Hypothetical 65 year old American Male:
Weight: 285 pounds – 120 # overweight
Health: Marginal, with chronic pain and increasingly difficult daily existence
Ask our hypothetical male if he wants to lose 100 # of unnecessary fat, improve his physical health, live 10 years longer, increase stamina, reduce chronic pain, and drive a golf ball 50 yards longer off the tee.
Reason: He is addicted to his food choices, alcohol consumption, smoking, other activities, thinking and emotions which created ill health, chronic pain, and 120 pounds of excess weight. Different actions and choices are needed, but most people prefer not to modify their habits and behavior.
The Process: Change the quantity and type of food he eats, reduce alcohol consumption, add strength training and flexibility exercises, modify habits, quit smoking, and radically adjust his lifestyle. Most people will not make the effort.
The actions, thinking and emotions that created the problems will not fix those problems. Drastic change is needed or his health and quality of life will deteriorate.
Most people (nations, families, cultures, central bankers, governments etc.) will not change their lifestyle and habits. They will continue doing what created current physical pain and financial ill health.
Suppose the hypothetical American family has $200,000 in credit card and mortgage debt. Income is approximately $40,000 per year. Assume annual credit card and mortgage interest rates average 8%. The interest only on the debt is nearly half the annual income, before many taxes and living expenses. Reducing the principal balance with minimum payments consumes most remaining income – for a very long time, assuming this family could somehow survive without increasing their debt.
This is a problem.
The numbers do not work unless the family can (magically) increase their debt each year – use a new credit card until maxed out, and then do the same with another credit card. Unfortunately, the minimum payments will soon consume the entire annual income and crowd out the family’s ability to pay for necessary living expenses. The credit card issuing banks may think “deadbeat” and refuse to expand credit limits or issue new cards.
This is a problem.
Compare to The U.S. National Debt and Government Finances:
Multiply the debt and income for our hypothetical family by 100,000,000 to appreciate our national debt dilemma. Total official debt is $20 trillion. (Unfunded liabilities are much higher and are not considered in this simple example.) Annual income is about $4 trillion. But the rules are different at the national level:
- Interest rates are held low. Instead of 8%, the government currently pays only 2 – 3% on the $20 trillion in debt. Eventually risk (currency plus default) might be appropriately priced and interest rates could rise.
- Debt increases every year. In effect the national credit card has no credit limit and congress spends more every year. To quote a former Vice-President, “Deficits don’t matter.” (But they do!)
- Expenses will increase rapidly due to the demographics of retiring baby-boomers, huge Medicare and health costs, and war, lots of expensive wars.
Since 1913 the national debt has doubled approximately every 8 – 9 years. Assume it doubles every 8 years from 2017.
2017 $20 trillion
2025 $40 trillion
2033 $80 trillion
2041 $160 trillion
2049 $320 trillion
This is a problem! It will become a crisis!
THE THINKING AND ACTIONS THAT CREATED THE CRISIS WILL NOT FIX THE CRISIS!
If the national debt exceeds $300 trillion in the year 2050, what will a family of four spend for food in a week? Consumer Price Inflation will grow into an ugly monster!!!
Like the example of the hypothetical American male in ill health, the same thinking and actions will lead to ever-increasing unpayable debt, a weaker economy, excessive interest payments, and massive consumer price inflation, perhaps hyper-inflation. A solution requires NEW thinking and DIFFERENT actions.
New thinking and different financial actions should be initiated by our Congress and Administration. Have we seen any positive changes or new and helpful ideas in the last three decades regarding deficits, excessive government spending, and ever-increasing debt?
The consequences of western financial actions and thinking will be increasingly unpleasant for everyone but the financial and political elite. More of the same will be increasingly less viable for the rest of us.
New thinking and different actions are needed!
Read: The Burning Platform: Swindling Futurity
The Deviant Investor
Secretary of the Treasury Steven Mnuchin visited Fort Knox on August 21. He tweeted “Glad gold is safe!” He told an audience in Louisville, “I assume the gold is still there.”
The Fort Knox Gold was last audited in the 1950s. Secretary Mnuchin’s statements were not helpful. Questions:
- The gold is safe, but where is it? Has most or all Fort Knox gold been shipped to Asia?
- How much gold is safe? A few bars? Hundreds of bars in a locked and dimly lit room visible only through a small window? Was it gold or gold plated tungsten?
- Does his assurance reduce suspicions of “missing gold” or encourage those speculations?
- To whom does it matter if the gold is safe? Total value at current prices for the Fort Knox gold supposedly vaulted is about $200 billion. The annual U.S. government deficit is several times that amount. The official national debt is 100 times larger. Yes, it is important if the gold is vaulted, as claimed, or missing. The truth should be reported.
- Will the truth be more unsettling than the suspicions of “missing gold?”
- When will an independent and comprehensive audit be conducted?
- Assuming a “cover-up” exists, what information besides “missing gold” has been concealed?
