The Federal Open Market Committee (FOMC) released its latest statement on monetary policy.  As was widely expected, the federal funds target range will remain at 1.5% to 1.75%.

For over a decade now (since the 2008 financial crisis), the Fed maintains the federal funds rate by paying interest on bank reserves.  Since the banks piled up massive excess reserves from the start of QE1, they no longer needed to borrow overnight funds.  Therefore, the Fed couldn’t control the federal funds rate by buying or selling assets as it had typically done before.

The FOMC statement, in the Implementation Note, states that the rate paid on bank reserves will be raised by 5 basis points, which is .05%, to 1.6%.  It seems this was done in order to keep the federal funds rate within the target range.

The bigger story out of the Fed is not the federal funds rate.  It really hasn’t been for over a decade now.  This may be the story that gets the attention from the corporate media, but it isn’t the most important.  The bigger factor is the Fed’s balance sheet.  After a massive and unprecedented expansion from 2008 to 2014, the Fed tightened its stance.  It actually started to allow some of its maturing debt to not be rolled over, which slowly decreased its balance sheet.

This all got reversed in 2019.  By the end of the year, the Fed was once again increasing its balance sheet while intervening in the repo market.

It looks like the Fed will keep increasing its balance sheet, but don’t call it QE according to Jerome Powell.

Perhaps the most interesting thing that came out of the FOMC statement is a slight change in language regarding inflation.  The Fed appears willing to be more aggressive in its quest for 2% or higher inflation.  The Fed may even go a little over that number if necessary.

The old statement said its stance is appropriate to support “inflation near the Committee’s symmetric 2 percent objective.”  The new statement says its stance is appropriate to support “inflation returning to the Committee’s symmetric 2 percent objective.”  See, they swapped out the word “near” for “returning”, which makes a big story for the financial media.

Of course, the Fed isn’t following the median CPI, which has been well over 2% per annum for quite a while.  Maybe Powell and company don’t think price inflation is high enough, but middle class America struggling to pay the bills is feeling it.

They Can’t Stop the Bust

I will keep returning to the theme of 2020, which is the unprecedented stock market bubble. The returns have been astronomical, and most of it isn’t because of great corporate profits.  It is built on monetary inflation.

But here is a key point.  The stock bubble will eventually go bust, regardless of what the Fed does.  Maybe if the Fed goes to hyperinflation (which I am not predicting), then nominal prices of stocks will go higher.  But that would, of course, be disastrous.

The Fed could possibly delay the bust (and make it worse) by being really aggressive with its digital printing of money.  But even that is not clear.

As Ludwig von Mises pointed out a long time ago, the correction has to eventually arrive, unless the central bank is willing to continually provide ever-greater stimulus in the form of monetary inflation.  But this will eventually end in what Mises called the crack-up boom, which is hyperinflation.

My point is that you shouldn’t think that stocks are safe because the Fed is trying to keep them propped up.  The Fed can cause massive distortions and manipulate many things, but once the fear and panic set in, it will be mostly helpless.  The bust in stocks will happen.

Remember, the Fed was already lowering its target rate before the 2008 recession.  It didn’t prevent it from happening.

The 10-year yield sank more after the FOMC announcement.  It is nearing the 3-month yield again.  But it already inverted in 2019.  Another inversion won’t tell us much at this point except that investors are seeking safety in long-term U.S. government bonds.

There is a disconnect between the stock market and the bond market.  I think the bond market will ultimately be proven more correct. When stocks come crashing down, I expect long-term yields to go down further.  I expect short-term yields to go lower as well, as the Fed lowers its target rate back to near zero.

It is a waiting game at this point.  It is amazing how long and how big this stock bubble has gone on.  It comes to a point where people think it will always be this way.  But I am here to warn you, it can’t keep going, and it doesn’t matter what the Fed does to try and stop the crash from happening.

The Dow Jones Industrial Average (the Dow) is currently right around the 29,000 mark.  It only has to rise a few percentage points to go over the 30,000 mark.  This could happen next week for all we know, as it will only take a couple of big up days on Wall Street.

I was originally going to title this post “Will the Dow Hit 30,000?”  But the obvious answer to that question is yes.  The Dow will hit 30,000.  It is just a question of when.  Will it be this year or a decade from now?

Unless there are drastic structural changes, particularly in regards to monetary policy, then the Dow will eventually hit 100,000.  It will eventually hit one million.  It is mostly a question of when, which is a question of how fast the Federal Reserve will create new money out of thin air.

