Zero Hedge – Dennis Tubbergen

Depression Parallels?

Depression parallels?

Not a comfortable topic to discuss, to be sure. But as my now oft-quoted history professor used to say, “those who don’t study history are doomed to repeat it.”

The older I get and the more experience I acquire, the smarter my history professor becomes.

Which brings me to this week’s “Portfolio Watch” topic – similarities between the period-of-time preceding the Great Depression and where we find ourselves today.

I address this topic very briefly this week, acknowledging the fact that an entire book could be written on the topic. In this brief narrative, I’ll discuss the wealth gap and consumerism excesses.

For context, it’s important to understand the role that central bank policy played in creating the prosperity illusion of the Roaring Twenties and the prosperity illusion that we’ve more recently experienced.

The central bank of the United States, the Federal Reserve, was founded in 1913. Shortly after its formation, the central bank reduced the backing of the US Dollar by gold. Prior to the establishment of the Federal Reserve, the US Dollar was essentially gold; the US Dollar was backed 100% by gold. An ounce of gold was twenty US Dollars.

Shortly after the Fed was set up, the backing of the US Dollar by gold was reduced from 100% backed by gold to 40% backed by gold. A little rudimentary math has us concluding that it increased the currency supply by 250%.

While I am not a trained economist (since the majority of trained economists today are of the Keynesian school of economics, I count my lack of formal training as an attribute rather than a detriment as my common sense has not been compromised), I have learned from my study of history that when currency is created, it always has to find a home.

While there are many eventual adverse outcomes as a result of currency creation, the two on which I will focus this week are income inequality (the wealth gap) and debt accumulation.

Let’s begin with debt accumulation. Here is an excerpt from an article published about consumerism and debt accumulation in the 1920’s (Source: http://athenaandkim.weebly.com/consumerism.html):

Consumerism in the 1920’s was the idea that Americans should continue to buy product and goods in outrageous numbers. These people neither needed or could afford these products, which generally caused them to live pay-check to pay-check. People bought many quantities of products like automobiles, washing machines, sewing machines, and radios. This massive purchasing period led to installment plans. These were plans for people in which they were able to purchase their products and pay for them at a later time in small monthly payments. This was the reason why “80% of Americans during the 1920’s had no savings at all – they were living pay-check to pay-check”. This consumerism later became a contributing factor to the start of the Great Depression because it greatly increased the amount of consumer debt in America.

The Great Depression was largely caused by debt excesses, debt levels in the private sector that were too large to be paid. As a result, many American citizens lived paycheck-to-paycheck.

We are now experiencing the same thing. Almost 2/3^rd’s of American households now live paycheck-to-paycheck.

This from MSNBC (Source: https://www.cnbc.com/2022/12/15/amid-high-inflation-63percent-of-americans-are-living-paycheck-to-paycheck.html):

As rising prices continue to weigh on households, more families are feeling stretched too thin.

As of November, 63% of Americans were living paycheck to paycheck, according to a monthly LendingClub report — up from 60% the previous month and near the 64% historic high hit in March.

Even high-income earners are under pressure, LendingClub found. Of those earning more than six figures, 47% reported living paycheck to paycheck, a jump from the previous month’s 43%.

“Americans are cash-strapped and their everyday spending continues to outpace their income, which is impacting their ability to save and plan,” said Anuj Nayar, LendingClub’s financial health officer.

While inflation, caused by excessive currency creation by the central bank, is a factor in the vast number of Americans currently living paycheck-to-paycheck, another factor is the level of debt that Americans have collectively racked up as a result of easy money policies and artificially low-interest rates. Here is just one example (Source: https://www.theatlantic.com/culture/archive/2023/01/buy-now-pay-later-affirm-afterpay-credit-card-debt/672686)

As familiar as Americans are with the concept of credit, many of us, upon encountering a sandwich that can be financed in four easy payments of $3.49, might think: Yikes, we’re in trouble.

Putting a banh mi on layaway—this is the world that “buy now, pay later” programs have wrought. In a few short years, financial-technology firms such as Affirm, Afterpay, and Klarna, which allow consumers to pay for purchases over several interest-free installments, have infiltrated nearly every corner of e-commerce. People are buying cardigans with this kind of financing. They’re buying groceries and OLED TVs. During the summer of 2020, at the height of the coronavirus pandemic, they bought enough Peloton products to account for 30 percent of Affirm’s revenue. And though Americans have used layaway programs since the Great Depression, today’s pay-later plans flip the order of operations: Rather than claiming an item and taking it home only after you’ve paid in full, consumers using these modern payment plans can acquire an item for just a small deposit and a cursory credit check.

From 2019 to 2021, the total value of buy-now, pay-later (or BNPL) loans originated in the United States grew more than 1,000 percent, from $2 billion to $24.2 billion. That’s still a small fraction of the amount charged to credit cards, but the fast adoption of BNPL points to its mainstream appeal. The widespread embrace of this kind of lending system says a lot about Americans’ relationship to debt—particularly among the younger borrowers who made BNPL popular (about half of BNPL users are 33 or under). “We found that most of the people that use buy now, pay later either don’t have or don’t use a credit card,” Marco Di Maggio, an economist at Harvard, told me. He said that Gen Z was skeptical of credit cards, possibly because many of them had seen their parents sink into debt.

Credit card debt is also reaching record highs. This from “Zero Hedge” (Source: https://www.zerohedge.com/markets/flashing-red-alert-near-record-surge-credit-card-debt-just-average-rate-hits-all-time-high):

Another month, another glaring reminder that most US consumer spending is funded by credit cards.

The latest consumer credit report was published by the Fed today at 3pm and it showed that in November, total credit increased by $27.962BN to $4.757 trillion, above the $25BN consensus estimate, and a number which would have been bigger than last month’s pre-revision increase of $27.1BN, had it not been revised modestly higher to $29.12BN.

As for the wealth gap, we are now once again seeing what was witnessed in the 1920’s. This from the same article quoted above:

The income gap of the 1920’s was the difference in income between the top 1% of wealthy Americans and the rest of the average earnings. Within this income gap, “60% of Americans earned below the poverty level. The top 1% of wealthy American’s saw their incomes increase by 75% during the 1920’s… the other 99% of Americans saw their income increase by only 9%… not enough to justify the huge expenditures on consumer products that most Americans were making”. This shows that there was a great split between those who earned an average income or less compared to the wealthy who earned a considerably larger amount of money.
Fast forward to today.

The wealth gap or income inequality gap is wider in the United States than in any other G7 country.

According to “World Population Review,” the top 1% of earners in the United States have an average earned income of $1,018,700 annually.

The bottom 50% have an average income of $14,500 annually.

If one peels out the top 10%, the average annual earnings are $246,800.

This is what currency creation and artificial markets do.

But artificial markets don’t last forever. History teaches us that this will end badly.

If you haven’t yet taken steps to protect yourself, now is the time.

