Weekly Article 03-13-2019

Capitalism will likely be blamed for our failed economy even though we have not had true capitalism for many decades. With true capitalism there would be the law of the jungle where the strong survive and the economy would get continually built up with new competition. This keeps older firms on their toes and creates new leaders for the future. The playing field would be level for everyone. If you come up with a better idea, or a way to provide a better price for a product or service, you could become wealthy.

While many would say that our current system is more like Fascism- where the state and private enterprise collude to dominate markets- I would agree. Large companies, through their lobbying efforts have made the barrier to entry into most businesses nearly impossible for a small player. By passing restrictive rules and regulations many upstart companies that could be massive job producers and agents of change are strangled before they can become a viable entity. To me this is a key reason for the demise of our once- thriving economy.

Moves like this damage not only our economy but might actually threaten our national security. The RAND corporation did a simulation of WW3 and the USA lost badly in all of the simulations. Many may wonder when we spend 10x the amount on national defense as our adversaries how that could be. If the competition is paying far less but outperforming there is likely a lot of waste and possibly fraud in our system. Could it be the lobbyists get the contracts for entrenched  businesses rather than those with cutting-edge technology? This may be why even NATO members are buying Russian defense equipment.

With capitalism the driving force is the incentive to better oneself and raise yourself from where you started to where you would eventually like to be. Barriers to entry would be low to foster competition- the lifeblood of capitalism. There ARE winners and losers. Those winners and losers would be determined in the marketplace and not by money “printers” offering favors to the favored few at the expense of the many.

With socialism, it is said that you eventually run out of other people’s money (Margaret Thatcher). That is because generally with socialism incentives are NOT there to better yourself but to take whatever the state masters allow. This leads to a dis-incentive to work and produce. Socialism also usually includes high taxes and was explained by Ronald Reagan as shared misery.

As Jerome Powell stated on 60 minutes -We have an unusual amount of people in their prime working years that are not in the labor force. Let that sink in. There are a lot of people in the economic wagon with fewer and fewer horses to pull the load.

In our current circumstance we are “printing” money to fund our deficits rather than raising taxes which gives the illusion that all is well even though our GAAP deficit for fiscal 2019 is $6 TRILLION. (USAdebtclock.org) How long before THAT bites us?

In Venezuela we are hearing about the inefficiency and fraud that has led to their current state of affairs (humanitarian crisis). It started when Hugo Chavez nationalized many industries and, by putting cronies in to run them, destroyed their profitability and production- most notably in the oil sector.

As things went from bad to worse they kicked the can down the road by “printing” money and continued social spending- until the “printing” rendered the currency virtually worthless. Now it takes millions of Bolivars for a cup of coffee.

As a matter of fact in all of my research of economies over time fiat currencies all seem to end in the same manner.

Charles Hugh Smith of oftwominds.com lays out an S curve which shows how societies evolve over time.

First is the rapid growth phase where anything seems possible. Then comes maturation where growth appears permanent and over-promising takes place. Third comes diminishing returns and reliance on debt financing increases. Fourth, it gets so bad that debt gets over-issued and the currency gets compromised. The final stage is collapse that usually comes very suddenly when most people least expect it. In Weimar Germany it was said that when asked how the hyperinflation happened the answer was slowly at first and then- all at once!

Let’s take a trip back to 2008. During our debt crisis the Fed, according to the GAO, handed out over $16 trillion to both national and international banks to make sure that they would survive. It is also reported that, as of 2018 over $24 trillion has been handed out to the same banks. In the meantime the market share of these banks has soared. According to Marketplace.org, JP Morgan manages $2.8 trillion in assets. That is more than the GDP of Italy, Canada and Brazil. Just 6 banks manage over 50% of all assets in the banking industry. The barriers to entry in this and many industries is extremely high.

Basically, the Fed determined the winners and losers- hardly capitalistic in my opinion.

How about the car companies? GM was bailed out also by the government and even though it bought a little time it appears to be faltering again. Instead of letting the market determine the outcome taxpayers were forced to “save” GM and many other companies.

While we are bombarded with the “Greatest Economy of All Time” schtick 24/7 Mr. Powell (Chairman of the Fed) let one slip on 60 minutes when he said that there was an unusual amount of people that were not participating in the workforce. I have written about the 95 million people that are conveniently not counted when the unemployment rates are being figured out. It appears to me that the reported unemployment rate is meant to deceive and paint a rosy picture- not an accurate one.

There are many reasons why so many may be disenfranchised, like a lack of the right skills for many, a lack of jobs that pay a living wage, or the fact that it pays better to sit at home and collect government benefits. I have heard numerous stories about available jobs not being taken because, if taken, it would disqualify the individual from their rent, food and other help the government provides. Does this sound like an Incentive to work- or a disincentive? Sounds awfully Socialistic to me.

The progressive income tax is a plank in the communist manifesto. The more you make the more they take. That is certainly a disincentive to produce.

It appears that all of the interference in markets and rigging prices is finally coming home to roost. Signs of discontent are everywhere and the “solutions” being offered are getting more and more radical by the day. The sad part is that many are so negatively impacted that they appear to be willing to listen to just about anything that appears to offer a solution.

I am pretty sure that we are in the “over-issuance of debt and debauchery of the currency” stage. Just how close we may be to the “collapse” stage is anyone’s guess. My guess is that we were already there in 2008 but, since we doubled our debts since then, the real crisis was hidden in plain sight.

With the action in the markets in December it is glaringly obvious that our “markets” cannot stay levitated without constant buying by central banks, large banks, hedge funds, etc. Any pullback, it appears, will lead to a rapid re-pricing of assets that could make 2008 look like a walk in the park.

The problem here is that the interventions get larger and larger over time and more assets are transferred from private ownership to entities. The numbers are truly staggering.

Many people believe that the central banks, since they can “print” money, can never go bankrupt. In theory that may be true but if you debauch the currency enough that myth would be shattered as nobody wants to accept a worthless piece of green paper or a computer blip for real assets. In reality, even though they can “print” in unlimited quantities it still may not be enough to stave off bankruptcy.

I believe this is why central banks and those in the know are buying record amounts of physical gold. I also believe this is why banks, countries and hedge funds are also buying gold and silver while the price manipulation keeps the prices low.

Many believe that our economy is OK and things are normal. Actually our economy is critically ill- as all of the economic reports show- and “printing” tens or hundreds of trillions of dollars and other currencies is so far from “normal” that if “normal” was to rear its head nobody would recognize it.

Currently we are setting records for: Store closings, credit card debt, student debt, auto loans, consumer debt, corporate debt, state debt, local debt, personal debt, unfunded liabilities for pensions, federal debt, etc. Also, we are at record levels of individuals who are BEHIND on debt payments mainly for credit cards, auto loans and student debt. States, who can’t “print” their own “money” to pay bills are seeing record amounts of unpaid bills and unfunded liabilities pile up also. Take Illinois $7 billion in unpaid bills that is growing daily as an example. The Federal budget is nothing short of immoral as we are making debt slaves of future generations. Of course, they can “print and pretend” that all is ok- until the day it’s not.

The economy is so “GREAT” that the Fed can no longer be expected to raise rates, are talking about more QE (“printing” money and buying assets) and cannot rule out a larger balance sheet (buying more assets and holding them indefinitely). You can’t make this stuff up!

This will end. When- I don’t know but I believe that history will favor those who took the time to discern the real truth, try to understand what is happening and make a plan to …

Be Prepared!

Mike Savage

Financial Advisor, Raymond James Financial Services, Inc.

2642 Route 940

Pocono Summit, Pa 18346

Phone 570-730-4880

Fax 570-243-8141

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