A Market Perspective

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

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

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

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

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

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

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

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

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

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

          Nasdaq up 16X

          S&P up 7x

          Dow up 6X

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

          Tesla up 352X or Apple up 62X.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

          That’s truly remarkable when you consider it.

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

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

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

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

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

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

As Mayer Amschel Rothschild poignantly stated in 1838:

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

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

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

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

          Are you prepared?

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

Financial Markets, the Economy and Currency Creation

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

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

            Bonds had a simply dismal week last week.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

About Stocks and Bonds

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A Predictable Pattern

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

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

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

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

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

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

          There is no doubt that we are now seeing inflation.

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

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

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

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

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

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

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

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

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

          Inflation, as I predicted is intensifying.

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

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

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

          Here is why that is significant.

          As prices rise, consumers make different spending choices.

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

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

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

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

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

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


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

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

          They have to.  The math doesn’t lie.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

          Let me attempt to put that into perspective.

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

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

Social Security/Medicare Tax    $ 7,987

Federal Income Tax                    $ 9,118

State Income Tax                       $ 3,370

Total Tax                                   $20,475

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Pension Plan Problems?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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: https://www.pgurus.com/is-the-world-about-to-be-weimared/#)

          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:  https://www.upi.com/Top_News/US/2021/11/04/trade-deficit-809-billion-imports-exports/2021636046685/):

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 www.RetirementLifestyleAdvocates.com.  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:  https://nypost.com/2021/09/27/dallas-boston-fed-presidents-announce-resignations-following-controversial-stock-trades/):

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: www.cnbc.com/2016/01/06/dont-blame-china-for-the-market-sell-off-commentary.html)

“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:  https://mises.org/wire/youll-be-shocked-learn-theres-corruption-fed).  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 www.RetirementLifestyleAdvocates.com.  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 Mises.org.  (Source:  https://mises.org/wire/four-reasons-next-recession-will-be-worse-last-one).  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 www.RetirementLifestyleAdvocates.com.  Our webinars, podcasts, and newsletters can be found there.

Dow to Gold Forecast and the Continued Decline of the Dollar

Stocks and gold both advanced last week, leaving the Dow to Gold ratio unchanged at 14.83.

As I stated last week, I continue to stand by my prediction of a Dow to Gold ratio of 2, perhaps even 1. 

That forecast which seemed radical when I made it, now seems more realistic.

The Federal Reserve policy of enormous quantities of money creation will have to eventually lead to inflation in my view should it continue at the current pace.  That will be bullish for gold;  individuals and foreign governments are already beginning to seriously question the role of the US Dollar as a world reserve currency moving ahead. 

As currencies evolve and as money is created out of thin air, the wealth gap will widen.  Beaten down economies will likely not recover as quickly as many hope.  This will likely lead to more geopolitical tensions and social unrest.

Six years ago, David Morgan, a renowned and recognized silver expert, noted that “you cannot have true peace and prosperity unless you can absolutely trust the money.”

As Patrick Heller observed in his June newsletter, “it is no accident that the relative free markets and a stable dollar tied to gold resulted in American becoming the most prosperous (and benevolent) country in the world.  This has become less true since former President, Richard Nixon, closed the gold exchange window in August of 1971.”

Mr. Heller also noted that the US Dollar as recently as one month ago was still holding up reasonably well against other world currencies although it was still trailing gold.

Over the one-month time frame ending on June 2, the US Dollar lost a lot of ground against other world currencies as well as tangible assets.

Most notably, the US Dollar was down against gold, more than 10% against platinum and palladium, and more than 20% against silver.

The chart, reprinted from Mr. Heller’s newsletter, illustrates.

The decline of the US Dollar is continuing as evidenced by the price of precious metals.  Keeping in mind that markets rarely go straight up or straight down, I would not be surprised to see a dollar rally and a metals decline given the magnitude of the decline over the past month.  However, I would view declines in metal’s prices to be countertrend at this point given current monetary policies.

Worldwide, the signs of low confidence in the US Dollar continue to emerge.

Just last week the chair of the Chinese Banking and Insurance Regulatory Commission, Guo Shuqing, delivered a warning about the US Dollar. 

