It’s time to sit back, relax and enjoy a little joe …
Welcome to another rousing edition of Black Coffee, your off-beat weekly round-up of what’s been going on in the world of money and personal finance.
And away we go …
“All fiat money eventually returns to its intrinsic value: zero.”
— Voltaire
“He who panics first, panics best.”
— Anonymous
Credits and Debits
Debit: Venezuela: the gift that keep on giving — or should I say, “taking.” Despite being an obscenely oil-rich nation, Venezuela is now suffering from a gasoline shortage. No, really. You know … that reminds me of the old joke that says if you put a bunch of socialists in charge of the Sahara Desert, in five years the Sahara would suffer from a shortage of sand. Yes, it’s funny. But it’s also true. Forward!
Debit: Then again, the only reason why the US isn’t suffering the same fate as Venezuela is because it happens to be the owner the world’s premier reserve currency — for now, anyway. That exorbitant privilege allows the US to export its inflation globally. Even so, the US government has a growing problem, as the interest payments on its massive debt is fast approaching $2 billion. Per day.
Credit: Earlier this year, money manager John Mauldin believed a global debt reset was still “one or two years away.” But in an article for Forbes, he says he’s having second thoughts. “Recent events tell me the reckoning could be closer than I thought,” he says. Uh oh. Frankly, the fact that John’s concern was even published in Forbes suggests the current monetary system may be closer to total failure than many people want to admit.
Debit: Mauldin has a compelling reason for believing a monetary reset is imminent: 50 years ago a dollar of debt added $4 to GDP — today, it boosts GDP by just 44 cents. In other words, new debt is only doing more harm than good now — and its adverse effects are growing in magnitude with each passing day. Psst. Do you hear that? That’s the sound of the piper knockin’ at our door. Or something like that:
Debit: In other news, it looks like many Australians are worried that the Bank of England has surreptitiously sold off at least 11 of the 80 tons of gold they were charged with securely holding for the Land Down Under. Unfortunately for Australians, only 0.01% of their entire gold horde is held on their own soil. Again, if you don’t hold it, you don’t own it, folks.
Credit: On second thought, I guess Australia’s plight could be worse; they could have gone all-in on bitcoin last year. Bitcoin’s plunge continued this past week, falling as low as $3515 before recovering slightly to end the week at $3947. What’s truly amazing is not so much that bitcoin has fallen more than 80% in less than a year — it’s that the ephemeral cryptocurrency is still worth more than three ounces of gold.
Credit: By the way, bitcoin and America’s credit rating aren’t the only things that have been plunging. General Electric stock has taken a beating too; GE shares have dropped from $32 in 2016 to $7.50 today. And now stocks in general are moving down in lock step with the Fed’s quantitative tightening monetary contraction campaign — just as they moved upward in lock step during quantitative easing. Imagine that.
Debit: Of course, GE was one of Wall Street’s major share buyback operators between 2015 and 2017 when it paid $40 billion for shares between $20 and $32. According to MarketWatch, with GE stock now selling for far less than that, it turns out that for those three years, “GE has managed to lose more on its share repurchases than it made in operations, by a substantial margin.” And the pain is just getting started.
Debit: Last, but not least … New home purchases dropped last month to the weakest pace in two years. Meanwhile, previously-owned home sales dropped for a sixth straight month — that’s the worst decline since 2014. As a result, the emergence of picky buyers has many homeowners who are looking to sell feeling antsy. As for the army of leveraged home flippers looking to turn a quick buck, they’re … well, see for yourself:
Credit: Bloomberg is reporting that homebuilders are starting to panic too, “Offering price cuts of more than $100,000 along with free media rooms, cabinets and blinds. And real estate brokers are being enticed with free vacations to Lake Tahoe, Cabo San Lucas and even a dude ranch in Wyoming — all in the hopes that they’ll (find) buyers in slowing markets.” The trouble is, hope is never a good strategy.
