Peter Schiff – Dennis Tubbergen

Recession Imminent?

US Treasuries rallied slightly last week as stocks, and precious metals fell.

Since the beginning of 2022, I have been commenting that I believed the US economy was in recession. As many of you know, after economic data is initially reported, it is often revised multiple times.

This time is no exception to the revision rule. This from CNN (Source: https://www.cnn.com/2022/06/29/economy/gdp-first-quarter-final/index.html):

The US economy shrank at a slightly faster rate than previously estimated during the first quarter, the Bureau of Economic Analysis said Wednesday.

With one quarter of negative economic growth in the books, the data adds to fears that a recession may be looming.

Real gross domestic product declined at an annualized rate of 1.6% from January to March, according to the BEA’s third and final revisions for the quarter.

Previously, the advance estimate released in April showed a contraction of 1.4%. Last month, that was revised to a decrease of 1.5%.

The Atlanta Fed just reported (Source: https://menafn.com/1104470550/GDP-of-Atlanta-Fed-shows-that-US-economy-already-in-recession) that the estimated growth for the second quarter will also be negative:

The United States economy is already in a recession, according to data from the Federal Reserve Bank of Atlanta’s gross domestic product (GDP) model released on Friday.

In a declaration, Atlanta Fed stated that “the GDPNow model estimate for real GDP growth, seasonally adjusted annual rate, in the second quarter of 2022 is -2.1 percent on July 1, down from -1.0 percent on June 30.”

The number is lower than the 0.3 percent growth anticipated announced on June 27; the next report will be issued on July 7, it was added. On the other hand, Real gross private domestic investment growth decreased to -15.2 percent from -13.2 percent, according to the bank, whereas real personal usage expenditures growth fell to 0.8 percent from 1.7 percent.

According to the Commerce Department’s third and final reading on Wednesday, the sharp decrease in data suggests that the largest economy in the world, which shrunk by 1.6 percent in the first quarter of the current year, may see a contraction in the months of April and June of the current year.

In another sign the economy is slowing, Amazon, the giant online retailer, announced the company is canceling or delaying plans to build 16 more warehouses this year. (Source: https://www.zerohedge.com/markets/amazon-cancels-or-delays-plans-least-16-warehouses-year)

After spending billions doubling the size of its fulfillment network during the pandemic, Amazon finds itself in a perilous position.

In the first quarter of 2022, the e-commerce giant reported a $3.8 billion net loss after raking in an $8.1 billion profit in Q1 2021. That includes $6 billion in added costs — the bulk of which can be traced back to that same fulfillment network.

Amazon CFO Brian Olsavsky said the company chose to expand its warehouse network based on “the high end of a very volatile demand outlook.” So far this year, though, it has shut down or delayed plans for at least 16 scheduled facilities.

“We currently have some excess capacity in the network that we need to grow into,” Olsavsky told investors on Amazon’s Q1 2022 earnings call. “So, we’ve brought down our build expectations. Note again that many of the build decisions were made 18 to 24 months ago, so there are limitations on what we can adjust midyear.”

There are only politicians and members of the Federal Reserve Board who are suggesting that we will not see a recession based on the research that I have done. If history teaches us anything about the prognostications of politicians and policymakers it is that these are attempts to control or direct the narrative rather than being legitimate forecasts.

This from New York Federal Reserve Bank President John Williams (Source: https://www.cnbc.com/2022/06/28/new-york-fed-president-john-williams-says-a-us-recession-is-not-his-base-case.html):

New York Federal Reserve President John Williams said Tuesday he expects the U.S. economy to avoid recession even as he sees the need for significantly higher interest rates to control inflation.

“A recession is not my base case right now,” Williams told CNBC’s Steve Liesman during a live “Squawk Box” interview. “I think the economy is strong. Clearly, financial conditions have tightened and I’m expecting growth to slow this year quite a bit relative to what we had last year.”

Quantifying that, he said he could see gross domestic product gains reduced to about 1% to 1.5% for the year, a far cry from the 5.7% in 2021 that was the fastest pace since 1984.

