NEW LEADERS - OLD PROBLEMS
Herbert Hoover, Source: The White House
The UK has a new prime minister and the US will soon have a new president. Will they be met with a historic financial crisis like Hoover soon after his election? Both will lead nations that are in dire financial shape. Neither leader will meaningfully address the twin problems of massive government debt and huge budget deficits. Both will face relentless pressure from the legions of government benefit recipients to expand spending yet further. Their problem is that taxes can only be raised so far before workers storm Washington and London with pitchforks and torches. Therefore, their likely "solution" will be to further debase their currencies. Of course, doing so will devastate wage earners, savers and pensioners living on fixed incomes. But that is a price elite political insiders are willing for the working classes to pay in order to remain in power for a little longer. This chart shows US nominal wages (blue line) compared to real, inflation adjusted, wages (red line) from January 2021 to present There is no mystery why the US election came out as it did.
The US Federal Reserve Bank and the Bank of England are both active participants in the debasement of their currencies. They try to keep interest rates low so their massively indebted treasuries can keep their noses above water and continue to pay interest to bond holders for a while longer. There is constant pressure on them to reduce rates. Proponents for low rates (including Donald Trump) argue that current rates (sub-5%) are historically high. That is false. This chart from the Federal Reserve Bank of St. Louis (FRED) reports the Federal Funds rate back to 1960. Five percent interest is just about average on a historic basis.
It was the Fed's "zero percent real interest rates" (interest rate less the inflation rate) in the recent past (above chart, right side) that ignited the highest price inflation in over forty years - proof that the Fed is clueless about the effects its erratic efforts to micro-manage the US economy. The Fed is now pushing down short term rates (as that is the only rate it controls) but long term rates (10 year Treasuries and mortgages) are rising because people anticipate more inflation ahead despite the Fed's assurances that it is now under control.
Incumbent Democratic politicians claimed during the recent election campaign that the US economy is in rude health. If that were true, lower rates would not be needed because strong economies do not depend on low rates. They succeed on growing productivity. It is not the case that the US has a strong economy. Factory orders are negative, industrial production is negative, capacity utilization has dropped for the second consecutive month, housing starts are down 3.1% and the US trade deficit is massive. This chart shows that one of the US' main exports is now dollars being sent abroad to producers of foreign goods.
Both US and UK treasuries borrow at interest rates that are lower than the real rate of inflation - meaning that their bond holders are losing purchasing power on a continuing basis - and that is before they pay taxes on their interest income. We have previously shown that government statistics are routinely "adjusted" (a nice way of saying "falsified") in order to make things appear to voters to be better than they are. (See our discussions about how they do this, e.g., The Decline of Empires re employment statistics and Lies Damn Lies and Statistics re CPI and GDP manipulations). Economists call this scheme to defraud bond holders, "financial repression." This is to make "theft" from bond holders sound less objectionable. The key take-away is that financial repression will continue, because it must continue to keep the ship of state from capsizing under the weight of its debt, and financial mis-information must continue to keep voters in the dark and the elites in power.
This chart shows the ever-declining value of the US dollar. Study it carefully. You may notice a "trend." Recall that one of the Fed's two statutory mandates is to maintain the value of the dollar. How long would you keep your job if you were this incompetent?
It is axiomatic that whatever cannot go on forever will not go on forever. Debt cannot rise to the sky without consequences. When the potential bankruptcy of a corporation or nation becomes a matter of public concern, no one in his or her right mind would buy its bonds. That has been happening since 2015. This chart shows the steadily collapsing share of US Treasuries held by foreigners.
As this progresses, the Fed will be forced to buy Treasury bonds with newly created money. That is called "monetizing the debt" and will be your klaxon alarm signaling that the end is nigh.