By the Numbers
According to the government’s Consumer Price Index, prices for most things have barely budged during the past two years. If you find the following numbers to be more than a bit understated, you’re not alone:
3.2% Overall increase in the CPI since November 2016, excluding housing.
$101 The resulting overall increase in the monthly expenses of an average family in the middle 20% of income distribution.
1.1% According to the CPI, the total increase in grocery prices since November 2016; that’s an increase of just $3.33 per month for the average family residing within the middle 20% of income distribution.
$0.50 The overall increase in the monthly electricity bill since November 2016.
3% The overall increase in rents since November 2016.
Source: New York Times
The Question of the Week
[poll id="243"]
Last Week’s Poll Results
Did you do any Black Friday shopping this year?
- No (71%)
- Yes (29%)
More than 1700 Len Penzo dot Com readers responded to last week’s question and slightly less than 3 in 10 said they did some shopping on Black Friday. Not me. I spent the day eating leftovers.
Useless News: Preaching the Faith
A priest, a minister, and a rabbi wanted to see who was the best at his job. So they each went into the woods to find a bear and attempt to convert it. Later that day they got together to compare how they did.
The priest said: “When I found my bear, I read to him from the Catechism and sprinkled him with holy water. Next week is his First Communion!”
Then the minister spoke: “I found a bear by the stream, and preached God’s holy word,” he said. “The bear was so mesmerized that he actually let me baptize him!”
Next to speak was the rabbi, who was lying on a gurney in a full body cast. “Looking back,” he said, “I probably shouldn’t have started with the circumcision.”
(h/t: Cowpoke)
Other Useless News
Programming note: Unlike most blogs, I’m always open for the weekend here at Len Penzo dot Com. There’s a fresh new article waiting for you every Saturday afternoon. At least there should be. If not, somebody call 9-1-1.
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Letters, I Get Letters
Every week I feature the most interesting question or comment — assuming I get one, that is. And folks who are lucky enough to have the only question in the mailbag get their letter highlighted here whether it’s interesting or not! You can reach out to me at: Len@LenPenzo.com
This week I heard from Taylor, who left this comment after reading my recent article on what you need to know before choosing a concrete contractor:
“Thanks for the great tips. My driveway is kind of old and lumpy, so I’ve been thinking it may be nice to replace it.”
Your driveway sounds a lot like my mattress.
If you enjoyed what you read here, please forward this to your friends and relatives. I’m Len Penzo and I approved this message.
Photo Credit: brendan-c
“…the ephemeral cryptocurrency is still worth more than three ounces of gold.”
Len, I prefer the words “fiat dollar priced at” instead of “worth”.
Good point, Dave. Either way, why there are people out there still willing to exchange a blockchain address for three ounces of physical gold is beyond me.
Buying Bitcoin is smart, if you ask me. Exchanging gold for it, no. But, putting some fiat into it… yes.
As long as other countries are willing to go along and keeps accepting dollars for their trade goods, the debt doesn’t matter because of the printing press. Interest doesn’t matter. Money will continue coming from thin air. Nice blog by the way. Found it last week from flipboard.
Welcome aboard, Alba. But the debt does matter because it represents all of the malinvestments and price distortions that have been piling up in the economy over time, thereby making it increasingly less efficient. If the debt generation machine was to stop, the negative repercussions of those poor decisions would almost instantly be revealed (e.g., zombie companies kept afloat by low interest rates would go bankrupt, white elephant projects would stop in their tracks, bubble assets would deflate to true value, and the banks that provided the imprudent loans would implode). The trouble is, it’s now getting more difficult with each passing day to hide those distortions!
Eventually, economic law will gain the upper hand and everything will correct to fair value. I, like John Mauldin, believe we are getting close — I just can’t see the current system going on for another ten years without a painful reset.
Is the dollar on its death bed? The big question that needs to be answered is what damage did years of QE do in the long term to it? Is the dollar mortally wounded or can it get by being just slightly better than all of the other fiat currencies out there?
I think we are going to know the answer to that question in most people’s lifetime, WA.
