US Dollar – Dennis Tubbergen

Have You Heard of Unicoin?

It’s as unsettling as it is interesting.

As I have been observing from time to time in “Portfolio Watch”, there are currency changes taking place around the world.

As I noted last week, citing an article from Michael Maharrey, the move away from the US Dollar worldwide is accelerating, with China and Brazil the most recent countries to execute a trade agreement that bypasses the US Dollar in bilateral trade. The agreement has the two countries using their own currencies rather than the US Dollar.

Saudi Arabia has already announced that the country would entertain using currencies other than the US Dollar for the country’s oil sales.

This past week, currency changes continued. The International Monetary Fund announced a new digital currency called “The Universal Monetary Unit”. This from Michael Snyder (Source: http://theeconomiccollapseblog.com/the-imf-has-just-unveiled-a-new-global-currency-known-as-the-universal-monetary-unit-that-is-supposed-to-revolutionize-the-world-economy/):

A new global currency just launched, but 99 percent of the global population has no idea what just happened. The “Universal Monetary Unit”, also known as “Unicoin”, is an “international central bank digital currency” that has been designed to work in conjunction with all existing national currencies. This should set off alarm bells for all of us, because the widespread adoption of a new “global currency” would be a giant step forward for the globalist agenda. The IMF did not create this new currency, but it was unveiled at a major IMF gathering earlier this week…

Today, at the International Monetary Fund (IMF) Spring Meetings 2023, the Digital Currency Monetary Authority (DCMA) announced their official launch of an international central bank digital currency (CBDC) that strengthens the monetary sovereignty of participating central banks and complies with the recent crypto assets policy recommendations proposed by the IMF.

Universal Monetary Unit (UMU), symbolized as ANSI Character, Ü, is legally a money commodity, can transact in any legal tender settlement currency, and functions like a CBDC to enforce banking regulations and to protect the financial integrity of the international banking system.

As the press release quoted above indicates, this new “Universal Monetary Unit” was created by the Digital Currency Monetary Authority.

So who in the world is the Digital Currency Monetary Authority?

Honestly, I had no idea until I started doing research for this article.

The press release says that the organization consists of “sovereign states, central banks, commercial and retail banks, and other financial institutions”…

The DCMA is a world leader in the advocacy of digital currency and monetary policy innovations for governments and central banks. Membership within the DCMA consists of sovereign states, central banks, commercial and retail banks, and other financial institutions.

Basically, it sounds like a secretive cabal of international banks and national governments is conspiring to push this new currency down our throats.

We are being told that the “Universal Monetary Unit” is “‘Crypto 2.0”, and those that created it are hoping that it will be widely adopted by “all constituencies in a global economy”…

The DCMA introduces Universal Monetary Unit as Crypto 2.0 because it innovates a new wave of cryptographic technologies for realizing a digital currency public monetary system with a widespread adoption framework encompassing use cases for all constituencies in a global economy.

I don’t know about you, but this sounds super shady to me.

Of course, the Digital Currency Monetary Authority is not the only one that has been working on a new digital currency.

The UK has also been working on one.

The same is true for the European Union.

And would it surprise anyone that the Biden administration is touting the potential benefits of a “digital form of the U.S. dollar”? The following comes from the official White House website…

A United States central bank digital currency (CBDC) would be a digital form of the U.S. dollar. While the U.S. has not yet decided whether it will pursue a CBDC, the U.S. has been closely examining the implications of, and options for, issuing a CBDC. If the U.S. pursued a CBDC, there could be many possible benefits, such as facilitating efficient and low-cost transactions, fostering greater access to the financial system, boosting economic growth, and supporting the continued centrality of the U.S. within the international financial system.

I don’t think that it is a coincidence that governments all over the Western world are simultaneously developing CBDCs.

