Market Analysis and Commentary on the Latest Russian Sanctions

        To begin with this week, I want to offer an update on last week’s market analysis.

        In last week’s “Portfolio Watch”, I wrote this about stocks and published a chart of the S&P 500 (which I am not reprinting here due to space limitations.  You can visit www.RetirementLifestyleAdvocates.com and download last week’s newsletter to see the chart):

Let’s begin by taking a look at stocks. 

I’ll use the Standard and Poor’s 500 for the analysis.  The chart below is of an exchange-traded fund that has the investment objective of tracking the S&P 500 index.

Notice on the right-hand side of the chart, I have drawn a blue trend line that begins at the end of the calendar year 2021 and continues to the present time.

Notice also, how far below the trendline the current price is.

Also on the chart, on either side of the green and red price bars (each bar is one week of price activity with the green bars representing the weeks that the ETF price went up and the red bars representing weeks the ETF price went down), you’ll see a blue line (on the top side of the price action) and a red line (on the bottom side of the price action).  Those lines are the Bollinger Band indicator.

When prices reach outside the Bollinger Band, either on the top side or the bottom side, it often represents a price extreme and the price reverts to the mean.

Finally, if you notice on this weekly price chart that last week’s price action ‘gapped down’ leaving a space in the chart between the prior week’s price action and last week’s.  Often, gaps on a chart are closed.

For these reasons, I would not be surprised to see a rally in stocks this next week although there is another market axiom that advises to ‘never try to catch a falling knife’.  It’s sage advice.

        That rally in stocks did occur; the Dow Jones Industrial Average rallied more than 5% and the Standard and Poor’s 500 Index rallied more than 6%.  Despite the seemingly strong rally, by measure stocks remain in a downtrend.

        The recent rally is counter-trend in my view, with the primary trend remaining down.  To demonstrate how far oversold stocks were going into the beginning of last week, stocks can rally another 10% or so from here to get back to a 20-week moving average of price.

        While stocks don’t have to rally that much, a consolidation period or a continued bear market rally would be more likely than not here in my view unless there is a geopolitical shock to the markets or some other black swan-type event.

        At this point in time, US Treasuries like stocks are oversold just not to the same extent. 

        This chart is a weekly price chart of an exchange-traded fund that tracks the price action of long-term US Treasuries. 

        The faint silver line in the center of the price chart is a 20-week moving average of price.  Notice that since the beginning of the calendar year 2022, US Treasuries have been trading well below their 20-week moving average price.

        Here’s why that may be important.  The 20-week moving average of price is the market’s collective consensus of value over a 20-week time frame.  As one might expect, to calculate a 20-week moving average of price, one takes the closing price of the exchange-traded fund over the past 20 weeks, adds them up, and then divides by 20.

        If the market’s current consensus of value is lower than the market’s consensus of value over the past 20 weeks, that means the market is down trending, at least by this measure.

        The indicators at the bottom of the chart measure overbought and oversold conditions (at least that is part of what they do).  Both indicators are telling us that the US Treasury market may be poised for a rally here although the indicators are not at extreme levels.

        In other news, the G7 announced this past week that Russian gold imports would now be banned.  This from “Zero Hedge” (Source:  https://www.zerohedge.com/markets/biden-g-7-will-ban-russian-gold-imports) (emphasis added):

“The United States has imposed unprecedented costs on Putin to deny him the revenue he needs to fund his war against Ukraine,” Biden tweeted on Sunday, the first day of a G7 meeting in Germany; a formal announcement is expected later on during the summit.

“Together, the G7 will announce that we will ban the import of Russian gold, a major export that rakes in tens of billions of dollars for Russia” he added.

The official talking point here, encapsulated by the pro-Biden outlet, The Hill, is that “while it does not bring in as much money as energy, gold is a major source of revenue for the Russian economy. Restricting exports to G7 economies will cause more financial strain to Russia as it wages the war in.”

