US Treasuries – Dennis Tubbergen

Recession, or Perhaps Worse?

Metals continued their slide last week as stocks rallied, US Treasuries fell slightly and the US Dollar Index rose.

Last week, I made the case that my January recession call was the correct one. The most recent revisions to GDP indicate negative growth in the first quarter of the year likely to be followed by negative growth during the second quarter as well.

In my view, the reality of the current economic situation no matter what the week-to-week market numbers might say is that there is too much debt in both the private sector and on the public balance sheet to ever be paid with ‘honest’ money.

When measured as a percentage of the economy, private sector debt today is on par with the level of private-sector debt at the onset of the Great Depression. However, U.S. Government debt is far more out of control than in the late 1920s. In 1929, US Government debt was about 16% of the economy while today it is hovering at about 130%!

That means the outcome we are likely to see today will be worse than in the 1930s. Former Presidential Candidate, Ron Paul (also a past guest on the RLA Radio program had this to say on the topic (Source: https://www.breitbart.com/clips/2022/07/05/ron-paul-what-were-facing-today-a-lot-worse-than-the-depression-recent-downturns/)

Tuesday, during an appearance on Newsmax TV’s “American Agenda,” former Rep. Ron Paul (R-TX) warned the country was worse off than it had been in some of the most challenging economic times in its history, including the Great Depression of the last century.

Paul decried the economic policies of inflating the money supply and the U.S. debt as the causes.)

“[T]he founders understood exactly what we’re talking about,” he said. “They had the runaway inflation with the Continental Dollar. So they put in the Constitution that only gold and silver could be legal tender. And if we had followed that, we wouldn’t have had the welfare-warfare state with these huge deficits and what we’re facing because I think what we’re facing today is a lot worse than what we’ve had in the past, whether it was the Depression or whether it was the downturns we’ve had in recent years.”

“I think the bubble is bigger,” Ron Paul added. “I think the debt is bigger. The demands are bigger, and people are way overconfident even though they’re getting worried — way overconfident that you can take your debt at $10 trillion and, in a few years, switch it to $30 trillion, and nothing changes.”

But things are changing and changing quickly. Debt is a drag on the economy as is becoming ever apparent. Matthew Piepenburg had this to say on the topic (Source: https://goldswitzerland.com/the-u-s-just-another-inflation-seeking-banana-republic/)

What the U.S. in particular, and the West in general, are failing to confess is that today’s so-called “Developed Economies” are in actual fact more like yesterday’s debt-straddled Emerging Market economies, and like a real banana republic, the only option ahead for our clueless elites is inflationary (and intentionally so).

Titanic Ignorance

I’ve often cryptically joked that listening to investors, mainstream financial pundits or downstream politicians debating about near-term asset class direction, inflation “management” or central bank miracle solutions is like listening to First Class passengers on the Titanic debating about dessert choices on the menu in their hands rather than the debt iceberg off their bow.

In short: The real issues are right in front of us, yet ignored until the economic ship is already dipping beneath the waves.

Rising Debt + Declining Income = Uh-Oh.

As for such hard facts (i.e., icebergs), the most obvious are fatal global and national debt levels rising at levels which can never be repaid….

Meanwhile, national income from GDP and tax receipts are falling, which means debts are grossly outpacing revenues, which any kitchen table, boardroom, or even cabinet meeting conversation should know is a bad thing…

Toward this end, it’s worth lifting our eyes above the A-deck menu and taking a hard look at the following iceberg scrapping the bow, namely: Tanking US tax receipts:

What Biden and Powell might wish to remind themselves is that U.S. tax receipts have fallen YoY by 16%, and are likely to fall even further as markets continue their trend South at the same time the US steers toward a recessionary block of ice.

What’s even more alarming is this stubborn fact: as U.S. Federal deficits are rising, foreign interest in Uncle Sam’s IOUs (i.e., U.S. Treasuries) are tanking.

China’s interest in U.S. Treasuries, for example, has hit a 12-year low, and Japan, as I’ve warned elsewhere, is too broke (and too busy buying its own JGB’s with mouse-klick Yen) to afford to bail out Uncle Sam.

The level of magical Yen creation (reminiscent of the Weimar era) coming out of Japan to “support” its pathetic bond market is simply mind-blowing:

Given the artificial and relative current strength of the USD and the fact that FX-hedged UST yields are negative in EUR, it’s fairly safe to conclude that there will be more sellers than buyers of USTs. That means rising yields and rates near-term.

That’s a bad sign for Uncle Sam’s bloated and unloved bar tab. Who but the Fed (and hence more QE) will buy his IOUs by end of August?

In the past, the spread between rising debts and declining faith in U.S. IOUs was filled by a magical money printer at the not-so-federal “Federal” Reserve.