I have no idea if the Dow will hit 30,000 this year.  If I knew for sure, I would be in the futures market getting wealthy.  My best guess is that it will hit this mark because it is so close already.

Here is one thing that I would bet on strongly.  I don’t think the Dow will hit 30,000 in the year 2021 for the first time. If the Dow is above 30,000 next year, it will be because it already surpassed that mark and the bull market in stocks has continued.

If the Dow fails to hit 30,000 this year, it isn’t going to do it next year.  That’s because the great correction will have already started.

Stocks are practically going parabolic at this point.  That means it has to significantly slow down, or stop, or reverse.  You can’t just keep going up at 20 to 30 percent per year unless there is a very valid reason, such as extreme monetary inflation.  Individual stocks can do this for a long while because of profitability and the potential for future growth, but this isn’t going to happen with the broad market.

This near-parabolic bull run could last longer.  I may be writing a post soon about whether the Nasdaq will hit the 10,000 mark.  I will be sure to reference this post.

I have said that writing about this major run up in stocks will be a major theme in 2020.  The stock market is largely symbolic of the overall economy.  I think the average American is already struggling and not greatly benefitting from the bull market in stocks.  This is the same as the mid 2000s.  But the sense of struggle isn’t the same as the major fear that was present in late 2008.

When stocks crash, so goes the economy.  Maybe stocks are an exaggerated version of the economy right now, but there is still a correlation.  It’s not even necessarily that one causes the other.  But you know that a major downturn in stocks will likely be coupled with a recession.  You could also say that a recession will likely be coupled with a downturn in stocks.

The Trump Economy

I keep hearing some hardcore Trump supporters touting our amazing economy.  I almost feel embarrassed for them when they are talking.  Some of these people are quite sympathetic to the free market, so it makes it especially hard to hear.

Do they not understand economics or anything about the artificial boom/ bust cycle in today’s world of central banking?  Do they not understand that we live in a world of YouTube?  These embarrassing comments can be played over and over again in millions of households across America after the so-called Trump economy collapses.

They can praise the cut in corporate taxes, and rightly so, but I see little else where we should give credit to Trump and the Republicans.  Maybe some minor regulations have been cut, but I don’t see this as significant enough to drive the economy.  What I see is a hike in tariffs and massive federal spending.

Anyway, most of this is driven more by monetary policy than fiscal policy.  The Federal Reserve controls far more than does Trump. I think Trump may sense this. He has been very critical of Powell and the Fed.  He wants a strong economy for his reelection.  He also wants someone for him to blame when things go bad.

There is going to be a crash, regardless of what the Fed does at this point.  It is a question of when.  I don’t use the word “crash” lightly.  Our lives will go on.  We will still have our great division of labor society. We will still have high living standards compared to a century ago.  But the correction, while necessary, will be tough.  The major crash will happen in stocks, but most everyone will be impacted in some way.

If the Dow blows past 30,000, then the correction will just be that much greater.  The longer it goes, the harder it falls.

For reference, the Dow hit a low of 6,547 in early 2009.  If it went to that now, it would be a loss of almost 80%.  I hope you aren’t basing future plans on long-term capital gains for stocks.

I recently heard a story about a guy in the military who is about to retire in his early 40s. He will be paid $42,000 per year for the rest of his life, and the pension will adjust for inflation (or at least adjust according to the government’s price inflation statistics).

We don’t know for sure if he will be paid $42,000 per year for the rest of his life.  That is his assumption.  That is what the politicians have promised to him. But politicians can promise a cure for cancer, but it doesn’t mean it will happen.

If the promises come through, the guy is close to set for life, financially speaking.  If he lives really frugally, he might never have to take another job in his life.  Or, he can just find a relatively low-paying job that he likes and live a nice middle class life.

Unfortunately, much of middle class America isn’t living a nice middle class life.  They are barely affording a middle class lifestyle.  And the pension of this military guy is largely symbolic of why this is the case.

I have no idea if this guy ever saw actual combat.  For the sake of argument, let’s say that the U.S. military wasn’t starting wars and running an empire around the world.  Let’s say the U.S. military wasn’t destroying other countries and their people and wasting hundreds of billions of dollars every year with foreign interventions.  Let’s say the military was purely defensive and defending our freedoms.

Even if this were the case (which it is not), there would still be no justification in paying someone over $40,000 per year for the rest of his life to do nothing, starting at the age of 42.  Where can you find that gig in the private sector?

