Why do stocks continue to rise in the midst of a decline that looks to be at least as bad as the 1930s and possibly much worse? The reason is real interest rates are declining dramatically, as the purple line on the following chart illustrates. Even using the government’s understated inflation numbers shown in the chart below, real rates on the 10-year U.S. Treasury is negative 0.65%. If the real rates constructed by John Williams were applied we would be looking at a negative rate of several percentage points per annum! This represent a truly remarkable level of capital destruction. Without any recognition of the horrendous destruction of capitalism via price discovery of capital, Keynesians, who encompass 99% of economists in the U.S., cheer this perversion of nature. On second thought,
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Why do stocks continue to rise in the midst of a decline that looks to be at least as bad as the 1930s and possibly much worse? The reason is real interest rates are declining dramatically, as the purple line on the following chart illustrates. Even using the government’s understated inflation numbers shown in the chart below, real rates on the 10-year U.S. Treasury is negative 0.65%. If the real rates constructed by John Williams were applied we would be looking at a negative rate of several percentage points per annum! This represent a truly remarkable level of capital destruction.
Without any recognition of the horrendous destruction of capitalism via price discovery of capital, Keynesians, who encompass 99% of economists in the U.S., cheer this perversion of nature. On second thought, given the cheering of Marxist orientated groups like Black Lives Matter and Antifa, perhaps destruction of capitalism is exactly what the elite that now control most of our institutions desire. These cheerleaders of capital destruction are essentially saying they believe they know better than the collective wisdom of markets how to order society. But God in his infinite wisdom and power is in charge of the ultimate outcome of America and the entire world, not the self declared geniuses from Harvard Princeton and Yale. Ultimately the laws of nature’s markets prevail. In fact it is obvious now that Keynesian economics is leading to global poverty and chaos.
Bloomberg and other champions of Keynes also gleefully note that inflation expectations are also on the rise, evidenced by a dramatic rise in the amount of money pumped into Schwab’s U.S. TIPS ETF. It grew by 20% over the past five days of this week, which included the largest single-day inflow ever.
You can go ahead and buy TIPS if you want to try to protect yourself against inflation. As for me, I prefer owning gold because it does a far better job than TIPS in protecting me against inflation. Evidence is seen in the chart on your left where gold is a far closer fit with John Williams’s inflation calculations (blue line) than the government’s inflation calculation depicted by the red line. If TIPS keeps up with the government’s inflation numbers you are far away from the actual rise in the cost of living.
The June 26 “Weekly Fix” Bloomberg article not only cheered negative real rates but also the fact that inflation expectations are on the rise. The Bloomberg article stated the following: “Another encouraging sign for policy makers — the slide in real rates is coinciding with a rise in inflation expectations. It’s a climb out of a deep hole, not a rebound — a key distinction given the inevitable scolding from some quarters about the risks of ultra-loose monetary policy stoking runaway inflation. (There was no sign of that in the recovery from the global financial crisis — a point often made, but worth reiterating to fend off stimulus skinflints.) As the full impact of the pandemic and economic shutdown took shape, a deflationary slump seemed the bigger threat, but that looks to have been averted.” Of course, what Bloomberg is ignoring is a massive inflation of financial assets, which serves to destroy the middle class while putting untold billions into the pockets of the likes of Bloomberg’s founder, Michael Bloomberg, and others like George Soros who are allegedly bankrolling Marxists like Black Lives Matter and Antifa. It works so well for the elite as they grab all the remaining wealth in the country and thrust the vast majority of Americans into slavery.
Happily, the June 26 article noted: “There’s no shortage of evidence to support the case for an upward trend in inflation. The destruction of global supply chains, which have in turn exacerbated shocking food shortages, lingering optimism about a V-shaped recovery, and — not least — the Fed’s own strategic review to sharpen up its act on hitting its 2% target. It’s just that there are a lot of well-worn counterarguments — take your pick from the structural forces of an aging population and declining immigration, advances in technology, or anything Larry Summers has ever written.”
Bloomberg also applauded a “victory” by the Fed in reduced interest rate volatility. In other words, these Keynesians think destroying expectations of reward to savers for postponing consumption is a positive thing for the economy. That is a really big lie and it is at the very heart of why capitalism is now nearly snuffed out. Keynesians seem not to comprehend the fact that true capital is income that is not consumed, not that which is created out of thin air by central banks. As a result of this misconception, capitalism and thus the wealth of the western world along with personal freedom and responsibility is being destroyed.
As I read through the article I was tempted to think the Bloomberg views about markets may not be entirely out of touch with reality when it stated the following: “This tranquility is emboldening investors to pile into risk assets — but the rates market surface may not stay so glassy for long, if corporate bond defaults start piling up. The default rate for speculative-grade companies could triple by next March, according to S&P Global, and more companies than ever are in jeopardy of losing their investment-grade ratings. That’s a compelling prospect for volatility mavens: Investors may be well advised not to fight the Fed, but fundamentals just might.”
And that is exactly what my friend Michael Oliver believes. Michael remains faithful to the notion that ultimately the laws of nature will prevail and that governments and its bed partners like the Fed do actually have limits placed on them by the laws of nature. Indeed, that was proven in the fall of the Soviet Union when their Marxist economic policies caused that country to rot from within, just as our “Marxist Light” Keynesian economic policies are now causing the western world’s demise. Michael may be right. But the biggest challenge for those of us law-abiding citizens who have become accustomed to investing in more normal times is how to survive over the decades of tyranny to come at the hands of the emerging Marxist-Black-Lives-Matter movement, which is now the most popular party in America. With God’s help we will do our best to offer some ideas. Certainly, all evil economic policies in force are now driving gold higher and higher and it is the best of times for our gold shares. But it may also be the worst of times in terms of the natural human quest for life, liberty, and the pursuit of happiness.