1) Price action, the yield curve and rate expectations are all telling us the bear market on deck could equal or exceed 1987, 2000 or 2007.
S&P price action before the bear markets of 1987, 2000 & 2007 versus 2019.
The yield curve 1987, 2000 & 2007 versus 2019.
1987, the curve didn’t invert until 1988 but it was a different world in 1987, 10 year Treasuries were yielding over 9.00%, 3 month over 8.00%, reported inflation 3.58%, AAA rated Treasuries paid a real rate of return in excess of 4.42%, total Federal debt 2.34 trillion (5.20 trillion in 2019 USD).
2000, The curve inverted in June, the bear market fully engaged in October, average Treasury yield 6.43%, reported inflation 3.37%, AAA Treasuries paid an average real rate of return of 3.06%, total Federal debt 5.62 trillion (8.27 trillion in 2019 USD)
2007, The curve inverted in January 2007, the bear market engaged in October, Average Treasury yield 4.80%, reported inflation 1.93%, AAA rated Treasuries paid an average real rate of return 2.15%, total Federal debt 8.95 trillion (10.97 trillion in 2019 USD)
2019, The curve inverted in January 2019, current 10 year Treasury yield 1.71%, current reported inflation 1.76%, downgraded AA+ rated Treasuries pay a real rate of return -0.05%, total Federal debt in excess of 22.51 trillion.
Rate expectations 1987, 2000 & 2007 versus 2019.
1987, 17 August, the S&P was trading at 335.40, 4+ trillion in interest rate derivatives was pricing in 1.60% in rate hikes.
13 October 1987, the S&P was at 314.52, -20.88, -6.22%, the 4 trillion derivatives had gone to pricing in just 1.07% in hikes.
20 October 1987 (1 week latter) the S&P had sold off a total of 35.90%.
2000, 25 January, the S&P was trading at 1,410.03, 8+ trillion in interest rate derivatives was pricing in 0.45% in rate hikes.
15 December 2000, the S&P was at 1,336.60, -73.70, -5.21%, the 8 trillion in derivatives had gone to pricing in 0.59% in rate cuts.
October 2002 the S&P had sold off a total of 50.50% and didn’t see a significant new high until September 2013.
2007, 12 June, the S&P was trading at 1,509.12, 10+ trillion in interest rate derivatives was pricing in a 0.1950% rate hike.
15th of November, the S&P was at 1,443.49, -65.63, -4.34%, the 10+ trillion in derivatives had gone to pricing in 0.77% in rate cuts.
March 2009, the S&P had sold off a total of 57.70% and didn’t see a significant new high until September 2013.
2018 to 2019, 5 October 2018, the S&P was trading at 2,909.65, 17+ trillion in rate derivatives was pricing in a 0.2550% rate hike.
6 December 2018, the S&P was at 2,696.15, -213.50, -7.33%, the 17+ trillion in derivatives had gone to pricing no rate hikes.
26 December 2108, the S&P was at 2,346.60, -563.05, -19.35%, the 17 trillion had gone to pricing in 0.15% rate cut.
14 June 2019 2019, the S&P was at 2,895.25, +548.65, +18.95%, the 17 trillion had gone to pricing in 0.79% in rate cuts.
19 September 2019 the S&P had rallied a total of 660.20 points to 3,006.80 +21.96%.
Either this was the shortest bear market in history or something in 2019 has fundamentally changed and in a very big way.
History’s telling us the S&P should be on it’s way to 2,000 not trying to bang out a new all time high.
The very big difference between 1987, 2000, 2007 and 2019
In 1987, 2000 and 2007 AAA rated U.S. Treasuries that paid a real rate of return qualified as a safe haven alternative to quality stocks,
In 2019 downgraded AA+ Treasuries that have a negative rate of return of -0.05% don’t even qualify as a good investment much less a safe haven alternative to quality stocks.
If 10 year yields returned to their 50 year low of 1.50% a 10 year Treasury with a 5.00% coupon, yielding 1.71% would appreciate by $2,270 from $130,010 to $132,280 for an appreciation in the liquidation value of the Treasury of +1.75%.
If 10 year yields went to their 50 year average of 6.35% a 10 year Treasury would fall in price by -$36,949 from $130,010 to $93,061 for a loss on the Treasury’s liquidation value of -28.42%.
At their 50 year high yield of 15.32% a 10 year would fall by -$81,180, from $130,010 to $48,830 for a loss on the Treasury’s liquidation value of -62.44%.
|Current, High, Average & low||Price 5.00% Coupon||Yield||Reported Inflation||Real Rate
The risk/reward of owning a Treasury in 1987, 2000, 2007 versus 2019
1987, there was motivation to sell stocks and buy AAA rated U.S. Treasuries with a real rate of return of 4.99% and upside instrument appreciation potential as the Federal Reserve lowered rates.
In 1987 if 10 year yields returned to the current 50 year low of 1.50% a 10 year Treasury with a 5.00% coupon, yielding 9.52% would have appreciated by $60,640 from $71,640 to $132,280 for a profit on the liquidation value of +84.65%.
Ff 10 year yields went to their current 50 year average of 6.35% in 1987 a 10 year Treasury would have appreciated in price by $21,421 from $71,640 to $93,061 for a profit on the Treasury’s liquidation value of +29.90%.
At the 50 year high of 15.32% a 10 year would have fallen by -$22,810, from $71,640 to $48,830 for a loss on the Treasury’s liquidation value of -31.84%.
|1987 to High, Average & low||Price 5.00% Coupon||Yield||Reported Inflation||Real Rate of Return|
The favorable risk/reward of owning a Treasury in 1987 helped fuel the sell off in stocks with stock sale proceeds being reallocated to buy U.S. Treasuries pushing their prices higher and yields lower. Lower yields reduced borrowing costs for the Federal Government on new debt and more importantly debt service cost on existing Federal debt.
