von Mises – Dennis Tubbergen

Are We on the Verge of a Crack-Up Boom?

Stocks rallied and gold fell last week. At this point, I don’t view these developments as trend-changing, rather as counter-trend rallies. The Dow to Gold ratio continued to fall last week. As currency devaluation continues, this is an indicator that becomes more meaningful in my view.

At its last meeting, the Federal Reserve increased interest rates by .25%. As I have been stating, I expect Fed action to counter inflation will be more form than substance. This increase of .25% certainly fits in that category in my view.

There is more to this inflation story than meets the eye. While an increase in the currency supply leads to inflation, it also creates other undesirable side effects, particularly when the currency is the world’s reserve currency.

As long-time readers of “Portfolio Watch” know, I have often discussed the concept of a ‘crack-up boom’ put forth by Austrian economist, Ludwig von Mises. For newer readers of “Portfolio Watch”, a crack-up boom is defined as currency inflation or hyperinflation coupled with a simultaneous recession or depression.

Current monetary policy and credit expansion, if it continues, could lead to such an outcome. Arguably, we are on the fringe of such an outcome presently.

Larry Lepard, manager of the EMA GARP fund recently commented on the probability of such an outcome in light of the Russia-Ukraine situation. (Source: https://www.zerohedge.com/markets/fiat-currencies-are-going-fail-spectacularly-lawrence-lepard). Here are some excerpts from his excellent analysis piece:

What just happened in the last two weeks is enormously important and misunderstood by many investors.

The Russian invasion of Ukraine and the corresponding Western sanctions and seizure of Russian FX reserves are nothing short of a monetary earthquake. The last comparable event was Nixon’s abandonment of the gold standard in 1971.

Russia, with the backing and support of China, just told the world that it is no longer going to sell its oil, gas, and wheat for Western currencies which are programmed to debase.

The West in its response just said to all countries around the world: “If you have foreign exchange reserves, held in our system, they are no longer safe if we disagree with your politics.”

It is similar to what the Canadians did when they moved to seize the bank accounts of Canadians who had demonstrated support for the truckers without due process of law.

Both of these political moves are blatant advertisements for what I call “non state controlled money without counterparty risk”, like gold and bitcoin. If governments can weaponize their money when they do not like what you are doing, what is the natural defense?

The US Dollar has been the reserve currency of the world since WW II and the Bretton Woods agreement. This has given the US an enormous advantage and subsidy from the rest of the world because everyone else needs to produce goods and services to obtain dollars and the US can simply produce dollars at no cost by printing them.

Putin is now cast in the role of Charles de Gaulle who complained about the “exorbitant privilege” of the US with its dollar hegemony. As we all know, de Gaulle demanded gold in exchange for France’s US dollar FX surpluses and this outflow forced Nixon to close the gold window.

Recall that post this event, gold went from $35 per ounce to $800 per ounce (23x). Russia’s move will lead to a similar move in favor of gold. Putin could see that the US fiscal and monetary situation was becoming untenable and he decided to use this to create an existential threat to the US and the world financial system.

He undoubtedly knows that the West has artificially suppressed the price of gold and that is why he has been building his gold reserves steadily for the past 20 years.

Putin just shot “King Dollar” in the head.

We can see it in the financial markets, as the price of everything commodity-related is going up relentlessly in dollar terms.

Russia is long commodities, long gold, and doesn’t need fiat currency. His debt to GDP ratio is low and taxes are low. If the world financial markets collapse on a relative basis, the position of Russia will be improved significantly. This is what I believe he is playing for. If investors do not recognize this, they will be caught wrong-footed as I believe many are today.

The implications for investors are quite clear. None of us own enough gold, real assets or commodities. Fiat currencies are going to fail spectacularly, and soon, in my opinion.

In the April issue of the “You May Not Know Report”, I report on another potential development that, should it occur, will be another blow to diminishing US Dollar dominance. “The Wall Street Journal” ran a story (Source: https://www.wsj.com/articles/saudi-arabia-considers-accepting-yuan-instead-of-dollars-for-chinese-oil-sales-11647351541) reporting that Saudi Arabia is now in serious discussions with China to price the kingdom’s oil sales or at least part of the oil sales in the Chinese currency. Here is an excerpt:

Saudi Arabia is in active talks with Beijing to price some of its oil sales to China in yuan, people familiar with the matter said, a move that would dent the U.S. dollar’s dominance of the global petroleum market and mark another shift by the world’s top crude exporter toward Asia.