That, of course, is incorrect: the biggest buyers of gold in recent years have not been G7 countries (United States, France, Canada, Germany, Japan, the United Kingdom, and Italy), many of whom naively sold much if not all their gold in the recent past and have refused or simply don’t have the funds to restock; instead, purchases have all been by developing-nation central banks (like India and Turkey, and of course China which however has a habit of only revealing its true gold inventory every decade or so) who have been quietly preparing to do what Russia is doing by dedollarizing and instead allocating capital into a counterparty-free asset.

As for Russia, its central bank has been an aggressive buyer of gold, not seller, and if anything Biden’s decision will only make the gold market the latest to follow the example of oil and bifurcate: cheaper for Russian-friends and much more expensive for Russian enemies.

        This decision, like the prior Russian sanctions, will backfire.  Russia and its allies will benefit and the west will suffer.

        Thinking critically about this policy decision, one has to conclude that the US has decided to prohibit the trading of US Dollars, which are rapidly devaluing, for Russian gold an asset that, at worst, has maintained its purchasing power.

        In other words, Russia gets to keep her gold and will not be allowed to exchange her gold for devaluing US Dollars.  That’s punishment?

        The reality is Russia and China, as the chart above shows, have been dumping US Dollars and adding gold as far as their reserve assets are concerned.  The countries have reduced their US Treasury holdings by 25% since mid-2015 and have increased their collective gold holdings by nearly double over the same time frame.

        The data unequivocally suggests that Russia (and China) has already made the decision to slow the exchange of US Dollars for gold.

        Ultimately, I expect this will be bullish for gold and will continue to be bearish for the US Dollar and other western fiat currencies.

        We live in economic times unlike any that anyone alive today has ever seen.  Yet, the ultimate destination is completely predictable. 

        Fiat currencies eventually fail or are redefined.  Unsustainable debt levels eventually cause a deflationary collapse and massive currency creation leads to inflation or hyperinflation before the deflationary crash begins.

        If you are not using Revenue Sourcing™ to plan your retirement income, now is the time to look into it.

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.

Market Analysis

This week, I want to offer some market analysis. 

Last week stocks fell hard, US Treasuries declined as did gold and silver.

One of the money management strategies that has proven itself over time was developed by Harry Browne who began publishing a financial newsletter in the 1970s and authored many best-selling books up through the 1990s.  The strategy was dubbed “Permanent Portfolio” by Browne and it had the investment objective of getting absolute returns (not losing money) while keeping pace with inflation.

When one examines the hypothetical performance of such a portfolio going all the way back to 1971 when the US Dollar became a fiat currency, the track record is very sound with 7 years of slightly negative returns and 44 years of positive returns.

This year, at the present time, this strategy is struggling as all asset classes are down or flat mid-way through the year.

Let’s begin by taking a look at stocks. 

I’ll use the Standard and Poor’s 500 for the analysis.  The chart below is of an exchange-traded fund that has the investment objective of tracking the S&P 500 index.

Notice on the right hand side of the chart, I have drawn a blue trend line that begins at the end of calendar year 2021 and continues to the present time.

Notice also, how far below the trendline the current price is.

Also on the chart, on either side of the green and red price bars (each bar is one week of price activity with the green bars representing the weeks that the ETF price went up and the red bars representing weeks the ETF price went down), you’ll see a blue line (on the top side of the price action) and a red line (on the bottom side of the price action).  Those lines are the Bollinger Band indicator.

When prices reach outside the Bollinger Band, either on the top side or the bottom side, it often represents a price extreme and the price reverts to the mean.

Finally, if you notice on this weekly price chart that last week’s price action ‘gapped down’ leaving a space in the chart between the prior week’s price action and last week’s.  Often, gaps on a chart are closed.

For these reasons, I would not be surprised to see a rally in stocks this next week although there is another market axiom that advises to ‘never try to catch a falling knife’.  It’s sage advice.

If you are a trader, you are best to trade with the trend and wait for a good opportunity to do so. 

