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Can Monopoly Money Save the Stock Market? Or Will It Buy Stagnation?

Can Monopoly Money Save the Stock Market? Or Will It Buy Stagnation?

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After eleven years of nearly uninterrupted advancement, the record-long, QE-spawned bull market is on life support, facing the effects of pandemic lockdown and a massively leveraged global financial system. The sheer scale of the equities super-rally (larger than the dotcom and housing bubbles combined) is dwarfed by the magnitude of the monetary policy experimentation that was its foundation (Figure 1).

Figure 1: S&P 500 and Fed Balance Sheet, January 1995–April 2020
S&P 500 Fed Balance Sheet

Rather than spurring real economic gains, the main outcome of the Federal Reserve’s unorthodox Quantitative Easing (QE) program has been to support, and further extend, the bloated and fragile debt grid, and generate exuberance in interest rate–sensitive risk assets like the stock market and real estate, fueling the largest wealth gap since the 1920s. It does this by suppressing the price of risk. Artificially low interest rates encourage unproductive debt accumulation and maintenance, and funnel money out of safe assets (through induced zero or negative yields) and into higher-risk assets with present value income streams that look a lot rosier in a depressed cost of capital environment. Known as the portfolio rebalancing channel of QE, this phenomenon drives asset value distension, malinvestment, and excessive risk taking.

Not surprisingly, the extra easy money regime of the last twelve years has lured worldwide debt to a historic high of 322 percent of GDP, 40 percentage points higher than in 2007 according to the IIF April 2020 Global Debt Monitor. “The size, speed, and breadth of the latest debt wave should concern us all,” said World Bank Group president David Mappass. Never have we seen this scale, involving both public and private debt and most of the world, warns the World Bank in Global Waves of Debt. Meanwhile, despite tepid real GDP growth and stagnant corporate profits, the S&P 500 climbed 360 percent between February 2009 and February 2020, powered by record-high debt-financed share buybacks.

However, central bank yield repression can generate debt-propelled asset exuberance only as long as there is capacity for more debt. The central bank’s bubble rebloat campaign will face new stumbling blocks this round as it confronts an overextended private sector. Furthermore, the counterweights to economic growth (partially QE grown) may finally be too large for the stock market to overlook.

Stumbling Blocks to Bubble Rebloat

Private Sector Debt Is Maxed Out.

The US traded the dotcom bubble for a housing bubble and substituted the housing bubble with a share buyback Super Bubble. Each bubble required the private sector to load up on debt. US household debt had grown to 100 percent of GDP when the 2008 bubble burst, and, before this year's first-quarter (Q1) contraction, US household debt is still 76 percent of GDP (Figure 2). In the midst of the 2001 recession, Paul Krugman urged “To fight this, the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of PIMCO put it, Alan Greenspan needs to create a housing bubble to replace the NASDAQ bubble.”

Following Krugman’s kick-the-can-down-the-road recommendation, to help inflate the housing bubble replacement, the debt hot potato was passed to businesses. Nonfinancial corporate debt grew nearly 70 percent over the last decade and total nonfinancial business debt stands at 84 percent of US GDP (before the contraction), a record high (Figure 2). Both the International Monetary Fund (IMF) and Bureau of Industry and Security (BIS) estimate that about half of US corporate debt is now speculative grade (Figure 3). Also precedent-setting is the percentage of corporate debt with near-junk status; for the first time, BBB-rated debt represents the largest portion of investment grade debt.

Figure 2: US Debt Bubble, 1950–2019
US Debt Bubble
Figure 3: Debt Rating Distributions in the US, GB, and EU, 2000–2017
US Debt Ratings

Contributing to the quality deterioration, a sizeable portion of the $4 trillion in new corporate debt amassed over the last decade was used for financial risk taking, to fund shareholder payouts in the form of share buybacks and dividends. The S&P 500 spent more than $5.4 trillion on stock buybacks between 2009 and 2019, 50 percent more than all three QE programs combined (Figure 4). S&P 500 dividends also broke records, totaling another $3.4 trillion over the same period (Figure 5). “Payouts—dividends and share buybacks—at US large firms have grown to record high levels in recent quarters,” and are “often funded by debt,” warned the IMF in its October 2019 Global Corporate Stability Report. This is “in contrast with subdued capital expenditures,” the report continues. Citing a 2018 Yardini study, journalist Larry Light cautions, “More than half [56 percent] of all stock buybacks are now financed by debt.”

