It is not often that we find ourselves in full agreement with mainstream media, but this list published by the NY Times this morning is very moving. As we all consider the many circumstances in our lives, let’s take a moment to remember those we’ve lost – regardless of the cause.
Sutton/Mehl
In 2008, the central bankers of the world revealed the true danger of Keynesian economic theory by staging the biggest bailout to date. There was a short flurry of complaints about the banking system being able to leverage the economy instead of just themselves and their filth-ridden balance sheets.
Fast forward 12 years. You guessed it – another massive bailout. The warnings issued after the crisis of 2008 went unheeded, banks leveraged to even greater levels than 2008 and brought the rest of the world with them. Now, not only has runaway Keynesianism enabled the banks to leverage themselves and the financial economy, now they’ve been permitted to leverage the entire world’s economy as well.
Central banks are gambling the next hundred years of economic history that they can print their way out of this mess. Instead of unwinding their malfeasance, they’re doubling down.
Many of you read our piece on ‘modern monetary theory’ last summer. That is now in play as well. This summer we’ll analyze the next move in an epic economic game of chicken. And there isn’t a person on Earth who will be left unaffected. Coming Soon…
Sutton/Mehl
The world started 2020 on the most shaky of terms, economically speaking. The world was already in the early stages of a contraction in aggregate demand. The covers of magazines had articles of various corporate analysts and CEOs talking about a serious recession as early as late 2018. We stress this was a global contraction, not limited to one or even a few countries. As was the case in 2008 some would fare better than others for myriad reasons. The last few months of 2019 and the beginning of 2020 saw the resignation of CEOs from several prominent companies such as Disney.
Being perpetual cynics, we wondered if they knew something the rest didn’t. The prospect of a recession was largely downplayed in the US/UK/EU mainstream press, which was no surprise. They’ve been derelict in their duty for decades now. The average American/Brit/European had no idea what was coming. Even the central banking community was bathed in complacency. They’d achieved Ben Bernanke’s ‘Goldilocks Economy‘ even if only in their own minds.
We pointed to one event as a harbinger of an upcoming crisis as early as 2016 – the appointment of Neel Kashkari to the position of President of the Minneapolis ‘Fed’. Huh? Neel Kashkari was tapped by Henry ‘Hank’ Paulson back in 2008 to head up the TARP fund created by Congress in November of that year as part of the massive Wall Street bailout brought on by a spate of bankruptcies, insolvencies, and general financial mayhem.
Why Kashkari in 2016? The last we’d heard, he was living in the mountains of California planting potatoes or some such. The TARP mess stank on every level and it was apparent that once his work was done, Kashkari was off for a long, long early retirement. So his appointment to such a position registered an 8 out of 10 on the weird-stuff-o-meter.
Moving into 2020 the United States economy was balancing on the triple supports of consumerism, financial sector activity, and government excess. The FY 2019-20 Federal deficit was going to be one for the ages long before the term ‘Corona’ was known as anything other than part of the Sun.
Geopolitical tensions were high with the sanctioned assassination of a prominent Iranian general within the first few days of 2020 and the failed ongoing ouster of Venezuelan President Nicolas Maduro at the forefront. Add to that an ongoing trade war / war of words / saber-rattling between Washington and Beijing as well as a good deal of ill-rhetoric between Washington and Moscow. That’s just a small sampling.
With nearly all of the first world nations running persistent current account deficits and the rest of the economic superstructure living heavily on debt and financial speculation, it was only a matter of time. Would it be a pin that popped the ‘everything bubble’ or would it simply just slowly deflate (not to be confused with monetary deflation)?
So pervasive was and is the presence of debt in the circumstance of nations, states, trading blocs, provinces, municipalities, companies, and individuals that the trillions of dollars racked up by the US alone was not even viewed askance by economists OUTSIDE what would be considered the mainstream of the scientific economics community. Keynesianism was like a high-quality dime store pinata. Now matter how hard it was hit, it just kept spitting out candy.
We mentioned in My Two Cents on several occasions that this whole ‘system’, if you will, would go until it didn’t. It was a confidence game, just like the multitude of fiat currency regimes that backed it in the various corners of global commerce. As long as economic actors had ample supply of tokens (currencies), and another economic actor would accept those tokens in exchange for scarce land, labor, capital, and technology, the system worked.
Then the world got sick.
