Daily Insights Archives - Page 13 of 29

Why it’s gotten tough out there…

“Your dollar will be worth just as much tomorrow as it is today,” President Nixon proclaimed on television with a straight face.

“The effect of this action, in other words, will be to stabilize the dollar.”

The date was August 15, 1971. President Nixon just announced that he was closing what was known as the “gold window”. This was the system through which foreign countries could redeem US dollars for physical gold upon demand.

The gold window was a fixture of the Bretton Woods System of 1944. That was the international agreement which established the US dollar as the world’s reserve currency.

What we’re talking about here is trust. The idea was that if the United States started printing too much money, the rest of the world could trade their dollars in for gold.

After all, nobody wants to hold a currency that somebody else can create from nothing anytime they want.

The story behind Nixon’s “gold shock” is very nuanced. But what followed isn’t…

The Rules of Money Changed

The rules of money and finance changed last year.

If we look at a chart of the S&P 500 going back to the early 80s, the picture is clear as day—stocks only went up over time.

Sure there were plenty of “dips”. But from 1982 on, we could buy a simple mutual fund or index fund and two years later we would have made money. Fifteen years later we would have made a lot of money.

Meanwhile, if we were to overlay a chart of the 10-year Treasury rate – the opposite is true. Interest rates only went down over time.

That dynamic – stocks go up, rates go down – was largely thanks to the Federal Reserve (the Fed). It had a hand in both via “loose” monetary policy.

But the game’s over.

The Fed pivoted in 2022. And Fed Chair Jerome Powell made it abundantly clear that he will no longer push interest rates lower to support the stock market.

And that means The Age of Paper Wealth is over.

We’re in uncharted waters here. Nobody under the age of 60 has been an adult in a world in which the Fed didn’t push stocks up and rates down.

So to me, the big takeaway is that we have to rethink financial planning 101. And I’m talking about the entire “nest egg” approach to retirement.

The Beginning is Near

We’re at an inflection point in history right now. Things aren’t going back to how they used to be.

I don’t think the financial media understands this yet. But the bread crumbs have been in plain sight for over a year now.

It comes down to an arcane change at the core of our financial system.

Last year something called the Secured Overnight Financing Rate (SOFR) went live across the board.

I bet very few people out there even know what this is. And of those who do, I doubt many understood SOFR’s significance.

SOFR is a benchmark interest rate for dollar-denominated loans and derivatives.

We don’t need to go down a deep rabbit hole on this. What’s important to understand is that the interest rates for all loans in the U.S. are now influenced by SOFR.

The London Interbank Offered Rate (LIBOR) used to hold that privilege. Before this year those who influenced LIBOR could also influence interest rates in the U.S.

And that means the Fed did not previously have full control over U.S. monetary policy.

SOFR changed that.

Thankful 2023

Hey friends,

In the spirit of the upcoming holiday, I felt compelled to share a quick note of appreciation with you today. No markets, economics, investments, or theories today… just thankfulness.

We talk a lot about becoming a good steward of civilization inside our investment membership The Phoenician League. What that means is a little different to each of us… but it’s tangible. And practical.

If we look around our world today, there’s something that’s blatantly obvious – yet none of us recognize it for what it is. We have conquered scarcity.

This statement is considered blasphemous in certain circles, but it’s true. It’s evident.

If a person who died prior to 1940 were to somehow magically appear in our world today, this is the very first thing they would realize. Humans conquered scarcity. That fact would smack them right in the face… because they didn’t think it was possible.

What I mean is this…

What to do about uncertain times…

People who are in or approaching retirement today face immense challenges that those who retired in the years before them did not.

Simply put, we’ve been living in a bubble world since the 1980s, but the bubble popped in 2022.

I think most of us know this to be true. We can feel it. But this next chart tells the story quite well:

Here we can see the S&P 500 and the 10-year Treasury rate going back to 1980. The S&P 500 is the black line. And the 10-year Treasury rate is the blue line.

We’re using the S&P 500 as a proxy for US stock prices. And we’re using the 10-year Treasury as a proxy for interest rates. This chart makes it perfectly clear that the two are inversely correlated.

Interest rates started falling in 1982, and they fell consistently for the next 40 years. Meanwhile, US stocks consistently went up in value over that same time period.

But everything reversed in 2022. Rates started going up, and stock prices started to fall. We can see those moves clearly marked by the red arrows on the chart above.

I keep coming back to this image because I want to hammer the message home. The Age of Paper Wealth is over.

The question is – what comes next?

The Fed, the Treasury, and the future

We’ve been talking all week about how the Federal Reserve (the Fed) and the New York banks have broken ranks from the globalist power structure.

The two factions now appear to be in direct conflict with one another. They are fighting a secret financial war for the future of our economic system.

This is something that’s hard for those of us schooled in Austrian economics to accept. We tend to lump all these people into the same Deep State category. But the signs of the current power struggle are everywhere…

When the Fed switched the US interest rate benchmark from the London Interbank Offered Rate (LIBOR) to the Secured Overnight Financing Rate (SOFR) last year—that was directly against the globalists’ interests.