Figure 4: S&P 500 Stock Buybacks, 1999–2019
S&P 500 Buybacks Stock
Figure 5: S&P 500 Dividends, 1999–Q1 2020
S&P 500 Dividends

Share Buyback Helium Is Running Low

QE-abetted buybacks helped mask the weakness in GDP growth, corporate profits, consumer spending, capital expenditures, and productivity. But record-high debt levels, pandemic pressure on earnings, and escalating antibuyback sentiment may prevent their swift return. A two-decade study in the Financial Analysts Journal covering forty-three nations concluded that buybacks are a major bull market catalyst, more important than economic growth. The report finds that “net buybacks explain 80 percent of the dispersion in stock market returns since 1997.” In fact, corporations have represented the major source of demand for equities since the Great Recession. John Authers reports:

For much of the last decade, companies buying their own shares have accounted for all net purchases. The total amount of stock bought back by companies since the 2008 crisis even exceeds the Federal Reserve’s spending on buying bonds over the same period as part of quantitative easing. Both pushed up asset prices.

Similarly, in a February 2019 New York Times article “This Stock Market Rally Has Everything But Investors,” Matt Phillips writes, “The surge in buybacks reflects a fundamental shift in how the market is operating, cementing the position of corporations as the single largest source of demand for American stocks” (Figure 6).​

Figure 6: Cumulative Net Purchases of US Corporate Equities, 2009–2019
Corporate Stock Purchases
Source: RIA

In addition to the price inflation effects of colossal corporate demand, share buybacks are a powerful bull market propellant, because they reduce the denominator in the earnings per share (EPS) calculation, thereby boosting EPS numbers and concealing limp real income growth. Although overall corporate profits have been stagnant since 2012 (Figure 7), growing only 1.6 percent (with pretax profits actually declining 4.1 percent), S&P 500 earnings per share grew 68 percent during the same 2012–19 period.

Figure 7: Corporate Profits Pre- and Post-Tax, 1980–2019
Corporate Profit

However, sentiment in Washington is viciously turning against buybacks, with some politicians calling them a form of share price and management compensation manipulation. Securities and Exchange Commission (SEC) commissioner Robert Jackson in a June 2018 speech commented on the disturbing results of an SEC study covering 385 buybacks over fifteen months:

In half of the buybacks we studied, at least one executive sold shares in the month following the buyback announcement….So, right after the company tells the market that the stock is cheap, executives overwhelmingly decide to sell.

Senators Schumer and Sanders are agitating for limitations on buybacks. Senator Rubio wants to change the preferential tax treatment of buybacks. Senator Tammy Baldwin wants to ban them altogether. Former Treasury secretary Larry Summers has spoken out against them, and COVID bailout covenants include explicit restrictions on future buybacks.

Aiding the hostility are three decades of stagnant wages for middle- and low-income Americans as the costs of housing, tuition, childcare, and healthcare have swelled. Lance Roberts reveals, “Since 2007, the ONLY group that has seen an increase in net worth is the top 10 percent of the population, which is also the group that owns 84 percent of the stock market.” The Wall Street Journal explains that

the median net worth in the middle 20 percent of income rose 4 percent in inflation-adjusted terms to $81,900 between 1989 and 2016….For households in the top 20 percent, median net worth more than doubled to $811,860. And for the top 1 percent, the increase was 178 percent to $11,206,000.

The scale of the wealth gap has helped propel the Political Stress Index to its highest level since the Civil War (Figure 8). Although corporate demand for shares has been a decisive contributor to the last two stock market bubbles, the accelerating populist resentment, high levels of speculative debt, and earnings hardships ahead will reduce its presence this cycle, withdrawing a critical component of bull market jet fuel.

Figure 8: The Political Stress & Well-Being Indices, 1780–2000
Social Tension Political Stress

With households and businesses bursting with debt, the Fed can’t rely on suppressed rates to induce extra debt-fueled consumption, unproductive private investment, or share buybacks. There isn't enough debt capacity left in the private sector to drive the inflation of the next bubble (Figure 2). “The only major debt category left that is big enough to play a role in the economy is government debt,” writes economist Klajdi Bregu in “The Fed is Running Out of Bubbles to Create.”​

The Fed Is Monetizing New Heights of Government Debt

“At this rate the Fed will own two-thirds of the treasury market in a year,” cautions Jim Bianco in “The Fed’s Cure Risks Being Worse Than the Disease”—but that won’t reflate the stock market. In Japan, government debt expansion for stock market kindling was unsuccessful. The Nikkei has never regained its 1989 high even though Japan’s government debt has ballooned from 64 percent to 237 percent of GDP (the highest in the world) over the last three decades. The Bank of Japan (BOJ) now owns 50 percent of Japan’s bond market (Figure 9).