There has been much talk of ‘black swan’ events. The term was coined by a current events/geopolitics author Nassim Taleb. The black swan is something that nobody is looking or planning for. It is not on the radar. Period. There have been some who have been talking about pandemics in general for quite some time now in similar fashion to your authors considering the likelihood of economic fallout from the fact that the organized world has violated every law of economics imaginable. There’s always a reckoning day.
We are not going to discuss the SARS-nCOV-02 situation from a biologic/scientific standpoint as that is outside the scope of our expertise. We’re going to focus on nCV as a triggering event or black swan and the likely economic ramifications.
The amount of money that has already been borrowed/printed and spent is mind-blowing. It cannot be complicated by the human mind. The US National Debt blew right past $25 trillion. It is hard to fathom this but the growth of the national debt is a mathematical function based on the concept of fractional reserve banking. The debt was headed to where it is now anyway. That is going to be the biggest take-home. Would have it happened this fast without nCV? Probably not, but it was headed past $25T in the next 12 months regardless.
What nCV does is give governments the world over a free pass if you will on the print and spend / borrow and spend fiscal irresponsibility that has been going on for decades now. Europe reached its breaking point because of this foolishness in the past decade. The 2020s will be looked upon in history as the decade when the USDollar finally died.
That’s a bold pronouncement isn’t it? Not really. Who in their right mind is going to continue to lend to any entity that is so fiscally reckless? Ourselves along with many others have laid bare the runaway fiscal policy that has infected the US for so long. Now there is the element of public health involved and the general consensus is that we have to continue these spending policies, bailout entire industries, and even provide income to the populace. Anyone speaking out against any of this is labeled as being against helping people.
What needs to be understood is that this ‘help’ is only temporary. Think of the minimum wage. It is a very applicable analogy. Every increase of the minimum wage only lasts so long then another increase is required to produce the same result. Now, scale that up to the world’s economies and that’s what you’ve got. The ‘system’ needs ever-increasing amounts of stimulus to produce the same effect.
While grossly overused, the analogy of a drug addict is a very good one. Eventually the addict needs a fix just to feel normal. And so goes the global economy. If the stimulus is scaled back, the economy goes into withdrawal. The US economy is around 70% consumption and has been that way for nearly two decades now. This is not just a national or government problem. It transcends all layers of the economy. Even successful companies loaded up on cheap, low interest rate debt to conduct share buybacks, thus pushing stock prices higher.
Where do we go from here?
Even before the new year began, countries and companies outside the US were cutting deals outside the dollar. The dollar’s status as world’s reserve currency was being challenged. Expect that to continue – and accelerate. There won’t be a pronouncement that the dollar is no longer the world’s reserve currency. It likely will not be a headline. It’s been happening incrementally for years now. This latest fiscal quagmire will accelerate the matter. China is testing a digital currency. Russia has thousands of tons of gold. These countries don’t get along with America and Europe on a good day. The Russians already dumped nearly all of their US Government debt, but the Chinese still have a significant amount around $1 trillion.
Treasury Secy. Steve Mnuchin claims all that debt doesn’t give China any leverage on America. We’ll allow you to draw your own conclusions.
A global reshuffling of the economic order was already taking place before 2020 started. Europe endured a partial crisis over excess debt and the austerity that followed. And all of that was just a small piece of the problem. Economic history is replete with examples of complacent countries and empires who thought it could never happen to them. Complacency might just be the most dangerous state of mind that man can occupy. We are quite sure the Romans would agree.
Sutton/Mehl
Notes: This has been posted before, however, it is imperative that people understand that no reserve currency lasts forever and such will be the case with the Dollar. This was going to happen anyway – even before the events of the past several months – although they might well have hastened its demise. What are the signals? Rampant accumulation of external debts, out of control monetary creation (the fed ‘pumping’ liquidity is a good example), and almost no one speaking out about the above.
Sutton/Mehl
Notes: This is a preliminary list of public companies (listed on a stock exchange with outstanding shares) that grabbed PPP cash that was meant for small businesses. We are fairly certain there will be more now that a second infusion of borrowed cash into the PPP (Paycheck Protection Program) appears imminent.
Sutton/Mehl
Investors don’t normally think of themselves as lenders – banks do the lending right? Not always. If you have any kind of bonds or mutual funds, closed-end funds or ETFs that own bonds, you are a lender. Not in the direct sense. You don’t have a contract with the borrower to be repaid, for example – unless you own a government or corporate bond directly.
During the 2008 financial crisis, the word default was a household term. People were defaulting on mortgages, companies were defaulting on their bonds, some companies, like Lehman Brothers, couldn’t get a loan because they were viewed as a high default risk.
