By David Smith, Originally Published on Money Metals Exchange
Over the last few years, so-called “crypto-currencies” – digital equivalents of a monetary exchange unit, have been all the rage. The most well-known in the category, Bitcoin, has had quite a run.
Starting out as a “virtual penny stock” it rose in 2014 to the elevated height of $1,150, before crashing back to earth. This “electronic currency” is created and stored in a computerized “wallet.” Purchases and sales are made via a “blockchain” which keeps a memory of every transaction conducted. Private keys (supposedly) provide assurance that a Bitcoin holder’s account is safe.
In less than three years, two seminal events have served to give bitcoin users financial heartburn. They give Inquiring Minds (readers of this column?) a serious reason to put on their thinking caps, before jumping to the conclusion that crypto-currencies can be viable challengers to what history teaches us is real money – gold and silver.
In February, 2014, the Tokyo-based bitcoin exchange, Mt. Gox, which at the time handled 70% of all bitcoin transactions, suspended trading and filed for bankruptcy after 850,000 bitcoins went missing. Then in early August 2016, 119,000 bitcoin worth $70 million were stolen from a Hong Kong exchange – one of the world’s largest.
These two events alone should fully justify safety concerns. More important than the theft itself was what the exchange decided to do about it. They decreed that account users who bore no responsibility for the loss, would still be subject to a 35% “bail-in” (exchange-approved theft) to make up for it.
Hackers Are Unleashing Sophisticated Malware to Rob Bitcoin Owners Blind
In what turned out to be prophetic comments, less than two years before the events discussed above, Nadeem Walayat, Editor of The Market Oracle, stated he believed that “thieves have been busy producing a whole host of bitcoin wallet malware that seeks to steal any wallets that they find on infected computers.” As new bitcoins are “mined” and the blockchain becomes more complex to operate, Walayat warned:
“…what bitcoin holders are going to be increasingly exposed to, is ever more sophisticated malware that are aimed at the theft of their bitcoin holdings at every stage of the process, starting right from their internet connected desktop PC’s to the interception of transactions between servers to the wild west bitcoin exchanges that can disappear with all of their customers bitcoin holdings overnight, to the highly sophisticated bot net infected mining pools that seek to target all bitcoins in existence by seeking to rewrite who owns what.”
Yet crypto-currencies do have a few things going for them, and maybe someday they will find acceptance and utility among the general population. They offer a certain amount of financial privacy. Funds can be transferred to any point on the globe.
A few businesses already accept Bitcoin in payment (including Money Metals Exchange). Their volatility means that holders have upside potential – BT recently traded as high as $788 (currently trading at $575.)
But are these benefits enough if you wake up some morning to find out that the site who you’ve entrusted with your BT has been hacked (robbed) and you’re informed that you’re going to be “bailed-in” to help restore the funds of other site holders?
Cash in the Bank Could Actually Be Safer Than Bitcoin
If this kind of risk appeals to you, why not just continue to keep all your liquid assets in bank CDs, non-interest bearing savings accounts, or money market funds? Soon enough you’ll have to pay them to hold your money via negative interest rates (NIRP). You’ll have new fees added to your non-interest-bearing accounts, and “redemption gates” – limitations on how much of your own money you can withdraw.
It brings to mind the exchange between two peasants, in the classic film The Magnificent Seven. They were discussing whether or not they should resist the continued thievery of the Mexican bandit Calvera and his gang, or just put up with their periodic depredations. “But they never steal all our corn!” responded one campesino who voted not to resist.
Eventually if/when your bank gets into trouble – even through no fault of your own, you may be “volunteered” to give up 20-30% of your account in a “bail in” to help cover their mismanagement. A few years ago, a Spanish bank took it a step further – forcing account holders to convert their cash to the bank’s stock… which promptly lost 90% of its value!
This fall, regulatory agencies will no longer require money market funds to promise that your shares will drop no lower than $1. In the past, his sacrosanct rule served as a guarantee that you could never lose your principal.