If you or someone you know could benefit from our educational materials, please have them visit our website at www.RetirementLifestyleAdvocates.com. Our webinars, podcasts, and newsletters can be found there.

Happy New Year – New Taxes Await

Happy New Year! And, with the new year comes higher taxes, thanks to the Washington politicians.

While I fully expect another difficult year for the economy and investing, the consumer spending-dependent US economy will have to withstand higher taxes in addition to record debt levels and inflation.

This from “Zero Hedge” (Source: https://www.zerohedge.com/political/heres-list-biden-tax-hikes-which-take-effect-jan-1):

When the Democrats finally passed the “Inflation Reduction Act” in 2022 (how’s that going?), they included several tax hikes set to take effect on Jan. 1, 2023.

Americans for Tax reform‘s Mike Palicz has conveniently compiled a list of them, along with his take on their intended effects:

$6.5 Billion Natural Gas Tax Which Will Increase Household Energy Bills

Think your household energy bills are high now? Just wait until the three major energy taxes in the Inflation Reduction Act hit your wallet. The first is a regressive tax on American oil and gas development. The tax will drive up the cost of household energy bills. The Congressional Budget Office estimates the natural gas tax will increase taxes by $6.5 billion.

And, of course, this tax hike violates Biden’s pledge not to raise taxes on Americans making under $400,000 per year. According to the American Gas Association, the methane tax will slap a 17% increase on the average family’s natural gas bill.

$12 Billion Crude Oil Tax Which Will Increase Household Costs

Next up – a .16c/barrel tax on crude oil and imported petroleum products which will end up on the shoulders of consumers in the form of higher tax prices.

The tax hike violates President Biden’s tax pledge to any American making less than $400,000 per year.

As noted above, Biden administration officials have repeatedly admitted taxes that raise consumer energy prices are in violation of President Biden’s $400,000 tax pledge.

As if it weren’t bad enough, Democrats have pegged their oil tax increase to inflation. As inflation increases, so will the level of tax.

$1.2 Billion Coal Tax, Which Will Increase Household Energy Bills

This one increases the current tax rate on coal from $0.50 to $1.10 per ton, while coal from surface mining would increase from $0.25 per ton to $0.55 per ton, which will raise $1.2 billion per year in taxes that will undoubtedly be passed along to consumers in the form of higher energy bills.

$74 Billion Stock Tax Which Will Hit Your Nest Egg — 401(k)s, IRAs, and Pension Plans

Democrats are now imposing a new federal excise tax when Americans sell shares of stock back to a company.

Raising taxes and restricting stock buybacks harms the retirement savings of any individual with a 401(k), IRA or pension plan.

Union retirement plans will also be hit.

The tax will put U.S. employers at a competitive disadvantage with China, which does not have such a tax.

Stock buybacks help grow retirement accounts. Raising taxes and restricting buybacks would harm the 58 percent of Americans who own stock and more than 60 million workers invested in a 401(k). An additional 14.83 million Americans are invested in 529 education savings accounts.

Retirement accounts hold the largest share of corporate stocks, accounting for roughly 37 percent of the outstanding $22.8 trillion in U.S. corporate stock, according to the Tax Foundation.

In 2017, corporate-sponsored funds made up $4.45 trillion in market value; union-sponsored funds accounted for $409 billion; and public-sponsored funds, which benefit teachers and police officers, added up to $4.25 trillion.

A tax on buybacks could dissuade companies from doing so, and US companies will face significant compliance costs, which will – again, be passed along to consumers.

$225 Billion Corporate Income Tax Hike, Which Will Be Passed on to Households

American businesses reporting at least $1 billion in profits over the past three years will now face a 15% corporate alternative minimum tax, which will be passed along in the form of higher prices, fewer jobs, and lower wages, according to Americans for Tax Reform.

A Tax Foundation report from last December found a 15 percent book tax would reduce GDP by 0.1 percent and kill 27,000 jobs.

Preliminary cost estimates from the Congressional Budget Office found the provision would increase taxes by more than $225 billion.

According to JCT’s analysis, 49.7 percent of the tax would be borne by the manufacturing industry at a time when manufacturers are already struggling with supply-chain disruptions.

Which industry will likely be most affected? According to the Tax Foundation, “the coal industry faces the heaviest burden of the book minimum tax, facing a net tax hike of 7.2 percent of its pretax book income, followed by automobile and truck manufacturing, which faces a 5.1 percent tax hike.”

There is really no such thing as a business tax. When businesses are required to pay additional taxes, the business simply adjusts the price of the product or service that the business offers in order to cover the tax. This means that consumers pay more when purchasing a product or service.

As I write this, I just paid my natural gas bill, which is how I heat my West Michigan home. The bill that I just paid was significantly higher than the bill from the same time last year. Now, after this tax is implemented, I can expect another 17% increase in the cost of natural gas. That increase will be solely the result of new taxes.

These taxes come at a time when the average American family is struggling due to inflation. Discretionary income in many households is now a memory rather than a reality. Making ends meet has become a nightmare for many households, and it’s now about to get worse.

Michael Snyder, an author, and prolific economic commentator, recently noted that almost 2 out of 3 American households are now living paycheck to paycheck. (Source: https://www.silverdoctors.com/headlines/world-news/15-facts-prove-a-massive-economic-meltdown-is-already-happening-right-now/)

This (Source: https://www.cnbc.com/2022/12/15/amid-high-inflation-63percent-of-americans-are-living-paycheck-to-paycheck.html) from CNBC:

As rising prices continue to weigh on households, more families are feeling stretched too thin.

As of November, 63% of Americans were living paycheck to paycheck, according to a monthly LendingClub report — up from 60% the previous month and near the 64% historic high hit in March.

Even high-income earners are under pressure, LendingClub found. Of those earning more than six figures, 47% reported living paycheck to paycheck, a jump from the previous month’s 43%.

Although consumer prices rose less than expected in November, persistent inflation has caused real wages to decline.

Real average hourly earnings are down 1.9% from a year earlier, according to the latest reading from the U.S. Bureau of Labor Statistics.

This leaves many Americans in a bind as inflation and higher prices force more people to dip into their cash reserves or lean on credit just when interest rates rise at the fastest pace in decades.

Already, credit card balances are surging, up 15% in the most recent quarter, the largest annual jump in more than 20 years.

At the same time, credit card rates are now more than 19%, on average — an all-time high — and still rising.

As I stated last week, because of the actions of the politicians and the Fed, it’s my firm belief that severe deflation and economic pain lie ahead.

Make sure you educate yourself and take action to protect yourself.

Metals, Currency and Inflation

Precious metals, stocks, and bonds all rallied last week.

Interestingly, the rally in metals occurred after the inflation report came in cooler than expected. This from “Zero Hedge” (Source: https://www.zerohedge.com/personal-finance/core-cpi-inches-lower-40-year-highs-real-wages-tumble-19th-straight-month)

The headline CPI printed far cooler than expected at +7.7% YoY (vs 7.9% exp) and down from the +8.2% in Sept. That is the lowest since January…

The official measure of inflation, the consumer price index, is a heavily manipulated number using ‘adjustments’ like weightings, hedonic adjustments and substitution to make the reported number seem more favorable.