Rates at artificial lows enabled the Federal Government to borrow and spend their way out of the recession quickly.
The downside is that it left debt the Federal Government had no intention of paying back or reducing confirmed by their complete lack of fiscal restraint when the U.S. economy “recovered”, strike 1.
|U.S. Debt Owned 1987||Billions||Percent|
|Total Debt Owned by Government Trusts (Special Issues) & the Federal Reserve||$601.08||25.75%|
|Total Federal Debt||$2,334.50|
|Annual Federal Revenue and as a percentage of total Federal Debt||$816.14||34.96%|
2000, again there was motivation to sell stocks and buy AAA rated U.S. Treasuries with a real rate of return of 2.50% and upside instrument appreciation potential when the Fed cut rates.
In 2000 if 10 year yields returned to the current 50 year low of 1.50% a 10 year Treasury with a 5.00% coupon, yielding 6.26% would appreciate by $41,440 from $71,640 to $132,280 for an appreciation in the liquidation value of +45,62%.
If 10 year yields went to their current 50 year average of 6.35% in 2000 a 10 year Treasury would appreciate in price by $2,221 from $90,840 to $93,061 for a profit on the Treasury’s liquidation value of +2.44%.
At the 50 year high yield of 15.32% a 10 year would fall by in value by -$41,010, from $90.840 to $48,830 for a loss on the Treasury’s liquidation value of -46.25%.
|2000 to High, Average & low||Price 5.00% Coupon||Yield||Reported Inflation||Real Rate of Return|
This again helped fuel the sell off in stocks with the proceeds being reallocated to U.S. Treasuries pushing their prices higher and yields lower reducing borrowing cost to the Federal Government on new debt and more importantly debt service cost on existing Federal debt.
This time round when demand in the free market for Treasuries at non competitive rates dried up the Federal Government borrowed from Government Trusts and used this money to buy more U.S. Treasuries at non competitive rates to force Treasury prices to artificial higher highs and yields to artificial lower lows.
Forcing rates to artificial lows made it easier for the Federal Government to again borrow and spend their way out of recession rather then addressing the fundamental problems that created the recession.
The downside is it left more debt the Federal Government had no intention of paying back or reducing confirmed by their complete lack of fiscal restraint when the U.S. economy “recovered”, strike 2.
|U.S. Debt Owned 2000
|Total Debt Owned by Government Trusts (Special Issues) & the Federal Reserve||$2,597.58||45.58%|
|Total Federal Debt||$5,698.93|
|Annual Federal Revenue as a Percentage of Total Federal Debt||$1,966.70||34.51%|
2007 selling stocks to buy AAA rated U.S. Treasuries with a real rate of return of 0.99% with upside instrument appreciation potential could still be justified. The demand for Treasuries again helped fuel the sell off in stocks, rally in U.S. Treasuries, yields lower which initially helped fund the U.S.’s record deficit spending.
In 2007 if 10 year yields returned to the current 50 year low of 1.50% a 10 year Treasury in 2007 with a 5.00% coupon, yielding 4.53% would have appreciated by $28,570 from $103,710 to $132,280 for a gain in the liquidation value of +27.55%.
If 10 year yields went to their current 50 year average of 6.35% a 10 year Treasury would have depreciated in price by -$10,649 from $103,710 to $93,061 for a loss on the Treasury’s liquidation value of –10.27%.
At the 50 year high of 15.32% a 10 year would have fallen in value by -$54,880, from $103,710 to $48,830 for a loss on the Treasury’s liquidation value of -52.92%.
|Current, High, Average & low||Price 5.00% Coupon||Yield||Reported Inflation||Real Rate of Return|
|U.S. Debt Owned 2007||Billions||Percent|
|Total Debt Owned by Government Trusts (Special Issues) & the Federal Reserve||$4,592.77||51.10%|
|Total Federal Debt||$8,988.54|
|Annual Federal Revenue as a Percentage of Total Federal Debt||$2,272.30||25.28%|
During the last recession when free market demand to buy U.S. Treasuries dried up the Federal Government had a problem.
Up until 2007 whenever the free market no longer wanted to purchase Federal debt at non competitive rates the Federal Government borrowed any additional funds they needed to sustain record deficit spending from Government Trusts like Social Security, Military and Civilian pension funds, by the end of 2007 Government Trusts owned 42.50% of total Federal debt (3.819 trillion of the 8.988 trillion) their liquidity cleaned out and replaced with non marketable “Special Issue Securities” that paid non competitive yields with duration of up to 15 years.
Facing a financial crisis and recession with nearly every source of funds exhausted the Federal Government had two choices, they could reduce record deficit spending and deal with the harsh realities of budget cuts or they could create trillions of dollars from nothing backed by nothing to fund additional record deficit spending which was conservatively projected to be 8 trillion dollars through 2018 the 8 trillion would have increased total Federal debt by the end of 2018 to 17.5 trillion or 4 trillion less than the actual increase of 12 trillion dollars to 21.5 trillion.
The decision was made to escalate Federal deficit spending rather than control or reduce it, to pay for it the Federal Government instructed the Federal Reserve to create trillions of dollars from nothing backed by nothing to buy all the debt at non competitive rates the free market wouldn’t touch or couldn’t be offed in Government Trusts from any surpluses collected in payroll tax receipts.
The Federal Government’s first priority was to bailout a select group of financial institutions that were blamed for igniting the financial crisis and recession. These institutions had extended excessive amounts or unjustified credit to mortgage companies who lent these borrowed funds at artificially low rates with very high fees to “sub prime borrowers” enabling the “sub primers” to buy real estate they couldn’t afford and/or to spend borrowed money against real estate they owned they couldn’t afford to pay back. Total debt levels became extraordinary high relative to total annual income, when the economy stalled delinquency rates on this debt soared putting the institutions that had condoned and promoted this irresponsible borrowing in jeopardy of being insolvent. The Federal Reserve immediately created over 1 trillion dollars to bail out a select group of these institutions letting others fail. Now in 2019 some of these bailout recipients and their cohorts who would have been hurt or insolvent by the bailout recipients failure pay Bernanke (who was chairman of the Fed at the time) and other Fed board members $10,000 to as high as $400,000 for a single “speaking engagement”.
