One of the most well-known quotes, particularly to those who have been investing for any period of time, is that “markets can remain irrational for far longer than you can remain solvent”. I believe that we can see that with the central banks intervening the period of irrationality has gone on FAR longer than it normally would have. Another Warren Buffett quote that should be remembered by those looking to successfully invest is that “Price is what you pay, value is what you get”. In the past few years none of the traditional metrics have been at all important in determining whether a certain investment will perform well- or not. In a normally functioning market, you would be able to look at cash flows, debt-to-equity ratios, price earnings ratios and determine if a particular stock would be a good fit in your portfolio. Of course, other things would play a part like dividends, industry, etc.
With bonds, you could look at the risk you are taking and determine if the interest rate you are receiving is adequately compensating you for the risk you are taking. With central banks buying particularly sovereign bonds the traditional valuations are stood on their head. In some cases some of the most risky sovereign bonds had yields that were less than US Treasuries, which a few years ago was considered to be extremely safe. This could only happen with central banks buying up the lower rated bonds which would drive the price up and yields down. If that intervention was to stop or even decrease the yields could spike and the price of the bonds could collapse. You can see why the interventions need to keep growing exponentially. New bonds are issued for current spending, current debt payments must be made, and maturing bonds replaced with new ones.
Since the central banks have become a third party that has entered the scene it seems that all of these metrics can be thrown out the window. This is, in my opinion, what is so dangerous about this current situation. The economy has been collapsing since at least 2008 when, if allowed to play out, would have likely purged the system of all the dead weight and we would now likely be on a way to a sustainable recovery. Instead, the money “printers” bailed out Zombie companies, bailed out the banks, and “printed” tens of trillions of dollars to pretend that all was ok. This is eerily similar to Weimar Germany, Venezuela, Zimbabwe, Argentina, and others. The one thing they all had in common was the conjuring up of cash to pretend that they were still prosperous and solvent when neither was actually true. This type of action has led to a collapsing currency 100% of the time throughout history. Many believe that “it could never happen here”. I guess those folks believe that economic laws apply everywhere but here in the USA.
With what has taken place in the past 20 years or so and the value of the dollar holding up pretty well while being “printed” to oblivion, I can’t say that I am surprised that many- particularly younger people may think that way. Too bad history has a sad ending- particularly for those who are not prepared. Another fun fact- in terms of gold the US dollar has LOST 98%+ of its purchasing power vs. gold. In 1971 gold was $35.00 per ounce. In 2023 as I write this in April it is $2010.00. Do the math! This is with major banks and central banks suppressing the price. When the boot is taken off the neck of the gold price it will likely be a sight to behold.
I have written many times that gold should be $20,000.00 per ounce RIGHT NOW. This would be based upon how much currency has been “printed”. This conjured up cash doesn’t just allow those “in charge” to manipulate prices higher for stocks and bonds but it also allows them to repress the prices they want suppressed particularly gold and silver. They do this mainly to give the illusion that the US dollar is strong. Economists throughout history have looked at what gold was trading for and could measure how well the purchasing power of said currency was holding up. To give the illusion of a strong dollar they compare it to inferior currencies- which are falling in value faster than the dollar to give the illusion of strength that way. I am sure there are millions wondering why, if the dollar really is so strong, why are prices rising uncontrollably right now? Bread is bread, gas is gas- it doesn’t change but the purchasing power of the dollar does.
To keep the price of gold and silver down major banks- likely at the behest of central banks (the major banks OWN the Fed) “print up” paper contracts that masquerade as real gold and silver. These paper contracts are sold into the market in massive amounts- particularly when the metals hit certain points where they may break out. This fake selling also prompts computer algorithms to sell and knocks the price down further.
Many have asked me why I would want to own something that is so manipulated. I have a simple answer. Every fraud has its own demise built in. This one allows me to stick to the #1 rule of investing. Buy Low- Sell High. It is important that, if you are investing for the long-term that you don’t let the paper games shake you out of a trade that you have high conviction in. This would go for all assets not just the metals I am discussing now.
I believe that one of the main obstacles that we all have now is recency bias. I just got a glossy sales pitch showing me the “great performance” of 60/40 portfolios over the last 50 years. I can’t argue that the portfolio didn’t work. As a matter of fact, up until late 2008 my strategy was similar. What I can argue is that the economic realities that were in place for the last 20 years or so are now changing and that anyone who thinks that assets will perform as they have in the past are likely greatly mistaken.
