I struggled through most of the 4 hours of debates spread across 2 nights.  As expected, it was mostly a competition between 20 people on how best they can rule over others.

And in order to rule, they must pander, and pander they did.  There were continual promises of free stuff and executive orders to make things right in the world.

I watched the debates so that I could write about them here.  It is also a form of self-defense.  I want to know what to be prepared for in the future. I also enjoy the political theater, despite the fact that I despise political power.

While the candidates were supposedly randomly chosen for each night, the heavy hitters (at least according to the polls) appeared on the second night.  This featured Joe Biden, Bernie Sanders, Kamala Harris, and Pete Buttigieg.  They were the most notable.

The first night had Elizabeth Warren.  She was the top-polling candidate for that night.  Tulsi Gabbard also participated on the first night, and I will have more on her in a bit.

It is hard to get into the mind of a leftist, but I can still somewhat detect who might come across as genuine to the typical Democrat voter.  I can detect who comes across as confident and “presidential”.

I think there are a couple of groups within the party itself.  It is like there are primaries inside the primaries.  It is not unlike what happened with the Republicans in 2015/ 2016.

There is a faction of establishment candidates.  Joe Biden is at the top of this list.  But I think Kamala Harris will take on Biden as the establishment favorite.  While I thought her positions were scary, she was impressive and articulate, or at least I could see others viewing her that way.

Now, she is a leftist to be sure.  When Harris was asked whether the candidates should have to explain how they would pay for every item they proposed (which is a lot) she didn’t really answer the question directly.  But she did present in her answer a proposal for a $500 per month tax credit for any family making under $100,000 per year.

I’m not sure what happens if you make $100,001 in a year.  Are you out your 6 grand then?

I don’t look at a tax cut as a government expense as many do.  But her answer just added to the list of free stuff instead of answering how the “free” stuff would actually be paid for.  A tax credit is not the same as a tax deduction.  This means that many people who pay little or no federal income tax would still get the $500 per month.  She is not proposing any cuts in the budget anywhere else, so this would just add to the already-large deficit.  It is a populist move to be sure, but it just added to the idea of there being a free lunch.

Harris took aim at Joe Biden on the issue of race.  She knows she is in competition with Biden for the establishment wing of the Democratic Party.  She attacked him for his vote a long time ago on school busing.

The crazy thing is that Biden actually took a decentralist position in defending his vote on busing at a federal level.  He told Harris that she should blame her local city council.  His vote was just not to involve the federal government.  If only he would take this position on other issues.

The other main group is the so-called progressives.  It is the hard left.  Some of them are self-identified socialists.  I don’t think they are pure socialists.  They just want a much bigger welfare state.  I don’t think they literally want the government to own everything.  Maybe they want the government to control everything, but that is more fascism than socialism.  That word is not as popular.

Bernie Sanders is vying for the top spot in the progressive wing.  His main challenger is Elizabeth Warren.

I just find it hard to believe that Elizabeth Warren has a chance.  She comes across as such a phony to me.  She is not charismatic.  If she got the nomination, the show between her and Trump would be something between a comedy and a circus.  I can just imagine Trump continually calling her Senator Pocahontas.

Not every candidate fits perfectly between these two groups.  Biden and Harris still try to appeal to the far left, or at least make themselves acceptable.  Sanders and Warren still try to make themselves acceptable to the establishment, and I think they mostly are acceptable to the establishment at this point.

Some of the other candidates try to play both sides.  If you look back at the Republican debates, you can see this with certain candidates.  Marco Rubio was an establishment candidate, but he had some rhetoric that was there to appeal to the conservative wing of the party.

I am not going to go through every candidate.  There were just a few notable things from my point of view.

Beto O’Rourke was asked if he favored a top marginal income tax rate of 70%.  He proceeded to speak in Spanish and avoided the question.  When asked again if he wanted to answer the question, he still couldn’t manage to do it.

He tried his pandering to Latino voters by speaking Spanish.  He wasn’t the only one.  I don’t think Beto is going anywhere unless he comes up with something brilliant for the next debate. 

Aside from Tulsi Gabbard, I think Andrew Yang is the most genuine person.  He believes in his universal basic income.  He wants the government to pay every American adult $1,000 per month.  The wealth redistribution and the implications of inflation are just a little too direct for many of the leftists to feel comfortable with it.  Most of them want their welfare programs to go through layers of bureaucracy first.

As far as Bernie Sanders, there wasn’t much new there.  We already know his agenda from four years ago.

There wasn’t a lot in the debates about foreign policy.  Bernie was actually pretty good on foreign policy when asked about it. He actually mentioned the crisis in Yemen.

There are a couple of problems though.  He barely spends any time talking about foreign policy unless directly asked. It isn’t on his priority list.

Second, he campaigned for the bloodthirsty Hillary Clinton in 2016.  Anyone who would do this (especially after the DNC rigged the primaries against him) can be counted on to not buck the establishment trend too much.  If Sanders became president, he would quickly be taken over by the establishment war hawks, not all that dissimilar to what has happened to Trump.

The Tulsi Train

By far the most interesting candidate to me (and should be for any libertarian) is Tulsi Gabbard. She is mostly bad on the issues except for foreign policy, which is her signature issue.

She was noticed. Reports are that she was the most searched candidate after the first debate night.  She was easily winning most of the online polls. I saw her over 40% at one point on Drudge Report’s online poll.

She is carving out a niche of her own.  She is becoming the Ron Paul of the Democrats.  She could learn some lessons from the 2008 Ron Paul campaign. She could learn some economics from Ron Paul too, but that is another matter.

Tulsi avoided her first question on gender wage gap, but for the better.  She went straight to foreign policy.  I think she got traction too.

Tulsi is young. She is attractive.  She is pleasant.  She doesn’t sound nagging or annoying.  And while I think her “service” in Iraq was a mistake, it gives her credentials to a certain degree.  It is hard to call her weak.