Over a trillion more was then created by the Federal Reserve to buy Treasuries at non competitive rates to rally Treasury prices to record highs and force yields to record lows, this slashed the cost of financing over 8 trillion in new Government debt and more importantly reduced the debt service cost on 9 trillion in existing Federal Debt, strike 3.
U.S. Federal debt was downgraded twice, the first time to AAA negative in March 2011 with a harsh warning to control record deficit spending and cease “Quantitative Easing” when these warnings went ignored the U.S.’s debt rating was downgraded again to AA+ in August 2011.
A debt rating of AA+ is the same as Finland & Hong Kong and below the AAA ratings of Canada, Denmark, Germany, Lichtenstein, Luxembourg, Netherlands, Norway, Singapore, Sweden, Switzerland and Australia.
The next recession will be the first in the U.S.’s history that it enters without it’s coveted AAA debt rating.
Even with the loss of their AAA rating the Federal Government still had no intent of paying it’s debt back, reducing record deficit spending or trying to restore their AAA rating confirmed by their continued lack of fiscal restraint when the U.S. economy “recovered”.
In 2019 it makes absolutely no sense to liquidate a tangible asset like gold, real estate or a quality stock to buy a downgraded U.S. Treasury paying a near record low yield of 1.71%, with a 0.05% negative rate of return with record high instrument and currency risk.
In 2007 if 10 year yields returned to the current 50 year low of 1.50% a 10 year Treasury with a 5.00% coupon, yielding 1.71% would appreciate by $2,270 from $130,010 to $132,280 for an appreciation in the liquidation value of +1.75%.
If 10 year yields went to their current 50 year average of 6.35% a 10 year Treasury would depreciate in price by -$36,949 from $130,010 to $93,061 for a loss on the Treasury’s liquidation value of -28.42%.
At the 50 year high of 15.32% a 10 year would fall in value by -$81,180, from $130,010 to $48,830 for a loss on the Treasury’s liquidation value of -62.44%.
What makes U.S. dollars and debt even less attractive relative to tangible assets and quality stocks is the fact that the Federal Reserve has now scheduled the creation of 760 billion dollars annually to continue to buy debt at non competitive rates.
|Current, High, Average & low||Price 5.00% Coupon||Yield||Reported Inflation||Real Rate of Return|
|Who Owned U.S. Federal Debt at the end of 2018||Billions||Percent|
|Total Debt Owned by Government Trusts (Special Issues) & the Federal Reserve||$8,292.74||38.67%|
|Total Federal Debt December 2018||$21,443.72|
|Annual Federal Revenue as a Percentage of Total Federal Debt||$3,235.86||15.09%|
4) Beyond Repair?
Annual Federal Revenue as a percentage of total Federal debt has declined from 56.89% in 1980 (when rates were at record highs) to a new low in 2018 of 15.09% (with rates at record lows). This ratio should make it absolutely clear what the Federal Government’s motivation has and continues to be to keep rates at record lows.
The demise of U.S. debt as a safe haven alternative to tangible assets and quality stocks initially helped fuel stock prices higher as investors sold U.S. debt and bought stocks through 2017.
In 2018 & 2019 with the credibility of U.S. debt continuing to deteriorate it’s helped to support the U.S. equity markets near their all time highs.
S&P valuation, dollars versus gold
The dollar may have appreciated against it’s foreign counterparts as these countries lowered their rates to and below zero to contain their debt service costs but the U.S. dollar continues to depreciate against tangible assets like gold.
Since “Quantitative Easing” began in 2008 gold has appreciated 77.44% from $837.50 per ounce in 2008 to $1,486.10 in 2019. Federal debt during this same period increased by 147.78%.
The S&P trading at 2,984.87 equates to 2.01 ounces of gold far from the high of 5.53 ounces in August 2008.
At 2.01 ounces it tells me equities still have profit potential trading them long, granted gains on long positions won’t provide the immediate gratification of shorting but longs are still in the 2019-2020 playbook.
My “Old Timer Portfolio” in 2019 is up 35.16% further confirming the U.S. dollar’s continuing devaluation against tangible assets and quality stocks.
The “Old Timer Portfolio” is a collection of 30 stocks that have survived 2 bear markets and recessions, this portfolio has appreciated 17 out of the last 19 years from $300,000 in 2000 to $12.49 million in 2019, this is without using leverage, doing any trading, hedging or reinvestment of profit.
|News Prices||Oct-2000||Oct-2019||2000 – 2019|
This page provides data, splits, quotes, news and a spreadsheet enabling you to create your own portfolio of the 30 and monitor them forward.
Since 2007 Gold has appreciated by 139.60%, the S&P 106.97% consistent with the growth in M3 (Money Supply) of 111.73% and Federal debt of 156.60% indicating a good portion of the appreciation in Gold and the S&P is is attributed to the dollar’s devaluation caused by the creation of trillions dollars from nothing and backed by nothing over the last 11 years.
The upside it tells me Gold at $1,486.10 and the S&P at 2,984.87 are not overvalued.
Sources; M3 CPI Gold Total Federal Debt
Further dollar devaluation against tangible assets and quality stocks is on the horizon.
Shortly after the Fed’s 203 billion dollar emergency bailout in the repo market in September 2019 they announced they will be creating an additional 720 billion dollars annually indefinitely from nothing backed by nothing to straighten out the crisis in the repo market. Fed chair Powell is telling us what the Fed is doing is not “Quantitative Easing” but it essentially does the same thing, creating money from nothing, backed by nothing to buy debt at non competitive rates to force debt prices higher, rates lower enabling the Federal Government to borrow for less and contain debt service cost on exiting Government debt,
What distorted our perception of valuation is the ongoing misrepresentation of inflation by the BLS.GOV which shows an increase of only 26.01% during this same period, the only thing that reported inflation is correlated to in 2019 is it becomes more distorted and less accurate the deeper the U.S. gets in debt to justify low rates that are stripping owners of Treasuries of a fair rate of return on their Treasury debt.
