Market price action, the yield curve and rate expectations are all telling us the bear market on deck could equal or exceed 1987, 2000 and 2007.
S&P price action 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 AAA Treasuries were yielding over 9.00%, 3 month over 8.00%, reported inflation 3.58% and Treasuries had 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 yields were 6.43%, reported inflation 3.37%, AAA Treasuries were paying 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 yields were 4.80%, reported inflation 1.93%, AAA rated Treasuries were paying an average real rate of return 2.15%, total Federal debt was 8.95 trillion (10.97 trillion in 2019 USD)
2019, The curve inverted in January, current 10 year Treasury yield 1.83%, current reported inflation 1.71%, downgraded AA+ Treasuries have a pre tax real rate of return of 0.12%, with total Federal debt now exceeding 22.51 trillion.
Rate expectations 1987, 2000 & 2007 versus 2019.
1987, 17 August, the S&P was trading at 335.40, 3+ trillion in interest rate derivatives were pricing in 1.60% in rate hikes.
13 October 1987, the S&P was trading at 314.52, -20.88, -6.22%, 3+ trillion derivatives was now pricing in 1.07% in rate hikes 0.53% less than August.
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, 5+ trillion in interest rate derivatives were pricing in 0.45% in rate hikes.
15 December 2000, the S&P was at 1,336.60, -73.70, -5.21%, the 5+ trillion in derivatives had gone from pricing in 0.45% in rate hikes to 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, 9+ trillion in interest rate derivatives were pricing in a 0.1950% rate hike.
15th of November, the S&P was at 1,443.49, -65.63, -4.34%, the 9+ trillion in rate derivatives had gone from pricing in a 0.195% rate hike to 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 at 2,909.65, 17+ trillion in rate derivatives were 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, 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.
28 October 2019 the S&P had rallied a total of 673.40 points to 3,020.00 +28.70%.
Either this was the shortest bear market in history or something in 2019 has fundamentally changed and in a very big way.
Market price action and interest rates are telling us the S&P should be on it’s way to 2,000 not putting in a new high.
What has and continues to support the market in 2019
In 1987, 2000 and 2007 AAA rated U.S. Treasuries qualified as a safe have alternative to quality stocks, they had a real rate of return of between 1.00% to nearly 5.00% with upside instrument appreciation potential when the Fed cut rates to stimulate the U.S. economy, this motivated investors to sell stocks as the market softened and reallocate funds to Treasuries.
In 2019 the U.S.’s credit rating is the worst in it’s history, 10 year yields recently traded at 1.66% near their all time historic low and 0.05% below reported inflation. Aside from a guaranteed post inflation loss what adds the most amount of risk to Treasury ownership in 2019 is instrument risk which is currently 3 times greater than potential reward with dollar devaluation risk a close second.
In 2019 U.S. Treasuries don’t qualify as a good investment much less a safe haven alternative to quality stocks.
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% that had 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 Treasury’s liquidation value of +84.65%.
If 10 year yields went to their current 50 year average of 6.35% a 10 year in 1987 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 Treasury 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.
Lower interest rates enabled the Federal Government to borrow and spend their way out of the recession.
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% that had 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 have appreciated by $41,440 from $71,640 to $132,280 for an appreciation in liquidation value of +45,62%.
If 10 year yields went to their current 50 year average of 6.35% a 10 year in 2000 would have appreciated 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 of 15.32% a 10 year would fall 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|
In 2000 the favorable risk/reward of Treasury ownership helped fuel the sell off in stocks with the proceeds being reallocated to U.S. Treasuries pushing Treasury prices higher and yields lower reducing borrowing cost to the Federal Government on new debt and 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 like Social Security, Military and Civilian pension funds and used this money to buy more U.S. Treasuries at non competitive rates to force Treasury prices to artificial highs and yields to artificial lows.
Lower borrowing and debt service costs made it easier for the Federal Government to again borrow and spend their way out of recession rather than addressing the fundamental problems that created the recessions of 1987 & 2000.