Tulsi was good at hammering away at foreign policy, but I found her ending statement weak.  I don’t care about clean air and access to healthcare for all.  (Well, I do care about those things, but not anything any of these candidates would do about them.)

She needs to focus continually on her signature issue, which is taking a stance against war and empire.  Whenever she is asked about economic issues, she needs to pull a Ron Paul and immediately tie it to foreign policy.  We can only improve significantly domestically if we dramatically scale back the empire and the many hundreds of billions of dollars per year that go with it.  She did mention a couple of times about the waste of money on the wars, but she can stress this issue even more.

She can also stress the morality of the issue of war.  She mentions the dead Americans from war, but what about the many more dead innocents of the countries that the U.S. government has attacked?

I know we are supposed to appeal to people’s self-interest when it comes to politics.  But most Americans have some sense of morality.  The only way the government can get the American people behind war is by appealing to their morality on false grounds.  They say we need to help the people of another country.  They say it is a humanitarian crisis, so we need to bomb them for their own good.

Ron Paul gained notoriety when he had his exchange with Rudy Giuliani.  Tulsi had a similar moment when she was debating Afghanistan with one of the lesser-known candidates.  It wasn’t quite as good as Ron Paul’s moment, but it was still pretty good.  I think it put her on the map.

I know the establishment is going to smear Tulsi.  They wouldn’t know what to do if it was her versus Trump.  I have no idea if she would be able to stand firm and end the wars if she became president, but at least we are talking about it. She will change the narrative to a certain degree.  The other candidates are going to be forced to contend with her positions at some point.

Bernie Sanders is better than most of them on foreign policy, but we shouldn’t trust him. He will not stand firm.  It isn’t his signature issue.  Tulsi should point this out.  She should point out that Bernie was quick to support Hillary the war hawk in 2016, but I think this can come at a later time.

Conclusions

There has been a lot of “free” stuff proposed.  There is free college, free healthcare, and the wiping out of student debt. Most of these proposals will never have a chance of actually passing Congress, let alone the court of public opinion.

Kamala Harris may be the scariest candidate of all.  She is authoritarian.  She is a war hawk.  She is in favor of much bigger government on the home front.  She is similar to Hillary Clinton, although I don’t know if she is as criminal.

Tulsi Gabbard is easily the most interesting candidate.  Libertarians should support her quest for a more peaceful foreign policy. You can support this aspect without supporting her whole agenda.

At least with Tulsi, she does understand that there is a cost to all of these government programs. She is the only one who has any kind of proposal on how to pay for a greater welfare state.  She wants to bring the troops home and stop spending money on war and empire.

This alone won’t balance the budget, even if nothing new is added.  But it is a lot closer to anything anyone else has.

The one issue where the president can make a major difference is foreign policy. Tulsi should stress this. If she could win the presidency and resist the establishment (which is not easy for many reasons), we could actually see greater peace and a move towards liberty in spite of her other positions.

I recently saw someone in a forum ask about paying off debt.  She was coming into some money and had multiple forms of debt including a car loan, a student loan, and a loan against her 401k.  She also owed some money to her mom.  She wondered what to pay first.

I was surprised to see some people give the advice that the she should pay off her 401k loan first. Some didn’t give any reasoning, but a few said that she would miss out on the gains of compounding returns. I will get back to that point in a moment.

There was a comment saying that she should pay back the 401k loan first because she would have to pay back the money if she lost her job, or something to that effect.

That isn’t really true though.  First, you may be able to negotiate and allow your regular payments to continue if you lose your job.  Second, if the company did want you to pay it back all at once, you can simply default.

So what are the consequences of “defaulting” on a 401k loan?  It is essentially the same as taking a withdrawal.  If you have a balance of $10,000 and you default on it (or take a withdrawal), then you just aren’t paying it back to yourself in your account.  You would owe taxes on that money, plus a 10% penalty if you are below the age of 59 and a half.

Put that way, it isn’t really all that bad.  If you lose your job, then your income may be lower for that year that you are essentially taking a distribution.  This would likely mean a lower marginal tax bracket.

I’m not saying it’s the ideal situation, but it usually isn’t when anyone loses their job involuntarily.  You might actually be in a worse situation if you had other debt and you lost your job.  I would rather have to pay taxes and penalty on $10,000 than having to keep making payments on a $10,000 loan if I lost my job.

My advice to the woman was to pay back her mom first.  This obviously has nothing to do with a mathematical calculation.  It isn’t even really financial advice, or at least not directly.  It is relationship advice.  If she owes her mother money, she should pay her when she has the money. She has a place to live and is putting food on the table.  She should pay back her mother first before paying back the banks and her own 401k account.

Without knowing the exact interest rates, I suggested paying off the student loan debt second. This is debt that cannot typically be discharged in bankruptcy.  You also don’t have collateral for it other than the supposed wisdom gained from attending college.  Really, it is the degree that is collateral that is supposed to help you get a better job.

I suggested the car loan after that and the 401k last.

Paying Interest to Yourself

When you take a loan against your 401k plan, you typically have to pay an interest rate. There may also be maintenance fees, but they may not be that significant if the loan is of a decent size. You don’t want to pay a $25 per quarter maintenance fee on a $1,000 loan, as that would be 10% of the loan in a year.  If you pay $100 per year for a $20,000 loan, then that would be half of a percent, which is obviously a much lower percentage.

The interest rate can vary depending on your plan and current interest rates.  Right now, you might expect to pay something in the neighborhood of 6%.

This is interest that you are paying back to yourself in your 401k account.  It doesn’t mean that it is irrelevant though.  You should consider this interest rate when taking out a loan because it will affect your cash flow.  When you start paying back your loan almost right away, your paycheck (assuming your employer automatically deducts it from your net pay) will go lower.  The higher the interest rate on the loan, the higher the amount that will be taken out from your net pay.

As I mentioned near the beginning of this article, a few people objected to having a 401k loan because you will miss out on the compounding returns.  But why are they assuming this is the case?