There are other alternative measures of inflation that are, in my view, more accurate in tracking the real inflation rate. One such measure is calculated by economist, John Williams, of www.ShadowStats.com.

This chart is from Mr. Williams’s website and compares the official inflation rate per the consumer price index with what might be considered to be the actual inflation rate, using the same methodology that was used to calculate the inflation rate pre-1980.

Notice from the chart that using the pre-1980 inflation calculation method, the inflation rate is about 16% which feels more accurate from my recent, real-world experience. Despite the disparity in calculation, the year-over-year inflation rate is declining.

Which brings us to the most important question – does this mean that the Fed is finally getting inflation under control?

Probably not in my view.

As I have stated many times previously, in order to get inflation under control, we need to have real positive interest rates. In other words, interest rates need to be higher than the inflation rate to create an incentive to save rather than spend. In 1980, then-Federal Reserve Chair, Paul Volcker, understood this as he increased interest rates to nearly 20%.

If we are generous, and round down the inflation rate to 7.5% and then compare that inflation rate to the current interest rate of 3.8% as I write this, it’s easy to see that real interest rates are still negative.

Yet, despite interest rates not being high enough to meaningfully impact inflation, the marginally higher interest rates that we are experiencing are already creating some potential problems. This from “Fox Business” (Source: https://www.foxbusiness.com/politics/next-us-debt-crisis-making-hundreds-billions-interest-payments)

The U.S. national debt keeps rising and to make matters worse, interest payments on the debt are rising at an even faster pace.

Next week, the Treasury Department will release data from the final month of fiscal year (FY) 2022, including how much the government spent to service $31 trillion in national debt, the highest it has reached in U.S. history.

According to Treasury data through August, which counts all but the final month of FY22, net interest payments on the debt totaled $471 billion. That is already much higher than the initial White House projection of $357 billion and above Treasury’s mid-year assessment of $441 billion; adding in September’s data could send the total over $500 billion.

At that level, interest on the debt is larger than the discretionary budgets of most federal departments and rivals the amount of money Congress gives to the Department of Defense each year.

Experts warn that one reason why the cost of servicing the debt was underestimated is because those estimates were made when interest rates were lower. For the last several months, the Federal Reserve has ratcheted up interest rates, which means when outstanding federal debt matures and is paid off through the issuance of new debt (or “rolled over”), that new debt is subject to higher interest payments.

Some say these rising rates is a major factor that will cause interest payments on the debt to explode higher in the next few years. The Peter G. Peterson Foundation warns that it is not just from other priorities.

For example, the foundation estimates that by next year, interest on the debt will soon cost more than all federal income support programs combined – programs such as unemployment, food stamps and child nutrition. Interest on the debt could soar to $1 trillion per year by 2032, or $3 billion each day and take up nearly one-fifth of all federal revenues in that year.

The numbers mentioned in the article are alarming enough when taken by themselves. But, when taking into account the additional spending that will occur for Social Security and Medicare and other programs, the numbers are totally and utterly unsustainable.

That’s why I believe that the Federal Reserve will ultimately ‘pivot’ and begin to pursue easy money policies once again via lower interest rates and quantitative easing.

And when they do, I believe that we will see a stagflationary environment emerge that will see higher consumer prices and lower financial asset prices. Literally the worst of both worlds.

Much of the rest of the world must agree with this assessment. While they may not be stating this outwardly and directly, they are taking actions that indicate this is the case. As the old axiom goes, you learn more by observing actions than you do by listening to words.

The BRICS countries are actively pursuing an alternative reserve currency to the US Dollar. This from “Economic Times” (Source: https://economictimes.indiatimes.com/news/economy/policy/brics-explores-creating-new-reserve-currency/articleshow/94628034.cms)

The BRICS countries are exploring establishing a new reserve currency to better serve their economic interests, according to senior Russian diplomat and BRICS points person Pavel Knyazev. It will be based on a basket of the currencies of the five-nation bloc, ET has learnt.

“The possibility and prospects of setting up a common single currency based on a basket of currencies of the BRICS countries is being discussed,” Knyazev, Russian Sou Sherpa on BRICS said during a discussion at Valdai Club in Moscow last week. Valdai is closely associated with President Vladimir Putin.
During the 14th BRICS Summit in June, Russian President Vladimir Putin announced that Brazil, Russia, India, China, and South Africa plan to issue a “new global reserve currency.”

Credit Card Use and Inflation

During this week’s “Headline Roundup” newscast (broadcast live every Monday at noon, then posted at www.RetirementLifestyleAdvocates.com), I expounded on a trend I discussed previously. That trend is that consumer spending is being increasingly funded by debt accumulation, primarily on credit cards.

This from “Zero Hedge” (Source: https://www.zerohedge.com/markets/recession-imminent-spending-fueled-debt-savings-run-dry):

The US personal savings rate is near a five-year low as pandemic fiscal stimulus savings run dry.

But consumers are still spending with credit.

How long can consumers keep spending with revolving credit at the highest level in decades?

The risk is that equity markets have a lot more room to the downside.

The danger is that consumer spending, which drives some 70% of GDP, will soon be tapped out.

Lower spending, lower earnings with lower economic growth, while inflation is still running hot, will likely leave equities nowhere to go but down.

Consumers are tapped out, with many using credit cards to fund spending.

One has to realize that many of these consumers who are using credit cards to fund spending would rather not, they just don’t have any other choice as inflation continues to intensify. This from “The Washington Examiner” (Source: https://www.washingtonexaminer.com/policy/economy/inflation-producer-index-june-near-highest-record)

Inflation as measured by producer wholesale prices ticked up to a red-hot 11.3% for the year ending in June, according to a report Thursday from the Bureau of Labor Statistics, near the highest on record.

Thursday’s report comes a day after headline inflation as measured by the consumer price index exploded to 9.1% for the 12 months ending in June, the highest level since 1981 and a bigger increase than expected.

The new producer price index numbers are just another indicator that prices are wildly out of control even as the Federal Reserve moves ever more aggressively to jack up interest rates to rein in the country’s historic inflation.

The PPI gauges the wholesale prices of goods, which are eventually passed down to consumers.

“Despite a modest improvement in supply conditions, price pressures will remain uncomfortable in the near term and bolster the Fed’s resolve to prevent inflation from becoming entrenched in the economy,” economists with Oxford Economics said.

The high rate of inflation has politically damaged President Joe Biden and undercut support for spending proposals from the White House and congressional Democrats.

Last month, the central bank hiked its interest rate target by a whopping three-fourths of a percentage point for the first time since 1994. The Fed typically raises rates by a quarter of a percentage point, or 25 basis points, so the June hike was analogous to three simultaneous rate increases.