The talks with China over yuan-priced oil contracts have been off and on for six years but have accelerated this year as the Saudis have grown increasingly unhappy with decades-old U.S. security commitments to defend the kingdom, the people said.

The Saudis are angry over the U.S.’s lack of support for their intervention in the Yemen civil war, and over the Biden administration’s attempt to strike a deal with Iran over its nuclear program. Saudi officials have said they were shocked by the precipitous U.S. withdrawal from Afghanistan last year.

China buys more than 25% of the oil that Saudi Arabia exports. If priced in yuan, those sales would boost the standing of China’s currency. The Saudis are also considering including yuan-denominated futures contracts, known as the petroyuan, in the pricing model of Saudi Arabian Oil Co., known as Aramco.

As I discuss in detail in the April “You May Not Know Report”, since 1974, all of the oil exports of Saudi Arabia have been priced in US Dollars. Should that change, it will be more bad news for the US Dollar and more inflation as there will be another reason not to inventory US Dollars by other countries around the world.

Of course, none of these developments is at all surprising or shocking. History teaches us that fiat currency systems have a 100% failure rate. We are not debating the ‘what’, we are only debating the ‘when’.

In the meantime, we will probably continue to see accelerating inflation or hyperinflation which will be coupled with an economic slowdown as von Mises described the ‘crack up boom’.

There is growing evidence that we are now in a recession or, at the very least, moving toward one. The Federal Reserve Bank of Atlanta recently revised 1^st quarter growth projections to 0%. This from “Seeking Alpha” published prior to the Fed’s ¼ point rate hike (Source: https://seekingalpha.com/article/4492503-stagflation-warning-atlanta-fed-cuts-q1-gdp-projection-to-zero_):

On Tuesday, the Atlanta Fed cut its GDP estimate for the first quarter of 2022 to zero.

Just a few days ago, the estimate was for 0.6% growth. That was down from 1.3% just a few days before that.

This is not an encouraging trend.

Keep in mind, Atlanta Fed GDP estimates tend to start high and then fall as the quarter progresses. We’re still early in the quarter.

Just a few weeks ago, a collapse in economic growth seemed impossible. We’re coming off 7% GDP growth in Q4, capping off the fastest growth year on record.

But here we are.

Stagflation is defined as little to no economic growth coupled with high inflation.

And here we are.

This puts the Federal Reserve in a nasty spot. The central bank would typically respond to an economic contraction with rate cuts and quantitative easing. But the Fed is supposed to be tightening monetary policy to deal with surging inflation.

In the book “New Retirement Rules”, I wrote about the two potential economic paths that were before us. Inflation followed by deflation or we would go direct to deflation. The latter could only happen if the Fed ceased easy money policies.

The Fed did not cease easy money policies but instead, doubled down on them. The inflation followed by deflation that I wrote about, now looks a lot like a ‘crack-up boom’.

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The Recent Stock Bull Market – Real or Nominal?

The double top theory for stocks that I suggested at the end of 2021, is looking like the right call at this point.

Stocks suffered their worst week since March of 2020 last week despite a 4-day trading week.

As I have been suggesting here each week, when stock gains are largely attributable to an artificial market environment created by easy-money policies, a correction will have to ensue.

My February special report will be an analysis of stocks. Look for an opportunity to get the report in the February issue of the “You May Not Know Report”. (If you’re not a subscriber, call the office to request a complimentary copy – 1-866-921-3613)

Given the dismal performance of stocks last week, ironically after I wrote about and offered evidence of a bubble in stocks last week, I thought it would be appropriate to dig into this topic a little more deeply.

But I want to examine this topic from a different viewpoint – the effect that currency devaluation has on stock prices.

Long-time readers of “Portfolio Watch” have seen this analysis in a similar form in the past, but the analysis is important to understanding what is largely behind the stock bull market.

This analysis requires that we define two terms – nominal and real.