If you are paying yourself back the interest, then this is essentially the same thing.  It’s just that your return is fixed.  If your interest rate is 6%, then you are essentially getting a return from your own payments of 6% on the borrowed money.

If I could find an investment right now that paid a guaranteed 6% return, I would probably have most of my money in it.  This might not always be true if I thought there was a significant threat of price inflation in the near future.

I think the few people with this mindset believe that you can get better returns by investing, which would impact your compounding returns.  They have the conventional mindset that you should invest in broad-based index funds that will return at least 8% annually over a long time horizon.

The problem, of course, is that there is no guarantee that you will get 8% annual returns. Past performance does not indicate future results.

If there were a way to get guaranteed returns above the interest rate you are paying on your 401k loan, then they would have a good argument.  But in the real world, this is not the case.

I don’t love the idea of taking out a loan against a 401k.  Again, you still have to make the payments unless you can somehow default on it, which would make it even less ideal.

But if you have to borrow money, then you may be better off paying the interest to your retirement account instead of paying it to a bank.

I don’t want to say that I am an advocate of taking out a 401k loan.  In many cases, people are better off not taking out any debt at all.  If you are going to borrow, it should be for a good reason and not for luxury purposes.

One final thought I have is related to a mortgage.  You can take a 401k loan to use as a down payment on a house.  Again, while I would prefer having the money saved up for a down payment, a 401k loan for this purpose can allow some people to avoid private mortgage insurance and to also get a better rate on the mortgage.  This should only be done knowing that you are quite comfortable with the mortgage payments and the 401k loan payments, along with all of the other expenses that come with home ownership.

The one other interesting idea in regards to a mortgage is to use a 401k loan to pay off a mortgage. I wonder if many people have used this strategy.

Let’s say that you have $40,000 left to pay on your mortgage.  You have a sizeable 401k plan well into six figures and you can borrow up to $40,000 from your plan.

Maybe it makes sense to take out a $40,000 loan against your 401k and wipe out the mortgage. Then you have your 401k loan payments instead of your mortgage payments.  But the interest would be going towards your retirement account instead of to the mortgage company.

I am not saying this is a good strategy for everyone.  It depends on your situation.  It depends on the maintenance fees for the 401k loan and other fine details. But it may be something for you to consider if you are in this situation.

The price of gold briefly surpassed the $1,400 per ounce mark on Friday for the first time in a long while.  Gold has been stuck in a somewhat narrow range for quite a while.

Every time the price shot above $1,300 and it seemed a new rally was coming, it would pull back again.

I don’t know if this time we will actually see a continued surge or if we will just see another pullback.  While gold has been a great investment if you bought it at the turn of the century, it has been rather lackluster at best for the last 6 years or so.  Mining stocks have been absolutely terrible to own for the last 6 or 7 years.

Of course, I don’t look at gold purely as an investment.  Its number one goal is something of an insurance policy against disaster and especially terrible government policies.

When I do look at gold as an investment, I look at it in context with a bigger portfolio.  I recommend a permanent portfolio, which includes 25% in gold assets.  It is a form of diversification.  It is a hedge against significant price inflation.

I have no problem with the idea of speculating in gold and gold-related investments, but it should be looked at as a speculation.  You could make money or lose money.  Mining stocks in particular are incredibly volatile.  When a new bull market in gold finally emerges, I expect mining stocks to give incredible returns.

Two Events This Week

There were two major events this past week that coincided with the explosion in the dollar price of gold.  One was Iran. The other was the Fed.

Regarding Iran, Trump and his war hawk advisors have been threatening Iran and making unproven accusations against it.  They were quick to blame Iran when two oil tankers were attacked.  They were also quick to blame Iran when an unmanned drone was shot down off the shores of Iran.

In regards to the oil tankers, we don’t really know what happened.  It is possible that the Iranian government was responsible, but I doubt it.  It is more likely a false flag.  If it actually was a false flag attack, I have my doubts whether Trump actually knew about it. I am not sure just how much is kept a secret from him.

Still, I do not excuse Trump.  He hired the horrible human beings that are Mike Pompeo and John Bolton.  He pulled out of the Iran deal.  He imposed sanctions on Iran.  He has been making verbal threats.

In regards to the shooting down of the giant drone, the contention by the U.S. government is that it was in international air space.  Iran says otherwise.

What would the narrative be if an Iranian drone were flying 20 miles offshore of Miami Beach? What if the U.S. government shot it down?  Americans would be calling for an all-out war against Iran for daring to threaten the U.S. by flying a drone near our shores.  Would anyone contend otherwise that this would be the reaction?

Although the U.S. may have come close this past week to starting an outright war with Iran, I don’t know if that contributed to the increase in the gold price.  It certainly must have contributed to the increase in the price of oil.

If the U.S. had just dropped a few bombs on Iran, I don’t know what the response would have been (or will be).  I don’t know if the Iranian government will just sit back and take it and hope that it stops. Or maybe they will fight back with their backs against the wall.  They will certainly try to disrupt the oil market.

The market does not seem to be betting on a massive war with Iran.  I think gold and oil would both be even higher at this point. Then again, sometimes the market is wrong.  We can’t predict what Trump and his warmongering advisors will do.

The rise of gold also coincided with the latest Fed meeting.  The Fed announced that it would keep its target interest rate the same for now.  With that, you would think gold might go down.

But Jerome Powell said in a press conference that the Fed is willing to accommodate if necessary. Investors are betting on a rate decrease the next time around.  This is in spite of the fact that the Fed is still reducing its balance sheet.

Still, the rise in gold really took off after the press conference by the Fed chair.  I think this had a bigger pull on gold than did the news about Iran.  Both stories probably contributed to the rise, but I think it was more the Fed.

The Gamechanger

The biggest short-term factor will be a recession.  The inverted yield curve, at least as comparing the 10-year yield to the 3-month yield, is indicating a recession ahead.  This will most likely occur in 2020.

