by John | Jan 23, 2021 | Political, The Economy, The Stock Market
I was wrong in my prediction regarding the 2020 election season. I thought it was most likely the red team would retain the senate with Biden in the oval office or what I called “Scenario 3”. I wrote “Scenario 4” was second most likely and that is what happened: Biden in the White House with the blue folks in control of the Senate.
My understanding of the Senate also lacked nuance. While the blue team does have a simple majority in the Senate thanks to 50 members plus Vice President Harris breaking ties, only certain legislation can be passed without a 60 Senator majority. With a simple 51 vote majority the Senate is (somewhat) limited in what legislation it can pass to what is authorized in the budget reconciliation process.
My very superficial understanding of the reconciliation process is that it must pertain to spending and revenue and can only be used once per year. It could be used to raise or lower taxes (for the blues it would be raise) and who knows what other tomfoolery.
Taxing and Spending
But even with the blue group being somewhat limited by the reconciliation process, I can guarantee new taxes and more spending. Perhaps Wall street either likes the tax and spend approach, or the market had already priced in a Biden-Harris Administration, or perhaps it is simply the removal of the election uncertainty for the next two years, combined with vaccine optimism, regardless of how the election turned out.
In any case the S&P 500 is up nearly 9% since November 5th.
Wall Street does seem to love spending, and doesn’t seem to care about the national debt. So while I wouldn’t expect the stock market to crash because of Biden’s tax and spend approach, I do think the economy would fare better under low taxes and fiscal discipline.
Perhaps Trump will say the stock market is magically back in a big, fat, ugly bubble again now that he isn’t in power. I think the stock market has been in a bubble for a while. However, the ability of the powers that be to keep the bubble inflated has far surpassed what I believed possible.
Even though the blue team is known for spending, their tax hikes don’t cover the bill. To be fair red team doesn’t have many fiscal conservatives either. The national debt goes up regardless of who is in power.
I predicted back in January of 2017 that the US nation debt would go to $40 trillion under Trump. However, under the Trump administration, the debt only went from about $19.9 trillion to about $27.7 trillion. Granted I thought Trump would win reelection at the time I made that prediction and he would have 8 years to run up the debt by over $20 trillion.
Unless Trump runs for office again and wins, my $40 trillion prediction was wrong. However, I think the national debt will go to $40 trillion by the end of 2024.
I think over the next four years it will go from $27.7 trillion to over $40 trillion. It would mean about $3 trillion per year. In 2020 the national debt increased by $4.2 trillion. I’m sure Biden will be looking for a big spending package in 2021 to get his administration started off with a bang.
Government spending financed by debt reduces the value of dollars, so more dollars are required for later stimulus in order to have the same effect. For example in 2008, when the banks were being bailed out the debt went up by about $1 trillion. Then the next year the debt went up by $1.8 trillion.
Granted 2020 had COVID-19 and lockdown crisis, but that hasn’t gone away. In 2018 and 2019, with the economy supposedly humming along and no large-scale military engagements, the debt still increased by over $1.2 trillion each year.
My $40 trillion prediction is based on the national debt going up by $4-5 trillion in 2021, followed by $2.5 trillion per year after that.
This is one reason why interest rates can’t rise. The treasury issues debt at a variety of maturity rates. But as interest rates rise, that means the government has to pay out more money on the debt. The treasury is already paying about $393 billion per year in interest at current rates.
Interest Rates Rising
In June of 2007 the yield on a 10 year treasury was 5%. In the wake of the 2008 financial crisis it has steadily fallen. While still stupidly low, the 10 year treasury yield has been rising. In July of 2020 it was as low as about 0.5%. Since then the yield has risen to about 1%. As I said before it is still stupid low, in contrast the 10 year treasury yield was 15% in the early 1980s.
However, the market is addicted to low interest rates. If the 10 year yield continues to rise and gets to 3 or 4% I think that would be devastating for stocks. As mentioned above it would also dramatically increase amount the treasury would need to pay in interest. For example at 0.5%, $2 trillion would cost $10 billion, but at 3% it jumps up to $60 billion. But it isn’t just the new debt, as older debt expires and the borrower gets paid back, the treasury issues new debt to pay for it, which must be issued at the new rates.
