Tag: financial crisis

The Recent Stock Bull Market – Real or Nominal?

          The double top theory for stocks that I suggested at the end of 2021, is looking like the right call at this point.

          Stocks suffered their worst week since March of 2020 last week despite a 4-day trading week. 

          As I have been suggesting here each week, when stock gains are largely attributable to an artificial market environment created by easy-money policies, a correction will have to ensue.

          My February special report will be an analysis of stocks.  Look for an opportunity to get the report in the February issue of the “You May Not Know Report”.  (If you’re not a subscriber, call the office to request a complimentary copy – 1-866-921-3613)

          Given the dismal performance of stocks last week, ironically after I wrote about and offered evidence of a bubble in stocks last week, I thought it would be appropriate to dig into this topic a little more deeply.

          But I want to examine this topic from a different viewpoint – the effect that currency devaluation has on stock prices.

          Long-time readers of “Portfolio Watch” have seen this analysis in a similar form in the past, but the analysis is important to understanding what is largely behind the stock bull market.

          This analysis requires that we define two terms – nominal and real.

          Nominal is defined as ‘in name only’.  When I say that stocks increased nominally, I am stating that stocks increased in name only.

          Real is defined as an actual thing, not imaginary.

          The most recent bull market in stocks has been in nominal terms not real terms.

          Here is an excerpt from the February Special Report to explain.

Stock analysts rarely discuss the key relationship between stock prices and currency devaluation.

Simply and succinctly stated, as currency is devalued stocks priced in that currency rise in price.  This increase in the value of stocks due to currency devaluation is nominal rather than real. 

The same currency devaluation or inflation that causes the price of groceries to increase also causes the price of stocks to increase.

Let’s look at an example to make the point.

This is a chart of the Dow Jones Industrial Average going back to 1971.

An initial perusal of the chart has one concluding that the Dow reached a level of about 12,000 in 1999 at the peak of the tech stock bubble and a high of about 14,000 at the market peak when the Great Financial Crisis began in 2007.  Presently, the Dow has reached about 36,000 at the high.

Nominally speaking, since 1999, the Dow has risen in value by about 300%, from about 12,000 to about 36,000.  But what did the Dow rise in real terms?

There are many different methods that are used to calculate the inflation rate.  There is the official CPI or Consumer Price Index, as well as more accurate alternate, private-sector inflation calculation methods.

The official inflation rate as measured by the CPI is very manipulated.  Alternate measures of inflation offered by www.ShadowStats.com or The Chapwood Index offer better, more accurate inflation estimates but the most accurate measure of inflation is determined by looking at the purchasing power of gold.

It’s been said that a loaf of bread priced in gold costs exactly the same today as it did during the Roman Empire more than 2000 years ago.  For more than 5000 years and throughout most of history, gold has been money.

To determine the real performance of stocks, it is helpful to price stocks in gold rather than US Dollars.

In 1999, when the Dow reached a level of 12,000, an ounce of gold was around $250.  To price the 1999 Dow in gold, one would take the value of the Dow (12,000) and divide by the price of gold per ounce ($250).  That math has us concluding that the Dow was 48 because it took 48 ounces of gold to buy the Dow.

Let’s fast forward to the present time.  The Dow was recently 36,000 while gold’s spot price was about $1,800 per ounce.  The same math has us buying the Dow for 20 ounces of gold.

Gold, over that 20-year time frame, has been constant.  An ounce of gold has not changed over the last 20 years, 100 years or even 5,000 years.  It is a constant metric.  An ounce of gold is the same today as it was at any time historically.

When one looks at the performance of stocks from this perspective, pricing stocks in gold, stocks have actually declined by more than 58% since the tech stock bubble of about 20 years ago in real terms.

Priced in US Dollars, stocks have rallied more than 300% since the tech stock bubble.  However, when priced in gold, stocks have fallen more than 58%!

From this analysis, one can conclude that the rally in stocks since the tech stock bubble has been in nominal terms rather than real terms.

          A loss in purchasing power causes inflation in consumer items and asset prices – that perfectly explains what we are now experiencing.

          The Fed is now painted into the proverbial corner as, at this point, it seems the financial markets have begun to unravel.  This piece discussed in the February “You May Not Know Report” newsletter explains. (Source: https://thebaddaddy.com/the-rock-and-the-hard-place/)

          Inflation or depression, the authorities are trapped.

          They should know this but are drunk on hubris, blinded by money-printing, schmoozed by lobbyists, and too busy insider-trading to care. If they understood this predicament, they’d have retired years ago.

          The real problem? In the DC halls of power and its feeder universities, they don’t understand economics. Instead, they parrot dogma dressed up in complex math to justify central planning and fiat money.

          Models that actually work (from the Austrian school) are ignored or obfuscated because they don’t consolidate power into a crony, captured system.

          Inflation or depression, how did we get here? Ludwig von Mises explained (in 1949)-

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

          US stock and bond markets are in an epic bubble, and can only be propped up with more money-printing. But that will cause the prices of beef, milk, eggs, rent, and energy to soar.

          The inflation genie is out of the bottle.

          To put her back in, they need to stop the easy-money policies, but that will crash the markets, a cascade of debt-deflation (like 2008) that also torpedoes the real economy.

          So, which will it be, inflation or depression?

          It’ll be an epic tug-of-war as they try to thread the needle. They’ll tighten this year until things start to break, then panic and turn the money spigots back on.

          I believe that this excerpt is spot on.  Inflation followed by deflation, as I’ve discussed often is the only possible outcome at this point.

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.