John Williams – Dennis Tubbergen

Inflation Heats Up, Are Price Controls Coming

The big economic news the week before last week was the big decline in US Treasuries. Last week, the big economic news was once again the big decline in US Treasuries.

While the US Dollar Index is higher once again this week, as I discussed last week, it’s important to remember that this measure of the US Dollar’s purchasing power is a relative measure and compares the purchasing power of the US Dollar to a weighted basket of 6 other fiat currencies.

On an absolute basis, the US Dollar’s purchasing power is declining as the official inflation rate rose to 8.5% last week. The real inflation rate is much higher than this heavily manipulated Consumer Price Index number.

John Williams, the economist at www.shadowstats.com, uses the inflation rate calculation methodology that was used pre-1980 to determine the inflation rate. Using that calculation methodology, which was used the last time we had inflation at these levels, the current inflation rate is 16.77%.

That feels more like what we are all experiencing.

Inflation levels are now either at or approaching levels that will cause more inflation. When inflation levels get high enough, the inflation cycle begins to feed on itself, creating even more inflation.

In today’s inflationary environment, it’s nearly impossible for a builder to comfortably and confidently quote a proposed building project. Assuming a building project will take a year or two to complete, the prices of the materials needed to complete the project will likely rise enough by the time the materials are actually needed to render any current quote attempts fruitless.

The same could be said about farming. Input costs have risen a staggering amount. Many farmers are not planting the same crops or the same quantity of crops as in past years due to uncertainty about the ability to make a profit.

And, of course, there is always the concern about what politicians might decide to do about inflation. That concern is rightfully heightened in an election year like this one.

In past posts, I have forecast that we will likely see price controls or perhaps even rationing of certain products, especially as the election approaches.

While history unequivocally teaches us that price controls never work, that fact has never kept self-serving politicians from implementing price controls on an uninformed public to make it seem like the politicians are doing something to address the problem.

In the 1970’s, after stating that “the (expletive deleted) things don’t work” referring to price controls, President Nixon reversed course and implemented price controls when his advisor reminded him he needed to navigate re-election.

Ironically, Nixon was right. Price controls didn’t work. As always happens price controls lead to empty store shelves as producers stop producing when the profit incentive is gone.

Now, as I predicted we would see earlier this year, there is talk among some Washington politicians to implement price controls. Here is an excerpt from an op-ed piece written by Stephen Moore in “The New York Post” (Source: https://nypost.com/2022/04/06/threatened-price-controls-wont-curb-biden-flation/)

Now the Biden administration complains that producers are taking advantage of product shortages and supply-chain constraints by jacking up their prices. He wants to penalize the meat packers for the high beef prices, the poultry industry for the rising expense of a chicken dinner, the drug companies for the high cost of pharmaceuticals and the oil and gas industry for recording record profits while gas prices soar.

He wants the Federal Trade Commission and other regulatory agencies to impose price ceilings to be monitored by an army of federal price-control police.

This is economic amnesia. We tried all these government manipulations in the 1960s and 1970s. The ruinous price regulations on industry made inflation worse. Back then we had Soviet-style central planners imposing price limits on everything: long-distance phone calls, oil and gas, airlines, rail service, trucking and banking services.

This was supposed to protect consumers, but by making it illegal for prices to rise, we got hit with empty shelves, shortages and gas lines.

The price ceilings became de facto price floors. Inflation shot up from 5% to 8% to 10% by 1980.

Even Democrats Jimmy Carter and Ted Kennedy realized that things were going haywire. They took the lead in ushering in an era of decontrol of prices. And when President Ronald Reagan was elected, his first executive order was to end oil and gas price controls.

What was the result? A famous study by the Brookings Institution found that the airline prices collapsed by one-third (ushering in an era of everyday Americans being able to afford to fly here, there and everywhere) and banking charges fell by half, as did trucking and rail costs. The price of oil briefly rose when the price controls were lifted, but then as energy supplies were unleashed, prices fell by more than 60%.

Brookings found “in every industry” in which price controls were lifted, “prices fell and service quality improved.”

Why is this history lesson so hard for the modern Democrats to learn?

Just this week, Bernie Sanders called for a backdoor form of price controls with his proposal of a 95% windfall-profits tax on such firms as oil companies, pharmaceuticals, and meat producers. No one told the senator that when you tax something, you get less of it. This will only make supply-chain problems worse and fuel even higher prices.

Businesses aren’t charities. And it’s not “greed” or price gouging to make a profit. Adam Smith taught us in 1776 that it’s profit, not “benevolence,” that induces companies to produce more of the things we want at prices we can afford. That eventually brings prices down.

How depressing that here we are 250 years later and our politicians in Washington still don’t understand that enduring economic lesson.

Hopefully, price controls don’t get taken out of the tired bag of tricks, but this is an election year and inflation is continuing to accelerate. I’m hopeful but not holding my breath.

The reality is that inflation is a result of extremely loose, I would argue reckless, monetary policy. Paul Volcker ended the inflation in the 1970s by raising interest rates to nearly 20 percent which caused the money supply to meaningfully contract.

Here’s the problem with following Volcker’s plan of action today – the Federal Reserve is indirectly monetizing government deficit spending. To tighten monetary policy permanently, the federal government’s budget will also have to be tightened.

That’s why I believe the Fed’s current actions to tighten will be reversed at some future point citing another economic emergency that requires more currency creation.

Meanwhile, following increasing yields on US Treasuries, mortgage rates rose as well with interest rates on a 30-year mortgage now rising past 5% for the first time in more than 10 years. This from “The Guam Daily Post” (Source: https://www.postguam.com/business/real_estate/mortgage-rates-hit-5-ushering-in-new-economic-uncertainty/article_396d6358-bc70-11ec-b78e-8b82b1f2f504.html)

Mortgage rates swelled above 5% for the first time in more than a decade – an unexpectedly rapid ascent that has begun to temper the U.S. housing boom and could usher new uncertainty into an economy dogged by soaring inflation.

The 30-year fixed-rate mortgage, the most popular home loan product, hit the threshold just five weeks after surpassing 4%, according to Freddie Mac data released Thursday. The average has not been this high since February 2011.

