Black Coffee: Soft Money, Hard Times

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?

‘How did you go bankrupt?’ Bill asked.
‘Two ways,’ Mike said. ‘Gradually, then suddenly.’

— Ernest Hemingway, The Sun Also Rises

Credits and Debits

Debit: Did you see this? It turns out that just seven stocks making up $11 trillion in market capitalization – Tesla, Meta, Alphabet, Netflix, Amazon, Microsoft, and Nvidia – contributed 73% of returns of the S&P 500 in the first half of this year. Yep. And when you consider the S&P’s price-to-earnings ratio is nearly double the long-term historical average of 13, only a fool would deny that the stock market is as robust and healthy as ever. Yessiree!

Credit: Despite Tesla’s huge valuation, the number of unsold electric vehicles (EVs) at dealers last quarter tripled compared to the previous year. Maybe that’s because 21% of new vehicle shoppers now say they’re “very unlikely” to consider an EV, up from 17.8% in January. At the same time, the share of those who said they were “very likely” to buy an EV remained flat at 26%. Why? Lack of public charging infrastructure and high prices were the top concerns, followed by range anxiety, charging time, power outages and grid concerns. On the bright side for EV manufacturers: the spontaneous combustion issue didn’t make the list.

Debit: So why haven’t we seen interest rate hikes have more impact on the economy? Housing prices have dropped, although not very much. Also, Americans are still piling up credit card debt and the economy appears to be limping along in spite of this.

Credit: Legendary macroeconomic analyst Jim Grant says that he thinks something is going to break – eventually: “I was of the view that try as Jay Powell might to emulate Paul Volcker, but Mr. Powell isn’t working with Paul Volcker’s economy. There is much more debt and, therefore, much more fragility. So with respect to the paradox of nothing breaking much yet, just be patient. I expected it might.” Judging from their appetite for gold, you can bet the world’s central banks expect so too …

Credit: By the way, Grant also said he thinks we’re about to enter “a long cycle of rising interest rates” and a “generational” bear market in bonds. His reasoning? “Interest rates fell for the last quarter of the 19th century; rose for the first 20 years of the 20th; fell from 1920 to 1946; rose in ’46 to ’81; and fell from ’81 to 2021. And at each juncture there was a speculative excess blow-off. So it wouldn’t surprise me at all if we’re embarked on a generation-length bear market in bonds – meaning rising yields and falling prices.” Uh huh. On a technical basis, this broken trend line certainly agrees …

Debit: Mr. Grant’s thesis makes sense when you look at US debt. In fact, the cumulative deficit 9 months into the fiscal year is already the 3rd highest on record, surpassed only by the crisis years of 2020 and 2021: at $1.4 trillion, the fiscal 2022 year-to-date deficit is already up 170% compared to the same period last year. This prompted Zero Hedge to opine that the monetary system’s “endgame has now arrived, and all the US can do now is rearrange the deck chairs.” Oh … and if you’re looking for irrefutable evidence that the US is now on the financially-deleterious business-end of a long-tail exponential debt curve, here it is:

Debit: This is just the beginning, as every month shorter-term Treasures bought at near-zero interest rates must be refinanced at today’s higher rates. In fact, over the next 12 months $6.1 trillion needs to be refinanced, and then another $7 trillion needs to refinanced through 2028. With that in mind, it’s no surprise that if rates don’t fall soon, debt servicing costs will hit $1.3 trillion by the end of next year, thereby making it the biggest US government expenditure – even more than Social Security and national defense. That begs this question: When the debt fully rolls over and every last penny of US debt is at 5% interest instead of 1%, will the annual interest expense be $1.5 trillion? Could it be even more? You bet it could!