“But that’s not a recession,” Williams noted. “It’s a slowdown that we need to see in the economy to really reduce the inflationary pressures that we have and bring inflation down.”

The most commonly followed inflation indicator shows prices increased 8.6% from a year ago in May, the highest level since 1981. A measure the Fed prefers runs lower, but is still well above the central bank’s 2% target.

In response, the Fed has enacted three interest rate increases this year totaling about 1.5 percentage points. Recent projections from the rate-setting Federal Open Market Committee indicate that more are on the way.

Williams said it’s likely that the federal funds rate, which banks charge each other for overnight borrowing but which sets a benchmark for many consumer debt instruments, could rise to 3%-3.5% from its current target range of 1.5%-1.75%.

He said “we’re far from where we need to be” on rates.

“My own baseline projection is we do need to get into somewhat restrictive territory next year given the high inflation, the need to bring inflation down and really to achieve our goals,” Williams said. “But that projection is about a year from now. Of course, we need to be data dependent.”

While some may think that Mr. Williams’ forecast of a soft economic landing, getting inflation subdued while avoiding recession, is possible, I am not among them. Particularly when the current ‘data’ being published by the Atlanta Fed squarely contradicts Mr. Williams’ statements.

Bottom line as far as I’m concerned is that the Fed will ultimately reverse course and once again engage in easing to try to prop up the economy. Of course, such action will be at the expense of the US Dollar. And consumer prices.

This perspective from Schiff Gold (Source: https://schiffgold.com/commentaries/rick-rule-fed-will-chicken-out-on-inflation-fight/):

Well-known investment advisor Rick Rule said the Fed will chicken out on its inflation fight.

Rule runs Rule Investment Media and formerly served as the president and CEO of Sprott US Holdings Inc. In a recent interview, Rule said that the Fed could get inflation under control with significantly tighter monetary policy for a sustained period of time. But he said he doesn’t think the central bank has the wherewithal to follow through when the economy starts to crash.

I think they’ll chicken out. If we had a period of real interest rates it would certainly cure inflation, but it wouldn’t cure inflation until it did amazing damage to various balance sheets.”

Rule has warned that the Fed won’t have the fortitude to fight inflation before. In an interview with MoneyWise earlier this year, he said, “I do not believe that the broad equities market will handle multiple rate hikes.”

Inflation has run hot for months. During the June FOMC meeting, the Fed raised interest rates 75 basis points for the first time since 1994.

Ron Paul has made similar statements, recently noting the Fed rate hikes have only raised rates to the level they were before the pandemic.

The Federal Reserve cannot increase rates to anywhere near the level they would be in a free market because doing so would increase interest payments to unsustainable levels for debt-ridden consumers, businesses, and the federal government.”

Jerome Powell continues to insist that the central bank can tame inflation while bringing the economy to a “soft landing,” but this promise seems dubious at best.

As noted, I expect the Fed to reverse course in the near future and once again pursue easy money policies.

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Fed Revelations

Stocks continued their losing ways last week. The major stock market indices are now in a bear market officially.

Stocks are following the script from 2018, the Fed tightens, and stocks fall.

The big question here is whether the fed stays the course and continues to tighten. Count me among the doubters.

Peter Schiff, a past guest on my radio program, had an interesting take on Fed options and also reported on some past Fed discussions that are nothing short of eye-opening. Here are some excerpts from his piece (Source: https://schiffgold.com/commentaries/peter-schiff-the-fed-girds-for-battle/) (emphasis added):

It’s the Fed’s “hold my beer” moment.

After more than a year in which Federal Reserve leadership appeared clueless, pollyannish, and indecisive, the Fed is conducting a full-throated messaging campaign to show that it is as serious as cancer about the inflation surge that is scaring the bejesus out of consumers, investors, and economists.

