Black Coffee: Rock Covers Paper

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.

After a long wait, silver has finally awakened from its decade-long slumber. On Friday the futures price closed at $22.85; that’s up 15.6% — for the week. Not to be outdone, the gold futures price ended the week with its highest weekly close ever at $1897.50 — not far from its all-time intra-day high of $1923.70 on September 6th, 2011.

I wonder why.

Okay … on to the financial commentary.

We can guarantee cash benefits in any size and any duration you want. What we can’t guarantee is the purchasing power of those cash benefits.

— Alan Greenspan

Credits and Debits

Credit: Did you see this? Mortgage delinquencies spiked dramatically in April, to 3.5% — that’s from less than 1% in March, when the pandemic started. But, as Wolf Richter points out, “It gets worse; mortgages that are in forbearance and didn’t miss a payment before going into it don’t count as delinquent — they’re reported as ‘current.’ And 8.2% of all US mortgages — or 4.1 million loans — are currently in forbearance.” Uh oh.

Credit: But, as Charles Hugh Smith notes, “Landlords, banks, local government, employees, and others are depending on enterprises returning to 100% of 2019 revenues. However, as tenants stop paying rent, landlords default on mortgages, sending banks into insolvency, leaving local government with less tax revenues and employees with fewer job prospects.” Uh huh. Now who’s going to tell this to the V-recovery cheerleaders?

Debit: Meanwhile, the Tesla stock farce continues. Tesla is up more than +760% since June 2019, when it was troubled by bankruptcy concerns. Two weeks ago it became the world’s largest automaker. And Tesla’s market cap has grown to over a third of the combined market cap of the US, EU and Japanese auto indices. Frankly, that makes about as much sense as a driving dog. Oh, wait …

Debit: By the way, if you believe the stock market, Telsa is valued at three times the entire S&P Automobiles & Parts sector, even though it’s not a member or in the S&P 500. And Tesla’s overall share of the global auto market has grown from 0.1% in 2017 to an expected 0.8% in 2020. The trouble is, when you consider Volkswagen’s share is 14%, Tesla is still just a minnow swimming among the whales. So much for the wisdom of the market.

Credit: Hey … if you’re looking for a sanity check, you can take comfort in knowing that there’s at least one asset manager out there who doesn’t believe the stock market accurately reflects the current state of the economy:

If you’d shown this headline to anyone on December 31, 2019 and told them $SPX would be at the same level as then despite this data you would’ve gotten laughed out of the room. https://t.co/1k4hfNVM8o

Sven Henrich (@NorthmanTrader) July 17, 2020

Credit: The truth is, as Kuppy at Adventures In Capitalism points out, despite stocks soaring on a nominal basis, if you look at the S&P indexed to the Fed’s balance sheet, it becomes apparent that the March crash “gave back a decade of retained earnings — a wasted decade in the market when indexed to the Fed’s balance sheet.” No, really. See for yourself:

Debit: Meanwhile, Bloomberg says that the Fed intends to implement a major policy change — that is, reinforcing their easy-money policy with “enhanced forward guidance and, eventually, yield curve control.” More alarming, the yield control could continue even if inflation exceeded 2%, assuming the Fed believes the higher rate is “transitory.” Translation: The Fed will never shut off the printing press or raise interest rates again. At least not willingly.

Credit: As asset manager Lawrence Lepard notes, “Real interest rates are negative and trending toward deeper negative values. Note how tight the fit has been between real (inflation adjusted) interest rates and the price of gold. If inflation increases and rates are suppressed via yield curve control, gold is going to continue to go up.” Ya think?

Credit: In fact, this week Barron’s actually went so for to suggest that, despite Treasury securities being “investors’ favored store of value” since the dollar’s anchor to the yellow metal was broken in 1971, it may not be long before gold becomes the new hedge over Treasuries. Why? Because, as Barron’s put it, “While the gold supply is relatively fixed, the supply of Treasuries is soaring.” Psst. Hey, Barron’s … the supply has been soaring for the past 20 years.