I’m sure the Federal Reserve will step in and drive the yield back down before that happens. The Washington elite definitely don’t want a stock market crash to happen when the blue team is in control of the government.
I think the Biden-Harris administration is much more likely to increase hostilities in the world. Despite all his faults, and alienating allies of the United States, Trump didn’t start any major military engagements in the world. I believe Biden-Harris will follow the Bush II and Obama approaches to foreign policy.
More war is good news for “defense” contractors, but less positive for everyone else. The loss of human life in war is the most tragic element and the most important reason to avoid military action except as a last resort. A distant second reason for avoiding war is that bombs, drones and aircraft carriers are expensive and contribute to the national debt. Surely the military action, as it always is, will be dressed up flowery rhetoric to make it seems necessary, noble and courageous.
I think a 10-20% allocation to precious metals is as important now as it ever was. Gold has been down and sideways since the new high was made in August of 2020. It seems to have support at around $1,790 per troy ounce. I think this is consolidation prior to the next leg up.
Stocks only seem to go up. Valuation and fundamentals don’t seem to matter.
While I always have some exposure to the stock market, I’ve missed out on the some of the gains of the last 8-9 years since I’ve been underweight US stocks. I’ve been waiting for a buying opportunity. I was considering buying in around March of 2020, but I expected the markets to go lower.
I was wrong.
The powers that be are able to maintain the stock market prices far beyond what makes sense to me. I’m planning on averaging into various mutual funds over time. Perhaps my capitulation is a sign that the top is near!
Despite all the challenges from higher taxes, more regulations, debt and lockdowns, there are still productive businesses out there. While I think Biden/Harris and their allies on the blue team will make things worse, there are still plenty of reasons to be optimistic. Being in a “bunker mode” for the past 8 years has cause me to miss out on a significant stock market rise. At some point I think the dollar will crash and maybe stocks will go down too, but that is what the precious metals are for.
by John | May 28, 2017 | Economic Outlook, Geopolitical Risk Protection, Wealth Protection
Some people think the United States economy is doing well. The unemployment rate is low. Major US stock indices continue to rise.. There has not been hyperinflation of consumer prices.
So one might be tempted to think the economy is doing pretty well and everything is good and normal. I don’t think this is accurate but I think it is important to look at some of the measures that do seem to support the view that the US economy is on strong ground.
The following are some facts that people will point to when they say that everything is fine.
Stocks are Up
US Stock investors have been handsomely rewarded since the lows of the 2008 financial crisis.
Led by darlings such as Apple, Alphabet (Google), and Amazon, the NASDAQ composite has reached new all-time highs.
The S&P 500 has been on a tear, also making new highs without any significant corrections.
The Dow Jones Industrial average is also making new highs.
The Dollar is Relatively Strong
Despite unprecedented central bank intervention and record US debt the US Dollar Index is holding.
US GDP Continues to Rise
United States Gross Domestic Product continues to climb.
The unemployment rate is below 5%.
But if you look a little deeper than the headlines there are systemic problems in the United States economy.
A lot of People Aren’t Working
Labor Force Participation is at levels not seen since the 70s. And no, it’s not because of baby boomer’s retiring. Labor force participation from those age 25-54 has dropped from 82.8% in 2004 down to 80.9% in 2014. Participation from those age 65 and older has increased from 14.4% in 2004 up to 18.6% in 2014. Source: https://www.bls.gov/emp/ep_table_303.htm
Just because the unemployment rate is low doesn’t mean people aren’t unemployed. If someone is unemployed for long enough, they simply drop off. If someone is fired from a good paying salaried position, and they get two new part time jobs, that is considered a net job gain.
United States GDP Growth is Slowing
The growth rate of US GDP has been trending down.
US Debt is Growing
US National debt is up to nearly $20 trillion, not counting the unfunded liabilities of Social Security and Medicare. Source:
It is politically impossible to cut spending. As Simon Black recently pointed out:
In 2016, for example, the government spent $2.87 trillion on Defense, Social Security, and Medicare, plus an additional $433 billion paying interest on the debt.
That totals over $3.3 trillion, which is more than they collected in tax revenue.
In other words all spending on the department of energy, education, homeland security, everything else besides defense, social security and medicare could be cut completely and there would still be a budget shortfall.
