Is a “Lehman Moment” Approaching?

          Stocks rallied last week although, as I noted last week, technically speaking, stocks look weak.

          Last week, we noted that 4 stock market sectors were lagging.  That was a significant development since all sectors that comprise the Standard and Poor’s 500 were positive going into October; that changed.  It’s also relevant to note that historically speaking, many stock corrections have occurred or intensified in October.

          It may pay to be cautious moving ahead.

          There is often an event, sometimes referred to as a black swan event, that is the catalyst for a market correction to begin.  As an example, in 2007, it was the failure of Lehman.

          When one takes in everything happening around the globe politically, financially, and economically at the present time, there is no shortage of possibilities for a black swan event to serve as a catalyst to pop this bubble.

          A couple weeks ago, I wrote about Evergrande, the mammoth Chinese real estate investment company that was poised to default on its debt obligations.  I suggested that Evergrande could be the calendar year 2021 version of Lehman.  That could still be the case since the Evergrande story is far from over.

          This from “Zero Hedge” (Source: which suggests the worst-case scenario for Evergrande may now be a likely outcome:

No matter how the Evergrande drama plays out – whether it culminates with an uncontrolled, chaotic default and/or distressed asset sale liquidation, a controlled restructuring where bondholders get some compensation, or with Beijing blinking and bailing out the core pillar of China’s housing market – remember that Evergrande is just a symptom of the trends that have whipsawed China’s property market in the past year, which has seen significant contraction as a result of Beijing policies seeking to tighten financial conditions as part of Xi’s new “common prosperity” drive which among other things, seeks to make housing much more affordable to everyone, not just the richest.

As such, any contagion from the ongoing turmoil sweeping China’s heavily indebted property sector will impact not the banks, which are all state-owned entities and whose exposure to insolvent developers can easily be patched up by the state, but the property sector itself, which as Goldman recently calculated is worth $62 trillion making it the world’s largest asset classcontributes a mind-boggling 29% of Chinese GDP (compared to 6.2% in the US) and represents 62% of household wealth.

It’s also why we said that for Beijing the focus is not so much about Evegrande, but about preserving confidence in the property sector.

But first, a quick update on Evergrande, which – to nobody’s surprise – we learned today is expected to default on its offshore bond payment obligations imminently according to investment bank Moelis, which is advising a group of the cash-strapped developer’s bondholders. Evergrande, which is facing one of the country’s largest defaults as it wrestles with more than $300 billion of debt, has already missed coupon payments on dollar bonds twice last month.

The missed payments, worth a combined $131 million, have left global investors wondering if they will have to swallow large losses when 30-day grace periods end for coupons that were due on Sept. 23 and Sept. 29. A separate group of creditors to Jumbo Fortune Enterprises who are advised by White & Case, are also waiting for a $260 million bond principal repayment after a bond guaranteed by Evergrande matured last Friday, and unlike the offshore bonds, does not have a 30 day grace period (although five business days ‘would be allowed’ if the failure to pay were due to administrative or technical error).

The Jumbo Fortune payment is being closely watched because of the risks of cross-default for the real estate giant’s other dollar bonds; it would also be the firm’s first major miss on maturing notes instead of just coupon payments since regulators urged the developer to avoid a near-term default. And with the five business days up as of today, and with a payment yet to be made, it appears that this weekend we will get news of a declaration of involuntary default from the creditor group which will set in motion the Evegrande default dominoes.

          Without the “default dominoes” described in the article falling, China is already experiencing a real estate crisis.  The same “Zero Hedge” article reports that 90% of China’s top 100 property developers saw year-over-year sales decline by 36% in September.  Seems that the real estate collapse may have already begun in China and the Evergrande defaults will simply accelerate the decline.

          Meanwhile, the headlines regarding the US economy are far from positive suggesting that the combination of economic weakness and overvalued stocks may be especially susceptible to a 2021 Lehman moment.

          The September jobs report was extremely weak; this from “MSN”  (Source:

 “September jobs numbers came in lower than expected at 194,000, but it was a messy report with some big revisions to prior months and a sharp drop in the ‘household’ unemployment rate to 4.8%,” Deporre wrote on Real Money. “The market has had a minor reaction to the news, but interest rates continue to rise, so there are still concerns about inflation despite the weak employment news.”

            And this from Reuters on the topic (Source:

For a second straight month, U.S. job growth proved to be bitterly disappointing in September, coming in more than 300,000 jobs short of what many economists had penciled in. That’s after August’s report initially came in almost half a million jobs below economists’ consensus estimate.

            A weak jobs report is combined with an economy that is contracting on a real basis.  Many of you who are long-time readers are familiar with the work of John Williams of  Mr. Williams reports economic data using the methods that were used prior to those methods being manipulated to make the reported numbers look more favorable.

          The chart on this page ( illustrating the official GDP annual growth and Mr. Williams’ estimate of the actual growth rate shows that in real terms, the US economy is still contracting while the officially reported GDP growth rate barely reaches 1%.

            That at least partially explains the jobs report.

            Couple a contracting economy with increasing inflation and you have a recipe for a Lehman moment. 

            Mr. Williams also calculates the inflation rate using the methodology that was used prior to 1980.  Using that method to calculate the inflation rate, as you can see from the chart, the real inflation rate is about 13%, a lot higher than the officially reported Consumer Price Index of a little more than 5%.

            For lower and middle-class consumers in a contracting economy, rising prices are exceptionally difficult.

            Crude oil prices just topped $80 per barrel for the first time since 2014 (Source:|facebook&par=sharebar&fbclid=IwAR1lVdAgHf36bf7D3FWmj9ZppE40M5JV3GZ10k8E1qFATl4DzQsI-kUe6JQ) and food prices are up more than 30% in one year.

            While it’s possible the Lehman moment could be delayed, I believe it is inevitable.

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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 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

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:

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: (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.

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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,, 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.  (

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 (

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 ( , 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.