Figure 9: Nikkei vs. Japanese General Government Debt, 1950–2019
Nikkei Japan Debt

Even with seven years of QE that included direct stock market purchases—granting the BOJ the dubious honor of also being the largest owner of Japanese stocks—the Nikkei stubbornly remained 40 percent below its 1989 high at the end of last year. The intervention swelled the BOJ balance sheet by nearly 300 percent between 2012 and 2019; it is now the size of the entire Japanese economy (Figure 10).

Figure 10: Nikkei vs. Bank of Japan Balance Sheet, 1950–2019
Nikkei BOJ Japan Balance Sheet

Ronald Reagan said that “the nine most terrifying words in the English language are: I’m from the government, and I’m here to help.” The government can issue debt to hand out money, but they can't force people to spend it in ways that help the economy. And the impulse to defer spending, reduce debt, and save money is acute in high-uncertainty, high-pain environments like the current one. Personal consumption expenditures as a percentage of GDP were already flat during the last decade (after having climbed for thirty years) as consumers began to delever to still-high current levels (Figure 11). Temporary government handouts to dampen the effects of the lockdown economy aren’t likely to reverse this trend.

Figure 11: Personal Consumption Expenditures as Percentage of GDP, 1959–2019
US Personal Consumption GDP

And despite significant increases in business debt, fixed private investment as a share of the money supply (printed for its very encouragement) remains at 2009 crisis lows. This is also reflected in capital expenditures as a percentage of GDP, which never recovered their pre–Great Recession or long-run levels (Figures 12 and 13).​

Figure 12: Fixed Private Investment as a Share of M2, 1981–2019
Fixed Private Investment M2
Figure 13: Total Capital Expenditures as a Percentage of GDP, All Sectors, 1947–2019
Total Capital Expenditures

Lobbing the Debt Timebomb at the Government Has Steep Costs

High government debt kneecaps economic growth. Not only are government-debt-for-handouts schemes ineffective at hotwiring sustainable growth, but it turns out that elevated public debt cannibalizes GDP growth. A 2010 study by Reinhart and Rogoff found that when government debt exceeds 90 percent of GDP,growth rates are roughly cut in half.” But a World Bank investigation found the destructive debt threshold to be lower: every percentage point of public debt greater than 77 percent of GDP costs 0.0174 percentage points in real growth. The US crossed the 77 percent precipice in 2009, and average annual real GDP growth since then has been nearly 45 percent lower than in the previous sixty years, a period that encompassed eleven recessions (Figure 14). In trading terminology, we would consider this a poor upside-downside capture ratio. By trying to limit the economy’s downside volatility, the Fed has constrained the upside, and, as 2020 will show, the policy has made the downside far worse.​

Figure 14: Real GDP Growth vs. Government Debt, Q1 1948–Q1 2020
Real GDP Growth

Japan traversed the fateful 77 percent Rubicon in the early 1990s. In the decades since, real GDP growth has averaged about 80 percent lower. “Japan’s ‘lost decade’ eventually extended to almost three decades of sub-par growth,” writes Dr. Mihai Macovei in Stimulus Brings Stagnation (Figure 15).

Figure 15: Japanese Annual GDP Growth vs. Government Debt, 1970–2018
Japan GDP Growth

US government debt (excluding unfunded social security and Medicare liabilities) is now approaching 130 percent of GDP, exceeding the record of 118 percent set during World War II. This astronomical debt load will not only weigh on economic growth but also on share buybacks, which can cheerlead stock market performance only as long as they can be funded (with earnings and/or debt). But as already stagnant corporate earnings are anchored by a debt-dragging economy, the most important demand source for stocks this century will remain in hibernation.

The Fed Is Breeding Zombies

A debt-promoting easy monetary policy adds another burden on economic growth and productivity: zombie proliferation. A 2018 study in the BIS Quarterly Review by Banerjee and Hofmann found that “lower nominal interest rates predict an increase in the zombie share [older public companies with earnings too low to meet interest payments].” These “living dead” firms that should pursue restructuring or bankruptcy are instead kept alive by discounted interest rates and evergreen lending. As with government spending, zombie firms crowd out productive investment and employment. Using a narrower definition of zombie that additionally factors in low expectations for future profitability, Banerjee and Hofmann determine that “a one percentage point increase in the narrow zombie share in a sector lowers the capital expenditure of non-zombie firms by around one percentage point.”

Prior to the COVID crash, an estimated 16 percent of US public companies were zombies. That number will grow as the Fed nationalizes large expanses of corporate debt markets and government policies prop up marginal firms and add restrictions (e.g., government ownership, workforce freezes, and payout controls) that will make them even less competitive going forward (Figure 16). Average US productivity over the last decade has already been 58 percent lower than the previous six decades; at the end of 2019, it had fallen to a Japan-like low of just 1.2 percent.