Now, that can change at any time, allowing the net asset value of the fund to close below $1 and stay there – in the trade called “breaking the buck.” Thus, on any business day of the week, you may lose some of your money market funds on deposit.
In 2010, the SEC voted 4-1 to authorize the ‘legal’ suspension of money market redemptions. They wrote “We understand that suspending redemptions may impose hardships on investors who rely on their ability to redeem shares.” Translation: You are in their thoughts and prayers, but they can still decide to prohibit withdrawals from your own account.
As the checkered history of upstart “money substitutes” like Bitcoin has shown, those who have control over the disposition of funds of any second party will sooner or later find a way to debase (steal) some if not all of it from the person who thinks he/she “owns” it.
Over two years ago, David Morgan wrote the following in an article titled “My Two Bits about Bitcoin,” which you can read on his blog here:
Looking at what has taken place, especially over the last year or so, I must conclude with this simple – and to my thinking – self-evident statement. Whereas Bitcoins can vanish, Gold cannot. Just remember for all who read this, the timeless advice of – caveat emptor! And may the Free Market Reign.
It’s likely Bitcoin will go through more “jury trials” – efforts at sustaining public acceptance – before it is either fully approved of, or tossed into history’s waste bin. But while we wait to find out, I’d say that, in some very important ways compared to gold, Bitcoin has so far proven itself to be nothing more than a two-bit interloper.
David Smith is Senior Analyst for TheMorganReport.com and a regular contributor to MoneyMetals.com. For the past 15 years, he has investigated precious metals’ mines and exploration sites in Argentina, Chile, Mexico, Bolivia, China, Canada, and the U.S. He shares his resource sector findings with readers, the media, and North American investment conference attendees.
An Interview with Michael Pento: Stagflation to Force People Into Gold
Michael Pento: Stagflation to Force People into Gold
Listen to the Podcast Audio: Click Here
Mike Gleason, Money Metals Exchange: It is my privilege now to be joined by Michael Pento, president and founder of Pento Portfolio Strategies and author of the book The Coming Bond Market Collapse: How to Survive the Demise of the US Debt Market. Michael is a money manager who ascribes to the Austrian school of economics and has been a regular guest on CNBC, Bloomberg, and Fox Business News, among others.
Michael, it’s good to talk to you again. Thanks very much for joining us today and welcome back.
Michael Pento, Pento Portfolio Strategies: Thanks for having me back on.
Mike Gleason: Well to start off here, Michael, I want to get your thoughts on some of the economic data we’re seeing out there and maybe you can explain some of the market action to us because there seems to be a lot of confusion. Now as you pointed out in an article you wrote earlier this week, we have a big disconnect between what the payroll reports and the employment numbers are showing compared to the tax receipts the Treasury Department is collecting. Talk about that if you would and also let us know what conclusions you’re drawing from these numbers.
Michael Pento: Well unfortunately, the conclusions I’m drawing is that the payroll numbers aren’t telling the truth. If you listen to the Labor Department, the number of net new jobs created year-over-year this fiscal year so far – it’s going to end at the end of September, so we have almost all the data in – there has been 1.66 million net new jobs created. One would assume if you have all these people in a net basis in the workforce that tax receipts would be increasing, and yet, you see corporate receipts are down 12.8% year-to-date and individual tax receipts are down 0.4% year-to-date. Furthermore, there’s something called the FUTA tax, and that’s basically a tax on, employment insurance tax on, the first $6,000 of anyone employed. So unless these people that are employed, supposedly full time and gainful employment, are earning less than $6,000 a year, these people should be paying into this pool. And those receipts are actually down year over year.
So I believe that the Bureau of Labor statistics is inflating this data and I believe the quality of the data, in other words, the number of jobs created and the quality of those jobs are mostly part time in nature and very low paying service sector jobs, which by the way, would also explain the absolute lack of productivity. Don’t forget, in case you don’t know, in case your audience isn’t aware, productivity has dropped for three quarters in a row, and a productivity of part time bar maids is not very high. That would explain the discrepancy between the two numbers that I just described between the Bureau of Labor statistics and the tax receipt data, and it also explains why I think this economy is most likely in a recession right now.
