One of the common funds found in retirement plans today is the target date retirement fund.  If you have a 401k plan through one of the major brokerages, you will likely find target date funds in it.

The idea is that you can invest in a fund that will allocate your money into assets that line up with your retirement date.  It is assumed that most people will retire around the age of 65.  As your target date approaches, the fund will get more conservative and less risky, or at least that is the idea.

If you were born in 1970, then you will turn 65 in the year 2035.  You would then pick the retirement fund with a target retirement date of 2035.  If you were born in 1980, then you would pick a retirement fund with a target date of 2045.

I believe these exist in increments of 5 years.  I haven’t seen any retirement funds with more precise dates.  So if you were born in late 1982 or early 1983, should you pick the 2045 retirement fund, or the 2050 retirement fund?

This may be a slight drawback to these funds, but I don’t think Vanguard and Fidelity want funds for every possible retirement year.  In the above example, someone could pick one or the other, and it wouldn’t have that much of a difference.  You could also split your money between the two funds.

Another thing to consider with these funds is that not everyone is going to retire around the age of 65.  There are some people who plan on working well into their 70s.

There are also people who are pursuing the FIRE life (financial independence, retire early).  There are people who want to retire at the age of 40.  Of course, for a person in this situation, they won’t be able to access their retirement money in a 401k plan until age 59 ½.  If they withdraw it any earlier, they will get hit with a penalty in most cases.  So an argument could be made that even these people should invest in the retirement date funds as normal.  Maybe they could target when they will hit age 60.

For most FIRE people, they are quite involved in their personal finances, so these people will figure out their needs.

There is an article on Investopedia describing the advantages and disadvantages of target date funds.

One of the disadvantages listed is that not all of the funds are the same when comparing different brokerages.  There are slight variations in the allocation to equities and bonds.  Within the equities portion, there are variations in the allocation toward international stocks.

The article also mentions expenses and how they can add up.  I would say this is a minor drawback, as the expense ratios for these funds are dropping and are very low as compared to what they have been in the past.

The Number One Drawback

It is curious that these conventional articles just don’t mention the number one drawback.  To me, the biggest problem with these funds is the lack of diversification.

First, there are really only two categories at play.  There are equities, which are stocks.  And there are fixed-income assets, which is mostly bonds and maybe a little bit of short-term assets that are like cash.

There is no focus on real estate or commodities.  You could pick up a little bit of exposure in the equities portion indirectly though.

It doesn’t provide a very good hedge against a situation of high inflation.  If we went through a period like the 1970s and early 1980s, these funds would get crushed.  Stocks do not always serve as a great hedge against inflation.  They certainly aren’t the best hedge.

But there is also a problem of deflation and recession and depression.  If you look at the examples from the Investopedia article, it gives three examples of 2045 target funds.  This was written in 2020, so it assumes a person born around 1980 who is 40 years old.  This person will turn 65 in 2045.

The current allocation (in 2020) shows all three funds with the equity portion above 90%.  To allocate 7 to 9 percent to bonds and the rest to stocks is absurdly risky.

I understand all of the arguments that someone at this age has time to recover.  This hypothetical person has 25 years and has plenty of time to ride out any bear markets, so the experts say.

We are told that 25 years is a long time horizon, and historically stocks always go up in the long run.

Tell that to the Japanese investor who put money into the stock market in 1989 and is still way down from that point over 3 decades later.

There is a legitimate retort that most people will not be dumping all of their money in at once, and it won’t be all at the top of the market.  But still, the Japan example (which is a first-world nation) shows that the stock market can basically go stagnant for a long period of time.

This is not a prediction of what will happen in the United States.  It is only to say it is possible.

And here in 2021, we are in a massive and unsustainable bubble.  The only way this thing doesn’t come crashing down is if we see massive price inflation.  And even then, we will likely eventually see a major market downturn from where we are.

And if a long period of high inflation does prevail, then stocks probably aren’t going to be your best investment anyway.

This is why I advocate using the permanent portfolio as a place to start.  You can tweak it to your own situation and even make it a little more aggressive if you are young.  But I believe that should be your starting point.

I don’t think it is a good starting point for a person who is 40 years old to have over 90% of his or her retirement account in stocks.

What happens if stocks drop by 50% and stay down for a while?  What happens if they drop by 80% and we have a prolonged depression?

Again, I am not predicting these things, but I am pointing out that they are possible.

Even if someone is continuing to contribute, that would be a massive hit.  If the 40-year old person has $200,000 saved up, a 75% drop in stocks would hit over 90% of this amount in the target fund.  How would this person like to open up the latest 401k statement and see that $200,000 went to $70,000?