Long-term, as noted in my mid-year market forecast published this month, I look for more downside in stocks.  I also expect the Fed to reverse course sometime soon and continue with easing.

That brings me to precious metals.

Gold and silver have not reacted the way one might expect of late with the high levels of inflation that exist.

The chart is a chart of an exchange-traded fund that tracks the price of gold.

Notice that the weekly price chart is forming a bullish ‘cup and handle’ pattern with the handle about to be completed.

I expect that the uptrend in gold will resume by year-end and silver will follow suit.

US Treasuries have also been a poor performer this year.

This chart is a chart of an exchange-traded fund that tracks the price of US Treasuries.  Keep in mind that as bond prices fall, bond yields rise.

The trend line on the chart is clearly down since the beginning of 2020.  A down trend over that time frame is not surprising given that the Fed expanded its balance sheet by trillions over that same time frame.

Now, as is the case with stocks, it would appear that bond prices are oversold and may be ready for a rebound.  The Bollinger Bands on the weekly price chart seem to indicate that as does the MACD indicator at the bottom of the chart.

To summarize, both stocks and bonds are extremely oversold here and a rebound would not be surprising although the primary trend of both stocks and bonds remain down.

Gold and silver are forming a bullish pattern that may see prices rise by year-end.

I expect that Browne’s permanent portfolio will continue to outperform the stock market as it has year-to-date and I expect some recovery in returns from here.

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

Are Currency Changes Imminent? – Part 2

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Are Currency Changes Imminent? – Part 1

        Despite the ever-so-slight rally in stocks this week, I view the primary stock market trend as down.  Unless the market highs of the end of 2021 are exceeded, this will be the case.

        This week, I want to discuss an event that has not been covered extensively so far as I can tell.  But this event that recently occurred has the power to change the way the world does a lot of its business.

        Here is why that could be a big deal to you – the rest of the world uses a lot of US Dollars in trade.  As I have discussed in this publication previously, there has been a gradual, ever-intensifying move away from the US Dollar over the past twenty years or so.  With this recent event, that move could really strengthen.

        To what event am I referring?

        This from “Fox Business” on February 28 (Source:  https://www.foxbusiness.com/markets/us-freezes-russian-central-bank-assets-held-by-americans):

The U.S. said it is blocking financial transactions of Russian central bank assets, effectively freezing any of those assets held by Americans.

The freeze is effective immediately, a senior administration official said in a briefing for reporters on Monday. The official said that the U.S.’s actions are in conjunction and cooperation with the European Union, Japan, the UK, Canada, and others. This means that not only will Russia not be able to access funds in U.S. dollars, they will be unable to use dollars in the other countries turn to other banks and other currencies.

By making the move effective immediately, before markets open, the official said, Russia will be unable to move assets to avoid or mitigate the consequences.

“Our strategy,” the official said, “is to make sure that the Russian economy goes backward as long as President Putin decides to go forward with his campaign.”

        As one would expect, Russia fought back.  The country is now demanding payment for its vast natural resource exports in either gold or rubles giving any of the rest of the world that does business with Russia another reason not to inventory US Dollars.

        Analyst and economic writer, David Kranzler, whose work I have discussed previously recently penned a piece on this topic titled, “Did Russia Intentionally Trigger a Monetary System Reset?” (Source:  https://www.investing.com/analysis/did-russia-intentionally-trigger-a-monetary-system-reset-200621146).  It is a thought-provoking article, here are some excerpts:

Fiat currency is a “promise” to repay a debt obligation and nothing more. A hard asset-backed currency is a guarantee that repayment will occur.

On Mar. 7, Zoltan Pozsar, who formerly worked at the NY Fed, was an advisor at the U.S. Treasury, and currently is a strategist at Credit Suisse, published a research report titled “Bretton Woods III.”

Anyone familiar with the Bretton Woods agreement understands the reference. Nixon’s snipping of the final thread connecting currency to gold is considered to be Bretton Woods II. Pozsar makes the case that Bretton Woods III is a reversion back to a monetary system in which currency is backed by commodities as opposed to being backed by a sovereign issuer’s “full faith and credit.”