And the IMF has actually already put together an extensive handbook “to assist central banks and governments throughout the world in their CBDC rollouts”…

The International Monetary Fund (IMF) is putting together a Central Bank Digital Currency (CBDC) handbook to assist central banks and governments throughout the world in their CBDC rollouts.

Published publicly on April 10, the “IMF Approach to Central Bank Digital Currency Capacity Development” report outlines the IMF’s multi-year strategy for aiding CBDC rollouts, including the development of a living “CBDC Handbook” for monetary authorities to follow.

A lot of people out there will cheer when these digital currencies are introduced.

But it is imperative to understand that once everyone is using them, your financial privacy will be almost totally gone.

Authorities will be able to track virtually everything that you buy and sell, and I am sure that they won’t hesitate to use that information against you.

Needless to say, the potential for tyranny in such a system is off the charts.

Can you imagine a world in which you are restricted from buying meat for a while because you have already used your “carbon credits” for the month?

Your “financial privileges” could potentially be restricted at any time at the whim of a government bureaucrat, and if you are a big enough troublemaker, you could be “de-platformed” from the system permanently.

Of course, in order for such a system to have real teeth, cash and other forms of payment will need to be phased out, and that is precisely what is happening right now in Europe. The following comes from the official website of the European Parliament…

To restrict transactions in cash and crypto assets, MEPs want to cap payments that can be accepted by persons providing goods or services. They set limits up to €7000 for cash payments and €1000 for crypto-asset transfers, where the customer cannot be identified.

Ultimately, they will just keep lowering the limits until the use of cash is almost completely eliminated.

Everyone will be slowly but surely forced on to the new digital system, and it will be a system that they control with an iron fist.

And most people will willingly go along with it. These days, most people are just scraping by from month to month, and one recent survey found that 70 percent of all Americans are “financially stressed” at this point.

Most Americans simply do not care that these new digital currencies could open a door for great tyranny.

They just want to be able to pay the bills and take care of their families, and if our politicians tell them that this new system is good for the economy, they will be all for it.

But those of us that are awake know that more globalism doesn’t lead anywhere good.

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Debt Truths

A seldom-discussed topic that has a significant economic impact is private sector debt levels.

Ever since 1971, when the US Dollar became a fiat currency, and new currency has been created by loaning it into existence.

If banks have a 10% reserve requirement, a $100,000 deposit into a bank can be transformed into $1,000,000 if the velocity of money is high enough.

For example, say you deposit $100,000 into your bank. Your banker reserves 10% or $10,000 and loans out the other $90,000. Say the borrower of the $90,000 buys an expensive car and borrows the $90,000 now available from your bank to do so. The car dealer deposits the $90,000 into her bank. That banker reserves 10% or $9,000 and loans out the other $81,000. That process continues up to a maximum of new currency created of $1,000,000.

Historically, when the Federal Reserve wanted to jump-start the economy by increasing the currency supply, the central bank would reduce interest rates to increase the velocity of money, thereby creating more currency.

That worked until the time of the financial crisis when interest rates were reduced to zero, but lending did not follow due to the fact that, collectively speaking, the American public was already deeply in debt.

It was at that point the Federal Reserve made the decision to ‘temporarily’ pursue a program of quantitative easing or currency creation. As we all now know, the program continued long past the time that a reasonable person would say it was temporary.

As I have often stated, it is my belief that this program will once again be revived in earnest, although it will likely be called something other than quantitative easing.

Since the time of the financial crisis, this policy of currency creation has caused debt levels to increase immensely. At the time of the financial crisis, worldwide debt was about $100 trillion. It now stands at $300 trillion – a truly remarkable number.

Presently, debt levels are continuing to increase. The data shows that consumers are increasingly taking on new debt to cope with rising living costs. This from “Zero Hedge” (Source: https://www.zerohedge.com/markets/consumer-debt-soars-394bn-most-20-years-record-169-trillion-young-borrowers-struggle-repay):

While it won’t tell us anything we don’t know – since it is two months delayed and we already get monthly updates from the Fed via the G.19 statement – this morning, the NY Fed published its quarterly Household Debt and Credit report, which showed that total household debt in the fourth quarter of 2022 rose by 2.4% or $394 billion, the largest nominal quarterly increase in twenty years, to a record $16.90 trillion. Balances now stand $2.75 trillion higher than at the end of 2019, before the pandemic recession.

