Black Coffee: A Nightmare on Wall Street

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.

Another busy week is crossed off the list. So without further ado, let’s get right to the commentary …

You gain strength, courage, and confidence by every experience in which you really stop to look fear in the face. You’re able to say to yourself, ‘I lived through this horror. I can take the next thing that comes along.’

– Eleanor Roosevelt

Adversity makes men, and prosperity makes monsters.

– Victor Hugo

Fear is the mother of foresight.

– Thomas Hardy

Credits and Debits

Debit: Did you see this? Consumer sentiment plunged last month to its lowest point in 18 months. It doesn’t help that, as macro analyst Wolf Richter points out, although “inflation in some goods is backing off, inflation is spiking in services, where it’s a lot stickier than in goods, and where consumers do nearly two-thirds of their spending.” But you probably already knew that. What you may not know is that price inflation in services hasn’t been this bad since 1982 – which probably helps to explain this:

Debit: On a related note, I see that existing US home sales are down 24% on an annualized basis – that’s the worst decline since 2010, aside from the pandemic. It’s also the eighth straight monthly drop in existing home sales – that’s the longest losing streak since 2007. In case you’re wondering, those plunging sales figures are almost certainly due to the fact that, despite skyrocketing interest rates, home prices in August were still 13% higher compared to a year earlier. Go figure. Obviously, this is completely unsustainable. So something will eventually have to give – either lower interest rates or lower prices. Until then:

Debit: Speaking of expensive real estate, I see that rent prices for single family homes hit a national average of $2495 a month this summer – which is a 13.4% increase compared to the same period in 2021. In the meantime, if you’re looking for a silver lining regarding the widespread price increases for food, fuel and shelter that is currently plaguing America, just remember that inflation is even worse across the pond. At least for now:

Debit: Of course, trying to keep a roof over your head is clearly becoming harder for many Americans. This has become more apparent than ever now that the Social Security Administration released its wage statistics for 2021 – and the numbers are truly frightening. In fact, the data shows that half of all US workers made less than $3133 a month last year – which means many Americans have very little cash left over for groceries, gasoline, and other bills after they’re done paying the landlord. As for Americans who are more fortunate, well … many of them are feeling the pinch too. Okay, okay … at least on relative terms:

Credit: Needless to say, the general public now finds itself stuck between the millstones of high inflation and rising interest rates. For his part, financial commentator Michael Snyder points out that “Inflation is systematically destroying our standard of living with each passing day because, once upon a time, you could live a very comfortable middle class lifestyle on $3133 a month.” Sadly, those days are long gone, which prompted Snyder to ask, “So if the middle class is steadily eroding during relatively stable times, what’s going to happen when the economy really begins to unravel?” You can bet the Invisible Man knows.

Credit: Believe it or not, rising interest rates have also caused the Fed and other central banks to suffer their deepest operating losses since the 1980s. Then again, a more accurate way to say that is: Central banks are going bankrupt on their balance sheets. And while Keynesian economists and ivory tower academics continue to mindlessly insist that central bank balance sheets are irrelevant, financial analyst Rafi Farber says that’s monetary nonsense. “If that’s true,” Farber asks, “then why is there a need for any monetary policy at all?” Answer: because the central bank’s balance sheet does matter.

Debit: Taking his example a step further, Farber says that central bank balance sheets do matter because they reflect the value of their respective currencies which “are a central bank liability. And if that liability is backed by assets of decreasing value, then that liability loses purchasing power because it takes more currency to buy things at an ever-increasing rate” – and that is reflected by skyrocketing price inflation. And, yes, the Fed could kill inflation by jacking rates up to 20% – but that would send the US economy into a catastrophic depression. So the Fed is in a really tight spot. Yes … even tighter than this:

Credit: Meanwhile, macroeconomist Daniel Oliver is warning that “the US Treasury bubble is the final bubble because they’re the backbone asset of central banks.” He then goes on to explain that, “The Fed had already suffered $720 billion in losses on its $8.7 trillion portfolio as of June 2. As rates increase, those asset losses will also increase. The Fed now has operating losses as well. Its liabilities include $2.2 trillion in reverse repo deposits and $3.3 trillion of bank reserves; that’s $5.5 trillion on which it pays floating rate interest. In other words: The Fed is just like the pension schemes, having swapped low fixed-rate income for rising floating-rate expenses.” Brilliant, ain’t it?