The post-1971 fiat currency reserve banking system enabled by the removal of gold from the monetary system is nothing more than a Ponzi scheme. “Inside money” refers to the interbank repo/lending mechanism from which the fractional bank reserve monetary system blossoms.

Pozsar distinguishes “inside money” from “outside money.” Inside money” is created by the Central Bank/inter-bank lending mechanism that can magically turn one dollar of reserve capital into nine dollars of “credit” capital. And the one dollar of reserve capital is backed by nothing tangible—just the “full faith and credit” of the issuing entity.

Think of this monetary system as an inverted pyramid, e.g., something like Exter’s Pyramid. In bankruptcy law, “full faith and credit” would be considered, at best, an unsecured loan. Get in line and pray that there’s value left over to be distributed to the unsecureds.

In contrast, Pozsar references Bretton Woods III as the “rising allure of outside money over inside money,” where “outside money” is “commodities collateral,” meaning tangible assets for which definitive value can be determined, as opposed to the sovereign promise of “full faith and credit.”

In periods of banking crises, banks are reluctant to participate in the “inside game” (see 2008 and September 2019, for instance) because, at that point in time, they don’t trust the fiat currency collateral on which the fractional reserve banking system is predicated and thus are reluctant to lend money to their banking peers.

Every time this occurs, the Central Banks have to print more money to “lubricate” the system enough so that it functions. This in turn further devalues the “inside money” on which the system is predicated.

But if currency issued by Governments and printed by Central Banks is backed by hard assets, this problem is avoided. In this system, the counterparty to trade or financing transactions would have the option of demanding payment in the hard asset or assets backing the currency—most likely gold or possibly a pre-agreed upon commodity asset. Remember, fiat currency is nothing more than an unsecured debt instrument of the issuing entity.

It’s likely that Putin knew ahead of time that the West’s response to Russia’s invasion of Ukraine would be to freeze Russian currency reserves held at western Central Banks. Of course, this response by the U.S./West brought to light the inherent Achilles’ Heel of the modern Central Bank fiat currency reserve system.

Any country that keeps currency reserves for trade settlement purposes at foreign Central Banks, specifically the Federal Reserve and the ECB, is at risk of having those reserves confiscated, thereby rendering them worthless.

In response, Russia is now demanding payment for energy in either rubles or gold from what it deems to be “unfriendly” countries. Whereas in the “inside money” banking system, settlement of trade is merely a matter of accounting ledger adjustments at the respective Central Banks, in this trade settlement arrangement, a country purchasing oil or gas from Russia in exchange for gold would need to 1) demonstrate that the gold being used for trade payment actually exists, and 2) transfer the ownership rights to Russia. Russia ultimately would likely demand repatriation of the gold. The U.S./G7 made it crystal clear that possession of assets is 100% of the law.

The response by the West—led by the U.S. and its control of the global reserve currency—in all likelihood has triggered a reset of the global monetary system. I actually do not like the term “Bretton Woods III” because it references an agreement which, in its essence, destroyed the gold-backed global monetary system.

Regardless, it appears for now that Russia—likely with China’s tacit support—has set in motion a global monetary system reset. In the new system countries which supply the world with goods that have price inelasticity of demand—oil, natural gas and food commodities, for instance—will have the power to enforce trade settlement in hard currencies, e.g., gold or other hard assets, rather than fiat currency Central Bank accounting ledger adjustments.

        “Coindesk” recently published a piece (Source:  https://www.coindesk.com/policy/2022/03/08/credit-suisse-strategist-says-were-witnessing-birth-of-a-new-world-monetary-order/) that provided additional perspectives from Zolton Pozsar:

Former Federal Reserve and U.S. Treasury Department official, and now Credit Suisse (CS) short-term rate strategist, Zoltan Pozsar has written the U.S. is in a commodity crisis that is giving rise to a new world monetary order that will ultimately weaken the current dollar-based system and lead to higher inflation in the West.