Debit: Frankly, with an average maturity time of slightly more than five years, slightly less than 20% of US Treasuries have to be rolled over each year – and the math on the resulting higher interest costs should frighten everyone. But it doesn’t. In fact, too many people still believe this is an issue that can be “fixed” by merely raising taxes and adding 87,000 more IRS agents. I guess ignorance really is bliss …

Debit: Did I mention that, at $1.3 trillion, debt servicing expenses will consume more than 25% of US tax revenue – assuming the US economy doesn’t fall into an economic depression. In that case, it would likely consume more than half of US tax revenue. Then it will be game over. Although it’s too late now, we wouldn’t be in this mess if only the spendthrift politicians in Congress had listened to this guy:

Debit: Needless to say, the only solution to this intractable math problem is a rapid escalation of fiat creation and debt monetization. The Fed will do everything in its power to hide the impacts of this on the USD by introducing CBDCs and yield curve control (YCC). Just remember that, financially speaking, your best protection against the consequences of all this madness is the accumulation of physical precious metal. Until then …

Credit: Of course, it shouldn’t surprise anyone that America’s abuse and weaponization of its reserve-currency exorbitant privilege will come to an end at some point after the BRICS new gold-backed currency is introduced next month. As for the consequences, macroeconomist Alasdair Macleod says to “expect higher prices, with central banks forced to (allow) higher bond yields, undermining all financial and property values.” Uh … just don’t tell that to the Magic Money Tree (MMT) crowd …

Debit: And so there you have it; signs that the “Almighty Dollar” won’t be almighty much longer are everywhere. And yet, when USD finally fails, it will blindside 99% of all Americans – not to mention the rest of the world. At the same time, our spendthrift politicians and the Fed will insist they never saw it coming. Needless to say, the responsibility to protect your wealth is on you and nobody else. As for those who believe their “benevolent” government will make them whole in a currency collapse, well … they’re simply deluding themselves.

By the Numbers

Here are the strongest – and weakest – state labor markets in the US according to its “Z score” which is based on a combination of factors including, labor productivity, job openings, quit rate, employment growth, wage growth, layoff rate and underemployment.

50 California (Z-score: -1.228)

49 New York (-1.019)

48 Rhode Island (-0.840)

47 Washington (-0.660)

46 Michigan (-0.653)

5 Idaho (0.644)

4 Virginia (0.647)

3 Florida (0.709)

2 South Carolina (0.748)

1 Louisiana (0.851)

Source: PeakSalesRecruiting.com

The Question of the Week

[poll id="484"]

Last Week’s Poll Results

What are your top three reasons for carrying cash?

• Small purchases (25%)
• Cash-only locations (21%)
• Financial emergencies (17%)
• Tipping (16%)
• Transaction privacy (14%)
• To help manage my finances (7%)

More than 2200 Len Penzo dot Com readers responded to last week’s question and it turns out that the most popular reason for carrying cash is to cover small purchases. For me, it’s financial emergencies – especially for those times when a store’s credit card readers are down – which seems to happen more than ever these days. At least for me.

If you have a question you’d like to see featured here, please send it to me at Len@LenPenzo.com and be sure to put “Question of the Week” in the subject line.

Useless News: Three Quick Questions

A Texan, a Venezuelan, and a New Yorker go into a restaurant in London. Before they could order, the waiter said, “Excuse me, but if you want a steak tonight you might not get one as there is a shortage due to mad cow disease.”

The Texan asked, “What’s a shortage?”

The Venezuelan replied, “What’s a steak?”

The New Yorker said, “What’s excuse me?”

(h/t: Salamander)

More Useless News

Here are the top five articles viewed by my 46,062 RSS feed, weekly email subscribers, and other followers over the past 30 days (excluding Black Coffee posts):

1. The Best and Worst Dollar-Store Deals
2. Do You Have Unclaimed Money? Here’s How to Find Out!
3. Can Money Buy Happiness? Here’s How to Get the Most Joy from Your Spending
4. A First-Time Buyer’s Guide for Gold & Silver
5. A Mechanic Reveals How to Avoid Costly Car Repairs

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(The Best of) Letters, I Get Letters

After reading this guest post from my daughter, Dana passed along this friendly suggestion to Nina:

Nina, you might want to consider charging your dad for the blog posts … Just an idea. Keep up the good work!

I also received this note in my inbox from Charles:

I hope you’re paying Nina for her writing services.

Nina gets $15 for every article she writes. That may not seem like much, folks – but her benefits package is absolutely boffo!

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