Nominal is defined as ‘in name only’. When I say that stocks increased nominally, I am stating that stocks increased in name only.

Real is defined as an actual thing, not imaginary.

The most recent bull market in stocks has been in nominal terms not real terms.

Here is an excerpt from the February Special Report to explain.

Stock analysts rarely discuss the key relationship between stock prices and currency devaluation.

Simply and succinctly stated, as currency is devalued stocks priced in that currency rise in price. This increase in the value of stocks due to currency devaluation is nominal rather than real.

The same currency devaluation or inflation that causes the price of groceries to increase also causes the price of stocks to increase.

Let’s look at an example to make the point.

This is a chart of the Dow Jones Industrial Average going back to 1971.

An initial perusal of the chart has one concluding that the Dow reached a level of about 12,000 in 1999 at the peak of the tech stock bubble and a high of about 14,000 at the market peak when the Great Financial Crisis began in 2007. Presently, the Dow has reached about 36,000 at the high.

Nominally speaking, since 1999, the Dow has risen in value by about 300%, from about 12,000 to about 36,000. But what did the Dow rise in real terms?

There are many different methods that are used to calculate the inflation rate. There is the official CPI or Consumer Price Index, as well as more accurate alternate, private-sector inflation calculation methods.

The official inflation rate as measured by the CPI is very manipulated. Alternate measures of inflation offered by www.ShadowStats.com or The Chapwood Index offer better, more accurate inflation estimates but the most accurate measure of inflation is determined by looking at the purchasing power of gold.

It’s been said that a loaf of bread priced in gold costs exactly the same today as it did during the Roman Empire more than 2000 years ago. For more than 5000 years and throughout most of history, gold has been money.

To determine the real performance of stocks, it is helpful to price stocks in gold rather than US Dollars.

In 1999, when the Dow reached a level of 12,000, an ounce of gold was around $250. To price the 1999 Dow in gold, one would take the value of the Dow (12,000) and divide by the price of gold per ounce ($250). That math has us concluding that the Dow was 48 because it took 48 ounces of gold to buy the Dow.

Let’s fast forward to the present time. The Dow was recently 36,000 while gold’s spot price was about $1,800 per ounce. The same math has us buying the Dow for 20 ounces of gold.

Gold, over that 20-year time frame, has been constant. An ounce of gold has not changed over the last 20 years, 100 years or even 5,000 years. It is a constant metric. An ounce of gold is the same today as it was at any time historically.

When one looks at the performance of stocks from this perspective, pricing stocks in gold, stocks have actually declined by more than 58% since the tech stock bubble of about 20 years ago in real terms.

Priced in US Dollars, stocks have rallied more than 300% since the tech stock bubble. However, when priced in gold, stocks have fallen more than 58%!

From this analysis, one can conclude that the rally in stocks since the tech stock bubble has been in nominal terms rather than real terms.

A loss in purchasing power causes inflation in consumer items and asset prices – that perfectly explains what we are now experiencing.

The Fed is now painted into the proverbial corner as, at this point, it seems the financial markets have begun to unravel. This piece discussed in the February “You May Not Know Report” newsletter explains. (Source: https://thebaddaddy.com/the-rock-and-the-hard-place/)

Inflation or depression, the authorities are trapped.

They should know this but are drunk on hubris, blinded by money-printing, schmoozed by lobbyists, and too busy insider-trading to care. If they understood this predicament, they’d have retired years ago.

The real problem? In the DC halls of power and its feeder universities, they don’t understand economics. Instead, they parrot dogma dressed up in complex math to justify central planning and fiat money.

Models that actually work (from the Austrian school) are ignored or obfuscated because they don’t consolidate power into a crony, captured system.

Inflation or depression, how did we get here? Ludwig von Mises explained (in 1949)-

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

US stock and bond markets are in an epic bubble, and can only be propped up with more money-printing. But that will cause the prices of beef, milk, eggs, rent, and energy to soar.

The inflation genie is out of the bottle.

To put her back in, they need to stop the easy-money policies, but that will crash the markets, a cascade of debt-deflation (like 2008) that also torpedoes the real economy.

So, which will it be, inflation or depression?