“This crisis is not like anything we have seen since President [Richard] Nixon took the U.S. dollar off gold in 1971,” wrote Pozsar.

As the initial Bretton Woods era (1944-1971) was backed by gold, and Bretton Woods II (1971-present) backed by “inside money” (essentially U.S. government paper), said Pozsar, Bretton Woods III will be backed by “outside money” (gold and other commodities).

Pozsar marks the end of the current monetary regime as the day the G7 nations seized Russia’s foreign exchange reserves following the latter’s invasion of Ukraine. What had previously been thought of as risk-free became risk-free no more as non-existent credit risk was instantly substituted for very real confiscation risk.

What occurred surely isn’t lost on China, and Pozsar sees the People’s Bank of China (PBOC) faced with two alternatives to protect its interests – either sell Treasury bonds to buy Russian commodities, or do its own quantitative easing, i.e., print renminbi to buy Russian commodities. Pozsar expects both scenarios mean higher yields and higher inflation in the West.

        Last week, I discussed how governments and central banks around the world are pursuing digital currencies with a great deal of determination.  Perhaps this development helps to explain the sudden level of increased urgency.  It certainly makes the case for non-US Dollar-denominated assets in a portfolio like gold and silver.

“Money is the barometer of a society’s virtue. When you see that trading is done, not by consent, but by compulsion–when you see that in order to produce, you need to obtain permission from men who produce nothing–when you see that money is flowing to those who deal, not in goods, but in favors–when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you–when you see corruption being rewarded and honesty becoming a self-sacrifice–you may know that your society is doomed.”

                                                                   -From “Atlas Shrugged”

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 is Real and Where are We Heading?

                    While I don’t typically publish the databox above in my blog each week, I am including it this week for reference.

          The Dow to Gold ratio continued to fall last week.  As currency devaluation continues, this is an indicator that becomes more meaningful in my view.

          If you are not familiar with the Dow to gold ratio, it is simply the Dow Jones industrial average priced in gold.  The Dow to gold ratio began the year at about 20 and it currently stands just under 16 1/2. That is a decline in stocks when measured in gold of almost 18%.

          To calculate the Dow to gold ratio, one takes the value of the Dow priced in dollars and divides by the price of gold per ounce also priced in dollars. The current value of the Dow, 32,944.19 divided by the price of gold per ounce of 1999 results in a doubt to gold ratio of 16.48.

          As currency is devalued, the nominal value of stocks increases. That can result in the illusion of an appreciating stock market when the reality is a depreciating currency, not a stock market that is increasing in real terms.

          If we go back to the beginning of calendar year 2000, we find that the Dow Jones industrial average was at about 11,500.  Presently, the Dow is nearly triple that level.

          The question is, does that mean stocks have tripled in value, or does it mean that the US Dollar just buys a lot less?

          By pricing the Dow in gold, we can get an idea. 

          In January of 2000, gold was selling for about $280 per ounce.  To price the Dow Jones Industrial Average in gold, one would take the value of the Dow, 11,500 and divide by the price of gold per ounce, $280, resulting in a Dow to gold ratio of about 41.

          In other words, if you were going to use gold to buy the Dow instead of US Dollars, you’d need 41 ounces of the yellow metal to own the Dow.  (You can’t actually buy the Dow, but this is a good comparison.)

          Today, the Dow is at about 33,000 and the price of gold per ounce is about $2,000.  Taking the value of the Dow and dividing by the price of gold per ounce, one finds that the Dow to gold ratio is 16.5.  In other words, 22 years later, stocks when priced in gold have fallen nearly 60% while the same stock index priced in US Dollars has nearly tripled.

          While that comparison may not conclusively answer the question posed above, another example may.

          According to the United States Census Bureau, the median price of a home in calendar year 2000 was $119,600.  (Source:  https://www.census.gov/data/tables/time-series/dec/coh-values.html)

          If you were using gold to buy the new home in calendar yar 2000 rather than US Dollars, a new home would have set you back about 427 ounces of gold.