The run-up comes as the Federal Reserve has launched a major initiative to rein in the highest inflation in 40 years. Fed officials are betting that higher interest rates will slash inflation and recalibrate the job market. But their plan also rests on the assumption that higher rates will cool demand for housing, especially while homes themselves are in such short supply.

Low rates fueled the revival of the U.S. housing market after the Great Recession and have helped drive home prices to record levels. But after two years of hovering at historical lows, rates have been on a tear: In January, the 30-year fixed average was 3.22%. It was 3.04% a year ago. And while mortgage rates had been expected to rise, they’ve done so more quickly than many economists predicted.

“I’m not surprised that rates have hit 5%, but I am surprised that everyone else is surprised,” Curtis Wood, founder and chief executive of Bee, a mobile mortgage app, said via email. “If you look at historical action by the Fed in a high-rate environment and compare that to what the Fed is doing today, the Fed is underreacting to the reality of inflation in the economy.

“I’m surprised that rates aren’t at 6% right now,” he added, “and wouldn’t be shocked if they’re at 7% by end of year.”

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.

Retirement Delayed?

As I have suggested previously, the economic climate and the policy response to COVID (massive money creation) will change the perspective that many Americans have about retirement.

An article published by the Foundation for Economic Education (Source: https://fee.org/articles/survey-1-in-3-americans-to-postpone-retirement-after-lockdowns/) last week reported on the results of a survey that found one in three American workers who were thinking about retirement have now decided to delay their retirement plans.

This is a 180-degree turnaround from retirement numbers in the calendar year 2020 which saw more than 3 million baby boomers retire, a number that was about double the number of boomers retiring in 2019.

This from the article (emphasis added):

The COVID-19 pandemic saw a retirement surge in 2020, with more than 3.2 million baby boomers retiring—more than double the previous year.

New evidence, however, says a stunning number of Americans are preparing to do the opposite: delaying their Golden Years because of the financial hit they took during the pandemic.

“[A] study from Age Wave and Edward Jones finds that about 1 out of every 3 Americans who are planning to retire now say that will happen later due to Covid-19,” CNBC reports.

The poll, a survey of 2,042 adults conducted in March, estimates that 69 million Americans say their retirement plans have changed since March 2020.

The article also references a survey from last December that found approximately 22 million Americans had ceased making contributions to their retirement accounts. Four months later, in April of this year, only 8 million of those Americans had resumed making contributions to their retirement accounts meaning 14 million had not resumed contributions.

Another survey cited in the article conducted by Survey Monkey in January of this year found that 46 million Americans had their personal savings wiped out in 2020 implying that the reason many of these folks with retirement dreams are simply not in a position to resume contributions to their retirement accounts.

The lockdown response to COVID was far more devastating to those approaching retirement than to those who were already retired. The CNBC report noted above states “pre-retirees were more negatively impacted by the pandemic compared to retirees, 44% versus 22%, respectively.”

The reality is that the response to the pandemic, at least from an economic perspective, was far more devastating to pre-retirees than the actual disease.

Let’s briefly examine the obstacles to a comfortable, stress-free retirement now facing someone with retirement dreams.

The massive government spending in response to the lockdowns imposed was funded through newly created currency. One look at the Federal Reserve’s balance sheet currently sees that the Fed has more than $8 trillion in assets. That $8 trillion is simply the amount of new currency the Fed has literally created to buy securities.

All this newly created money is now leading to a very predictable conclusion – inflation is rearing its head on a large scale making it more difficult for aspiring retirees to save and for many Americans to cover the cost of their basic living expenses. This from “MSN Money” (Source: https://www.msn.com/en-us/money/personalfinance/e2-80-98i-e2-80-99m-going-to-go-broke-e2-80-99-this-is-how-rising-inflation-feels-for-an-american-who-e2-80-99s-living-on-disability-insurance/ar-AALr5yj) (emphasis added):

Lately, just about everything is costing Todd Richardson more than it did before the pandemic.

He’s paying $2 more per pound of chicken wings, his cable and electricity bills have also gone up by $100 since before the coronavirus pandemic, and he’s anticipating that his landlord will raise his rent from $750 to $1,100.

But that’s not even the biggest shock to him.

“I can’t believe cat litter and food have gone up by $5. How could they even do that? It’s kitty litter and cat food for God’s sake,” he said.

Richardson, 56, is only able to save $110 each month, if he’s lucky.

Richardson used to work as a home-care aide for elderly people, but after contracting Lyme disease three years ago, which left him partially immobilized and with permanent neurological damage, he was forced to quit.

He receives around $1,500 a month in Social Security Disability Insurance benefits — half of which goes toward paying rent for his one-bedroom apartment in Plymouth, N.H. He spends the rest on transportation, cat supplies, electricity, cable and food, after he exhausts $200 a month in food stamps.

Richardson lives with his girlfriend, who also relies on Social Security Disability Insurance, and two cats. “Before the pandemic, I could survive,” Richardson told MarketWatch. He found small ways to save money, such as buying 99-cents-per-pound chicken wings at Walmart and visiting a local food pantry. Those same wings now cost $2 more per pound.

Richardson’s situation is hardly unique — Americans across the board are paying more for goods and services than they have in more than a decade due to inflation.

While Mr. Richardson’s difficulties may not exactly mirror those of someone more affluent who is planning to retire, the concerns are the same.

Why retire when one doesn’t know how the purchasing power of one’s savings will be affected in the near future due to continued Fed money creation? The safer option is to continue to work and see how this all plays out.

A would-be retiree counting on Social Security benefits for much of their retirement income might be nervous to put themselves on a fixed income with adjustments for inflation that are more form than substance.

And, given that interest rates have been kept artificially low, retirees who would be logically looking for a more conservative investment approach during retirement are left with a conundrum. Maintaining a conservative approach to avoid losing significant investment assets during a stock market crash will, over time, see a portfolio lose purchasing power due to the huge gap between the real inflation rate and fixed interest available on a conservative investment vehicle.

