Weekly Article 07-05-2018
I hope that everyone enjoyed a relaxing and fun 4th. of July.
Today it is back to work- for some anyway- and I wanted to share a few ideas.
I was listening to David McIlvaney this morning and in his audio he commented that the Venezuelan President just increased the wages of all workers in Venezuela to 3 Million Bolivars per month. For anyone not paying attention you may think that everyone in Venezuela just got “rich”. Not quite. Since Venezuela has reached 43,000% inflation that 3 million Bolivars will purchase 5 cups of coffee. Not much to show for a month of work.
This is one of the real tragedies of “printing” money to make things appear ok. It is an illusion that, once exposed, ruins lives, causes good people to do bad things to survive, and destroys not only economic but social order in the areas that this takes place. The bad news is that this is what is currently taking place globally and a few countries like Venezuela, Zimbabwe, and others are showing what may be our future if we don’t make some radical changes. By the way- one ounce of silver purchase 6 MONTHS of food in Venezuela according to Truthnevertold.com and others. Think about that! A little planning could have alleviated a lot of suffering and at least have bought some time.
Could this be yet another reason that the Fed and other central banks are talking about reducing their balance sheets and pulling back on new purchases with this “money” from nowhere?
My question is will they have the guts to do it in the face of pushback from the stock and bond markets as they attempt to do their job and establish “fair” value? My guess is probably not since “fair” value is likely FAR lower since trillions of dollars, yen, euros, yuan, and other currencies “printed up” out of nowhere have launched asset prices far beyond any rational valuations. Stopping the buying could stop the rally and cause a pullback. An actual reduction of the balance sheets (selling of assets) could turn the raging bull into a raging bear in short order. The central bank’s history- at least in the past 30 years or so is to do all they can to arrest any declines.
In short, for 30 years I believe they have basically been undermining what would have been economic cycles and have virtually replaced the economic cycles with credit cycles. Instead of business activity and the traditional ways of measuring economic activity it may make more sense these days to track the creation and implementation of credit.
My question is when do market participants get a clue that all of the debt that has been created is too much? My guess is that it should have been evident in 2008 but “printing” has made most oblivious to the fact that the “too much debt” level was likely breached in 2008.
I mentioned a couple of weeks ago about the “markets” not being able to get out of their own way since the latest Fed rate hike. This could be a sign!
In another piece of information ZeroHedge on July 4th reported that the St. Louis Fed (FRED) discontinued reporting on the Fed’s balance sheet normalization. That immediately raised a red flag with me because I remember in 2006 – actually March 26, 2006 the Fed announced that they would no longer be reporting on M3 money supply. My guess at that time was that they were probably going to “print” money like crazy and didn’t want it known.
Lo and behold, that is what appeared to happen. Since then, we have found out that at least $21 trillion was “printed up” and spent by HUD and the Defense department and the “money” cannot be accounted for.
Let’s not forget the $4 Trillion plus on the Fed’s balance sheet that was “printed up” out of nowhere also.
This is in ADDITION to the over $21 trillion that the government has on its books and the other “off the books” debt. This had to be found by a professor at Michigan State and corroborated by many others by taking the government’s own numbers and adding them up, including Lawrence Kotlikoff in Forbes .
The Zerohedge article hypothesizes that the Fed may not want others to know how fast and furious they may be reducing their balance sheet and cause alarm in markets. That could be true but personally, my first thought was that they were likely being less transparent because just MAYBE they want the flexibility to NOT reduce the balance sheet if conditions warrant that action.
Of course, if it is not reported than it is likely that anything could go just like in 2006 when it appears massive money “printing” started not long after the cessation of reporting took place. They could actually resume buying rather than selling and we wouldn’t know about it for a long time. Of course, eventually we will likely find out- after it’s too late- like when the $700 billion bailout turned into over $16 trillion for the banks according to the GAO.
Basically, personal, corporate, municipal, state and national debts are at all-time record levels. The levels of debt to purchase stock are at historical all-time highs. Most developed nations are carrying debt levels that are truly off the charts and central banks are “printing” money to pay interest on existing debt and issue new debt to continue this charade.
Doe this sound like a long-term viable plan? Would you expect a person with a $20,000.00 income and $25,000.00 in bills -not including $50,000.00 he owes you- to pay off that debt any time soon?
Don’t forget that most of our financial assets are claims that someone else is expected to pay. Will they?
Just in case I am right and many people are morally bankrupt I feel a little better having a portion of my assets under my control like gold, silver, cash, food, etc.
Many will argue that we could have done better in stocks. I will argue that everything goes in cycles. In my opinion anyone thinking they are buying stock or bonds- or real estate low now are deceiving themselves.
I am not saying don’t have allocations to all assets- that is one of my main points- have assets everywhere but SO MANY people are being led away from precious metals and tangible assets at a time when central banks, countries, hedge funds and billionaires are loading up on those assets.
What do you think these people know that you don’t?
Mike Savage, ChFC, Financial Advisor
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