From an article posted April 5, 2016:
Fort Knox Paradox
Officially the Fort Knox Bullion Depository contains 147.3 million ounces of gold. However, the last audit was performed over 60 years ago. According to reliable sources “audits” since then have been incomplete and inadequate.
Question: If the Bullion Depository contains over 147 million ounces of gold, why not audit it, prove the existence of the gold, and eliminate speculation? The US government spends over $70 billion on “food stamps” every year and nearly one $ Trillion per year on “defense,” so cost is not the issue.
Current policy seems to be “don’t ask, don’t tell” because the answer might be disconcerting, might destroy the narrative that the US gold exists, and the revelation of missing gold might encourage other embarrassing questions …
Speculation and possible scenarios:
Scenario One: Fort Knox Bullion Depository contains 147 million ounces of gold, as claimed, but the Department of the Treasury ignores calls for a comprehensive audit.
- “Trust but verify” apparently applies to the nuclear weapons in other countries but not our gold. Why?
- Why refuse to perform a comprehensive audit? Cover-up?
- If an audit proved that 147 million ounces of gold were safely stored inside the vaults, it would be a political victory. Why would the Bush or Obama administration, such as in 2008 or 2016, NOT want a political victory when their credibility was weakening?
- The implication is that an audit would fail and no political victory was possible.
Scenario Two: Fort Knox Bullion Depository is essentially empty – say it contains less than ten million ounces of gold.
- That begs the questions: Where did the gold go? Who should be indicted? Why have politicians for the past 50 years lied about it?
- Under scenario two the Department of Treasury cannot do an audit and desperately wants to avoid the scandal of missing gold.
- The only viable option is “stonewall.” Maintain that an audit is unnecessary, too expensive, or already has been done.
Scenario Three: Fort Knox Bullion Depository is essentially empty of real gold – say it contains less than ten million ounces of gold but also contains perhaps 140 million ounces of gold plated tungsten.
- A comprehensive audit would easily detect the fake gold.
- The same questions from scenario two would plague the Department of the Treasury, the President, and the Federal Reserve.
- The only viable option is “stonewall.” Maintain that an audit is unnecessary, too expensive, or already has been done.
- If the Fort Knox Bullion Depository gold exists, as claimed, there is little reason to refuse a comprehensive audit.
- Since all requests for a comprehensive audit have been rejected, it seems likely that a “cover-up” continues.
- If an unpopular President wanted a political victory, he would have ordered an audit of the Fort Knox gold if an audit had been a viable option. Since no audit was initiated, it seems likely that a gold audit would have produced problematic results with unanswerable questions.
- Gold “leasing” has been documented. Gold leased by a bullion bank from a central bank can be sold in the international market, yet is still officially listed in the vaults of the central bank. Official gold can exist in two (or more) places at once …
- It is possible that most sovereign and central bank gold in the United States, including the Fort Knox gold, the United Kingdom gold, and German gold is no longer stored in western vaults, and has been melted down and converted to the one kilo bars preferred in Russia, India and China.
- An honest and credible audit would confirm or deny such speculation. Further “stonewalling” encourages such speculation. What is the rest of the story?
The Deviant Investor
There are five identical bags of gold, and each contains ten gold coins. However, one of the five bags contains fake gold. The real gold, fake gold, and five bags appear identical, except the coins of fake gold each weigh 1.1 ounces, and the real gold coins each weigh 1 ounce. You have an accurate digital scale and CAN USE IT ONLY ONCE.
How do you determine which bag contains the fake gold?
(Thanks to my friend Brian C. for sending me this dilemma.)
There is a straight-forward answer to this question, but let’s speculate on what happens when we involve politics and prejudice.
The European Politician: As Prime Minister Junker said, “When it becomes serious, you have to lie.” Forty ounces of gold is serious wealth, and we discourage using gold, so this is one of many times when lying is required. These gold coins are fakes and we are confiscating them. The supposed owner will be charged with several crimes.
The Dallas School Politician: We are planning to rename schools bearing the names of Confederate generals and leaders because the Confederate economy used slavery and slavery was bad. The Southerners also used gold for trade, so we are opposed to using gold as well.
The Chicago Politician: These gold coins symbolize the oppression of the masses and the unfair distribution of wealth across racial lines in America. As your public servant I am personally confiscating these coins so they will no longer remind my many supporters of racism and inequality.
The Swiss Gold Refiner: We’ll perform a simple and non-invasive test, return the fake gold to London, melt and refine the genuine gold into 99.99% purity and cast it into a one kilo bar. The remaining gold bullion will be used in another bar and both will be sold to China where gold is understood and valued.
The DEA Agent: No American has any business carrying 40 or 50 ounces of gold. These gold coins resulted from illegal drug sales, so we are confiscating them.
The NFL Player: Hey man, like we’re protesting social issues or somethin’ and don’t know about no gold coins.
Ben S. Bernanke: “Nobody really understands gold prices and I don’t pretend to understand them either.” These coins will be shipped to my friend, the CEO of Goldman Sachs, for evaluation.
Democratic National Committee Executive: I understand this question will be presented to both candidates in the next debate. I’ll make certain our Democratic candidate receives both the question and answer in advance.