Some of the large companies in the private sector (i.e., non-government companies) used to have pension plans like this.  But unless you were a top executive, you typically had to work longer than 20 years to get it.  It is far less common now, as it is too expensive and too unpredictable for companies to make these promises.  But they have a bottom line to worry about and a future to worry about. Politicians don’t really care about a bottom line, and their future extends only to the next election.

Anyway, if a company wants to pay out a nice pension to attract and retain good employees, there is nothing wrong with that.  The key is that you aren’t forced to pay for it.  In the case of this person retiring from the military, we are all forced to pay for him to do nothing for the rest of his life.

There are defined-benefit plans and defined-contribution plans.  Many government employees receive both.  A defined-contribution plan for a government worker (similar to a 401k plan) would be less offensive.  The employee gets whatever is put in there during his time of working.  The government isn’t making future promises in this case.

I have no idea how many hundreds of thousands or millions of people there are who receive a defined-benefit pension like this.  When you include medical care paid to veterans, the costs are absolutely astronomical.  And it is a long-term and sustained burden.

If there are 1 million people on federal government pensions (not counting state and local, which are also a major problem), then the total cost would be $42 billion per year at $42,000.  Of course, the number is much higher than this.  It is hard to get an accurate cost for all federal pensions because the funds get so mixed up and are allocated in different buckets.

A Middle Class Revolt

I used to think there would be a war between generations.  The younger generation would get tired of struggling and paying for the retirement of the older generation.  The older generation is largely living off the younger generation because the government money spent on the older generation is coming from current tax (and deficit) dollars.  There was no money put aside in a Social Security trust fund or a Medicare trust fund.

I still think this generational war is possible.  Unfortunately, much of the younger generation, instead of advocating that the government spend less on the older generation, are advocating for more socialism for everyone.  We’ll all live at the expense of each other.

But more than this, I believe there should be (and maybe will be) a revolt by the middle class against the elites and those benefitting heavily from the government.

You can preach patriotism and supporting our troops all day long (I don’t), but there comes a breaking point for frustration.  If you are struggling to pay your bills every month and can’t afford to take your family on even a modest vacation, then your ears may perk up a little when you hear about a government ex-worker who is collecting over $40,000 per year doing nothing.  This has to be especially frustrating for someone who is making $40,000 per year, getting up early every morning and busting their butt, with no company pension, to know they are still having to fund these people’s early retirement.

I don’t really care that the guy in the military may have been deployed.  I don’t care that he may have risked his life.  I don’t care what he was promised by politicians.

Politicians lie all of the time.  So let’s make them liars here.  Any promises made by the government are invalid contracts.  If I promise to pay you money that I am going to steal from someone else, it is an invalid contract.  If I make this promise to you, you should know that it is invalid because it is based on the use of force against another party that did not agree.

I don’t know if the rest of middle class America will ever see it this way, but they should. They are working hard to pay for other people’s easy retirement.  Meanwhile, they can barely stay above water.  Maybe they’re fighting with their spouse about money.  Maybe they have to take a second job. Maybe they have to send the kids to after-hour day camp so that both parents can work full time to pay for the military guy to collect easy money every month.

You don’t have to be a radical libertarian to see this as unfair and unjust.

And while there are a lot of people collecting government pensions, the majority of voting-age Americans are not.  They can change the rules if they really want it, and if they make it known.

I am waiting for a middle class revolt of some kind.  I don’t know if I will wait forever.  Either way, the laws of economics are going to dictate some kind of change.  The massive deficits, coupled with unfulfillable promises, will force change.  It may seem sustainable right now, but it is not.

The Iowa Democratic caucuses will be held on February 3, 2020.  This will likely be my last major political analysis before then.  I will reassess the situation after Iowa, and maybe after the New Hampshire primary on February 11, 2020.

It is a fascinating situation to me because we could potentially have two somewhat anti-establishment candidates going head to head.  Maybe the term “anti-establishment” is not quite correct, but they are not establishment approved.

I am referring to Donald Trump and Bernie Sanders.  Trump is hated by the establishment and its media.  That is obvious.  Bernie is also hated, but they are a little more careful to not be so blatant about it.

The problem the establishment elites have with these two individuals isn’t that they will necessarily drain the swamp or reduce the size of government.  The problem is that they occasionally tell the truth. This is especially true with respect to foreign policy.

Trump has shown that he can be really bad on foreign policy.  He surrounds himself with war hawks and gets persuaded into these foreign interventions.  He is a coward in many respects.

Bernie may not be much better, but there is hope.  Most of what he says regarding foreign policy is pretty good from a libertarian aspect.  He is certainly good as compared to all of the other Democratic candidates, with the exception of Tulsi Gabbard.