According to John Williams at ShadowStats.com, the real inflation rate is presently about 13%. Interest available on a conservative, fixed interest investment is more than 10 percentage points lower. That puts retirees in a very precarious situation – take more risk than they should be taking to attempt to retain purchasing power or use a conservative investment knowing that should present policies continue, the future purchasing power of investments will be devastated.

An aspiring retiree planning for retirement using traditional strategies is choosing between two potentially ugly outcomes.

Interestingly, the surveys conducted reference the pandemic as the cause of the current economic problems when the reality is the response to the pandemic, namely lockdowns and massive money creation, that are the real culprits here.

A government operating with a balanced budget in a sound money system would have been able to react to COVID in a much different manner without the inflationary fallout that we are all presently experiencing.

That however was not the case.

Going into the pandemic, the government was already fundamentally broke. The Fed was already subsidizing much of the government’s deficit spending through money creation. The level of money creation since early 2020 has now simply gone off the charts.

It’s important to understand that there is a time lag between money creation and inflation. We are now seeing the inflationary results of last year’s money creation.

However, money creation hasn’t stopped. Politicians refuse to collectively realize that additional, new spending will add to the deficit, resulting in more money creation and add to the pain that many Americans are now feeling.

It’s a twisted irony that printing currency to help those in the population who need it actually ends up hurting those same people the most.

If you’re an aspiring retiree, consider using the Revenue Sourcing approach described in the book “Revenue Sourcing: A Retirement Planning Strategy for the Post-Pandemic Economy”.

If you know of someone who 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.

Flashback to the 1970’s?

One of the most obvious economic stories remains inflation. As I discuss on the RLA Radio program this week with guest Karl Denninger, there is a time lag between money creation and the onset of inflation.

Money creation began in earnest last year in response to COVID as stimulus packages were passed and helicopter money was distributed to many households. We are now seeing the effects of that money creation in the form of inflation.

The current economic situation is beginning to resemble the 1970’s. Prices, including fuel prices, are rising and the economy is contracting. Economists refer to this economic environment as stagflation.

The chart, put together with data from the Federal Reserve shows the M2 money supply.

Notice that the money supply has expanded from about $15 trillion last year to more than $20 trillion presently.

You don’t need to be an economist to view that chart and understand why we are experiencing inflation.

I noted above that the current climate resembles the 1970’s when the country experienced something similar. The chart published here is a chart showing the growth of the M2 money supply from the time the US Dollar became a fiat currency in 1971 until interest rates were increased to fight inflation.

Notice that the money supply over that 12-year time frame roughly tripled.

Since the financial crisis, we have seen similar growth in the M2 money supply. Over that time frame, like during the 1970’s the money supply approximately tripled. We are now seeing the same end result.

Rather than owning up to the fact that too much fiat currency has been created, the Fed is doing what the Fed has done historically when the economic data gets ugly. The Fed’s playbook is to either change the way the data is reported or just quit reporting the data altogether.

In this case, the Fed has chosen the latter. This from David Kranzler of Golden Returns Capital (red font added for emphasis) (Source: https://www.investing.com/analysis/the-fed-further-reduces-its-transparency-200579465):

Ben Bernanke, outgoing Fed Chairman 2014:

“Fostering transparency and accountability at the Federal Reserve was one of my principal objectives when I became Chairman in February 2006.”

Janet Yellen, 2013 as Vice Chairman of the Fed:

“Recently I used the word ‘revolution’ to describe the change from ‘never explain’ to the current embrace of transparency in the FOMC’s communication.”

Fed Chair Jerome Powell, 2018:

“In a democratic system, any degree of independence brings with it the obligation to provide appropriate transparency. In turn, transparency provides an essential basis for accountability and democratic legitimacy by enabling effective legislative oversight and keeping the public informed.”

Over the years, I’ve learned to keep one hand on my wallet and one hand on my physical gold and silver safe when a Fed official promises more transparency.

Right after Bernanke promised more transparency, the Fed decided to no longer report the M3 measure of the money supply. The U.S. is the only major industrialized country that does not report M3.

With Jerome Powell at the helm, earlier this year the Fed quietly obscured the distinction between the M1 and M2 money supply measures, making it almost impossible to distinguish between bank demand and term deposits.

This is important because each classification provides information about the relative liquidity of the banking system. Now that distinction is impossible to assess.

Tuesday (May 11) the Chicago Fed announced that it would discontinue publishing the Midwest Economy Index after the Jun. 30, 2021, release:

“Our researchers’ standard approach for estimating the Midwest Economy Index (MEI) has become increasingly ineffective. As of early May 2021, we have determined that it will not be appropriate to publish the MEI’s results after the middle of the year.”

What is the Fed trying to cover up by eliminating this economic report? Interminable economic weakness masked by economic indices that show nominal gains which are primarily attributable to the price inflation effects of money printing rather than an increase real economic activity.

Make no mistake, the economy is much weaker than the politicians, Fed officials and Wall Street animal are willing to admit. And much of what is reported as increasing economic activity reflects little more than the effect of price inflation on the input components of the various indices.

1970’s stagflation on steroids.

As such, the Fed is removing the trail of evidence and is preparing to take its money printing to a new level, in an a tragically flawed effort to stimulate real economic growth.

While inflation is undeniable, there is another trend taking place that makes the inflation even more dangerous. As Mr. Kranzler notes in his piece, the economy is not strong. In real terms the economy is contracting.

In case you missed it, Kranzler makes a very important point. He says that when increasing economic activity is reported, it is the direct result of price inflation (or currency devaluation) rather than being attributable to real economic growth.

Mr. John Williams of www.ShadowStats.com tracks the economic output of the United States, typically measured by Gross Domestic Product. As John explains on his website, the headline or reported GDP number refers to the most recent quarter’s annualized quarter-to-quarter rate of change. In other words, the headline number is the annualized GDP number if the most recent quarter-to-quarter change was compounded for four consecutive quarters. What this means is that the latest quarter can be reported as a positive annualized rate of growth while the actual annual rate of change is negative.

The chart, courtesy of www.ShadowStats.com, shows that GDP or economic output is contracting.

Keep in mind that GDP is contracting even when it’s measured in US Dollars that have been devalued through excess money creation.

