Americans are now paying a heavy price for this magical thinking. Inflation—spurred at least in part by record government spending and inaction on other issues—is running at its highest rate since 1982. The prices for meat and eggs are up 12.2% since last year. Furniture and bedding is up 17% and used cars and trucks are up 40.5%.

Meanwhile, the Treasury Department recently reported America’s total national debt is now over $30 trillion—the highest ever. To put this in context: If you stacked $30 trillion of $100 bills you could almost reach the weather satellites orbiting the earth at over 20,000 miles above us.

Today, we have absolutely gigantic mountains of money chasing a smaller pool of goods and services because of the pandemic.

As a result, the cost of living has been soaring into the stratosphere.

For example, one new study found that 82.2 percent of new vehicle buyers actually paid above sticker price during the month of January…

A study from the online marketplace found that 82.2% of new car buyers paid over the manufacturer’s suggested retail price (MSRP) in January, up from .3% in January 2020, before the coronavirus pandemic started affecting the industry

The average price paid above sticker was $728, while savvy shoppers were getting a discount of $2,648 just two years ago. Cadillac’s customers led the way by paying a $4,048 premium, followed by Land Rover’s ($2,565) and Kia ‘s ($2,289).

In my entire lifetime, I have never seen anything like this.

Years ago, I remember spending hours hammering a salesman until I was totally satisfied that the dealership would not knock off a single penny more from the price of a used vehicle that I wanted.

But now things have completely changed.

Today, just about everyone is paying above MSRP.

Of course, it is becoming more expensive to fuel our vehicles as well.  On Wednesday, the average price of a gallon of gasoline in California hit a brand new record high

Gas in California hit a record high of $4.72 a gallon on average on Wednesday — and experts say a whopping $5 a gallon will likely be the norm there in a matter of months, if not sooner.

Sadly, five-dollar gas is only just the beginning.

In fact, one expert that was interviewed by Yahoo Finance has actually raised the specter of seven dollar gas

Drivers best start bracing for another surge in gas prices amid the conflict between Russia and Ukraine and years of under-investment by the oil industry, warns one veteran energy strategist.

“My guess is that you are going to see $5 a gallon at any triple-digit [oil prices] … as soon as you get to $100. And you might get to $6.50 or $7. Forget about $150 a gallon, I don’t know where we will be by then,” Energy Word founder Dan Dicker said on Yahoo Finance Live.

Can you imagine paying seven dollars for a gallon of gasoline?

That definitely seems crazy to me.  But soon it will happen.

Housing prices continue to surge as well.  In fact, we are being told that a recent spike in lumber prices has increased the average price of a new home by nearly $19,000

“If people aren’t listening now, the dire predictions that we’ve been making appear to be coming true,” National Association of Home Builders CEO Jerry Howard said on “Varney & Co.” Wednesday.

Volatile lumber prices have caused the average price of a new single-family home to increase by $18,600, according to a new statistic from the NAHB.

Heating our homes is becoming a lot more painful too.  According to the Heartland Institute, the average American family saw their heating and cooling costs jump “by as much as $1,000” last year…

A new analysis by the Heartland Institute reports the typical American family’s home heating and cooling costs increased by as much as $1,000 in 2021 as a result of President Joe Biden’s energy and environmental policies.

          Needless to say, most Americans were not prepared for a dramatic shift in the cost of living such as this.  At this point, 70 percent of Americans are living paycheck to paycheck.

          So how are people making ends meet?  Well, we just found out that credit card debt rose at the fastest pace ever seen during the fourth quarter of 2021…

          As I have been suggesting, the best course of action is to hedge for both inflation and deflation using the Revenue Sourcing™ planning strategy. 

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

The Fed, the Economy and the Markets

          The double top theory for stocks that I called at the end of 2021 and have been discussing this month still looks intact despite a bit of a rally in stocks last week.

          There was a lot of volatility in stock markets last week and a week end rally propelled stocks into positive territory for the week.

          The big news last week was the Federal Reserve’s meeting.  This from MSN about how investors may view the Fed’s post-meeting statement: (Source:  https://www.msn.com/en-us/money/markets/what-to-expect-from-markets-in-the-next-six-weeks-before-the-federal-reserve-revamps-its-easy-money-stance/ar-AAThaoB)

Federal Reserve Chairman Jerome Powell fired a warning shot across Wall Street last week, telling investors the time has come for financial markets to stand on their own feet, while he works to tame inflation.

The policy update last Wednesday laid the groundwork for the first benchmark interest rate hike since 2018, probably in mid-March, and the eventual end of the central bank’s easy-money stance two years since the onset of the pandemic.

The problem is that the Fed strategy also gave investors about six weeks to brood over how sharply interest rates could climb in 2022, and how dramatically its balance sheet might shrink, as the Fed pulls levers to cool inflation which is at levels last seen in the early 1980s.