And the same chart broken down by age:

Every type of consumer credit increased in Q4, and here is a detailed breakdown:

Mortgage balances rose by $254 billion in the fourth quarter of 2022 and stood at $11.92 trillion at the end of December, marking a nearly $1 trillion increase in mortgage balances in 2022.
Home equity lines of credit rose by $14 billion to $340 billion.
Student loan balances now stand at $1.60 trillion, up by $21 billion from the previous quarter. In total, non-housing balances grew by $126 billion.
Auto loan balances increased by $28 billion in the fourth quarter, consistent with the upward trajectory seen since 2011.
Credit card balances increased $61 billion in the fourth quarter to $986 billion, surpassing the pre-pandemic high of $927 billion.

There is an eternal truth about excessive debt accumulation – if there is too much debt to be paid, it won’t be paid.

This is true regarding private sector debt and it is true as far as government debt and liabilities are concerned as well.

It is my view, based on simple math, that debt levels are now past the point of no return and are now too high to ever be paid.

The result, at some future point, will be a massive deflationary environment that will, in my view, resemble the 1930’s; or, possibly, worse.

Looking at the first chart above, one can see the combined debt total of mortgage debt, home equity loan debt, auto debt, student loan debt, and credit card debt is now about 1/3^rd higher than at the time of the financial crisis.

Alarmingly, debt levels have grown the most among those over age 60. That, at least in my view, indicates that consumers are increasingly relying on debt to make ends meet in what is a very difficult economy.

And, to add insult to injury, the most recent inflation numbers indicate that inflation is not under control. This was not at all surprising to me. As I have been stating, the Fed isn’t doing enough to get inflation under control.

Inflation will not be controlled until we have real, positive interest rates – something we are a long way away from.

In the meantime, the US economy (and the world economy) is heading for a time of painful stagflation.

Are the Saudis Ready to Ditch the Dollar?

For several years now, I have been writing about the ultimate consequences of the considerable devaluation of the US Dollar.

Over the past couple of years or so, every American has felt the effects of this dollar devaluation first-hand as consumer price inflation has driven the price of nearly every necessity higher.

But now, even more serious consequences may be on the horizon.

Ever since the 1970’s, when the US Dollar became a fiat currency, the dollar has retained its status as the world’s reserve currency due to the agreement put in place with Saudi Arabia in the early 1970’s. This agreement had the United States offering Saudi Arabia military protection in exchange for the kingdom pricing oil exports in US Dollars. It was this agreement that established the petro-dollar as any country around the world that wished to purchase oil from Saudi Arabia had to inventory US Dollars in order to do so.

That agreement has served the US well for about 50 years. However, over the past few years, there are ever increasing signs that much of the rest of the world is seeking US Dollar alternatives.

This past week, another major move was made away from the US Dollar as Saudi Arabia publicly announced the kingdom was actively looking to price its oil exports in currencies other than US Dollars. This from “The Gateway Pundit” (Source: https://www.thegatewaypundit.com/2023/01/another-biden-catastrophe-saudi-arabia-announces-readiness-trade-currencies-us-dollar-another-blow-us-economy/):

Saudi officials announced this week they are ready to to trade in currencies other than the US dollar in a huge blow to the American economy.

Saudi Arabia announced the move following a December meeting with China’s President Xi Jinping. The kingdom is ready to trade in yuan instead of the dollar in trade exchanges.

Saudi Arabia has also announced its intention to join the BRICS alliance.

Russia Today reported:

Saudi Arabia is ready to discuss trading in currencies other than the US dollar, according to the Kingdom’s finance minister Mohammed Al-Jadaan, as cited by Bloomberg.