The Fed is set to meet again later this month, and it will likely raise its rate target by another 75 basis points, although some analysts think that the central bank could act even more aggressively and raise interest rates by a full percentage point.

Nomura, a major Japanese financial holding company, is now predicting that the Fed will raise rates by 100 basis points, given Wednesday’s hotter-than-anticipated inflation reading.

Atlanta Fed President Raphael Bostic said that “everything is in play,” including a full percentage point hike, after June’s CPI report, according to Bloomberg.

There are concerns that the Fed’s aggressive cycle of rate hiking will knock the economy into a recession, fears that worsen as inflation keeps growing higher and the Fed keeps having to take a more hawkish approach to monetary policy.

I have stated that I believe we have been in a recession since the end of calendar year 2021. I have also stated that inflation will likely not be subdued until real positive interest rates exist, in other words, interest rates are higher than the inflation rate.

We are a long way from that.

As the chart below illustrates, the current Fed Funds rate is hovering just under 2%.

Even if the Fed raises interest rates by 1%, inflation will probably not be affected but financial markets may be.

I expect that before the year is over the Fed will reverse course on the interest rate increases so the ‘economy can be supported’. I should also point out that there are some analysts who disagree with me on this arguing that the dollar would be devalued to an even greater extent, further threatening it’s use as an international currency.

I believe that is the outcome that the Fed will choose given that that other choice is a painful deflationary period.

Ironically, the painful deflationary period will probably not be avoided. In fact, we may be witnessing the onset of such a period presently. Stocks are down significantly year to date and I believe real estate will soon follow.

Take a look at this chart illustrating US housing prices versus wage growth. Seems apparent that this housing bubble is bigger than the one at the time of the financial crisis.

The Political Realities of the Taper

This past week, after the Federal Reserve’s Jackson Hole, Wyoming symposium, Fed Chair, Jerome Powell commented on Fed policy. It was widely anticipated that the Fed Chair would discuss the ‘taper’, or the Fed’s plan to slow the rate at which currency is being created.

The Fed Chair, in many respects, disappointed. This is from “Zero Hedge” (Source:https://www.zerohedge.com/markets/dovish-powell-sparks-most-painful-meltup-52nd-record-high-2021):

All that angst and jitters heading into today’s Jerome Powell speech, with so many fearing that the Fed Chair would finally make good on urgent warnings from a growing number of Fed speakers that the Fed’s easing is causing bubbles across all asset classes – including housing and certainly stocks – and warns traders that the big, bad taper is coming, and… nothing.

Instead, Powell was far more dovish than almost anyone had expected, barely mentioning the upcoming taper (and only in the context of what the Fed said in the recent Minutes), while reserving the bulk of his speech to discuss why inflation is transitory.

Predictably, Powell’s dovishness sparked a waterfall in the dollar and yields, with the 10Y and the Bloomberg Dollar index both sliding.

I have long been of the strong opinion that it will be difficult for the Fed to ‘taper’. Not because of economic reasons, but because of political reasons. Ryan McMaken, of the Mises Institute, wrote an excellent piece on this topic that explains:

Much of the discussion over the Fed’s policies on interest rates tends to focus on how interest rate policy fits within the Fed’s so-called dual mandate. That is, it is assumed that the Fed’s policy on interest rates is guided by concerns over either “stable prices” or “maximizing sustainable employment.”

This naïve view of Fed policy tends to ignore the political realities of interest rates as a key factor in the federal government’s rapidly growing deficit spending.

While it is no doubt very neat and tidy to think the Fed makes its policies based primarily on economic science, it’s more likely that what actually concerns the Fed in 2021 is facilitating deficit spending for Congress and the White House.

The politics of the situation—not to be confused with the economics of the situation—dictate that interest rates be kept low, and this suggests that the Fed will work to keep interest rates low even as price inflation rises and even if it looks like the economy is “overheating.” If we seek to understand the Fed’s interest rate policy, it thus may be most fruitful to look at spending policy on Capitol Hill rather than the arcane theories of Fed economists.

Why Politicians Need the Fed to Keep Deficit Spending Going—at Low Rates

Federal spending has reached multigenerational highs in the United States, both in raw numbers and proportional to GDP.

If all this spending were just a matter of redistributing funds collected through taxation, that would be one thing. But the reality is more complicated than that. In 2020, the federal government spent $3.3 trillion more than it collected in taxes. That’s nearly double the $1.7 trillion deficit incurred at the height of the Great Recession bailouts. In 2021, the deficit is expected to top $3 trillion again.

In other words, the federal government needs to borrow a whole lot of money at unprecedented levels to fill that gap between tax revenue and what the Treasury actually spends.

Sure, Congress could just raise taxes and avoid deficits, but politicians don’t like to do that. Raising taxes is sure to meet political opposition, and when government spending is closely tied to taxation, the taxpayers can more clearly see the true cost of government spending programs.

Deficit spending, on the other hand, is often more politically feasible for policymakers, because the true costs are moved into the future, or they are—as we will see below—hidden behind a veil of inflation.

That’s where the Federal Reserve comes in. Washington politicians need the Fed’s help to facilitate ever-greater amounts of deficit spending through the Fed’s purchases of government debt.

Without the Fed, More Debt Pushes up Interest Rates

When Congress wants to engage in $3 trillion dollars of deficit spending, it must first issue $3 trillion dollars of government bonds.

That sounds easy enough, especially when interest rates are very low. After all, interest rates on government bonds are presently at incredibly low levels. Through most of 2020, for instance, the interest rate for the ten-year bond was under 1 percent, and the ten-year rate has been under 3 percent nearly all the time for the past decade.

But here’s the rub: larger and larger amounts put upward pressure on the interest rate—all else being equal. This is because if the US Treasury needs more and more people to buy up more and more debt, it’s going to have to raise the amount of money it pays out to investors.

Think of it this way: there are lots of places investors can put their money, but they’ll be willing to buy more government debt the more it pays out in yield (i.e., the interest rate). For example, if government debt were paying 10 percent interest, that would be a very good deal and people would flock to buy these bonds. The federal government would have no problem at all finding people to buy up US debt at such rates.

Politicians Must Choose between Interest Payments and Government Spending on “Free” Stuff

But politicians absolutely do not want to pay high-interest rates on government debt, because that would require devoting an ever-larger share of federal revenues just to paying interest on the debt.

For example, even at the rock-bottom interest rates during the last year, the Treasury was still having to pay out $345 billion dollars in net interest. That’s more than the combined budgets of the Department of Transportation, the Department of the Interior and the Department of Veterans Affairs combined. It’s a big chunk of the full federal budget.

Now, imagine if the interest rate doubled from today’s rates to around 2.5 percent—still a historically low rate. That would mean the federal government would have to pay out a lot more in interest. It might mean that instead of paying $345 billion per year, it would have to pay around $700 billion or maybe $800 billion. That would be equal to the entire defense budget or a very large portion of the Social Security budget.

