Is This the Mother of All Bubbles?

Is this the “Everything Bubble”?

Past radio program guest, Mr. John Rubino, made a great case that we are now experiencing a bubble unlike any bubble we’ve experienced historically.

I have long been stating the same thing, pointing at stocks, bonds and real estate in particular.

Rubino, in his recent article (Source: points out that if someone today is over age 40, they have lived through at least three bubbles:  there was the junk bond bubble of the 1980’s, the tech stock bubble of the 1990’s and the housing bubble of the 2000’s.

Each of these bubbles occurred as a result of easy money policies, but, as Mr. Rubino points out, they affected only a single sector of the financial markets.

This bubble looks different and it looks like it’s affecting almost every financial sector.

Bubbles use easy money as their fuel.  Without easy money, bubbles cannot form.  Easy money, as we’ve discussed in past issues of “Portfolio Watch” is easy credit.  Today, easy money combines easy credit and money creation literally out of thin air.

This combination makes the bubbles even bigger.

Taking a look at money creation over the past 20 years since the turn of the century, one finds that the US money supply has more than tripled with money creation last year alone increasing by more than 1/3rd.

That’s a lot of easy money to get bubbles going in a lot of different areas.

While bond yields have started to rise meaning bonds are losing value (bond yields and prices are inversely correlated, when bond yields rise, it means bond prices are falling), over the longer time frame, yields have fallen dramatically which means price have risen significantly.  The chart illustrates the yield of the 10-Year US Treasury Note.  Since 1980, yields have been declining which means prices have been rising.

Lest you think this is normal behavior for bonds, John Rubino published this chart that clearly demonstrates today’s bond yields are the lowest in human history.  The chart, titled “Visualizing Interest Rates Throughout History” shows that going back to 1350, interest rates have never been this low.  That means bond valuations have never been this high and we all know these nosebleed bond valuation levels are not because the credit risk of the bond issuers is low.  Quite the contrary, interest rates are artificially low while credit risk is rising.  It’s a perfect storm for a bond bubble.

But, it’s not just bonds that are in a bubble; for a long while now, I’ve been warning that stocks are overvalued.  While my technical stock indicators have stocks in a solid uptrend, they are overbought and stock fundamentals don’t support these valuation levels.

Using the “Buffet Indicator” to measure the value of stocks, as seen on the chart, stocks are more overvalued presently than at any time in the last 30 years.

Stocks, using the Buffet Indicator are more overvalued presently than at the peak of the tech stock bubble two decades ago.

While the last big bubble was in housing a little more than a decade ago, it seems that we are headed in that direction again.

The chart, from the Federal Reserve Bank of St. Louis, shows that housing prices last year went nearly vertical on the chart – an historic sure-fire indicator of a bubble.

While bubbles can build for a longer period of time than one might think, eventually, bubbles have to burst.

It’s easy to argue that there is also a bubble in crypto-currencies.

The chart illustrates Bitcoin price history.

Notice the straight-up chart pattern of the chart, a pattern that I would call parabolic.  Regardless of what you call the pattern, straight up on charts are almost always followed by straight down in my experience.

Ethereum, another popular crypto currency has a chart price pattern that is even more extreme.

Almost every market and economic sector is now ‘bubbling’ due to all the easy money created by the central bankers at the Federal Reserve.

It seems that the central bankers have no intention of changing course any time soon.

Fed Chair, Jerome Powell, is committed to even more easy money policies moving ahead. 

Reading between the lines, it’s obvious that the Fed understands the risks of much higher inflation that will likely accompany these continued policies.

 Last year, the Fed changed the way the central bank would track the inflation rate.  The new inflation tracking methodology is Average Inflation Targeting.  This allows the Fed to let inflation run hotter than the desired level for a period of time as long as the average rate is at the Fed’s targeted rate.

No matter the metric used to track the inflation rate, the actual inflation rate seems certain to rise.

While last year’s federal budget operating deficit of a little more than $3 trillion seemed like it could be the straw that broke the proverbial camel’s back, this year’s deficit will make that one look like child’s play.

Prior to the proposed $1.9 trillion stimulus package, this year’s deficit is projected to be $2.3 trillion (Source:  Add the stimulus package in and we could see a deficit of more than $4 trillion with declining GDP.