There are a couple of points to remember. The first is that return needs to be commensurate with the risk involved. Oftentimes the market might indicate which instruments are perceived as more ‘risky’ – they’ll have higher yields than other comparably rated instruments. Debt is nearly always rated. There are various ratings agencies. Standard & Poors, Moody’s, and Fitch are three of the major agencies. They all have a different nomenclature for their grading, but it’s the same as your report card.
A is the best, B second-best, and so forth. You should see yields increase as you look at lower-rated bonds. There is a fairly significant misconception right now. People seem to think that because the government and/or fed are bailing everything out that there is no longer any default risk. Again, this is not simply an American circumstance, this is more global. So simply shifting bond purchases to overseas companies won’t necessarily help.
The big advantage of holding a bond over a stock is that 1) you’re going to get some type of interest even if it is small. Companies may or may not pay a dividend on their common stock. Generally the preferred shares, which are hybrids and have characteristics of both stocks and bonds also have interest. The second big advantage to owning debt is that you’re a creditor of the company. If there IS a bankruptcy, the bondholders and other creditors are first in line for any distribution of the company’s assets. Stocks are considered equity.
Keep in mind that a default and a bankruptcy are two different events. A default is when the borrow stops paying on a particular loan or multiple loans. While a default is an alarming development, it doesn’t necessarily equal a bankruptcy in which the company either is permitted to re-organize or goes out of business altogether. So if you own bonds from a particular company and that company goes bust, you might get some of your capital back, but almost certainly not all of it. If you’re a shareholder in a company and the company goes broke, it is extremely unlikely to have any return of capital.
When considering the risk of default it is always good to look at a company’s balance sheet and several years worth of income statements at a bare minimum. A SWOT analysis is also helpful. What sorts of events might result in your company not having money to make good on its debts? What is going on right now is certainly going to cause problems. What other types of events could hurt your company? We would encourage people to stay away from the assumption that industries and companies will always be bailed out by governments. After all, investors and creditors in Lehman Brothers, didn’t think the USGovt would leave the company twisting in the wind.
There are some very important lessons to be learned by studying economic and financial history with the goal being to learn from the mistakes of others rather than having to endure the pain of defaults in your own portfolio.
Sutton/Mehl
Note: This column, while deemed relevant was written by a third-party author. The views, opinions, and content are attributable to the author, not the Institute for Economic Awareness.
Most people don’t understand the cause of hyperinflation. Many argue that we can’t get hyperinflation since asset prices are now under pressure and there is no demand led inflation as most people currently have very little money.
What few people understand is that hyperinflation is a currency driven event. It doesn’t arise as a result of prices going up. Instead hyperinflation comes from the value of the currency imploding. In every case of hyperinflation in history, it is the collapse of the currency that is the cause. So what leads to the currency collapsing. Well, exactly what is happening now around the world, namely unlimited money printing and credit creation. Led by the Fed and the ECB, the whole world is now extending trillions in loans, subsidies and guarantees to companies and individuals. Government deficits are now surging as tax revenues collapse and expenditures increase rapidly. So governments will also need to print money to finance their galloping deficits. The inevitable outcome will be bankruptcy although few nations will admit it.
I produced the debt chart below the first time at the end of 2017 when Trump was elected president. I forecast then that US debt would reach $28 trillion by the end of 2021 and double by 2028 to $40 trillion. These kind of debt increases seemed incredible at the time. But very few people study history and learn from the past.
All we need to do is to go back to 1981 when Reagan became president. Since 1981 US Federal debt has on average doubled every 8 years, without fail. Obama doubled debt during his reign from $10 to $20 trillion. Thus, it was totally in line with history that the US debt would be $40 trillion 8 years later, in 2025.
Until a couple of months ago, it seemed totally impossible to reach these high debt levels. But today it looks like we could exceed those figures by a big margin, especially the 2025 one of $40T. I am not surprised. Because when you make these forecasts you know that there are always unforeseen events that will occur to fulfil them. And the end of the biggest asset and debt bubble in history had to end with an unexpected event.
The bottom part of the graph above shows US tax revenue. It was $0.6T in 1981. Currently it is $3.4T. With the present situation in the US, it is likely that tax revenue will collapse, thus increasing the deficit further. But even at the current level of $3.4T, tax revenue has gone up less than 6X since 1981 whilst debt has gone up 31X.
As the banking system comes under pressure with debt defaults and imploding asset prices together with the $2Q derivatives going up in smoke, the US will be looking at an economic and social situation which is terrifying.