Instead of soothing market jitters, the wait-and-see approach has Wall Street’s “fear gauge,” the Cboe Volatility Index up a record 73% in the first 19 trading days of the year, according to Dow Jones Market Data Average, based on all available data going back to 1990.

“What investors don’t like is uncertainty,” said Jason Draho, head of asset allocation Americas at UBS Global Wealth Management, in a phone interview, pointing to a selloff that’s left few corners of financial markets unscathed in January.

Even with a sharp rally late Friday, the interest-rate-sensitive Nasdaq Composite Index remained in correction territory, defined as a fall of at least 10% from its most recent record close. Worse, the Russell 2000 index of small-capitalization stocks is in a bear market, down at least 20% from its Nov. 8 peak.

“Valuations across all asset classes were stretched,” said John McClain, portfolio manager for high yield and corporate credit strategies at Brandywine Global Investment Management. “That’s why there has been nowhere to hide.”

            The Fed announced after its two-day meeting that rates hikes would likely begin in March and would end its quantitative easing program at about the same time.  The Fed noted that it is considering how quickly to end that program.

          I find it curious that despite near-record inflation, the Fed opted to wait a month before taking any action.  Seems that if subduing inflation was the goal, action sooner rather than action later would be warranted.

          As I’ve discussed in past issues of “Portfolio Watch” and on the weekly “Headline Roundup” webinar update that is broadcast live each Monday at Noon Eastern, I believe it will be difficult for the Fed to end its quantitative easing program. 

          There are many reasons I have reached this conclusion.  Let me cover a couple of them with you.

          First, via member banks, the Fed is helping the government cover its massive level of deficit spending.  Since the spending by the Washington politicians is totally out of control, this will be a difficult thing for the Fed to get done.

          Second, in my view, the economy isn’t strong enough to handle monetary tightening.  Should the Fed follow through with its latest policy statement, I believe the economy and the financial markets will quickly and negatively react.  Arguably, they have already begun to react adversely.

          Every week, I read articles that tout the economic recovery.  Most of these are published by media with an agenda in my view which has now sadly become the norm.  I believe these stories to be more rhetoric than fact.

          This from “Zero Hedge” (Source:  https://www.zerohedge.com/economics/atlanta-fed-shocker-us-economy-verge-contraction) (Editor’s note:  The acronym BTFD defined and sanitized, means “buy the dip”)

          Nothing says “BTFD in stocks” like collapsing sentiment (UMich 10 year lows this morning) and crashing growth expectations and no lesser entity than The Atlanta Fed just released its latest GDPNOW forecast for Q1 economic growth in the US… and it’s a doozy.

          US macro data has been disappointing recently…

          All of which have sent the initial GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2022 to just 0.1 percent on January 28, i.e. on the verge of contraction.

            The chart on the right illustrates the GDPNow model.  Note that it is at the zero line indicating the Atlanta Fed’s research has the economy on the verge of recession.

          The Atlanta Fed is not alone in this opinion.

          This from another “Zero Hedge” piece (Source:  https://www.zerohedge.com/markets/recession-deck-bofa-slashes-gdp-forecast-sees-significant-risk-negative-growth-quarter)

          Which brings us to the current Wall Street landscape where some banks, most notably the likes of Goldman, continue to predict even more rate hikes while ignoring the risk of a slowdown, its entire bullish economic outlook for 2022 predicated on households spending “excess savings” which they have spent a long time ago (expect a huge downgrade to GDP in 2022 from Goldman in the next few weeks as the bank realizes this), while on the other hand we have banks like JPMorgan, which recently pivoted to the new narrative, and as we reported last weekend, now sees a sharp slowdown in the US economy following a series of disappointing data recently…

… and as a result, JPM now “forecast growth decelerated from a 7.0% q/q saar in 4Q21 to a trend like 1.5% in 1Q22.

          And while not yet a recession, today Bank of America stunned the market when its chief economist joined JPM in slashing his GDP for 2022, and especially for Q1 where his forecast has collapsed from 4.0% previously to just 1.0%, a number which we are confident will drop to zero and soon negative if the slide in stocks accelerates due to the impact financial conditions and the (lack of) wealth effect have on the broader economy.

            For a long time, I have been discussing my belief that the economy and the markets were artificial and a day of reckoning would have to come.

          That day of reckoning would be inflation followed by deflation.

          We are now in the inflation part of that pattern, headed at some future point for deflation.

          The question is how out-of-control will inflation get before we see deflation that is likely to be on par with the deflation of the 1930’s.

          The answer to that question, in my view, depends entirely on Fed policy.

          I remain skeptical that the Fed will follow through completely with its rather vague promise to tighten monetary policy.

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

A Market Perspective

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

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

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

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

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

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

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

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

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

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

          Nasdaq up 16X

          S&P up 7x

          Dow up 6X

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

          Tesla up 352X or Apple up 62X.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

          That’s truly remarkable when you consider it.

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

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

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

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

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

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

As Mayer Amschel Rothschild poignantly stated in 1838:

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

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

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

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

          Are you prepared?

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