So, if interest rates are rising, a growing chunk of the total federal budget must be shifted out of politically popular spending programs like defense, Social Security, Medicaid, education, and highways. That’s a big problem for elected officials because that money instead must be poured into debt payments, which doesn’t sound nearly as wonderful on the campaign trail when one is a candidate who wants to talk about all the great things he or she is spending federal money on. Spending on old-age pensions and education right now is good for getting votes. Paying interest on loans Congress took out years ago to fund some failed boondoggle like the Afghanistan war? That’s not very politically rewarding.

So, policymakers tend to be very interested in keeping interest rates low. It means they can buy more votes. So, when it comes time for lots of deficit spending, what elected officials really want is to be able to issue lots of new debt but not have to pay higher interest rates. And this is why politicians need the Fed.

The Fed Is Converting Debt into Dollars

Here’s how the mechanism works.

Upward pressure on rates can be reduced if the central bank steps in to mop up the excess and ensure there are enough willing buyers for government debt at very low-interest rates. Effectively, when the central bank is buying up trillions in government debt, the amount of debt out in the larger marketplace is reduced. This means interest rates don’t have to rise to attract enough buyers. The politicians remain happy.

And what happens to this debt as the Fed buys it up? It ends up in the Fed’s portfolio, and the Fed mostly pays for it by using newly created dollars. Along with mortgage securities, government debt makes up most of the Fed’s assets, and since 2008, the central bank has increased its total assets from under $1 trillion dollars to over $8 trillion. That’s trillions of new dollars flooding either into the banking system or the larger economy.

For years, of course, the Fed has pretended that it will reverse the trend and begin selling off its assets—and in the process remove these dollars from the economy. But clearly, the Fed has been too afraid of what this would do to asset prices and interest rates.

Rather, it is increasingly clear that the Fed’s purchases of these assets are really a monetization of debt. Through this process, the Fed is turning this government debt into dollars, and the result is monetary inflation. That means asset price inflation—which we’ve clearly already seen in real estate and stock prices—and it often means consumer price inflation, which we’re now beginning to see in food prices, gas prices, and elsewhere.

Money Printing, Politics and an Imaginary Suit

This week, a couple of observations.

One, food inflation rose for the seventh consecutive month as I predicted we would continue to see. Dairy products and vegetable oils rose most. This from “Zero Hedge” (Source: https://www.zerohedge.com/commodities/global-food-prices-rise-seventh-consecutive-month) (emphasis added):

The Food and Agriculture Organization’s Food Price Index rose for a seventh consecutive month in December, led by dairy products and vegetable oils.

The FAO Food Price Index averaged 107.5 points last month versus 105.2 points in November.

The benchmark, which tracks global food prices of cereals, oilseeds, dairy products, meat, and sugar, averaged 97.9 points for 2020, a three-year high, and a 3.1% rise from 2019 levels.

The global food index was still down 25% from its historical high reached in 2011.

Vegetable oil prices saw the most significant jump, up 4.7% month-on-month in December after surging more than 14.0% in November. The index was up 19.1% in 2020 over the prior year.

FAO explained that soaring vegetable oil prices are due to “ongoing supply tightness in major palm oil-producing countries. International trade was affected by a sharp hike in export duties in Indonesia. International prices for soy oil rose in part due to prolonged strikes in Argentina that impacted both crushing activity and port logistics.”

Cereal prices rose 1.1% from November and for all of 2020 averaged 6.6% over the prior year. The reason for the increase is that export prices for wheat, maize, sorghum, and rice all rose last month due to growing condition concerns in North and South America and the Russian Federation.

Earlier this week, we highlighted drought conditions materialized in Argentina resulted in corn (maize) prices trading in Chicago surging to 6-1/2 year highs.

Rome-based FAO said the dairy index increased 3.2% on the month, but for the year, it was flat compared to 2019.

The meat index increased 1.7% last month, while its average this year was 4.5% below that of 2019.

Everyone’s favorite permabear, SocGen’s Albert Edwards, who, unlike Goldman Sachs, is starting to worry about soaring food inflation, writes FAO Food Price Index been surging over the last few months.

With the FAO food index continually rising, Edwards notes that “annual inflation in cereals reached 20%, the highest annual rise since mid-2011 when the Arab Spring was in full flow!”

Edwards makes his feelings clear on who ultimately was to blame for the global tidal wave in food inflation back in 2011: “Despite Ben Bernanke’s denials that the Fed’s QE policies caused rampant food price inflation in 2011 (link), many economists such as myself believe that was absolutely the case.”

Edwards summarizes his concerns best with the following statement: “even in the richest country in the world, food poverty has become a real problem during this pandemic.”

This leaves us with the next imminent food inflation crisis as central banks are mindlessly injecting a record $1.4 billion in liquidity into capital markets every hour.

Soaring food inflation may result in social-destabilization; the question is where will it start?

From my perspective, Edwards is spot-on correct; food inflation in 2011 was a direct result of the Fed’s QE policies or money printing. Of course, Mr. Bernanke, who was at the helm of the Fed at the time, denied that the Fed’s policies had anything to do with food price inflation. To admit money printing created food price inflation would be to admit failure.

History teaches us beyond any doubt that when money is created in sufficient quantity, price inflation is the result. That was the case in 2011 and that is once again the case now. And, unless monetary policies change in the future, inflation will continue to accelerate.

As the piece quoted above notes, the current rate of money creation is literally mind-blowing; $1.4 billion every hour!

More inflation is inevitable.

As we move ahead through what is shaping up to be another tumultuous year or few months at a minimum, we will continue to monitor money creation levels and make suggestions and recommendations accordingly.

My second observation this month, which not surprisingly has gone unreported by MSM, is that in December the Fed decided to change the way that the money supply is reported. Long-time readers of “Portfolio Watch” know that the Fed presently reports M1 money supply and M2 money supply.

M1 is money that is immediately available while M2 is the total of M1 plus savings accounts and time deposits.

The Fed long ago (2006) ceased to report the M3 money supply as it inflated the money supply to deal with the imminent banking crisis.

This from Dave Kranzler at Investment Research Dynamics (Source: https://investmentresearchdynamics.com/the-fed-is-about-to-go-weimar-gold-and-silver-will-soar/) (emphasis added):

Thus, it’s not a coincidence that the Fed’s decision to obfuscate the movement of funds from M1 to M2 occurred after a parabolic shift of funds into M1 commenced. The change is retroactive back to May 2020, which is around the time of the movement of cash from M2 to M1 started to go vertical. While the movement of funds continues, the change in the Fed’s reporting of the “M’s” will make it impossible to see it as it happens.

In that regard, the Fed has taken further steps to increase the opacity of the monetary aggregates. This is direct from the Fed’s website: “Of particular note, the publication frequency of the release will change from weekly to monthly, and the release will contain only monthly average data.” The Fed also will no longer publish non-M1/M2 account balances, like institutional money funds, which help enable the reconstruction of M3.

