In March 2020, there was a major cutback in consumer spending.  A big portion of this was just the fact that people couldn’t spend.  It is difficult to spend money on your hair and nails when the hair salons and nail salons are closed.  You can’t spend money eating out when restaurants are closed for diners.  Even getting a to-go order is cheaper without the tip and possibly without drinks.

That isn’t the only reason consumers were cutting back at this time.  There was a rational fear.  When the media is advertising the plague, and businesses are shut down, and there are orders to stay at home, there tends to be uncertainty.

Many people lost their job in 2020.  Some were temporary.  Some had their hours cut back.  Even with some people getting unemployment benefits greater than their previous income, it still creates uncertainty.  You don’t know how long it is going to last.

This is why it makes sense for people to cut back their spending.  You should save money for a rainy day.  When you actually get a rainy day, you need to reduce your consumption in case it is rainy again tomorrow.

This is especially true for families or people who have others who depend on them.  If you are 23 years old and single and you temporarily get laid off from work while collecting unemployment that replaces that income, then you probably aren’t too panicked.  You can always find another job.  You can scrape by.

It is a different situation for someone, or even a couple, who has several children at home who depend on them.  They probably have a house.  They have health insurance costs to worry about.  They have to put food on the table for others who are dependent.

People react according to their environment.  They adjust as needed.  When pushed, humans can adapt and change.  In football terminology, they can call an audible.

While all of us do self-destructive things at times (some worse than others), humans do have a rational side.  It is rational to increase savings at a time of turmoil and great uncertainty.

The Irrationality of an Artificial Boom

This rationality seems to get thrown out the window when things are distorted.  There are major distortions that come from government spending and policy.  There are also major distortions in the money we use every day.  These are distortions caused by a wildly fluctuating money supply and artificial interest rates.

We are currently experiencing a bit of a boom, which is hard to believe given what has occurred over the last 18 months.  This isn’t just a rebound to where we were in February 2020.

Housing prices have exploded almost everywhere in the United States.  The price of my house is almost double of what it was 11 years ago.  It is at least 30% higher from where it was 18 months ago.

Stocks continue to roar and hit new all-time highs.  The Nasdaq hadn’t even hit 10,000 yet before March 2020.  Now it is pushing close to 15,000.  Meanwhile, speculative “assets” like cryptocurrencies and NFTS are out of control, with everyone and their brother trying to make a quick buck.

Even outside of real estate and investment markets, I see a major boom.  People are spending on lavish vacations again when they can.  I see people getting major upgrades to their home.  I see people installing pools that must cost close to six figures, and the prices are only going up.

So most people are spending money again like it’s 1999 (or February 2020).  Actually, I think people are spending more now than they were 18 months ago.

Some of it is rational.  The Federal Reserve has flooded the system with money, while it keeps short-term interest rates near zero.  It makes some sense for people to rush into real estate.  Interest rates are low, and a house on some land is a hard asset.  It is better than having your money sit in a checking account and losing 2 or more percent to inflation every year.

But sometimes it does make sense to have money sitting in a checking account losing 2 percent per year to inflation.  It can even make sense at 5 percent price inflation.

If the real estate bubble pops in 2022 and prices go down by 40%, then it certainly would have made more sense for someone to keep their money in a checking account rather than buy a house this year, even with the low interest rates.  It would be better to buy it in a couple of years at a 40% discount.

If your money is sitting in a checking account waiting to be used as a down payment on a house, then it is only depreciating if the prices for houses are going up in your area.

I think it is good that people are generally feeling good again.  It is nice to see people going to a movie theater.  It is nice to see busy malls and restaurants.  But at the same time, I am concerned that many people are going to get hurt when the boom goes bust.

The reason it makes sense to save for a rainy day is so that you aren’t miserable when the rainy day hits.  There is something to be said for continuity.

It is mentally exhausting to have to significantly change your lifestyle because economic conditions changed.  For some people, it can be dangerous.  Most homeless people had a home at one time.

It is good to set a goal that your lifestyle won’t change in any significant way because of economic conditions, assuming nothing dramatic.  Your lifestyle may change because of your personal situation of income, savings, life events, etc., but it shouldn’t be determined by booms and busts in the economy, at least to the degree that you can control that.

If you save some money and live at least a little bit below your means, then you can typically avoid having to change your lifestyle because of an economic bust.