Republican Senator: Don’t bother me with trivial issues. I’m on my way to collect a $2,000,000 “thank you gift” from a major defense contractor because I wrote legislation that will boost his profitability by over one $billion in the next five years. American business must be supported.
Professor funded by a grant from Global Warming Advocate: My extensive computer analysis shows that production of these gold coins increased the average temperature of the planet by 0.000003 degrees Celsius, plus or minus 0.0002 degrees. Further, I calculated the gasses created from fossil fuels burned in the production of these gold coins were equal to the flatulence expelled by 137 average cows over the course of one year. The production of these gold coins and excessive cow flatulence are two causes of the global warming catastrophe that will destroy the planet.
Conservative Austrian Economist: The real gold coins are money. The fake coins are similar to debt based fiat currency units with no intrinsic value. The free market can decide which should be used.
Congressman: I will convene a committee of distinguished colleagues and we shall hold public hearings accepting fair and objective testimony as to which coins are real, which are fake, and why people bother with the barbaric concept of gold coins. Hearings and analysis should last no longer than ten months. I will present the committee report about six weeks before my next election. All television networks are invited to broadcast my presentation of our findings. I trust my American voters will appreciate me, their congressional representative, and how I am dealing with this pressing problem.
Mainstream News Reporter: We believe these coins are fake news. An anonymous source has confirmed that all 50 coins are fake gold and were manufactured in Russia, possibly at the request of our Republican President. This is another example of Russian gold hacking that must be stopped.
Another solution to the gold coin dilemma is:
Take one gold coin from the first bag, two from the second bag, three from the third bag, four from the fourth bag, and five from the fifth bag. If the weight on the scale ends in .1, then you know the first bag contains the fake gold. If the weight on the scale ends in .2, then the second bag contains the fake gold, and so on.
Gold has been money for thousands of years. It has no counter-party risk and, based on history, has significant intrinsic value.
Regardless of its value and our economic history, gold is affected by the intrigues of central banks and politicians. However, gold will be the “last man standing” after the global fiat currencies have been devalued to worthlessness.
The Deviant Investor
Bill Holter has written an important article: “This Is How China Moves the World to A Gold Standard“
Read the entire article, but if you want a summary, consider the following quotes:
“We also know China has been gobbling up global mine supply of gold for going on 10 years now. As I’ve written in the past, just using the back of a napkin, it can be surmised they now have hoarded 20,000 tons or more compared to the “supposed” 8,133 tons held by the U.S..”
“The announcement of “yuan for oil, convertible into gold” is a game changer http://www.zerohedge.com.”
“Where will another 1,000 tons (or maybe much more?) of demand be satisfied if oil producer’s newly acquired yuan are converted to gold? The easy answer is “they cannot” …AT CURRENT PRICES!”
“By making yuan convertible into gold, China in essence is creating a demand they know cannot be met by supply … (again) AT CURRENT PRICES!”
“First, they are THE largest owner of gold on the planet so they are in fact marking the value of their treasury up by multiples.”
“Second, they will in essence be devaluing the yuan versus gold.”
“Next and of great importance, moving the world “naturally” to a gold standard means moving away from the dollar standard …”
“If China refuses to convert yuan into treasury gold but instead buys the bullion on open markets they will never have their “De Gaulle moment”.”
“Wrapping this up, China can effectively use Mother Nature and free markets to create a gold standard where they are the wealthiest ones at the table.”
The next time you:
- Pay your mortgage, which is mostly interest;
- Pay your outrageously large auto or student loan;
- Pay an exorbitant amount for health insurance;
- Pay an even larger co-pay for a minor hospital procedure;
- Buy groceries for $100 and compare that purchase to what $100 bought in 1971;
- Realize that a four person family’s share of the U. S. national debt is nearly one-quarter million dollars …
Consider the costs of fiat paper currencies, deficit spending, central banking and … dragon maintenance.
A long time ago and far, far away outlaws raided a village and stole food, gold and women. The angry villagers could do little to protect their village except pray to their gods.
A large and fearsome dragon descended into the village square answering their prayers. The dragon agreed to protect the village in return for food.
Everyone was afraid of the dragon’s sharp claws and its fiery breath which incinerated those who threatened the dragon or the village. Raiders avoided the village.
The people rejoiced in their new safety but worried the dragon ate too much food.
Problems developed after several years.
- The village council went deeply into debt paying for dragon food. They also raised taxes and printed an excessive amount of paper money which increased all consumer prices. This angered the residents.
- Farmers increased food prices even higher because of the greater demand for dragon food. Residents grumbled about higher food costs.
- The village council hired public relations specialists to convince the people that dragon maintenance was necessary. The extra employment was helpful, but the village council went deeper into debt paying the new employees.
- Economic activity declined because the cost of capital tripled.
- The village grew poorer, and everyone suffered as their cost of living increased. In many respects they were worse off than before the dragon arrived.
- After a drought and partial crop failure, prices for wheat tripled and the dragon grew hungry and cranky. He ate three village residents.