Accelerated U.S. dollar devaluation will engage
29.07% of total Federal debt is now owned by non U.S. investors increasing by over 380 billion from 6.256 trillion to 6.636 through June 2019 alone.
July, August & September 2019 not reported yet by the Fed add another 150 billion bringing the total up to 6.786 trillion though September 2019 up 530 billion or +8.47% in 2019.
Add this 6.786 trillion to the 44.214 trillion in non Treasury assets and the total exceeds 51 trillion U.S. dollars.
This 51+ trillion makes the U.S. dollar and debt extremely vulnerable to foreign liquidation when the long-term trend in the U.S. dollar begin to change from up to down.
When foreign U.S. dollar liquidation engages it will create a hemorrhage in the U.S. dollar’s value against tangible assets that the Federal Reserve won’t be able cauterize with their one and only remaining tool “Quantitative Easing”
2008 – 2019 Dollar Index chart (updated every 10 minutes)
What is “Quantitative Easing” and it’s true purpose?
“Quantitative Easing” is nothing more than the creation of money from nothing, backed by nothing to buy debt at non competitive rates the free market won’t touch.
The primary purpose of “Quantitative Easing” (QE) is not to simulate the economy as represented by the Federal Government and Federal Reserve.
QE’s primary purpose has and always will be to buy Federal debt at non competitive rates to force and hold rates down. Low rates enable the Federal Government to finance record deficit spending for less and more importantly contain Federal debt service cost on existing debt.
No one can create a valid argument that by removing trillions of dollars in interest income from the owners of Treasury debt who would have spent this money in the free market economy has or ever will stimulate it.
Ask yourself if the true purpose of low rates was to help the citizens of the U.S. through the last recession and stimulate the economy then why during the last recession did the personal loan rate remain above 10.00%, credit card rates above 12.50% when bank borrowing and deposit rates went below 0.25%?
As Governments, corporations and individuals carry more debt as qualified by annual income as a percentage of their total debt the more vulnerable they and the economy become. The mortgage crisis that ignited the last recession clearly demonstrates the vulnerability of a debt laden economy.
Debt and lack of liquidity have now put the Federal Reserve once again in “bailout mode”
September 2019, in less than 1 week a “cash crunch” in the Repurchase Market (Repo) drove the Repo rate from 2% to over 10% and the Federal Funds rate to 2.30% or 0.30% above the Fed’s current 2.00% upper limit. The only way the Federal reserve was able to contain the spike higher in rates was to create hundreds of billions of dollars from nothing backed by nothing to intervene in the repo market.
In its first direct injection of cash into the banking sector since the financial crisis the Fed created $203 billion in “temporary cash” over several days to quell the funding crunch and push the effective Fed Funds rate back down in what’s know as an overnight system Repo.
October 2019 the Fed has now scheduled to create 60 billion per month in “temporary asset purchases” or 720 billion annually indefinitely to contiue to buy debt at non competitive rates.
No one can create an argument that the creation of trillions of dollars will support the long-term value of the U.S. dollar (as determined by it’s buying power).
Ask yourself, does a healthy economy have to create money from nothing, backed by nothing to buy their own debt at artificially low rates in order to finance record deficit spending as it spirals out of control?
Reality, the Fed still owns over over 3.96 trillion of the debt they purchased with “created” money during the last financial crisis & recession.
|Last available Date||Mortgage Back Securities owned by the Federal Reserve||Federal debt owned by the Federal Reserve||Total debt owned by the Federal Reserve|
In 2019 the U.S.’s AAA rating and fiscal credibility aren’t the only things that have disappeared, so have yields and real rates of return .
The average Treasury rate above reported inflation (real rate of return) has gone from the 1968 -2007 average of +3.58% to -0.05% and it’s headed even lower.
|Period||Average Treasury Yield||Average Reported Inflation||Average Real Rate of Return||Credit Rating|
|1968-2007 Pre QE Average||8.29%||4.71%||3.58%||AAA|
||2.67%||1.76%||0.91%||AAA to AA+ 2011|
3.02) The primary purpose of eliminating real rates of return and removing trillions of dollars in interest income from the free market economy was done to contain Federal debt service cost. There is absolutely no valid argument that anyone can make that would support the removal of nearly 4 trillion dollars of interest income from an economy stimulates it.
Debt service cost as a portion of total Government debt
The table & chart below compare the cumulative total increase in Federal debt to the cumulative total of U.S. Federal debt service cost from 1968 through 2018.
|Year||Total Increase in Federal Debt||Total of Debt Service Cost|
3.03) The reduction and elimination of real rates of return has reduced Federal Debt Service cost by more than 3.795 trillion since the inception of “Economic Stimulus” and “Recovery”.
|Year||Eliminated Real Rate of Return||Cumulative Total|
5.01) Projected Federal Deficits through 2024
The Federal Government’s 2019-2024 projected deficits total 5.918 trillion. These estimates were calculated with the optimistic assumption the U.S. will have continued economic expansion and no recession through 2024.
They also exclude “Off Budget Expenditures”
2019 -2024 Projected Budget Deficits
“Off Budget Expenditures” are not included in reported budget deficits because they are considered “mandatory” expenses and U.S. politicians don’t get to vote on them therefore the Federal Government has deemed they don’t count.
“Off Budget Expenditures” include incidentals like the cost of Social Security, the cost of running the Federal Reserve, the U.S. Postal Service and hundreds of other Government programs.
