Black Coffee: The Fed Is Flying Blind

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 hope everybody had a wonderful week. And with that, let’s get right to this week’s commentary, shall we?

Until the government can so identify its interests with those of the people, and refrain from defrauding the masses through currency depreciation for the sake of remaining in office, the wise will prefer to keep as much of their wealth in the most stable forms possible — forms which only precious metals provide.

— Elgin Groseclose

Gold is the money of kings; silver is the money of gentlemen; barter is the money of peasants; and debt is the money of slaves.

— Norm Franz

Credits and Debits

Debit: Did you see this? After missing subscriber growth forecasts for the seventh time in eight quarters, Netflix’s share price imploded this week; on Wednesday the stock plunged 37%. For the year, the streaming service is down 62% – which is bad news considering that it’s only April. And from its November 2021 all-time high, Netflix shares have lost 69% – erasing more than four years of gains. That prompted Zero Hedge to ask if it may be time to “kick out the N” from the until-now seemingly-invincible “FAANG” stock portfolio. Um, wait … on second thought, let’s not.

Debit: Speaking of plunging numbers, the US Housing Affordability Index hit its lowest level in 14 years, with current affordability plummeting over the past two months. In fact, with mortgage rates now above 5%, we can expect another big decline in affordability this month, as new homebuyers are getting 25% less house for their mortgage payment compared to a year ago. Because of this, Mish Shedlock points out that “many people who were trying to buy a few months ago are now out of the bidding – priced out.” If affordability is falling at this pace, it’s only a matter of time before homebuyer bidding turns into home seller begging.

Debit: Of course, it wasn’t too long ago that card-carrying members of the doom-and-gloom tin-foil-hat brigade – including yours truly – were warning that massive currency supply growth resulting from the government’s response to COVID would lead to price inflation. This was at odds with government economists and their mainstream media shills who assured the public between the summer of 2020 and early 2021 that inflation wasn’t a threat. Obviously, prices for many items have since become unhinged – while inflation-adjusted wages for production and non-supervisory workers is nearly the same today as it was in February 1973. Hey … I’m not sayin’! I’m just sayin’.

Credit: As for the stock market, financial analyst Lance Roberts reminds us that “in 2008, 2000, and 1929, stock valuations were incredibly high – and each time it was widely believed ‘this time was different‘ – but ultimately, it wasn’t. Since 2009, the belief that low-interest rates justified high valuations was the primary catalyst supporting the (current) ‘this time is different’ narrative. However, with rates now rising, that support for over-valuation is at risk. Historically, the Fed hikes rates until something breaks, which resolves the over-valuation problem” … which, unfortunately, quickly morphs into a whole slew of other problems.

Credit: Sprott’s macro analyst John Hathaway is also waiting for the interest rate tripwire to be triggered. This week he warned that, “the level that interest rates need to rise to compensate rational investors is likely to be high enough to cripple the economy and deflate financial assets. The road to equilibrium interest rates promises to be far more torturous than that contemplated by consensus, and respected observers have concluded that it’ll be impossible for the Fed to thread the needle between taming inflation and causing a recession.” Then again, with the rate hikes still coming at a snail’s pace, the Fed may never get to that point.

Credit: So what is the “magic rate” that will break the markets this time? Asset manager Michael Pento notes that, as the amount of debt increases, the rate it takes to break the economy falls. To illustrate, Pento says that “in 2000 it took a Fed Funds Rate (FFR) of 6.5% before the market melted down. For the Great Financial Crisis (GFC) of 2009, that level dropped to 5.25%. It then took a FFR of just 2.5% to cause the credit markets to freeze and stocks to falter in 2018.” And Pento thinks an FFR of less than 2.0% will be enough to trigger the next meltdown. The trouble is: at that level, there’s simply not enough altitude to recover …

Credit: All of the inflation, and the growing economic instability currently plaguing the US and the rest of the world are symptoms of a dying fiat monetary system; a gold standard, where currency in the form of publicly-circulated banknotes could be freely exchangeable for gold coins, would have avoided these troubles because it instills confidence in the issuer’s credit. As for the amount of gold needed to regain the public’s trust, when he was Master of the Royal Mint, Sir Isaac Newton concluded that confidence would never break as long as the price of the yellow metal covered just 40% of the total currency in circulation.

Credit: By the way, macro analyst Alasdair Macleod says that in a gold standard, “both currency and credit become bound to its virtues. And while the general level of prices will fluctuate influenced by changes in the quantity of currency and credit in circulation, the discipline of credit and currency limits brings prices back to normal. This discipline is disliked by governments who believe that money is the responsibility of a government acting in the interests of the people, and not of the people themselves.” Imagine that.