The Consumer Price Index (CPI) numbers were released for June, and they came in even hotter than expected.

The CPI rose 0.9% from the previous month.  The CPI less food and energy was no better.  It also rose 0.9% from the previous month.

The year-over-year CPI now stands at 5.4%.

The more stable median CPI came in at just 0.2% for the month of June.  This indicates that the significant rise in consumer prices is occurring in half or less of the products being measured.  Still, it is significant for any family that has a budget with a good portion of it allocated towards those products that are increasing at a higher rate.

It is important to realize that these price inflation numbers are like compounding interest.  If you have 1% inflation every month, you don’t get 12% after one year.  It is compounding.  1% per month for 12 months gets you a little over 12% after one year.  This makes a difference over a long time span.

Is it Transitory?

If you listen to the financial media, you will keep hearing the term “transitory”.  The Fed is using this term to indicate that this inflation is just temporary.

There is a problem with that.  Let’s say that the Fed is right and this really is just transitory or temporary.  Let’s go through a thought exercise.

Let’s say you go to the grocery store once per week.  Your average weekly bill is $100.  Then you get some higher price inflation for one year that is considered transitory.  After that first year, you are paying $110 per week at the grocery store.

Then the price inflation stops.  Everyone is relieved that inflation was just transitory.  It has fallen to zero now.  But when you go to the grocery store, you are still paying $110 per week.  You aren’t going back to the old days of paying $100 per week.

You can apply this across the board to everything.  You can apply to your rent.  You can apply it to your medical costs.  You can apply it to your transportation costs, and your clothing, and your restaurant dining, and your monthly trip to the hair salon.

If your wages didn’t also go up by 10%, then you have permanently lost, at least until your wages catch back up.  Even here, with taxation, your wages would have to go up by a little bit more than 10% for that year.

Of course, we aren’t going to zero percent inflation.  The Fed’s idea of transitory price inflation is that it will return back to its 2% target.  So you will keep getting continued price inflation, but it will be at a slower pace.

And the Fed now says it wants an average of 2% over time.  We have no idea what this means and how far back it is supposed to go.  Is it supposed to average 2% going back 20 years?  If we use government statistics, then we could have many years of inflation running at 5% or more to supposedly make up for the lack of inflation in the past.

Tapering?

This is all a joke.  Middle class America is taking it on the chin.  Of course, much of middle class America cheers on the stimulus checks, the unemployment benefits, and all of the other “free” things coming from the government.  People say they care about the deficit/ debt, but they really don’t care.

Even though the Fed claims not to use the CPI as its main measuring stick, there is no question at this point that price inflation is running hot.  It is even probably outside of the Fed’s comfort zone.

We will have to wait until the next FOMC meeting to see if there is any change in policy.  I don’t think they will raise the target federal funds rate at the next meeting.  It is possible we could see some light tapering, although even that is more likely to come in September if it comes at all this year.

This means that instead of the Fed creating $120 billion per month in new money every month, they might only create, say, $90 billion per month.  It is still highly inflationary, but just a little less so.

We will also get to see investors react to all of this.  The giant speculative “everything bubble” that we are currently in is all dependent on loose money and low interest rates coming from the Fed.  When the fuel for the fire starts to be taken away, it is going to have major impacts.

The Fed is too scared at this point to remove all of the so-called stimulus.  Even if price inflation continues even higher, I don’t they will go cold turkey.  They aren’t going to just all of a sudden stop all asset purchases.  It would instantly tank the stock market.

All of this monetary inflation is finally catching up with the Fed.  They are going to have to walk on a narrower tight rope now.  They don’t want to lean too far to the inflation side, and they don’t want to lean too far to the tight monetary policy side, which will give us a recession.  They can maintain their balance for now, but eventually they’ll run out of rope.

The best predictor of a recession is an inverted yield curve.  This is when the yield (rate) on a long-term bond falls below the rate on a short-term treasury.

I have seen different metrics used when determining whether the yield curve has inverted.  I have seen some use the 10-year yield vs. the 2-year yield.  I have seen some use the 30-year yield vs. the 1-month or 3-month yield.

While I pay attention to the 30-year yield, I think it is a little too long of a timeframe to give us what we need in terms of prediction.  If an investor thought we would have a prolonged economic slump for 10 years and then have roaring inflation after that, then it wouldn’t make that much sense to buy and hold a 30-year bond.  It would make more sense to buy a 10-year instrument.