Bottom line economically speaking is this – we are now looking at stagflation which is inflation combined with economic contraction.

There is only one way to cure stagflation, stop inflation by reducing the money supply and then endure the inevitable recession that follows.

Inflation and the Price of Gold

As noted last week, stocks looked extended. Stocks look even more extended this week. Gold and silver are beginning to look more bullish and despite a bad week for US Treasuries, we remain technically bullish on the long bond for now.

As I have been warning for a long time, the Fed’s money creation policies are now leading to inflation. The Fed’s is insisting that the inflation we are now seeing is transitory and will settle down once the economy returns to a more normal status. I have my doubts if current monetary policy continues as it now seems it will.

The most commonly used measure of inflation the Consumer Price Index has risen significantly over the past several months. This from “Wolf Street” (Source: https://wolfstreet.com/2021/05/12/its-getting-serious-dollars-purchasing-power-plunges-most-since-2007-but-its-a-lot-worse-than-it-appears/) (emphasis added):

Fed officials, economists “surprised” by surge in CPI inflation, but we’ve seen it for months, including “scary-crazy” inflation in some corners.

The Consumer Price Index jumped 0.8% in April from March, after having jumped 0.6% in March from February – both the sharpest month-to-month jumps since 2009 – and after having jumped 0.4% in February, according to the Bureau of Labor Statistics today. For the three months combined, CPI has jumped by 1.7%, or by 7.0% “annualized.” So that’s what we’re looking at: 7% CPI inflation and accelerating.

Consumer price inflation is the politically correct way of saying the consumer dollar – everything denominated in dollars for consumers, such as their labor – is losing purchasing power. And the purchasing power of the “consumer dollar” plunged by 1.1% in April from March, or 12% “annualized,” according to BLS data. From record low to record low. Over the past three months, the purchasing power of the consumer dollars has plunged by 2.1%, the biggest three-month drop since 2007. “Annualized,” over those three months, the purchasing power of the dollar dropped at an annual rate of 8.4%.

As I have noted in the past, the Consumer Price Index is not really an accurate assessment of the true inflation rate. Over the years, the CPI has been manipulated to make the reported level of inflation appear more favorable.

Economist John Williams of ShadowStats.com and The Chapwood Index are both private inflation measures that, in the view of many, including me, provide far more accurate pictures of the real inflation rate.

Mr. Williams, using the inflation rate calculation methodology used pre-1980, now calculates the actual inflation rate to be approaching 13%. That is 1970’s style inflation.

What is different presently is the response of the Federal Reserve to the inflationary environment. In the 1970’s and presently, the cause of the inflation lies at the feet of the Fed. In 1980, responding to the high level of inflation, the Fed increased interest rates to more than 20%. Inflation was subdued.

Presently, the Fed is taking the opposite approach vowing ultra-low interest rates and more money creation. Why is the Fed taking an approach that is obviously reckless?

The answer is simple; the Fed must now monetize government spending. Interest on the national debt which is now approaching $30 trillion is already consuming a large portion of the operating budget. An increase in interest rates bankrupts the government (or makes the bankruptcy obvious). So, the Fed has elected to continue to pursue the policy that has caused the inflationary problem. Likely pursuing the policy until the inflation gets so out of control that it causes the price reset the Fed is trying so hard to avoid.

Government finances have deteriorated substantially since last year. Deficit levels are up more than 30% from the same time frame last year. Creditors are not lined up to buy US Government debt so the Fed becomes the buyer of last resort using newly printed currency to purchase US Government debt.

Ironically, in light of the increase in prices in food, lumber, fuel and other items, gold and silver have moved higher but not to the extent one might have expected. Frank Holmes, CEO of US Global Investors addressed this issue last week stating that central banks around the world are stabilizing prices of precious metals. Holmes stated “The threat of gold exploding would basically say they have lost control, and I really think there is some type of stabilization, if you want to call it.”

That begs the question, how would a central bank go about ‘stabilizing’ or manipulating the price of gold and/or silver. Craig Hemke of “Sprott Money News” explains (Source: https://www.silverdoctors.com/gold/gold-news/bullion-bank-pump-n-dump/) (emphasis added):

Though we’ve seen this trick countless times over the years, it never gets less frustrating. However, with a summer rally pending, this latest Bank effort might be instructive.

Speaking of countless, I have no idea how many times I’ve written about this topic. Ten? Twenty? It’s impossible to say and, unfortunately, the fraud of the current pricing scheme continues. At any rate, you might review this post from April 2017 as it explains in greater detail the specifics of this latest smash, which we’ll discuss in detail today.

Here is your most recent example of this tried-and-true, Bank price manipulation technique.

Over the last three days—Thursday, May 6; Friday, May 7; Monday, May 10—some of the most fundamentally bullish news of the year hit the COMEX gold market. Inflation is soaring. Real interest rates are plunging. Wages are increasing and stagflation is pending. All of this combined to surge Speculator interest in COMEX gold. Hedge funds, institutions, and traders all sought COMEX gold price exposure, and price rose $55 over those three days.

But that doesn’t tell the whole story.

Over those same three days, the market-making Banks created and added a total of 45,858 new COMEX gold contracts. The deep-pocketed Banks took the short side of these contracts and sold them to the aforementioned Speculators, who took the long side of the trade.

So let’s first stop here and ponder just how far price might have risen without these additional contracts diluting the available supply. Yes, a $55 rally is nice, but how far might price have risen if sellers of existing contracts were needed to be found in order to meet the Spec demand? $105? $155? It’s impossible to say.

But next let’s think about the scam and fraud of all this. The Banks created “gold” from nothing and sold it to Speculators who bought this “gold” by only putting 15% down (margin). No physical gold ever changed hands, and no physical gold entered the COMEX warehouses as collateral for the new shorts. Instead it’s just one side making a bet against the other, and one side has monopolistic control of the “market” and the too-big-to-fail deep pockets needed to guard against margin calls.

The result is what we’ve seen literally hundreds of times before. Price spikes. The Banks control the rally through new contract issuance, and total open interest rises. Price is capped. Buying exhaustion follows. Banks initiate a price raid. Price plunges as jittery Specs begin to liquidate. Banks use Spec selling to buy back and cover the shorts they had created on the run up, and total open interest declines.