Impact of “Off Budget Expenditures” from 1968 through 2018
In 2018 the reported Budget Deficit was 779.14 billion yet the increase in Federal Debt was 1.256 Trillion, the 447.48 billion dollar difference was generated by “Off Budget Expenditures”.
Since 1968 “Off Budget Expenditures” represent 7.365 trillion of the 21.128 trillion total increase in Federal debt.
|Period||Reported Deficit (Millions USD)||“Off Budget Expenditures” (Millions USD)||Actual Budget Deficits (increase in Federal Debt Millions USD)|
|1968-2018 Total Reported Deficits (Millions USD)||1968-2018 “Off Budget Expenditures” (Millions)
||1968-2018 Actual Budget Deficits|
5.03) Including “Off Budget Expenditures” actual Federal deficits as qualified by the increase in total Federal debt are expected to be a minimum of 7.20 trillion dollars through 2024, this assumes contained debt service cost (yields less than 2.00%), continued economic expansion and no recession.
5.04) Projected Growth in Annual Federal Revenue
Projected deficits including “Off Budget Expenditures” though 2024 also assume total Federal Revenue will magically start to grow 7.5 times faster over the next 6 years (+6.12% per year) than it has over the last 3 years (+0.82% per year).
|Year||Projected Federal Revenue (Billions USD)||Projected Annual Growth in Revenue (Percent)|
5.05) Increases in Social Security
Social Security is an “Off Budget Expenditure” and has increased by 141.26% since 2000 from 409.47 billion annually to 987.89 billion in 2018 and is projected to be at least 1.389 trillion by 2024.
Social Security is also scheduled to run out of money by 2035, in 2035 according to the Trustees Report May 2019 they plan to drop benefits across the board by 20% or raise payroll taxes by more than 2.00%.
The problem the Federal Government facing more immediately is they’ve already borrowed the 2.895 trillion in the Social Security Trust Funds by issuing the the Trusts non marketable “Special Issue Securities” at non competitive rates.
As of 2020 the Federal Government has lost one of their major sources of cheap money that up until now has financed 12.89% of total Federal debt.
In 2020 Social Security is scheduled to have it’s first deficit in decades which means the Federal Government instead of borrowing from Social Security Trust funds at non competitive rates will have to pay the projected deficit between payroll taxes and benefits of 187.13 billion plus an additional 81 billion in interest for a total of 268.13 billion, this number escalates to 455.86 billion plus interest by 2024.
If the Federal Government doesn’t borrow the money from another source or raise payroll taxes benefits to 63 million Americans who depend on Social Security will be cut sooner than the May 2019 Trustees Report of 20% by 2035.
|Period||Old Age Survivor Ins (OASI) (Billions USD)||Disability Ins (Billions USD)||Total Annual Social Security (Billions USD)|
Annual cost increases in Social Security use projections for a “reported inflation rate” of less than 2.00%, that government revenue will grow 7.5 times times faster over the next 6 years than the previous 3, the U.S will have continued economic expansion, no recession and the the retirement of baby boomers will be less than any independent projection.
5.06) Increases in Medicare
Federal Government Medicare costs have increased by 199.13% since 2000 from 196.27 billion to 587.11 billion in 2018, Medicare has no reserves, by 2024 annual Federal Medicare expenditures are expected to increase by 47.35% to 865.13 billion annually and this is without making it free for everyone.
To put the $987.89 billion cost of Social Security and 587.11 billion for Medicare into proper perspective total Federal Revenue for 2019 is expected to be $3.437 trillion.
|Year||Part A (Hospital Insurance)-fed $ billion nominal||Part B (Suppl. Med. Ins.) (Billions USD)||Part C (Medicare Advantage) (Billions USD)||Part D (Sup. Med. Ins. Drug) (Billions USD)|
5.07) What Federal deficit spending has done to Social Security Recipients, Military & Civilian Pensioners.
“Special Issue Securities” are non marketable Treasuries with a duration of up to 15 years, they’re issued at non competitive rates, then placed into Government Trusts like Social Security, Military & Civilian Pension Funds.
In 2019 the “Special Issue” well has run dry, the Federal Government has cleaned out every trust they oversee including Social Security by issuing these non marketable “Special Issue Securities” .
By borrowing all the money out of these Trusts at noncompetitive rates the Federal Government has jeopardized the pension benefits of over 100 million Americans that made involuntary lifetime contributions to these Trusts. These Americans in their retirement will more likely be living in poverty than security because of reckless Government spending.
To maintain retirement benefits the Federal Government will have to lower the standard of living of every American taxpayer by raising payroll taxes to meet benefit obligations or lowering benefits to recipients, my guess is they’ll do both to solve the problem raise payroll taxes and cut benefits.
Buy the end of 2018 the Federal Government had borrowed nearly all reserves out of every government trust they have a duty to oversee by issuing them more than 5.54 trillion in non marketable “Special Issue Securities” at non competitive rates.
5.08) What Federal spending did for the American taxpayer, their children and grandchildren.
1979, Federal debt per taxpayer, $9,222, equivalent to 99.69% of median annual income.
1987, Federal debt per taxpayer $22,974 or 140.83% of median income.
2000, Federal debt per taxpayer $42,631 or 139.14% of median income.
2007 Federal debt per taxpayer $64,863, or 162.97% of median income.
2018 Federal debt per taxpayer $143,980 or 268.33% of median income.
From 2007 through 2018 Federal debt per taxpayer increased by $79,117, $7,192 per year or $599 per month for 11 years, this trend is continuing and there is no plan on deck in 2019 by any U.S. political candidate to even try to contain this.
5.09) Did the U.S. economy and Taxpayer get their 12.511 trillion worth from 2008 – 2018?
U.S. taxpayers responsible for this debt were told the majority of the money borrowed was to “stimulate” and protect the U.S. economy.
From 2007 through 2018 the percentage of the employed U.S. population declined by 0.20% from 45.76% in 2007 to 45.56% in 2018.
The population increased by 25,587,000
The number of jobs increased by 11,069,750.