Credit: With all that in mind, it’s not surprising that gold’s role in international finance and geopolitics has changed dramatically since 2008. The GFC reminded central banks of the importance of insuring themselves against the extremely rare – but catastrophic – risk of hyperinflation. That fear is why, after decades of being net sellers of gold, central banks have been net buyers since 2010, steadily purchasing more than 400 tonnes a year. Most folks scoff at the notion of these so-called “tail risks” because they have astronomically long odds of occurring in our lifetimes. But they do happen. Just ask this poor guy:

Credit: As macro analyst Ronnie Stoferle noted this week, the “militarization” of the US dollar (USD) has “deprived it of a neutrality that’s indispensable for a universal currency. Even though China is now the most important trading partner for two-thirds of all countries, the yuan’s lack of convertibility, lack of trust, and a comparatively small bond market make it highly unlikely that it will replace the USD any time soon. Therefore, the chances are that gold may once again play a role in reshaping the world monetary order, as gold is politically neutral, and doesn’t belong to any state, political party or institution.” Well, it sure seems that way …

Credit: Indeed, after Russia temporarily pegged the ruble to gold, Hathaway says, “the message was loud and clear: Russia is prepared to back its currency with gold when needed. Using a ruble-gold peg as a reference price, the USD has been cut out of the trade loop. To import energy from Russia now, buyers must pay in either rubles or gold – and sellers no longer need to park proceeds in US Treasuries.” In other words: from this point forward, the cost of credit in the US is going up. And that’s bad news for all those zombie corporations who have been dependent on cheap debt to stay afloat.

Credit: For his part, Stoferle is very bullish on the yellow metal, noting that we’re now “facing a major tectonic shift; the post-war order now seems to finally be on the verge of being replaced and the era of unbacked (currency) is rapidly coming to an end. How the future global monetary system will be designed is still wide open. What is clear, however, is that the odds have never been better for gold to play a monetary role again.” Some would dare say that gold’s return is inevitable. If that’s true, it would be important capitalize on the transition by adding a little physical to your portfolio before the price resets – not after.

By the Numbers

A recent survey looked at how Americans plan for retirement across various fields of employment. Here are some of the results:

32% The share of workers at companies with less than 10 employees who said they plan to retire in their 50s.

47% Percentage of respondents who think you can be “too old” to start saving for retirement.

40% The share of all respondents who said they don’t think they’ll have enough money in retirement to last the rest of their life.

52% Percentage of those working at companies with more 1000 employees who said they contribute to a 401(k).

44% The share of all workers who said they contribute to their employer’s retirement plan.

48% Percentage of employees between 30 and 64 who said they’re contributing to their employer’s retirement plan.

39% The share of employees between 18 and 29 who said they’re contributing to their employer’s retirement plan.

37% To ensure they hit their retirement age, the percentage of workers who said they’d exchange a job they liked for a better-paying one they liked less.

73% Percentage of employed respondents wish their employer would provide better 401(k) guidance and education.

Source: Human Interest

Last Week’s Poll Results

When is the last time you had a meal at a non-fast-food restaurant?

• Within the last week (45%)
• Within the last month (30%)
• More than a year ago (12%)
• Within the last six months (9%)
• Within the last year (5%)

More than 2300 Len Penzo dot Com readers responded to last week’s question and it turns out that 3 in 4 have had a meal at a quality restaurant within the past 30 days or so. At the other end of the spectrum, 1 in 7 say they haven’t been to restaurant without a drive-through in at least six months. Frankly, with inflation raging, I figured those numbers would be reversed. I may just have to ask this question again a year from now to see if there are any significant changes.

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.

The Question of the Week

[poll id="421"]

Useless News: The Ladies’ Man

A reporter was at the airport, writing a piece on the womanizing reputation of airline pilots. It wasn’t long before she soon spotted a handsome, uniformed captain walking in the terminal; so she approached him and said, “Captain, I’m with the Springfield Gazette. I’m working on an article about airline stereotypes. Would you mind if I asked you a question?”

The pilot looked into her eyes, gave her a big smile, and said, “I’d be happy to!”

The reporter thanked the pilot for his cooperation, and then asked, “Can you please tell me the last time you made love?”

“Of course!” said the pilot without hesitating. “It was 2015.”

“Oh wow, that long ago?” she responded. “I thought you airline pilots held a reputation as real ladies’ men.”

The pilot then looked at his watch and said, “Well, considering it’s only 2145 now …”

(h/t: Just the Facts)

More Useless News

Here are the top five articles viewed by my 42,217 RSS feed, weekly email subscribers, and other followers over the past 30 days (excluding Black Coffee posts):

1. What’s the Fastest Way to Pay Down the Mortgage Early?
2. Tip Inflation: We’ve Got Nobody to Blame But Ourselves
3. What Should You Do If the IRS Finds a Mistake Made by Your Tax Preparer?
4. The Great Paper Towel Test: Which Brand Is Your Best Value?
5. 3 Subscriptions You Need to Cancel Today

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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 explaining why financial freedom requires very little money, Mary said:

My husband and I are debt-free, don’t bring in a ton of money and still save $8000 per year. I guess we both don’t want what the Joneses have.

That makes three of us, Mary.

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