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||Billions||Percent|
|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% that still had limited upside instrument appreciation potential could still be justified. The demand for Treasuries helped fuel the sell off in stocks, rally in U.S. Treasuries and pushed 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 with a 5.00% coupon, yielding 4.53% would have appreciated by $28,570 from $103,710 to $132,280 for a gain in 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, by the end of 2007 Government Trusts owned 42.50% of total Federal debt up from 16.72% in 1987. By 2007 the marketable liquidity in these trusts had been cleaned out and replaced with non marketable “Special Issue Securities” that paid these Trusts non competitive yields with duration of up to 15 years.
In 2007 with the Government facing yet another financial crisis and recession with every source of funds exhausted had three choices, they could reduce record deficit spending and deal with the harsh realities of budget cuts, raise taxes, or they could create trillions of dollars from nothing backed by nothing to fund additional record deficit spending projected to be 8 trillion dollars through 2018. This 8 trillion would have increased total Federal debt by the end of 2018 to 17 trillion or 4.5 trillion less than the actual deficits of 12.5 trillion dollars.
The decision was made to escalate Federal deficit spending rather than control it and pay for it by instructing the Federal Reserve to create trillions of dollars to buy all the debt at non competitive rates the free market wouldn’t touch or that could not be offed in Government Trusts through “Special Issue Securities” cleaning out any surpluses that would be collected in payroll taxes.
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 of unjustified credit to banks & mortgage companies who lent these borrowed funds at artificially low rates to “sub prime borrowers” and collected very high fees. This enabled the “sub primers” to buy real estate they couldn’t afford and/or to borrow and spend money against real estate they owned (using inflated appraisals) they couldn’t 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 lending in jeopardy of being insolvent. The Federal Reserve immediately created over 1 trillion dollars to bailout a select group of these institutions letting others fail. Now in 2019 some of these bailout recipients and their cohorts 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 force Treasury prices to record highs and yields to record lows, this would slash the cost of financing over 8 trillion in new Government debt and more importantly for the Federal Government 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 trying to restore their AAA rating, paying this debt back or reducing record deficit spending again 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 1.83%, with a 0.12% pre tax real rate of return carrying record high instrument and currency risk.
In 2019 if 10 year yields returned to the 50 year low of 1.50% a 10 year with a 5.00% coupon, yielding 1.83% would appreciate by $3,350 from $128,730 to $132,280 for an appreciation in liquidation value of +2.76%.
If 10 year yields went to their 50 year average of 6.35% a 10 year Treasury would depreciate in price by -$35,669 from $128,730 to $93,061 for a loss on the Treasury’s liquidation value of -27.70%.
At the 50 year high of 15.32% a 10 year would fall in value by -$79,900, from $128,730 to $48,830 for a loss on the Treasury’s liquidation value of -62.06%.
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|
|U.S. Debt Owned 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%|
Annual Federal Revenue as a percentage of total Federal debt has declined from 56.89% in 1980 (when rates were near record highs) to a new low in 2018 of 15.09% (with rates near 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.
What is “Quantitative Easing” and it’s true purpose?
“Quantitative Easing” is nothing more than the creation of money from nothing, backed by nothing.
The primary purpose of “Quantitative Easing” (QE) is not to simulate the economy as represented by the Federal Government and Federal Reserve but to buy debt at non competitive rates to force debt prices to artificial highs and yields to artificial lows.
Low rates enable the Federal Government to continue to finance record deficit spending for less and more importantly contain Federal debt service cost on the 22.5 trillion dollars in existing Federal 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 paid taxes on and spent this money in the Global economy) has or ever will stimulate the economy.
If the true purpose of low rates was to help citizens through the last recession and stimulate the economy then why at the same time savers were stripped of trillions of dollars in interest income did the personal loan rate remain above 10.00%, credit card rates remain above 12.50% when bank borrowing and deposit rates went below 0.25%?
Forcing rates to artificial lows to enable Governments, Corporations and individuals to borrow and spend money they don’t’ have never has or will make an economy stronger and more stable in the long run. The mortgage crisis that ignited the last recession clearly demonstrates this.