In addition to the reporting of the numbers monthly rather than weekly, the H.6 statistical release will provide components of the monetary aggregates only “at a total industry level without a breakdown of components by banks and thrifts.” Well, guess what? The breakdown by the bank and thrift components contains the data that truthseeking Fed analysts would like to see. The last weekly statistical release will be on February 11, 2021. And the data will be cleansed retroactive back to May 2020. Again, no coincidence with the May 2020 retroactivity.

Two points of clarification:

One, the money supply went vertical in May due to colossal levels of money printing and has remained on that trajectory ever since. The chart on this page, prepared with data from the Fed, reflects this fact. The new money supply reporting methodology will change retroactively to May effectively changing the data that has already been reported.

Two, the reporting frequency of the money supply will move from weekly to monthly. So instead of publishing the data about 4 times monthly, the data will only be published once monthly. On top of that, the data will be only monthly average data; in other words, the data will be manipulated before it is reported.

This change is not shocking or surprising.

Over the past 40 years or so, whenever reported economic data begins to look bad or concerning, the reporting methodology is changed to make the data look better. This is exactly what is happening again.

We are truly living in a time where the emperor has no clothes. There are many examples of it. You are all undoubtedly familiar with this childhood story.

A team of tailors arrives on the scene and tells the emperor that they can make him an exquisite suit of clothes that will also distinguish the fools from the wise; only those unfit for the jobs and positions they hold will be unable to see the suit, the wise will be able to see the suit clearly.

The charlatan tailors begin to sew the suit of clothes using imaginary cloth and needles with imaginary thread. The king sends delegations to review the progress of the suit’s construction. Not wanting to be seen as unfit for their jobs, the members of the delegation admire the cloth and comment on how nicely the suit is coming along.

When the big day came and the emperor was to show off his new suit, he was walking through the streets in his underwear with all the king’s servants and employees admiring how beautiful the new suit of clothes was.

Everything was fine until a child, seeing the emperor was nearly naked, whispered that the emperor had no clothes. Soon, the message spread through the crowd until it reached the emperor who suddenly was faced with the reality that the suit was merely make-believe.

Here’s my take. There are many, many aspects of our world that now resemble an imaginary suit of clothes and we are but one whisper away from having to face reality. It is that whisper that will wake everyone and alert them to the fact that what seemed mainstream was merely fantasy.

For more information about Dennis Tubbergen and his work, please visit https://retirementlifestyleadvocates.com.

Higher Education and Hyperinflation

In this week’s update, I’ll look at a couple of topics that I’ve examined in previously.

I’ll begin with my forecast from earlier this year that at least 1/3^rd of colleges and universities would close within five years. While COVID has impacted enrollment at institutions of higher learning, problems existed in the higher education world prior to the lockdowns imposed in response to COVID.

For several years I have been forecasting big changes in higher education. The primary reason for this forecast was the huge amount of student loan debt that existed and continued to build. Once one understands the anatomy of a price bubble, they become easy to recognize. Tuition rates at colleges and universities have been rising at rates much faster than prices for just about every other category of spending.

This rapid rise in tuition rates has been fueled by access to easy credit in the form of student loans for virtually any student who wants one. Easy credit is rocket fuel for price bubbles.

While price bubbles are easy to recognize, the timing of when these bubbles burst is much more difficult to predict. Bubbles can often build for a much longer time frame and to much higher levels than one would ever think is possible.

As I have stated, COVID simply exposed where weakness already existed, not just in higher education, but in many areas.

As far as higher education is concerned, there is evidence that the bubble may be about to unwind.

A recent “Zero Hedge” piece (Source: https://www.zerohedge.com/personal-finance/fall-enrollment-slides-coronavirus-threatens-higher-education-bubble) explained:

Take, for example, the 2020 fall semester, the number of first-year undergraduate students are in freefall across the country, down 16%, when compared to 2019 fall semester, according to a new report by the National Student Clearinghouse Research Center (NSCRC). Overall undergraduate enrollment slid 4% from this time last year, mostly because of the 13.7% drop in international students.

Naked Capitalism’s Yves Smith points out that virus-related enrollment declines are happening at a time when colleges and universities’ revenues were already slumping, potentially creating a perfect storm of campus closures.

“Empty seats are inflicting financial damage on colleges already reeling from the pandemic. Earlier this year, when the virus began spreading, many schools cleared their campuses of students and refunded housing costs. With enrollment warning, revenue from tuition, dormitories and dining halls is being hurt at a time when some institutions are posting low endowment returns,” Bloomberg said.

Jack Maguire, the founder of the enrollment-consulting firm Maguire Associates and former dean of admissions at Boston College, warned that “colleges are losing billions of dollars” as the virus continues to rage across the country.

“It may not be the end of it if this new wave hits and students are sent home again,” Maguire said.

NSCRC showed enrollment slumps were the most drastic at community colleges, down 9.4% overall, and 22.7% for first-year students. Undergraduate enrollment at four-year public colleges and universities fell 1.4% overall, and down 13.7% for first-year students. As for private nonprofit colleges, overall enrollment was down 2%, and -11.8% for first-year students.

Despite undergraduate enrollment down across all types of institutions, private for-profit colleges recorded a 3% increase.

Rapidly declining enrollment numbers will make it difficult for many colleges to survive.

In past posts, I have also been taking an in-depth look at the ultimate end result of the massive money creation now taking place. If you’ve been a longer-term reader of this site, you know that I have forecast a future reset which will be reactive as occurred in Zimbabwe and Weimar, Germany or proactive like the worldwide currency reset in 1944 as a result of the Bretton Woods agreement.

This week, I wanted to draw your attention to an article penned by past radio guest, Alasdair Macleod. In the article (Source: https://www.goldmoney.com/research/goldmoney-insights/hyperinflation-is-here), Mr. Macleod states that hyperinflation is already here.

Here is a bit from his piece (emphasis added):

The progression of annualized monetary inflation from under 6% before the Lehman crisis, to 9.6% subsequently until March this year, and 65% in the thirty weeks since is clear from the chart. If the monetary authorities have the knowledge, the mandate, the authority, the ability, and the desire to stop inflating the currency, we would not describe it as hyperinflation, instead deeming it to be no more than a brief period of exceptional inflation before a return to sound money policies.

But sound money was emphatically discarded in 1971, when the post-war Bretton Woods agreement was finally abandoned — not that the monetary regime at that time was in any way sounder than Adam’s fig leaf was an item of clothing. For the fact of the matter is that sound money in America was arguably abandoned long ago, with the founding of the Fed at Jekyll Island before the First World War.

As a means of funding government deficits, inflation is capable of being stopped by cutting government spending and/or raising taxes. But now, a one-off increase of 65% of narrow money is to be followed by another massive expansion already in the wings. The hope is that that will be enough, just as the original 65% increase in M1 was hoped to be enough to ensure a V-shaped recession would be followed by a return to normality.

