Black Coffee: A Thief In the Night

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/CzC2isgigM

Sven 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