Their public pronouncements in recent weeks go something like this: “Out of a good faith misreading of post-pandemic data we had concluded, mistakenly as it happens, that the inflation wave, which began in 2021, was transitory. But now that we know it is not, we are moving with great speed and resolve to bring the problem to heel. Given the power of our tools, the underlying strength of our economy, and our hard-earned credibility, we are confident we can get the job done quickly, and without inflicting undue harm on the economy. We will continue until inflation gets closer to our 2% target. And so, if you don’t mind, kind sir, please step aside and let us do the job we were created to do. We got this!”

This newly found resolve may assure many that at least the Fed is no longer in denial and has a plan to get us out of this mess. In reality, these open-mouth operations are simply a desperate Hail Mary designed to convince us that the Fed can do what it clearly has no stomach or power to do. I would suggest that Fed officials hold onto their beers and drink. They are going to need it.

While most observers have focused on Chairman Jerome Powell’s press conference last week as the clearest insight into the Fed’s thinking, I think more can be gleaned from the extensive conversation two days later in Minneapolis between Christopher Waller, a member of the Federal Reserve Board of Governors (a current voting member of the FOMC) and Neel Kashkari, the President of the Federal Reserve Bank of Minneapolis (and an FOMC alternative member). In particular, Waller offered a very clear assessment of the Fed’s battle plan.

Right off the bat, he confronted mounting criticism that the Fed failed to read the economy accurately over the past 18 months, thereby grossly miscalculating policy, which let the inflation genie out of the bottle. His defense, which essentially boils down to “don’t blame us, no one with mainstream credentials in government, economics, or finance saw this coming,” is both bizarre and inadvertently illuminative. Not only does this ignore the 2021 predictions of former Treasury Secretary Larry Summers, who used to have at least some mainstream credibility, but it completely ignores all those like me who had been shouting from the rooftops that this danger was lurking. Waller’s admission, which shows how deeply embedded Fed leaders are in their own echo chamber, is more of an indictment of the entire economic elite rather than an excuse for their errors.

Waller then admitted that inflation data that was released way back in September 2021 revealed to them that the “transitory story’ that they had been spinning since the beginning of 2021, would no longer hold water. He explained that members of the FOMC were so alarmed that they immediately responded with plans to roll out new messaging that hinted strongly at tighter policy. Say what?

They determined nine months ago that very high inflation had been running rampant for the better part of a year, that it showed no signs of slowing, that the Fed Funds rate (which was then at 0%, and likely 800 basis points below the rate of inflation) was adding fuel to the fire, and the only thing they were prepared to do was to start talking tougher?

The Fed did not implement its first rate hike (25 basis points) until March of this year, fully seven months later! And during that entire time, it continued to expand its balance sheet by hundreds of billions of dollars through quantitative easing rather than immediately stopping the program or, better yet, reversing it. That’s insane. Captain, there is a huge gash in the hull of the ship but rather than try to repair the damage now, let’s think about how we are going to word our next few press releases!

Instead of taking bold steps back in the fourth quarter of last year to get ahead of the curve, or to at least not fall far further behind, the Fed irresponsibly took a slow and muted path. Given its admitted understanding of the conditions nine months ago, its actions seem hard to justify.

Despite these past missteps, Waller claims that the Fed is well-suited to make up for lost time. Emboldened by what he sees as a “historically” strong labor market, Waller believes the current economy can absorb the negative effects of higher interest rates without succumbing to recession. As a result, he predicts the Fed will not be deterred by weaker jobs or economic reports that may emerge in the coming months. In fact, he claims such data would be welcome developments. In his view, the economy needs to lose jobs to be put back into balance. Reduced hiring, he argues, will diminish upward wage pressure, which he sees as the root cause of inflation.

To justify his confidence that higher rates will kill inflation but not the broad economy, Waller took pains to draw a sharp contrast between today’s conditions and those that predominated in the late 1970s/early 1980s, which was the last time the Fed confronted nearly double-digit inflation with bold monetary tightening. Back then, the sharp rise in interest rates brought down inflation AND plunged the country into a recession. But as he views the current economy as benefiting from a “historically strong” labor market, he believes that fate will be avoided.