Figure 16: Share of “Zombie Firms,” Euro Area (EA), GB, and US, 2000–2017
Market Share of Zombie Firms

A portentous example of the path to zombiehood and the incentive perversion generated by government subsidies and ownership is offered by the railroads in the late nineteenth century. Government aid for the Union Pacific (UP) and Central Pacific (CP) railroads encouraged track-laying speed over railroad efficiency. Grant payments were higher for construction on hilly or mountainous terrain. “This incentive for speed resulted in winding, inefficient routes built with inferior materials, ultimately culminating in a federal price tag of 44,000,000 acres and $61,000,000 (astronomical sums in the 1860s–70s). Despite all of this federal assistance, shortly after the golden spike was driven on May 10, 1869 at Promontory Summit, Utah, the UP and CP were nearly bankrupt and required further assistance to stay afloat….they ultimately went bankrupt in 1893,” explains Dane Stuhlsatz.

Tenured insolvent businesses sustained by repressed rates and government underwriting have been blamed as one of the causes of Japan’s economic stagnation and lost decades. An estimated “two-thirds of the nation’s companies don’t make enough profit to pay taxes,” contributing to the downward spiral in productivity and GDP growth. Japan’s GDP per hour worked has nosedived nearly 70 percent, from an average 4.2 percent pre–bubble bursting, to just 1.4 percent since 1991 (Figure 17).

Figure 17: Japan Productivity Growth, 1971–2018
Japanese Productivity

An accelerating zombie share will constrain US productivity growth when it is needed most. Sleepwalker firms underperform in the broader market, and as they propagate like a virus through US companies, they will add another ball and chain to a stock market already suffering from demand destruction

The Last Stand: The World's Biggest Debtor Tries to Guarantee Everyone Else’s Debt

The Fed has relied on the temporary camouflage provided by manipulated risk asset exuberance and related wealth effects (benefiting a high income–earning minority) to cover up the economy’s post-QE failure to thrive. Now, with more than a decade of ultralow rates, the entire world is stuffed with debt and the leverage encouragement portion of the QE formula is facing its limits.

The program’s last stand is to double down, hoping that artificial demand from QE infinity will keep rates low enough to limit private sector delevering and brace the stock market while the debt timebomb is passed to the government and the world’s biggest debtor tries to prop up everyone else’s debt. However, high government debt, bankrolled with QE monopoly money, won’t save the stock market Super Bubble. It will only deepen the economic stagnation and perpetuate the negative feedback loop that requires ever more intervention, debt, and printing to monetize it.

Even the Fed acknowledges the “apparent ineffectiveness of credit easing (CE) [a.k.a. QE] on aggregate output and employment” in “Evaluating Unconventional Monetary Policies—Why Aren't They More Effective?,” by Yi Wen.

Rather than more socialization of the economy, we need a return to free markets: a shift away from centrally planned rate suppression that blows up financial bubbles; an embargo on bailouts that propagate moral hazard and prevent the productive redeployment of labor and resources; a contraction in government spending to reduce crowding out of valuable private sector employment and investment; and a rejection of distortive intervention in the debt markets. Although these changes would initially be painful, they would lead to regeneration and a true boom. The current path is toward a slow stagnation death as the central bank eats the economy.

The Nikkei rose 360 percent between 1982–1989 and then fell 73 percent over twenty-three years. Even with the BOJ buying 5 percent of the Japanese stock market, the Nikkei is at the same level it was in 1996, 40 percent below its peak, illustrating QE’s diminishing “returns.” The US has a 2019 bubble to rival Japan’s 1989 bubble, and it’s following the same monopoly money prescription to try to save it but expecting a different outcome. The Fed is setting the economy and the stock market up for a lost “decade.”

Today is already the tomorrow which the bad economist yesterday urged us to ignore. (Henry Hazlitt)

 

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Pfizer Responds After Director Says Company Is Developing Ways To Mutate COVID-19

Pfizer Responds After Director Says Company Is Developing Ways To Mutate COVID-19

Authored by Zachary Stieber via The Epoch Times (emphasis…

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Pfizer Responds After Director Says Company Is Developing Ways To Mutate COVID-19

Authored by Zachary Stieber via The Epoch Times (emphasis ours),

Pfizer late Jan. 28 responded to comments from a director at the company about exploring ways to mutate COVID-19 as a method to “preemptively develop new vaccines.”

“In the ongoing development of the Pfizer-BioNTech COVID-19 vaccine, Pfizer has not conducted gain of function or directed evolution research,” Pfizer said in a lengthy written statement after days of ignoring queries from The Epoch Times and other outlets.