The problem with Bernie (from my perspective) is that he would also likely be a coward. This is the man that campaigned for Hillary Clinton in 2016.  She is one of the biggest bloodthirsty war hawks of all time.  She also worked with the Democratic Party establishment to snatch the nomination from Bernie.  If there was any major election interference in 2016, it was here.

I also point out that Bernie puts little emphasis on foreign policy.  He is more concerned with attacking the top 1% than he is with stopping the bombing and starvation of little children in foreign countries.

Still, even though Bernie is a massive interventionist domestically, he does appear to favor non-intervention with foreign countries, or at least that is what his rhetoric indicates.  The establishment doesn’t like him because they fear that he might actually follow through with some of what he says.  This would hurt the U.S. empire and the military-industrial complex.  This is why they oppose Bernie.  They aren’t scared about him enacting higher taxes on the rich.

Bernie’s Loyal Followers

It seems strange that the two current frontrunners for the Democratic nomination are old white men. Sanders is 78.  Biden is 77.  They would both turn 80 in their first term in the White House.

There is a big difference between the two, even aside from their politics.  Biden is stumbling.  He can barely put two good sentences together.  He is boring and safe, at best.  But I can’t even say that he is boring. He is actually funny.  The problem is that people who are laughing are laughing at him and not with him.

Bernie, on the other hand, acts younger.  He has energy and passion.  This has earned him a loyal following.  The people who favor Joe Biden in polls are doing so mostly because of name recognition and that they think he can best beat Trump. If they start paying attention, they will realize that he may be the worst person to put up against Trump. If Biden can barely act coherent when speaking for 15 minutes in a 2-hour debate, how will he do when he is speaking half the time in a 2-hour debate?

I think more Democratic voters are going to realize in the coming months that Joe Biden would be a complete disaster.  It would be entertainment for those who don’t like him.  It would be like a bad movie where the audience cringes at one of the characters who keeps embarrassing himself.

This is why Pete Buttigieg should stay in the race.  The establishment may turn to him when they realize just what a disaster Biden is.

It’s interesting that the narrative is that Bernie and Elizabeth Warren are fighting for the hard left voters.  I don’t think there is as much truth to this as there once was.  The really hardcore left doesn’t like Warren. They see her as a phony, which they should.  They only trust Bernie.

Meanwhile, I think the establishment would be more than happy with Elizabeth Warren as president. They could completely control her. She would mostly give them what they want.  And she wouldn’t be enacting a wealth tax.

So if Biden implodes, they may just turn to Warren.  Actually, I think Biden has already imploded.  I am just waiting for others to recognize this fact.

I know there are still several other candidates, but I don’t see a path to victory for any of them. Michael Bloomberg may have an outside chance, even though he is not all that likeable.  It is interesting that there are two billionaires (Bloomberg and Steyer) who are running for the Democratic nomination.  The Democrats supposedly want more equality and they also want to keep money out of politics.  I’m not sure how those views can be squared with billionaire candidates.  But the fact that Bloomberg is gaining a little support just shows that some people are easily enough brainwashed with a few simple commercials.

If several people stay in the race, then I think Bernie has a good chance because of his loyal following that nobody else has.  The establishment does not want him.  This showed during the last debate when he was asked about telling Warren that a woman couldn’t be president.  He vehemently denied he said it.  Immediately after that, one of the debate moderators asked Warren a question based on the premise that Bernie had made that comment.

If Bernie can somehow get by the establishment this time, I actually think he has a decent chance against Trump.  If I were Trump, he is the person I would fear the most.

The bad thing is that it will become something of a referendum of capitalism vs. socialism. Unfortunately, Trump will be representing the capitalism side.  This is a guy who likes tariffs and is helping to run an annual budget deficit of $1 trillion.  And let’s not forget his continued promotion of lower interest rates by the Fed.

2020 will be an interesting year.  I still think the economy is one of the biggest factors.  I don’t know if the stock market can hold up for another 10 months. If it goes down 5 or 10 percent from here, it’s not a big deal.  But if there is a major crash and an obvious onset of a recession before November, then Trump will be in big trouble.  That is, unless the Democratic voters are foolish enough to hand him the gift of Joe Biden.

If you follow the FIRE movement (financial independence, retire early), then you may know about the 4% rule.  This is a general rule about figuring out how much you need to retire, which includes retiring early in life.

