Saturday, August 21, 2021

Graveyard of Empires


Biden and others have called Afghanistan the Graveyard of Empires.  There are a number of definitions of "empire" but here we will use:

   Empire:  A government that collects taxes from other countries.

By this definition I believe the USA is an empire, though using a tax very few recognize.   As Keynes put it:

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.

After world war 2 the US dollar became the world reserve currency.   Since then Central Banks, businesses, and people all over the world have been using the US dollar and holding US bonds.   As the US prints more dollars, they are really collecting a hidden tax on dollar holders all over the world.   This is a most diabolical tax, as it is so secret and unobserved.   This "inflation tax" has gone on for more than 70 years.

Recently the pace of money printing has increased to trillions per year.   This may be getting to the "evil empire" stage, where there is a tax revolt

The fraction of US debt held by foreigners has been dropping recently:

Source:  Fred

If enough people realize that holding dollars makes them subject to this tax, and so decide to no longer use the dollar, we could easily get hyperinflation.

The rest of the world could leave the dollar for something else.  For example, other central banks could use gold as reserves to back their own currencies.  Gold is what was used before the dollar and could work again.  A number of central banks do seem to be buying gold faster recently.   For international settlement, Bitcoin could work.    No doubt such a major change will be chaotic for awhile.  After the change most of the world could be better off, as they would no longer pay the US dollar inflation tax.   However, the USA will be much worse off, as they will no longer collect this huge inflation tax from the rest of the world.

Like other empires that failed after failing in Afghanistan, probably the American Empire is coming to an end.  


Saturday, August 7, 2021

Devil in the Details

 The low on the S&P 500 in 2009 crash was 666.   If we multiply that by 6.66 and round off just a bit we get 4444.    A factor of 6.66 in 11 years should qualify as "frothy".  Seems like 4444 is a good number for a high. 

Friday, August 6, 2021

Extreme Valuation and Crash Warning Charts


They say "no one rings a bell at the market top".   But there are signs that things are higher than normal or getting shaky.  I am collecting links that show charts indicating extreme stock, bond, or real estate valuations or things that often come before crashes.  If you know of other such links that you like, please comment and I will add them to the original post.  Thanks.

  1. How to Spot a Bubble, March 2021, Hussman
  2. Crescat Capital March Research Letter
  3. Shiller PE, gurufocus
  4. Buffett Indicator, gurufocus
  5. Goldmen Sachs Non-Profitable Technology Index, Robeco 
  6. Is the Market Still Overvalued?, Advisor Perspectives, 8/21 
  8. P/E and inflation, Advisor Perspectives, 8/21 
  9. 14 Warning Signs That a Stock Market Crash Is Coming, 
  10. Stock Market Crash, Fragility And Silence, 
  11. This one signal says a stock market correction may be on the way,
  12. Whole Lotta Love: Sentiment’s Potential Warning, 
  13.  What Triggered the Crash?, John Hussman, 7/20/21 
  14. Alice’s Adventures in Equilibrium, John Hussman, 6/21
  15. Grantham:  This is a bubble, this is serious 
  16. Warnings about a stock market crash are growing louder, 
  17. These 23 Charts Prove That Stocks Are Heading For A Devastating Crash,  July 2014
  18. The Folly of Ruling Out a Collapse, Hussman Aug, 2021
  19. Recession Alert! Morgan Stanley, Rabobank, Normura, & BofA Warn Investors a Crash is Coming Aug 25, 2021
  20. Four Reasons the Next Recession Will Be Worse Than the Last One 9/10/21 
  21. Technically Speaking: The Markets Next “Minsky Moment” 7/27/21 
  22. The Beginning Of The End -Alasdair MacLeod 10/11/21
  23. When Bubble Meets Trouble - Hussman 11/9/21

From the above, I think one of the most important charts is:


At the current inflation level we have never had such a high P/E before (yellow box).   If inflation gets higher this P/E will be even more extreme.

Sunday, August 1, 2021

Inflation Expectations are Never "Well Anchored"


Jerome Powell keeps saying, "inflation expectations are well anchored".   This "well anchored" makes it sound like they can't easily change.

 The reality is people expect inflation about like the current inflation.  As seen in the graph below, if the CPI (green line) goes up, as it has the last 4 months, people's expectations goes up too (blue line).   For Powell to think it it safe to print money because people are not expecting much inflation at this moment is foolish.   People's expectations can change in a month but the "long and variable delays" from policy change to inflation change  can take years.

Inflation can get into positive feedback loops that are very hard or impossible to control.  The central banker needs to take a long term view, because inflation responds so slowly to their policy changes.   It is irresponsible to make decisions about money creation based on a short term and fickle measure like people's expectations.  

The reality is that people's expectations are never "well anchored".  If we get CPI numbers of 6% or 7% then inflation expectations will move to that range also.   Maybe then Powell will stop saying, "inflation expectations are well anchored".