Debt and lack of liquidity have now put the Federal Reserve once again in QE “bailout mode”.
September 2019, in less than 1 week a “cash crunch” in the Repurchase Market (REPO) drove the overnight lending 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 this 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 overnight down in what’s know as an overnight system Repo.
October 2019 the Fed has now scheduled to create 60 billion per month to facilitate “temporary asset purchases” or 720 billion annually indefinitely to continue to buy debt at non competitive rates the free market can’t or won’t. to continue to hold rates at artificial lows.
No one can create an argument that the creation of trillions of dollars from nothing & backed by nothing will support the long-term value of the U.S. dollar as qualified by it’s buying power.
In a healthy economy a Government does not have create trillions of dollars to buy record amounts of their own debt at non competitive rates to contain their borrowing and debt service costs.
The Federal Reserve still owns over over 3.96 trillion in “temporary debt purchases” they made with money they created from 2008 through 2017, the total of “temporary” asset purchases will now be increasing by 60 billion per month indefinitely.
|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 debt rating and fiscal credibility aren’t the only things that have disappeared, so have 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 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|
|2007-2019 Average||2.67%||1.76%||0.91%||AAA to AA+ 2011|
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 further contain Federal borrowing and debt service costs. There is absolutely no valid argument that that would support the removal of nearly 4 trillion dollars of interest income from beneficiaries of Trusts and the economy stimulates or stabilizes 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|
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”.
|Year||Eliminated Real Rate of Return||Cumulative Total|
Projected U.S. 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 contained debt service cost (less than 2.00%) contained inflation, 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 total 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 though 2018.
|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|
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, no inflation despite creating trillions of dollars from nothing and back by nothing and no recession.
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 or more than 3 times projected inflation) than it has over the last 3 years (+0.82% per year).
|Year||Projected Federal Revenue (Billions USD)||Projected Annual Growth in Revenue (Percent)|
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 Trustee’s Report May 2019 they plan to drop benefits across the board by 20% or raise payroll taxes by 2.00%.
The problem the Federal Government is facing more immediately is they’ve already borrowed out the 2.895 trillion in the Social Security Trust Funds by issuing these 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 (the Social Security Trust Funds) that have up until now 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 the Social Security Trust funds at non competitive rates will have to pay the projected deficit between payroll taxes and benefits of 187.13 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 Trustee’s 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% and the retirement of baby boomers will be less than any independent projection.
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.
To put the current cost of $987.89 billion 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)|
What Federal deficit spending has done for 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 them non marketable “Special Issue Securities” whenever they needed money to sustain their record deficit spending.
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.
Buy the end of 2018 the Federal Government had borrowed all reserves out of every government trust they have a duty to protect & oversee by issuing them more than 5.54 trillion in non marketable “Special Issue Securities” at non competitive rates.
To maintain the retirement benefits for over 100+ million Americans the Federal Government will have to lower the standard of living of every American taxpayer by raising payroll taxes to meet benefit obligations and/or lowering benefits to the 100+ million recipients, my guess is they’ll do both to try and solve the problem they created and to pump up their special issue slush funds.
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, $599 per month for 11 years, this trend is continuing and there is no viable plan on deck in 2019 by any U.S. political candidate to even to try and contain this.
Did the U.S. economy and Taxpayer get their 12.51 trillion worth from 2007 through 2018?
U.S. taxpayers responsible for this debt were told the majority of the 12.51 trillion borrowed was to “stabilize”, “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 or initially funded projects these people would have been working on.
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.
Bernanke’s & Obama’s Economic stimulus was the most expensive policy failure in U.S. history there is nothing in U.S. history that comes close to the money that was wasted during BO economic stimulus.
FDR’s “New Deal” that fueled the U.S. out of the great Depression was done at a fraction of the cost (in 2019 USD) many of the projects built by the “New Deal” programs still serve the American public today like the Hover Dam and Golden Gate Bridge. Can you name one project of the same scale that was done with the monies spent during BO economic stimulus that still serves the American public in 2019?