For example, let’s say that your living expenses are $40,000 per year, and you plan to keep a similar lifestyle.  According to the 4% rule, you need $1 million in order to retire financially free, assuming you can maintain the same lifestyle.  4% of $1 million is $40,000.

If you want to live on $80,000 per year, then you will need $2 million in assets in order to retire.

You shouldn’t include the equity in your house, unless you are factoring that into your cost. If you own a one million dollar house outright but have no other money, then you are obviously not financially free if you keep owning the house and living in it.  If you want to include a house that is paid off, then you have to include what it would cost you with a mortgage as part of your living expenses.

I have heard a few people say that 3% is the new 4%.  In other words you should be conservative and use a 3% rule.  So, if you are going to live on $40,000 pear year, then you would need about $1.333 million.

Still, most people who are even talking about such a rule are using 4%.  Therefore, that is what I will discuss here.

To be fair, even those who use the rule, use it as a general guideline.  I think most would admit that there are nuances.

I think the biggest factor is age.  If you are 70 years old and you have a million dollars and live on $40,000 per year, then you will probably be fine, assuming you don’t need full-time care in a nursing home (which may still be assuming too much).  If you are 30 years old with a million dollars and currently live on $40,000 per year, I don’t think you have any chance of making it financially without working again.

The 4% rule assumes that you will only draw interest (which really includes dividends and capital gains) from your investments.  You will make 4% on your investments, and you will use that money to live, while keeping the principal intact.

The return on your investments will likely vary.  You probably aren’t going to have some kind of annuity for life, and if you did, it wouldn’t be paying out 4% right now.  The only way I could possibly see getting a relatively steady return on your money of 4% is by investing in residential real estate.  But even here you have to factor in all of the maintenance costs and vacancies.  There is also no guarantee that the rents will not go down.

Those who put faith in the 4% rule don’t expect an exact 4% return every year.  They actually count on a higher return overall, but that will include some down years.  They hope that the good years will more than offset the bad years.

The Inflation Factor

If you can’t already tell, I am not really in favor of using the 4% rule for determining early retirement (or maybe any retirement).  I think it is useful as a measuring stick, but it may steer some people the wrong way.

Let’s say someone is 40 years old.  Let’s say they were lucky and skilled enough to obtain $1 million in assets.  Let’s say they are frugal and live on just $40,000 per year.  If that person wants to take a couple of years off of work to travel, I would tell them to go for it if that is what they want.  If they want to take their dream job that only pays $12 per hour, I say go for it.

However, I don’t think this person should retire with the expectation of never working again for money.  I just don’t think a million dollars will last that long.  If technology improves, or even if it doesn’t, this person could live another 60 years.  A million dollars simply will not last.

We live in a world of central banking where there is almost constant inflation.  If prices go up only 1% in a year, the central bankers are complaining about the lack of inflation.  Most of them say they want at least 2%.  But actual price inflation is impossible to measure precisely.  Sometimes the government statistics underreport the actual inflation due to the weighting and other factors.

Let’s say that you get price inflation of 3% per year.  Using another rule – the rule of 72 – this means that prices will double approximately every 24 years.  This means they will quadruple after 48 years.

Our hypothetical person who is 40 years old will see his cost of living go up by four times by the time he is 88 years old.  If he still has the same lifestyle (which is assuming no additional medical costs), then he will be living off of $160,000 per year.

If we see a decade like the 1970s where price inflation was in the double digits, then most of the 4% rule retirees can start looking for work again.  A decade of 10% annual inflation will likely devastate these people.

I know that defenders of the 4% rule will say that the rule takes inflation into account.  In other words, if you have 4% price inflation, then you should expect 8% returns.

The problem is that we live in the real world.  There is no guarantee of annual returns of 8%. The stock market in Japan is lower now than it was 30 years ago.  Anyone who used the 4% rule in Japan in 1989 and invested in stocks would have been back to work within a few years.

There is a tradeoff between keeping the nominal principal amount safe and hedging against inflation.  You could keep a million dollars in a savings account and make 1% per year, but that wouldn’t even guarantee to last you 20 years living off $40,000 per year.  That is because of inflation.  After 10 years, you may be spending $60,000 per year for the same lifestyle that $40,000 bought you 10 years prior to that.

Meanwhile, if you get too aggressive with your money, you risk losing the principal amount. If you put a million dollars into stocks, it may only be worth $700,000 the following year if there is a bear market.

This is why it is so hard to plan for retirement.  The inflation factor makes it extremely difficult.  And this is the main reason that it makes the 4% rule highly unreliable.

