On Economy

     

 

 

Learning From Other People’s Mistakes is Cheaper

One benefit of hindsight is that it imparts a cheap superiority over the past blunders of others.  We certainly make more mistakes than we’d care to admit.  Why not look down our nose and acquire some lessons learned from the mistakes of others?

 

Bitcoin, weekly. The late 2017 peak is completely obvious in hindsight… [PT]

 

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Money Supply Growth Continues to Falter

Ostensibly the stock market has rallied because the Fed promised to maintain an easy monetary policy. To be sure, interest rate hikes have been put on hold for the time being and the balance sheet contraction (a.k.a.“quantitative tightening”) will be terminated much earlier than originally envisaged. And yet, the year-on-year growth rate of the true broad money supply keeps declining noticeably.

 

The year-on-year growth rates of US TMS-2 (broad true money supply) and the narrow money aggregate M1. Y/y growth of TMS-2 has declined to a new 12-year low as of March 2019. For some background on the calculation of TMS-2 see Michael Pollaro’s excellent summary at Forbes.

 

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Unsolicited Advice to Fed Chair Powell

American businesses over the past decade have taken a most unsettling turn.  According to research from the Securities Industry and Financial Markets Association, as of November 2018, non-financial corporate debt has grown to more than $9.1 trillion [ed note: this number refers to securitized debt and business loans, other corporate liabilities would add an additional $11 trillion for a total of $20.5 trillion].

 

US non-financial corporate debt takes flight – the post 2008 crisis trajectory is breath-taking, to say the least [PT]

 

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Boom Times Compared

It has become abundantly clear by now that the late 2018 swoon was not yet the beginning of the end of the stock market bubble – at least not right away. While money supply growth continues to decelerate, the technical underpinnings of the rally from the late December low were actually quite strong – in particular, new highs in the cumulative NYSE A/D line indicate that it was broad-based.

 

Cumulative NYSE A/D line vs. SPX – normally the A/D line tends to deteriorate before the market peaks, as the advance narrows and fewer and fewer stocks participate in the rally. This did in fact happen shortly before the early October top.

 

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A Growing Gap

The first quarter of 2019 is over and done.  But before we say good riddance.  Some reflection is in order.  To this we offer two discrete metrics.  Gross domestic product and government debt.

 

US nominal GDP vs total federal debt (in millions of USD) – government debt has exceeded  total economic output for the first time in Q4 2012 and since then its relative growth trajectory has increased – and it seems the gap is set to widen further. [PT]

 

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Maurice Jackson of Proven and Probable Interviews Jayant Bhandari

Maurice Jackson of Proven & Probable has just conducted another interview with Jayant Bhandari, who is known to long-time readers as a frequent guest author on this site.

 

Jayant Bhandari

 

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Extrapolating The Recent Past Can Be Hazardous To Your Wealth

Those who cannot remember the past are condemned to repeat it,” remarked George Santayana over 100 years ago.  These words, as strung together in this sequence, certainly sound good.  But how to render them to actionable advice is less certain.

 

George Santayana – purveyor of eminently quotable wise words by the wagon-load, but what shall one do with them in practice? [PT]

 

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Not the Brightest Tool in the Shed

Shane Anthony Mele stumbled off the straight and narrow path many years ago.  One bad decision here.  Another there.  And he was neck deep in the smelly stuff.

These missteps compounded over the years and also magnified his natural shortcomings.  Namely, that he’s a thief and – to be polite – a moron.

 

Over-educated he ain’t: Shane Anthony Mele, whose expressive mug was captured by a Florida police photographer first in pensive and then in defiant mode. A few days ago he inter alia stumbled over his exceedingly well-developed inability to properly evaluate collectors items. [PT]

 

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Special Guest Trey Reik and Board Member Jim Rickards Discuss Fed Policy

On occasion of its Q1 meeting in late January, the Incrementum Advisory Board was joined by special guest Trey Reik, the lead portfolio manager of the Sprott Institutional Gold & Precious Metal Strategy at Sprott USA since 2015 [ed note: as always, a PDF of the complete transcript can be downloaded further below].

 

Trey Reik of Sprott USA.

 

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Riding the Tailwinds of Fiat Money Inflation to Fame and Fortune

Warren Buffett bought his first shares of stock when he was 11 years old.  He saved up $114.75 and “went all in,” purchasing three shares of Cities Service preferred stock.  The day was March 11, 1942 – nearly 77 years ago.  Buffett recently reminisced about this purchase in his annual letter to shareholders:

 

“I had become a capitalist, and it felt good.”