The villagers met and demanded the council banish the dragon because dragon maintenance was too costly. They ordered the Mayor to roust the dragon and send it elsewhere. The Mayor promptly resigned.
People escaped to other towns, and the village deteriorated culturally and economically as it sunk into poverty.
The village council fed mal-contents and old people to the dragon when the council could not afford other food.
Soon everyone feared the village council would declare them dragon food. Most people fled the village except for members of the council who were confident the dragon would protect, but not eat, them.
They were mistaken.
The dragon ate roasted councilmen for dinner, burned the village to the ground and flew away, searching for another village that wanted protection.
The village had survived for hundreds of years but it died not long after the dragon arrived.
However the village existed a long distance away from the United States and the dragon maintenance saga happened before the world developed central banking, fiat paper money, deficit spending, ever-increasing debt, High Frequency Trading, derivatives, Quantitative Easing, PhD Keynesian economists and career politicians who manage our nations … so don’t worry … about dragon maintenance.
The Deviant Investor
Steve St. Angelo wrote an insightful article relating the silver to gold ratio to the S&P 500 Index. I encourage you to read his articles and analysis.
My commentary on the silver to gold ratio:
The following graph shows the SI/GC ratio versus the S&P500 index beginning in August 1971 when President Nixon severed the final gold backing of the US dollar. Currency in circulation, debt, consumer cost of living, and most prices including gold, silver, crude oil, and the S&P rose in devalued dollar units.
The two lines follow each other over long periods, and diverge during other periods. The next graph shows the same monthly data but smoothed with a ten month moving average. I divided the graph into four sections:
August 1971 – January 1980. The dollar “floated” lower, silver and gold rose in a parabolic bubble, the economy grew slowly, and “stagflation” was dominant in the United States.
February 1980 – February 1991. Gold and silver corrected and silver hit a low of $3.51 in February 1991. The S&P moved higher.
March 1991 – April 2011. Silver rallied from $3.51 to nearly $50.00.
May 2011 – February 2017. Silver and gold corrected and the S&P rallied.
These dates are important for silver and gold prices. Examine the statistical correlation (excel calculated) for the SI/GC ratio compared to the S&P500 Index.
- August 1971 – January 1980. Correlation = +0.28
- February 1980 – February 1991. Correlation = -0.79
- March 1991 – April 2011. Correlation = +0.91
- May 2011 – February 2017. Correlation = -0.93
These are interesting positive and negative correlations! How are these periods similar and different?
Stagflation: The 1970s was the decade of “stagflation.” Interest rates and commodity prices rose, the nation was deeply divided politically, and the S&P was mostly flat. It was a difficult time for most Americans as debt and prices increased while incomes slowly followed. American prestige declined. 2017 – 2025 could be a repeat of the 1970s.
Correction: The correction period saw the collapse of gold and silver prices and a bull market in stocks.
Rally phase: Almost all markets rallied when measured in devalued dollar units. Gold set a new all-time high (August 2011) and silver approached its 1980 bubble high. Central banks exercised more control over markets, engaged in monetary nonsense such as QE, near zero interest rates, direct purchase of equities, trillions of dollars in swaps, guarantees, taxpayer funded bail-outs, and policies that supported a “no banker left behind” mentality.
Levitation phase: Central bankers panicked and forced interest rates down to negative yields in Europe and Japan, purchased equities and ETFs, levitated stock and bond markets and created all-time highs in stock indices. Gold and silver dropped 40 – 70% while China, India, Russia and Turkey purchased massive quantities of gold bullion in the west, refined it into kilo bars, and shipped it to Asia.
WHAT CHANGED DURING THE LEVITATION PHASE BETWEEN MID-2011 AND TODAY?
- U. S. national debt increased by $5.6 trillion, about 39%. (Borrow and spend and spend and spend…)
- U. S. student loans increased by $0.60 trillion, about 70%. (Let the defaults begin.)
- U. S. auto loans increased by $0.3 trillion, about 40%. (More defaults coming.)
- U. S. corporate debt increased by $1.5 trillion, about 125%. (Buy back stocks to boost CEO compensation.)
- The Federal Reserve balance sheet increased by $1.8 trillion. (Buy toxic debt with “funny money” and make the debt disappear.)
- The S&P 500 Index increased by 1,000 points, about 74%. (Levitation works. Too bad about employment, good jobs, pension plans, savers, small businesses and middle America…)
- Silver dropped from nearly $50 in April 2011 to about $18 in February 2017, down about 63%. (A rally too far and too fast followed by a deep correction.)
- Gold dropped from over $1,900 in August 2011 to about $1,240 in February 2017, down about 36%. (Don’t let gold reach $2000 and fantasize all is well in central banker land. Read “Fed Up.”)
- The silver to gold ratio declined. The next major moves should be rallies in silver and gold, a correction in the S&P 500, weak growth and a repeat of stagflation.
