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.
It was a week where both stocks and bonds were falling at the same time, which I’ve always said will begin happening with increasing frequency as the death of the current monetary system draws near. It also appears that the Fed will soon be implementing yield curve control (YCC) to hold rates down. If/when that eventually fails, it’ll finally be game over.
And with that, let’s get to the commentary …
It is extraordinarily appealing.
It possesses all the ingredients of reality,
Except the reality itself.
It is falsehood.
A fleeting hope.
A passing phase.
A false pool of water
On a desert road,
On a sunny, dry day.
It’s an aberration.
It’s a mirage.
— Abiodun Fijabi, “A Mirage”
Credits and Debits
Credit: Did you see this? Investor Michael Burry, the guy who foresaw and shorted the 2007-2010 subprime mortgage crisis — of The Big Short fame — is now calling for Weimar-style hyperinflation in the US, noting that “Germany’s inflation cycle ran for nine years, with eight years of gestation and only one year of collapse.” And he believes there are plenty of historic parallels that suggest America’s hyperinflation gestation period began in 2010. Uh oh.
Debit: When interest rates are kept arbitrarily low by government policy, the effect must be inflationary because the actual money interest rate can only be held under the true inflation rate by printing fresh currency. While this is bad news for almost everyone’s living standard, that endless sea of cash conjured out of thin air by the world’s central banks pumps up dubious stocks and other assets. For example, check out these market cap figures:
Nikola $8 billion – no revenue
Airbnb $120 billion – no assets
Tesla $750 billion – no profit
Bitcoin $1 trillion – no use
Chadford Whitmore VI (@PunchableFaceVI) February 21, 2021
Another blowout quarter for Nikola: $0 in revenue and $147 million net loss. Shares outstanding continue to rise (+44% YoY). Market Cap: $8 billion.$NKLAhttps://t.co/vwIBl39DFD pic.twitter.com/1u7ahu51zp
Charlie Bilello (@charliebilello) February 25, 2021
Debit: As the late economist Henry Hazlet once noted: “Currency printing and new credit add to the apparent supply of new capital just as the judicious addition of water adds to the apparent supply of real milk.” In other words: the markets are a mirage. The good news is, despite central bankers’ best efforts, the economic law of supply and demand can only be held at bay for so long. Yes — even for assets like gold and silver … or even rhodium:
Rhodium is $24,300 /oz today in NY, up $500/oz fr yesterday.
In 2016, #Rhodium was $600 /oz.
Pure supply / demand pricing @ metal broker.
No unallocated contract pounding the price w/ 100M oz sell orders as w/ silver today.
David Jensen (@RealDavidJensen) February 23, 2021
Debit: With that in mind, it should be no surprise that inflation expectations have spiked dramatically in recent weeks. The 10-year breakeven inflation rate — what the bond market currently is betting inflation will average over the next decade — is now higher than it’s been in five years. As you can see from the accompanying chart, expected 10-year inflation stood at just 0.50% last March; this past week it got as high as 2.24%.
Debit: Meanwhile, data released this week shows stagnant growth with surging inflation — that is, stagflation. How bad was it? Well … input costs for both manufacturing and services soared at the steepest rate — by far — since comparable data were first available in 2009. Imagine that. As for those of you hearing the term “stagflation” for the first time, there’s no need to feel bad. ‘Twas a time when even the most basic terms of today were unknown …
Debit: By the way, it’s not just producer prices that are being infected by inflation. Since last year, agricultural products are up 50%, steel is up 160%, houses are up 14%, lumber prices have more than doubled. On top of that, shipping costs are skyrocketing thanks to rising oil prices, and copper and tin are more expensive than they’ve been in almost ten years. In fact, commodity prices in general are up 100% since last April.
Debit: Not surprisingly, despite rising prices everywhere, this week Fed Chair Jerome Powell groused that, based on the government’s official economic data, inflation remains “soft” — as if the general public actually enjoys paying more for everything they buy. Frankly, I’m still trying to figure out if Powell is: 1) truly that out of touch with reality; 2) intellectually dishonest; or 3) a complete idiot.
