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.
Well … the New Year is here — but I’m still more than a bit wary. Here’s hoping that 2021 turns out to be much better than 2020.
Off we go …
Inflation is taxation without legislation.
— Milton Friedman
A robber who justified his theft by claiming that he actually helped his victims because his spending gave a boost to retail trade, would find few converts — but when this theory is clothed in Keynesian equations and impressive references to the ‘multiplier effect,’ it unfortunately carries more conviction.
— Murray Rothbard
Credits and Debits
Debit: Did you see this? A new survey that asked Americans about the current state of their finances discovered that a whopping 55% of us consider this year to be “a personal financial disaster.” Among employed respondents, 70% say they need an immediate raise to continue making ends meet — and 62% plan on taking on a second job in 2021 to meet their financial goals next year.
Debit: Meanwhile, the hospitality industry continues to be decimated by the pandemic as American continue to stay home and travelers avoid hotels. How bad is it? Well … for the week prior to Christmas, the US hotel occupancy rate was an anemic 37% — that’s 26% lower compared to the same period in 2019. Perhaps even more disturbing: For the first time ever, the industry breached one billion unsold room nights in a single year. Speaking of disturbing hospitality …
Debit: On the other hand, the Fed printing presses are keeping the gravy train rolling for government employees and contractors. In fact, two-thirds of all federal spending in the second half of fiscal 2020 was funded that way, with at least another $5 trillion of freshly-printed funny money expected to flood the monetary system during the next two years. Curiously, I see the Fed is making its money supply data more opaque next month. Coincidence? What do you think?
Why hide M3? Because it was the best measure of the money supply. Hiding M3 prepare the Fed for the “QE” era, which is getting ready to go “Weimar”
Dave Kranzler (@InvResDynamics) December 30, 2020
Debit: By the way, it’s not just the Fed that’s printing currency like there’s no tomorrow. In 2020 the aggregate money supply increase in the US, China, Euro Zone, Japan and eight other developed economies surged by $14 trillion — that’s the biggest increase ever in the 18 years that such data has been recorded. It also obliterates the previous record increase of $8.3 trillion in 2017.
Credit: Then again, no party lasts forever, and macroeconomist Alasdair Macleod is warning the soiree will soon be over. He says, “The days when governments can finance their schemes by debauching their currency are numbered. Consequences flow. And the world stands on the threshold of hyperinflation with the dollar leading the way. The final months of fiat money are coming into view.” Yes … he said “months.” His words, folks; not mine.
The debt financed economy.
Between 2007 and 2020 GDP has grown from $14.5 trillion to $21.5 trillion but debt obligations have grown from $52.5 trillion to $82 trillion. pic.twitter.com/CzC2isgigMSven Henrich (@NorthmanTrader) January 1, 2021
Debit: Whether the current monetary system is months or years away from imploding, governments that have used fiat currency to live beyond their means and expand into every facet of society now find themselves stuck in a debt trap that can only be escaped by eliminating their enormous bureaucracies — but will they actually approve the enormous spending cuts to do so? Heh. I think anyone with a lick of horse sense knows the answer to that question. Right, boys?
Debit: In the meantime, US 5-year real yields have declined to a five-year low. That means with real yields at negative 1.56%, investors are being charged 1.56% annually to own US 5-year Treasury bonds after adjusting for expected inflation. So the party rages on — for now. Even so, those negative real yields mean that the old argument of gold not paying a yield is officially moot. At least for those who are paying attention to the clock on the wall.
Credit: Of course, as time goes on and those massive government spending cuts fail to materialize, faith in fiat currency will disappear, and credit will dry up for unprofitable zombie corporations that rely on credit to stay afloat. The bad news is zombie corporations currently make up about 15% of the US economy. Believe it or not, that includes Wall Street darling, Tesla. Yep. That Tesla.
TSLA PE 1340 after buy recommendation from @neelkashkari
Stalingrad & Poorski (@Stalingrad_Poor) December 30, 2020
Credit: I know what you’re thinking; the Fed could raise interest rates to protect the dollar, although the increased cost to service the debt would eat up the majority of the Treasury’s revenue. And zombie corporations would find themselves unable to refinance their existing debt and collapse which, in turn, would almost certainly lead to a full-scale economic crisis. Otherwise, yeah … jacking up interest rates is a great idea. Unlike this …
Credit: So with the Fed and the other major global central banks backed into a corner, Macleod believes those institutions will have no choice but to try and “retain control by the only means at their disposal: deploying their gold reserves to back their currencies as credible substitutes” for the yellow metal. At least eventually.