A recession is typically not good for gold, especially if consumer price inflation is relatively low and expected to stay low.  We may see a temporary pullback in consumer prices, which is actually what the American middle class desperately needs.

I believe the Fed will turn again to loose money.  It won’t just be lower interest rates and possibly even moving towards negative interest rates as we’ve seen in Europe and Japan.  There will be more quantitative easing (QE).  In other words, the Fed will return to creating money out of thin air.

There will be a time to get further into gold and possibly gold-mining stocks.  I am not going to say that we should go all-in.  I never want to go all-in on anything.

I recommend a core holding of gold assets all the time.  Maybe we’ll see gold prices run higher a bit before the recession hits. When the recession does hit, maybe the pullback will be less than normal.  Cash is king in a recession.  People want liquidity.  It is also an opportunity to buy assets that are on sale.

Gold may see a sale price, but I don’t think it will last long.  It certainly won’t last long if the Fed is as aggressive as it was the last time a deep recession hit.

The FOMC released its latest monetary policy statement.  It was not clear whether the Fed would lower its target for the federal funds rate, but investors seemed to be betting that it wouldn’t happen this time around.

The FOMC did not lower its target rate, and stocks held up pretty well, which indicates that investors got what they expected, or better.  When I say “better”, I mean from the perspective of the stock bulls who always want lower interest rates and easy money.

The reason stocks reacted somewhat favorably is because the statement dropped the word “patient” from last time, meaning that the Fed is more likely to act in the near future. In addition, in his press conference, Fed chairman Jerome Powell said that the case for somewhat more accommodative policy has strengthened.

Stocks weren’t the only thing to rise.  Bonds went up, and gold went up.  The 10-year yield is now sitting around 2%, which is far below what most people expected six months ago.  The 10-year yield is still below the 3-month yield, which indicates coming weakness in the economy.

To be more precise, there is already weakness in the economy.  The malinvestment has already happened.  Resources were diverted to things that were not necessarily their best use in accordance with consumer demand.  It’s just that the weakening is not really evident yet, except for those of us actually looking at the yield curve.

James Bullard is watching the inverted yield curve.  He spoke last year about the flattening yield curve.  He was against rate hikes at that time.  He was the one dissenting FOMC voting member in the current statement. He thought the federal funds rate should be lowered now.

I don’t agree with him in his policy prescription.  Even though there is a coming recession, the Fed shouldn’t be artificially lowering interest rates, although I admit I don’t technically know what they should be.  Of course, that is the point.  The Fed shouldn’t be dictating interest rates at all.  It should be done by the free market.

Still, I think Bullard is right in his concern.  He knows there is trouble on the horizon.  Maybe the others do too and just don’t want to sound the alarm bells.

A Demotion for Powell?

This all comes on the heels of whining from Donald Trump.  During his campaign in 2016, he talked a few times about the Fed blowing up bubbles due to low interest rates, or at least something to that effect.  He also said he was a low interest rate guy, but people thought he was referring to himself as a businessman and not a politician.

In other words, when Trump was in business and buying real estate, he liked the low interest rates. He took advantage of the low rates to buy properties.  But this doesn’t mean that you have to think it is necessarily good policy for the country.

Ever since Trump became president, he has been an advocate for lower interest rates, which is implying a looser monetary policy.  I guess he wants to blow up the asset bubbles even bigger, as long as it is on his watch.

The other day, Trump was asked if he wants to demote Jerome Powell.  Trump’s response was, “Let’s see what he does.”  Now we know that the Fed is not really an independent institution, but Trump is really putting it out there that it is a politicized institution.

If Trump is going to try to fire the chairman of the Federal Reserve for not lowering interest rates, what is the point of having a Fed chair?  Maybe Trump would just like to dictate monetary policy by himself. He is already telling the president of China that he better show up for a meeting.

When Powell was asked about his job in the press conference, he responded, “I think the law is clear that I have a four-year term, and I fully intend to serve it.”

This whole story almost fits perfectly with the whole Trump presidency.  Trump is a disaster in many ways, but he actually helps to expose the corrupt system, even if it is sometimes inadvertent.  In this case, he is clearly showing how it is in the best interest of the current president to have a loose monetary policy.  He is also showing that the Fed is a political institution.

That Which is not Mentioned

There is one area that gets very little attention.  You could read several “mainstream” articles on the Fed’s meeting today, and you probably won’t see it mentioned.

You have to look at the Implementation Note from the FOMC statement. It says that the Fed will continue to reduce its balance sheet by not rolling over $15 billion per month in Treasury securities and $20 billion per month in mortgage-backed securities. In other words, the Fed is still reducing its balance sheet by $35 billion per month.

This may not seem like a lot in the context of the balance sheet having been over $4 trillion, but it is important to realize that the Fed is still in deflation mode.  With all of the talk about interest rates, this somehow gets left out.

This just adds confirmation to me that a recession is highly likely in 2020.  It could happen before 2019 ends, but I think 2020 is the best bet right now.

Let’s remember that the yield curve inverted back in 2006.  The Fed started lowering its target rate in 2007 before the official recession began.  So the Fed acted, but the recession happened anyway.

This is an important lesson because it tells us that it doesn’t really matter what the Fed does at this point.  Barring some version of hyperinflation, the imminent recession cannot be stopped. It probably can’t even be delayed much.  It doesn’t matter if the Fed drops interest rates in July.  It can’t stop the coming correction.

There is an inverted yield curve, the Fed is still in monetary deflation mode, and stocks are near all-time highs.  This is a recipe for disaster, especially for those who have a good portion of their net worth tied up in stocks.

The U.S. dollar has reigned supreme since the end of World War 2 and the implementation of the Bretton Woods agreement.  The dollar, throughout this time, has been considered the world’s reserve currency.