But Waller is looking at the rear-view mirror. He assumes that the economy that arose during the last decade of almost zero percent interest rates and historically stimulative fiscal policy will persist after those props are removed. But now, as rates increase and stimulus is removed, the economy must contract and change. We are already seeing such a change in the more speculative end of the economy. That’s where the problems are usually first manifest.

In case you hadn’t noticed, the wheels are coming off the technology and the cryptocurrency sectors. The technology-heavy Nasdaq composite index is down more than 25% thus far this year. The ARK Innovation ETF, which tracks the highest-flying growth-oriented technology, and “new economy” stocks are down 56%. E-commerce bellwethers such as Netflix and Shopify are down even more. The carnage in the crypto space is also spectacular. Although bitcoin is down about 60% from its high, that’s the good news. Lesser-known cryptos are down 70% or 80%. Some have been nearly wiped out completely, even those “stable” coins that were supposed to be pegged to the dollar. The pain extends to the businesses that worked in the crypto space. Financial firm Microstrategies, which borrowed to invest in bitcoin, is down 60% year to date while Coinbase, the crypto trading platform, is down 72%. (Bear in mind that all the losses listed above are just this calendar year. If you started measuring from the November 2021 highs, the losses are significantly greater.)

Recall that the Recession of 2001 and 2002 largely resulted from the implosion of the dot-com bubble when the pain in Silicon Valley rippled through the broader economy. But this time the outsized gains were even bigger and less tethered to reality. Many tech firms have already announced large-scale layoffs. Hundreds of thousands of highly paid workers may suddenly find themselves looking for jobs. Falling stock prices may also encourage recent retirees, who may have been coaxed out of the labor force by oversized stock market gains, or millennials who’ve been trading meme stocks and cryptocurrencies on Robinhood for a living, to join former Netflix, Twitter and Peloton employees in looking for work. Boom will go bust, and the unemployment rate may rise much quicker than Fed models suggest.

Here is the big takeaway from the piece. The fed knew inflation was not transitory yet did nothing for months. Then, when the Fed did take action, it was anemic and more form than substance. I would encourage you to read the entire piece; it is very well done.

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 Zavalny, made 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.

The Current Level of Money Creation is Unsustainable

This week, I want to focus once again on proposed money changes being discussed and implemented around the world.

I will preface this discussion by once again stating the obvious – the current level of money creation is completely unsustainable. History teaches us that money printing always ends badly and the end of the cycle sees money printing occurring in exponentially greater amounts.

The primary reason money printing occurs is government overspending. While most governments overspend, as long as the government is reasonably credit worthy and the over spending is within what is generally reasonable, the overspending government is able to sell bonds to investors who are willing to help the government finance its deficit spending in exchange for interest paid to the investor on the amount loaned to the government.

However, chronic, perpetual overspending eventually leads to money creation as investors become ever more skeptical of a government’s ability to repay the loan. Once the money creation begins, it occurs in ever increasing quantities. It’s a self-feeding cycle that ends with a loss of confidence in the currency.

With that overview, there are two topics I want to discuss in this week’s issue. Both suggest we are getting closer to that end point.

First, past radio program guest, Peter Schiff wrote an article this past week that I discuss in more detail on this week’s program. The podcast version of the radio show is available via the RLA app and at www.RetirementLifestyleAdvocates.com.

Mr. Schiff makes the point that the primary creditors of the United States have lost their appetite for US Government debt. That means that the monster deficit spending of the United States’ government is being financed by the central bank of the US, the Federal Reserve. To state the obvious, the Federal Reserve has no money to loan the government without creating it out of thin air.

Here is a bit from Mr. Schiff’s piece (emphasis added):

Over the last year, the US government had borrowed over $4.2 trillion. The national debt now stands well above $27 trillion. There is no end in sight to the borrowing and spending and that raises a significant question: who is going to buy all of the bonds necessary to finance the government spending machine?

Not too long ago, Uncle Sam could count on foreign investors to gobble up a big chunk of his IOUs, but times are changing. In 2008, foreign investors held more than half of the outstanding Treasury debt. Today, that amount has plunged to the lowest level since the turn of the century.