I think it is fine to use the 4% rule as a general measuring stick, but I would not recommend basing your entire retirement on this.  There needs to be some flexibility because nobody can predict inflation or investment returns.

U.S. stocks are hitting all-time highs again.  This will be a theme for 2020.  It’s not to say that the “all-time highs” part will be the main theme, even though that could continue for a while.  The theme is that this is one of the biggest stock bubbles this country has ever seen, and its implosion will be significant.

There was a tiny setback for stocks at the beginning of the year with the prospect of a full-blown war with Iran.  But after Iran’s rather mild response, and Trump seemingly backing off, stock investors cheered on the reduced tensions with another rally this past week.

Every time a new high is notched, it is a signal of just how much more painful it will be when it all comes crashing down.

It’s not that U.S. stock indexes making new highs is by itself a problem or any kind of signal of a bubble.  The problem is that the returns in stocks have been extraordinary over the last decade and much of this is due to easy money from the Fed.  A much smaller portion is due to actual corporate profits, and these profits can quickly vanish with the arrival of a recession.

In my predictions post for the year 2020, I predicted that stocks would hit new all-time highs again early in this year. So far, I am right, but I admit this didn’t take a lot of skill to predict accurately.  The odds were good that this would happen.

Part of getting predictions right is luck.  As I noted, the timing and exact nature of events is impossible to predict because we are dealing with the action of billions of human beings.

So I don’t know when this whole thing is going to implode, but I am confident that it is going to implode.  I am not talking about a 15 to 20 percent correction.  I am talking about a major crash that will see U.S. indexes fall by at least 50%, but probably even more.

Stocks are often tied to economic growth or the overall health of the economy.  I do think this is a mistake, but it’s not altogether wrong either.

Do Asset Bubbles Help the Middle Class?

Right now, the American people are struggling.  This is a generalization, but the average middle class person is finding it hard to save any significant money.  We can blame smartphones all we want, but this isn’t a major expenditure, especially when compared to housing and medical care.  We should be able to have smartphones without experiencing a decline in living standards elsewhere.

In many ways, this does remind me of how things were in the mid 2000s.  There was a supposedly booming economy then, yet many people were feeling the pinch of debt and a high cost of living.  There is no question that many people made bad decisions, but we have to acknowledge that there was a cluster of bad decision making largely due to government policies and the Federal Reserve.

Just as housing prices and stock prices were going up in the mid 2000s, so it is today.  This time around, there seems to be more of a bubble in stocks and a milder bubble in housing as compared to last time. We won’t know for sure until it all shakes out.

People hear about the booming stock market, so they tend not to question out loud the supposed strength of the economy.  They wonder why they are struggling to pay their bills when those around them seem to be doing well.  But those around them probably aren’t doing well either.

Admittedly, this is a first-world problem.  I know there has been a spike in homelessness, especially in California. But most Americans have a roof over their head and food on the table every night.  This shouldn’t prevent us from exploring why our living standards aren’t higher than they should be.

Most Americans don’t have any significant ownership of stocks outside of a retirement plan. So think about someone who is an adult but still well below the official retirement age.

Let’s say someone owns a house and has a 401k through their employer.  Housing prices may be going up in their area.  The stock market is going up.  On paper, their net worth is increasing.  It has increased a great deal since 2009.

The problem here is obvious.  All of the wealth is on paper.  You can’t touch the 401k money in most cases, especially if you still work for the same employer. Other than possibly getting a loan and going further into debt, you can’t touch that money until you are almost 60 years old.  If you leave your job, then you can access it, but you will pay income taxes and an early withdrawal penalty.

The equity in the house is mostly useless unless you plan to sell it and move somewhere cheaper. You could do a cash-out refinancing, but this just adds to personal debt and makes it harder in the longer-term future.  It is reminiscent of the mid 2000s.

So people see rising house equity and larger retirement accounts, but these things don’t really pay for the electric bill or the higher cost of repairs for the house.  It certainly doesn’t pay for the rising costs in insurance and medical care.

The recession, to a large degree, is already happening.  It is happening in the sense that people are struggling.  We just haven’t seen the rise in unemployment yet.

There needs to be a correction.  The falling stock market will correspond with the correction.  The problem is that the correction – a precise word here – is not typically allowed to fully happen by the government and central bank. The Fed does not allow a full cleansing of the misallocated resources.

A correction will actually help many struggling American families.  It will be painful.  It will be especially painful for those who lose their job.  The positive side is that prices should come down (until the Fed’s monetary inflation ruins that), which will make life a little more affordable for many people.

