Black Coffee: A Mouse In the Pocket

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.

I’ve got a busy weekend to attend tom so let’s get right to this week’s commentary …

There are no markets; only interventions.

— Chris Powell

Credits and Debits

Debit: Did you see this? In the old days, when markets were free from central bank meddling and the dollar was a credible — if still imperfect — substitute for real money, stocks and bonds regularly ebbed and flowed like the tides. Not any more. In fact, it’s now been 191 days without a 5% drawdown in the S&P 500, which happens to be one of the longest uninterrupted stretches in the last 100 years. Imagine that.

Debit: Of course, central bank currency mismanagement is also the reason why inflation is now running at 13% based upon the methodology the US used prior to 1980. That means if you aren’t earning returns of at least that much on your savings and portfolio investments, then you’re losing purchasing power. The good news is employers are increasing wages to keep their workers’ standard of living from declining. Oh, wait …

Debit: Speaking of portfolios, traditional portfolio theory says that bonds are a diversifier for equity market investments. Indeed, this strategy has allowed cross-asset traders to diversify excess equity risk into bonds for more than a century — but not any more. After several decades of gross monetary mismanagement by the Fed, this basic premise of modern portfolio construction no longer works, as bonds and stocks now tend to move in lock step.

Credit: The reason for this is the Fed has pushed so much liquidity into the markets via its decade-long QE program that everything is being bought. And as JPMorgan credit strategist Eric Beinstein warns, “the implications are interesting, with the risk being that (the correlation) remains when the equity market sells off.” Translation: In the next crash, everything will plunge at the same time, with few places to hide. True. Then again, I doubt many physical precious metal holders are losing sleep over this.

Debit: Don’t think the Fed is unable to see the dwindling lack of correlation between stocks and bonds, because they most certainly do. It’s yet another reason why the stock, bond and housing bubbles have gotten so large that the Fed can no longer risk anything popping it — so they won’t. Why? Because they know that popping the largest asset bubble ever would ultimately result in a monetary system reset that could put them out of business.

Credit: Financial market analyst Sven Henrich knows this too. This week he warned that, “debt levels have so exploded during the past 13 years that any pre-crisis-type interest rates — which were historically low then — would collapse the entire system. They know it. I know it. You know it. The entire system is predicated on debt expansion and cheap money to sustain it. That’s it.” Uh huh. And to think I thought these guys had cornered the market on bad ideas …

Credit: By the way, rents getting out of control too. If you don’t believe me, then take a look at the following chart, which shows that in 2021, rents have been rising at the absurd pace of 3% per month in the 100 largest US cities. I wonder how many of those affected rentees’ paychecks have been climbing just as quickly.

Debit: You know, once upon a time debt could effectively grow the economy — but not anymore. Shortly after the Great Financial Crisis (GFC), a dollar of debt could no longer provide more than $1 of economic growth. Since then, debt has transformed from being economic medicine to economic poison. And that poison is growing more toxic with each passing day; today, a dollar of debt generates less than 20 cents of GDP growth. Thankfully, there are financial historians to help us learn from the past …

Debit: Although adding more debt no longer benefits the economy, Henrich points out that the Fed believes it’s “the only way to avert disaster. Keep expanding wealth inequality, keep disconnecting asset prices from the economy ever further, and keep telling everyone they do it for the downtrodden — even though the bottom 50% are taking the bath with permanent price increases while their wages aren’t keeping up.” Okay, Sven. But if you think these bankers are going to forgo their bonuses this year, you’re sadly mistaken.

Debit: Another symptom of the Fed’s blatant mismanagement are negative real interest rates — which signal bond yields are too low to compensate buyers for the effects of inflation. Indeed, at negative 4.15%, real yields are at their lowest point since 1980 — and just 40 bps off of a 70-year low. The good news is negative real yields historically act as rocket fuel for precious metal prices. The bad news is somebody apparently needs to remind the gold and silver markets of that little fact.

Credit: Even more alarming, Deutsche Bank credit strategist Jim Reid is warning that any attempt to push interest rates higher will lead to a collapse in the financial system. And why is that? As Reid explains, it’s because “positive US real yields for any length of time would likely set off debt crises around the world — so we are probably stuck.” Uh … what do you mean “we,” Mr. Banker?

Credit: Macroeconomist Alasdair Macleod says that when the Fed finally loses control, “the order is likely to be first an asset value crisis leading to attempted widespread liquidation, rapidly followed by a currency collapse as panicked authorities try to sustain asset values. And the only security in these conditions is the possession of (real) money: gold and silver bars and coins.” It’s your choice: you can hedge your finances with some monetary security … or you can follow the bankers and “wee wee wee” all the way home.

By the Numbers

When it comes to job security, here are the ten professions that are least likely to experience down-sizing today, based upon the percentage change in unemployment rate for every professional category between March 2020 to March 2021 as measured by the US Bureau of Labor Statistics:

10 Construction (year-over-year unemployment change: +14%)

9 Healthcare (+13%)

8 Marketing (+12%)

7 Legal Services (+5%)

6 Architecture & Engineering (+4%)

5 Social Services (-5%)

4 Education (-7%)

3 Life, Physical & Social Sciences (-11%)

2 Farming, Fishing & Forestry (-11%)

1 Information Technology (-21%)

Source: USDirect Business

The Question of the Week

[poll id="384"]

Last Week’s Poll Results

When was the last time you rode a bicycle?

• More than a year ago (59%)
• Within the last week (16%)
• Within the last year (14%)
• Within the last month (11%)

More than 2300 Len Penzo dot Com readers responded to last week’s question and it turns out that 2 in 7 have been on a bike within the last month. Put me among the 3 in 5 who haven’t been on a bicycle in more than a year. I sure hope those who say you never forget how to ride one are correct!

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: Grizzly Bear Warning

In light of the rising frequency of conflicts between humans and grizzly bears this summer, the Montana Department of Fish & Game is warning all hikers, hunters, and fishermen to take extra precautions and keep alert for bears while in the field. Here is the official public advisory from the state’s chief game warden in Helena:

“We advise all hikers to make noise and wear small bells on their clothing, so as not to startle bears that aren’t expecting them. Furthermore, we advise all outdoorsmen to carry pepper spray with them in case of an unexpected bear encounter. It’s also a good idea to be aware of fresh signs of bear activity; hunters and hikers alike should be able to recognize the difference between black bear and grizzly bear poop. For example, black bear poop is smaller and contains mainly berries and squirrel fur. In contrast, grizzly bear poop is much larger, smells like pepper and has little bells in it.”

(h/t: Cowpoke)

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

I found this message in my inbox from Heather Madison:

I’m reaching out to you because I’m looking for a Bozo who is interested in taking on more clients.

I’ll have to pass, Heather — the clown car is in the shop and my calendar is completely booked.

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

Photo Credit: (flags) public domain; (cartoon) Investing.com