Al-Jadaan’s comments come a month after China’s President Xi Jinping said that Beijing is ready to make energy purchases in yuan instead of the US dollar in trade exchanges with members of the Gulf Cooperation Council (GCC). China’s leader highlighted the necessity of the shift while speaking at a Chinese-Arab summit hosted by Saudi Arabia earlier this week.

“There are no issues with discussing how we settle our trade arrangements, whether it is in US dollar, in euro or in Saudi riyal,” Al-Jadaan said on Tuesday during an interview with Bloomberg in Davos, Switzerland.

The oil-rich kingdom is seeking to deepen its ties with vital trade partners, including China. The readiness for talks on the issue expressed by Riyadh may signal that the world’s biggest oil exporter is open to diversifying away from the US dollar after decades of pricing crude exports in the US currency. The riyal, the Saudi national currency, has been pegged to the greenback, too.

This is simply HUGE news and provides yet another reason for Americans who aspire to a comfortable retirement to diversify out of US Dollars. (One of the best ways to do this, in my view, for many investors is to consider adding precious metals to one’s portfolio.)

While I don’t know the time frame (nor does anyone else in my opinion), I believe that ultimately the US Dollar will lose its status as the world’s reserve currency. Admittedly, this opinion is at odds with the opinions of some very bright guest experts that I interview on my radio program, but in my view, the US Dollar’s devaluation will continue, and the rest of the world will increasingly and urgently look for alternatives.

“Quoth the Raven” is an interesting opinion column. Here are some comments on this recent development involving Saudi Arabia from that column (Source: https://quoththeraven.substack.com/p/saudi-arabia-just-killed-the-petrodollar):

Put simply, I believe there is a historic divide in the making between the BRICS nations, led by Russia and China, and the West, led by the United States.

I was one of the few outlets last summer to even report on the fact that Russia and China openly announced a “new global reserve currency” (announced in July 2022, predicted by me in February 2022). And of course, Russia and China can’t do it on their own: they are working with nations like Saudi Arabia and India to help put their plans into practice.

Crucial to dethroning the U.S. dollar would be the removal of its use for buying and selling oil – a system that has been in place since the 1970s when the U.S. promised security for the Saudi Kingdom in exchange for the petrodollar system that underpins the dollar’s strength as global reserve currency. It’s a topic that I discussed at length back in September with Andy Schectman on this podcast.

Andy told me back in September 2022: “The dollar hegemony is right about ready to break when you realize that Saudi Arabia is about to join the BRIC nations. Do you think Biden is going to fly there to ask for more oil? He went there to beg them not to join BRIC.”

“The dollar was made reserve currency only because of our protection of the Saudi kingdom,” Andy continued. He then noted astutely that Saudi Arabia had signed new protection agreements with Russia. “All of the Eastern European countries that have repatriated their gold. They’re all part of the EU but they all trade their own currency. They’re all going to break away from the Western system,” he added.

And now it looks like Andy was right: it appears Saudi Arabia has just issued a death knell to the exclusivity of the petrodollar as we once knew it – the first of several dominoes that needs to fall before the U.S. is exposed financially as an emperor with no clothes.

As I have discussed here previously, the BRICS nations (I’ve added an ‘S’ to the BRIC reference to include the country of South Africa) are now developing their own currency, likely commodity-backed, to use in trade. This latest development involving Saudi Arabia may have the Saudi’s looking to use a different currency in oil trade, perhaps this BRICS currency that is being developed.