I believe it is politically impossible to cut social security, medicare or defense spending in the United States.
The Debt to GDP is Rising
The debt to GDP ratio is at levels not seen since the United States was fighting a World War in the 40s. Source: https://en.wikipedia.org/wiki/File:Public_debt_percent_of_GDP.pdf
State Pension Funds are Underfunded
The majority of State Pension funds are underfunded.
Social Security and Medicare are Underfunded
This isn’t some alarmist drivel. The people in charge of the Social Security and Medicare Trust Funds are issuing statements like following:
“Both Social Security and Medicare face long-term financing shortfalls under currently scheduled benefits and financing.”
As well as statements like:
Under the intermediate assumptions, DI Trust Fund asset reserves are projected to become depleted in the third quarter of 2023, at which time continuing income to the DI Trust Fund would be sufficient to pay 89 percent of DI
scheduled benefits. Therefore, legislative action is needed soon to address
the DI program’s financial imbalance. The OASI Trust Fund reserves are
projected to become depleted in 2035, at which time OASI income would be
sufficient to pay 77 percent of OASI scheduled benefits.
I haven’t even touched on consumer debt, state debt, low home ownership, and low savings per capita.
The US Economy isn’t Fine
So despite headlines like the low unemployment rate and stock markets making new highs that seem to indicate a recovery from the 2008 financial crisis there are systemic issues in the US economic system. I don’t think that the United States will be able to continue to borrow and spend without consequences. The fact as the United States has a printing press and the world reserve currency doesn’t mean it can borrow and spend forever.
There are ways to protect yourself but you have to be aware of the problems.
by John | Jan 22, 2017 | Geopolitical Risk Protection, Value Investing, Wealth Protection
For better or worse the President of the United States gets credit (or blamed) for how the economy has performed during his tenure.
How much control does the President have over the economy? In my opinion more than he should have but less than people give him credit for.
Donald Trump was sworn in a couple days ago and there is alternating fear and hope from either side of the aisle about what he will or won’t do.
But as I’ve written before, when it comes to some of the largest systemic issues facing the United States: it doesn’t matter who won.
How has the US Economy Fared under the last three Presidents?
As part of trying to anticipate how the markets will fare under Trump I was inspired to take a brief look back at how “the economy” performed during the past three presidents’ terms.
Past performance does not guarantee future results but the past is all we have.
For my high-level assessment I looked at US national debt, the price of gold and the S&P 500.
These three areas are just scratching the surface of the United States economy.
Other metrics one could look at are GDP (which I don’t think is useful), unemployment rate (deceptive), the Consumer Price Index (CPI, which has been resigned so that it doesn’t measure consumer prices), labor force participation, dollar strength relative to other currencies, home ownership, household debt, etc.
However as an investor I’m mainly interested in getting any clues as to how stocks and precious metals are going to perform.
Keep in mind these trends have more to do with Federal Reserve actions, regulations, laws, and government spending and less to do with who is taking up space in the oval office.
Former President Bill Clinton and Former First Lady of the United States Hillary Clinton
Under President William J. Clinton, the US national debt went from $4.2 trillion to $5.73 trillion, the price of gold fell 30% and the S&P 500 went up 182%. The housing bubble also started to form under Clinton.
Bonus: During the Clinton reign the NASDAQ tech bubble popped and the index went from it’s high of 4,696 down to 2,500.
To be fair, if you bought the NASDAQ in 1993 you would been up almost 300% by the end of Clinton’s term. But that doesn’t help anyone who bought in during the peak.
Former President George W. Bush attempting to wear a poncho.
Under US President George W. Bush the housing bubble continued to form and peaked. This bubble popped resulting in the 2008 financial crisis, the national debt nearly doubled and went from $5.73 trillion to $10.63 trillion, gold went up 222% and the S&P 500 dropped 41%.
In an attempt to paper over the 2008 financial crisis a stock and bond bubble also started to form in Bush’s last year.
Bonus: Under the Bush regime, during the 2008 financial crisis the S&P 500 went from it’s peak of 1550 down to 805.
One of the worst things Bush did from an economic perspective was to appoint Federal Reserve Chair Ben Bernanke in 2006.