It gets even worse for those close to retirement.  Take the Vanguard Target Retirement 2030 Fund.  This means someone will be retiring in approximately 9 years.  Vanguard still has this at over 66% in stocks.

While I love Vanguard’s low-fee index funds, this retirement target fund is absurd and completely irresponsible.

Let’s imagine someone who is 56 years old and planning to retire in 9 years.  Then stocks crash.  That two-thirds portion in stocks takes a hit of 80%.  Maybe the smaller portion in bonds goes up 10%, although there is no guarantee that bonds will go up in value (interest rates decline) with a stock market crash.

Let’s say this person had one million dollars sitting in this retirement fund with a target date.  About $660,000 in stocks drops to $132,000 (80% drop).  About $340,000 in bonds goes up to $374,000 (10% increase).  That leaves this person with $506,000.  That million-dollar retirement portfolio essentially just got cut in half with only 9 years until retirement.

Perhaps I should say that it was supposed to be 9 years until retirement.  If the market doesn’t recover quickly, then this person will not be retiring as planned, or will be doing a lot less in retirement than what was planned.

In summary, I understand that these target retirement date funds are there for simplicity.  They are for people who don’t really know what they are doing in terms of investing, which is most people.

The problem is that these funds are very heavy in equities.  They would have served most people well over the last 40 years.  But past performance does not guarantee future results.  That is the problem.

We are living in an unprecedented bubble.  Maybe it will keep going for a while.  Maybe it won’t.  But it is setting up many millions of people to take a drastic hit in their portfolio if and when stocks crash.  The people in these target retirement date funds may have to change their retirement date when things get bad.  I don’t know if they will change their fund.

It won’t look good for these major brokerages when someone is looking at their 2030 target retirement date fund in 2035 when they are still working.

The Federal Reserve (the Fed) has done the unthinkable.  It has increased its balance sheet to over $8 trillion.

The balance sheet stood around $900 billion in 2008.  When the financial crisis hit, it quickly doubled in the matter of a couple of months.  It proceeded higher for many years, reaching $4.5 trillion in late 2014.

This was all referred to as quantitative easing (QE).  From 2008 to 2014, we went through QE1, QE2, and QE3.

Ben Bernanke had talked about balance sheet normalization.  In 2018 and early 2019, there was mild monetary deflation coming from the Fed.  But it was very mild, and we, of course, never went back to anywhere close to what the balance sheet looked like in early 2008.  In August 2019, the balance sheet got down to about $3.76 trillion.

Here is something that people forget (if they ever knew).  The balance sheet started increasing again in September 2019 when interest rates in the repo market spiked higher.  These are rates on short-term loans that the Fed had to control by starting up monetary inflation again.

It is also easy to forget that the yield curve went negative in 2019.  There were many problems on the horizon.  But the Fed was able to cover it all up because of virus hysteria and lockdowns that came about in March 2020.

By the time March 2020 came, the balance sheet had already gone back up to about $4.2 trillion.  Balance sheet normalization (using pre September 2008 as a basis) was never going to happen with or without a virus.  It wasn’t ever going to be close.

Now here we are in June 2020, and the balance sheet is over $8 trillion.  It is up about nine times what it was prior to the fall of 2008.

It’s not that this is unprecedented in history.  We know about Weimar Germany, Zimbabwe, Venezuela, and many other countries that have experienced hyperinflation.  What is unprecedented is that this is happening in the richest country in the world with a currency that is still considered to be the world’s reserve currency.

I am not saying that we are in hyperinflation or that we will go into hyperinflation.  But when the central bank increases its balance sheet 9-fold over a period of 13 years, it should open your eyes.

From 2008 to 2014, the Fed mostly got away with its massive monetary inflation.  Much of the newly created money went into bank reserves.  The fractional reserve lending process of banks did not multiply this new money like it could have.  In addition, there was still some hesitancy on the part of consumers due to the shock of the financial crisis.  While assets went up in price – particularly stocks – consumer prices did not rise significantly according to the government’s CPI numbers.

It is a different story in 2021.  The Fed’s inflation has come fast and furious, and the government has helped inject some of this new money directly to people in the form of unemployment checks and stimulus checks.

We are in a major boom right now.  The problem is that it is mostly an artificial boom.  It is also unsustainable.

The Fed is continuing to add about $120 billion per month to its balance sheet.  This could end quickly if Fed officials see that they are losing control of the dollar.

They say they want higher inflation (meaning price inflation).  They say that the current pickup in price inflation is just transitory.  But you better believe that they are a bit concerned right now.  They really don’t want to return to the 1970s or something far worse.

These are dangerous economic times.  We could see much higher price inflation still to come.  We could see a major pop in the “everything bubble”.  We could see one and then the other.  We could see both at the same time.