There is one bubble I did not discuss – a currency bubble.

Seems that bubble is bursting in painful slow motion as we watch.

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Bailout or Not: Many States and Cities Are In Trouble

As I suggested might happen on my “Portfolio Watch” live webinar last week, both gold and silver pulled back after big, parabolic moves up.  It would not be unusual to see the pullback continue for a bit or to see these markets consolidate.  From a fundamental perspective, I remain bullish on precious metals. 

By my technical measures, stocks are now once again in an uptrend.  I remain very skeptical of stocks given that stock valuations using the market capitalization to gross domestic product ratio is at all-time highs.

This week, I’ll examine the financial state of many states and cities around the country.  In a word, many states and cities have finances that are abysmal. 

John Rubino of and past RLA radio guest had this to say on the topic last week (emphasis added):

Lacking monetary printing presses, US cities and states tend to behave more like normal economic entities than do most nations. That is, they’re always balanced on the knife-edge of insolvency as taxes fail to cover the promises, legitimate and otherwise, that mayors and governors have made to voters.

Toss in the covid-19 lockdowns and – in a few especially badly-run places, continuing riots – and many if not most American cities and states are looking at functional bankruptcy, featuring mass layoffs of teachers, cops, librarians and pretty much every other kind of employee. Trash won’t be collected, libraries won’t open, 911 calls won’t be taken.

To repeat the guiding prediction of this series, American towns will look more like Caracas than Zurich.

The one hope mayors and governors have been nursing is a massive federal bailout that papers over unfunded pensions and ongoing operating deficits alike with trillions of newly created dollars.

This prospect seemed imminent just a couple of weeks ago. After all, in an election year how can Washington allow the above carnage? But now imminent seems to be off the table and even “inevitable” is in question. Republicans (who don’t much care about big cities run by the opposition) and Democrats (who desperately want a bailout, but maybe not as much as they want to crush Trump in November) can’t agree on a new plan and have, for now at least, given up trying.

          Mr. Rubino references an Associated Press article in his piece (emphasis added):

Stay-at-home orders in the spring, business shutdowns and tight restrictions on businesses that have reopened are slamming state and local government revenue. In a June report, Moody’s Analytics found that states would need an additional $312 billion to balance their budgets over the next two years while local governments would need close to $200 billion.

Many states already are staring at ledgers of red ink. Texas is projecting a $4.6 billion deficit. In Pennsylvania, it’s $6 billion. In Washington state, the deficit is expected to be nearly $9 billion through 2023. California’s budget includes more than $11 billion in cuts to colleges and universities, the court system, housing programs and state worker salaries.

            Will the Washington politicians bail out state and local governments?

          This being an election year, there will probably be some additional form of stimulus package and it’s important to remember that regardless as to the extent that state and city governments are included in the package, there is no money to pay for such a package without once again resorting to the printing press and simply creating the money that is needed to fund any additional spending.

          That’s the problem.  Nothing is free.  There is ALWAYS a tax to pay, either an actual tax where the government has you parting with some of your hard-earned dollars or an inflation tax where the value of the currency is diminished.

          An inflation tax punishes savers and investors.

          On this week’s RLA Radio program, guest expert, Peter Schiff, commented that presently 60 cents out of every dollar that the United States spends is created by the Federal Reserve.

          As next weeks’ RLA Radio guest, Jeff Deist, president of the Mises Institute and former advisor and chief of staff to congressman Ron Paul noted, when the year 2020 began a $1 trillion operating deficit at the federal level was anticipated.

          Now, however, the reality of the situation is that the United States could finish the year with an operating deficit that exceeds total tax receipts.  That is simply remarkable when you think about it.  And, it’s completely unsustainable.

          While it remains to be seen if the Washington politicians decide to bail out states and cities and to what extent, it’s likely that many states and cities will require more than one bailout even if they get their first one.

          I reach this conclusion for a couple of reasons.

          First, state and city tax revenues will continue to decline as lockdowns in response to COVID continue to force more businesses to permanently close.  As I have reported here, many businesses that closed temporarily to comply with lockdown restrictions are now closed permanently.  Businesses that are permanently closed no longer pay taxes.