First of all, we had a 40-year bull “market” in bonds which appears at an end. This was a MAJOR tailwind not only for bonds but also for stocks and any asset that many borrow to own. Rising rates will create a headwind for these assets today.
Rising rates are not only a problem for asset prices but also are a major obstacle for businesses- not just the ones that are over-indebted but for all. It is just that the companies that are most indebted create the greatest risk to your future wealth.
In many of my articles I ask a question. It is “What is the VALUE of a promise that cannot, or will not, be kept?”
I believe this is a key question when we see that virtually anywhere you look- national debt, state debt, local debt, corporate debt and personal debt all look to be unsustainable in most cases.
It is not a surprise to me that most of the world is moving away from using the US dollar as the reserve currency. While I am sure that sanctions on Russia sped up the process, I am sure that most world leaders who get a look at our balance sheet (the one they let us see) and it is glaringly obvious that we cannot repay what we are promising with our currency retaining anywhere near its value. This doesn’t even take into account off-balance sheet items like Social Security, Medicare, Prescriptions, Wars, etc. that are off-balance sheet items. There are estimates that our unfunded liabilities are as high as $220 TRILLION. My guess is that is probably on the low side. Let’s also keep in mind that we are running a budget deficit of $1.5 TRILLION (that they admit to- likely FAR higher when wars are added in- which they are NOT in “official” numbers) so instead of paying down the debt we are going deeper and deeper into the abyss.
Let’s also keep in mind that foreigners (the main buyers of our debt in the past) are shying away from our new debt. This leaves FEW options other than to have the Fed buy the debt of the government. This is called monetizing the debt and has proven to be inflationary 100% of the time throughout history. BE READY.
In doing research for an article a few years ago I looked at Weimar Germany and how they destroyed their currency- the Deutsch Mark in the late 1910s and early 1920s. After World War 1 at the Treaty of Versailles the Germans were loaded down with massive war reparations. The only way they could pay was to “print up” the “money” and pay it. In other words, print money up out of nowhere and pretend that you earned it. The unsettling part for me was that I saw a loaf of bread in 1914 was around .13 (I am using dollar terms but it is Deutsch Marks) By 1919 the price was .26. By 1920 the price was 1.20. By mid- 1922 it had risen to $3.50. By December 2022 it was 700.00, by spring 1923 it was 1200.00 and by September 9MILLION. By the way, one month later it was 670 MILLION. Sounds impossible? It is history- not conjecture. I find an interesting correlation to our own price of bread right now.
I would also like to point out that the seeds of this crisis were sown in 1914 when the German’s abandoned the gold standard that they put in place in 1873. We did that in 1971. This frees the central bank to “print” money in unlimited amounts since there is nothing needed to back it up with. 1918 Germany loses the war and is in economic ruin. We haven’t won a war since WW2 and we are most certainly in an economic freefall. 1921 Allies make reparations 6.6 BILLION pounds. This leads to massive money printing and debasing of the currency. 1923 payments stop- France invades and Germans stop working. This leads to a fall in government revenue and the need for more printing. Are you seeing how many Americans have given up on working? Have you seen the recent layoff notices? There are FAR too many similarities to ignore.
If we were to see ANYTHING like that here- even a fraction of it will it really matter how many dollars you have if things get so out of hand that only the uber-rich could survive? It has happened in MANY other places and it is always the same scenario. The economy sinks. Politicians want to stay in power so they don’t want to raise taxes but still need to hand out freebies. Money gets “printed” without creating ANY value of any kind. This dilutes the value of every other currency unit in existence. Once critical mass is hit you can see that things can happen in lightning quick ways.
Years ago, the Zimbabwe Dollar was worth more than the US dollar. In a matter of years, the entire population of Zimbabwe were BILLIONAIRES. While that might sound sexy you might want to know “the rest of the story”. It cost a trillion Zimbabwe Dollars for 3 Eggs a few years ago. If conjuring up cash out of nowhere created wealth then Venezuela, Argentina, Zimbabwe and all these places would be shining examples. Unfortunately, they are an example alright- but as a warning. Not as a roadmap. Too bad our “leaders” are using them as a roadmap!
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