Today’s GDP figures today are a joke. That is why it’s alarming to see the debt levels skyrocketing while being compared to bogus GDP numbers. If you did an honest comparison of debt to govm’t income, the numbers would be literally insane. But it would give a much more truthful picture of what’s going on.
Knight, I have been railing against how the government calculates GDP for years here. The flaw lies in the fact that economists include government expenditures as part of GDP. That is flat out wrong; government expenditures are not a part of the real economy because those expenditures are paid for by the private sector; only the private sector can create real wealth.
They can also be paid for with debt.
“Paid” for with debt, Max? You must be new here! Stick around for a month and let me know if your opinion on that changes.
Hi Len,
Hope you had a happy Thanksgiving. Keep on stacking!
Sara
Um … I did, Sara. But Thanksgiving is celebrated on the fourth Thursday in November — not the fifth! Did you celebrate it last week????
https://lenpenzo.com/blog/id34168-100-words-on-why-thanksgiving-never-falls-on-november-29-or-30.html
No! I knew. I just forgot to ask you last week!
Ha ha! Okay … just checking! Yes, it was great. I hope yours was too.
At least Australia has some gold still in the local safe (even if it isn’t a lot). Canada sold ALL of its gold a few years ago!
I think it is surreal to know that many people own more gold bullion than the Canadian government.
Bitcoin has done 80% drops a few times now. I think what’s more important is… that it recovered and came back.
And it will do so again.
And the volatility will lessen as the market gets bigger and it matures.
You could be right, David — but as I mentioned in last week’s Black Coffee, I think it’s going to be harder this time around (i.e., it will take a lot longer to recover) because bitcoin’s market cap is much larger than it was the last two times it dropped 80%.
That’s possible, although I pay attention to the space, and I think all signs point to a robust recovery. For instance, Morgan Stanley, Citigroup, Fidelity Investments, TD Ameritrade, Goldman Sachs, Intercontinental Exchange, Northern Trust, and the Chicago Board Options Exchange (CBOE) are all coming into this space. Opening up crypto trading desks and custodian options. They wouldn’t be doing that for no reason. While the market is down, the fundamentals are great.
Keep in mind, Amazon dropped from around the $300 range per share all the way down to $6 during the dot-com crash. Today, it is sitting at $1690. I personally think you’re going to see some of these various cryptos (and that will likely include Bitcoin) follow a similar pattern. Others will certainly drop to zero, but some will not and the space as a while will continue to grow.
Len,
Look around, who is buying US Debt? The Chinese and Russians are no longer doing this, so who is it????
It’s the Fed buying it’s own debt and many have proposed that the missing 21 trillion Dr. Skidmore has found missing from our government is exactly what’s being used to do this! The politicians and bankers in this country are truly ruthless and dispicable!
What’s your opinion?
Jared
Jared, more than a few people are arguing that at least some of the slack is being taken up by American investors (Baby Boomers taking their stock market gains and rolling them into Treasuries). That is undoubtedly true, but as you mention, there is clearly so much debt on the books that is not accounted for (i.e., the $21+ trillion found by Dr. Skidmore and Catherine Austin Fitts, which makes the National Debt $42 trillion; it’s telling that the documents they used to compile the data for their study are no longer accessible from Internet, supposedly removed for “national security purposes”). The fraud is so pervasive that I think it is safe to assume the majority of the US debt is now being monetized by the Fed. And then there are US unfunded liabilities ($100 trillion to more than $200 trillion, depending on the source) which aren’t even part of this discussion!
Depending on how much one reads, the only thing holding up the system is either ignorance or naive confidence now, but it seems to be getting harder with each passing day to keep the ruse going.
You can bet the world’s sovereign nations are aware of what’s going on — it’s why they are openly and actively working so hard to get out from under the dollar-based international monetary system as quickly as possible.
Buyers of U.S. debt, last 12 months:
https://wolfstreet.com/2018/09/18/who-bought-1-47-trillion-of-new-us-national-debt-past-12-months/