 

The Oracle of Omaha – he was a great stock picker (lately he is suffering from “style drift”), but he also had the tailwinds of the greatest fiat money inflation in human history at his back during his entire career. Buffett would undoubtedly have been a great investor without it as well, but one cannot deny that the unanchored fiat money system was highly conducive to paving his way to success. [PT]

 

Buffett was merely getting started.  Over the succeeding 77 years Buffett’s investing acumen, and a rising tide of government sponsored fake money, garnered him a personal net worth over $80 billion.  That’s a breathtaking haul, indeed.

Most nights Buffett sleeps well.  Why wouldn’t he?  He’s got more dough than he could ever possibly spend.  And as for the burden of extreme wealth, Buffett’s been given a nifty – tax free – escape route from beneath the mass of this weighty condition.

His pal Bill Gates, via the Bill & Melinda Gates Foundation, offloaded his conscience and flattered his ego.  Thus, even in the late night hours, when the coyote’s howl at a full moon, Buffett sleeps soundly and with the full knowledge that his fortune will be used for noble philanthropic causes.

Buffett has pledged to give more than 99 percent of his wealth for benevolent endeavors. This we neither applaud nor do we find fault with it.  How one chooses to spend one’s wealth is a personal decision.  Perhaps some good will come of it.

As an aside, foundations are frequently used by the ultra-wealthy as a means to pass on their wealth, while avoiding estate taxes.  Remember, someone – likely a familial heir – has to run the foundation well into the future.  A well-structured foundation leaves descendants with good work, at good incomes, for generations.

We don’t know whether this is the case with Buffett’s ventures with the Bill & Melinda Gates foundation. We do know that Buffett is a master at limiting his income tax obligations.  Perhaps he has applied this predilection to limiting his estate tax disbursements too.

Again, we neither applaud nor find fault with how Buffett chooses to spend his personal wealth; we are merely adding context to the popular refrain of the goodness of his philanthropic benevolence.

 

Berkshire Hathaway, weekly – this is what the stock of Buffett’s company has essentially been doing since the 1970s, i.e., it went up and up and up. The “A” shares were never split to our knowledge, which is why buying a single one will set you back by more than 300,000 smackers. This is also the reason why a class of “B” shares was created, so as to enable the paupers  weighed down with slightly less moolah to partake in the BRK goodness as well. [PT]

 

“All In”

Beneath the wealth and affluence Buffett is still human, of course.  He will be asked to explain himself when he meets his Maker.  And in the interim, there is still one remaining fear that gets caught up in his mind’s eye during the darkness just before dawn… like a fly in a spider’s web.

Buffett first “went all in” to American business in 1942.  He has remained all in up to the present.  His timing has been impeccable.  He has ridden the crest of the American wave of economic dominance, and unprecedented issuance of debt based fiat money like no other man.

 

Top dog goes all in… at just the right time. [PT]

Illustration by C. M. Coolidge

 

What’s more, the success of his thrilling ride has led him to believe he can predict the future by extrapolating the past.  From his recent letter to shareholders:

 

“If my $114.75 had been invested in a no-fee S&P 500 index fund, and all dividends had been reinvested, my stake would have grown to be worth (pre-taxes) $606,811 on January 31, 2019 (the latest data available before the printing of this letter).  That is a gain of 5,288 for 1.  Meanwhile, a $1 million investment by a tax-free institution of that time – say, a pension fund or college endowment – would have grown to about $5.3 billion.

“Let me add one additional calculation that I believe will shock you: If that hypothetical institution had paid only 1% of assets annually to various “helpers,” such as investment managers and consultants, its gain would have been cut in half, to $2.65 billion.  That’s what happens over 77 years when the 11.8% annual return actually achieved by the S&P 500 is recalculated at a 10.8% rate.”

 

Buffett then took a moment to knock the doom and gloom concerns of runaway debts and deficits.  He also took an errant swing at gold buyers:

 

“Those who regularly preach doom because of government budget deficits (as I regularly did myself for many years) might note that our country’s national debt has increased roughly 400-fold during the last of my 77-year periods.  That’s 40,000%!  Suppose you had foreseen this increase and panicked at the prospect of runaway deficits and a worthless currency.  To “protect” yourself, you might have eschewed stocks and opted instead to buy 3 ¼ ounces of gold with your $114.75.

“And what would that supposed protection have delivered?  You would now have an asset worth about $4,200,less than 1% of what would have been realized from a simple unmanaged investment in American business.”