While this move away from the US Dollar was likely going to happen anyway at some point, recent US policy decisions have motivated the Saudi’s to move more quickly away from the US Dollar. This from “Times of India” (Source: https://timesofindia.indiatimes.com/readersblog/blogthoughts/saudi-arabia-the-foundation-of-brics-currency-47508/):

BRICS is an alliance of the world’s five major developing economies: Brazil, Russia, India, China and South Africa, most people underestimate it since it includes emerging economies as opposed to established economies in the G7. These five countries account for 41 percent of the world’s population and have a combined GDP of over 24.4 trillion U.S dollars. They also have a substantial military capability and an increasing political influence in the global sphere, and by teaming together, this group commands a voice for itself in the global sphere, for example, it helps them to have wiser worries about emerging economies whenever the West implements policies that are explicitly beneficial to itself, and a famous example of this is the carbon tax. The European Union routinely complains about the carbon emissions created by the Indian and Chinese steel industries. Because their industries are adopting to clean energy, they are now going to apply a carbon tax, so that when Indian and Chinese steel enter the global marketplace in 2030, Indian products will be taxed penalties precisely because of more carbon emission than these developed countries. However, developed nations have generated so much carbon during their development phase that they are primarily responsible for climate change, yet they ignore the past and now impose a tax on carbon emission, when developing countries needs economic fuel to thrive.

Saudi Arabia is one of the most powerful nations in the world, and it has always been the closest ally of the United States of America. However, Saudi Arabia is currently involved in a cold war with the same United States, because Saudi Arabia reduced oil output by 2 million barrels a day as a result the price of oil shot off from 91 dollars a barrel to 94 dollars a barrel, this action was tremendously profitable to OPEC, but it caused mayhem in the West. Further, President Biden warned Saudi Arabia with unclear repercussions and even offered passing the No Pick Bill to challenge Saudi Arabia’s security which begin violating the Petro dollar agreement between the U.S and Saudi. So, in exchange, Saudi Prince Mohammed bin Salman made a major step that sent shivers down the spines of Americans, and that was his proposal to join members of the BRICS. Previous years data states that Saudi has started making defence deals with both China and Russia firstly, they are not overly reliant on the U.S, secondly the Biden administration wants to relax economic sanctions on Iran, Saudi Arabia’s opponent in the Middle East, and the third reason is the oil consumption of BRICS. Resulting in Saudi Arabia, the world’s top oil producer allegedly proposing to join BRICS, by which they will have the backing of China, Brazil and India as the biggest consumers of oil in the world.

If you haven’t yet embraced “Revenue Sourcing” for your planning to help you protect yourself from currency risk, now is a good time to do so.

Welcome to 2023 and the US Dollar Losing Favor

This week, I want to highlight some of the currency shifts that are taking place presently. Not surprisingly, the Chinese Yuan is gaining favor around the world at the expense of the US Dollar.

This from Alex Kimani (Source: https://oilprice.com/Energy/Energy-General/Why-We-Shouldnt-Underestimate-Chinas-Petro-Yuan-Ambitions.html):

The de-dollarization of the global oil industry is in a treacherous mission creep phase. Things like this don’t happen quickly, but determinedly and gradually, not exactly fitting into today’s media headline game that only considers instant developments. But it is happening and the tide will not be turned based on current and near and medium-term geopolitical developments. Credit Suisse’s Zoltan Pozsar recently warned clients, in essence, that the de-dollarization of the global oil industry is in full swing–even if we can’t see the final end game from here.

And it’s all about China, of course. Pozsar does the OPEC math for us.

Some 40% of proven oil reserves belonging to OPEC+ members is owned by Russia, Iran and Venezuela–all of whom are selling to China at major discounts, and all of whom are on board with Beijing’s petro-yuan plan.

The countries of the Gulf Cooperation Council (GCC)–most notably Saudi Arabia and the UAE–account for another 40% of proven oil reserves, and they are increasingly cozying up to China.

The remaining 20% is also accessible to China, and China is already the largest importer of crude in the world.

What it all means is that de-dollarization is marching to the beat of a fairly steady drum. In terms of global trade, the yuan accounts for around 2.7% of settlements, while the dollar accounts for 41%. These are the numbers that prompt the new trend of instant gratification to suggest this is not an imminent threat to the dollar. They are wrong. The biggest threats take a significant amount of time to develop. From here on out, the pace will pick up momentum.