          Fast forward to today and the National Association of Realtors reports that the median price of a home is $358,000.  (Source:  https://www.newhomesource.com/learn/cost-to-build-house-per-square-foot/)  Given that gold is about $2,000 per ounce, a new home could be had for about 179 ounces of gold.

          Like stocks, home values have roughly tripled in the last 22 years when priced in US Dollars.  But, priced in gold, real estate values have declined just like stock values.

          This brings me to my point this week, in real terms (gold) we are experiencing deflation.  Measured in US Dollars we have inflation.

          As I discussed on my “Headline Roundup” webinar this week, Egon von Greyerz had some great observations along these same lines last week.  Here is a bit from his article (Source:  https://goldswitzerland.com/global-monetary-commodity-inferno/):

Inflation leading to hyperinflation was always guaranteed in the current debt-infested era, although the Fed and other Western central banks have never understood what inflation is. Just as they didn’t understand that their fake and manipulated inflation figures couldn’t even reach the Fed target of 2%. Now with real US inflation exceeding 15% (see graph below), the Fed has a new dilemma that they are totally unprepared for.

The US government conveniently changed the calculation of inflation to suit their purpose. Had they stuck to the 1980s established method, official inflation would be over 15% today and rising.

For years, the US Fed unsuccessfully tried, with all the king’s horses and all the king’s men, to get inflation up to 2%. In spite of throwing $ trillions at the problem and keeping interest rates at zero, they never understood why they failed.

In spite of printing unlimited amounts of counterfeit money, inflation for years stayed nearer 0% than 2%.

Now with official inflation at 7% and real at 15%, the Fed can’t understand what has hit them as we know from their laughable “transitory” language.

So now a quick volte-face for the Fed to figure out how to reduce inflation by 5 percentage points and more likely by 13 to get inflation down to 2% instead of up to 2%.

Clearly, the Fed can never get it right but many of us have known that for a very long time.

If the Fed studied and understood Austrian economics rather than defunct Keynesianism, they would know that the real inflation rate depends on growth in money supply rather than the obsolete consumer price model.

So let’s take a look at the growth in Money Supply. Since 1971, M2 has grown by 7% annually. A 7% growth means that prices double every 10 years. Thus 100% total inflation over 10 years rather than the 2% per annum that is the Fed target.

But as the chart above shows, the exponential phase started in March 2020 with M2 growing by 19% annually since then. That means a doubling of prices every 3.8 years.

Since the money supply is growing at 19% annually, this means that inflation is also 19% based on our Austrian friends.

And this is what the US and the world were facing before the Ukraine crisis. But now there is a lot of explosive fuel being poured on the global inflation fire.

Russia has the biggest natural resource reserves in the world which include coal, natural gas, oil, gold, timber, rare earth metals, etc. In Rubles, these reserves will obviously appreciate substantially with the falling currency.

In total, the Russian natural resource reserves are estimated at $75 trillion. That is 66% higher than the second country USA and more than twice as much as Saudi Arabia and Canada.

Even if the total Russian supply is not lost to the world, it is clear that the West is determined to punish Russia to the furthest extent possible. Therefore, as we have already seen in the major escalation of oil and gas prices, the shortages will put insufferable pressure on the prices of natural resources.

I have for quite a few years warned about the coming inflation, leading to hyperinflation, based on unlimited money printing.

But the dynamite of a global commodity crisis and shortages thrown into the already catastrophic debt and global monetary fire will create an inferno of nuclear proportions.

If a miracle doesn’t stop this war very quickly (which is extremely unlikely), the world will soon be entering a hyperinflationary commodity explosion (think both energy, metals, and food) combined with a cataclysmic deflationary asset implosion (think debt, stocks, and property).