The U.S. dollar has gained this status for a few reasons.  Some people think it is because the U.S. is the world’s superpower with the greatest military might.  Some people think it is because the U.S. has the world’s largest economy.  I think it is a combination of these things, although probably more the latter.

Although the U.S. government is basically an empire, the currency would not be able to hold up without the economic power, unless the rest of the world was literally forced to use dollars.

At the same time, I do want to acknowledge the political aspect of the dollar as the world’s reserve currency.  Washington DC has had a deal worked out with the Saudis for decades now.  The Saudis trade oil in U.S. dollars, while the U.S. government keeps the House of Saud from sinking through its implicit, and sometimes explicit, military backing.

It is a deal that has served both sides well.  When I say both sides, I mean the governments of both sides.  I don’t necessarily mean the people under their rule. The House of Saud gets to stay in power and be wealthy from the oil revenues.  The U.S. government gets its military industrial complex, and it gets the benefit of a strong U.S. dollar.  It allows them to spend and run deficits to a much greater degree.

There was a time in the 1970s when the U.S. dollar was under threat.  It was a threat by the Federal Reserve system that creates the dollars.  There was too much money creation.

There was, at least to a degree, a gradual loss of faith in the currency.  This is what happens when the central bank creates money out of thin air and interest rates and price inflation rates are in the double digits on an annual basis.

It took the appointment of Paul Volcker as Fed chair to slam on the monetary brakes and bring the price inflation rates way down.  It brought on the recession or recessions of the early 1980s, but it had to be done.  If it hadn’t been done, then the U.S. dollar really did risk losing its status as the world’s reserve currency.  International markets are only going to rely on a currency with double-digit price inflation rates for so long.

Shooting Their Collective Feet

I believe that U.S. officials are currently overplaying their collective hands.  They are playing emperor of the world, and the rest of the world doesn’t really like it.

Look at all of the wars and meddling around the world by the U.S. government.  And aside from the shooting wars, there are sanctions and trade wars.

Just in the last decade, there have been major power plays by the U.S. government around the planet. There have been sanctions placed on Russia.  It started as a response to Russia’s annexation of Crimea, which was really just the people of Crimea overwhelmingly voting to join Russia.  It happened because of a CIA-backed coup in Ukraine.  The media will refer to “Russia’s aggression against Crimea”, but it was really just Russia accepting what the people of Crimea wanted.

There have been severe sanctions against North Korea and Iran, two countries that do not want war with the United States.  The leaders of these countries know they would be decimated.  They talk about nuclear weapons only as a deterrent.  They can see what happened to Gaddafi in Libya and Saddam Hussein in Iraq.  The war hawks in the U.S. are pushing especially hard for war with Iran.

There are severe sanctions against Venezuela, along with an attempted coup.  Even though this is a weak economic player, there is oil there.  But more importantly, Russia does not want war there, especially with U.S. involvement. Russia (Putin) also does not want war in Iran.  They didn’t want war in Syria, which Obama went ahead with anyway.

Putin, and presumably most Russians, are tired of the antics from the U.S.  They are tired of the threats and the bullying, just as they should be.  Sanctions alone can be seen as an act of war.  Therefore, Russia is trying to avoid the U.S. dollar as much as possible. Last year, Russia dumped most of its U.S. Treasuries.

Now China is feeling the heat from the Trump administration, especially in the form of tariffs. Trump recently threatened the president of China that he better attend the G-20 summit or else more tariffs will got into effect.  Is this really what the U.S. empire has come to?  The president of the United States threatens the president of China to attend a certain event or else there will be repercussions? How would Trump and U.S. officials take it if China’s president threatened something similar?

China still has over $1 trillion in U.S. government debt.  They could sink the U.S. bond market if it sold this debt in a hurry.  So far, there has only been brief mention of such a possibility, but no credible threats. I think it would take a lot for Chinese officials to go this far.  But when you push someone hard enough, and you keep pushing, don’t be surprised when the person being pushed eventually pushes back.

Russia and China have been amazingly patient with U.S. threats.  Putin in particular has been amazingly restrained, especially with the constant allegations made against him.

Instead of threatening back, Russia and China are somewhat quietly working on the sidelines to get along and bypass the U.S.  More accurately, they are working on bypassing the U.S. dollar.

There is no need to use the U.S. dollar has a middleman currency other than to bow down to U.S. officials.  Russia and China are big enough that they can ignore the threats, or at least not follow them. Both countries are being painted as really bad guys in the U.S. press, so kneeling before Trump isn’t going to get them anywhere anyway.

The Saudis and some other U.S. puppets will continue using U.S. dollars for now.  But some of the big players are starting to turn away from using dollars when feasible.  There is no reason to use the dollar as a middleman in most cases.  It would help more if the Chinese would allow the yuan to be a free-floating currency on the exchange markets.

I believe that foreign officials are realizing that they don’t have to use the U.S. dollar. With open exchange markets, there really doesn’t have to be a world’s reserve currency.  You can exchange foreign currency for your own currency, or you can use it to buy the goods and services that are produced in that foreign country.

If anything does replace the dollar as the world’s reserve currency, I don’t think it is going to be another fiat currency issued by a government/ central bank.  If anything, it will be gold.

This is a good long-term reason to buy and hold gold and gold shares.  Russian officials have shown the wave of the future, which is to dump U.S. government debt and to shore up gold reserves.

Every time you hear about the U.S. government issuing more tariffs or more sanctions, just think about adding another straw on a camel’s back.  But the camel isn’t going to collapse.  It is going to shake off the straw and turn elsewhere.  That elsewhere will likely be gold.

The latest consumer price inflation (CPI) numbers were released, and the consumer price inflation rates are relatively low. I say “relatively” so as to distinguish our world of central banking as compared to a time without the Federal Reserve.

In the late 19^thcentury, prior to the existence of the Federal Reserve, the overall price level did not go up.  In fact, prices actually slightly declined, as productivity increased.