But with a cornered Fed still tilting toward QT rather than QE, where will this magical money come from, as it sure as heck ain’t coming from tax receipts, the Japanese, China, or Europe?

As I see it, the Fed has only two pathetic options left if it wants to fill the widening gap between its growing deficits and declining faith from foreign bond buyers (or even US banks, see below).

Namely: It can 1) default on its embarrassing IOUs and send markets over a cliff, or 2) pivot from QT to QE and create more magical (i.e., inflationary and toxic) money.

As I have been stating from day one, I believe the Fed will pivot; it will reverse course and begin currency creation once again. That will likely be bullish for metals as well as commodities as the US Dollar is devalued even further.

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Market Analysis and Commentary on the Latest Russian Sanctions

To begin with this week, I want to offer an update on last week’s market analysis.

In last week’s “Portfolio Watch”, I wrote this about stocks and published a chart of the S&P 500 (which I am not reprinting here due to space limitations. You can visit www.RetirementLifestyleAdvocates.com and download last week’s newsletter to see the chart):

Let’s begin by taking a look at stocks.

I’ll use the Standard and Poor’s 500 for the analysis. The chart below is of an exchange-traded fund that has the investment objective of tracking the S&P 500 index.

Notice on the right-hand side of the chart, I have drawn a blue trend line that begins at the end of the calendar year 2021 and continues to the present time.

Notice also, how far below the trendline the current price is.

Also on the chart, on either side of the green and red price bars (each bar is one week of price activity with the green bars representing the weeks that the ETF price went up and the red bars representing weeks the ETF price went down), you’ll see a blue line (on the top side of the price action) and a red line (on the bottom side of the price action). Those lines are the Bollinger Band indicator.

When prices reach outside the Bollinger Band, either on the top side or the bottom side, it often represents a price extreme and the price reverts to the mean.

Finally, if you notice on this weekly price chart that last week’s price action ‘gapped down’ leaving a space in the chart between the prior week’s price action and last week’s. Often, gaps on a chart are closed.

For these reasons, I would not be surprised to see a rally in stocks this next week although there is another market axiom that advises to ‘never try to catch a falling knife’. It’s sage advice.

That rally in stocks did occur; the Dow Jones Industrial Average rallied more than 5% and the Standard and Poor’s 500 Index rallied more than 6%. Despite the seemingly strong rally, by measure stocks remain in a downtrend.

The recent rally is counter-trend in my view, with the primary trend remaining down. To demonstrate how far oversold stocks were going into the beginning of last week, stocks can rally another 10% or so from here to get back to a 20-week moving average of price.

While stocks don’t have to rally that much, a consolidation period or a continued bear market rally would be more likely than not here in my view unless there is a geopolitical shock to the markets or some other black swan-type event.

At this point in time, US Treasuries like stocks are oversold just not to the same extent.

This chart is a weekly price chart of an exchange-traded fund that tracks the price action of long-term US Treasuries.

The faint silver line in the center of the price chart is a 20-week moving average of price. Notice that since the beginning of the calendar year 2022, US Treasuries have been trading well below their 20-week moving average price.

Here’s why that may be important. The 20-week moving average of price is the market’s collective consensus of value over a 20-week time frame. As one might expect, to calculate a 20-week moving average of price, one takes the closing price of the exchange-traded fund over the past 20 weeks, adds them up, and then divides by 20.

If the market’s current consensus of value is lower than the market’s consensus of value over the past 20 weeks, that means the market is down trending, at least by this measure.

The indicators at the bottom of the chart measure overbought and oversold conditions (at least that is part of what they do). Both indicators are telling us that the US Treasury market may be poised for a rally here although the indicators are not at extreme levels.

In other news, the G7 announced this past week that Russian gold imports would now be banned. This from “Zero Hedge” (Source: https://www.zerohedge.com/markets/biden-g-7-will-ban-russian-gold-imports) (emphasis added):

“The United States has imposed unprecedented costs on Putin to deny him the revenue he needs to fund his war against Ukraine,” Biden tweeted on Sunday, the first day of a G7 meeting in Germany; a formal announcement is expected later on during the summit.

“Together, the G7 will announce that we will ban the import of Russian gold, a major export that rakes in tens of billions of dollars for Russia” he added.

The official talking point here, encapsulated by the pro-Biden outlet, The Hill, is that “while it does not bring in as much money as energy, gold is a major source of revenue for the Russian economy. Restricting exports to G7 economies will cause more financial strain to Russia as it wages the war in.”