Median personal income averaged $45,316 per year.
To put this 12.511 trillion dollars into proper perspective 12.511 trillion could have employed 23,008,009 Americans for 11 years from 2007 through 2018 and paid each of them $45,316 per year for 11 years for total of $543,791 each, monies generated in income taxes on these 23,009,009 jobs could have created over 5 million more American jobs.
Percent of the population working in 2007 45.76%
Percent of the population working in 2018 45.56% (0.20% less)
Jobs created from 2007-2018 = 11,069.750
Jobs that could have been paid for by a 12.511 dollar trillion deficit = 23,008,009 to 28,000,000.
For more on the failure of Bernanke’s & Obama’s Economic stimulus see the article I wrote on Seeking Alpha explaining the difference between failed 2007-2017 BO Stimulus versus FDR’s New Deal that fueled the U.S. out of the great Depression.
FDR’s “New Deal” was done at a fraction of the cost (in 2019 USD) with many of the projects built by the “New Deal” programs still servicing the American public today like the Hover Dam and Golden Gate Bridge. Can you name one project pf the same scale that was done with the monies spent during BO economic stimulus that still serves the American public in 2019?
Yes, unemployment did improve but it’s not at a 50 year low as qualified by the percentage of the U.S. population working.
Federal deficits cannot be blamed on American productivity, lack of growth in Personal Income or total growth in Annual Federal Revenue.
GDP Per Employed Person
From January 1997 through December 2007 the growth in GDP per employed person outpaced reported inflation by an average of 1.82% per year with GDP per employed person outpacing inflation 10 out of 11 years.
From Jan 2008 – Dec 2018 the growth in GDP per employed person outpaced reported inflation by an average of 0.75% per year with GDP per employed person outpacing reported inflation 7 out of 11 years.
From 1997-2018 GDP per employed person outpaced reported inflation 17 out of 22 years by an overall average of 1.32% per year.
In theory Americans should be proud of the growth in their GDP, businesses should be thriving, jobs secure, the economy stable and quality of life good.
Growth in Personal Income
From Jan 1997 through Dec 2007 growth in annual personal income outpaced reported inflation by an overall average of 1.85% per year with growth in personal income outpacing inflation 10 out of 11 years.
2008 -2018 personal income increased faster than inflation by an average of 1.02% per year with growth in Personal Income outpacing reported inflation in 8 out of 11 years.
According to the BLS.GOV since 2000 prices have increased by 48.83%.
According to the U.S. Bureau of Economic Analysis, Median Income has increased by 76.30%.
In theory with growth in Personal Income outpacing reported inflation in 18 out of the last 22 years by an overall average of 1.44% per year Americans should be living far better in 2019 with more disposable income than in 1997.
Growth in Total Federal Revenue
From Jan 1968 through Dec 2018 growth in total Federal Revenue per capita outpaced reported inflation by an average of 1.41% per year.
From January 1997 through December 2007 growth in total Federal Revenue per capita outpaced reported inflation by an overall average of 1.81% per year with growth in Federal Revenue outpacing reported inflation 7 out of 11 years.
From Jan 2008 – Dec 2018 total growth Federal Revenue per capita increased faster than reported inflation by an average of 0.16% per year with growth in Federal Revenue outpacing reported inflation in 6 out of 11 years.
In theory with growth in total Federal Revenue per capita outpacing reported inflation in 33 out of the last 50 years by an overall average of 1.41% per year the U.S should have been able to reduce or eliminate budget deficits, maintain their AAA debt rating and be able to properly fund everything from childcare to retirement rather than cranking up over 22 trillion in debt that their children and grandchildren’ will be responsible for.
Ask yourself, how can Personal Income , Federal Revenue per capita, Federal spending per capita, Federal debt per capita, GDP per capita, Median Home prices and everything else from College tuition to trash pick-up all outpace reported inflation for 50 years and/or during any economic cycle during the last 50 years?
|Period Average||Reported Inflation||Federal Revenue||Federal Spending||Federal Debt||Personal Income||GDP||Median Home|
Which inflation rate do you believe is more accurate?
The red line was complied by an Actuarial Mathematician based on actual revenue and cost increases.
The black line was complied by the BLS.GOV who has consistently massaged the Official Inflation Rate lower since 1980 using what they call “Hedonic Quality Adjustments” I would have have expected a much more believable explanation from the BLS.GOV for “Hedonic Quality Adjustments” than this considering they have over 2.6 million employees with a median income of $104,980.
7) The Problem.
Aside from 2 justifiable U.S. debt downgrades, record low yields, near record high instrument and currency risk and negative real rates of returns professional traders, especially those that manage Family Offices have a very difficult time with the BLS.GOV’s reporting.
My piers and I all believe that the official BLS.GOV inflation rate has been misrepresented by the BS.GOV since 1980. In 1980 when inflation soared forcing rates and debt service cost higher the Federal Government instructed the BLS.GOV to do their first round of “revisions” to make the “official inflation rate” more “accurate” to justify lower yields enabling the Federal Government to contain Federal borrowing and debt service costs.
Over the last 40 years as Federal spending spiraled out of control and deficits soared the Federal Government has continued to instruct the BLS.GOV to “correct” the way that inflation is reported to the point in 2019 the “official inflation rate” as reported by the BLS.GOV has zero credibility with any advisor or money manger that has more than 1 functioning brain cell.
It’s this simple, by misrepresenting the “official inflation rate” the Federal Government contains debt service cost. The problem the Federal Government is now facing and why they talk about “inflation targets” is that true inflation has declined to approximately 3.50% and there is nothing left to adjust to keep the “Official Inflation Rate” at or below 2.00% to justify record low Treasury yields and negative rates of return.
Growth in Federal debt versus growth in Federal debt service cost tells the story.
A lower official inflation rate also contains all other Governmental expenditures that are linked to the “official inflation rate” such as increases in Social Security benefits and nearly all other Government programs, salaries and pensions.