The U.S. was on something of a gold standard, even if it wasn’t pure.  Libertarians should actually favor a completely free market in money, but obviously a gold standard is far preferable to the disaster we have now where the central bank controls the money supply and continually tampers with interest rates.

So considering the last century, with the existence of the Fed, price inflation is relatively low, at least according to the government statistics.  The year-over-year CPI in May stood at 1.8%.  The median CPI is a little higher at 2.7%. This certainly isn’t the 1970s when consumer price inflation was in the double digits.

If anything, this more resembles the 1920s.  Murray Rothbard wrote a book called America’s Great Depression, which really details the lead up to the Great Depression.  It was the easy money policies of the 1920s that eventually led to the bust.  You can read his comments here on how stable prices fooled a lot of people into thinking everything was fine.

I am not saying we are going to have another Great Depression.  There were a lot of disastrous things done after 1929 that prolonged the depression.  Some people say the depression ended with the beginning of World War 2, but that really only “solved” the unemployment problem by sending a mass number of boys overseas to fight.  The economy didn’t really recover until after the war ended.

Hoover and Roosevelt both made the situation far worse with their economic policies, which generally consisted of more government interventionism.

If we hit a severe recession, we don’t know what the policies will be.  We can assume more monetary inflation by the Federal Reserve, and likely more spending out of Washington DC, but we don’t know for sure.  We can hope that there will not be more interference in the labor markets.  We don’t want unemployment like there was in the Great Depression.

Asset Prices vs. Consumer Prices

Even though I am not predicting another Great Depression, I am making a comparison of 2019 to, perhaps, 1928.  Maybe it’s more like 1927 or 1929.  90 years is a nice even number, but I don’t know that the major crash will happen before the end of this year.

In the late 1920s, people saw stable prices, at least for many consumer products.  However, there was asset price inflation. The obvious sector that was most inflated was stocks.  I believe that stocks are the most inflated now.  I am not considering asset classes that most people are not in, such as cryptocurrencies.

When the Fed creates money out of thin air and keeps interest rates artificially low, there are many potential consequences.  Rising consumer prices is just one possible consequence.  For sure, we know that it results in a misallocation of resources.  There is malinvestment, where capital is put into projects that otherwise wouldn’t have happened without the loose monetary policy.

The money supply is not the only thing that drives prices.  There is the supply and demand of each individual product.  There is productivity, which can increase the number of goods and services.  There is also the demand for money.  If people are saving more and paying down debt, this can counteract the monetary inflation.  And the lending market through fractional reserve banking impacts the money supply.

We aren’t going to see a complete replay of the Great Depression, but there may be similarities.  I think the relatively stable prices are going to fool a lot of people.

Stocks will get hit the hardest, but other sectors such as housing will also take a hit. Unemployment will rise, as is typical in any recession.  The resources need to be reallocated in accordance with consumer demand.

The government statistics aren’t completely reliable, but prices are not going up dramatically at the grocery store.  Health insurance prices have certainly gone up, but that is more of a function of the government’s regulations than it is of overall consumer price inflation.

We have asset bubbles. That is where you will see the big pop.  The yield curve, as measured by the 10-year yield vs. the 3-month yield, is inverted.  A recession in 2020 is looking likely. We may be in 1928 right now.

Are you going to buy stocks to get the last little bit out of the bull market?  It is better to be out too early than to be out too late.

I am a fan of using the principle of compounding interest.  I believe it is essential to understand this to have long-term financial success, at least for most people.

Unfortunately, some of the same people who promote the understanding of compounding interest also tend to be long-term bulls on stocks.  They talk about historical returns, and they specifically talk about U.S. stocks, usually with optimistic outlooks on returns.

In a way, they have largely been correct up to this point.  Over the last century, if you invested in a broad-based U.S. index fund, you were probably successful if you stayed in long enough.  The Great Depression was obviously an exception, but there were other periods where returns were also low or negative.

I often hear an assumption of 8% returns.  Sometimes I hear as ridiculous as 10%.  The problem is that the people assuming these returns are not talking about running a business or buying real estate.  They are not talking about investing in yourself by gaining more skills and knowledge.  They are talking about financial investments, and specifically stocks.

I think this is a bad assumption.  You should not be basing your retirement plans on a return of 8% over the long run, especially in real terms.  You may get 8% nominal annual returns, but it isn’t going to do you much good if inflation is running at 4% or 6%.

Unless you are creating your own product or business, I don’t think you should count on 8% annual returns from passive investments, unless you are betting on extraordinary overall economic growth in the United States, and perhaps the whole planet. If we have a huge wave of libertarianism blow over this planet, then I think a relatively free market could possibly give us real returns of 8%, but even that may be a stretch.

Stocks and Inflation

I often like to point out that the overall rising stock market is largely a function of inflation.  Without monetary inflation, there would be no overall trend of stocks going higher.  Some individual stocks would go higher, and some would go lower.  But overall, the stock market would not continually go up, even over long periods of time.

People would invest in individual stocks for speculation that some might grow (capital gains), just as they do now.  People would invest in stocks for dividends.  Without the current distortions with taxes and regulations, dividends would be more common.  It is really the main fundamental reason for investing in stocks over the long run in a free market, but we live in a distorted market.  The whole point of buying into a business is to earn a share of the profits, which are the dividends that eventually should get paid out to shareholders.  If shareholders were never paid a dividend, what would be the point of being a shareholder, other than to sell your shares even higher to the next sucker?

In a society without monetary inflation, the overall stock market would likely be relatively stable over time.  You would invest in stocks for dividends.  Also, due to increased productivity, your money would likely buy more goods and services over time.  So even if your investments were not going up in nominal terms, they would be going up in real terms, as your money gained purchasing power.

Compounding Interest Over 2,000 Years

I like to use this example to illustrate my point about the unrealistic returns.  Let’s say that someone living 2,000 years ago invested one dollar.  This would have been the time when Jesus Christ walked the earth.  This investor was able to get a return of 8% every single year and reinvest the returns.  When he died, he passed on his investments to one of his children, who kept the investments earning 8%.  They never withdrew anything.  Each child kept passing the investments on to the next child.

