Many a day we hear or read about an economic report that has the stock market hitting a new all-time high. In fact, investors may be getting somewhat numb to the news. Like most stories, there is another side, to which I submit the following for your consideration.
Item one: If over the past 10-12 years a typical family has experienced annual cost of living increases of 5 to 10 percent (energy, housing, medical costs, insurance, fees and taxes, education, etc.) while at the same time the government reports CPI (consumer price index) increases of 2 percent, what is the actual inflation rate?
Item two: Author Rana Foroohar in a New York Times op-ed, tells us that the financial industry, dominated by the biggest banks, commands 4 percent of the country’s jobs while taking about 25 percent of corporate profits.
Item three: Try to imagine this nation — the land of the free and the home of the brave with its rich democratic heritage and representative government — allowing the financial overloads of America to systemically destroy some 75 percent of the purchasing power of our currency during the past 45 years. Further, the entrenched actors that have prosecuted this (Federal Reserve and U.S. Treasury) have actually grown in power and authority.
Item four: A large well-diversified (stocks, real estate, bonds) public pension plan encounters a mean reversion pricing correction in which its portfolio value next year is decreased by 25 percent. Coincidently, the dollar price of gold has increased by 25 percent. Does this mean that the real purchasing power loss for the plan is 50 percent? (Pretty much).
Item five: From Baker & Company Advisory Group, the nation’s output (GDP: gross domestic product) is made up of consumption plus investment plus trade surplus/deficit adjustment plus government spending. It points out that during the past decade, if the debt portion of government spending is removed, the reported GDP numbers are measurably less. In fact, without the government counting borrowed money as income, the country has been in a depression for the past nine years.
Item six: A case can be made that the peak real value of a house in America is when the house is sold as new (other things equal).
Item seven: Wall Street cheerleaders along with politicians tell us continually that the unemployment rate — currently 4.5% range currently — is the dominant bullish economic signal. At the same time, the civilian labor force participation rate has decreased from 67 percent in 2000 to currently 63 percent — resulting in about 15 million potential workers missing from the labor force.
So, what you say, the markets are going up. To get down to cases, devil’s advocate version, Item three should be thought of as foundational. The systematic currency debasement over the past decades must be either policy- driven or the nearly complete lack of monetary/budget discipline, neither remotely sustainable, desirable or inclined to have a pleasant ending in this writer’s view. Adding Item five into the mix, ought at a minimum, cause investors and asset holders to wonder if the underpinnings of their holdings are dependent upon a government accounting gimmick. (They are, along with excess debt.)
Since the GFC (great financial crisis, 2007-2009), we hear and read about our improving economy without ever really getting there. Positive employment numbers, low inflation, and decent GDP reports are the common thread (please see Item one, five, seven). It isn't necessarily so. An aside: America was better off when the government didn’t bend and mold statistics and hadn’t yet mastered the fine art of propaganda.
The scary yet realistic thought today is that perhaps the government depends on these positive reports as it has become captive to the high levels of investment markets. Put another way, a cyclical recession during these highly leveraged and indebted conditions would not and will not be a pretty thing.
To summarize, this is the dilemma as this writer see it. A holder of financial securities (stocks, bonds, investment real estate) wishes to pull some or all funds out of the market due to highly unattractive risk/reward conditions. Where then can they place the funds with high confidence of purchasing power protection for the long game? They have few options — gold, or a cryptocurrency — if they dare.
Andy Wahrenbrock is an independent investment adviser from Bakersfield.