The virtually inevitable crash in stocks that is coming is not just relevant to your investment portfolio.  It is relevant in its symbolism in the unsustainable boom that we are in.  The crash in stocks will occur mostly in tandem with the coming correction.

Trump ordered the assassination of a top Iranian official, or at least that is what the narrative is.  Trump is certainly not denying that he was involved in the decision, so I will take him at his word that he has blood on his hands.

I first started this blog in 2008, and one of my first pieces was about Iran.  I was fearful that the Bush administration at that time was going to launch a war against Iran.  Thankfully, that did not happen.  The disaster in Iraq was such a stain on Bush that it made it virtually impossible (politically speaking) to start another war.

Here we are over a decade later, and we are on the verge of a full-scale war with Iran.  When Trump campaigned in 2015 and 2016, he talked about the disastrous and endless wars in the Middle East.  Now that he is in office, he has been unable to end the wars, and he has started a new conflict with Iran.

This is not the doing of Iranian officials.  They do not seek war with the United States.  It is Trump’s fault for pulling out of the agreement with Iran, which was one of the few good things that Obama did as president.  Trump slapped sanctions on the Iranians and has continued to make threats.  With this assassination, there is a real and significant danger of escalation.

Some might argue that Trump is not really calling the shots.  Maybe it is Pence and Pompeo and the other war hawks in his administration.  Maybe Trump is taking orders from the Israeli government.  Maybe Republican senators are nudging him into conflict in exchange for supporting Trump when the Senate has hearings from the House impeachment.  Maybe it is all of these things.

One thing we do know is that Trump is not in the dark about what is happening.  He is defending this assassination of an Iranian official.  The best you can say about Trump at this point is that he is a coward.  He will stand up to the media at times, and he will pick fights with people on Twitter.  But when it comes to the war hawks that he hired, he has no courage.

Trump doesn’t have to listen to them.  He can give a primetime speech in front of the American people explaining why he is ordering the immediate withdrawal of troops from the Middle East. But he hasn’t done this. Instead, he goes along with murdering someone and risking a major war.

Even if you think of the worst-case scenario – meaning, the best excuse for Trump – I don’t see how anyone who is anti war can support him.  Even if he is secretly being threatened that something bad will happen to his family if he doesn’t go along, then he should simply resign from office.

When I say that anti war people should not support Trump, it doesn’t mean you should act like his worst enemies.  You shouldn’t have Trump Derangement Syndrome.  You can speak in favor of the good things he does and speak out against the bad things he does.

The Hypocritical Left

Most of the political left have proven themselves to be a bunch of hypocrites.  They will criticize Trump no matter what.  They criticize him when he announces the withdrawal of troops from northeastern Syria.  They criticize him for cozying up to dictators when he meets with the North Korean leader.

Now, Trump is giving the less interventionist position to the left by engaging in war with Iran. Now they can criticize him and take the less hawkish stance.

Of course, much of the left will say that the Iranian official was a really bad guy (without offering any proof, of course).  Their main talking point right now is that Trump did not get authorization from Congress.  Has that ever stopped any president of the last 70 years or more from engaging in foreign intervention?  The original authorization to use military force after 9/11 has been used to justify war virtually everywhere in the Middle East.  An actual declaration of war hasn’t taken place since World War 2.

Regardless of the bad and unprincipled arguments made by most of the left, they still gain the high ground on Trump on this issue.  Trump was too much of a coward to stand up to his neoconservative buddies.

I think Trump will lose some support from libertarians and libertarian leaning people who didn’t necessarily agree with Trump on many things, but were at least sympathetic to him in his battle against the deep state.

Trump has maybe done two good things for the cause of liberty.  One is that he was actually elected in the face of a hostile media.  He got past the establishment.  This should give us some hope that it is possible to bypass the establishment.

The second good thing is that Trump has helped expose the deep state, which is a term that was rarely used four years ago.  For anyone paying attention, it is obvious that there is an establishment elite that looks to control the narrative.

As far as I am concerned, Trump has served his purpose.  We have no more use for him at this point.  He is a disaster in almost every way when it comes to policies. I really doubt that Bernie Sanders could be much worse.  If Bernie is president, at least we might see some congressional opposition to the massive budgets.

As for Bernie, I think he is a beneficiary of Trump’s blunder with Iran.  Bernie is probably the best of the major candidates when it comes to foreign policy.  I am not including Tulsi Gabbard.