Credit: Of course, as investment advisor John Mauldin points out, “After a 40-year run, there isn’t much juice left in the bond market — unless you think that rates will go negative.” But that’s highly unlikely — especially if the US wants the dollar to maintain its role as the global reserve currency. Mauldin says that makes Treasuries “one of the worst investments” now, as they’re fast becoming an example of return-free risk. And here’s another one …

Credit: Gold isn’t sexy, but it’s free from counterparty risk — unlike US Treasuries which, after a relentless four-decade bull market, are currently at elevated risk of a sharp decline due to waning confidence in the dollar, or a US credit downgrade. And deepening negative real yields in Treasuries has led to a furious gold rally that is now pushing the yellow metal toward its all-time high from 2011.

Credit: Heck, even traditional bankers are beginning to wave the towel on the debt-based monetary system their livelihood has relied on since 1971. Deutsche Bank’s Jim Reid says that, “Fiat money will be a passing fad in the long-term history of money.” It’s an astounding admission. Yes, gold doesn’t yield anything; but in a world of negative real rates, the financial pros know that the return of capital trumps the return on capital.

Got gold? pic.twitter.com/5hU3jDXTX1

Lawrence Lepard (@LawrenceLepard) July 23, 2020

By the Numbers

With Major League Baseball finally back, and National Hot Dog Day this past Wednesday, I thought I’d highlight the top hot dog consuming cities:

10 Tampa

9 Washington

8 Chicago

7 Detroit

6 Atlanta

5 Boston

4 Philadelphia

3 Phoenix

2 New York

1 Los Angeles

Source: Retail Me Not

The Question of the Week

[poll id="331"]

Last Week’s Poll Results

What type of car is your primary vehicle?

• Japanese (51%)
• American (36%)
• German (7%)
• Korean (4%)
• Something else. (2%)

More than 2000 Len Penzo dot Com readers responded to last week’s question and it turns out that slightly less than two in three have a foreign car as their primary vehicle. At my house, there are four drivers and all of us have a foreign car; three Hondas and a 17-year-old Infinity.

If you have a question you’d like me to ask the readers here, send it to me at Len@LenPenzo.com — and be sure to put “Question of the Week” in the subject line.

Useless News: Supply and Demand

The current market insanity and broken supply chains brings to mind the following old joke about the Soviet economy, which could never keep supply matching consumer demand …

A man goes into the Soviet car showroom and asks to buy a car. The disinterested salesman doesn’t even put out his cigarette and says, “We only take 100% cash payments.”

Undeterred, the man puts down a bag full of rubles on the table, and the salesman then sits up and proceeds to greedily count the cash. After counting the money and finding it all there, he says to the customer, “The only color is grey.”

“No problem,” the man replies. “When will my car arrive?”

The salesman grabs a dog-eared book and slowly looks through it. After a few moments, he says, “Mmm … five years from today.”

The customer nods sagely, and then asks: “Morning or afternoon?”

“What do you care morning or afternoon?” asks the salesman. “It’s five years from now!”

“Well,” says the customer, “Because I’m getting my new refrigerator in the morning.”

(h/t: Michael Every)

Other Useless News

Here are the top five articles viewed by my 33,323 RSS feed, weekly email subscribers, and other followers over the past 30 days (excluding Black Coffee posts):

1. Why Your Expensive Luxury Car Doesn’t Impress Smart People
2. Is Early Retirement Worth It? How to Know If You Really Should
3. 7 Big Lies About Gold that Wall St. Doesn’t Want You to Know
4. How to Reduce Everyday Spending
5. 4 Financial Tips to Consider Before Becoming a Stay-at-Home Parent

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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

From Alicia:

Love the blog! How come you didn’t give it a catchy name like some of the other personal finance sites I read?

Well, to tell you the truth, Alicia … “Len Penzo dot Com” seemed pretty catchy at the time.

If you enjoyed this, please forward it to your friends and family. I’m Len Penzo and I approved this message.

Photo Credit: public domain