BUSINESS AS USUAL: The U. S. government borrowed and spent and the Federal Reserve bailed out the largest banks. Students, auto owners, and corporations increased their debt loads, and newly “borrowed into existence” dollars levitated the stock and bond markets. Debt enlarged, fiscal and monetary nonsense prevailed, banker bonuses increased, pension plans were crippled and savers were hurt by near-zero interest rates.
BONDS TURNED DOWN: Bonds turned down last July and stocks could correct at any time. Trillions of digital dollars could disappear in days if stock and bond markets collapse, but the debts will remain.
Regardless of how quickly and harshly the fiat currency, bond, and stock bubbles collapse, gold and silver will remain real money and valuable.
“I view gold as the primary global currency.”
THE UNITED STATES IN EARLY 2017:
Equities sell for all-time highs and at historically high valuations by many measures. Bonds have probably entered a bear market, like the 1970s. Equities trade in the zone where we should expect a correction or crash even though central banks are blowing bubbles and levitating markets via direct purchases and ever increasing debt.
Interest rates bottomed in July-August 2016 and probably finished a 35 year bull market. Rising interest rates will hurt government finances, real estate purchases, derivatives, corporate stock buy-backs and central bank credibility. Remember the 2008 crisis and read Charles Hugh Smith regarding a “Shrinking Pie.”
Silver, gold, and their mining stocks turned upward after their December 2015 lows. New all-time highs lie ahead.
THE RETURN OF STAGFLATION:
- Expect higher interest rates, lower stock prices and more political turmoil. Debt ceiling debates, increased military spending, more wars, tax increases, token budget cuts, and other issues such as the dreaded transgender bathroom controversy will occupy our leaders.
- Expect aggressive national participation in the “blame game.” Blame will be directed toward Russia, China, ISIS, Trump and Obama.
- Expect the S&P 500 Index and the Dow Jones Industrial Average to correct and possibly crash toward normal valuations.
- Expect the economy to grow slowly or decline due to overwhelming debt. A weak economy + higher prices = Stagflation!
- Expect a vicious repeat of the “stagflation” of the 1970s but with prices rising far more rapidly than incomes, except for the top 1%.
- Expect silver, gold, mining stocks and the silver to gold ratio to rise rapidly in 2017 and 2018.
- Expect melting snowflakes in late spring and summer.
The Deviant Investor
Guest Post By Clint Siegner, Money Metals Exchange
The bullion markets have entered a new phase.
The two terms of President Obama included the aftermath of the 2008 financial crisis, zero interest rate policy from the Federal Reserve, and multiple rounds of Quantitative Easing. Reasons to buy gold and silver were plentiful. Today, the reasons to diversify into gold and silver are as strong as ever, but they’re perhaps less obvious to the average retail buyer in the U.S.
The rationale for owning physical gold and silver isn’t making page one headlines. That does not mean the gold story is over. Rather the markets seem to be at a crossroads with investors waiting to see which direction events will take them.
One path is not bullish for precious metals prices. That route includes a stronger U.S. dollar coupled with real economic growth and risk assets continuing to outperform.
The other two paths move through very different landscapes, but both lead to sharply higher gold and silver prices. The first path involves price inflation amid rapidly growing government debt. The need to hedge against the dollar’s declining purchasing power re-emerges in investor psychology. The second path leads toward geopolitical uncertainty and the return of safe-haven buying.
There are good reasons to expect metals markets will take one of the more bullish paths. Here are the potential catalysts as we see them today…
The Return of Price Inflation as an Investment Thesis
The Bureau of Labor Statistics just reported the biggest jump in the Consumer Price Index in four years. Bureaucrats have a sordid history of under-reporting the true price inflation rate.
But a massive devaluation of the dollar remains the only politically viable means of addressing our national debt and avoiding an overt default on entitlement obligations.
President Trump and his advisers would very much like to see a weaker dollar, and they are saying that explicitly. The jawboning has even yielded some results. For the moment, however, they aren’t getting much help from Janet Yellen. The Fed is still signaling tighter monetary policy, which could make the dollar look stronger relative to other major currencies.
The administration has put some proposals on the table which would promote a decidedly weaker dollar. Trump’s bid to launch a massive infrastructure spending program is one of these. The anticipation of a trillion dollars worth of construction projects is already fueling inflation expectations.
The proposal for significant tax reductions is getting plenty of attention, but, as yet, not many see it as a significant driver of price inflation. It would be. Tax cuts work as a direct stimulus because people have more spendable cash left in their pockets. Any cuts could also undermine the dollar by driving up federal deficits and borrowing, assuming a booming economy doesn’t increase overall tax revenues.
Finally, should Trump convince congress to levy import or border taxes with a major trading partner such as Mexico or China, it will mean higher prices inside the U.S. That is the inevitable cost for such a policy.
Now Is NOT the Time to Abandon Safe-Haven Investments
Even the most optimistic Trump supporters should be planning for a bumpy ride on the way to reform. For starters, it is increasingly clear the president is at war with the Deep State – the unelected, often anonymous bureaucrats and elites who have been running our government from behind the scenes for decades.