Personal Income outpacing reported inflation in 18 out of the last 22 years by an overall average of 1.44% per year?
Real Disposable Income tells us a very different story down 20% versus 2000.
Source: Real Disposable Personal Income
Since 2000 Personal Income in ounces of gold has declined by 62.74% from 112.48 ounces in 2000 to 41.87 ounces by the end of 2018.
7.05) Fictitious inflation rates were tolerable when U.S. Treasuries had a real rate of return that bridged the gap between reported and actual inflation, not in 2019, yields and real rates of return have disappeared along with the U.S.’s AAA credit rating and any remaining shred of fiscal credibility and accurate economic reporting.
Is the U.S. Globally competitive in 2019?
Trade deficits will quickly tell you if the U.S. is Globally competitive or not and whether U.S. companies can maintain operations in the U.S.
Trade surplus = competitive in the Global marketplace keeping jobs, wealth and tax revenue in the U.S.
Trade Deficits = non competitive in the Global marketplace, loss of domestic wealth, jobs & tax revenue to non U.S. competitors.
9.01) The U.S has not had a meaningful and sustained trade surplus in over 50 years. In 2018 the reported trade deficit was 627.68 billion, 2019 year-to-date deficit through August 428.73 billion with the projected total trade deficit for 2019 between 655 billion to 721 billion depending on the outcome of tariffs and trade-wars.
From 1968 to 2019 U.S. trade deficits tell us U.S. citizens & entities have lost over 12.54 trillion in wealth to foreign competitors, 10.56 trillion of this 12.54 since 2000.
Taxation, increasing but less effective regulation, product plagiarization, escalating litigation and unrealistic unionization have gradually forced U.S. companies to move their manufacturing facilities out of the United States to survive.
From 1968 through 2019 the United States has lost over 14 million manufacturing jobs.
Loss of 14 million U.S. jobs over the last 50 years equates to the loss of 100’s of billions in domestic consumer spending and 100’s of billions in tax revenue that these jobs and companies would have generated for the U.S. Government over the last 50 years.
From 1968 through 2007 manufacturing represented an average of 17.86% of the total U.S. workforce, in 2018 only 8.51%, 0.04% from it’s all time historic low of 8.47% in 2017.
8) The players
8.01) Who is the BLS.GOV?
The BLS.GOV is a governmental statistical agency that collects, processes, analyzes and disseminates essential statistical data to the American public. It also is the main source of data for Congress, Federal agencies, State and local governments to determine cost increases for the majority of Governmental programs including, business that contact with the Federal Government.
The BS.GOV also serves as a statistical resource to the United States Department of Labor and conducts research into how much families need to earn to be able to enjoy a decent standard of living.
The BLS.GOV has 2,639,500 employees with a median income of $104,980 per year.
It’s ironic that median income for a BLS.GOV employee is $104,980 or 92.90% higher than U.S median Personal Income of $54,420 when the BLS.GOV determines the amount of money necessary for an American family to have a “decent” standard of living.
The Federal Reserve
The Federal Reserve is represented as an independent Central Bank with a charter to protect the integrity of the U.S. economy, financial system and U.S dollar.
The members of the Board of Governors, including the Chairman, are nominated by the President of the United States and confirmed by the Senate.
The salary for the Chairman of the Federal Reserve is set by Congress. In 2019 Congress set Fed Chair Powell’s salary at $203,500. only $73,340 less than the U.S, postmaster general’s of $276,840. Unlike the U.S. postal service that lost nearly 4 billion last year the U.S.’s “Independent Central Bank” makes money.
Prior to “Economic Stimulus” and “Quantitative Easing” in 2008 the Federal Reserve had an average annual net income of 28.40 billion per year.
Since “Economic Stimulus” and “Quantitative Easing” their average annual income has jumped by 165.90% to 75.52 billion per year.
I thought it would be higher since they can create trillions of dollars from nothing, backed by nothing to trade a market they control, guess you just can’t get good help these days $203,500 a year.
Unfortunately for the Federal Reserve they have to forfeit all their profits to their boss the U.S. Treasury.
From 2008 through 2018 the U.S.’s Independent Private Central Bank remitted over 830.7 billion in profits to the U.S. Treasury.
What’s going to happen
Ability to finance ongoing deficit spending
Including “Off Budget Expenditures” a minimum of 7.20 trillion in new issues will need to be sold to finance projected Federal deficit spending through 2024. The 7.20 trillion projection is based on continued economic expansion, contained debt service cost with Treasury yields at less than 2.00%, that total Federal Revenue will grow 7.5 times faster per year over the next 6 years (6.12% annually) than it has during the last 3 years (0.82% annually) and Social Security and Medicare costs will increase as projected.
The 7.20 trillion in new issues will have the worst yields and debt rating in the U.S.’s history (AA+) and have nearly highest instrument and currency risk in history.
A debt rating of AA+ is the same as Finland & Hong Kong and below the AAA ratings of Canada, Denmark, Germany, Lichtenstein, Luxembourg, Netherlands, Norway, Singapore, Sweden, Switzerland and Australia.
In 2019 the U.S. Federal Government can’t afford to pay a competitive rate on their existing debt much less a high enough rate that would attract buyers in the free market for 7.2 trillion in new debt they need to sell to fund the projected deficits.
To bridge the gap between the amount of debt the Federal Government can sell in the open market and what they want to spend the Federal Reserve will increase the creation of money from nothing backed by nothing from the current 720 billion per year to over 1 trillion.
The Federal Reserve will use this money to buy debt at non competitive rates to force debt prices to artificial highs and yields to artificial lows. This procedure will enable the U.S. to finance the projected deficits for less and more importantly contain debt service cost on the existing 22.5 trillion in existing debt.
Lack of fiscal restraint, the creation of trillions of dollars to buy their own debt at not competitive rates, understating projected deficits and ongoing misrepresentations by the BLS.GOV about economic releases such inflation will lead to further U.S. debt downgrades.