The world will be experiencing totally unknown consequences without the ability to solve any of them for a very long time. All the above would most likely happen even without a global war. But if the war spreads outside Russia and Ukraine, then all bets are off. At this point, I am not going to speculate about such an outcome since what is standing in front of us currently certainly is bad enough.

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

Inflation and Deflation Perspectives

          Despite last week’s rally in stocks, the highs of mid-November remain the market’s high point.  As I have been noting, my long-term, trend-following indicators remain negative.

          This past week, I began to read the most recent book by James Turk, a past guest on my radio program.  Mr. Turk’s book is titled, “Money and Liberty; in the Pursuit of Happiness and the Natural Theory of Money”.

          In the book, Mr. Turk offers a perspective similar to the perspective I have offered in the past regarding money and currency and the difference between the two.  Currency is used in commerce and money is a good store of value over time.  Sometimes in history, currency and money have been the same thing, other times, including the present time, they are not the same thing.

          Mr. Turk offers the example of West Texas Intermediate crude oil.  When a barrel of oil is priced in US Dollars, Euros, or the British Pound, one concludes that the price of crude oil has risen significantly since 1950.

          However, when priced in gold grams, the price of a barrel of crude oil hasn’t changed since 1950.

           Fiat currencies, over time, are devalued by central banks or governments.  That makes fiat currencies poor measuring units.

          Economic output, or gross domestic product, is measured in fiat currencies.  Devalued currencies make the reported economic output number look better than it is in reality.

          The same is true when it comes to stock values.  Stock prices reported in fiat currencies move up as the currency is devalued.  The same devalued fiat currencies that make the price of consumer goods like groceries rise also make the price of stocks increase.

          Historically speaking, this devaluation of currency is controlled and gradual initially, but then the politicians and policymakers lose control of the devaluation process and inflation gets out of control.

          Economist John Meynard Keynes, the father of the loose money policies that are being pursued worldwide today, knew that control over the devaluation process would eventually be lost with dire consequences. 

          In 1923, Keynes wrote a tract on monetary reform.  The second chapter of the tract is titled, “Inflation as a method of taxation”.  Keynes, in his writing, discusses devaluation of a currency or inflation as a method of taxation that allows a government to survive when there is no other means of survival.  This from his tract (Source:  https://delong.typepad.com/keynes-1923-a-tract-on-monetary-reform.pdf):

A government can live for a long time, even the German Government of the Russian Government, by printing paper money.  That is to say by this means, secure the command over real resources – resources just as real as obtained through taxation.  The method is condemned, but its efficacy, up to a point, must be admitted.  A government can live by this means when it can live by no other.  It is the form of taxation which the public finds hardest to evade and even the weakest governments can enforce when it can enforce nothing else.” 

          Keynes indirectly states that the positive effects of currency printing diminish over time when he states that “its efficacy, up to a point, must be admitted.”

Keynes clearly understood that in the long run, the point is reached when currency devaluation doesn’t work and the adverse consequences of currency creation emerge.  One of Keynes’ most infamous quotes is “in the long run, we are all dead.”  Keynes clearly understood that eventually, this monetary policy would fail but it would be long after he and his cohorts exited the planet.

          Mr. Turk, in the aforementioned book, has this to say about Keynes’ statement.

“These words, which are frequently quoted, are among the most grossly irresponsible statements ever spoken by an economist.  Actions have consequences and planning for the next generation is an essential element of economic activity.  What is important to society and indeed our civilization is not just how we live, but what we leave for future generations.  That the planet’s environment has become so scarred is an indication of how much we have accepted the ills of progressivism, socialism, and authoritarian control by the State and moved away from capitalism, private property, and individual liberty.  The State today rarely leaves people alone.

Keynes’s comment is typical of socialists and progressives who focus on satisfying their innate yet perverse need to control others rather than where their attention should be directed, which is the consequence of their actions.  For example, they proclaim their vision that forces the world to drive electric cars so that we do not inhale the emissions from exhaust pipes, yet they are blind to the number of plants needed to generate the electricity to power all those new cars.  Decisions cannot be made on emotion.  In our world of limited resources, they must be made based on sound economics and that requires trustworthy money spent and invested at a true cost of capital.  These are requirements that only gold can provide.  Further, to achieve the best possible outcome decisions need to be unfettered by government involvement and their market interventions.