Governments in dire straits always try to put off their day of reckoning by ever-more draconian means. They might require that all personal, business and local government cash be held in treasury bonds. That will be sold to the public as a way to "protect savers" from losing money during a future (or pending) banking crisis. Then all money will be controlled by the government and you will be dependent on the government's willingness to give you access to your money. The same result would be achieved by implementing a "central bank digital currency" coupled with a recall of all paper currency. We have discussed the totalitarian consequences that central bank digital currencies would have. (See, An Unexpected Inheritance). The point to remember is that desperate governments always do desperate things. If you ignore growing risks today, expect to pay the price tomorrow.
You might rejoin, "But the dollar has been rising in value!" as shown in the following chart.
This is true, but the dollar is "rising" only compared to other fiat currencies. That just means means that the other currencies are currently losing value faster than the dollar. The irrefutable fact is that all currencies are losing value because all governments are debasing their currencies - as they have done throughout recorded history. One might ask, "How about the Swiss franc? Switzerland is a financially sober country." That is also true, but the Swiss National Bank has engaged in the same practice. You may remember that it bought huge sums of Apple stock. Why would it so such a thing? The answer is that as people and businesses exit their failing currencies and buy Swiss francs, that drives up the value of the franc which is good for you, the Swiss franc saver, but is terrible for Swiss exporters whose goods and services now go up in price on the world market. A soaring Swiss franc would cripple Swiss businesses. So the SNB did what it thought it had to do and that is devalue the franc. It sold huge quantities of Swiss francs on the open market and bought dollars. That held down the value of the franc.
The only evidence of a currency's true value is to compare it to the price of gold, which has been treasured as real money for over 5000 years. It is real money because no government can create it at will as they can with paper and digital currencies. Here is a dated chart of gold priced in various currencies. Recent gold prices have extended this rise. All currencies have fallen dramatically in value compared to gold - which has simply maintained its value. Consequently, holding your important assets (savings and investments) in any currency is a recipe for disaster.
When might the next currency crisis come to pass? Could it be in six months, six years? The answer is that no one knows because there are an endless number of events that could trigger it. Bear in mind that crises typically arrive suddenly. If you have failed to prepare for it, you have little hope of surviving it with your assets intact. You buy insurance for your home and auto - not hoping that your house burns to the ground or that you will be involved in a horrible crash - but to protect yourself from the possibility of such losses. It would be foolish not to do so. For the same reason it would be foolish not to buy some "insurance" to protect you from ongoing currency devaluations.
Bear in mind that gold is not an "investment". It pays no dividend or interest. It simply protects you from the ongoing debasement of your national currency. As the dollar goes down in value it takes more of them to buy an ounce of gold. It took $42 dollars to buy an ounce of gold in the early 1970's. Today it takes over $2,600. That is not because gold is suddenly rare; it is because dollars have been continuously debased. Its rise from $42/oz. to a recent high of over $2800/oz has not been linear. Its price goes up and down, but over time the dollar has gone steadily down and will continue to do so because there is zero political will to stem its decline. Instead, there is a specific intention to continue its decline. Gold has simply maintained its purchasing power over the years. One factor supporting the high gold price is the huge quantity of gold being purchased by central bankers around the world. They are doing so to hedge their dollar exposure risk. You should consider doing so too.
The US Election
America is now Trump country, at war with progressivism, open borders, international bureaucracies, net zero, Jihadism, military adventurism and the Left-wing media. Voters are crying out for a crackdown on crime. They don’t want mass illegal immigration, even if they are immigrants themselves. They hate inflation. They want higher wages. They believe in the American dream, and are sick of the Democratic party’s anti-Western self-loathing, its unwillingness to properly fight Islamism and absurd campus extremism, its hateful normalisation of anti-Semitism, its anti-meritocratic wokery, its rejection of biological reality when it comes to sex.