China and the GCC

As Oilprice.com reported earlier in December, Chinese President Xi Jinping has pledged to ramp up efforts to promote the use of the yuan in energy deals, suggesting at a summit in the Saudi capital that the GCC countries should make full use of the Shanghai Petroleum and Natural Gas Exchange to carry out its trade settlements in yuan.

The year we just exited should be considered the year in which the petro-yuan really took hold, as China forges a path of increasingly oil and gas purchases from places that are petro-yuan friendly. Russia’s war on Ukraine and the Western sanctions response has only acted as a further catalyst.

In a note to clients carried by the Irish Times, Pozsar warns: “China wants to rewrite the rules of the global energy market”, and it will do it by first removing the dollar from the orbit of the Bric countries (Brazil, Russia, India, China) that have been affected by the “weaponization” of dollar foreign exchange reserves meant to punish Russia and keep Putin from filling his wartime coffers.

What’s happened here is a window of enormous opportunity for Beijing, which has now told the Gulf countries that they are absolutely guaranteed buyers for oil and gas, for payment in yuan, with Xi promising to “import crude oil [and natural gas] in a consistent manner and in large quantities from the GCC”.

Xi’s trip to Saudi Arabia in early December was precisely about the yuan. This was the defining moment for the petro-yuan. It was an invitation, and it was well-received. China and Saudi Arabia signed over $30 billion in trade deals during the visit. That’s $30 billion in leverage that will only help further promote the petro-yuan plan.

More than 25% of China’s crude imports come from Saudi Arabia, and it seems inevitable that the GCC will gradually adopt the petro-yuan, even if there will be a lot of roadblocks along the way due to their exposure to Western financing.

What Western minds are banking on–quite literally–is the fact that China alone has $1T in U.S. Treasury bonds. And as for the Saudis, they are truly tied to the Western financial system and the petrodollar. De-pegging the riyal from the dollar, though it has been discussed very quietly (only from a purely research perspective), would be a rather dramatic shock for the Kingdom–one the Crown Prince won’t likely be willing to risk for a very long time. But he will actively discuss oil deals with China in yuan.

The Chinese goal is much more patient than any Western mind can fathom. It’s about slowly chipping away at the dollar’s throne in oil and commodities markets, and as the reserve currency of choice. That is what Brics and the Shanghai Cooperation Organization (SCO) is all about.

And with every geopolitical upset on the level of Russia-Ukraine, and with every tightening of the sanctions screws by the West, Beijing gets a little further with its petro-yuan goals.

There won’t be any announcement. There won’t be any loud noise. It will happen gradually. It will happen very slowly. And the West will struggle to find its footing when a new global energy order emerges in the longer-term future.

I have been writing about this for several years.

The Chinese Yuan is quickly gaining favor around the world. Check out this recent development regarding the Russian sovereign wealth fund. (Source: https://www.zerohedge.com/news/2022-12-31/what-russia-doubling-its-gold-and-yuan-holdings-really-means)

On Friday, Russia’s Finance minister announced their National Wealth Fund (NWF) is now permitted to allocate up to 60% of its holdings in Chinese Yuan and up to 40% of its holdings in Gold Bullion. This is a doubling in permitted allocation percentages up from 30% and 20%.

Simultaneously the fund reduced its holdings of the British Pound and the Japanese Yen to zero.

Reuters reports from Moscow:

Russia’s finance ministry on Friday said the maximum possible share of Chinese yuan in its National Wealth Fund (NWF) had been doubled to 60% as it restructures its rainy-day fund to reduce dependency on currencies from so-called “unfriendly” nations. Source

The NWF had been recently used to finance the widening budget deficit in 2022 due in no small part to sanctions by the G7. The Fund stands at $186.5 billion according to Reuters.