For trading purposes, it might make sense to buy the 30-year bond and then eventually sell it, but only if you think that most others won’t see the inflation coming.

That is my complicated way of saying that I prefer to look at the 10-year yield vs. the 3-month yield when looking for an inversion.  If the 10-year yield falls below that of the 3-month, then you should prepare for a recession, typically within a one-year timeframe.

It is easily forgotten that there was an inverted curve in 2019.  And we did get a recession and major downturn in March 2020.  But the coronavirus and the lockdowns that came with it get all of the blame.  Now we are back into an artificial boom because the Federal Reserve has created ridiculous amounts of new money.

If there was no virus hysteria and lockdowns, it is hard to say how things would have played out.  The Fed would have been forced (politically speaking) to only wildly inflate once things got bad economically.  In March 2020, it had the excuse of the virus and the lockdowns.

If there had been no virus hysteria and lockdowns and the Fed had just done what it did anyway in March 2020, people would have been wondering why the Fed was acting that way even though no crash had happened yet.  We don’t know if this would have been enough to delay any signs of a stock market crash and recession.

Are Bond Investors Telling Us Something?

When people are heavily buying bonds/ treasury bills, it drives down the interest rate or yield.  So if people are rushing in to buy 10-year treasuries, the 10-year yield will go down.  There is a tendency to do this in anticipation of an economic downturn.  Investors are locking in longer-term rates.

The exception to this is when there is anticipation of high price inflation.  You don’t want to get 1.5% per year for 10 years if you think inflation is going to run at 5% per year.  You would be losing money.  The only reason someone would do this is because he sees a loss of approximately 3.5% per year (in real terms) as being better than losing 5% per year.  In other words, you are better off holding the 10-year treasury paying 1.5% per year than having the money sit in a checking account for 10 years earning nothing while losing purchasing power to inflation.

In a relatively non-inflationary environment, U.S. treasury bills and bonds are seen as a safe haven.  When there is fear without a fear of inflation, this is where people put their money.

When you have more demand for long-term government debt and less for short-term government debt, this is a sign of economic problems ahead.  The yield curve tends to invert about 6 months to a year ahead of when the trouble becomes evident.

In the first few months of 2021, the yield on the 10-year was going up.  It was briefly below 1% at the start of the year.  From early March 2021 to early June 2021, the 10-year yield was above 1.5%.

Over the last month, it has started to tick down.  On July 8, it went as low as 1.25% during the day.  This spooked investors in the stock market, which declined that day.

To be sure, the yield curve is still a ways away from inversion.  But it is a little bit closer now than it was a month ago. The bond market is telling us that things may not be so rosy in the future.

The problem is that short-term rates are really low.  They are still near zero, and the Fed isn’t showing signs of raising its target rate, which has a big influence on short-term yields.

Right now, the 3-month yield sits around 0.06%, which is essentially zero.  The only way the Fed is going to hike its target rate this year is if inflation numbers come in really hot.  By this, I mean price inflation.  We already have massive monetary inflation.  And even if high price inflation numbers do come in, the Fed may just not do anything new anyway.

It is going to be very difficult for short-term rates to rise with any significance over the next 6 months, and probably longer.  So to get an inverted yield curve, the 10-year yield is going to have to fall to near zero.  If that happens, we are probably already in a recession, so that isn’t going to do us any good in terms of predictions.

I do think it is possible we could have a recession without an inverted yield curve, especially with the Fed holding short-term rates near zero.

Here is my strategy.  I am prepared for a recession and a stock market crash at any time.  I am not heavily in stocks except for my permanent portfolio and some speculative mining stocks.

But without an inverted yield curve, the prospects for a recession in the coming months is relatively low.  So I am not going to bet on a recession.  For example, I probably won’t be buying any short positions that bet on falling stocks.  I will hedge against a recession, but I will not proactively try to profit from one.

I need to see something close to an inverted yield curve.  Maybe it won’t come before the next recession.  But if that happens, it will be an historical aberration.  There is almost always an inverted yield curve before a recession.

It is hard not to make comparisons.  There are similarities and differences between the real estate situation now and what it looked like in the mid 2000s.

I have heard some discussions on the topic of real estate and whether we are in a bubble.  The general consensus seems to be that we are not in a real estate bubble, or at least it is nothing like what we saw in 2006.