The potential for widespread social unrest should not be discounted. Anti-Trump forces are already mobilized and cultivating enough hysteria to foment violence in places like Berkeley.
The president has many enemies in Congress, including some powerful Republicans. What happens if the president is impeached? What if there is an assassination attempt?
Turn away from America’s extraordinarily volatile political scene, and you’ll find other reasons to retain some caution. This year promises to be pivotal in Europe. Anti-EU candidates just may win in upcoming European elections. Should that happen in either France or Germany, it is likely to shake markets to the core.
Europe isn’t the only continent with trouble brewing. Jim Rickards is among a number of experts who think the next economic crisis might kick off in Asia. Appearing on the Money Metals podcast last week, Rickards makes the case for China “going broke” as officials attempt to maintain a currency peg and grapple with the massive numbers of bad loans piled up in Chinese banks.
Current valuations in the U.S. equity markets should also be giving investors reasons for concern. Having risen dramatically as shown in the chart below, price-to-earnings ratios are signaling a significant correction may be just ahead.
The bull run in the S&P 500 has lasted almost 8 years. Do Trump’s plans for economic revitalization mean the run can persist for years longer?
It’s possible. There are two ways for valuations to fall back into line, and one of them is for corporate earnings to rise significantly.
The other is for share prices to fall… hard. For anyone who isn’t supremely confident in Trump’s ability to shepherd the tax cuts and a big infrastructure program through congress, this is the better bet.
Clint Siegner is a Director at Money Metals Exchange, the national precious metals company named 2015 “Dealer of the Year” in the United States by an independent global ratings group. A graduate of Linfield College in Oregon, Siegner puts his experience in business management along with his passion for personal liberty, limited government, and honest money into the development of Money Metals’ brand and reach. This includes writing extensively on the bullion markets and their intersection with policy and world affairs.
Thanks to Clint Siegner, Money Metals Exchange
The Deviant Investor
Following President Trump’s speech the Dow Jones Industrial Average (Dow) easily broke 21,000, and closed at another all-time high – 21,115.
The Dow closed up for the 12th consecutive day on Monday February 27, another three decade record.
Excel calculated the Dow’s daily Relative Strength Index (RSI – 14 period), a technical timing oscillator. It reached 97.75 (maximum = 100.00) on March 1, an exceptionally “over-bought” reading that has occurred nine times since 1950.
The weekly RSI also reached a very high “over-bought” reading as of March 3, the end of last week.
Margin debt recently registered an all-time high on the NY exchange. Price to earnings ratios have risen into “nosebleed” territory, and the last 1% correction in the S&P was in November – a long time ago. Many other market extremes and highs in confidence indexes are evident.
YES, THE EUPHORIA IS PALPABLE!
The Dow reached new highs the normal way – levitated through the creation of massive unpayable debt and the expectation of huge profits (for traders). Daily sentiment has reached a peak and indicates we are at or near a top. Read Bob Moriarty.
Official national debt is nearly $20 trillion. Regardless, President Trump promised something for everyone:
- More military spending, which will create larger deficits and more debt;
- Middle-class tax relief; (Larger deficits and more debt…)
- $1 trillion infrastructure spending; (More debt…)
- Education bill for more school choice etc.; (More debt…)
- The Wall; (More debt…)
- And more promises that require massively more debt.
The Dow likes more debt, until reality strikes.
Previous Peaks in the Dow: (National debt in $ billions.)
Date Dow Official National Debt Ratio Dow to Debt
Jan. 1973 1,067 450 2.37
Aug. 1987 2,746 2,330 1.18
Jan. 2000 11,750 5,776 2.03
Oct. 2007 14,198 9,055 1.57
Mar. 2017 21,115 19,960 1.06
To keep the Dow rising, create debt and don’t worry, be happy…
But it takes more debt to buy each Dow point than it did several decades ago. How much debt will be needed to levitate the Dow to 30,000? Will it require $40 trillion in debt? And what are the consequences of massively more debt? Stagflation is on the horizon.
Consequences of the spending problem according to Ron Paul:
“That leaves only one solution: printing money out of thin air.” [But] “printing money out of thin air destroys the currency, hastening a US economic collapse and placing a very cruel tax on the working and middle classes as well.”
His solution for US government policy:
“… end the US military empire overseas, cut taxes and regulations at home, end the welfare magnet for illegal immigration, and end the drug war. And then get out of the way.”
These ideas will encounter fierce resistance, so much that his plan is clearly “dead on arrival.”
CREATE MORE DEBT!
More debt is guaranteed by a century of fiat currency devaluations, a borrow-and-spend congress, the executive branch, central banks that love debt, and an economy that runs on debt and credit. Expect continued dollar devaluation and more Dow highs after a nasty correction/crash.
While the Dow corrects and the U. S. economy struggles in a fiat currency induced coma, gold and silver prices will rise.
- The Dow has reached another all-time high powered by borrow and spend euphoria. A bubble in search of a pin… Read Speculative Blow-offs.