China and Japan have been the biggest foreign buyers of US debt in recent years. Japan ranks as the largest foreign creditor. The Japanese have continued to buy Treasuries over the last year but at a much slower pace. The country increased its holdings by just $15 billion in Q3. Over the last year, Japan has increased its US debt holdings by $130 billion.

Meanwhile, China is dumping Treasuries. It sold off about $13 billion in US Treasuries in Q3 and has shrunk its holdings by $40 billion over the last year.

Over the past five years, Japan’s and China’s combined holdings of US Treasuries have remains relatively stable.

Over the past five years, the two largest foreign buyers of US Treasuries have not increased their holdings. So, how has all the deficit spending over the past five years been financed?

You already know the answer. Here is more from Mr. Schiff’s piece:

It looks like the responsibility (for financing US Government deficit spending) will increasingly fall on the Federal Reserve. In fact, the Fed is already backstopping the market and making this borrowing binge possible.

In Q3, the Fed bought $240 billion in US Treasuries. That brought its total Treasury holdings to $4.44 trillion. The central bank now holds a record 16.5% of the US debt load.

In the last 12 months, the Fed has doubled its holdings of Treasuries, adding a staggering $2.4 trillion in US government bonds to its balance sheet – most of that since March. The Fed’s total share of US debt has spiked from 9.3% in Q1 to 16.5%.

Without the Fed’s intervention in the bond market, it would be virtually impossible for the US government to borrow money at the current level. As we’ve seen, foreign demand is already waning, even with prices artificially inflated. Interest rates would have to soar in order to entice average investors to buy US Treasuries. The market would collapse.

As noted, the Fed cannot backstop this market forever. Artificial markets always fail.

It seems that there are now many central banks around the world who are openly stating that the easy money policies being pursued by most world central banks will soon have to come to an end.

As we have noted in previous newsletters, there will have to be a reset. The reset will either be reactive in response to a currency collapse, or proactive, in an effort to avoid that outcome and have a more favorable end result. Many central banks are now publicly agreeing.

This from the Central Bank of Italy:

“Gold is an excellent hedge against adversity and high inflation. Gold cannot depreciate or be devalued. Gold … is not an asset ‘issued’ by a government or a central bank and so does not depend on the issuer’s solvency.”

The Central Bank of Italy is suggesting that holding central bank-issued, fiat currency is not without risk. Perhaps even more notably, the central bank is suggesting that gold is a good way to hedge this risk.

The Central Bank of Uzbekistan has begun to issue gold as a currency in the form of sealed gold bars.

Starting last month, the central bank of Uzbekistan (yes, that IS a real country in central Asia) began to issue sealed gold bars with a QR code to allow for real time verification. The central bank is looking to encourage the use of gold for storing wealth while also increasing the circulation of gold.

The gold bars issued by the central bank of Uzbekistan are sealed with a unique membrane that changes color when broken, have a unique serial number and a QR code to allow for instant verification.

The gold bars are produced in different sizes: 5, 10, 20 and 50 grams. The bars are all sealed in packages that are the approximate size of a credit or debit card. The gold bars can be purchased at any of 28 commercial banks in the country and can be sold back to the bank at any time, even if the seal is broken.

The move to encourage the circulation of gold by the central bank is Uzbekistan is a logical extension of the bank’s internal policies. Presently 57% of the bank’s reserves are held in gold.

This development is positive in my view. It’s a step toward a proactive reset of a currency system.

As time passes, I would expect to see more of this by central banks, perhaps even a gold backed digital currency.

While the ‘when’ is more difficult to predict than the ‘what’, it is clear that massive money creation will have to lead to a reset. History teaches us that a currency reset, whether proactive of reactive, ends in gold or gold and silver as currency.

While there are many cryptocurrencies that have performed well of late, I am still more confident that gold and silver will eventually, ultimately, be the currency of choice as they have been for most of history.

Ultimately, it is my belief that we will see a ‘marriage’ between central bank issued or government issued digital currencies and precious metals.