A sign for Pfizer is displayed in New York in a file photograph. (Timothy A. Clary/AFP via Getty Images)

Pfizer did say that it has conducted research “where the original SARS-CoV-2 virus has been used to express the spike protein from new variants of concern.”

“This work is undertaken once a new variant of concern has been identified by public health authorities. This research provides a way for us to rapidly assess the ability of an existing vaccine to induce antibodies that neutralize a newly identified variant of concern. We then make this data available through peer reviewed scientific journals and use it as one of the steps to determine whether a vaccine update is required,” the company added.

Pfizer did say it has conducted experiments in a level 3 laboratory.

Pfizer said, in its work developing a treatment for COVID-19, it has “engineered” the COVID-19 virus “to enable the assessment of antiviral activity in cells.”

“In addition, in vitro resistance selection experiments are undertaken in cells incubated with SARS-CoV-2 and nirmatrelvir in our secure Biosafety level 3 (BSL3) laboratory to assess whether the main protease can mutate to yield resistant strains of the virus,” Pfizer said. “It is important to note that these studies are required by U.S. and global regulators for all antiviral products and are carried out by many companies and academic institutions in the U.S. and around the world.”

Pfizer produces a COVID-19 treatment called Paxlovid, or nirmatrelvir that is authorized in the United States and some other countries.

In its statement, Pfizer did not dispute that Dr. Jordon Walker, who told a Project Veritas journalist that Pfizer is exploring how to “mutate” the COVID-19 virus, was or is a Pfizer employee.

Professional profiles for Walker, which have since been taken down, listed him as a director of messenger RNA research at the company. Pfizer’s COVID-19 vaccine utilizes messenger RNA. The profiles also listed a Pfizer email address, and an email sent to that address did not bounce back. A receptionist at Pfizer on Thursday also told The Epoch Times that Walker had an internal company profile, but a different receptionist on Friday said there was no listing for the doctor, indicating he might have been terminated after the comments were made public.

Malone

Dr. Robert Malone, who helped develop the messenger RNA technology, said that the experiments Pfizer described met the definition of “gain of function.”

Pfizer is basically acknowledging that they are doing the same type of gain of function research that Boston University was caught doing, but they are denying that it is gain of function or directed evolution,” Malone wrote on Twitter.

Malone pointed to Pfizer’s comment about taking the original SARS-CoV-2 virus and using it “to express the spike protein from new variants of concern.”

Gain of function generally describes experiments that aim to increase functions of a virus such as transmissibility and virulence. Walker had said in his comments that the work he was describing was not gain of function, but “directed evolution.”

Researchers with Boston University revealed in 2022 that they had developed a strain of COVID-19 that killed 80 percent of mice infected with it.

The U.S. National Institutes of Health (NIH) is supposed to oversee risky research conducted in or funded by the United States but has faced criticism for only reviewing a handful of projects—none since 2019—under the oversight system.

The NIH funded gain of function experiments at the Wuhan laboratory situated near where the first COVID-19 cases were identified, and officials have promised to keep funding research in China.

Sen. Marco Rubio (R-Fla.) had written a letter to Pfizer CEO Albert Bourla referring to Walker’s remarks and questioning whether the company has or is planning to mutate the COVID-19 virus.

Walker’s comments “are alarming,” Rubio wrote in the Jan. 26 missive.

YouTube Takes Down Video

In a notice sent to Project Veritas, YouTube cited its medical misinformation policy, which bars “claims about COVID-19 vaccination that contradict expert consensus from local health authorities or the World Health Organization (WHO).”

It wasn’t clear which authorities specifically YouTube was relying upon to rebut the video.

YouTube, which is owned by Google, did not respond to a request for comment.

O’Keefe noted that the claims in the video were made by a Pfizer director.

Project Veritas was given a “strike,” which prevents the organization from taking actions like uploading new videos for one week. A second strike would block such actions for two weeks and a third strike in a 90-day period would result in a permanent removal of the group’s account, YouTube warned.

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Tyler Durden Sat, 01/28/2023 - 14:30

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Von Greyerz: As West, Debt, & Stocks Implode; East, Gold, & Oil Explode

Von Greyerz: As West, Debt, & Stocks Implode; East, Gold, & Oil Explode

Authored by Egon von Greyerz via GoldSwitzerland.com,

“The…

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Von Greyerz: As West, Debt, & Stocks Implode; East, Gold, & Oil Explode

Authored by Egon von Greyerz via GoldSwitzerland.com,

“The risk of over-tightening by the European Central Bank is nothing less than catastrophic” says Prof Kenneth Rogoff .