 

Hidden within Buffett’s boasts and blusters is his final remaining fear…

 

Why Warren Buffett Should Buy Gold

Buffett, you see, is locked in – with no escape route – and will have to ride the American wave of economic dominance, and its fake money system, as it crashes down upon the jagged rocks.  His remaining fear is that the status quo will be overturned.  That a social, political, and financial reset obliterates the wealth edifice that he has erected over the last 77 years.

To clarify, a reset is a complete collapse of the world as we know it.  Certainly, history has seen plenty of resets.  WWI and WWII.  The French Revolution.  The Russian Revolution.  The War between the States.  The Great Depression.

 

Sometimes there is great upheaval, including revolutions. In this example from Russia in 1917, all capitalists ended up expropriated and many were hounded to death in waves of “red terror” organized by the new ruling class. Soon the whole country was even more miserable than before, but by the time the masses realized this, it was too late. [PT]

 

No doubt, the present order is long overdue for a reset.  And when the current reset hits its fever pitch, Buffett’s holdings – which are concentrated in American businesses – will be directly impacted.

Of course, wealth is more than just money.  And some of Buffett’s businesses will hold up better than others through the reset.  For example, his railroads will still be an important asset – assuming he has the capital to operate and maintain them.  But his insurance businesses – his greatest money makers of all – are a construct of dollar based fiat money, and their ephemeral value will disappear before you can say Jack Robinson.

Being “all in” – to use Buffett’s words – on anything is a bad idea.  This goes for being fully invested in American businesses, or an S&P 500 index fund.  It also goes for being all in with gold.

Buffett’s other mistake is in equating gold to an investment.  It is not.  Gold, on the other hand, is real money that retains its purchasing power over time – including through epic resets.  Hence, misconstruing gold as an investment will be fatal.

 

As indicated by the shape of the content of this treasure chest, gold was historically mainly used as money. It emerged as the most marketable commodity all over the world in a lengthy process of trial and error; no committees or government diktats were required for this to happen. Gold was the market-chosen money, and despite having been officially “demonetized” by governments, it retains its “moneyness” to this day – as is evidenced by how the markets are treating it. [PT]

 

Fiat money, unlike gold, has an unblemished record of perfection.  All fiat money eventually returns to its intrinsic value of fire kindling, toilet paper, or birdcage liner.  Fiat based digital monetary credits will also ultimately disappear, like AOC’s cow flatulence, into the atmosphere.

This is precisely why Warren Buffett should buy gold… and why you should too.

 

Chart by: StockCharts

 

Editing and chart & image captions by PT

 

MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.

 

     

 

 

One Great Big Difference

On a beautiful midsummer day, roughly six months ago, two distinguished men, of distinguished stature, crossed paths under precarious circumstances.  They are very much alike, these two distinguished men.

 

Let’s confuse him…  [PT]

 

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Almost Predictable

One of the more enticing things about financial markets is not that they’re predictable.  Or that they’re not predictable.  It’s that they’re almost predictable… or at least they seem they should be.

 

For a long time people believed – and from what we read and hear, many still do – that economic cycles move in easily predictable, regular time periods. All you had to do was create a chart of the up and down waves of your favorite cycle model and extrapolate it into the future, and presto, your prediction was ready to be sold. But it turns out it is not that simple. The chart above was published by the “Inflation Survival Letter” in the late 1970s and purported to show the future trend of the so-called Kondratiev Wave, a cycle invented by Soviet economist Nikolai Kondratiev (who was eventually deported to the GULAG and killed by the Stalin regime, after a fellow American economics professor denounced him to the communists in Moscow as a “counter-revolutionary”). Interestingly, their forecast of the trend in wholesale prices turned out to be correct, but everything else they predicted in this context was incorrect. According to the K-Wave theory, the year 2000 was supposed to have been the trough of a major economic depression, with extremely high unemployment, a plunging stock market and all the other symptoms associated with a giant bust. In reality, the year 2000 was the peak of a major boom, with unemployment almost reaching a record low and stock prices soaring to unprecedented valuations. There was a time when the seeming elegance and simplicity of models like Kondratiev’s had our attention as well. There are ways of rationalizing such models. For instance, one could argue that it takes a few generations to “forget the lessons of a depression” and end the risk aversion and penchant for saving it inculcates in the public. There are certainly kernels of truth in this, but the fact remains that the future is unknowable. Kondratiev e.g. didn’t know that the communist empire would crumble in 1990 and that half the world would join the hampered market economy of the nominally capitalist West. This was undoubtedly one of the factors helping to extend the economic boom well into the 1990s (precisely because it kept prices low, which in turn enabled central banks to implement loose monetary policies). [PT]

 

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