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.
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 lack of growth in Annual Federal Revenue.
GDP Per Employed Person
From 1997-2018 GDP per employed person outpaced reported inflation 17 out of 22 years by an overall average of 1.32% per year.
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 January 2008 – December 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.
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 January 1997 – December 2008 Personal Income outpaced reported inflation in 18 out of the last 22 years by an overall average of 1.44% per year
From January 1997 through December 2007 growth in annual personal income outpaced reported inflation by an overall average of 1.85% per year with growth in personal income outpacing reported inflation 10 out of 11 years.
2008 –2018 personal income increased faster than inflation by an average of 1.02% per year with the 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 inflation by 27.47% since 2000 quality of life should be exceptional with disposable income at a new high in 2019
Growth in Total Annual Federal Revenue
From January 1968 through December 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 January 2008 – December 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.
Reported inflation fact or fiction?
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.
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.
Everything else will continue to increase faster than reported inflation which you can monitor using the links on this spreadsheet.
Aside from 2 justifiable U.S. debt downgrades, record low yields, near record high instrument/currency risk and negative real rates of returns, professional traders, especially those that manage Family Offices believe the official BLS.GOV inflation rate has been intentionally 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 total Federal debt 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 unless of course they sell long only fixed income investments.
It’s this simple, by misrepresenting the “official inflation rate” the Federal Government had and continues to reduce debt service cost by trillions giving them control of these trillions rather than paying the trillions to Treasury debt holders who would pay taxes on this income and spend this income in the free market economy.
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, pensions and contracts.
Personal Income outpacing reported inflation 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.
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 shred of fiscal credibility.
With the credibility of U.S. debt continuing to deteriorate it’s helped to support the U.S. equity markets through 2019.
S&P valuation, dollars versus gold
The U.S dollar may have appreciated against it’s foreign counterparts as these countries too 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 January 2007 gold has appreciated 132.84% from $642.05 per ounce to $1,495.10 in 2019. Federal debt during this same period increased by 147.78%.
The S&P trading at 3,040.25 equates to 2.03 ounces of gold far from the high of 5.53 ounces in August 2008.
At 2.03 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 very much in the 2019-2020 playbook.
30 Stocks that have survived 2 bear markets and recessions
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 any leverage, doing any trading, hedging or reinvestment of profit.
To enhance performance you can trade any of these stocks using the same fully disclosed trading parameters I use in this S&P program which is very easy to learn and execute and has captured the majority of every major up and down trend over the last 40 years.
|Seeking Alpha Link||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 132.84%, the S&P 104.63% consistent with the growth in M3 (Money Supply) of 111.73% and Federal debt of 147.78% indicating a good portion of the appreciation in Gold and the S&P is attributed to the dollar’s devaluation against tangible assets and quality stocks 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 $1,490.10 and the S&P at 3,040.25 are not overvalued.
Sources; M3 CPI Gold Total Federal Debt
Aggressive dollar devaluation against tangible assets and quality stocks is on the horizon.
The creation of trillions of dollars by itself would eventually cave in the dollars buying power.
What will accelerate the dollars decline against tangible assets and quality stocks will be foreign liquidation of U.S. dollars and debt.
29.07% of total Federal debt is now owned by non U.S. investors increasing by over 380 billion from 6.256 to 6.636 trillion through June 2019.
July, August & September 2019 not reported yet by the Fed adds another 150 billion bringing the total up to 6.786 trillion though September 2019, up 530 billion or +8.47% in less than one year.
Add this 6.79 trillion to the 44.21 trillion in non Treasury assets and the total exceeds 51 trillion U.S. dollars now owned by Non U.S. investors.
This 51+ trillion makes the U.S. dollar extremely vulnerable to foreign liquidation when the long-term trend in the dollar changes from up to down.
When foreign liquidation of the U.S. dollar engages it will create a hemorrhage in the dollar’s value against tangible assets and quality stocks 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)
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, jobs and pay taxes 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.