With falling tax revenues and galloping debt and deficit, the US is clearly on the way to default and bankruptcy.
SO WE ARE LOOKING AT THE FINANCES OF A BANKRUPT STATE. No additional printing of worthless dollars will remedy the situation. All it will lead to is a collapse of the dollar and an implosion of US debt. SO HYPERINFLATION HERE WE GO!
But the US won’t be alone, since sadly the EU (ED-European Disunion) and many other nations will encounter a similar destiny. A bankrupt world is the inevitable result of the irresponsible actions of central banks and governments in the last 100 years.
As Voltaire said already back in 1729:
The table below shows all the major currencies since the Fed was created in 1913. The straight line at 100 is Gold which represents stable purchasing power. In the last 100 years all major currencies have gone down 97-99% against gold.
If we look at more recent periods, the table below shows the currencies’ decline since 1971 and 2000. Since 1971 they are all down 98-99%, except for the Swiss franc and Yen, thanks to Nixon closing the gold window.
What few people realise is that since 2000 all the major currencies, except for the Swiss franc, are down 82-87%. This means that in real purchasing power, the currencies in industrialised countries have lost more than 4/5th of their value. So the final leg of the destruction of the current monetary system started 20 years ago. And from 2020 for the next 1-3 years, we will experience the final destruction down to Zero.
But what we must remember is that final fall to the bottom involves a 100% fall from today in the value of the Dollar, Euro, Yen etc. It was always clear that the current monetary system would end like all the others in history since no currency has ever survived in tact with the exception of gold. And the world’s central banks have now started the process that will lead to the demise of paper money as we know it today.
The facts and tables in this article are indisputable. The message couldn’t be clearer.
Still, most people don’t get gold, since less than 0.5% of world financial assets are invested in physical gold.
As I have outlined in many articles, stocks, bonds and property will lose 90-99% in real terms, against gold, in the next few years. Many bonds will lose 100%. And paper money will lose 100%.
Investors who don’t take immediate action are going to lose most of their investment assets. If you own property without debt, you can at least hold on to it but you will stop looking at it as an investment. But sadly most investors in conventional assets, like stocks and bonds, will be paralysed, hoping that Central Banks and Governments will save them yet one more time. But it won’t happen this time as more worthless debt cannot solve a debt problem. So I urge you to take action now.
Stocks will very soon start the next downleg in the secular downturn that started a few weeks ago. So there is a last little window to get out at what will seem like fantastic prices just a few months from here.
Gold has now started the acceleration phase and made new highs in most currencies except for in US dollars. The 2011 high of $1,920 will soon be reached on the way to much, much higher levels.
The three biggest gold refiners in the world in the Swiss canton of Ticino are now operating again but only at 1/4 of normal capacity. So there will be very little physical gold available. Our company can still get hold of gold but the tight supply situation will lead to prices going up rapidly and spreads widening.
Remember that you are not holding gold for illusory gains in worthless paper money. Instead, physical, and only physical, gold is life insurance against a collapsing world economy and monetary system.
Egon von Greyerz
Founder and Managing Partner
Matterhorn Asset Management
Zurich, Switzerland
Phone: +41 44 213 62 45
Since interest rates have been the topic of much conversation and debate recently, we thought we’d start here. What exactly is interest rate risk?
Let’s say you have a portfolio of securities and you bought the entire portfolio back in 2004 when interest rates were comparatively much higher than they are now. Your intent in 2004 was to subsidize other sources of income during retirement. Or perhaps you were younger at the time and wanted a ‘base’ to your portfolio that would throw off cash streams that could be used to purchase other securities. Essentially planning on reinvesting the interest rather than removing it from the portfolio.
You’ve had some very good news since then in that as rates go lower, the prices of already purchased assets go higher since rates and price are inversely proportional. If you had a fistful of bonds in 2004, there has been a decent amount of capital appreciation. And your yield on those bonds is still the same as it was in 2004 – if the bonds haven’t matured and rolled over into new ones. You’d have had to be in the 20-30 year range on bonds if your 2004 bonds haven’t matured for obvious reasons.
But what about your reinvestment strategy? It’s been put through the meat grinder. Compared to 2004, you’re going to pay more for assets that yield MUCH less. You can avoid paying more by purchasing new issues at or near par, but you can’t avoid the massive destruction of your interest cash streams. If you’re re-investing, maybe you can shuffle a bit and if your time horizon is long enough, this might well pass – rates have nowhere to go but up.