Mike Gleason: There’s something else here that doesn’t seem to add up. We continue to see records in the stock market, but earnings are not keeping up with the rise in share prices. It’s hard to know who’s actually buying shares. Zero Hedge has reported that retail investors don’t seem to be buyers. So is it possible that the fed might be actively playing in this market? We do know the Swiss Central Bank has been buying U.S. stocks and certainly Bank of Japan is a huge buyer.
Michael Pento: Sure. Really, is it that much of a stress to believe that the Federal Reserve is doing exactly what other central bankers are doing? I think we’re all headed towards helicopter money. This is where this is all going to head up. So if you look at earnings on the S&P 500, it is down 5 quarters in a row and most likely it will be 6 quarters after this earning season is wrapped up. So if you have 6 quarters in a row of falling earnings, what is supporting the stock market, which is, by the way, trading at record highs? If you look at median PE ratios, if you look at price to sales ratios, if you look at total market cap to GDP ratios, this is the most expensive market in aggregate that we have ever had in history. It’s even more expensive when you think of the fact that you have earnings that are most likely falling, that means negative, 6 quarters in a row.
So who is inflating the stock bubble? It has to be the Bank of Japan, the Swiss National Bank, the European Central Bank, and the Fed, even if they’re not directly buying ETS as they are over there in the maniacal inflation seeking retirement colony in Japan. You at least have to admit that keeping interest rates near zero for 90 months and inflating the Fed’s balance sheet by $3.7 trillion has bent down the yield curve to almost a flat level where it sits now at a 10-Year around 1.5%. That has forced everybody in a wild search for yield and where are they going? They are going every place from municipal bonds to collateralized loan obligations to REITs to every type of fixed income proxy there is, even to high performance sports cars and art. So every asset is in a bubble thanks to the fact that risk-free, so called risk-free, rate of return has been pushed down to near zero for 90 months on a worldwide basis.
Mike Gleason: You’ve written a book about the coming bond market collapse and I want to get your comments on that market here. We continue to see bond prices holding strong and even rallying. Central banks have been huge buyers, but it appears even the private sector can’t get enough of them. Investors are taking bonds with negative yield in many cases and I’ve seen reports that offerings have even been over-subscribed. Has the ongoing strength in bonds surprised you and have you revised any of your thinking on the dire predictions about the bond market? Because there is an argument out there, Michael, that the central banks can continue to buy bonds with newly created electronic money until the moment the electricity goes out.
Michael Pento: Well they certainly can. I wrote the book in 2013. I never expected that yields would go into negative territory. So I was prescient, I was definitely ahead of the curve, calling this a bond bubble when nobody else was calling this a bond bubble, but what has occurred basically, quite simply, is that the bond bubble is more elastic than I thought and has gotten much, much bigger. Look at the amount of global debt. Global debt right now is $230 trillion, up $60 trillion since 2007. That is 300% of global GDP.
The U.S. debt is 350% of GDP. The average ratio of U.S. debt to GDP is 150% and that existed for decade after decade after decade prior to going off the gold standard in 1971. So we went from 150%, which is sort of the average, the normal, to 350% debt to GDP. And there’s a massive accumulation of this debt. But by the way, this is not debt that’s been taken on by you put your savings in the bank and you have robust GDP growth, you save a little money, and that money is loaned out to the private sector for what? Capital good creation and for engendering productivity enhancements. This massive accumulation of debt isn’t at all that genre, it’s unproductive debt that is only made serviceable by unprecedented increases in base money supply. This is the perfect recipe for stagflation.