Bret Stephens opined in the left-leaning New York Times that Democrats lost the election because "they dismissed inflation and immigration and have become a party of pontification and pomposity." We read with amusement the effect that the election has had on some wealthy Democratic party faithful. From Melissa Lawford,
Wealthy Democrats are racing to snap up multi-million pound boltholes in London in the wake of Donald Trump's US election win. Mr Trump’s election triumph this week has sparked a flurry of interest from ultra-wealthy Americans who want to buy prime UK property as a “safety net” because they disagree with the president-elect’s rhetoric, buying agents report.
This displays their astonishing ignorance of anything happening outside the US. Were they to investigate the facts they would discover that the wealthy of England are planning their own exodus due to the Labor party's left-leaning agenda and plan to raise taxes dramatically.
The US Economy - Sound As A Dollar? Sadly, Yes
Consider what voters, especially the working classes, have confronted every day throughout the Biden administration: higher prices for food, autos, housing, and insurance. It is true that the rate of increase is now slower than before, but actual prices have not fallen - they continue to increase, just at a slower pace. No amount of political bluster can overshadow that obvious fact. It is why blacks and Hispanics, who were once captives of the Democratic party, did not buy the Democrats' rosy assessment of the Biden economy.
The cause of rising prices, of course, results from the government pumping trillions of freshly minted dollars into the economy. As economist Milton Friedman famously said, "Inflation is everywhere and always a monetary phenomenon." Or as David Stockman recently wrote, "Inflation is caused by excessive government spending, borrowing and money printing and nothing else." See the US government's spending blow-out (total expenditures) here, paid for with printing press money.
This chart compares price inflation of many goods during the Trump and Biden administrations. It explains why working people "voted with their wallets" despite being told repeatedly that the economy was in fine fettle.
The Alarming Level of US Government Debt
The next chart from the Congressional Budget Office shows US government debt as a percentage of GDP rather than the total in dollars (now over $36 trillion). It separately projects debt to reach 200% of GDP by 2050. The trajectory (red arrow) is both alarming and unsustainable.
Be advised that the above chart ignores "off balance sheet" government liabilities including Social Security and Medicare (whose trust fund balances are headed to zero in the early 2030's). Payments will then have to be made out of general revenues, crowding out other outlays. The US government is spending $3 trillion more per year than just five years ago. That is a 75% increase. The CBO's estimate of the budget deficit for FY 2025 is $2 trillion.
Doug Casey helps put the US national debt of $36 Trillion into perspective.
Americans also owe $5.1 trillion in consumer debt (credit card, student and auto loans) and another $13 trillion in mortgage debt resulting in total household debt of $18 trillion. The good news is that this debt, as a percent of disposable income, is down from 2008 levels and personal bankruptcies are not yet elevated. However, a recession coupled with job losses would trigger a debt default crisis.Suppose you had a job that paid you $1 per second, or $3,600 per hour.
That amounts to $86,400 per day and about $32 million per year.
With that job, it would take you 31.5 years to earn a billion dollars.
It would take you over 31,688 YEARS to earn a trillion dollars and would take over 1,131,261 YEARS to pay off the current US federal debt.
US corporate debt totals $11 trillion. State and Local Government totals another $3 trillion. Total debt is nearly $68 trillion. At an average of 6% interest rate, the US is spending nearly $4 trillion annually on just interest payments - or 15% of national GDP. That sum will continue to grow. Steve Blumenthal writes,
My base case is that we’ll continue to elect leadership that promises to give us more sugar. This will continue until we reach the point where we all realize that sugar is poison to the system. In other words, more inflation will provide the pain. The reliance on fiscal stimulus and monetary expansion to fund government spending, deficits, and entitlements is inherently inflationary.
John Mauldin explains why he believes there will be no course correction until the next crisis arrives.
If we are to start reducing the debt, the first step is to stop digging. Right now, the government runs a roughly $2 trillion annual deficit. To balance the budget, we would need $2 trillion in spending cuts and/or revenue increases, not just once but every single year. And that doesn’t solve the debt problem, it just keeps it from getting worse!!