At Davos he also said:

Italy is extremely vulnerable. But this could pop anywhere. Global debt has gone up massively since the pandemic: public debt, corporate debt, everything.”

Rogoff believes that it is a miracle that the world averted a financial crisis in 2022, but the odds of a major accident are shortening as the delayed effects of past tightening feed through.

As Rogoff said: 

“We were very fortunate that we didn’t have a global systemic event in 2022, and we can count our blessings for that, but rates are still going higher and the risk keeps rising.”

But lurking in the murkiness is also the global financial assets/liabilities which is almost $500 trillion including the shadow banking system at 46% of the total. The shadow banking sector includes  pension funds, hedge funds and other financial institutions which are largely unregulated.

Shadow banking is not subject to the normal mark-to-market rules. Thus no one knows what the real position or losses are. This means that central banks are in the dark when it comes to evaluation of the real risks of the system.

Clearly, I am not the only one harping on about the catastrophic global debt/liability situation.

And no one knows the extent of total global derivatives. But if they have grown in line with debt and also with the shadow banking system, they could easily be in excess of $3 quadrillion.

Cultures don’t die overnight, but the US has been in decline since at least the Vietnam war in the 1960s. Interestingly, the US has not had a real Budget surplus since the early 1930s with a handful of years of exception.

But when you, like the US, live on borrowed time and borrowed money, it becomes increasingly difficult to keep up appearances. In 1971, the pressures on the US economy and currency became too great.  Thus Nixon closed the Gold Window with the dollar having lost over 98% in real terms since then. This is of course a total catastrophe and a guarantee that the remaining 2% fall to ZERO will come in the near term future, whether it takes 5 or 10 years for the dollar to reach oblivion. Remember that the final 2% is 100% from today!

The US, EU and Japan have now reached the stage when no one wants their debt. So sovereign debt of these nations is no longer a question of “passing the parcel” but keeping the parcel. When every third party holder of these debts is a seller, who will buy?

These three countries will end up holding their own debt. Japan already holds over 50% of its debt. Before the Western Ponzi scheme comes to an end, these three nations will virtually hold 100% of their own debt. At that point, the bonds will be worthless and interest rates will have reached infinity. Not a pretty prospect!

US – PERFECT RECIPE FOR DISASTER

The final phase of all empires always includes excessive deficits and debts, inflation, a collapsing currency, decadence and war. And the US qualifies perfectly in all those categories.

Ernest Hemingway stated it superbly:

The first panacea of a mismanaged nation is inflation of the currency; the second is war.
Both bring temporary prosperity;
both bring a permanent ruin.
But both are the refuge of political
and economic opportunists. 

The US has failed in every war since the Vietnam war, including the Yugoslav Wars, Afghanistan, Iraq, Syria and Libya. The results have been massive casualties and destruction of the countries, often leading to economic misery, anarchy and terrorism.

The Ukrainian war is not between Ukraine and Russia but between the US and Russia as I discussed in a previous article (Link). The clear proof that there is no desire for peace from the US is that they are sending money and weapons to Ukraine in the $100s of billions and “encouraging” an increasingly suffering Europe to do the same. But they are not sending any peace negotiators to Russia in an attempt to end the war. This is very ominous.

The geopolitical situation is now on a knife edge with two major nuclear powers fighting about a relatively insignificant country. This is how major wars normally start.

Let us hope that the current conflict does not lead to a major nuclear war since that would be the end of the world. Thus not worth to speculate about the outcome of this high risk scenario.

But the economic war and the collapse of the US dominated financial system is not just  inevitable but also catastrophic for the Western economies.

A COMMODITY DOMINATED WORLD

As the hegemony of the US is coming to an end, the dominance of the decadent West is moving quickly to the East and South. Commodity based countries like the enlarged BRICS will dominate for the next few decades and probably longer. Oil and gas will form the base of this shift but also many other commodities including gold which is now starting a new era.

It is likely that 2023 will be the first year of many when we will see a strong rise in gold just like 2000 – 2011 which saw a 7.5X gain.

The end of the Western debt based cycle and the rise of the Eastern and Southern commodity cycle is well illustrated in the graph below

OIL, GOLD TO GO UP > 9X AGAINST STOCKS

The S&P Commodity Index relative to Stocks has recently made a 50 year low. Just to return to the mean, the index would need to go up 4X. But when long term cycles turn up from a historical low, they tend to trend higher and longer than anyone expects. So a move past the 1990 high of 9 is very likely. This would mean that commodities, and especially oil and gold, relative to stocks would move up more than 9X!

This  9X move  would obviously involve a combination of falling stocks and rising commodity prices.