So if you add a massive increase of unproductive debt, and I gave you the numbers, $230 trillion – totally unproductive debt going to share buybacks and hole digging and pyramid building – this debt is not going to be accompanied by any type of GDP growth. It’s unserviceable unless central banks continue their torrid and unprecedented pace of quantitative easing. Just put a figure on that. There is now occurring $200 billion of quantitative easing every month, every month. So worldwide, central bankers are engaged in QE to the tune of $200 billion a month of central bank credit creation. So if you have stagflation, no growth, and a massive and unprecedented and intractable increase in the base money supply, of course you’re going to get inflation. You have to get a rapid rise inflation. And when that occurs, you’re going to have a collapse in the bond market, the likes of which we have never seen before.
Let me just quickly take you to Japan, an example I love to use. 250% debt to GDP, that’s just federal debt, that’s not gross debt, it’s just federal debt. You have an inflation target of 2% and you have a perpetual recession, never ending. It’s been going on and off since 1989. What happens when the BOJ, the Bank of Japan, successfully achieves a 2% inflation target…? And don’t be misled for a second, no central bank can peg an inflation target, it will go to 2% and then keep on going. Here you are holding a Japanese JGB, ten year note, going out ten years, yielding negative ten bases points, inflation is rising, going north of 2%, and you’re dealing with an insolvent nation. The debt you hold is that of an insolvent, broke nation that is going to default.
What are you going to do? You’ll panic out of that note. You will sell that to anybody because you know that the central bank of Japan, the BOJ, will be getting out of the monetary monetization business. That’s what I predict will happen. It’s going to happen in Europe, it’s going to happen in Japan, it’s going to happen in the United States. And when that happens, when yields spike, it will reveal the insolvency of that global $230 trillion debt condition.
Mike Gleason: Let’s pivot and talk about the metals, specifically, certainly, we’ve seen some very strong action this year, which began back in January and February when we spoke to you last. Gold is up about 25% for the year, silver’s up about 40%, but both metals have come under pressure here over the last couple of weeks. The mining stocks, which have been on absolute tear, have pulled back as well. Do you expect this to be a prolonged correction in the metals with prices maybe heading lower into September or October? What are your thoughts there on the metals?
Michael Pento: Well let’s give you the reason. First of all, I am not a Pollyanna about any asset class. If I thought that the Federal Reserve was going to be able to engage in a protracted, steady increase in the Fed funds rate in the matter they did between 2004 and 2006, if I thought that they were going to be able to do this in the context of steadily increasing GDP growth, then I would tell you, “You better get the hell out of gold and gold mining shares as quickly as possible”. I can tell you right now, I don’t believe that’s the case.
So the pullback I see right now is healthy in nature, it’s way overdue, and it was engendered by, it was caused by, a plethora of talking heads from the FOMC, Federal Open Market Committee, coming out and it was perfectly timed up until this Jackson Hole meeting, which is occur on Friday, to tell Wall Street that they are way too quiescent in their view that the Fed is not going to raise interest rates in 2016. They haven’t done so yet. They did once, as you know, in December of 2015. The market fell apart. And they threatened four rate hikes this year and we are now coming up to September and have no rate increases so far.
I believe they may raise once in December after the election. That all depends if the economic data turns around. If you look at what’s happened with GDP, if you look at Q4 GDP 2015, Q1 and Q2 (of this year), we are now displaying zero handles on Gross Domestic Product. And if you look at the latest data on housing, existing home sales – which is by far the much bigger portion of home sales, vis a vis, new home sales – and if you look at mortgage applications, mortgage applications are now down year-over-year and existing home sales are down year-over-year.
That says that the all-important housing market is rolling over, people cannot afford home prices, and I think after that brief blip up in data that you see in July, Q3 will also be very anemic and the data between now and the end of the year will most likely not allow the Fed to raise interest rates between now and the end of the year, but even if they go once in December, the most salient point I can make to your investors is that the central bank will be very clear that this is not part of a protracted, elongated rate hiking campaign.