And you wonder how and why the Bank proprietary trading desks post a profit month after month.

Next, let’s stop to consider the size and scope of this massive scam.

Due to their infinitely-deep pockets and their monopolistic role as “market makers”, The Banks can simply create contracts on COMEX—and they do so in the size mentioned above. And how many ounces of digital derivative “gold” are willed into existence through the creation of 45,858 contracts? At 100 ounces per contract, that’s 4,585,800 ounces. Stated another way, that’s 142.6 METRIC TONNES! That’s more than the official reserves of Sweden or South Africa and over 5% of total global annual mine supply. That’s also about 1/3 of the entire, current stock of gold in the COMEX vaults that’s marked as “registered”.

The Shills, Apologists, and Charlatans would have you believe that the altruistic Bullion Banks are simply acting as conduits for the mining companies to hedge and forward sell their production. Hmmm. Do you really think that there was a sudden rush by Barrick or Kirkland Lake or Newmont to dump ALL of their projected 2021 production as soon as the COMEX gold price broke out and rallied on the most fundamentally positive news of the year? Give me a break!

So, The Banks did it again. No surprise there. But here’s the point of this post…

How might what we just observed be a warning of what to expect this summer?

The key component to last summer’s rally to new all-time highs was a lack of Bank shorting. Whether this was due to the March 2020 collapse in confidenceis hard to say. What we do know, however, is that for some reason The Banks were reluctant to play their usual games.

So did we just get our first hint that The Banks will not willfully allow a repeat of last year? Are they instead going to fight us every step of the way in the usual three-steps-forward-and-two-steps-back pattern? Time will tell, but the past four days are definitely not encouraging.

But let’s end this week on a positive note that IS encouraging…

The seven-month consolidation in COMEX gold prices ended with the double bottom at $1680 in March. Price has since broken higher—and through several layers of significant resistance—and the only remaining hurdle is the 200-day moving average, currently near $1865.

Leading the charge is a surge of fundamentally bullish factors such as plunging real interest rates, dovish Fed policy, and surging inflation. The next target for price remains $2000 by sometime in early July—regardless of the Bank interference, we are sure to encounter every step of the way.

Ultimately, I believe the fundamentals will take over and increasing inflation will lead to much higher, nominal gold and silver prices. Given the current situation, if you don’t have 20% of your portfolio in PHYSICAL metals, I would encourage you to seriously consider it. If you want to have a conversation about this and the best way to go about it, feel free to give my office a call at 1-866-921-3613.

Inflation or Deflation?

My view remains that many markets are very extended here and a price correction at some point is inevitable.

To this point in time, the Fed’s easy money policies have kept price bubbles moving higher and these markets could continue higher for a bit longer, but at some future point, the prediction made by Thomas Jefferson will have to come to pass in my opinion. Mr. Jefferson warned us against allowing private bankers to control the issue of our currency stating that first by inflation then by deflation, the bankers will essentially destroy the country.

That is exactly what we are presently seeing.

In past issues of “Portfolio Watch”, I have discussed the real inflation rate in detail. Suffice it to say for today’s discussion that the official inflation rate, typically measured by the Consumer Price Index, is heavily manipulated to present a headline number to the public that appears innocuous.

There are many privately administered inflation indexes that, in my view do a much better job of relating to the public what the real inflation rate is. John Williams of www.ShadowStats.com and Ed Butowksi of the Chapwood Index would estimate the real inflation rate to be somewhere between 8% and 12% depending on what part of the country you happen to live in.

The chart is reprinted from www.ShadowStats.com.

Arguably, we are seeing inflation. While how much more we see is difficult to quantify, we know that debt levels in both the private sector and public sector are at nosebleed levels. I discuss this in the April “You May Not Know Report” titled “Are We Rocketing Toward Reset?” If you are a client of our company, you should see this issue arrive in your mailboxes by mid-month.When debt levels are unsustainable, as they are presently, at some point the debt will have to be dealt with. That’s when deflation kicks in and asset prices collapse. Ironically, the same easy money policies that have helped to stave off deflation to this point are the very reason debt levels get to unsustainable levels.

I’ve discussed stock valuations in the past. Warren Buffet’s favorite stock market valuation metric is market capitalization over gross domestic product. By this measure stocks are more overvalued than at ANY time historically.

Real estate prices are also at record high levels and the real estate market is nothing short of crazy. The chart shows that the most commonly used real estate valuation measure, the Case Shiller Index, now has real estate prices more overvalued that at ANY time in history.

I expect to see the real estate market turn negative by the end of this year unless some form of artificial support is used to intervene in this market or if mortgage forbearance programs are extended further.

The Consumer Financial Protection Bureau warned mortgage firms last week to take all necessary steps to avoid a wave of foreclosures this fall. This from “Zero Hedge” (Source: https://www.zerohedge.com/markets/feds-warn-mortgage-firms-tidal-wave-distress-amid-upcoming-forbearance-lapse):

The Consumer Financial Protection Bureau (CFPB) warned mortgage firms Thursday “to take all necessary steps now to prevent a wave of avoidable foreclosures this fall.”

As of March 30, approximately 2.54 million homeowners remain in forbearance or about 4.8% of all mortgages, according to the latest data from Black Knight’s McDash Flash Forbearance Tracker.

CFPB said mortgage firms should “dedicate sufficient resources and staff now to ensure they are prepared for a surge in borrowers needing help.” To avoid what the agency called “avoidable foreclosures” when the forbearance relief lapses, mortgage servicers should begin contacting affected homeowners now to guide them on ways they can modify their loans.

“There is a tidal wave of distressed homeowners who will need help from their mortgage servicers in the coming months,” said CFPB Acting Director Dave Uejio. He said,

“There is no time to waste and no excuse for inaction. No one should be surprised by what is coming.”

The Coronavirus Aid, Relief, and Economic Security (CARES) Act provided a safety net for borrowers with federally-backed mortgages who could access forbearance programs. With millions of borrowers in the program set to lapse in the second half of the year, unavoid foreclosure will occur despite the government trying everything under the sun to keep people in their homes.