This is why it is important to diversify.  I still recommend something resembling the permanent portfolio.  It is important to not get sucked into the mania.  The mania is unsustainable.

Jon Stewart recently made an appearance on The Late Show with Stephen Colbert.  Stewart went on a little rant about the infamous virus.

The best part about viewing that video isn’t necessarily the accuracy and simplicity of Stewart’s funny rant.  For me, it was watching just how uncomfortable Colbert was with the whole thing.

This was Stewart’s version of the boy yelling that the emperor has no clothes.  He was pointing out some obvious facts and helping to connect the dots.  He does it so well, but the simplicity of it all has to make others wonder why you don’t hear anything like this on the “mainstream” news.  It took a comic as a guest on a late night show to explain the obvious.

I have been a big fan of Harry Browne since shortly after his 2000 election run on the Libertarian Party ticket.  I listened to his radio/ internet shows in the 2000s up until his death in early 2006.

I recall Browne talking about Jon Stewart and The Daily Show at the time.  Browne highly praised Stewart, and it puzzled me a little bit at the time.  I knew Stewart was something of a political leftist.  I had watched his show a little bit.  I found parts of it funny, but then I could see his political leftism come out at times.

I also watched The Tonight Show with Jay Leno at times.  Overall, I liked Leno.  I believe he is a leftist as well, but he was fairly equal opportunity when telling political jokes.  He would certainly make fun of Democratic politicians almost as much as Republican ones.  He was also nice to Ron Paul when Leno had him on the show.

As a side note, the hatred for Trump completely destroyed late night comedy shows for me.  They tried too hard to make Trump look bad, so it did not come across as funny.  Watching Colbert, Jimmy Fallon to a lesser extent, and others was no longer funny.  It was more like watching CNN trying to slam Trump for his latest misstep.  I was already not a Colbert fan, but the last 5 years made it far worse.

I haven’t gone back to late night shows.  I have maybe seen a couple of minutes of Jimmy Fallon.  I also don’t watch Saturday Night Live any longer.

You would think it would be a gift to have Joe Biden in the White House with his many gaffes.  The problem is that they don’t want to make him look too bad just coming off of the Trump presidency.  Also, it is hard to make fun of him for his dumb remarks and for tripping over words because some of that is due to old age.  Are they going to make fun of the guy for having mild dementia?

Anyway, going back to Stewart and Colbert, it is interesting that Colbert got his main start by appearing on Stewart’s The Daily Show.  Somehow Colbert ended up with the late night show on one of the major networks.

Stewart was on the Comedy Channel, but his show became quite a hit at the time.  I don’t know if he got tired of it, but there hasn’t really been another show like it since that time.  I have heard or seen people say that they love Jon Stewart, even to this day.  I don’t think I’ve ever heard the same said about Colbert.

After I heard Harry Browne’s comments praising Stewart, I gave him more of a chance.  I never became a regular watcher, but I did appreciate him a bit more.  I was really appreciative of him when he did a segment exposing the establishment media’s attempt to hide Ron Paul in the Republican primaries.

Most political leftists end up being stooges for the establishment.  But every now and then you get someone who is willing to go against the grain and challenge the establishment narrative.  Just as Glenn Greenwald challenges the establishment narrative with his columns, so does Jon Stewart with his comedy.

I have really come to appreciate people like this.  They may not know their economics very well.  Their words are often imprecise.  They often challenge the lies of the establishment yet hang onto every word of them when it comes to some other issue.  For example, I have seen people talking about being led into war based on lies, but then in the next breath believing everything that they’re told about global warming.

But we need people with courage who are willing to stand up and point out that the emperor has no clothes.  Jon Stewart did this on Colbert’s show, which is typically a mouthpiece for the establishment.

I don’t think it is any coincidence that Colbert made it to the top in terms of comedy/ talk shows on network television.  He got the job as host of a late night show on a major television network because he fit in to the culture.  Part of that culture is towing the establishment line.

I have no idea if Jon Stewart ever wanted such a job.  But I don’t think he would have lasted, or else he would have been corrupted.  He would have been told to tone it down.  You can’t question Fauci and “the science” until you are granted permission to do so.

When Stewart had his moment on Colbert’s show, not only was it making Colbert uncomfortable, but his audience was also laughing.  Stewart was probably getting more laughs that Colbert ever gets on a regular basis.

We need comedy as part of political persuasion.  For those who appreciate Stewart and heard his rant, they probably have a little less faith now in the so-called experts and the so-called science that everyone is supposed to follow.

The establishment, for all of the damage done over the last year and a half, is actually quite vulnerable right now.  It only takes a few voices to tell the truth to expose the big lies.