I am hopeful that it will be proactive rather than reactive.

Since, as we move into 2021, some type of reset seems inevitable in the relatively near future, I would suggest that many investors have up to 20% of their portfolio in tangible assets such as gold and silver.

That recommendation to put 20% of one’s portfolio into precious metals could increase again in the future should next year see the US move into full-blown modern monetary theory (massive additional money printing) as a result of increased federal spending and deficits.

Although silver and gold rebounded last week, I am of the opinion that it’s a good time to add to precious metals holdings since prices are still down from recent highs.

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 dollarcollapse.com 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.

Economic Recovery and the Possible Future of Money

This past week, I had many conversations with clients and other financial professionals about where the economy goes from here.

There is no shortage of strong opinions about the current economic environment brought about by the restraints placed on the economy with the stated goal of protecting public health. I’m sure you have your opinion too.

I’ll put all that aside and focus on where we go from here economically speaking. Will we have a V shaped recovery? L-shaped?

I commented on this in my June newsletter soon to be sent to our firm’s clients.

I have long been skeptical as to the health of the US economy and have stated so often over the past several years.

That is not an indictment of any current or prior politician or policy; rather it has been a sharp criticism of Federal Reserve policies which were creating what I perceived to be an artificial economy.

Peter Schiff recently commented on this(emphasis added):

The economy was booming. The stock market was setting records. Then coronavirus came along and governments shut things down to minimize the pandemic. That led to massive layoffs and a nasty recession. But once states open up, things will spring back to life and the economy will go back to being great again.

That’s the mainstream narrative. But it’s not based on reality.

In truth, the economy was a Fed-induced bubble before the pandemic. The central bank has managed to reinflate the stock market bubble despite the economic destruction, but it is nothing but a Fed-induced sugar high.And the economy won’t likely rebound quickly, even after things open up.

There are all kinds of reasons to doubt the quick economic recovery narrative. We’ve reported on the number of over-leveraged zombie companies, skyrocketing household debt, the battered labor market, and a potential cash-flow crisis even after the economy gets moving.

Now we have another sign of long-term economic trouble. A survey conducted by financial services company Azlo found that nearly half of small business owners think they will eventually have to close their businesses for good.

Forty-seven percent of the small business owners surveyed said they anticipate shutting down, and 41% said they are looking for full-time work elsewhere.

This is on top of the small businesses that have already shut down and will never reopen.

The survey also asked questions about the Paycheck Protection Program (PPP) instituted through the CARES Act. The results were less than stellar, as Newsweek reports.

Less than half of participants—38 percent—involved in Azlo’s recent survey applied for PPP loans. Of those who did apply, 37% said the program was slow to distribute funds and 20% described the process as ‘painful,’ the company reported.”

It’s absurd to think the economy is going to come roaring back when nearly half of small business owners expect to shut down. Small businesses employ 58.9 million Americans, making up 47.5% of the country’s total employee workforce.

That’s not good news, quite the opposite – it’s dismal news.

The Fed’s response as Mr. Schiff notes is more of the same.

I am reminded of what Albert Einstein said about the definition of insanity – doing the same thing over and over again while somehow expecting to get a different result.

Today’s monetary policies fit Mr. Einstein’s definition of insanity perfectly.

Each time a bubble bursts, and the current bubble is now unraveling, the monetary policies pursued to create the illusion of prosperity become more extreme and less effective. In other words, it takes more stimulus to get fewer results.

I have my doubts about an instant recovery.

Small business destruction eliminates vital employment infrastructure that won’t quickly be replaced.

Entrepreneurs will be hesitant to invest in a new business given the lockdown response of many states to the COVID 19 situation. Regardless as to how you feel about the policies that have been pursued in response to COVID 19, the fact is that there will be far fewer entrepreneurs investing in the economy moving ahead since there is a real possibility that a fledgling enterprise could be shut down and destroyed by a future executive order.

Instead, it’s my view that most would-be entrepreneurs or investors in the economy will simply opt to “keep their powder dry”, preserving investment capital until the dust settles at some future point.