The biggest misrepresentation by the Federal Government and Federal Reserve is the the purpose of artificially low rates telling U.S. citizens it is to stimulate the U.S. economy and aid consumers through recession until the U.S. economy recovered.
S&P Global will be the first to downgrade U.S. debt leading with a harsh warning when the next round of “Quantitative Easing” fully engages (up from the current 720 billion to over 1 trillion annually), when the warning is ignored S&P Global will follow up with a downgrade to AA potentially AA- depending how hard the the Federal Government instructs the Federal Reserve to hit the “Quantitative Easing” throttle.
With escalating Social Security and Medicare costs and the overly optimistic assumptions the Federal Government’s deficits as qualified by the increase in total Federal debt will be far greater then the projected 7.2 trillion through 2024. Conservative independent estimates currently exceed 10 trillion.
I can’t see buyers showing up for the Federal Government’s new issue parties to buy this 7+ to over 10 trillion in new debt with the worst credit rating in history, lowest yields in history and highest instrument and currency risk in history.
With no buyers for U.S. debt at rates the U.S. Government is willing to pay the Federal Government will dictate to the Federal Reserve to create the trillions necessary to buy and new issues that can be sold or assigned to Government trusts.
Below what the Federal Reserve has created to-date to buy Federal debt the free market won’t, they update this chart quarterly, by the end of 2024 the total will have increased from the current 2.5452 trillion to more than 6 trillion USD.
The creation of trillions more coupled with U.S. debt downgrades will cause the U.S. dollar’s trend to reverse from up to down.
When the dollar’s price action moves below the, EMA9 (exponential moving average 9) the red line and the EMA9 moves below the EMA18 the blue line on the chart linked below trillions in U.S. dollar sales will engage and investors liquidate long dollar positions and speculative investors establish aggressive net new short positions.
Federal debt owned by non U.S. investors has and will see temporary demand pushing the total closer to 8 trillion, when the dollars trend softens you see liquidation engage, when the dollars trend is confirmed lower aggressive liquidation with downward momentum in U.S. debt prices accelerating exponentially as net new shorts enter the market.
Monitor the liquidation U.S. Treasury debt bought or sold by non U.S. investors on this link.
Monitor the declines the U.S. debt market using the links provided on the Global Interest Rate analysis page.
11.06) Gold will will rally during this period to a new all time high
11.07) Foreign liquidation of U.S. debt and dollars aggressively engage as the Fed creates trillions of dollars to try and cauterize the U.S. dollar & debt hemorrhage, I see the U.S. dollar taking out it’s 20 low.
11.08) Inflation will fully engage with reported inflation moving above 6.00% and actual inflation moving above 8.00%.
11.09) The Fed will continue with “Quantitative Easing” in the name of “Economic Stimulus” still trying to contain Federal Debt service cost and stabilize the decline in the U.S. dollar and debt markets further escalating the level of U.S. debt owned by the Federal Reserve.
11.12) Federal debt will exceed 30 trillion by the end of 2025 with the majority of the maturities being 5 or more years, in 2025 over 50% of Federal debt will be owned by the Federal Reserve and U.S. Government Trusts.
1.12) Inflation will continued to be misrepresented by the BLS.GOV on this link with Total Federal Income, U.S. Government Spending, GDP and Personal Income linked below continuing to outpace reported inflation by over 1.00% per year.
11.11) All prices will continue to increase by 50% to 100% faster than reported inflation which you can monitor using the links on this spreadsheet.
11.10) Unable to contain dollar and debt devaluation the Federal Government will enact “emergency and temporary” increases in income and payroll taxes. Just as the “emergency and temporary rates cuts of 2008 never went away away stripping savers of trillions in interest income I believe the “emergency and temporary” increases in income and payroll taxes won’t either.
In addition to the tax increases by 2035 Social Security Benefits, Military and Civilian Pensions will be cut, interest income generated by retirement savings will have disappeared and all income as qualified by it’s buying power from all sources will have been decimated by inflation caused by the Fed’s creation of money backed by nothing from 2008 forward.
By 2035 the true poverty rate in the United States will take out the old high of 15.90% in put in in 2012 unless the U.S. Census Bureau learns BLS.GOV inflation math and corrects it lower.
11.13) The Stocks of companies that survive will rally more from dollar devaluation than economic recovery.
These 29 stocks are a good place to start they have survived 2 bear markets and recessions with overall portfolio appreciation from $300,000 in 2000 to over 12.6 million in 2019 using no leverage, no trading and no reinvestment of profit.
This spreadsheet will enable you to create your own portfolio of these stocks, I’ve linked historical data, quotes and news enabling monitor their performance forward and whatever portfolio you may create forward.
11.14) By 2035 gold will be above $4,000 per ounce
11.15) By 2035 Personal Income in ounces of gold will have declined from 41.87 ounces in 2018 to less than 20.
12) During the next 15 years it will be essential to preservation and enhancement of family wealth to take risk and trade markets both long and short.
Current extreme fundamentals will generate extreme market moves creating what likely will be the best trading opportunities of our trading careers, these fully disclosed Automated Trading Account (ATAs) were designed to capture these moves .
|Link||ATA||Mini-mum||Start Date||Average Per Year||Maximum Drawdown||2019|
|12.20||Risk Disclosure||Defining Risk||Suspended & Closed|
|12.21||Automated Trading Accounts (ATA)|
|12.22||The ATA Fee Structure|
|12.23||Defining Overall Risk For Your ATA Account|
|12.26||How Balances Are Guaranteed Plus or Minus Trading|
|12.27||How To Open An Account|
13) In addition to never ending research of ATAs will continue to review all Hedge Funds, ETFs and CTA’s with the objective of providing our clients with the best solutions to the challenges of making money.
If you have any questions contact me
Peter Knight Advisor