financial markets – Dennis Tubbergen

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.

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.