The U.S. System Is Off the Rails and Rigged to Blow

Investment Research Dynamics

There’s nobody looking for value out here [in the stock market] – there is none. It’s obvious the Fed is holding up the stock market. This is one of the reasons the Fed will never be audited. – Friend and colleague of Investment Research Dynamics.

The money printing by the Fed has created the most overvalued stock and bond market in history.  The stock market overvaluation is even worse if you use real accounting. But it’s not just outright money printing. The supply of money includes credit creation.   This is a fact that surprisingly is overlooked by most, even those I consider highly intelligent:   debt behaves like money until that point in time when the debt is extinguished by repayment – not “restructuring.”    Take a look at this:

(click to enlarge – source:  Wolfstreet.com with IRD edits).  The auto debt used to finance car purchases since 2010 hits an all-time every month.  The debt issuance behaves like printed money until it’s repaid.  But I would bet at least half of that $1 trillion debt will default.  That’s how much has been issue to sub-prime and deep sub-prime and comatose borrowers. That debt created an inordinate amount  of artificial economic activity.  “Artificial” because it would not have occurred otherwise and was created by printed money that will have no value when the debtor defaults.

We’re seeing that same dynamic in all sectors of the economy:  housing, commercial real estate, education, healthcare, general corporate purposes (primarily stock-buybacks).  According to the Fed,  as of March 25, total credit market debt outstanding was $63.4 trillion.  This is up about 20% from its low-point after the Great Financial Collapse Crisis. To put this in context, this number was $30 trillion at beginning of 2000.  It represents 350% of GDP – a staggering fact.  Even more horrifying when you consider that the GDP metric is highly inflated with the application of a  potpourri of statistical manipulation techniques.

NOT included in that number, but should be, is the degree to which the nation’s public and private pension funds are underfunded.  A conservative estimate would be 50%.  I know of some studies which suggest it’s a lot higher when you take into account the use of proper mark to market pricing for illiquid assets, like private equity investments.  Some pension funds have as much as 20% of their asset base in private equity.  The mark to market on this investment class will be somewhere between zero and 20 cents on the dollar when the next big stock market accident is set in motion.  Pension funds will wiped out completely. But the underfunded portion is technically debt.  It’s money owed to the pension fund beneficiaries.  At this point, its a massive transfer of wealth from current contributors to current receivers.

If you are in a 401k fund, I would highly advise looking into what it would take to get your money out now, even if it means taking a net present value payout.  70% of something is much better than 100% of zero.  That’s where the nation’s pension fund is headed.  I said in 2002 or 2003 that the elitists would hold up the system with printed money until they had wiped every last crumb of wealth off the table and in to their own pockets.  I also said the retirement assets would be the last leg of this endeavor.

A friend of mine and I were discussing how much of his investment portfolio should be in precious metals (or mining stocks).  I low-balled with 30% because I knew he would recoil from that number – which he did.  The reality is that eventually the dollar, like all fiat currencies, will be devalued to zero.   That would suggest that you should keep everything in physical gold/silver and some in mining stocks for wealth appreciation.

He asked me if I thought “it was that bad.”  To which I replied:

John, it’s probably worse than I think. It’s amazing how blind most are to it. That’s why it’s gotten so bad. For god sakes, look who’s running for President. Two criminals. Hillary is a confirmed criminal and Obama is obstructing the investigation and prosecution of her by telling the Justice Dept to leave it alone. That tells us how corrupted the system. It’s been largely hollowed out – our rights and our wealth. Right now they’re picking at the carcass. It’s a house of cards that could collapse at any time. If the Fed stepped away from the stock market, the Dow would get cut in half quickly and still be overvalued by any rational historical measures. 

The bond market  is telling us that the global economy is headed into depression.  Despite the efforts of the Fed to convince everyone that they are going to raise rates, the yield on the long-maturity Treasury debt continues to head lower.  The yield curve is become flatter by the day, which historically has signaled the onset of recession.   The Fed has made every effort to prevent other traditional measures of economic turmoil from sending up systemic warning flares – most notably the stock market and gold – but it appears to be powerless to stop the compression of Treasury bond yields.   Something really ugly is brewing in the horizon.

Paper money eventually returns to its intrinsic value – zero. – Voltaire, 1694-1778