Debit: For now, the uncontrolled currency debasement means most trend followers will continue making money in the financial markets. However, the scales will eventually tip. At that point, those market “profits” based on nominal prices will become strictly illusory as the debauched currency’s purchasing power begins to fall faster than the inflation-adjusted asset values.
Are stocks a good hedge against #Inflation? My JHU colleague Jack Tatom writes that there’s a “strong negative correlation” between inflation & stock prices. So, equities arent an effective hedge. Investors are better off looking at #Gold & #RealEstate.https://t.co/Wik9pdSq6S
Prof. Steve Hanke (@steve_hanke) December 30, 2020
Debit: For his part, the highly-respected Macleod assures us that one thing is certain: “Hyperinflation will destroy the mainstream’s dreams. That time is now upon us — but the blind, deaf, and mute Keynesians and their followers will only wake up to reality late in the hyperinflationary collapse.” Sadly, when it comes to the life savings of most middle- and lower-class Americans who fail to insure their wealth, “better late than never” won’t apply.
By the Numbers
Here are the year-end performance figures for select assets in 2020. Do you think these positive market returns are more indicative of a roaring economy in the midst of a pandemic — or severe monetary inflation that is destroying the dollar’s purchasing power?
7.2% Dow Industrials
16% S&P 500
18% Russell 2000
23% Gold Miners (GDX)
25% Gold
38% Silver Miners (SIL)
44% Nasdaq
49% Silver
305% Bitcoin
721% Tesla (TSLA)
Contributing Source: The Wall Street Journal
The Question of the Week
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Last Week’s Poll Results
Do any of your retirement savings include an actively managed fund?
- No (56%)
- Yes (26%)
- I’m not sure (18%)
More than 2100 Len Penzo dot Com readers responded to last week’s question and I’m a bit surprised to learn that almost 1 in 5 of them didn’t know whether or not they have money in an actively managed fund. For those who aren’t sure, an actively-managed investment fund is one that is overseen by an asset manager who makes decisions about how to invest the fund’s money. In return for the manager’s services, you are charged a flat fee, typically 1% or more — regardless of whether the fund turns a positive return or not. Ironically, since the turn of this century, actively-managed funds have under-performed passive index funds.
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: The Angry Cowboy
A cowboy went into a saloon and bought a drink. When he finished it, he saw that his horse had been stolen. So the cowboy went back into the saloon, flipped his gun into the air, caught it above his head without looking, and then fired a shot into the ceiling.
With everybody’s attention secured, the cowboy calmly announced, “Alright. I’m gonna have another beer, and if my horse ain’t back outside by the time I finish, I’m gonna do what I dun in Texas! And I don’t want to have to do what I dun in Texas!”
And with that, the cowboy stepped up to the bar and had another beer.
After the cowboy finished his beer, he walked outside and saw that his horse had been returned to the saloon’s hitching post. As he started to ride out of town, the bartender ran outside and asked, “Say, pardner! Before you go … what happened in Texas?”
“Well,” the cowboy said, “I had to walk home.”
(h/t: RD Blakeslee)
More Useless News
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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
After reading my article on how to get credit card interest charges waived, Vicky S. left this comment:
I’m still not sure how I ended up here, but I thought this post was really good. Cheers!
You know, Vicky … I’m still trying to figure out how I ended up here myself.
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
Hi Len,
Happy new year! Stacking silver paid me a nice dividend in 2020. Something tells me it will pay an even bigger one this year.
Thanks for another great cup of black covfefe!
Sara
Sara, I’m curious how you get silver. Do you buy online and have it mailed to you?
Mark,
I buy it online at places like APMEX and JM Bullion. It’s so easy!
Sara
I think you are right about silver, Sara.
(And I see what you did there.) 😀
Bitcoin is up almost 10 percent in 2021 and its only Jan. 2nd! Do you think it will outperform gold or silver this year?
I’d go all in.
I have no idea, David. All I will say is it is not a store of wealth like physical gold and silver … it is a pure speculative play. And, for many people, a very profitable one. So far.
Happy New Year, Len. Long time reader (a few years), but this is my first comment ever.
I just can’t see how this year can be worse than 2020.
I’m on the fence. If the dollar begins to really go belly up this year, it could be worse.