Credit: Of course, with the extremely high level of federal debt on the books, interest rates are the Achilles heel of America’s bubble economy. Why? Because if rates rise high enough, they’ll collapse the stock and housing markets. As for those who are hoping that the Fed will come to the rescue by lowering rates, macroeconomist Alasdair Macleod says, “The assumption that central banks are still in control of interest rates is demonstrably false. Prices are rising and markets are taking charge, driving both rates and bond yields higher – and that’s leaving central banks powerless.” In other words: The Fed has finally reached …

Debit: By the way, Macleod also notes that “the US dollar’s (USD) strength is an illusion.” He says the Fed will soon be forced to stop its current tightening policy because contracting credit is breaking the markets. Instead, he says the major central banks will agree to replace contracting commercial bank credit with expanding central bank credit to “save” their collapsing bond markets. Macleod says that’s when the USD’s “safe haven status as the world’s reserve currency will be exposed for what it truly is: just another fiat currency facing infinite inflation.” Uh huh. And that’s when the Fed may try a final – but futile – attempt to introduce a CBDC.

Debit: So what’s the Fed’s biggest fear? This: As interest rates continue to climb, the Fed’s balance sheet – and the US government – will both fall deeper into bankruptcy. Then – when the Fed’s balance sheet is finally recognized as being all but worthless – the only remaining asset on the Fed’s balance sheet capable of supporting the USD will be gold. But in order to extinguish the debt, the yellow metal will have to be revalued much higher in USD terms. The end result will be a huge wealth transfer from those holding USDs and other USD-denominated paper assets, to those holding physical gold, silver and, to a lesser extent, other hard assets.

Debit: So … the Fed has a very simple choice. Does it try to save the markets and stabilize the economy by expanding its balance sheet to counteract contracting bank credit – which will eventually kill the USD? Or does it choose to save the currency by continuing to raise rates until the inevitable collapse in asset values and the banking system, along with rampant Main Street bankruptcies and soaring unemployment? Both history and Keynesian ideology suggest that, ultimately, the Fed will “save” the markets and the underlying economy at the expense of the dollar. Regardless, you can be certain of this: For those without wealth insurance, both paths will end in a financial bloodbath.

By the Numbers

With Halloween here, let’s take a look at the top ten highest-earning horror titles of all time. How many of these movies have you seen?

10 The Nun (worldwide box office: $366 million)

9 Signs ($408 million)

8 The Exorcist ($441 million)

7 Jaws ($471 million)

6 It: Chapter 2 ($473 million)

5 The Meg ($530 million)

4 World War Z ($540 million)

3 I Am Legend ($585 million)

2 The Sixth Sense ($673 million)

1 It (2017) ($700 million)

Source: Dread Central

The Question of the Week

[poll id="446"]

Last Week’s Poll Results

How much do you spend on household groceries each month?

• $401 to $600 (34%)
• $201 to $400 (24%)
• $601 to $800 (17%)
• More than $800 (13%)
• Less than $200 (12%)

More than 1900 Len Penzo dot Com readers responded to this week’s poll and it turns out that slightly more than 1 in 3 say their monthly grocery bill is $400 or less. The last time I asked this question was in 2014. Back then, 51% of my readers said they spent $400 or less on groceries every month. At the other end of the scale, 9% of my readers in 2014 said they spent more than $800 per month – compared to 13% today.

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: Psychology Assignment

A psychology professor put the men in his class into one group, and the women into the other group. He then asked the two groups to collectively decide if computers are masculine or feminine.

The men said “feminine,” because:

• no one but their creator can decipher their internal logic
• they speak in code language that only they and experts can understand
• every mistake you make is stored in their memory for later retrieval
• as soon as you take up with one you spend half your paycheck on accessories for it

The women said “masculine,” because:

• in order to get their attention you have to turn them on
• they have a lot of data but can’t think for themselves
• they’re supposed to solve problems but half the time they are the problem
• as soon as you take up with one you realize that if you had waited a little longer you could have gotten a better model

(h/t: chrtoo)

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 about 5 common money mistakes new grads need to avoid, Steve from Arkansas had this to say about the accompanying photograph:

How cool, a 1955 double-die penny! I collected coins as a kid and always wanted one but could never afford it.

It’s even worse for today’s kids, Steve. Most of them can’t even afford to collect a roll of 1964 quarters.

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

Photo Credit: stock photo