I have been of the general opinion that we are likely in a bubble, but it probably isn’t as bad as what we saw in 2006.  I think it is worse for stocks.  It is also worse for cryptocurrencies and NFTs, but these things didn’t really exist 15 years ago.

I still maintain that the real estate bubble, at this point, is probably not as big as 2006, but I can’t discount that possibility.  Also, the way it is going right now, we may have farther to run still.

In other words, we may not have a similar situation right now as to 2006, but maybe we are in 2004 or 2005 levels right now.

The prices of houses in most areas are going crazy right now.  You can’t see them going up 20% or 30% per year without some kind of major correction.

It is possible that inflation will keep it going, at least in nominal terms.  It makes some sense that people are bidding up the price of housing, as they are buying a hard asset.  And if you take out a 30-year mortgage, the payments in real (inflation adjusted) terms will go down over time as the dollar depreciates.

With that said, it is foolish to buy a house in desperation because some people think the prices will just continue to go up.  The more I hear people say this, the more it looks like a bubble.

Young Adults

I sometimes feel sorry for young people in this world.  I see young adults in their 20s just starting out.  Some of them may even make a good income, yet they are still struggling.  Rents are high and housing prices are even higher.

Let’s take someone who is 25 years old making $60,000 per year, which seems like a decent income for that age.  Most people who are 25 years old probably aren’t making that much.  This person does not live with his parents and is single.  He can pay $1,500 per month for a decent apartment in a decent area.  Or he can pay $300,000 for a basic 3-bedroom, 2-bathroom house.

That last part may actually be optimistic.  In some areas, $300,000 will barely buy you a shed on the side of the road.

Just in this example, that is a lot of money.  $60,000 per year isn’t that much when you take out a big chunk for taxes and another big chunk for health insurance.  That $5,000 per month paycheck could easily go down to something in the $3,000 to $3,500 range.

Paying rent on a $1,500 apartment would take up almost half of that, and you still have to eat, pay for transportation, etc.

But the renting option is the more attractive option.  If you buy a house for $300,000, then you might have a payment (with current low interest rates) around $1,400 per month.  That is just principal and interest.  You also have to pay homeowners insurance, property taxes, any association fees, and repairs and maintenance.

The repairs and maintenance is a massive expense.  If you’ve never owned a home, you don’t realize how expensive it is to keep it up.  When you think about all of the appliances and everything else that can go wrong, you really have to budget several thousands of dollars per year for this.

In this hypothetical situation, I don’t think this person earning $60,000 per year can afford a $300,000 house.  The only realistic way is if he had saved up a lot of money for a big down payment.  But most 25 year olds don’t have much in savings at all.

To be sure, he might get approved for a loan in this amount, but he really can’t afford it.  That was the problem in the 2000s.  People were sold homes and given mortgages that they couldn’t really afford.

This hypothetical person might be able to make it work if he gets two roommates to each rent a room.  That can be a good way to build wealth.  The problem is that most people don’t want to do this.

I lived in an apartment shared with two other people after I graduated college.  I did this for about 4 and a half years.  It was a good decision because rent was really cheap and I was able to save some money.

The Current Mania

While things are a bit different this time, I see many similarities with the current real estate mania and the mid 2000s.  It is a seller’s market right now.  In most areas, you can just put your house out there, and you may get yourself a bidding war between buyers.

I see desperate buyers trying to get in on something because they are afraid they will never be able to afford it if they don’t get in now.  This is a classic sign of a bubble.

The lending may be a little less reckless now than what was in the 2000s.  Back then, you basically needed a pulse and the capability to fill out an application.  Lenders would give just about anyone a loan.  It isn’t quite that bad now.

There are differences now that make the bubble seem even worse though.  There is a house on my street that was bought by a corporation.  I think it was Zillow that bought it.

It has sat empty for several months now.  This makes no sense to me.  What are these investors thinking?

This is why, if you are going to invest in real estate, you really have to do it yourself for any good chance to make significant wealth.  You can’t just throw some money at a big company and expect them to deliver good, long-term returns.

This house on my street sits empty.  They have to pay property taxes.  They have to pay homeowners insurance (or at least they should).  They have to pay association fees for facilities that aren’t being used by anyone living there.  They have to pay to keep up the landscaping.  I have seen a couple of people there to make some repairs, but there are no major renovations.  The holding costs are significant.