In other words, they’re going to go very, very, very slowly, as they’ve evidenced so far, and the terminal point, which they call the neutral Fed Funds Rate, will be much slower than at any other time in the past. You think about in history neutral Fed Funds rates are usually 5% to 6% on the overnight lending rate. They’re at 3%, that’s their target right now, and I believe, after these next few meetings in September and December, Janet Yellen will come out and tell you that the terminal rate, the neutral target rate, is something in the neighborhood of 2%, so they’ll be lower for longer and have a much lower terminal rate. By the way, I don’t think they ever get there. As I said before, I think the economic data turns profoundly negative between one or two more rate hikes. We enter into an inverted yield curve, we enter into a fully manifested recession, and that means the Fed joins the ECB and BOJ back into quantitative easing.
Mike Gleason: Well as we begin to close here, Michael, I would certainly think that a negative real interest rate type environment is likely to continue. Sounds like maybe that’s what you’re predicting. What do you think that’s going to mean for the metals? And also, just give us your thoughts on the whole election as we move towards the election season here in November.
Michael Pento: Well first of all, I’d like to tell you that I believe that nominal rates are going to stay very low and I believe stagflation is going to be coming more and more into the fore. You’re looking at real yields, which will be moving further into negative territory. Anybody who knows anything about gold will tell you that this real and honest currency is absolutely essential during times when nominal rates are negative and real interest rates are even further negative, and that’s exactly the condition that we are headed into. If you look at nominal GDP, it’s just 2.4% year-over-year. If inflation is higher than 2.4% then we are now in a recession.
I also want to give you one more data point. I know it’s very data heavy, but that’s how I am and that’s how your audience is going to be able to grasp why it’s so essential to maintain their position in gold and in the miners. Core inflation is up 2.3% year-over-year. Real GDP is up just 1.2%. So inflation is twice as high as real GDP. That’s stagflation, that condition is going to get worse, that is going to make real interest rates even lower, and that is going to force people more and more into the protection of gold.
And I want to also touch before we end, you asked me about the election. Donald Trump is on record saying that he’s the king of debt and that he loves debt. He is also on record saying that if the U.S. ever enters into another 2008 type scenario, that we can default upon that debt. Now if you ever wanted to have another reason to own gold instead of treasuries that yield almost nothing is the fact that the nominal yield you’re getting, which is practically zero, if even that nominal yield has been threatened to be defaulted upon. So while Trump is a deficit lover, so is Clinton, who I believe will, by the way, unfortunately, win the election. So I believe both of these candidates are lovers of debt. Both of these candidates will be vastly increasing to the amount of debt deficits that we run up, which by the way, will be and must be monetized, and according to Mr. Trump, will be defaulted upon. At least he’s being honest.
Mike Gleason: Well we’ll leave it there. Excellent stuff Michael. We always appreciate your insights and thanks for being so generous with your time. As always, we really enjoy your commentaries, and on that note, if people want to both read and hear more of those from you and want to follow your work or learn more about your firm, tell them how they can do that.
Michael Pento: The website is PentoPort.com. Love to have you subscribe to my podcast. You can read my commentaries online all over the place. I’d love to be also be able to help you manage your money through this tumultuous time that we’re going through, which will get much worse.
Mike Gleason: Again, great stuff Michael. Hope you enjoy the rest of your summer. I look forward to catching up with you again soon. Hope you have a good weekend and thanks for the time today.
Michael Pento: Thank you Mr. Gleason.
Mike Gleason: Well that will wrap it up for this week. Thanks again to Michael Pento of Pento Portfolio Strategies. For more info, visit PentoPort.com. You can sign up for his email list, listen to his midweek podcast, and get his fantastic market commentaries on a regular basis.
Mike Gleason is a Director with Money Metals Exchange, a national precious metals dealer with over 50,000 customers. Gleason is a hard money advocate and a strong proponent of personal liberty, limited government and the Austrian School of Economics. A graduate of the University of Florida, Gleason has extensive experience in management, sales and logistics as well as precious metals investing. He also puts his longtime broadcasting background to good use, hosting a weekly precious metals podcast since 2011, a program listened to by tens of thousands each week.
Guest posts from Money Metals Exchange.