What if you’re using those interest payments to subsidize your fixed income from SocSec during retirement though? You need the yield. Your advisor tells you the only way to get the yield is to buy ‘high yield’ CEFs, ETFs, bonds, private equity funds, etc. What your advisor might not be telling you is that you’re going to be stuck buying securities that are maybe a step or two above a rating of ‘junk’. Your risk just went through the roof to attain the same yield as previously. This happens to many investors and they don’t even realize it because their advisors and brokers are derelict in their ethical responsibilities towards their clients. Fortunately all investment professionals don’t fall into this category.
Asking your current financial professional about risk is a good way to gauge how sincerely they are approaching the stewardship of your assets. Financial professionals are required by law to ask you questions about risk tolerance when they take you on as a client and then periodically after that. A diligent approach is to perform a yearly check up and make sure the client knows to let their financial professional know if there are any major changes in their lives between check-ups. The professional can then determine if re-structuring the mix of assets is necessary.
You should be asking about risk in general regardless of your age or portfolio design and making sure the recommendations you are given are in line with your risk tolerances.
The darker side to investing in low-rated investment grade assets involves what is known as default risk. We’ll take a look at default risk tomorrow.
Sutton/Mehl
We say ‘brief’ because first hurdle one has to clear when assessing any type of situation is whether or not there is risk involved. Risk can appear anywhere – even crossing the street. Such simple acts are rarely given much consideration, but our brains are constantly analyzing risk/reward quotients for various activities.
Often, when looking at investments, we give in to perceptions rather than realities. Most capital asset pricing models, for instance, rely on the use of ‘the riskless asset’ in their various formulae. Does such an asset exist or is it akin to the ‘Giffen good’ concept in mainstream economics texts?
If anything has become clear since the turn of the century, it is that there is no such thing as a ‘riskless asset’. US Government debt, the de facto ‘AAA’ rated standard bearer of zero risk has become fraught with uncertainty. Once we break the mental model that there are in fact safe havens, we can start to have a meaningful conversation about risk and reward. Before we launch into a series of short briefs outlining the various types of risk, we need to hit some assumptions. These assumptions are especially true for Americans and anyone who holds depreciated US Dollars in any real quantity.
The Dollar as the reserve currency of the world. At present time, this is an arrangement of convenience more than anything else. Why would anyone want a paper ticket (or mostly digital now) that has no intrinsic value, does not act as a store of wealth (Thanks Msrs. Powell, Bernanke, Greenspan, et al), and has developed such an animus about it?
Answer: Because that’s what we’ve always done. The population of the world, in vast majority, hasn’t lived through a time when the Dollar wasn’t the standard bearer. So it is human nature to assume this will continue – despite mounting evidence to the contrary. If we make the leap that the Dollar is vulnerable, then so does all the debt that bears its name. Goodbye says the ‘riskless asset’. What does that do to our models? We need new ones if we’re going to accurately assess risk either qualitatively or quantitatively.
So, with that rather unpleasant bit of business done and the idea of the riskless asset disposed of, we’ll embark on a rundown of the various types of risk for a typical investor in an environment that often looks more like a war zone than a place to nurture wealth.
We’ll try for one each day and, failing at that, to accomplish this task within the next few weeks. If you looked at the chart of the US National Debt that was posted yesterday, you can probably imagine there is an essay forthcoming. The media isn’t covering the out of control accumulation of debt – passed on to our children and grandchildren – so our rather small group of deficit hawks will do their job for them. Stay well.
Sutton/Mehl
Notes: Almost exactly 6 years to go from $5T to $6T. We’ll ignore the jump from $23T to $24T because of the emergency spending. We assert that the spending would have happened anyway, but omit it in the interests of full disclosure. The jump from $22T to $23T took only 8.5 months. The slope of the debt curve is increasing at nearly the square of the annual increase.
Economists love to talk about ‘escape velocity’ in terms of economic recovery. We’re going to inject that term into the debt discussion. By 2024, the Congressional budget office estimates the national debt will be at $36T – another $12 trillion over top of where we are now. So.. $12T in the next four years. In the previous four years, the growth was around $4.5T.
It doesn’t take a mathematician to figure out if we get to $36T by 2024, there is no going back. In all honesty, that ship has likely already sailed. Our planning needs to move into the next phase now. Where do we go from here? We’ll be addressing that, along with some pointers on general risk management in the weeks that follow.
Just one follow-up question – when was the last time you heard anyone talk about the infamous debt ceiling???? Something to think about during all this time we all have for contemplation.
Sutton/Mehl
**Chart compliments of CNS News**