That, of course, is incorrect: the biggest buyers of gold in recent years have not been G7 countries (United States, France, Canada, Germany, Japan, the United Kingdom, and Italy), many of whom naively sold much if not all their gold in the recent past and have refused or simply don’t have the funds to restock; instead, purchases have all been by developing-nation central banks (like India and Turkey, and of course China which however has a habit of only revealing its true gold inventory every decade or so) who have been quietly preparing to do what Russia is doing by dedollarizing and instead allocating capital into a counterparty-free asset.

As for Russia, its central bank has been an aggressive buyer of gold, not seller, and if anything Biden’s decision will only make the gold market the latest to follow the example of oil and bifurcate: cheaper for Russian-friends and much more expensive for Russian enemies.

This decision, like the prior Russian sanctions, will backfire. Russia and its allies will benefit and the west will suffer.

Thinking critically about this policy decision, one has to conclude that the US has decided to prohibit the trading of US Dollars, which are rapidly devaluing, for Russian gold an asset that, at worst, has maintained its purchasing power.

In other words, Russia gets to keep her gold and will not be allowed to exchange her gold for devaluing US Dollars. That’s punishment?

The reality is Russia and China, as the chart above shows, have been dumping US Dollars and adding gold as far as their reserve assets are concerned. The countries have reduced their US Treasury holdings by 25% since mid-2015 and have increased their collective gold holdings by nearly double over the same time frame.

The data unequivocally suggests that Russia (and China) has already made the decision to slow the exchange of US Dollars for gold.

Ultimately, I expect this will be bullish for gold and will continue to be bearish for the US Dollar and other western fiat currencies.

We live in economic times unlike any that anyone alive today has ever seen. Yet, the ultimate destination is completely predictable.

Fiat currencies eventually fail or are redefined. Unsustainable debt levels eventually cause a deflationary collapse and massive currency creation leads to inflation or hyperinflation before the deflationary crash begins.

If you are not using Revenue Sourcing™ to plan your retirement income, now is the time to look into it.

Market Analysis

This week, I want to offer some market analysis.

Last week stocks fell hard, US Treasuries declined as did gold and silver.

One of the money management strategies that has proven itself over time was developed by Harry Browne who began publishing a financial newsletter in the 1970s and authored many best-selling books up through the 1990s. The strategy was dubbed “Permanent Portfolio” by Browne and it had the investment objective of getting absolute returns (not losing money) while keeping pace with inflation.

When one examines the hypothetical performance of such a portfolio going all the way back to 1971 when the US Dollar became a fiat currency, the track record is very sound with 7 years of slightly negative returns and 44 years of positive returns.

This year, at the present time, this strategy is struggling as all asset classes are down or flat mid-way through the year.

Let’s begin by taking a look at stocks.

I’ll use the Standard and Poor’s 500 for the analysis. The chart below is of an exchange-traded fund that has the investment objective of tracking the S&P 500 index.

Notice on the right hand side of the chart, I have drawn a blue trend line that begins at the end of calendar year 2021 and continues to the present time.

Notice also, how far below the trendline the current price is.

When prices reach outside the Bollinger Band, either on the top side or the bottom side, it often represents a price extreme and the price reverts to the mean.

For these reasons, I would not be surprised to see a rally in stocks this next week although there is another market axiom that advises to ‘never try to catch a falling knife’. It’s sage advice.

If you are a trader, you are best to trade with the trend and wait for a good opportunity to do so.

Long-term, as noted in my mid-year market forecast published this month, I look for more downside in stocks. I also expect the Fed to reverse course sometime soon and continue with easing.

That brings me to precious metals.

Gold and silver have not reacted the way one might expect of late with the high levels of inflation that exist.

The chart is a chart of an exchange-traded fund that tracks the price of gold.

Notice that the weekly price chart is forming a bullish ‘cup and handle’ pattern with the handle about to be completed.

I expect that the uptrend in gold will resume by year-end and silver will follow suit.

US Treasuries have also been a poor performer this year.

This chart is a chart of an exchange-traded fund that tracks the price of US Treasuries. Keep in mind that as bond prices fall, bond yields rise.

The trend line on the chart is clearly down since the beginning of 2020. A down trend over that time frame is not surprising given that the Fed expanded its balance sheet by trillions over that same time frame.

Now, as is the case with stocks, it would appear that bond prices are oversold and may be ready for a rebound. The Bollinger Bands on the weekly price chart seem to indicate that as does the MACD indicator at the bottom of the chart.

To summarize, both stocks and bonds are extremely oversold here and a rebound would not be surprising although the primary trend of both stocks and bonds remain down.

Gold and silver are forming a bullish pattern that may see prices rise by year-end.

I expect that Browne’s permanent portfolio will continue to outperform the stock market as it has year-to-date and I expect some recovery in returns from here.