The Federal Open Market Committee (FOMC) released its latest statement on monetary policy on Wednesday, June 16, 2021.  As was widely expected, the Federal Reserve will keep its target federal funds rate near zero, in spite of higher price inflation.

Jerome Powell held a news conference at the conclusion of the meeting and statement release.  It was amazingly boring, even though he had to answer questions about price inflation coming in a bit higher than expected.

Powell is still saying that the higher inflation should be transitory, but admits that it is a difficult job trying to predict the future.  He, like many others, also blames shortages.

But shortages and inflation go hand-in-hand.  If there are shortages, then prices should eventually rise.  The shortages themselves may be due to higher demand for certain things, which in itself is a result of loose monetary policy.

The cure for shortages is higher prices.  The cure for higher prices is higher prices, as the higher profit motive gives an incentive to producers and suppliers to produce more and supply more.  Higher prices also give an incentive for consumers to cut back.

The problem is if the higher prices are a result of higher costs for producers and suppliers, and if there is an overall trend of higher prices in the economy.  This can only come about and be sustained by more monetary inflation, courtesy of the central bank.

In other words, the Fed is the problem.  There are shortages and higher price inflation because of the Fed.  It is possible to have a shortage of something due to other factors, but when you hear about it being widespread, all fingers should point to monetary policy.

The idea of shortages doesn’t make much sense in a somewhat free market system where prices are allowed to fluctuate.  But there can certainly be temporary shortages because the market needs time to adjust.

Some businesses are hesitant, and rightly so, to raise prices quickly.  Even if their costs have risen, they don’t know if it is a temporary situation.  Gas stations get away with it because we know to expect fluctuating prices.  But it is not as easy in other businesses.

Imagine you are a store selling electronics.  There is supposedly a chip shortage.  You are selling a certain type of computer for $500.  Your costs to make or purchase the computer wholesale are $400.  Your costs all of a sudden rise to $500, but you don’t know if it is temporary.  You may just hold off on raising the price until you find out if the higher costs are permanent.  When the cost of obtaining a product is the same as your sell price, you are really losing money, as you carry all of the other costs associated with holding the product and running your store.

If the higher costs are coming in for everything, then you will have to quickly raise your prices unless you are willing to run at a significant loss for a while.

At the same time, it is understandable to not want to raise prices too quickly.  There is no guarantee that your customers will pay the higher price.  A sale at $500 is better than no sale at $600.

Also, most companies are not like gas stations where the price changes every day.  It is complicated to keep changing the price of something.  It gets more complicated if you sell hundreds or thousands of products.

Imagine walking into Best Buy and seeing a computer for $499.  You go home and talk to your spouse.  The next day you go back to buy it and the price has gone up to $539.  Then you go back the next day and the price is at $524.  This just isn’t how most retailers want to operate, and rightly so.  Customers want some predictability.

This is also a reason that you will never see anything truly priced in Bitcoin.  If a company ever says they accept Bitcoin in payment, it will always be a conversion from the true price in actual money.

Since most companies are hesitant to constantly change their prices, it is possible that prices could rise even more rapidly in the coming months.  It is impossible to say, but many companies may have held off raising prices significantly up to this point.  If they see the shortages continuing, which in most cases is really just higher prices, then they may decide it is going to be more permanent.

The Fed’s Balance Sheet

This all goes back to the Fed’s balance sheet.  As it approaches the $8 trillion mark, the Fed is not letting up.

Powell said that this is the meeting where they are talking about talking about tapering.  That is not an error.  In other words, they are still in the very preliminary stages of even thinking about slowing down its policy of mass monetary inflation.

As of now, the Fed will keep adding about $120 billion per month to its balance sheet.

When they talk about “tapering”, that doesn’t mean stopping the asset purchases (monetary inflation) all at once.  It means slowing it down.

So even when the Fed begins tapering, whenever that will be, it will still be adding money to the balance sheet.  Maybe it will slow down from $120 billion per month to $80 billion per month, but new money will be created until it has completely stopped.

After the Fed’s announcement on Wednesday, stocks fell.  They somewhat recovered during Powell’s press conference.

It is not exactly clear why.  Investors knew what was coming.  There wasn’t anything earth shattering in this statement or in the press conference.

Is it only because Powell is now saying that they are talking about talking about tapering that stocks sold off?  If that’s the case, imagine when the Fed actually starts tapering.

Stock investors love the loose monetary policy.  It keeps their game going.  Higher price inflation is a threat to that because it threatens that the Fed will stop creating so much money out of thin air.  The Fed may want higher price inflation, but Powell and company don’t want anything close to hyperinflation.

There may be something of a tug-of-war coming between higher price inflation and recession.  My fear is that they will both win.