And, many will never invest. They won’t trust the politicians to allow them to pursue their small business dreams.

That, in my view, will be the biggest obstacle to a viable economic recovery.

As far as the stimulus packages that have been passed (and more proposed), these economic aid packages referred to as stimuli should actually be called sustenance packages. Stimulus encourages investment; these programs largely provide money to allow the recipients to subsist for a while.

On another note, Federal Reserve Board nominee, Judy Shelton, whose appointment seems to be stalled at the moment made some interesting comments last week.

In an interview, she stated that she favors a gold-backed digital currency. Not surprisingly many of the Washington politicians are opposed to Ms. Shelton’s appointment. A gold-backed currency automatically imposes fiscal restraint on politicians making wild, out of thin air, money creation impossible.

Since my clients and friends are savers and investors, I side with them. Such a monetary system would help to preserve the purchasing power of the money they’ve saved in IRA’s and 401(k) plans.

Ms. Shelton recently offered her views¹⁰ on how a system based on gold might work in a recent interview (emphasis added).

“I don’t see it so much as returning [to the gold standard], more like ‘back to the future.’ I think that what a gold standard stands for is monetary discipline for its own sake. Money is supposed to be a unit of account, a reliable measure and a dependable store of value. It really shouldn’t be subject to who’s the chairman of the Federal Reserve.”

This from the article reporting on Ms. Shelton’s thoughts (emphasis added):

According to Shelton, a “futuristic” vision of the gold standard may involve a digital currency component. She said that central banks are “not serving the private sector in providing that reliable unit of account […] under the gold standard, you did have that stability, and I think that’s what’s missing […] it could be used in a very ‘cryptocurrency way.’”

Engaging with the emerging sector of digital currencies is not wholly new for Shelton, who has previously advocated for a digital dollar’s potential in helping to “preserve the primacy” of the U.S. currency worldwide.

For Shelton, the U.S. needs a “reset” away from the “distortions” of the Fed over the past half-century. She has previously argued that the Federal Reserve’s current mandate flies in the face of a market-led society.

Central bank activism, for Shelton, hinders the ability of the market to function free from centrally planned overreach. Here she overlaps with proponents of Bitcoin (BTC) who argue that blockchain technology can ensure that the currency will remain immune to any single entity’s attempts to “manipulate” its value.

Shelton might well be sympathetic to advocates of digital scarcity who claim that Bitcoin can induce a deflationary monetary policy by serving as a reserve currency with a finite supply.

Yet she has also said that she is open to an approach where the Fed would target a dollar price for gold “by linking the supply of money and credit to gold”.

Moving ahead, as I have stated, I believe we will see deflation followed by inflation assuming money creation continues.

Should money printing continue, it’s inevitable that at some future point a monetary system like the one that Ms. Shelton is discussing will be adopted somewhere in the world. And, when it is put into use, it will in all likelihood become very popular very quickly.

I believe the two-bucket approach remains the best tactic to utilize in your portfolio from my perspective since the timing of the transition from deflation to inflation is very difficult to determine.

My Interpretation of the Dow to Gold Ratio – Why Stocks Have More Downside and Why Gold Has More Upside

Stocks rebounded again last week as metals retreated slightly.

The Dow to Gold ratio now stands at 17.78. For those of you unfamiliar with the Dow to Gold ratio indicator, it is calculated by taking the price of the Dow Jones Industrial Average and dividing by the price of gold per ounce.

The Dow began the week at 26,797.46 while gold was at 1507.50. That makes the Dow to gold ratio 17.78 (26,797.46/1507.50)

My long-term forecast continues to be that this ratio will reach 1 which means more downside for stocks and more upside for gold.

Given the current level of 17.78, that last sentence may be an understatement.

The reality is that in order to hit that target of 1, stocks will have to significantly fall, and gold will need to rally strongly.

In my view, economic circumstances that exist around the world presently suggest that is a likely outcome.

As crazy as that prediction might sound to you, her me out.