The U.S has not had a meaningful and sustained trade surplus in over 50 years. In 2018 the reported trade deficit was 646.3 billion, 2019 year-to-date deficit through August 428.7 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 plagiarizing, 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 lost over 14 million manufacturing jobs alone, millions more non manufacturing jobs for the same reasons.
Loss of 14 million manufacturing jobs over the last 50 years equates losing over 7 trillion dollars in domestic consumer spending and over 2 trillion in total tax revenue that these jobs and companies would have generated for the Federal, State and local Governments, add in the loss of non manufacturing jobs and totals are well above 10 trillion.
From 1968 through 2007 manufacturing jobs 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.
Who are the the BLS.GOV & Federal Reserve
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 and business’s that contract 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.
It’s ironic that median income for a BLS.GOV public servant is $104,980 or 92.90% higher than U.S median Personal Income of $54,420 when theses public servants determine the amount of money necessary for an American 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 salaries for the board members and Chairman of the Federal Reserve are set by Congress. In 2019 Congress set Fed Chair J.H. Powell’s annual salary at $203,500 only $73,340 less than the U.S, postmaster general’s annual salary of $276,840. But don’t feel too bad for J.H. Powell when his term as Fed chair is over he’ll be able to join former Fed chair B.S. Bernanke and make up to $400,000 for a 2 to 4 hour speaking engagement.
The Federal Reserve unlike the U.S. postal service that lost nearly 4 billion last year 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 U.S.’s “Independent Central Bank” they have to forfeit all their profits to their boss the U.S. Treasury.
From 2008 through 2018 the Federal Reserve remitted over 830.7 billion in profits to the U.S. Treasury.
Including “Off Budget Expenditures” a minimum of 7.20 trillion in new issues will have to be sold to finance projected Federal deficits as qualified by the increase in total Federal debt through 2024.
The 7.20 trillion deficit projection is based on continued economic expansion, continued contained inflation, contained debt service cost (Treasury yields at less than 2.00%) that total Federal Revenue will grow 7.5 times faster per year over the next 6 years than it did over the last 3 years (0.82% annually) or 6.12% annually and Social Security and Medicare costs will increase below any independent analyst’s projections.
The 7.20 trillion in new issues will have the worst yields and debt rating in the U.S.’s history and have nearly highest instrument and currency risk in history.
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 to purchase the 7.2 trillion in new debt to finance the projected Federal deficits through 2024.
In 2018 the average Treasury rate was 2.44% with debt service cost consuming 15.71% of total annual Federal revenue.
If Average Treasury yields returned to the 1968-2007 pre “Quantitative Easing” average of 8.29% debt service cost would consume 53.43% of total annual Federal revenue.
If average Treasury yields went to 15.50% (levels we’ve seen before) debt service cost would consume 100% of total annual Federal Revenue.
To bridge the gap between the amount of debt the Federal Government can sell on the open market and what they want to spend the Federal Government will instruct their employees at the Federal Reserve to increase the creation of money from nothing backed by nothing from the current 720 billion to over 1 trillion annually.
Below is the amount of money the Federal Reserve has created to-date to buy Federal debt at non competitive rates the free market wouldn’t
The Federal Reserve updates this chart quarterly, by the end of 2024 the total will have increased from the current 2.54 trillion to more than 6 trillion USD.
S&P Global will threaten to downgrade U.S. debt again leading with a harsh warning when the next round of “Quantitative Easing” (or whatever the Fed calls it) increases from the current 720 billion to over 1 trillion annually. When the warning is ignored S&P Global will downgrade U.S. debt to AA potentially AA- depending how hard the the Federal Government instructs the Federal Reserve to hit the “Quantitative Easing” throttle.
The creation of additional trillions coupled with U.S. debt downgrades will cause the U.S. dollar’s long-term trend to reverse from up to down.
When the dollar’s price action moves below the, EMA9 (exponential moving average 9, the red line on the chart below) and the EMA9 moves below the EMA18 (blue line) trillions in U.S. dollar sales will engage as non U.S. investors liquidate long dollar positions and aggressive net new speculative short positions enter the market.