The chart above is telling. The trajectory of money creation from 1980 to 2008 was rather tame. From 2008 to earlier this year the trajectory of money creation, when charted, was about a 45-degree slope. Earlier this year, the trajectory went parabolic.

You don’t need to be an economist to forecast this outcome, you only need to view a few price charts that went parabolic to quickly conclude that parabolic price charts always reverse because parabolic price charts reflect bubbles.

Mr. Macleod notes in his article that senior Fed economist, Michael T. Kiley concluded in August that quantitative easing (money printing) in an amount equal to 30% of US Gross Domestic Product (GDP) would be needed to deal with the Coronavirus. In rough terms, the Fed has already created about $3 trillion in new money this year; that means there could be another $3.5 trillion coming to fund additional stimulus.

In his article, Alasdair points out that the US Government’s annual operating deficit when calculated since March of 2020 is about $4.4 trillion. That’s a number that is significantly more than tax receipts.

Mr. Macleod notes in his piece that these already scary numbers are likely to get worse (emphasis added):

If these conditions persist in the new fiscal year — which seems increasingly certain, Kiley’s calculation of the further $3.5 trillion stimulus underestimates the problem. According to an op-ed by Allister Heath in today’s Daily Telegraph, Larry Summers, the US economist and arch-inflationist, believes that the cost of covid-19 will reach 90% of US GDP, substantially more than Kiley’s estimate of 30%. Over-dramatic perhaps; but can we envisage that the forthcoming stimulus package, and then undoubtedly the one to follow that, will restore normality and set the budget deficit firmly in the direction towards a balance? If the answer is no, then we already have hyperinflation.

Alasdair notes that people hold a certain level of personal liquidity or cash. When money is stable, this level of personal liquidity doesn’t vary much. But, when people sense that the price of items will fall, the level of cash they hold rises and when they expect the price of items they wish to buy to fall, they exchange their cash for tangible items.

He also notes that hyperinflations tend to end quickly (emphasis added):

The effect of changes in the general level of personal liquidity is potentially a more important influence on the level of prices than the quantity of money itself. It should be evident that if the increased quantity of money in circulation is simply hoarded, there will be no effect on the general level of prices. Alternatively, if the public decides to abandon a state-issued currency, irrespective of the quantity in circulation it will lose all of its purchasing power.

The abandonment of a state-issued currency by the public terminates all hyperinflations and once the process is underway it tends to be rapid. In Weimar Germany, it was said this flight into goods and out of money began in May 1923 and lasted to mid-November. In the other European nations, which suffered collapses of their currencies in the early 1920s, the final process was equally swift.

The Exodus Continues

The exodus from major cities continues.

To follow up on one of the trends that we have discussed in detail over the past couple of months, the migration from the city to the country is intensifying.

“The New York Times” published two separate stories on Monday highlighting how moving companies are actually turning away customers due to excessive demand for their services.

Those with the means to exit the city are doing so as rioting persists and crime rates rise.

This from “Zero Hedge” (Source: https://www.zerohedge.com/markets/demand-insane-nyc-movers-turn-people-away-suburban-rural-housing-snagged-big-city-covid) (emphasis added):

There’s fresh data showing that during the pandemic Americans are fast getting the hell out of the more expensive “real estate meccas” of New York and New Jersey.

First, New York City moving (companies) are reporting a rush of customers so high it feels like “move out day on a college campus”.

According to FlatRate Moving, the number of moves it has done has increased more than 46 percent between March 15 and August 15, compared with the same period last year. The number of those moving outside of New York City is up 50 percent — including a nearly 232 percent increase to Dutchess County and 116 percent increase to Ulster County in the Hudson Valley.

“The first day we could move, we left,” a dentist was cited as saying of the moment movers were declared an “essential service” by Gov. Cuomo late March. Her family moved to Pennsylvania where they had relatives.

And second, the Times details the unprecedented boom in the suburban real estate as an increasingly online workforce is fed up with closures in the city, losing its appeal and vibrancy.

July alone witnessed a whopping 44% increase in home sales among suburban counties near NYC compared to the same month last year, as the report details:

Over three days in late July, a three-bedroom house in East Orange, N.J., was listed for sale for $285,000, had 97 showings, received 24 offers and went under contract for 21 percent over that price.

On Long Island, six people made offers on a $499,000 house in Valley Stream without seeing it in person after it was shown on a Facebook Live video. In the Hudson Valley, a nearly three-acre property with a pool listed for $985,000 received four all-cash bids within a day of having 14 showings.

Since the pandemic began, the suburbs around New York City, from New Jersey to Westchester County to Connecticut to Long Island, have been experiencing enormous demand for homes of all prices, a surge that is unlike any in recent memory, according to officials, real estate agents and residents.

They’re not just fleeing for the suburbs or upstate, but also to the significantly cheaper and lower cost of living areas of the country like Texas, Florida, South Carolina, and Oregon, or to rural areas.

This level of migration has not occurred since the mid 20^th century.

“Bloomberg” published two charts illustrating the winning states and losing states in this robust migration.

The first chart illustrates the top ten outbound states. New Jersey is at the top of this list with 70% of the moves involving New Jersey being outbound moves. New York, Illinois, and Connecticut are next on the list.

This chart leads to the next which helps us understand to what states people are moving.

The State of Vermont is a popular choice with 75% of the moves involving that state being inbound moves. Idaho, Oregon, and South Carolina are the next most popular destinations on the list.

The National Association of Realtors conducted a survey among its members in June asking them in what areas prospective home buyers were searching.

Leading the way was suburban areas, followed by rural areas and small towns. Urban areas and resort areas complete the list.

As one can see from the chart, nearly half of prospective homebuyers were seeking a home in the suburbs or a subdivision and about 40% were looking to go rural with their next real estate purchase. Only a little more than 10% of prospective homebuyers were considering an urban area in which to purchase real estate.

In another developing trend I have been monitoring, many college and university students are frustrated with what they are describing as last-minute policy changes that have them confined to their rooms attending classes via Zoom with no social interaction.

In past pieces, I have related my forecast that anywhere from 30% to 40% of all colleges and universities will cease to exist in the future as the finances of higher education dwindle with demand.

Here are a few quotes from students gathered by Jordan Schachtel (Source: https://jordanschachtel.substack.com/p/tales-from-americas-covid-college):

University of Alabama student:

“The whole thing is a bait and switch. We’re being forced to pay to attend Zoom classes in our rooms all semester. A few of my friends didn’t even come back to town, and I don’t blame them. Why would they when they can get the same education at home?

I only have two in person classes. Both meet one day a week. One is optional to go on Zoom if you prefer. The other allows five students in class at once. We’re going on shifts so Week 1 the first five go, then Week 2 the second five go, etc.”

I love this university but if I knew when I was in high school that I’d be staying in my room all day, I would’ve never gone to any college.”