People have been worried about hyperinflation since 2008 and it still hasn’t got here. At least the Fed can combat inflation must better than they can deflation. If you think about it, a little inflation isn’t really bad for anyone.
I disagree about your assertion that the Fed can fight inflation much better than deflation. All it has to do to fight deflation is print more currency.
Fighting inflation is much tougher. They can stop printing our debt-based currency — and try to curtail bank lending by raising reserve requirements (which are currently 0%, by the way) — but that would send the economy into a tailspin. The other option is to raise interest rates — but the cost to service the debt would overwhelm government revenue.
The Fed was able to arrest the crazy inflation of the late 1970s and early 1980s and restore confidence in the dollar by jacking up interest rates to almost 20%. They got away with that because the US debt was very low.
They don’t have that luxury today.
Those year end returns are interesting. Did anything lose money in 2020? I also know that Tesla, Bitcoin and the general stock market ISN’T the economy.
Most oil and gas related stocks were down.
Ironically, most stocks that make up the major indices lost money in 2020 — those indices were propped up by a small minority of the biggest movers, like the FANG stocks.
Len, first time commenter too. Thank you for these weekly roundups. I look forward to reading them because they are informative and entertaining. I’m sure that’s hard to do!
Thank you , Kelly.
You are ever wise Len. Inflation. Wow. It drives down everyone’s real monetary wealth. I was thinking about paying off one of our remaining teeny tiny car loans but maybe that’s not even worth it? It’s such a piddling amount. Anyway, great reminder.
Explain to me. Wouldn’t this train of thought only be beneficial by assuming your salary rises along with inflation? Or particular investment rise alongside it? Curious
Well… it depends! If your credit score could use some improvement and you pay off a loan early, you get a positive bump in your credit score. If your credit score is already around or above say 820 then there’s not as much point as it won’t move the needle much if at all. Of course there is the “debt snowball” (Thank you Dave Ramsey!) psychological satisfaction of wiping one more debt off the list. That’s worth something too!
With the dollar being debauched so rapidly now, the real rate on most loans is negative — so it makes little sense to pay any of them off early.
That being said, credit card debt should always be paid off in full at the end of every month.
Don’t gold/silver miners usually outperform gold and silver? They returned less in 2020.
They do; as a rule, by about three to five times. In a bull market they outperform upwards — just remember, in a bear market they do three to five times worse. They are not for folks with weak stomachs.
Although nobody can say for certain what will happen, I suspect those miners will catch up and outperform (upward) physical gold and silver in 2021.
Hi Len and community,
Another first-time commenter. Im curious about 2 things.
First, Im just now realizing the degree to which gold/silver could act as a diversifier to what Ive traditionally thought was a reasonably diversified portfolio of US & International stocks + preferred, bonds & cash. Given my behind-the-times realization of adding additional asset classes that would further diversify my portfolio, do you have thoughts on adding new money to gold/silver given their seemingly lofty levels.
The obvious approach is to dollar cost average in over 12-18 months or so; though the cheap !@#$@#$ in me says to wait till prices come down after a return to some semblance of normality w/ impending vaccinations.
Second, I know youre a proponent of holding physical gold. However, for those that lack a home arsenal for protection and dont relish going to the bank to open a safety deposit box (#covid), what are your thoughts on the recent venture between APMEX and Sprott @ http://www.onegold.com where you buy metals and they hold them for you (for a small fee that is comparable to Gold ETFs) and you can ultimately exchange for cash OR have gold delivered.
Thanks in advance for comments,
jj
You have the right mindset, JJ: start now, and dollar cost average over time. Buy a set amount every month, or every quarter. For what it’s worth, January and February are typically the best months for precious metals on a seasonal basis so, although nothing is certain, historically one can expect their price to rise over the next two months. Unlike stocks and bonds, the great thing about buying physical gold and silver is they are money — so what you are buying will never go to zero and their purchasing power will remain relatively stable. That makes them a terrific 100%-safe alternative to bonds.
I have no opinion on onegold. I haven’t not taken advantage of it yet. That being said, I am intrigued by it. I do know of several people at a subscription website I belong to (TFMR Metals Report) who say they’ve opened up onegold accounts — and one of them recently said they actually had metal delivered as well. I’ve heard no negative reviews yet from those who claim to have an account.
I do have an actively managed gold & silver mining stock fund account with Sprott — I am very happy with them.