Meanwhile, it isn’t being rented out and it isn’t up for sale.  They are just throwing money down the drain.  It’s possible the company could turn around and sell the house at some point and still make money, only because the market is so hot. The price may go up by $40,000 over the course of 6 months.  Even though this is absurd and unsustainable, some investors will get lucky.  Others will not.

If this house is sold later this year, any gains won’t be that great even with the boom because of the holding costs and the transaction costs.  If one person or a small group of investors had bought this house, then it would be rented out by now, or else it would have been flipped and sold already.

The fact that these companies are doing this (being reckless, really) and depending on continued gains through price appreciation, tells me that this is a major bubble.

It is unsustainable because these companies will start losing money.  You can’t just buy a whole bunch of houses and hold them sitting empty and expect to make money over the long term.

The boom is also unsustainable because middle class America can’t afford these ridiculously high prices.

I am convinced that we are in another real estate bubble.  I think the stock bubble is worse, but real estate can be more impactful because of the leverage.

I don’t know how high up it will go and for how long, but at some point there will be a reversion to the mean.  There will be a correction.  Those who are over leveraged will get hurt badly.

Happy Secession Day!  It is also known as Independence Day.

You can read my Independence Day thoughts from 2020, which put off a rather negative tone.

Earlier this year, Joe Biden told us that if we behave well, and we get our vaccinations, and the CDC numbers look good, then we might possibly be able to have a few people in our backyard for a July 4^th cookout.

As I watch baseball stadiums filled with fans, and I see restaurants filled up without any masks, I have to wonder who exactly Joe Biden was talking to.

2020 was a rather depressing and ironic Independence Day.  I had fun with my family and my neighbors in 2020, but the state of the country and the world was rather depressing at that point.  It made it hard to celebrate liberty when most of the country was locked down or under severe restrictions.

I am feeling much better about the situation in 2021.  A majority of people have dropped the masks, and life seems to be getting back to normal (pre March 2020).  It is understandable that some people remain guarded, not because of a virus resurgence, but because of a government tyranny resurgence.

I see how things have been in other first-world countries including Canada, Australia, the United Kingdom, and much of Western Europe.  For all of the faults of the United States of America, Americans are demonstrating to the rest of the world that it is possible to be relatively free.

I don’t understand how Canadians can see filled sports arenas and see Americans living life, while they remain under lockdown or heavy restrictions while terrified of a virus.

The Soviet Union fell in the late 1980s and early 1990s.  The Russians got a glimpse of life in America, and it was far superior to that of life in the Soviet Union.  But this was in a pre internet era, so it is understandable that a lot of information was blocked from ever getting in.

In today’s world, how can Canadians and others not see what is happening?  They have televisions.  They have Facebook.  They have the internet.

I have been saying through the virus hysteria that the best thing you can do is to live freely to the greatest degree that you can.  It is a demonstration for others.  You won’t win over many people by arguing with them about statistics.  But when visitors came to Florida and saw people going to restaurants and congregating in crowds, they started to realize that we weren’t walking over dead bodies everywhere because of a virus.  It sets an example.

While Biden and Fauci continue the scaremongering with talk about vaccines and variants and everything else, the best thing to do is to ignore them in the way you live your life.  It is an informal way of seceding.

So for that reason, I am feeling better about American life in 2021.  We may not be officially seceding or declaring independence, but most Americans are essentially ignoring what Biden and Fauci say at this point.

The views of the average Republican voter have shifted over the last 5 years.  It is mostly a positive shift, although there is a lot of progress to be made still.

This is largely due to the Trump effect.  For all of his flaws, Trump has moved his followers into being slightly less statist.  I think there was already major discomfort in a major faction of the Republican Party.  That is why Trump was able to exploit this and get the nomination in 2016.

To be clear, I am talking about the average Republican/ Trump follower.  I am not talking about politicians and bureaucrats who claim to support Trump.

I was talking to a friend the other day.  He is a big fan of Trump.  He knows that I am a libertarian.  We can have a good discussion, but there are areas of disagreement.  Sometimes there are disagreements on the most important topics.  He sees immigration as a very important issue.  It’s not that I don’t think it is important, but it is not a top issue for me.  I also think it is largely an effect of other bad policies.

If you dramatically reduce the welfare and warfare state and enforce property rights, then immigration becomes less of a problem.