Tulane University student:

“No gatherings over 15 people. Everyone’s mental health is crumbling. Nobody is even sick. School requires asymptomatic testing and there’s no end in sight . My guy and girl friends are all miserable . So many have been like this is prison we can’t do anything. All bars closed in Louisiana. We gather at local parks and the cops come to shut it down. No fun ever allowed and no end in sight.”

Middlebury College student:

“Students had to sign a health pledge that they had no say in developing. All students are confined to dorm rooms until COVID test comes back negative. No one is allowed off campus until at least September 15. No visitors on campus all year. School has a google form so that people can snitch on non-compliers. This is in a county in Vermont that has had 5 cases and the entire state had 55 deaths. They have cancelled all fall athletic competitions. Students are back on campus, but most classes will be remote, with of course a 3% tuition increase.”

“I would rather be exposed to the inconvenieneces attending too much liberty than those attending too small a degree of it.”

-Thomas Jefferson

Dow to Gold Forecast and the Continued Decline of the Dollar

Stocks and gold both advanced last week, leaving the Dow to Gold ratio unchanged at 14.83.

As I stated last week, I continue to stand by my prediction of a Dow to Gold ratio of 2, perhaps even 1.

That forecast which seemed radical when I made it, now seems more realistic.

The Federal Reserve policy of enormous quantities of money creation will have to eventually lead to inflation in my view should it continue at the current pace. That will be bullish for gold; individuals and foreign governments are already beginning to seriously question the role of the US Dollar as a world reserve currency moving ahead.

As currencies evolve and as money is created out of thin air, the wealth gap will widen. Beaten down economies will likely not recover as quickly as many hope. This will likely lead to more geopolitical tensions and social unrest.

Six years ago, David Morgan, a renowned and recognized silver expert, noted that “you cannot have true peace and prosperity unless you can absolutely trust the money.”

As Patrick Heller observed in his June newsletter, “it is no accident that the relative free markets and a stable dollar tied to gold resulted in American becoming the most prosperous (and benevolent) country in the world. This has become less true since former President, Richard Nixon, closed the gold exchange window in August of 1971.”

Mr. Heller also noted that the US Dollar as recently as one month ago was still holding up reasonably well against other world currencies although it was still trailing gold.

Over the one-month time frame ending on June 2, the US Dollar lost a lot of ground against other world currencies as well as tangible assets.

Most notably, the US Dollar was down against gold, more than 10% against platinum and palladium, and more than 20% against silver.

The chart, reprinted from Mr. Heller’s newsletter, illustrates.

The decline of the US Dollar is continuing as evidenced by the price of precious metals. Keeping in mind that markets rarely go straight up or straight down, I would not be surprised to see a dollar rally and a metals decline given the magnitude of the decline over the past month. However, I would view declines in metal’s prices to be countertrend at this point given current monetary policies.

Worldwide, the signs of low confidence in the US Dollar continue to emerge.

Just last week the chair of the Chinese Banking and Insurance Regulatory Commission, Guo Shuqing, delivered a warning about the US Dollar.

While delivering a speech in Shanghai, Mr. Shuqing made four points:

One: The US Federal Reserve is the de facto central bank of the world. When the policy of the central bank targets its own economy without considering the spillover side effects, the Fed is very likely to “Overdraft the credit of the dollar and the US.”

Two: The pandemic may be around for a long time. Countries around the world keep throwing money at it with diminished impact. Mr. Shuqing advised that countries “think twice and reserve some policy space for the future,”

Three: Money printing will cause future economic turmoil. There is no free lunch. Watch out for inflation.

Four: Financial markets (stocks) are disconnected from the real economy and these distortions are “unprecedented”. Mr. Shuqing noted that it’s going to get “really painful’ when the policy withdrawal begins.

Mr. Shuqing concluded by saying, “Some people say ‘domestic debt is not debt’, but external debt is debt. For the United States, even external debt is not debt. This seems to have been the case for quite some time in the past, but can it really last for a long time in the future?”

This from a “Zero Hedge’ article on this same topic (https://www.zerohedge.com/markets/beijing-sounds-alarm-about-dollars-reserve-status) (Quote is from Mr. Shuqing):

“China cherishes the conventional monetary and fiscal policies very much. We will not engage in flooding the system, nor will we engage in deficit monetization and negative interest rates.”

It’s not the first time China vented frustration against the “exorbitant privilege” of the dollar. After the financial crisis, then-PBOC Governor Zhou Xiaochuan proposed using the SDR to replace the dollar as the main reserve currency.

It went nowhere. But this time, China seems to be determined to enhance its reserve-currency status by avoiding unconventional policies. It won’t dislodge the dollar tomorrow, but its attractiveness is clear in the foreign flows to its bond market.

As the US Dollar continues to lose favor and alternatives are sought out and adopted, the US Dollar will lose purchasing power and the price of gold will rise in nominal terms. That will be a key factor in getting the Dow to God ratio back to 2 or even 1.

Stephen Roach, former Chairman of Morgan Stanley Asia agrees. This from an MSN article (Source: https://www.msn.com/en-us/money/markets/the-dollar-will-collapse-under-a-ballooning-us-deficit-and-deglobalization-former-morgan-stanley-asia-chairman-says/ar-BB15yROf) on the topic (emphasis added).

The US dollar’s dominance faces major threats as the post-pandemic global economy emerges, Stephen Roach, former chairman at Morgan Stanley Asia, said Monday.

The currency’s strength survived attacks from President Donald Trump, a trade war, and the start of the coronavirus outbreak. Yet its winning streak has faded in recent weeks as investors prepare for record borrowing to fund trillions of fiscal and monetary stimulus. A sinking national savings rate also stands to drag on the dollar, Roach told CNBC’s “Trading Nation.”

“The US economy has been afflicted with some significant macro imbalances for a long time, namely a very low domestic savings rate and a chronic current account deficit,” he said. “These problems are going to go from bad to worse as we blow out the fiscal deficit in the years ahead.”

Looming shifts in the global manufacturing industry will create a more long-term pressure on the currency, the Yale University senior fellow added. Several experts project the US will promote domestic production and move away from increasingly complex supply chains. Roach sees such a transition taking place over the next couple of years and sealing the dollar’s fate.

“Generally, it’s a negative implication for US financial assets,” he said. “It points to the probability of higher inflation as we import more higher-cost foreign goods from overseas, and that’s negative for interest rates.”

The argument for a weaker dollar and higher gold prices is a very solid one.

Gold rising to $3000 to $5000 per ounce or more as stocks fall is not an unrealistic expectation in my view.

At the same time, the argument for much lower stock prices is also an easy argument to make given current stock valuation levels.

As I noted at the outset of this piece, I have been predicting a Dow to Gold ratio of 2, or more likely 1 for many years, now it seems that there is now a path on which we get there.

If you are not using the two-bucket approach to manage your assets, we would encourage you to begin immediately. Economic conditions that we predicted would appear are now appearing. This approach is outlined in my recent book “Revenue Sourcing”.

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