The official statement out of the ministry read in part like this:

“The Russian finance ministry is continuing its consistent reduction of the share of currencies of ‘unfriendly’ states in the structure of the National Wealth Fund’s assets.”

The news agency notes these measures are in no small part a counter to the sanctions by western nations.

We would strenuously add that while this “counter” explanation is true, the circumstances creating the situation are not likely to reverse even if sanctions are lifted and Ukraine magically healed itself.

The world, in our opinion is very different. The trust is broken. Nations are countering existential threats (in their view), with increasingly mercantilist policies that fragment trade irreparably.

Would you trust currency of a country that confiscated your assets?

Stealing in Russia’s Eyes

You cannot confiscate (as opposed to just freezing) the assets of a nation as held at the IMF or other “safe” institutions as was done by the West, and expect that nation to continue to carry assets in your currency. This is not spite-work by Russia, it is economic survival. While this is a horrendous development, in their (Russia’s) eyes it is the lesser evil now.

People can debate if this is justified or not all they want. But it is happening, and there are global consequences that will manifest locally for everyone.

Establishing the Golden Yuan and PetroYuan

Reuters also goes on to add that Finance Minister Anton Siluanov said the trend will continue next year when Russia resumes growing that fund by allocating oil and Nat Gas revenues to this rainy day fund.

We would note again as a second-order knock-on effect: If sanctions do not work, and Russia is making money to be held in Bullion and Yuan; then the west must move from Financial sanctions to Commodity action. That means somehow they must get Oil lower to kill Russian revenues , as some suspect they have been doing with rehypothecation in WTI.

As Russia buys gold with oil revenues, it attempts to create a defacto Gold and Yuan peg. Our point is, law follows economic practice. If enough people use something, it becomes the standard. The announcement is made after the broad acceptance, not before.

While 2023 may not be the year that the big shift from the US Dollar occurs, I expect there will be movement in that direction. If you are holding all your wealth in US Dollar based assets, you may want to consider adding some precious metals to your portfolio.

About Stocks and Bonds

The stock market highs of November have not yet been taken out and my long-term trend-following indicators continue to become more bearish. At this point, a “Santa” rally looks less likely especially given the Fed’s recent statements about accelerating the taper or slowing the rate of currency creation.

As the longer-term readers of “Portfolio Watch” are aware, I believe the Fed’s taper talk is just that. The math doesn’t lie; the federal government cannot fund its deficit spending without currency creation. While the Fed may taper officially, liquidity will have to be made available in order to close the budget gap.

Of course, common sense dictates that this process of currency creation will have to cease at some future point. When it does, it is my belief that a reset will have to occur that will affect many assets including stocks and real estate.

Both stocks and real estate are in a bubble in my view.

David Stockman, former budget director, penned an article last week that examines just how extended stocks likely are. Here is a bit from Mr. Stockman’s piece (Source: https://internationalman.com/articles/david-stockman-reveals-the-truth-about-the-stock-market-and-what-it-means-for-you/)

The fundamental consequence of 30 years of Fed-fueled financial asset inflation is that the prices of stocks and bonds have way overshot the mark.

That’s why what lies ahead is a long stretch of losses and investor disappointment as the fat years give way to the lean.

These will hit hard the bullish investor herd and aggressive buyers of calls who can’t imagine any other state of play. They will be shocked to learn — but only after it is way too late — that the only money to be made during the decades ahead is on the short side of the market by buying puts on any of the big averages: the FANGMAN, S&P 500, NASDAQ 100, the DOW and any number of broad-based ETFs.

The reason is straightforward. The sluggish, debt-ridden Main Street economy has been over-capitalized, and it will take years for company profits and incomes being generated to catch up to currently bloated asset values. Accordingly, even as operating profits struggle to grow, valuation multiples will contract for years to come, owing to steadily rising and normalizing interest rates.