- By many measures including daily sentiment, P/E ratios, technical indicators, and consecutive daily highs, the Dow is peaking and due to correct. Perhaps the correction/crash will occur soon, or near the next Fed meeting, or after the March 15 budget ceiling deadline, or whenever the HFT machines decide to crash the market.
- Expect massively more “money printing” and debt creation.
- Ever-increasing spending and more debt and currency in circulation will push the price of gold to new highs. Fear and panic will eventually force withdrawal of “funny money” from the stock markets and bond markets. Some of that fearful money will purchase gold and silver for safety, preservation of capital, and protection against further devaluation of fiat currencies.
- The stock and bond markets will correct but the debts will remain.
Gold and silver will surge higher, probably through the balance of this decade.
The Deviant Investor
Death: It comes to all of us, including empires, paper currencies and countries.
Debt: The world is drowning in debt – $150 to $200 trillion. The U.S. government is sinking into a black hole of debt – $20 trillion official and another $100 – $200 trillion in unfunded obligations. Total U.S. debt securities exceed $40 trillion according to the St. Louis Federal Reserve.
Devaluation: Given unpayable debt and unwillingness to face the insanity, the remaining option is devaluation.
Taxes: Governments need more revenue. It will come from taxes and “printing.” Both are poor choices.
Since 1913 debt has been a necessity for bankers, governments, and businesses. More debt = more currency in circulation = higher prices, including gold and silver.
There is practically no chance that debt will stabilize or decrease. Consider total U. S. government debt in 1972 (roughly $400 billion) versus today (roughly $20,000 billion = $20 trillion).
Total U.S. debt securities in 1972 were roughly $850 billion versus today, roughly $41,000 billion = $41 trillion. The following graph uses a log scale and shows that total debt securities have increased about 9% per year since 1971. The gold scale matches the debt scale.
Gold prices have increased along with debt and currency in circulation. Gold bubbled higher in the stagflationary 1970s and then languished in the “great age of paper” from 1982 – 2000. Gold will probably catch up with debt as central bankers rapidly “print” currencies, which will cause accelerating devaluations in the next several years.
Are higher gold prices guaranteed?
- Of course not. But higher gold prices, given the monetary systems in place, along with overwhelming debt and inevitable devaluations, must rally much higher.
- The debt junkies of the world, including governments, central bankers, congress, leaders, corporations and individuals will increase debt to continue buying votes, boosting stock prices, and living in excess of revenues. Yes, debt will increase as it has for over a century.
- How many politicians or Presidents have asked congress to cut spending and balance the budget? Debt will increase.
- If total debt were to be reduced the current system would spiral downward into a horrible depression. What politician or central banker desires that outcome? Bet on increasing debt and devaluation.
- Debt will increase, currencies will devalue, and central banks will “print” to keep the financial systems moving and markets rising, if they can. How much more debt can the system accommodate?
- Bonds have rolled over from a 35 year bull market. Is a ten year bear market from 2016 – 2026 unlikely?
- Mortgage interest rates are rising, which are restricting real estate sales and refinancing. Commercial property is weak. How many newly printed “out of thin air” dollars will be needed to inflate that bubble again?
- Regardless of the “official” statistics the U.S. economy acts weak and poised to fall further. An excess of debt, rising interest rates, and the “blowback” from decades of bad policy, poor decisions, wars, and excessive expenditures are a drag on growth. Expect a slowing economy, higher consumer price inflation, recession or depression.
- Rising interest rates, higher consumer price inflation, slowing economy, bond bear market and stocks rolling over indicate — STAGFLATION. Welcome to a return of the 1970s, but probably worse.
- Gold rose from about $40 to over $800 in the 1970s and into January of 1980. Silver rose from under $2 to over $50 during the same time. They will bubble higher again, sooner rather than later.
But you might say, “I doubt it.” You could be right, but consider:
- The “smart money” bet on Hillary. How did that work out?
- Brexit? That wasn’t supposed to occur either.
- Who wins the ongoing currency wars as all countries devalue? Answer – nobody.
- Will the euro survive another “exit?”
- Gold has been real money for thousands of years. How long have unbacked debt based fiat currencies survived before their governments and central banks devalued them to worthlessness? Answer: usually only decades.
- When the euro and dollar have become distant memories, gold will still be valuable.
- Fiat currencies have crashed before while gold and silver have retained their value, rising in nominal currencies to unbelievable price heights. Fading currencies and rising metals are likely in our near future.
The Deviant Investor
Grab your ultra-reliable 357 magnum revolver and load the cylinder with six, not one, rounds of ammunition. Point the gun at your head if you are a member of the struggling middle-class. Imagine pulling the trigger and hoping …
Do you feel lucky?
The Six Loads of Ammunition for your 357 revolver are:
#1: Central banks and commercial banks exert a huge influence over all aspects of our financial lives. Paper currencies issued by central banks, digital currency units, credit card debt, pension funds, retirement accounts, checking accounts, Quantitative Easing, bond monetization, congress, regulators, Presidents, and the list goes on. Their game, their rules, your losses, and more of the same.