It’ll be an epic tug-of-war as they try to thread the needle. They’ll tighten this year until things start to break, then panic and turn the money spigots back on.

I believe that this excerpt is spot on. Inflation followed by deflation, as I’ve discussed often is the only possible outcome at this point.

Fifty Years of Fiat

An important anniversary is approaching this week. Although it won’t be widely observed or likely even mentioned, it’s the anniversary of the event that led to current economic and investing conditions.

This coming Sunday, August 15 will mark 50 years since the US Dollar became a fiat currency. On August 15, 1971, President Richard Nixon gave a televised speech during which he announced he would be instructing Treasury Secretary Connolly to temporarily suspend the redemptions of US Dollars for gold to protect the US Dollar from speculators.

Nixon, during his speech, also stated that he wanted to address a ‘bugaboo’, namely that there were many who were concerned that the move would negatively impact the purchasing power of the US Dollar. Nixon stated that you might spend more if you wanted to buy a foreign car or take an overseas trip, but if you were among the overwhelming majority of Americans who didn’t make those purchases, your dollar would buy just as much in the future as it did presently.

50 years later, we know that the redemptions have been permanent, and the US Dollar has lost more than 95% of its purchasing power.

As I have often discussed, it was at that point in time that the US Dollar began to be loaned into existence. At that point in time, money became debt, and the money supply was expanded by expanding credit.

More debt meant more money.

The Austrian economist, Ludwig von Mises, perfectly articulated the outcome of this money transformation in my view.

He said, “There is no means of avoiding the final collapse of a boom brought on by credit expansion. The alternative is only whether the crisis should come sooner because of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

In other words, the currency creation ceases, and the crash happens, or the currency is destroyed, and the crash occurs. Neither outcome is desirable and both eventualities are painful to endure. Survival requires an understanding of this principle and preparation in your personal finances.

Egon von Greyerz, who often offers perspectives on this topic wrote another piece last week as the US Dollar’s fiat currency birthday approaches. (Source: https://kingworldnews.com/greyerz-warning-we-are-now-headed-for-a-catastrophic-global-crack-up-boom/)

The beginning of the end of the current monetary system started exactly 50 years ago. In the next few years, the world will experience the end of another failed experiment of unlimited debt creation and fake fiat money.

Economic history tells us that we need to focus on two areas to understand where the economy is going – INFLATION AND THE CURRENCY. These two areas are now indicating that the world is in for a major shock. Very few investors expect inflation to become a real problem but instead believe interest rates will be subdued. And no one expects the dollar or any major currency to collapse.

But in the last two years, money supply growth has been exponential with for example M1 in the US growing at an annual rate of 126%!

Von Mises defined inflation as an increase in the money supply. The world has seen explosive growth in credit and money supply since 1971 and now we are seeing hyperinflationary increases.

Hyperinflation is a currency event. Just since 2000 most currencies have lost 80-85% of their value. And since 1971 they have all lost 96-99%. The race to the bottom and to hyperinflation is now on.

Mr. von Greyerz published this chart that illustrates the price of gold per ounce in various currencies. Using this metric, from 1971 to the present, the US, the UK, Europe, and Canada have seen their respective currencies decline by 96% to 99%.

To say that we are on a slippery slope would not be accurate, we have already made the slide down the proverbial slippery slope, we are now just awaiting the outcome that von Mises forecast.

As many past guests on RLA Radio have stated, hyperinflationary events tend to escalate rapidly and climax relatively quickly as well.

Von Greyerz offers some terrific perspectives on this principle too. This is from his piece:

Since the Great Financial Crisis in 2006-9, there has been an exponential growth in US Money Supply.

Looking at US M1 money supply, the graph below shows how it grew from $220 billion in August 1971 to $19.3 trillion today.

From 1971 to 2011 the growth seems modest at a compound annual growth (CAGR) of 6%. If the dollar purchasing power declined by the same rate, it would lead to prices doubling every 12 years. Or put in other terms, the value of the currency on average would drop by 50% every 12 years.

Then from 2011 when the Money supply started growing in earnest, M1 has grown by 24% annually. This means that prices in theory should double every 3 years.

