Rarely has there been a larger disconnect between the underlying economy, and the stock and bond markets used to represent them. In sector after sector, the reality of business difficulty experienced on the ground belies the dizzying heights the markets have climbed. On the one hand, powerful forces such as suppressed interest rates, currency creation, and a Federal Reserve that has broken precedence to purchase securities in nearly every market sector are working to prop up the markets. On the other hand, thousands of layoffs, business closures, and decreased travel due to Covid 19 restrictions have led to lower and in some cases non-existent business revenues and tax revenues in many sectors of the economy. When local businesses and citizens suffer economic loss, so do the coffers of local and state governments. Unlike the federal government, states and cities have no power to create their own currency.Fortunately there remains a safe place to put our capital that provides potential for continued growth and purchasing power protection, in the form of precious metals.
Financial markets are having difficulty remaining levitated despite receiving unprecedented support. Meanwhile Gold and Silver prices have been climbing over time in most currencies, despite repeated efforts to suppress them. The question we must ask ourselves is the same question large investors have started asking themselves. What happens when the financial engineering and intervention ceases? What happens when it continues, but ceases to provide the same impact? As that happens, we will want the protection that precious metals can provide. Currently the Dow Jones Industrial Average is where it was 2 years ago and headed lower, whereas Gold and Silver are merely where they were 2 months ago, and poised to resume their climb.
Challenges for Billionaires
Even the billionaires among us are facing challenges in this environment. The owner of a large majority stake in Revlon, for example, has seen their $1.74 billion investment in the company fall to a market value of $365 million. Meanwhile, Revlon is in debt to the tune of $3 billion, over 8-times it’s current market value. Store closures related to the pandemic have made a difficult business environment nearly impossible for the company. While bonds are often touted as a safer alternative than stocks, Revlon bonds currently sell for 86% less than original price. For every Dollar of bonds owned, investors can get $0.14. Many Americans unknowingly own these and similar bonds in their mutual funds, 401k’s, and other retirement funds.
But most billionaires have their wealth diversified into many sectors of the economy. This is not always helpful however, when precious metals are not included as one of the sectors. Billionaire Ron Perelman, who was once touted as America’s richest man, has seen his wealth decrease by 425% since 2018. Today he is listed nowhere among the top 500 billionaires, his wealth having fallen to a paltry $4.2 billion. Of course, most Americans in such dire straits financially would still be set for 10-20 lifetimes of living expenses. But the factors impacting billionaires are also affecting average Americans, in ways more likely to affect their quality of life in the years ahead. For most of us, owning precious metals offers a way to weather the financial and societal upheaval currently upon us, which is likely to continue.
Challenges for the Federal Reserve
Even the assets of the Federal Reserve are revealing the evidence of financial stress and imbalance at work in the real economy. When debts of questionable quality comprise over 60% of “assets” on their balance sheet, it indicates an uncertain financial future up ahead. The largest category of debt on the books is currently a portfolio of student loans, of which only 1/3 are currently receiving regular payments. There is also great political pressure building within both political parties to “forgive” student debt. If this occurs the entire portfolio becomes a non-performing asset, with the debt distributed to the taxpayers to pay. While obviously those indebted may welcome the relief, the remaining taxpayers that did not incur this debt will likely not accept responsibility for paying it back without offering strong objections. Either way, resolution of the student debt issue is not evident without constructive changes to our economy.
When we consider that the Federal Reserve also currently owns over 22,000 different investment securities including corporate bonds and ETF’s, it should give us pause about investment demand for these securities. Even government bonds are becoming a questionable asset, when the interest rates paid by these bonds are below the rate of inflation. Inflation is another topic we must consider, when a stated goal of the Federal Reserve is now to create inflation higher than the current rate, and to allow it to run for an extended time. Then we have the issue of the official inflation rate as currently defined by the CPI, vs the actual inflation rate experienced by the average consumer. As we have previously noted, the actual rate of inflation experienced by most Americans is 5-6% higher than the official rate.
Challenges with the Election
As we are all aware, there is a national election coming up in less than 2 months. All stops will be pulled out to try and keep the markets level or higher, regardless of underlying economic conditions. The question we must ask ourselves, is how much of our wealth do we want allocated to financial markets whose main support seems to be from newly created or borrowed currency? When earnings are lower or non-existent, an influx of newly created currency can sometimes provide temporary support to markets or a financial system under severe stress. But what about after the election window dressing is no longer being applied? We have 2 main possibilities, depending on the outcome of the election.
Should Joe Biden win, as some polls project, we can expect corporate tax rates to rise. This will quickly remove whatever wind remains in the sails of the stock market, leading to lower levels from here. Should Donald Trump win a second term, as some polls project, we will probably be faced with continued societal unrest and business disruption, from those upset with the outcome. No matter who wins, the reality of current economic conditions will have to be faced, and a long climb out of the current malaise must begin. While facing our current realities, restoring our manufacturing base, and restructuring our economy can pay huge dividends in the future, it may be a long time before our financial markets are supported by earnings once again. The more debt created to support our financial system, the longer it may take for the economy to break free.
What We Can Do
In the meantime, we continue to have the opportunity to purchase Gold and Silver to help protect ourselves. While prices have pulled back temporarily with the recent stock market selloff, it provides a welcomed opportunity to purchase Gold and Silver in September, at July prices. I believe in a few months, we may all be glad we did.