While delivering a speech in Shanghai, Mr. Shuqing made four points:

One:  The US Federal Reserve is the de facto central bank of the world.  When the policy of the central bank targets its own economy without considering the spillover side effects, the Fed is very likely to “Overdraft the credit of the dollar and the US.”

Two:  The pandemic may be around for a long time.  Countries around the world keep throwing money at it with diminished impact.  Mr. Shuqing advised that countries “think twice and reserve some policy space for the future,”

Three:  Money printing will cause future economic turmoil.  There is no free lunch.  Watch out for inflation.

Four:  Financial markets (stocks) are disconnected from the real economy and these distortions are “unprecedented”.  Mr. Shuqing noted that it’s going to get “really painful’ when the policy withdrawal begins.

Mr. Shuqing concluded by saying, “Some people say ‘domestic debt is not debt’, but external debt is debt.  For the United States, even external debt is not debt.  This seems to have been the case for quite some time in the past, but can it really last for a long time in the future?”

This from a “Zero Hedge’ article on this same topic (https://www.zerohedge.com/markets/beijing-sounds-alarm-about-dollars-reserve-status) (Quote is from Mr. Shuqing):

“China cherishes the conventional monetary and fiscal policies very much. We will not engage in flooding the system, nor will we engage in deficit monetization and negative interest rates.”

It’s not the first time China vented frustration against the “exorbitant privilege” of the dollar. After the financial crisis, then-PBOC Governor Zhou Xiaochuan proposed using the SDR to replace the dollar as the main reserve currency. 

It went nowhere. But this time, China seems to be determined to enhance its reserve-currency status by avoiding unconventional policies. It won’t dislodge the dollar tomorrow, but its attractiveness is clear in the foreign flows to its bond market.

As the US Dollar continues to lose favor and alternatives are sought out and adopted, the US Dollar will lose purchasing power and the price of gold will rise in nominal terms.  That will be a key factor in getting the Dow to God ratio back to 2 or even 1.

Stephen Roach, former Chairman of Morgan Stanley Asia agrees.  This from an MSN article (Source:  https://www.msn.com/en-us/money/markets/the-dollar-will-collapse-under-a-ballooning-us-deficit-and-deglobalization-former-morgan-stanley-asia-chairman-says/ar-BB15yROf) on the topic (emphasis added).

The US dollar’s dominance faces major threats as the post-pandemic global economy emerges, Stephen Roach, former chairman at Morgan Stanley Asia, said Monday.

The currency’s strength survived attacks from President Donald Trump, a trade war, and the start of the coronavirus outbreak. Yet its winning streak has faded in recent weeks as investors prepare for record borrowing to fund trillions of fiscal and monetary stimulus. A sinking national savings rate also stands to drag on the dollar, Roach told CNBC’s “Trading Nation.”

“The US economy has been afflicted with some significant macro imbalances for a long time, namely a very low domestic savings rate and a chronic current account deficit,” he said. “These problems are going to go from bad to worse as we blow out the fiscal deficit in the years ahead.”

Looming shifts in the global manufacturing industry will create a more long-term pressure on the currency, the Yale University senior fellow added. Several experts project the US will promote domestic production and move away from increasingly complex supply chains. Roach sees such a transition taking place over the next couple of years and sealing the dollar’s fate.

“Generally, it’s a negative implication for US financial assets,” he said. “It points to the probability of higher inflation as we import more higher-cost foreign goods from overseas, and that’s negative for interest rates.”

The argument for a weaker dollar and higher gold prices is a very solid one.

Gold rising to $3000 to $5000 per ounce or more as stocks fall is not an unrealistic expectation in my view.

At the same time, the argument for much lower stock prices is also an easy argument to make given current stock valuation levels.

As I noted at the outset of this piece, I have been predicting a Dow to Gold ratio of 2, or more likely 1 for many years, now it seems that there is now a path on which we get there.

If you are not using the two-bucket approach to manage your assets, we would encourage you to begin immediately.  Economic conditions that we predicted would appear are now appearing.  This approach is outlined in my recent book “Revenue Sourcing”.

Thank you for your support of the book!  It reached #1 best-seller status in 4 Amazon categories.