As I frequently point out, I don’t trust Bernie when it comes to foreign policy.  He does not emphasize it, and he campaigned for Hillary in 2016, who is one of the biggest war hawks of all time.  I have little doubt that Bernie will be put in his place as soon as he takes office, if not before.  But maybe we could have a little hope that he will be a little less belligerent than all of the presidents we have seen so far in the 21^stcentury.

The establishment is against Bernie because he does suggest less intervention overseas.  He wants more intervention domestically, but his policies might hurt the military-industrial complex.  I don’t know who the establishment would be more against in a matchup between Trump and Sanders.  After this week, they might actually favor Trump.

Out of all of the Democratic candidates, Bernie has the largest following of loyal supporters. People who favor Joe Biden are just favoring him by default.  The longer that several major candidates stay in the race, the more it favors Sanders.  The others will split up the more establishment votes.

I wish Bernie would take a more principled stand against war.  I wish he would emphasize the issue more.  Unfortunately, he will probably continue to play envy games against the top 1%, or whatever it is.  He cares more about soaking the rich than he does about saving innocent lives of foreigners.  Still, I think Bernie is going to benefit from Trump’s stupid, dangerous, and cowardly move against Iran.

I am a strong advocate for using a permanent portfolio for financial investments. I wrote a short e-book on the topic.

The permanent portfolio is an idea developed by the late Harry Browne.  It is explained in his book Fail-Safe Investing.  In the book, he distinguishes the difference between investing and speculating.  He advocated investing in a permanent portfolio.  Speculation should be done with money that you can afford to lose.

In my book, I discuss tweaks you can make to the permanent portfolio to fit your personal situation. I don’t know if Harry Browne would have approved of this or not, but I still don’t deviate too much from the portfolio.  It is there as a home base.

With that said, I think it is important that I disclose what I am currently doing.  I certainly have some money invested in PRPFX, which is the mutual fund that is loosely modeled after the permanent portfolio.

However, beyond PRPFX, I am quite light on stocks.  Stocks make up less than 25% of my total financial assets.  If you exclude some specialty stocks in precious metals and energy, then I am way below 25%.

Is this speculation? Yes.  But it is very calculated.  After all, what is the worst that can happen in terms of my investment portfolio?  The worst-case scenario that could result from this deviation is that stocks continue to go higher for a long period of time.  I will miss out on the gains.

I am betting on a major correction (or worse) in U.S. stocks in the somewhat near term.  I am making this bet by not owning as much as what is recommended in the permanent portfolio.  I have not yet proactively bet in any significant way by shorting the market.  I may decide to buy a bear fund at some point, but I will limit my exposure in case I am completely wrong and stocks go up.

The permanent portfolio offers simplicity.  You don’t even really need to follow the financial markets in order to follow it.  You just have to rebalance your portfolio once in a while.  Even simpler, you can buy PRPFX and let it sit there.  (I have warned in other writings that PRPFX is a bit more speculative than the actual permanent portfolio.)

I am light on stocks knowing that this is a deviation.  I just want to disclose this because I am such a strong advocate of the permanent portfolio.  I am still using it as my guide, but I am deviating in accordance with what I think is currently happening in the economy.

Stocks are near all-time highs.  They went down quite a bit today because the U.S. government has essentially started a proxy war with Iran.  This has added uncertainty.  But even if things cool down with Iran, I think stocks are in trouble.

The yield curve mostly inverted for several months in 2019.  The 3-month yield was higher than the 10-year yield.  This is a recession warning.  Meanwhile, starting in September, the Fed has intervened in the “repo” market in order to prevent a spiking of short-term interest rates.

In 2019, the S&P 500 was up about 29%. The Nasdaq was up 35%.  This is not normal.  Does anyone honestly think that the economy is booming so much, and profits are going to be so high, that these valuations are justified?

I think the downturn will begin in 2020.  Maybe it can be delayed until 2021, but I doubt it.  No one can know for sure.  But I am willing to forego possible gains in the stock market in order to protect against possible losses.  I think the downside is much greater than the upside at this point.  And when the implosion begins, it is going to get ugly.  I can’t discount the possibility of something very severe, where stocks go down in the neighborhood of 70 or 80 percent.  I am not saying this is going to happen, but it is a realistic possibility.

If and when the stock crash happens and the Fed ramps up its monetary inflation – as it surely will do – then I will go back to 25% in stocks as part of the permanent portfolio.  If stocks get beaten down bad enough and I have the courage to do so, maybe I will go a little heavy in stocks at that time.

I believe the stock bubble is the biggest bubble at this point that could implode at any time. There is a giant government bubble, but unfortunately we may have to wait a while longer before that implodes.