In our conversation, I was criticizing Trump for people he surrounded himself with.  I said that people like Bill Barr and Nikki Haley are not, and never were, Trump’s friends.  Haley opposed Trump in 2015 and 2016 when he was trying to get the nomination.  Barr is another leftover from the Bush regime.

I mentioned Mike Pompeo to my friend.  He said he views him favorably.  I told him not to be fooled.  Pompeo is just politically savvy.  He will take Trump’s words and manipulate them into a more hawkish stance on foreign policy.  He is careful not to directly criticize Trump because he knows how much support Trump has.

I have seen the same thing with Lindsey Graham over the last several years.  He is still a major war hawk, but he makes himself appear to be an ally of Trump.  He has slipped up a few times, and I think some Trump supporters recognize now that Graham is not an ally.

I also mentioned George W. Bush to my friend.  He is not a fan.  My friend suspects that Bush was behind the 9/11 attacks, or at least knew it was going to happen.  This is a major thing.

It’s interesting that Trump has turned a large portion of the Republican Party against Bush.  This helps cut down on the militarism.  I just don’t understand why more of them didn’t see an issue when Trump was appointing Bush regime leftovers to his cabinet/ administration.

Police, Military, Intelligence Agencies

I watch Fox News a little bit.  I have seen some shifting there based on viewer preferences.  Most of it is positive, but I understand there are many shows and people on that network that still promote war and militarism.

While CNN and MSNBC talk about Russia, many on Fox News are talking about China, and not in a good way.  It is just more poking at the hornet’s nest.

It’s not that there aren’t a lot of things to criticize about China, but they ignore the many crimes of the U.S. government.  The criticism we do get internally is about Biden and Harris, not about the whole corrupt system.

But there are exceptions.  Tucker Carlson holds the big primetime spot at 8:00 PM on the east coast.  While he is not a libertarian by any means, he has largely been a hero for those promoting liberty.  He has done some great work exposing the deep state.  If Bill O’Reilly were still in there, we would be getting old Republican talking points promoting tyranny and war, sprinkled with a few good things here and there.

I sometimes see parts of Gutfeld before I go to bed.  This is a mix of comedy and political/ current events.  I certainly disagree with things that are said on the show, but there are a variety of guests with a variety of views.  Sure, there are no hardcore leftists on there, and most of it leans conservative, but I can’t help but notice the libertarian leanings of some of the people on there.  I have heard criticisms of the drug war, the police state, and other things that would make a libertarian happy.  I saw one episode where Dave Smith was one of the guests, so that in itself puts it ahead of almost any other show on television.

The Republican base still defends the police and military.  They still even sometimes defend the intelligence agencies.  They’ll say things like, “Most of the people with the FBI are good people, but there’s a few corrupt individuals at the top.”

Still, I’ll take what I can get, because I also hear criticisms of U.S. foreign policy and criticisms of the police that I wouldn’t have heard 5 years ago.

There is more skepticism of power, including those who actually carry out the enforcement.  Conservatives have seen videos of the police tackling and arresting someone because they weren’t wearing a mask, or going to a restaurant to shut it down because they had indoor dining against the restrictions.  More people are seeing the viciousness of the state come out.  And it can only be vicious if it is enforced with force.

People have also seen the brutality in other first-world countries.  There were people in Australia getting arrested for being out without a purpose.  There was a pastor arrested in Canada for having a church service.  This exposes the state for what it is.

Trump did his part in exposing the deep state.  Some of it was done inadvertently.  The corporate media, in trying to attack Trump, also helped to expose themselves as liars, as well as exposing the lying and criminal intelligence agencies for what they are.

Conclusion

The Republican politicians and bureaucrats are still mostly corrupt.  Some of them read the political tea leaves and change their rhetoric accordingly.

The average Republican who has generally supported Trump has gotten better.  Trump is a major improvement over Bush.

There is still way too much reliance on the state.  But there is less militarism than before, and there is a little bit of skepticism towards too much police power.  This is a step in the right direction, and libertarians should exploit this.

I find you can talk to most Trump followers.  It is easier to nudge them in a libertarian direction than you will get with almost any leftist.

The state has less consent of the people than it did 5 years ago.  Overall, this is a positive occurrence for liberty.

Now we just need to get the Trump people to start questioning the idea of the state educating our children.

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.