After 2,000 years, how much would today’s heir have with the investments having earned 8% compounding for that whole time.  Using the Rule of 72, the investment would have doubled approximately every 9 years.

After just 500 years, the initial investment of just one dollar would have turned into over $50 quadrillion, or $50,000 trillion.  That is way more money than is currently in existence in terms of U.S. dollars.  And that’s just after 500 years.  After 2,000 years, the number would be so large as to be incomprehensible.

In other words, it would have literally been impossible to get 8% annual returns over the last 2,000 years.  It was not possible given the economic growth.

Even if you just had a 2% compounding return over the course of 2,000 years, how much do you think that would turn into?

Your one dollar would turn into about $158,614 trillion.  You could add up all of the world’s GDP over the course of history, and it wouldn’t match this number.

Again, this just shows that a 2% annual return over the last 2,000 years would have been impossible, at least in real terms.

Now, the last 200 years or so have been incredible as compared to the previous 1,800 years. We have had sustained economic growth that basically didn’t exist before.  Somewhere around the late 1700s and the beginning of the Industrial Revolution, economic growth took off, or at least this is when it became evident in retrospect.

I have no idea what economic growth will look like over the next 40 years, let alone the next 200 years or 2,000 years.  Most of the world lived in extreme poverty 200 years ago, and that is not the case now.  Very extreme poverty in the world is probably somewhere around 10%.  This is a significant drop just in the last few decades.

My main point in all of this is that you should not expect sustained 8% annual returns in real terms.  I think returns these days, to the extent we see them, are somewhat artificial.  I don’t think there is enough accounting for inflation. There are also bubbles that cannot be sustained.

You should not plan your long-term future with an expectation of 8% annual returns, or even 6% annual returns, unless you are actively investing.  You shouldn’t expect to just buy an index fund in the S&P 500 and watch your money double every 9 years, adjusted for inflation. It probably isn’t going to happen.

I have been saying repeatedly over the last several years that the Federal Reserve would very quickly return to a loose monetary policy at the slightest sign of recession.

When this long – and largely artificial – boom comes to an end, we will initially see interest rates go down.  We will likely see price deflation.  At the very least, we will see significant asset deflation.

The asset deflation will happen hardest in stocks this time around.  That is where the unsustainable boom has been the most. I think real estate will also go down in many areas, but I don’t expect prices to fall as much as they did in the last decade.

Commodities, in general, are likely to go down, just as they do in most recessions.  Gold is a little more unpredictable, but there may be a temporary downturn as the dollar temporarily strengthens.  This may be short-lived because the Fed will adopt a loose monetary policy.

I fully expect another round of so-called quantitative easing (QE).  This will be QE4.  QE3 ended in late 2014.  The Fed is currently in a deflationary mode, but that is going to end very soon. The Fed never exactly got around to reducing its balance sheet to anywhere near what it was in 2008.

You don’t hear Fed officials speak a whole lot about the yield curve, but I am certain that they watch it closely.  James Bullard, who is considered a dove (meaning he tends to favor a looser monetary policy), has mentioned the yield curve.  Last year, he said that the Fed should not challenge the yield curve, meaning that he thought the Fed should stop hiking its target interest rate.

The yield curve inversion has gotten worse.  The 20-year yield actually briefly dropped below the 3-month yield. The 30-year yield is still above the 3-month, but not by a whole lot.  The 10-year yield is currently well below the 3-month yield.

The bond market is smarter than the stock market.  Of course, markets aren’t people.  They aren’t really smart or stupid.  But the people who invest in the bond market tend to be more correct than the people who invest in the stock market.  This is a generalization, but it has continually proven true, at least in the short run.

Now, I do think buying a 30-year bond at a 2.5% interest rate is crazy, unless you plan to sell it well before maturity.  I am not confident that inflation will be low 20 to 30 years from now, let alone 10 years.

In the short run, the bond market is smart.  The inverted yield curve is the closest thing we can get to an accurate recession indicator.  It is really just a matter of how much time it will take to shake out.  It is typical for a recession to start about a year after the yield curve inverts.

It Didn’t Take Much

With the further inversion of the yield curve, and with a few hard days for stocks, the Fed indicated that it is willing to accommodate as necessary.  Stock investors loved this indication by the Fed, even though everyone should have known it anyway.  Now, people are expecting an actual cut in the Fed’s target interest rate. Because of this, stocks boomed on the announcement that really wasn’t that much of an announcement.

This is the Fed’s put.  Investors expect the Fed to step in any time things get rough.  And they’re probably right.

The only problem is (from their perspective), the Fed can’t control everything.  Just because the Fed announces an interest rate cut, or even a new round of monetary inflation, it doesn’t mean it can save the stock market.  The Fed could go crazy and announce, let’s say, $250 billion per month in new money, but this would only make things worse in the long run.  It may or may not prolong the boom, but it would certainly prolong the agony.  If the Fed got aggressive enough, it would eventually risk destroying the dollar as the world’s reserve currency.

I don’t expect the Fed to start QE4 until we are actually in a recession.  For now, I think they will just lower the target range for the federal funds rate.

It is important to know that the Fed started lowering its target rate prior to the fall of 2008.  It actually started prior to the official start of the recession in December 2007.  It obviously didn’t matter.  It couldn’t stop the bust, and it won’t be able to stop it this time either.

If anything, the Fed’s actions to loosen monetary policy should concern investors.  We are told the economy is booming and that unemployment is historically low.  Yet, the Fed is talking about lowering rates that are already low by historical standards.  Yes, the Fed is definitely watching the yield curve.  But whatever they do, it will be too little and too late to stop the bust.

The Fed is already blaming the tariffs imposed by Trump.  I think the tariffs are bad, but they will not be the cause of the bust.