To begin with, much of the rally in stocks over the past couple of years has been due to stock buybacks of their own stock by companies.

This from CNN on August 22 (https://www.cnn.com/2019/08/22/investing/stock-buybacks-drop-tax-cuts/index.html):

Corporate America’s epic buyback mania may finally be succumbing to gravity.

The 2017 corporate tax cut left US businesses flush with cash. S&P 500 companies responded by rewarding shareholders with record amounts of buybacks in 2018, with each quarter setting an all-time high.

However, that record-shattering pace appears to be slowing. S&P 500 companies executed $165.7 billion of buybacks during the second quarter of 2019, according to preliminary estimates by S&P Dow Jones Indices. Although that’s still a stunning amount of repurchases, it marks a 13% decline from the same period a year ago.

The slowdown in buybacks, which have become a lightning rod for criticism among some in Washington and even on Wall Street, underlines the impact the tax law had last year as companies steered a sizable chunk of their windfall to investors.

As stock buybacks slow, one of the activities that has been supporting the stock market becomes less supportive making stocks more susceptible to a decline.

Secondly, margin debt is higher month-over-month. Margin debt is debt that an investor incurs to purchase securities, usually stocks. As long as margin debt keeps rising, it helps create more demand for stocks.

While margin debt is near an all-time high on a nominal basis, on a real basis, adjusted for inflation, margin debt is still below all-time highs. Perhaps there is a little more room to add to margin debt, but I wouldn’t count on it.

Thirdly, one of Warren Buffet’s favorite indicators to gauge stock valuation, market capitalization to Gross Domestic Product is inflated.

The chart printed here illustrates market capitalization to GDP. Note that the ratio remains slightly below the levels prior to the tech stock crash but is much higher than just prior to the financial crisis about one decade ago.

Finally, “Fortune” magazine had this to say recently about stocks (Source: https://fortune.com/2019/07/31/yes-stocks-are-overvalued-but-by-how-much-heres-what-history-tells-us/) (emphasis added):

Robert Shiller’s cyclically-adjusted price-to-earnings (CAPE) ratio has only breached 30 three times in history.

The first time was in 1929, just a few short months before the stock market was trounced in one of the worst crashes in history during the Great Depression. Almost 70 years later, it happened again in 1997 and stayed above that level for nearly 5 years as the dot-com bubble deflated. The most recent flirtation with a CAPE of 30 began in the summer of 2017, where it has remained in a tight range ever since.

This chart, printed with the article, illustrates.

As far as gold is concerned, central bank policies are improving the fundamentals for gold.

Money creation via quantitative easing programs worldwide are bullish for tangible assets, gold in particular.

Peter Schiff, past guest on RLA Radio, had this to say this past week about his call for gold reaching $5,000 per ounce this past week (Source: https://kingworldnews.com/peter-schiff-on-his-5000-gold-call-and-todays-pullback-in-gold-silver/):

Most investors think my $5,000 gold call is crazy. But what’s crazier negative interest rates or $5,000 gold? In the insane world of negative interest rates, $5,000 gold is the one thing that makes sense. In fact, $5,000 for an ounce of gold will likely prove to be a bargain!

This week’s guest on Retirement Lifestyle Advocate’s Radio, Mr. Michael Pento of Pento Portfolio Strategies had this to say about gold.

He explained that when interest rates are up, keeping money in cash in a deposit account makes sense.

Given a choice between depositing money in a deposit account yielding 6% interest or buying gold that yields 0, mot investors will choose the deposit account and capture the investment yield.

On the other hand, if both cash accounts and gold are yielding zero, most investors would opt for the tangible asset, gold rather than keeping assets in a fiat currency.

Today, however, for many investors the choice is even more obvious. Given a choice between gold and a negative-yielding cash account, the gold becomes a ‘no-brainer’.

As central banks continue to pursue crazy monetary policies like negative interest rates, that will likely be bullish for gold.

The entire radio program and the interview with Michael Pento are now posted at www.RetirementLifestyleAdvocates.com.