There is no way Congress will cut annual expenses by one-third because they would fear ouster from office at the next election. Thus, the debt will continue to get worse until we are deep in crisis - at which point the actions necessary to address the problem will be exceedingly painful.
High Stock Valuations
This chart shows the Schiller PE ratio of stock prices to corporate earnings. The historic mean is 16 and it is currently over 38. That represents a very "over-bought" market that is at risk of "returning to the mean." Avoiding that debacle is "job one."
Warren Buffett's famous advice is to "be fearful when others are greedy and greedy when others are fearful." That is another way of saying, "buy low and sell high." What is America's most famous stock investor doing now? He is selling huge quantities of stock - recently Apple, Bank of America, Ulta Beauty, Capital One Financial, and Charter Communications raising $34 billion. He bought just $1.3 billion in new stock. He now holds a staggering (and unprecedented) $325 billion in cash.
Is he worried about a major market set back or is it difficult to put such a large sum of money to work in the market without being disruptive? Likely, both. His recent investment was in Chubb Insurance, an industry he loves because policy holders pay him money every month that he can invest and earn money on and then pay claims later. Nevertheless, he seems to be especially concerned that current high stock prices evidence investor "greed" - a time to avoid the market. Securities bought at high price-to-earnings multiples historically have low returns over time.
Who Pays the Cost and Suffers the Pain of Politicians' Net Zero Promises?
England, and most western nations, is wrestling with the burdens and consequences of trying to meet its "Net Zero" pledges. The Telegraph reports,
Britain’s wind generation is set to plummet to virtually zero this week as Ed Miliband presses ahead with plans to increase the nation's reliance on renewable energy. Much of the UK has seen zero hours of sunshine this month, and the first part of this week will see already-light winds hit fresh lows in many areas, according to Met Office forecasters.
Annabel Denham writes,The dark and windless weather comes as Sir Keir Starmer and Mr Miliband, the Energy Secretary, fly to the UN climate talks in Baku, Azerbaijan, to pledge massive cuts in UK greenhouse gas emissions.
It’s not moral to legislate privations on the masses. It’s not honest to pretend the only way to reduce emissions is by ignoring economic and technological reality, and kneecapping what’s left of our manufacturing base. Our industrial energy prices are already more than double those of other developed nations. And it’s not reasonable to plough ahead with command-and-control targets, bans and regulations which will hit those on lowest incomes hardest.
The Rapidly Growing Threat to Free Speech
Trump was very successful in connecting with voters through his use of social media. Not everyone was thrilled about that. Vice-president Harris complained,Presumably, she meant that some government official should be vetting what her political opponents were permitted to say to the voters about her. Democrat John Kerry expressed his enthusiastic support.They are directly speaking to millions and millions of people without any level of oversight or regulation and that has to stop!
You know there's a lot of discussion now about how you curb those entities in order to guarantee that you're going to have some accountability on facts, etc. But look, if people only go to one source, and the source they go to is sick, and, you know, has an agenda, and they're putting out disinformation, our First Amendment stands as a major block to be able to just, you know, hammer it out of existence.
Democracies around the world now are struggling with the absence of a sort of truth arbiter, and there’s no one who defines what facts really are.
If government officials ever gain the power to be the "truth arbiter" and suppress unfavorable comments about those in political power, we will have arrived at the form of government depicted in the dystopian novel 1984. The essence of democracy is the ability to criticize those in power and their policies. When you have no freedom of speech you end up with no freedom at all. The essence of totalitarian governments is restricting the people's ability to criticize the government (e.g., Russia, China, Cuba and North Korea). With regard to government control of speech, be careful what you ask for - as you might get it good and hard.
Important Message: The foregoing is our opinion and is not a recommendation to purchase or sell any security or asset, or to employ any particular investment strategy. Only you, in consultation with your trusted investment advisor, can select the strategy that meets your unique circumstances, investment objectives and risk tolerance.
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