We can benchmark this impending grand reversal on Wall Street by reaching back to a cycle that began in mid-1987. That’s when Alan Greenspan took the helm at the Fed and promptly inaugurated the present era of financial repression and stock market coddling that he was pleased to call the “wealth effects” policy.

At the time, the trailing P/E multiple on the S&P 500 was about 12X earnings — a valuation level that reflected a Main Street economy and Wall Street financial markets that were each reasonably healthy.

The US GDP in Q2 1987 stood at $4.8 trillion and the total stock market was valued at $3.0 trillion, as measured by the Wilshire 5000. Back then, Wall Street stocks were stably capitalized at 62% of Main Street GDP.

Over the next 34 years, a vast unsustainable gulf opened up between the Main Street economy and the Wall Street capitalization of publicly traded stocks.

During that three-decade period, the Wilshire 5000 market cap rose by 1,440% to $46.3 trillion. That’s nearly four times the 375% gain in nominal GDP to $22.7 trillion.

Accordingly, the stock market, which was barely three-fifths of GDP on Greenspan’s arrival at the Fed, now stands at an off-the-charts 204% of GDP.

If we assume for the moment that the 1987 stock market capitalization rate against national income (GDP) was roughly correct, that would mean that the Wilshire 5000 should be worth $14 trillion today, not $46 trillion. Hence, the $32 trillion of excess stock market valuation hangs over the financial system like a Sword of Damocles.

In fact, we believe that the gulf between GDP and market cap has been growing wider and more dangerous since the Fed sped up money printing after the Lehman meltdown. To wit, since the pre-crisis peak in October 2007, the market cap of the Wilshire 5000 is up by nearly $32 trillion, while the national income to support it (GDP) is higher by only $8 trillion.

The stock market’s capitalization should be falling, not soaring into the nose-bleed section of history. After all, since the financial crisis and Great Recession, the capacity of the US economy to generate growth and rising profits has been sharply diminished. The real GDP growth rate since the pre-crisis peak in Q4 2007, for instance, is just 1.5% per annum, which is less than half its historical trend rate of growth.

Back in October 2007, the stock market’s capitalization was 106% of GDP and in just 14 years it has soared to the aforementioned 204%. So even as the growth rate of the US economy has been cut in half, stock market capitalization has doubled.

Given that the stock market has gotten way, way ahead of the economy, the longer-range implication is a long spell during which financial asset prices will stagnate or even fall until they eventually recover the healthy relationship to national income.

Looking at this from a different angle, the current $46 trillion market cap of the Wilshire 5000 would not return to 62% of GDP until US GDP reaches $75 trillion. At an average of 3.3% per annum increase in nominal GDP since Q4 2007, it would take 38 years to get there!

That’s right. The massively over-valued stock market is currently capitalizing on an economy that might exist by the year 2060… if all goes well.

Mr. Stockman offers a terrific perspective on where stock valuations have moved since the Fed began the ‘temporary’ policy of currency creation.

Real estate has followed a course similar to the course tracked by stocks.

The Case-Shiller Housing Index is the commonly used metric of housing values. The chart illustrates housing values for the past 25 years.

Looking at the chart, one can see the decline in housing values at the time of the financial crisis. The index fell from 200 to about 150.

Notice that housing values began to increase in earnest after the Fed began quantitative easing. Since that time, housing prices have nearly doubled.

And, as inflated as housing prices were at the time of the financial crisis, they are far more inflated presently – they are about 50% higher than they were prior to the collapse that began in 2007.

Of course, as we have demonstrated many times in the past if real estate and stocks were priced in gold rather than depreciating US Dollars, one gets a completely different perspective. In 2007, gold was about $650 per ounce. Today, the spot price of gold is about $1800. That’s an increase of about 275%. Priced in gold, both stocks and real estate have declined in value which one would expect given the massive levels of debt that exist.

The reality is that the US Dollar and every other fiat currency around the world is no longer an accurate metric when examining economic data and asset pricing.