Propane costs up 30%, worst semiconductor shortages that I can ever remember, leading to across-the-board price hikes, and on and on. Inflation too “soft”? The only thing soft about inflation is the way the BLS calculates it.
fred hickey (@htsfhickey) February 23, 2021
Credit: Ironically, precious metals seem to be the assets that have been least affected by the central banks’ relentless ten-year currency printing campaign. In fact, asset manager Egon VonGreyerz points out that gold is at historic lows in relation to money supply; essentially at the same point it was in 1970 when gold was $35, and in 2000 when gold was $290. See for yourself:
Debit: At the same time, the average US home price is now rising at over five times the Fed’s stated inflation target — that’s the fastest pace since 2014 and runs counter to the patterns of the past two recessions, further bolstering the stagflation narrative. In fact, if house prices were used instead of rents, core CPI would be 3%, which is almost twice the ‘official’ rate of 1.6% — and yet even that is still less than the true rate that’s closer to 10%. Yes; ten. Do ya copy, Miss Jones?
Credit: Of course, with $5 of debt now needed to create $1 of growth, the sellers’ market for homes is on borrowed time. Why? Because, as financial analyst Lance Roberts notes, “Rate changes impact consumption and growth. Since interest rates affect payments, higher rates negatively affect consumption, housing, and investment, which ultimately deters economic growth — and with market expectations currently off the charts, (higher) rates will start the great unwinding.” Tick tock.
if you have a clean shirt and a necktie – and can explain why rising rates won’t be a problem for the stock market – call CNBC to schedule an interview
StockCats (@StockCats) February 25, 2021
Credit: Speaking of higher interest rates, on Tuesday market analyst Sven Henrich warned that, the “economy couldn’t handle 3.2% in 2018. And now we’re seeing concerns with the 10-year bond approaching a key technical pivot at 1.44%, which marks the 2019 lows. The Fed wants to prevent a sustained break above 1.44% or the markets may embark on a major rebalancing journey to the downside.” They better get to work. On Thursday, the 10-year closed at 1.53%, before backing off to 1.42% on Friday.
Debit: Unfortunately for the Fed, as inflation pressures grow, using the printing press to hold interest rates down will only speed up the dollar’s demise. On the other hand, if they stop printing, then interest rates will surge, thereby crashing the markets, which is why VonGreyerz is warning that the Fed is officially in “a no-win situation.” It sure looks that way. And if Michael Burry is right, we won’t have to wait long to find out.
By the Numbers
Open for business? Certainly not in the following ten states with the biggest percentage change in employment between February and December of last year. Well … unless you were employed by the government:
-8.3% New Jersey
-9.1% Rhode Island
-9.4% New Hampshire
-10.7% New York
Source: Business Insider
The Question of the Week
Last Week’s Poll Results
Will you close your savings accounts if the banks go to negative interest rates?
- Yes (61%)
- No (20%)
- I’m not sure (19%)
More than 2300 Len Penzo dot Com readers responded to last week’s question and it turns out that 2 in 5 of them will pull their cash out of the bank — or at least think about it — if those institutions ever decide to implement negative interest rates. That being said, after adjusting for inflation, savers have been suffering with negative real interest rates for more than a decade now.
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: Camping Trip
One day Sherlock Holmes and Dr. Watson decided to go on a camping trip. After a long first day of enjoying the great outdoors, they set up their tent, and fell asleep.
Some hours later, Holmes woke his faithful friend. “My dear Watson! Look up at the sky and tell me what you see.”
“I see millions of stars.” Watson replied.
“And what does that tell you?” asked Holmes.
Watson pondered the question for a long minute. Finally, the good doctor turned to his friend and said, “Astronomically speaking, it tells me that there are millions of galaxies and potentially billions of planets. Astrologically, it tells me that Saturn is in Leo. Time wise, it appears to be approximately a quarter past three. Theologically, it’s evident the Lord is all-powerful and we are small and insignificant. Meteorologically, it seems we will have a beautiful day tomorrow. What does it tell you, Sherlock?”
And with that, Holmes looked at his partner and said: “Watson, you idiot! Someone stole our tent!”
More Useless News
Here are the top five articles viewed by my 36,989 RSS feed, weekly email subscribers, and other followers over the past 30 days (excluding Black Coffee posts):
- The 10 Worst Things I Ever Bought
- 25 Examples of Shrinkflation That No Longer Fool Consumers
- 7 Perplexing Money Questions Without a Good Answer
- The Big Secret the Banking Industry Doesn’t Want You to Know
- The Real Secret to Becoming Rich as a King
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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
Superman has Lex Luthor and I have Oscar — who asked the following question:
If you had the cash on hand and your two options for buying a $100,000 house were for $125,000 or $200,000, which would you choose?
Um … Is that a trick question?
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Photo Credit: public domain