Based on all his public comments Bernanke was completely blindsided by the 2008 financial crash and is perhaps most responsible for the current stock and bond bubbles.
Former United States President and Golfer in Chief, Barack Obama
Under US President Barack H. Obama, the stock and bond bubbles grew to a capacious size, national debt went from $10.63 trillion to nearly $20 trillion, the price of gold went up 30% and the S&P 500 went up 175%.
Bonus: Under Obama’s rule, the labor force participation rate dropped down to a level not seen since the late 1970s. And no, it’s not because of baby boomers retiring.
Double Bonus: During Obama’s entire tenure as President the Fed Funds rate was never over .75%. Except for Obama’s last year in office the Fed Funds rate was below .25% for his entire presidency.
There has never been a period in US history that interest rates were that low for that long.
This means Obama presided over the US economy while the largest economic bubble to date was blown.
Interestingly, Obama retained the Bush appointed Fed Chair Ben Bernanke for the majority of his presidency. It was over five years into Obama’s presidency that Bernanke was replaced by current Fed Chair Janet Yellen.
Blow a Bubble, Let it Pop, Repeat
Bernanke could not correctly forecast the present
As you can see from the chart below, the S&P 500 grows in a bubble, then the bubble pops.
Obama truly lucked out.
During Obama’s tenure there was no significant correction, there was also no significant attempt to normalize interest rates and the bubble has grown even larger than past bubbles.
This means that when the stock and bond bubbles do pop the fallout will be much worse.
Most people don’t understand how the Federal Reserve fuels asset bubbles.
Unfortunately for Trump, the bubble will probably pop during his first (and thus only) term and he (and free-markets) will be blamed for it.
Free markets and deregulation are not the cause of these bubbles: it’s government spending, moral hazard created by the government, harmful government incentives and the Federal Reserve.
Green Shows the % increase in the price gold, Black shows the % increase in the S&P 500
What Can the Past Tell Us about the Future
History might not repeat itself but it does rhyme.
In many ways the Trump presidency, from an economic and market perspective, is starting off similarly to George W. Bush’s presidency.
Both Bush II and Trump inherited a bubble economy that formed under his predecessors. Bush continued to grow the housing, stock and bond bubbles and made them worse. Trump will probably do the same to the existing stock and bond bubbles.
But the stock and bond bubbles will burst eventually.
It’s nigh-impossible to predict exactly when, but at some point valuations of US debt and US stocks will revert to their historical averages and more realistic valuations.
I thought theses bubbles would pop while Obama was in office but I was wrong. I think the bubbles will pop during Trump’s first term and I don’t anticipate being wrong again.
When the bubble does pop, the government will react the way it always does. Lower interest rates, print money, lower taxes (maybe), and spend, spend, spend.
This doesn’t work but it’s the only playbook the government knows.
I believe real assets and foreign stocks will perform well in this environment.
Trump has talked about lowering taxes and reducing regulations.
These actions would benefit the US economy.
But Trump would also need to significantly reduce government spending. The US government is already insolvent and reducing taxes without also reducing government spending would only increase US national debt.
However, because most government spending is on the military, social security and medicare there is practically no chance Trump will actually reduce government spending.
Thus the US national debt will continue to grow and I believe will double to $40 trillion.
I hope I’m wrong.
Trump has also talked about tariffs, infrastructure spending, and how the dollar is too strong (implying he will try to weaken it).
These things are all bad for the US economy.
Over the next four years I believe the stock and bond bubbles will collapse. I also think the dollar will lose a great deal of value and the price of gold will outperform and reclaim the 2011 high of $1,920.
What John is Doing
So what is one to do in the age of Trump?
I know what I’ll be doing to grow and protect my wealth.
It’s the same things I’ve been doing:
Investing in Foreign Value Stocks
Investing in alternatives like peer to peer loans
Holding some Cash
I’ve got those setup to both grow and protect my wealth. I also work in my day-career in financial services earning US dollars to spend on the necessities of life and to convert any excess funds to the assets I’ve mentioned above.
I’m excited about the Trump presidency.
Not because I expect him to do the right thing or because I think he can or will fix the foundational systemic issues with the US economy; but because this is a time of great opportunity for individuals who take the appropriate steps to protect themselves.