#2: Derivatives are used to “manage” markets, exercise control via futures markets over prices for physical and paper assets, increase leverage and enhance profits for the banks. Each derivative includes a commission – it is not a “zero-sum” game. Banks and CEO bonuses win.
#3: Debt, debt, and much more debt. Deficit spending increases debt, and governments run deficits. Interest is paid by individuals, corporations, and governments. Global debt of $200 trillion will require inflation, hyper-inflation or default. How long can government expenditures increase much more rapidly than revenues? Answer: As long as our current “Ponzi” finance can continue. How long can a Ponzi scheme last? Answer: Not forever. A default or hyper-inflation will occur, sooner rather than later. Fiat currencies will devalue.
#4: Near zero interest rates, negative interest rates, and financial repression. If central banks lower the interest paid on bonds and investments, pension plans and savers are penalized. Debtors, including governments, banks, and large corporations benefit. Your government plan and corporate pension plan are increasingly insolvent. Interest earnings are nearly zero. “High yield” checking accounts pay 0.01% interest. Your savings are depleted, and you may outlive your retirement assets. Welcome to the world of NIRP, ZIRP and financial repression that transfers assets and revenue from you to the banks, courtesy of central bank policies.
#5: High Frequency Trading or HFT is legalized skimming. Ultra-fast computers, PhD mathematics and software have replaced human traders. The result is consistent and profitable trading for the big financial institutions. Per zerohedge JP Morgan’s in-house trading group has been unprofitable on only two days in the past four years. Average trading revenues were $80 million per day for 2016. Someone contributed heavily to the JP Morgan casino winnings.
#6: Too Big To Fail, Too Big To Jail. If central banks and the five largest commercial banks contribute to congressional elections, and Presidents fill their key positions with executives from the financial industries, and regulators work for them, what is the likely result? If a few large commercial banks are too big to fail, the government and taxpayers must … and you know the drill. More debt, more influence, more derivatives, and a successful business model that benefits the wealthy far more than the middle class.
Your revolver is loaded with six rounds of ammunition, any of which can blast a hole in your net worth and financial security. The central bank loads are:
- Their rules, their game.
- Debt, lots of unpayable debt.
- Near zero interest paid on your savings as currencies are devalued.
- HFT skims from many markets for banker profits.
- Too big to fail. Bail-outs, bail-ins, taxpayer assistance, and bonus checks. (Google “bail-ins.”)
One, two, three … pull the trigger!
Instead of playing a guaranteed to fail game of Russian roulette with your financial security, consider a return to the basics:
- Use real money – gold and silver – for your savings.
- Gold has no counter-party risk. Silver has no counter-party risk. Most or all “paper” and debt based assets depend upon counter-parties.
- Minimize debt and reduce your “debt footprint.”
- Reconsider your investments in bonds, stocks, ever-increasing debt, devaluing currency units, minimal interest paid on savings, counter-party risk and trust in your friendly central bankers.
- Be cautious when playing Central Banker Russian Roulette with your savings and retirement funds. The stock market crash of 1987, the LTCM crash of 1998, the NASDAQ crash of 2000, and the global financial crisis of 2008 warned us about counter-party risk, excess debt and trusting Wall Street.
- Trust gold and silver more, and use fewer paper investments.
Read: “Banks” from Peak Prosperity
The Deviant Investor
Keep it simple!
- Snowballs have a short life expectancy in Death Valley.
- Fiat currencies, backed by credit and debt, survive longer than snowballs in Death Valley, but history shows all fiat currencies are inflated into worthlessness and eventually die.
- “U.S. dollars have value only to the extent that they are strictly limited in supply.” Ben Bernanke on November 21, 2002. But we know the supply of dollars has grown rapidly since 1971, and especially after the 2008 crisis while Bernanke was Chairman of the Fed.
- The U.S. government is officially $20 trillion in debt. Unfunded liabilities are far larger.
- Official national debt has doubled every eight to nine years for decades. Debt in 2017 is $20 trillion and accelerating higher, and in 24 – 27 years it could be eight times higher – at $160 trillion. Can this fiat currency Ponzi scheme survive that long?
- If the Fed “prints” another $140 trillion, will that destroy the purchasing power of the dollar?
- Note to congress: “If you don’t raise the debt limit you will collapse the fiat currency bubble. But if you raise the limit and continue with ever-increasing debt you only delay a larger collapse.”
- If something can’t continue, it will stop. What specifically might stop? Economic insanity, exponentially increasing debt creation, Federal Reserve credibility, the dollar as the Reserve Currency, purchasing power of the fiat dollar, euro, pound, yen …and others come to mind.
- Federal Reserve Notes are debts of the central bank and have value because they are strictly limited in supply. But the supply of dollars is huge and rising rapidly. That begs the question, “What will preserve the value of the dollar?”
- Gold has been valuable money for thousands of years. Which will retain their value longer?
Fiat dollars created in ever-increasing quantity?
Snowballs in Death Valley tell us most of what we need to know about debt based fiat currencies – and their chances for survival.
The Deviant Investor