The upside is dollar devaluation will make U.S. produced goods more competitive in the Global market, tangible assets and quality stocks will appreciate as the dollar’s buying power implodes.
Federal debt owned by non U.S. investors that has enjoyed temporary demand through September 2019 it will peak before it get to 8 trillion and will aggressively sell off with the dollr, you can monitor the liquidation using this link.
With the BLS.GOV‘s bag of “Hedonic Quality Adjustment” tricks empty inflation will engage with reported inflation moving above 5.00% and actual inflation moving above 7.50%.
The Fed will continue to create money by the trillions trying to continue to hold rates down and contain Federal borrowing and debt service cost with Federal debt owned by the Federal reserve exceeding 7 trillion by the end of 2027, to monitor the Fed’s creation of money to buy Federal debt see this link.
By the end of 2029 total U.S. Federal debt will exceed 35 trillion with over 50% of total Federal debt owned by the Federal Reserve and U.S. Government Trusts to monitor the increase in Federal debt use this link.
Unable to contain dollar and debt devaluation the Federal Government will enact “emergency and temporary” increases in all taxes. State and local governments will follow the Federal Government’s lead.
Just as the “emergency and temporary rate cuts” of 2008 that have stripped savers of trillions in interest income became permanent “emergency and temporary” increases in all taxes will become permanent as well.
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 income as qualified by it’s buying power will have been decimated by true inflation.
By 2035 Personal Income in ounces of gold will have declined from 41.87 ounces in 2018 to less than 20 by 2035.
The poverty rate in the United States will take out the old 2012 high of 15.90% (unless the U.S. Census Bureau learns BLS.GOV inflation calculation math).
The majority of the poverty rate will be retirees that will be living in poverty as a direct result of the Federal Government using their payroll taxes for decades to pay for unchecked reckless deficit spending rather then investing these funds in markatable securities at competitive rates.
By cleaning out the liquidity in these Trusts and replacing it with non marketable “Special Issue Securities” at non competitive rates. They have reduced the returns the Trust funds assets would have generated by 1.00% to over 3.00% annually forever reducing the amount these trusts can pay in retirement benefits. Inflation misrepresentations will continue to contain benefit increases to further reduce the standard of living for these 100+ million American retirees.
To monitor the poverty rate in the U.S. use this link.
I truly wish we were trading off economic prosperity that was generated by ethical bipartisan Governments more concerned about the well being of the citizen rather the trying to destroy one another to gain control of Federal revenue and spending.
Over the last decade we’ve seen Global monetary credibility deteriorate at an accelerated pace forcing all of us to work harder, take greater risk, trade markets long and short to protect and enhance our family’s wealth.
The only upside to this mess is during the next decade as these extreme fundamentals fully engage it will fuel major market moves in metals, stocks, stock indices, energies, interest rates, currencies and commodities generating some of the best trading opportunities we will likely see in our entire trading careers.
The purpose of me writing these articles is not to generate new accounts, I’m set, all my clients are Qualified Eligible Participants all have the the risk tolerance of Satan. My purpose is to motivate U.S. citizens to address and solve the escalating debt crisis in the U.S. and once again lead the World in what would be in the best interest of future generations.
I am not a U.S. citizen but my two sons are, now they have graduated college and are entering the U.S. workforce both are disgusted with the legacy of debt the generation of the last 40 years has left their generation. My oldest said it best, if Government was a publicly traded company, the majority of politicians both Republican and Democrat would be living in a different kind of gated community called jail.
Additional disclosure: I’ve been a professional trader and have run a family office from Tortola, British Virgin Islands for the past 20+ years, zero income, corporate, sales and inheritance tax and would like to keep it that way. Because of the potential tax and regulatory implications I do not provide services for or am licensed to trade for U.S. retail accounts, I do however manage funds for a limited number “Qualified Eligible Participants” I may at times for my own accounts and/or for the accounts I manage have positions on that could be contrary to the ones mentioned in my reports.