          Second, there is literally an exodus taking place from many states and municipalities as people are seeking out peaceful country living.  This will further diminish tax revenues in these areas.  Past RLA Radio program guest, Jim Rickards had this to say on the topic (emphasis added):
I want to discuss some of the permanent changes that the national economy is going through. It has to do with what you might call the Great American Exodus. There’s a massive migration out of the big cities. Millions of Americans are fleeing the cities for the suburbs or the country from coast to coast.

There’s hard data to support that claim.

For example, let’s say you want to rent a U-Haul trailer from New York City to the Catskill Mountains, which are not that far away. Or you want to rent a U-Haul trailer from Los Angeles to, maybe Sedona, Arizona.

It’ll cost you much, much more than if you were going the other way. If you went from Sedona to LA, or the Catskills to New York, the price is only about one quarter as much. In other words, you have to pay a 400% premium to get the trailer going out of town, but U-Haul will practically pay you to bring it back in.

And there are shortages. If you’re moving out of your apartment to a house or another apartment outside of the city, try getting movers. I’ve done this recently myself, and know others who have. It was very hard to book moving companies or something as simple as a U-Haul trailer.

So the mass exodus out of cities is a real phenomenon, backed by solid evidence.

This is a shift we probably haven’t seen since the 1930s, when people left the Dust Bowl and moved out to California, looking for jobs in the agricultural industry. That was a mass migration. We’re seeing another one now, except this one’s going in the opposite direction.

And that’s a big problem for the economy because cities are centers of economic activity that contribute a lot to GDP. 

          Rickards cites three reasons for this mass migration.

          One, millennials are getting older.  The first of the millennial generation will turn 40 in a couple years.  It’s normal for people who enjoyed living in the city in their 20’s and 30’s to want to move to the country as they get older.

          Two, the pandemic.  Highly populated areas are inherently more dangerous when it comes to virus transmission.  Many people are looking to minimize that risk by moving to less populated areas.

          Three, the riots.  Peaceful protests are protected by the constitution.  Peaceful protests against injustices should be supported.  But, no one has a right to loot stores and burn buildings; that shouldn’t even be a debate.

          Rickards adds that calls to defund the police are making many city dwellers see the writing on the wall and they’re opting to move while they can.  Rickards notes that crime rates in New York are already rising and since the riots, retirement applications among police officers have increased by 400%.

          No matter the amenities offered by city life; if citizens perceive it to not be safe, many will understandably opt to move.  And they are.

          Rickards concludes by saying (emphasis added):

Now, you cannot underestimate the economic impact of this. The cities are where most 80% or more of the population, economic output, job creation, and R&D are centered. And who’s leaving the cities?

It’s the people who can have the option to leave. It’s the talent. It’s the money. It’s the energy. It’s the people that you most want in your cities who have the ability to leave.

And of course, now we have this whole work from home model. So a lot of corporations are saying, we don’t need 10 floors on 53rd and Park Avenue. We can do two floors of shared conference facilities, with a shared receptionist. So the commercial real estate market faces some strong headwinds.

The bottom line is, we’re looking at a substantial drag on economic recovery based on this migration out of the cities. It’s a big story that’s not getting nearly enough coverage.

          As economic recovery lags, so do tax revenues.  As people leave cities, taxes these people would have paid leave with them.

          The facts are pretty clear.  One bailout of states and cities will lead to another.  And if you’re a saver or investor, you’ll be paying for the bailout via the inflation tax. 

          There is still time to protect yourself.  If you’ve not already done so, consider using the two-bucket approach to manage your assets.

          You might also be wise to see if it makes sense for you to eliminate the tax liability on your IRA or 401(k) while tax rates are lower.  My office can help.  If you’d like an analysis done on your ultimate income tax liability on your retirement account(s), give the office a call at 1-866-921-3613.

The Inevitable What…

After a bit of a pullback, it seems that metals may be resuming their uptrend after last week’s price action.

Given the state of world finances, the massive amount of government debts and monster operating deficits I expect that metals will be a good place to be with some of your assets moving ahead.

The math behind the deficits and the debt can lead to no other reasonable forecast.

Despite the political demagoguery that would have you believe otherwise, these financial problems cannot be solved through tax increases; there is simply not enough money in existence to do so.

I’ve stated this previously in my posts, but given the size of the national debt and the underfunded liabilities of Social Security and Medicare, confiscating 100% of household wealth will not solve the problem.