“Our first priority is ensuring struggling families get the assistance they need. Servicers who put struggling families first have nothing to fear from our oversight, but we will hold accountable those who cause harm to homeowners and families,” Uejio said.

With the CFPB focused on preventing avoidable foreclosures, the government’s forbearance programs ends in September, which could result in the quick unraveling of the social fabric for many households who may find themselves homeless.

So here we have a government agency that is outright predicting a ‘tidal wave’ of ‘distressed homeowners’ who will need more help from their mortgage servicers. As with many (perhaps most) well-intentioned government programs, an action that was designed to help a segment of the population, in this case homeowners, actually ends up harming them.

One visit to the Consumer Financial Protection Bureau’s website confirms this. This is taken directly from the CFPB’s website (Source: https://www.consumerfinance.gov/coronavirus/mortgage-and-housing-assistance/help-for-homeowners/learn-about-forbearance/) (emphasis added):

Forbearance is when your mortgage servicer or lender allows you to pause or reduce your mortgage payments for a limited time while you build back your finances.

For most loans, There will be no additional fees, penalties, or additional interest (beyond scheduled amounts) added to your account, and you do not need to submit additional documentation to qualify. You can simply tell your servicer that you have a pandemic-related financial hardship.

Forbearance doesn’t mean your payments are forgiven or erased. You are still obligated to repay any missed payments, which, in most cases, may be repaid over time or when you refinance or sell your home. Before the end of the forbearance, your servicer will contact you about how to repay the missed payments.

The last point is the key point.

These forbearance programs don’t forgive any payments. The homeowner is still obligated to pay back payments as well as current payments.

How many of these distressed homeowners, when faced with this reality will just walk away from the house?

That will likely turn this real estate market on it’s head.

My advice?

If you’re thinking about selling real estate, doing so soon is probably something you should seriously consider.

And, if you’re thinking about buying, you might ponder taking a deep breath and waiting a bit to see how this plays out this fall.

You may just find your dream home for a much lower price.

Of course, all this hinges upon how much money creation the Fed actually engages in and how much inflation we might see before the inevitable deflation kicks in as Mr. Jefferson suggested.

Imminent Inflation?

Stocks had another big rally week. The major indices have now gained nearly 6% over the past two weeks. A pullback in price after such a big up move would be typical.

As I noted on the Headline Roundup Webinar last week (replay available on the app, search YourRLA at the app store), gold prices declined to the long-term, uptrend line and I expected they may stabilize. To this point, that is what has happened. I’ve reprinted the chart here.

This past week, the topic of inflation began to appear frequently in the news headlines. Even many mainstream media sources noted that inflation seems imminent.

US Government debt saw yields increase which means bond prices fall. This is a phenomenon that is observed when investors fear that inflation is on the horizon.

This from “Bloomberg” last week (Source: https://ca.finance.yahoo.com/news/treasury-yields-surge-test-key-104318569.html) (emphasis added):

Treasuries tumbled anew Friday, sending 10- and 30-year yields to their highest since early 2020, amid growing concern stimulus will fuel an explosion in economic growth that ignites price pressures. Expectations for inflation over the next decade lurched to a seven-year high.

Yields on the 10-year benchmark rose as much as 10 basis points to reach 1.64% in U.S. morning trading, a level unseen since February 2020. The 30-year rate advanced almost 11 basis points to a session high of 2.40%, edging toward a January 2020 peak. Rates leaped across notes and bonds, with the biggest moves in the long end, steepening the yield curve. The 10-year rate has failed to close above 1.60% since early 2020, though it has surpassed that level in volatile intraday trading several times in recent weeks.

“We’re talking about a fair amount of stimulus — both fiscal and monetary — going forward,” BTG Pactual Asset Management’s John Fath said, referring to the $1.9 trillion pandemic-relief bill and prospects for more, along with the Federal Reserve’s pledge to stay accommodative. “We potentially could grow a lot faster and inflation could come into the horizon a lot quicker,” which begets higher rates.

The breakeven rate on 10-year notes, a measure of market expectations for annual consumer-price gains based on the yield gap to inflation-linked debt, topped 2.30% in early New York trading Friday, a level it hasn’t breached since early 2014. An equivalent measure for the five-year note touched its strongest level since 2008.

In our managed portfolios, we remain bearish on bonds as we have been since January of this year. An Exchange Traded Fund that tracks the price of the US Treasury long bond has declined more than 10% since that time.

Reuters had this to say on the topic last week (Source: https://www.msn.com/en-gb/money/other/us-consumer-prices-rise-underlying-inflation-muted-for-now/ar-BB1esatq) (emphasis added):

U.S. consumer prices increased solidly in February, with households paying more for gasoline, but underlying inflation remained tepid amid weak demand for services like airline travel and hotel accommodation.

The mixed report from the Labor Department on Wednesday did not change expectations that inflation will push higher and exceed the Federal Reserve’s 2% target, a flexible average, by April as declining COVID-19 infections and a faster pace of vaccinations allows the economy to reopen.

Inflation is also seen accelerating as price decreases early in the coronavirus pandemic wash out of the calculations. Many economists, including Fed Chair Jerome Powell expect the strength in inflation will not stick beyond the so-called base effects and the reopening of services businesses.

“Base effects and one-time price increases stemming from the reopening of the economy and some pass-through of higher prices from supply chain bottlenecks should lift core inflation to 2.5% in the spring,” said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics in New York.

To put these inflation conversations in context, we need to understand that the methodology used to calculate the inflation rate has been changed over the years to make the rate of inflation seem more subdued.

This is a topic that is not often discussed nor widely understood.

For example, there are now adjustments for hedonics and substitution and the weighting of the items in the basket of goods used to calculate the inflation rate are changed. All these adjustments reduce the reported inflation rate.

A hedonic adjustment is an adjustment for convenience or literally for ‘pleasure’. As items that we buy are improved, if prices go up some of that price increase is arbitrarily removed from the inflation rate calculation since the item has made our life more pleasurable.