Finally, from August 2019 to August 2021 M1 has gone up by 126% a year. If that was translated to the purchasing power of the dollar it would lead to prices doubling every 7 months.

Von Greyerz goes on to explain that von Mises defined inflation as an expansion of the money supply rather than an increase in prices. To this point, there has not been a lot of price inflation experienced by consumers but there has been inflation in asset prices as I have discussed in previous issues of “Portfolio Watch”.

Von Mises and von Greyerz are discussing the same phenomenon that Thomas Jefferson described when he warned of inflation followed by deflation if the American people ever allow private bankers to control the issue of their currency.

Historically speaking, this cycle has repeated itself with amazing frequency. Fiat currencies have a 100% failure record.

I remain solidly in this camp even though there are many respected, highly educated analysts who have different opinions. Those who believe the US Dollar will be a safe haven moving ahead are coming to that conclusion assuming confidence in the US Dollar continues.

While confidence may continue for a period, over the longer term, confidence will have to disappear unless as von Mises said, there is a voluntary abandonment of credit creation. While that would be the preferred outcome of the two von Mises describes, it does not seem that the current crop of politicians and policymakers will pursue this ugly, yet more desirable outcome. Instead, they appear to be opting to kick the can down the road as long as possible, postponing the crash for as long as possible even though the crash will be worse as a result.

My new book “Retirement Roadmap” an updated version of last year’s “Revenue Sourcing” book will be released within the next 10 days. It offers strategies for you to consider in your own, personal financial situation to help protect you from this eventuality.

Crack-Up Boom Coming

Have you ever heard of a ‘crack up boom’?

You may want to get familiar with the term and what it means before you experience it.

Let me state at the outset of this piece that I am biased, some might even say extremely biased. And they may be right.

I am biased in the sense that I am firmly against Keynesian economic policies which are currently dominating US economic and monetary policy even more than in the past. That’s a big statement given the massive quantities of money that the Federal Reserve has manufactured from thin air over the past several years.

For those unfamiliar with Keynesian economics, it is an economic theory advanced by John Maynard Keynes who advanced the idea that when an economy slows down and private sector spending wanes, the government needs to step in and spend to make up for the lack of spending in the private sector.

I am of the firm opinion that Keynesian policies don’t work and end badly because Keynes himself had the same opinion.

You can’t make this stuff up.

Keynes promoted and encouraged the pursuit of economic policies that he knew would eventually fail. In a tract Keynes penned in 1923 on the topic of monetary reform, Keynes wrote this, “Long run is a misleading guide to current affairs. In the long run, we are all dead.” (Source: https://www.azquotes.com/author/7958-John_Maynard_Keynes)

In my view, a better approach to economic policy is to take an Austrian view, as Ludwig von Mises did.

Examining where we are today from an economic policy standpoint, the predictions promulgated by Mr. von Mises are presently coming to pass.

Janet Yellen, former chair of the Federal Reserve and experienced money printer had this to say in her Senate confirmation hearing last week. Ms. Yellen has been nominated for the position of Treasury Secretary. (Source: https://www.zerohedge.com/economics/when-boom-turns-crack-boom)

“But right now, with interest rates at historic lows, the smartest thing we can do is act big. In the long run, I believe the benefits will far outweigh the costs, especially if we care about helping people who have been struggling for a very long time.”

You don’t have to be an economist to understand that Ms. Yellen is proposing more Keynesian solutions; more stimulus funded by more money creation out of thin air.

Mr. von Mises warned us of the ultimate outcome of these reckless policies. This from a “Zero Hedge” article on the topic:

As credit expansion pumps money through the economy, wild and unpredictable things happen. Austrian economist Ludwig von Mises, in his work, Socialism: An Economic and Sociological Analysis, explained:

“Credit expansion can bring about a temporary boom. But such a fictitious prosperity must end in a general depression of trade, a slump.”

But what happens if a credit expansion is followed with an additional expansion of credit? Does the debt ever have to be repaid? With enough credit-based money, can’t the economic depression be postponed forever?

Even Mr. Keynes knew the answer to this question, he stated that ‘in the long run we are all dead’. Keynes knew that he was mortgaging the future with his policies but calculated the fallout was a long way down the proverbial road.