The expected move of the index confirms the shift from the West, based on an unsound and debt infested system, to the East & South, based on commodities.

Much of this move is based on the fossil fuels of the countries involved – to the chagrin of the climate movement zealots.

In today’s woke world, there is a tendency to believe that we can change all the laws of nature and science. This is the case both in the economy and climate.  Bankers and governments are confident that they can create permanent prosperity by printing worthless pieces of paper believing that these represent real and lasting value and wealth.

Well surprise, surprise, these people will soon have the shock of a lifetime as all that printed money returns to its intrinsic value of ZERO.

A debt based economy eventually becomes a self-fulfilling prophecy.

The higher the debt, the more the debt needs to grow in a never ending vicious circle. In the end the debt cycle becomes a perpetual motion Ponzi scheme……. UNTIL IT ALL CRASHES!

The debt feeds on itself and the more that is issued, the more needs to be issued. As inflation rises, the escalating interest cost on the debt leads to more debt. Next is defaults, both private and foreign. Then the $2-3 quadrillion derivatives, a great part of which is in the shadow banking system, comes under pressure. This leads to massive further debt creation by the Fed and other central banks, desperately trying to save the system.

This will eventually lead to what von Mises called:  “…. a final and total catastrophe of the currency system involved.”

But remember that we are here talking about the Western financial system. The economic sun in the East will rise strongly and eventually be the guiding light for the world economy.

The debt based US and West will to quote Hemingway decline “first gradually and then suddenly.”  So due to the $2+ quadrillion size of the problem, the biggest part of the decline is unlikely to take more than 10 years and it could be a lot faster, especially at the end.

But the climate zealots

 will have to wait to 2050 to learn that through their actions they didn’t manage to limit the increase in temperature to 1.5 degrees. But with a lot of luck, climate cycles might be on their side and make the weather much colder.

Personally I believe that cycles determine the climate and not humans.

The climate cycle graph below covering 11,000 years shows that there has been numerous periods with warmer temperatures than currently. At the peak of the Roman Empire 2000 years ago, Rome had a tropical climate.

Fossil fuels produce 83% of the world’s energy today. According to forecasts this percentage is unlikely to come down significantly in the next 50 years.

Partly due to the increased cost of producing energy, fossil fuel production will fall by 26% by 2048. Increases in nuclear and renewables will not compensate for this decline.

If the world stops using fossil fuels, the world economy would totally collapse. Sadly the climate activist movement does not seem to worry about such disastrous consequences.

So it seems fairly clear that for a very long time, the world will be dependent on fossil fuels in order for the economy and population not to collapse.

For the above reasons, the commodity based countries will soon dominate the world and that for a very long time.

The constellations of commodity rich nations are forming rapidly.

Firstly we have the BRICS countries which currently consist of Brazil, Russia, India, China and South Africa. Many countries are in the process of joining BRICS including Saudi Arabia, Iran, Algeria, Argentina and Turkey.

It is the enlarged BRICS aim to bypass the dollar and create their own trading currency.

Many talk about the Petroyuan replacing the Petrodollar but what would everyone do with the Chinese currency since it isn’t freely convertible. Better then to have a currency linked to several commodity countries like Special Drawing Rights. This would create more stability and usability. The Credit Suisse analyst Pozsar calls this Bretton Woods III.

There is also the EAEU or Eurasia Economic Union with Russia leading plus China, India, Iran, Turkey and UAE involved.

The SCO – the Shanghai Cooperation Organisation headquartered in China is also an important force. The SCO is a political, economic, international security and defence organisation. It includes many Eurasian nations like China, Russia, Uzbekistan, Kazakhstan etc.

All the economies involved in this important development are commodity based. For example, commodities are 30% of Russian GDP. Their target is to expand gold mining to 3% of GDP and become the biggest gold producer in the world.

Russia has the world’s largest commodity reserves at $75 trillion and produces 11 million barrels of oil per day. Russian friendly provinces produce another 14M totalling 25M. China produces 5m barrels and the Middle East Oil going through the Strait of Hormuz is 22M barrels.  So in a conflict with the US, Russia, China and Iran  could decide to close the Strait of Hormuz which means they would have control over 50% of global oil supply. As Goldman Sachs has stated, oil would then be in the $1000s.

If we take Russia, Iran and Venezuela, they control 40% of the global oil supply.

The point I am making is that these various constellations of commodity countries will be the dominant economic power of the future as the US and Europe decline.

So for Russia, gold and oil are two strategic commodities which will play an important role not just for Russia but for all of these Eastern/Southern countries.

And no one should believe that the US and European sanctions are working. Russia and Iran are selling oil and gas to China at a discount. China then exports this, including refined products, to Europe at premium.