For Keynes, the long-run has arrived, and he wrote his own fitting epitaph:

‘Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.  Madmen in authority, who hear voices in the air are distilling their frenzy from some academic scribbler of a few years back.’

It’s time to bury Keynes, Keynesianism, and socialism.”

          I agree with Mr. Turk.

          But abandoning currency creation will come at a cost.  A deflationary period of time will materialize.  Continuing with the Keynesian policies of currency creation will not avoid the deflationary period, it will only make the eventual deflationary period worse.

          The choices are grim; an ugly deflationary period, or an uglier deflationary period.  The longer currency creation continues, the more severe the resulting deflationary period will be.  Keynes touched on this in his 1923 tract:

“In the first place, deflation is not desirable because it effects, what is always harmful, a change in the existing Standard of Value, and redistributes wealth in a manner injurious, at the same time to business and social stability.  Deflation, as we have already seen, involves a transference of wealth from the rest of the community to the rentier class and to all holders of titles to money; just as inflation involves the opposite.”

“But, whilst the oppression of the taxpayer for the enrichment of the rentier is the chief, lasting result, there is another more violent disturbance during the period of transition.  The policy of gradually raising the value of a country’s money to (say) 100% above its present value in terms of goods, amounts to giving notice to every merchant and every manufacturer, that for some time to come his stock and his raw materials will steadily depreciate on his hands and to everyone who finances his business with borrowed money that he will, sooner or later, lose 100% on his liabilities.  Modern business, being carried on largely with borrowed money, must necessarily be brought to a standstill by such a process.”

          If you’re not familiar with the term ‘rentier’ class, it refers to someone who relies on a pension, rents, or other fixed-income sources.

          These people benefit from a currency that buys more over time.

          On the other hand, borrowers benefit from a currency that buys less over time.  Mortgage holders, business owners with debt, and the government all benefit from a currency that is being devalued.  In this scenario, dollars borrowed, buy more than dollars that are used to pay back the debt.

          When Keynes fails to acknowledge in his 1923 tract is constant money.

          Gold is constant money.

          When we go back and revisit the example of West Texas Intermediate crude oil that Mr. Turk used in his book, we find that the barrel of crude oil that sold for $2.57 in 1950 now costs more than $70 to purchase when using US Dollars in the transaction.

          That barrel of oil purchased with gold grams in 1950 and today would cost the same amount.  Gold has historically been constant money.

          At different times in history, the paper currency has been only partially backed by gold which allows for more currency creation and is inflationary.

          Today, there are zero currencies in the world with any level of gold backing.  Currency creation worldwide has been expanding and consumer price inflation is now manifesting itself in earnest.

          In response, many world central banks are raising interest rates to attempt to suppress inflation.  Wolf Richter (Source:  https://wolfstreet.com/2021/12/22/end-of-easy-money-global-tightening-in-full-swing-fed-promises-to-wake-up-in-time/)  reported last week that the central banks of Czechoslovakia, Russia, England, Norway, the European Central Bank, Mexico, Chile, Hungary, Pakistan, Armenia, Peru, Poland, Brazil, Korea, New Zealand, South Africa, Iceland, and Japan have all increased interest rates.

          The Fed has kept interest rates at zero; look for more inflation before we see deflation. 

          As for Keynes, he was right about being dead in the long run.  Keynes passed away in 1946.

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.

Gold Price Analysis

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

          This past week, as noted above, Mr. Egon von Greyerz looked at this topic from a fiat currency devaluation perspective.  Here is a bit from his excellent piece (Source:  https://goldswitzerland.com/shortages-hyperinflation-lead-to-total-misery/):

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

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

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

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

The same is happening now all over the world.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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