That includes all the wealth of the 500+ billionaires that call the United States home.

The venomous politics of Washington is taking attention away from the real problems – unmanageable debt and out-of-control deficits.

And, while we all have our political preferences, this is a problem that has been getting progressively worse with each new administration.

Here are the facts.

When George W. Bush left office, the official national debt was $5.849 trillion more than when he took office.

When Barack Obama left office, the official national debt was $8.588 trillion more than when he took office.

Under Donald Trump, deficits have continued to be ‘normal business’.  This will continue to the case until the financial realities of Social Security and Medicare are addressed.  However, politicians have been and will continue to be reluctant to seriously look at these issues since the only viable solution is massive program cuts.

There are some that would argue raising taxes could be a solution, namely higher Social Security tax on high-income earners.  The numbers say otherwise.  Any higher taxes would still have to be coupled with significant cuts to provide a solution.

Despite these economic realities, BOTH Republicans and Democrats this past week agreed to a $320 billion spending increase as part of a bill to keep the government funded (Source:  This despite the fact that revenues for the first two months of fiscal 2020 were $471 billion and outflows were $814 billion.  That’s a deficit of more than $340 billion – over just two months!

Medicare and Social Security spending is increasing at 6% per year.  Those spending increases are ‘auto-pilot’ increases.

But other increases are totally discretionary.  Military spending is up 7%, education spending is up 25% and spending on Medicaid is up 9% to name just a few of the many examples.

Continuing to add to the debt through huge operating deficits, will eventually catch up with us.  As the old farmer said, “the rooster always comes home to roost”.

This one will too.  And, when it does, we will all have to deal with the consequences.

Sadly, politicians in both parties are collectively not interested in getting budgets under control.  As I just noted, there is agreement on more spending but with no thought on where revenues to support that spending will come from.

Without that agreement, the only option to deal with this problem is money creation.

That’s the road on which we’re traveling and this road will ultimately lead to ugly consequences. 

Massive debt levels are stagnating economic growth and central bankers are responding by attempting to create more debt. 

One of my past RLA Radio guests, John Rubino commented on this last week citing the example of Japan (Source: (emphasis added):

Japan is preparing an economic stimulus package worth $120 billion to support fragile growth, two government officials with direct knowledge of the matter said on Tuesday, and complicating government efforts to fix public finances.

The spending would be earmarked in a supplementary budget for this fiscal year to next March and an annual budget for the coming fiscal year from April. Both budgets will be compiled later this month, the sources told Reuters, declining to be identified because the package has not been finalized.

The package would come to around 13 trillion yen ($120 billion), but that would rise to 25 trillion yen ($230 billion) when private-sector and other spending are included.

Japan’s economic growth slumped to its weakest in a year in the third quarter as soft global demand and the Sino-U.S. trade war hit exports, stoking fears of a recession. Some analysts also worry that a sales tax hike to 10% in October could cool private consumption which has helped cushion weak exports.

Such spending could strain Japan’s coffers – the industrial world’s heaviest public debt burden, which tops more than twice the size of its $5 trillion economy.

Two takeaways here:

First, pushing interest rates into negative territory and not getting an epic debt-driven boom screams “end of the interest rate road.If paying people to borrow doesn’t induce them to do so, then paying them more probably won’t generate much new action.

Second, running massive deficits and then raising sales taxes to offset the stimulus is the kind of policy mix that’s too stupid to bother discussing.

Most all world central banks and world governments are on the same path. 

Massive government spending not supported by tax revenues.  And central bank policies that attempt to solve a debt problem by creating more debt.

It doesn’t take a Ph.D. in economics to figure out that both policies are utterly and completely unsustainable.

You can’t spend more than you have in income for an extended period of time.  And, anyone who’s ever maxed out a credit card will tell you that it’s a lot of fun until you hit the limit.  Then, reality sets in.

That’s where we are presently – getting close to the point where reality sets in.

Money creation will continue until it doesn’t.  No one knows precisely WHEN that will be, but if we can all agree that the current path is unsustainable, the WHAT is certain. 

And whenever the WHAT hits, if you’re not yet holding tangible assets with at least part of your portfolio, you could find yourself unprotected.