I’ll give you an example that will give away my age. Some of my earliest television memories were of three working channels on a black and white set, with no remote control. If you wanted to change the channel, you had to get out of the chair and walk across the room and turn the knob on the set.

When I was old enough, my Dad had me serve as the remote, telling me what channel to put on. Fortunately, there were only three choices so it didn’t take too long.

Then, a television manufacturer developed a remote control. Even though it cost more to buy a television with a remote control, that increase in cost would not have been factored in when calculating the inflation rate due to an adjustment for hedonics since the remote control made television viewing more pleasurable.

Then there is the adjustment for substitution.

This adjustment is made when an item that is included in the basket of goods and services that is used to calculate the inflation rate increases in price dramatically. Because of this dramatic price increase, a bureaucrat arbitrarily determines that no one will buy that item any more and another lower cost item is substituted for the first item.

Finally, there are the adjustments for weighting. These weightings are also arbitrarily determined. For example, as of January 2021, health care was given a 7% weighting in the Consumer Price Index calculation even though healthcare consumes about 20% of Gross Domestic Product.

My first point is simply this: you should discount any source that uses the Consumer Price Index as the measure of inflation.

Past radio program guest, Mr. John Williams, calculates the inflation rate using prior methodologies. You can check out his fine work at www.ShadowStats.com. The chart on this page taking from Mr. Williams’ website shows that using the 1980’s inflation calculation methodology, the real inflation rate is in the 10% range.

The red line on the chart is the official CPI and the blue line is Mr. Williams’ alternate calculation.

My second point is that the real inflation rate is much higher than the reported rate but even those analysts who report on inflation using the lower, manipulated official inflation rate are now warning of impending inflation.

The Associated Press reported (Source: https://apnews.com/article/business-prices-inflation-producer-prices-c084f9d40c972f3e6269f4e6c672e563) that energy prices increased 6% in February after a 5.1% rise in January.

The same piece reported that food prices jumped in February as well.

Jeff Gundlach, CEO if Doubleline Capital sees headline inflation (the official inflation rate) potentially reaching 4% by summer. (Source: https://www.thinkadvisor.com/2021/03/10/gundlach-watch-out-for-inflation-topping-4-bond-fallout/)

Mr. Gundlach stated that he believes the Fed is not concerned about inflation; in fact, he believes the Fed will welcome higher inflation. It’s easier to pay off existing debt with discounted dollars.

What Are Precious Metals Telling Us?

Metals broke out last week. Gold rallied 5.58% while silver advanced nearly 18%. I believe this move is largely related to the extremely easy monetary policies currently being pursued by the Federal Reserve.

Historically speaking, gold prices reflect the true rate of inflation. Silver prices are also correlated to the inflation rate although more loosely correlated and silver is more volatile.

I have long been predicting a breakout in the nominal price of metals and it seems that last week may have been that breakout. It’s always important to remember that markets typically don’t go straight up or straight down, so a pullback here would not be surprising. But long-term I expect higher nominal gold and silver prices.

There is a great deal of debate among very bright analysts as to whether we see a deflationary outcome to the current economic situation or an inflationary outcome. We thought it would be interesting this week to examine this question in a little more detail.

Since the vast majority of today’s money is debt, when debts go unpaid (defaults occur) money disappears from the financial system. This is deflationary.

Money printing is inflationary. The Federal Reserve has expanded their balance sheet (or printed money) to the tune of more than $3 trillion this year, that’s inflationary.

So, what will the ultimate outcome be?

A look at what has happened historically might help us sort this out.

After the War of 1812, a central bank was established that could print money. The impetus behind the formation of this bank was the war debt. The central bank was established, and money was printed, but there was still a link to gold.

At the time of the Civil War, when the President Lincoln and congress changed the banking laws to allow the US Dollar to be backed by gold, silver and government debt, money creation occurred, but gold was never completely abandoned.

This change was necessary since there wasn’t enough gold and silver money in existence to fully fund the war.

It’s interesting that gold prices spiked as seen on the chart. Gold prices moved from $20 per ounce to $50 per ounce before reverting back to $20 per ounce when the country returned fully to the gold exchange standard.

On the other side of the war, the Confederacy created the Confederate dollar in 1861.

The Confederate Dollar was a total fiat currency. At its creation, the Confederate Dollar was on par with a gold dollar. A $1 Confederate dollar note was equal to a $1 gold backed dollar.

About one year later, it took $1.25 in Confederate money to equal $1 gold-backed dollar – that’s 25% inflation in just one year.

The month before the Confederate note was rendered worthless the exchange rate went from $100 to $1 to $1,200 to $1. That’s an inflation rate of 120% in just one month.

That frightening level of inflation was largely driven by fear. Consumers were willing to pay high prices for tangible goods assuming it was the lesser of two evils. They could either hold the currency and hope it didn’t devalue as quickly or they could exchange the currency for a tangible good that might hold its value much better.

This fear is the driving force behind nearly every hyperinflation.

The Confederate Dollar, like every fiat currency, does, eventually, fail. The Union, on the other hand, did print money but they never completely abandoned gold.

In order for a hyperinflationary climate to exist, there needs to be two elements. One, the currency needs to be entirely fiat, and two, money printing has to be massive, something that cannot occur on a gold exchange standard.

The chart illustrates the annual inflation rate for the Confederacy. At the time that the Confederate Dollar failed, the annualized inflation rate was approaching 6000%.

Notice that for a period of time, in 1864, inflation subsided for a short time. The reason for this decline is that there was a currency exchange. Citizens were required to exchange $3 in currency to receive $2 back in an effort to reduce the money supply and curb inflation. While it worked for a short time, it caused inflation to spike to more than 700% prior to the exchange as citizens aggressively sought to exchange their fiat currency for tangible property.

In just four years, Confederate citizens saw their cost of living increase by a factor of 92. Think about that for a moment. If your household expenses are now $30,000 per year, in just four years those same expenses would total $2,760,000!

It’s important to note that at the present time, EVERY currency in the world is a fiat currency. That’s the first condition for a possible hyperinflation.

The second condition is that massive levels of money printing need to be occurring. That condition also exists.

If, at some future point, citizens begin to earnestly seek to exchange their dollars for tangible assets, hyperinflation could be triggered. I believe this is where many analysts get in wrong.