Then when the Fed proceeded to raise rates farther and faster than ever before in history – exceeding even the pace of Fed Chair Paul Volker from 1979 to 1981, and even as the United Nations (UN) screamed at them to stop from across the pond—that was a shot across the bow. The war was on.

And Powell made it clear that he wasn’t going to back down. He even told the media over the summer that his Fed would not finance out-of-control government spending. Here’s that dialogue:

The Fed and Warring Factions

It’s a big club and you ain’t in it.

The late great comedian George Carlin loved spitting this quote in his skits. He would talk about how the political power structure and the media always seem to march to the same beat… regardless of which political party happened to be in power.

What Carlin was talking about is often called the Deep State today. It refers to what appears to be a shadowy coalition of people behind the scenes who drive government policy.

Donald Trump catapulted Deep State into popular vernacular. But to be fair, Bill Bonner was using the term years ahead of Trump. Let’s give credit where it’s due.

But the question is… does this view of the power structure explain the macroeconomic events we are seeing play out today?

To be sure, the Deep State view can explain why nothing much seems to change regardless of which political party is in power. But it cannot explain the break between the Federal Reserve (the Fed) and the international power structure—the globalists.

As we discussed yesterday, the Fed coordinated monetary policy with the world’s central banks in the wake of the 2008 financial crisis. It certainly looked like there was a big club at work.

But the globalists did not want the Fed to raise interest rates aggressively last year. The Fed powered forward anyway… and fired the first shot in what’s become a secret financial war.

Powell closed the door on the globalists

Jerome Powell wasn’t having it.

“Just close the &#%!@?! door”, he instructed his security team as they rushed him off the stage.

Powell was speaking at the International Monetary Fund’s (IMF’s) annual research conference in Washington, D.C. last week. The event lasted two days – last Thursday and Friday. Powell’s speech was the headliner.

The Fed Chair took the stage to talk about the Federal Reserve’s (the Fed’s) outlook on inflation, interest rates, and the US economy. But about a minute into his talk, a group of “climate activists” rushed the stage to heckle him.

They shouted angrily about “fossil finance” and held up a big sign in front of the audience and the cameras. It read, “Business As Usual Is a Climate Disaster”.

Of course, the media dismissed it as a random event. It’s just those feisty climate activists wanting to be heard.

But let’s think about this for a minute…

America is at a crossroads…

For the last two generations, the success plan was clear.

Go to school —> get good grades —> go to college —> get a good job. If you followed that plan and had a good work ethic, a successful middle-class lifestyle would come easy to you.

And for those more ambitious, there were very few roadblocks to starting a business. Opportunity was everywhere.

That was the American dream. It’s what inspired countless immigrants to leave their homeland to create a new life in this country.

But that dream is fading.

The traditional success plan – go to school, get good grades, get a job – it no longer guarantees success. Colleges today load students up with debt and fill their heads with all kinds of useless claptrap.

Meanwhile, the Administrative State peppers small businesses with all kinds of regulatory burdens. Those small business success stories from a generation ago would be hard-pressed to recreate the same success if they had to start today.

And to top it off, reckless government spending has driven up everybody’s cost of living dramatically in recent decades. They finance this spending with printed money, and that creates consumer price inflation. It’s wiping out the middle class.

And that’s not just an opinion. It’s all in the data. Today I’ve got two tables for you that spell it all out, clear as day.

Gold Never Left

Gold served as base money for thousands of years prior to 1933.

In other words, gold served as the foundation of our monetary system. It was the monetary reserve upon which the financial system operated. Even when gold coins were not used to settle transactions in the private sector, the banks would redeem the paper currency in circulation for gold upon demand.

That all stopped in 1933. That’s when the United States and other countries transitioned to fiat currency not redeemable for gold. By the way, the word fiat is Latin for “let it be done”.

This transition paved the way for The Age of Paper Wealth. It lasted forty years from 1982 to 2022. During that time the world’s central banks created trillions of dollars out of thin air to drive interest rates down and stock prices up.

But that era is over now. The Fed’s aggressive rate-hiking campaign last year marked the end of it.

So if The Age of Paper Wealth is over… what do we think that means for gold going forward?

I think it’s wildly bullish.

We aren’t going back to the days of using gold as base money. But we can’t ignore the fact that the US government still owns 8,133.5 tons of gold. That’s worth over half a trillion dollars at current prices.

And official records suggest that the world’s central banks hold 26,866.5 tons of gold. That’s worth over $1.7 trillion today.

These numbers aren’t large in the big scheme of things with gold priced around $2,000 an ounce. But they could become significant if the price of gold roared higher.

This shows that the world’s central banks never abandoned gold… even as they worked hard to convince people that gold was a “barbarous relic”, as famed economist John Maynard Keynes put it.

Why is that?