The only way to stop the bust would have been to never start the unsustainable boom in the first place.  There shouldn’t have been QE1, QE2, and QE3.  Growth would have seemed slower up to this point, but the growth would have been real and sustainable.

Instead, we are facing a recession ahead.  My bet is on 2020 at this point.  I want to take a few short positions (betting on stocks going lower), but I am not quite ready yet.  I think it is a little early.  We may see one final run up in stocks before the full bear market hits.

The biggest threat to the average American is unemployment.  If you can keep your income during the recession, you may actually benefit.  Things should get cheaper, at least for a little while.

I do think stocks are going to get hit the hardest.  The boom in stocks is really irrational.  The revenues and profits are not there now to back up the prices, and they certainly won’t be there once the next recession becomes evident.  I think we could easily see stocks go down 50%, but it wouldn’t surprise me if it is much worse than that.

Some people’s dreams will be shattered.  I think you should mostly be out of stocks now, but I especially can’t understand people who are supposedly close to retirement who are heavy in stocks.

There will be some pain ahead.  It will also be a time of opportunity for those with some cash on the sidelines.

If there is one really good thing about Donald Trump being president, it is that he has helped clarify how much I should trust other people.  For anyone really paying attention, Trump has helped expose the shills for the establishment.

It’s not that Trump himself isn’t, at least part of the time, a shill for the establishment. He has obviously surrounded himself with some horrible people, especially in the realm of foreign policy.  But because Trump has a tendency to be unpredictable and to sometimes disrupt the status quo, the establishment fears him and will do almost anything to take him down.

You can be opposed to Trump without having an irrational hatred of him and his rhetoric. There is a difference between opposing Trump policies and having Trump Derangement Syndrome (TDS).  TDS means hating Trump and opposing him no matter what the issue.  It means not being able to think clearly whenever Trump’s name is mentioned in a conversation.

Thanks to Trump, he has exposed another shill for the deep state.  That is Congressman Justin Amash, who has announced his support for impeachment proceedings against Trump for possible obstruction of justice in the Russia collusion investigation.

Amash is considered by some to be the most libertarian member of Congress.  When he first entered Congress, some were saying that he was another Ron Paul.  I have never bought into this.  While I have agreed with most positions taken by Amash, there has always been something off about him.  I can’t always pinpoint it, but I can pick up little subtleties with language. He is certainly not as forceful as Ron Paul.

I have now lost all respect for Justin Amash.  He is acting as a shill for the establishment and deep state.  I am not sure how intentional it is on Amash’s part.  I think he is just trying to stand out and get some attention.  He has done that.  He has received some praise from the left and the rest of the anti-Trumpers.

I don’t simply oppose Amash for opposing Trump.  I oppose Amash because of his reasoning for opposing Trump.  The Russia-gate story is a hoax.  There is no evidence that the Russian government interfered in the 2016 election in any significant way.  We are supposed to believe that perhaps $100,000 or so of Facebook ads (that weren’t even particularly pro Trump) threw the election in his favor.  If only Hillary Clinton had known how to be this effective with hundreds of millions of dollars at her disposal, along with most of the establishment media in her corner.

I see a few of my Canadian Facebook friends post something about American politics.  Can I now say that the Canadians are interfering with U.S. elections?  The whole thing really is just as ridiculous as it sounds.

Obstructing a Hoax

There was no evidence presented of collusion between the Trump campaign and Russia.  It is just assumed that Russia interfered in the election, but there is absolutely no evidence of this.  The exposure of emails from the Democratic National Committee (DNC) was likely an inside job.  It probably came from a Bernie Sanders supporter who knew they were getting the shaft from the DNC and Clinton campaign.

It would be nice if Mueller would share the basis for why the investigation started.  The reason we know about why the investigation started is from the Steele Dossier, which was put together by Christopher Steele, who was working for Fusion GPS, which is a company that was working for the Clinton campaign.

The Russia story is a hoax.  It was put on by the deep state to undermine Trump, to make an excuse for him winning the election, and to keep tensions high with Russia on behalf of the military-industrial complex.

Even if Trump did obstruct the investigation, I don’t really care, and I don’t really blame him. And I don’t really care if there is a federal law that he violated because most of the federal laws are unconstitutional and unlibertarian.

If the police are framing you for a murder that you didn’t commit, and you try to obstruct their framing, are you guilty of obstruction of justice?  Who is really the criminal?

Amash – Gullible or Establishment Hack

Justin Amash is completely buying into the fake Russia story, or at least he is pretending to buy into it.

If he really believes that Russia hacked the elections, and he believes that the people investigating Trump are honest, then he is just completely gullible.  He is so naïve, he shouldn’t be trusted in power. He certainly shouldn’t be trusted by libertarians to promote the cause of liberty when he is acting as a defender of the establishment.  He is only serving to defend the deep state and to risk inflamed tensions with Russia.

Otherwise, Amash is just another lying politician who is serving up some rhetoric to promote himself.

Either way, we can’t trust Amash if he is going to buy into an establishment narrative that is so obviously false.  He is not the only supposed libertarian who is being exposed by this story.

Judge Andrew Napolitano has also been promoting the establishment narrative that Russia hacked our elections without questioning the allegations.  He if trying to follow the letter of the law, as if libertarians should do such a thing when the law is so corrupt.  He, of all people, should know better that there is often a lack of justice, especially when it comes to federal law and the intelligence agencies.

When Amash and Napolitano and other “libertarians” talk about the Mueller report and the possibility of obstruction of justice by Trump, just remember the people prosecuting this war against Trump.  Remember who Robert Mueller really is.

Anyone who thinks Trump should be impeached for obstructing justice is just acting as a defender of the evil establishment.

Amash and Napolitano could advocate impeaching Trump for bombing Syria or starving little kids in Yemen, but that’s not what they’re doing.  Instead, they are helping to promote a fake story put on by the establishment, and they are helping out the military-industrial complex by promoting more bad relations with Russia.