These analysts state that you can’t have inflation without demand. That’s not necessarily true. Inflation, especially hyperinflations can occur when those holding a currency cease to trust that currency. A study of the Confederacy and other hyperinflations brings me to that conclusion.

Gold tracks the real inflation rate. This is the terrific point made by recent RLA Radio Program Guest, John Williams of ShadowStats.com. It’s a very valid point when one studies history. Go back and review the price of gold during the Civil War.

Or, review the chart of the price of gold in German Marks during the Weimar Republic hyperinflation after World War I.

Notice that once again in this case, gold prices track the real inflation rate.

Or, take a look at the chart of gold priced in the Venezuelan Bolivar over the past couple years. Notice that the gold price tracks the inflation rate.

Finally, looking at the US Dollar Index, which measures the purchasing power of the US Dollar against the currencies of the 6 major trading partners of the United States, one sees that the US Dollar is more than 8% lower since the first part of April when the massive money creation began.

Keep in mind that all of the currencies against which the dollar is compared are fiat currencies which are also being devalued. The US Dollar is just being devalued at a much faster pace, at least for now. That helps explain the big jump in the nominal price of precious metals when priced in US Dollars as well.

Devaluation

Last week, theUS Dollar Index finished lower in what was a pretty good week for markets in general.

It’s important to keep in mind that the US Dollar Index measures the purchasing power of the Dollar relative to the purchasing power of the currencies of the six major trading partners of the US. It does not measure absolute purchasing power.

And, that’s the point I want to make this week. I want to discuss absolute purchasing power but from a slightly different perspective than I have previously.

Past RLA Radio guest and economist John Williams does some work in this area. He tracks economic data using methodologies that have been used in the past. As many of our longer-term readers understand, as time has passed, the tracking and reporting structures of the most followed economic data has changed.

Unemployment levels and the rate of inflation were calculated differently in the past than they are currently measured. Not surprisingly, current calculation methods make the reported economic data look more favorable.

Since our topic for this week’s issue is absolute purchasing power, we’ll focus on comparing how the official rate of inflation is calculated now versus 30 years ago.

According to Mr. Williams’ website, www.shadowstats.com, the official inflation rate is now about 2%. But, when using the 1980- based inflation calculation, the real rate of inflation is just under 10%.

The chart on this page, courtesy of Shadow Stats, illustrates. (www.ShadowStats.com)

Looking at this chart, the current Consumer Price Index of about 2% is between 7 and 8 percent lower than it would be if the 1980-based calculation methodology was used.

Over time, that creates a huge disparity between reported inflation and the real inflation rate which we all feel when we buy things.

Let’s just go back to the beginning of this century and look at the official CPI each year. This CPI data was taken from the Minneapolis Federal Reserve Bank’s website ( https://www.minneapolisfed.org/community/financial-and-economic-education/cpi-calculator-information/consumer-price-index-and-inflation-rates-1913).

By my calculations that is an average annual inflation rate of 2.19%.

While this next calculation is not scientific, it does give you an idea as to how the official inflation rate compares with the actual, real-world rate of inflation.

Assuming an item cost $1 in 2000, based on the official inflation rate, that item should cost about $1.50 today. To be exact, $1.51.

That means an item that one would have purchased for $100,000 in calendar year 2000, would today be $151,000 based on the official, reported inflation rate.

Now, let’s look at reality.

A base model Ford F150 pickup in calendar year 2000 was listed for $15,520.

Today, a base model Ford F150 pickup lists for $28,495.

If the price of the new pickup had tracked the official, reported inflation rate, the new pickup should sell for $23,435. But, that’s not the case.

According to the US Census Bureau (https://www.census.gov/construction/nrs/pdf/uspricemon.pdf) , the average home sale price in 2000 was $163,500. The median price was $200,300 which simply means that half the homes that transferred ownership in 2000 sold for more than $203,000 and the other half below.

Fast forward to the present time. The average home sale price today is $299,400 and the median home sale price is $362,700.

Had home prices tracked the official, reported inflation rate, the average home sale price today would be $246,885.

There are many, many examples of this disparity that I’ll call the reported vs. reality gap. Many are more extreme.

The point of this discussion is this: the official inflation rate is really just the official US Dollar devaluation rate. It’s the official measure of the loss of purchasing power of the currency. The reality is that the real loss of purchasing power exceeds the official, reported rate by a good measure.

The reason the US Dollar Index is not a good metric to use to determine the purchasing power of the currency is that, as we stated above, it is a relative measure, not an absolute measure. Nearly every country in the world, is devaluing its currency. The US Dollar Index just gives you an indication as to whether the US Dollar is being devalued faster or more slowly relative to other fiat currencies.

The monetary policies being pursued by central banks presently will accelerate this devaluation process. As we have stated in this newsletter many times before, there are only three ways to deal with sovereign debt; raise taxes, cut spending or print currency.

The latter is the policy du jour of world central banks.

As debt levels continue to build beyond any level that could ever be paid through raising taxes (which is where we are presently), the remaining two choices will lead to outcomes that are flat-out ugly from an economic perspective.

Cutting spending leads to an economic deflationary period.

Creating more currency eventually leads to a loss of confidence in the currency. When that occurs, history teaches us that the debt gets redenominated and an economic deflationary period sets in.

I shared the Thomas Jefferson quote with you a couple of weeks ago. Jefferson warned that allowing bankers to control the issue of the currency would lead to inflation and then deflation.

This has been the case many times throughout history. From John Law’s France in the early 1700’s, to Weimar Germany after World War I, to Zimbabwe more recently, the end result of this policy is predictable.

It’s difficult to make any argument to the contrary. The outcome is certain. When it will occur is not.

That’s why I suggest that readers consider tangible assets in their portfolios to hedge against this continued dollar devaluation that is likely to accelerate.

Tangible assets are a critical element in the two-bucket approach which has an investor divide her money into two “buckets” of money, with the assets in one bucket invested to protect from a deflationary event and the assets in the other bucket invested to protect from an inflationary event.

As time passes and debt builds, I believe this will be critical to financial success.