So the sanctions are a farce which totally kills the European economy.

Interestingly, the relationship between yellow gold and black gold has been stable for decades as this chart shows:

GOLD / OIL RATIO 1950 – 2023

GOLD – THE VITAL WEALTH PRESERVATION ASSET FOR 2023 AND BEYOND

Gold was the best performing asset class in 2022 but the investment world didn’t notice since it is hanging on to the declining bubble assets of stocks, bonds and property.

Let’s look at gold’s performance in various currencies in 2022:

The chart shows gold up 15% against Swedish Kroner on the right and for example up 11.6% in pounds, 6% in Euros and virtually unchanged in US$.

Bearing in mind that most asset markets, including bonds, have fallen by 20-30%, this is an outstanding performance by gold.

But no one must believe that gold is going up. All gold does it to reflect the total mismanagement of most economies. The chart above should be turned upside down to reflect the loss of purchasing power of all paper money.

As has been the case since 1971, this trend of falling currencies will continue but not at the same steady pace.

With the debt infested Western economies collapsing, their currencies will implode one after the other.

So please firstly acquire as much physical gold as you can afford and then some more.

And when you own your gold, don’t measure the value in collapsing currencies. Just measure your gold in ounces, kilos or grammes.

Also please don’t keep it in the country where you live, especially if that country has a tendency to grab assets. I don’t need to tell you which countries you can’t trust. The problem is, there are not many you can trust.

BEWARE – A GOLD CUSTODIAN DISAPPEARED WITH CLIENTS’ METALS

Also if you store your gold with a gold custodian, ensure that only you can release it by having the Warehouse Receipt in your name. A custodian gold company disappeared last year with the major customer assets in spite of the gold being stored with a major vault company. The weakness was that the gold company could release the gold without the client’s approval. This is not an acceptable way to store your wealth preservation asset. 

Finally remember that gold is not just your most important wealth preservation asset but can also be beautiful.

TUTANKHAMUN’S DEATH MASK 1327 BC

Tyler Durden Sat, 01/28/2023 - 11:30

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Government

Federal Food Stamps Program Hits Record Costs In 2022

Federal Food Stamps Program Hits Record Costs In 2022

In early January, The Wall Street Journal Editorial Board warned that one peril of a…

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Federal Food Stamps Program Hits Record Costs In 2022

In early January, The Wall Street Journal Editorial Board warned that one peril of a large administrative state is the mischief agencies can get up to when no one is watching.

Specifically, they highlight the overreach of the Agriculture Department, which expanded food-stamp benefits by evading the process for determining benefits and end-running Congressional review.

Exhibit A in the over-reach is the fact that the cost of the federal food stamps program known as the Supplemental Nutrition Assistance Program (SNAP) increased to a record $119.5 billion in 2022, according to data released by the U.S. Department of Agriculture...

Food Stamp costs have literally exploded from $60.3 billion in 2019, the last year before the pandemic, to the record-setting $119.5 billion in 2022.

In 2019, the average monthly per person benefit was $129.83 in 2019, according to the U.S. Department of Agriculture. That increased by 78 percent to $230.88 in 2022.

Even more intriguing is the fact that the number of participants had increased from 35.7 million in 2019 to 41.2 million in 2022...

All of which is a little odd - the number of people on food stamps remains at record highs while the post-COVID-lockdown employment picture has improved dramatically...

Source: Bloomberg

If any of this surprises you, it really shouldn't given that 'you, the people' voted for the welfare state. However, as WSJ chided: "abuse of process doesn’t get much clearer than that."

In its first review of USDA, the GAO skewered Agriculture’s process for having violated the Congressional Review Act, noting that the “2021 [Thrifty Food Plan] meets the definition of a rule under the [Congressional Review Act] and no CRA exception applies. Therefore, the 2021 TFP is subject to the requirement that it be submitted to Congress.” GAO’s second report says “officials made this update without key project management and quality assurance practices in place.”

Abuse of process doesn’t get much clearer than that. The GAO review won’t unwind the increase, which requires action by the USDA. But the GAO report should resonate with taxpayers who don’t like to see the politicization of a process meant to provide nutrition to those in need, not act as a vehicle for partisan agency staffers to impose their agenda without Congressional approval.

All of this undermines transparency and accountability for a program that provided food stamps to some 41 million people in 2021. The Biden Administration is using the cover of the pandemic to expand the entitlement state beyond what Congress authorized.

The question now is, will House Republicans draw attention to this lawlessness and use their power of the purse to stop it to the extent possible with a Democratic Senate.

And don't forget, the US economy is "strong as hell."

Tyler Durden Sat, 01/28/2023 - 09:55

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