Stock Market Party

By John Mauldin 

"History repeats itself, that's one of the things that's wrong with history.”

—Clarence Darrow (1857-1938), American lawyer

The end of 2020 has me looking back. 

I started writing the letters that later became Thoughts from the Frontline back in the late 1990s. 

Similar to COVID-19 today, we had a giant macro issue then, too: Y2K It’s hard to believe now how frightened some people were. 

But as I expected, the big day came and the world didn’t end.

Another similarity is the stock market was rising like a rocket. 

This newfangled “Internet” thing had people super-excited, and rightly so. 

It was a world-changing paradigm shift. 

Unfortunately, some of the stocks born in that incredible boom weren’t world-changing paradigms at all. 

The market party ended, just as this one will, but went on far longer than almost anyone (including me) expected.

Had you bought the Nasdaq at the March 2000 peak, and held on, you would have got back to breakeven about 15 years later. 

And now, 20+ years later, your annualized return for those two decades would be around 4%. 

That’s not terrible. 

You beat CPI inflation by a couple of points. 

But people back then expected far more—15% annualized returns were thought to be easy.

The moral of the story is simple: Starting valuation matters. 

In the example above, waiting a couple of years to start lower would have drastically changed the outcome. 

But again, almost no one thought that at the time.

And while we’re talking about valuable things, please let me remind you that the window of opportunity to become an Alpha Society member this year is closing soon.

The Alpha Society is our most exclusive membership service—and the one that is nearest and dearest to my heart.

It was born out of my desire to create an “inner circle” of serious investors. I have watched it grow over the years like a proud father watches his kid’s first steps, first day of school, first football game... all the way to graduation.

We’ve upgraded many of the features this year—for example, you’ll find a brand-new version of the Alpha Council, our members-only social media platform, which now looks a lot like Facebook. You can meet your fellow Alpha Society members there, as well as our editors. I sometimes stop in to chat as well.

New members also receive a hand-selected bonus package I’m sure you will enjoy. It gives you free access to three of Mauldin Economics’ most popular events and specialty products.

As an Alpha Society member you’ll receive lifetime access to all of our premium subscription services, including those we’ll launch in the future. You can even bequeath your membership to your kids or grandkids.

The savings over time are enormous, so if you are serious about investing (and our research), I highly recommend you join my “inner circle” before time runs out. The membership offer closes at midnight, December 21.

And now, we’ll take a closer look at the stock market and where it may be going.

Fundamental Madness

We last dove into the equity pool back in July in Valuation Inflation. Rereading that letter, I could easily say it all again and just update the numbers. All the valuation metrics I described look even more overvalued now.

That makes sense when you consider the prime factor—central bank liquidity—hasn’t changed. The Fed has continued pumping so asset prices have kept rising. It’s not just stocks, either. Their bubble is just more obvious because they change hands more often than houses and land do.

Here are Federal Reserve assets, via the FRED database:

Source: St. Louis Fed

It’s not just the US Federal Reserve. 

The world’s other central banks are all doing the same thing.

Source: Thomson Reuters

The passage of time also indicates monetary stimulus may be more important to markets than fiscal aid. The stimulus checks, extra unemployment benefits, and PPP loans mostly ended over the summer and fall, but stocks kept climbing. This suggests that government spending, while it was a lot, had a smaller impact on the stock market.

But regardless of the cause, this market is certainly at the upper end of fair value, if not overvalued, no matter what fundamental or historical comparison you want to make. It’s clear in this Doug Kass table I showed you last week.

Source: Doug Kass

To buy now, you must either convince yourself this is wrong, or find some reason to argue “it’s different this time.” 

That is rarely the case. To see why, we are going to look at some of the above data in detail, starting with some charts from Dave Rosenberg’s magnificent monthly chartbook.

The S&P 500 price-to-operating earnings ratio is back where it was in the early 2000s bull market and well above its peak in the financial crisis.

Source: Rosenberg Research

Worse, notice how fast it climbed. That’s not normal. Nothing fundamentally changed enough to make US public company earnings 50% more valuable than they were in March. What changed was the cost of debt capital, and it changed for purely artificial reasons. That means the valuation is now artificial, too.

Looking at it in dollar terms, we see S&P 500 operating earnings per share are now back where they were in 2018–2019, when the market was much lower. There is a whole lot of optimism going on (channeling my inner Jerry Lee Lewis).

Source: Rosenberg Research

That’s partly good news. It means companies collectively (though not every company) are making as much as they did before the pandemic and recession. As I noted last week in Survival of the Biggest, some of this is at the expense of struggling and dying small businesses (especially in the restaurant and hotel/travel sector). But it’s not imaginary.

The bad part? While S&P 500 companies are making the same profits, their share prices are something like 35% higher. Investors are willingly paying much more for each dollar of earnings. What are they thinking?

That being said, the traditional difference between the bond and stock market is striking:

Source: Rosenberg Research

Well, maybe they are thinking earnings will rise a lot more. This next chart, courtesy of Jim Bianco, shows the forward P/E ratio, which means it looks at Wall Street’s consensus expectation rather than what has actually happened.

Source: Bianco Research

Here again, we see the same pattern. This means buyers are not simply paying fair price for expected future earnings. 

They are paying more even if earnings grow to match Wall Street’s rosy scenarios. That’s a market we can no longer call “rational.” It is trading based on something other than reality.

By the way, it’s not just the US market. The whole world is being revalued. My friend Alexander Einechen since this out Friday morning:

Source: Alexander Einechen

Further, the chart from Jim shows forward “projections.” How often do those projections turn out to be correct? 

The answer is, almost never. Jim shows our friend Ed Yardeni’s reviews of analyst estimates for the last 35 years. 

The little blue squiggles show where estimates begin and you can see where they end. 

Most of the time they end up going down, especially when valuations are high. Analysts are human, and they make the human mistake of projecting current reality into the future.

Source: Bianco Research

So what are analysts actually projecting? 

It turns out that they are a remarkably bullish group. Again from Jim Bianco:

Just for the record, here are the individual estimates…

Source: Bianco Research

This is a very optimistic group. Maybe I should ask them to share their drug of choice so it would make me happier, too.

As I write, the S&P is around 3,700. Citigroup, the most bearish, estimates 3,800 by the end of 2021. 

J.P. Morgan and Cantor Fitzgerald see an almost 20% further gain on top of what we have seen this year.

Not everyone is so bullish. John Hussman projects a -1.7% 12-year total return for a 60/30/10 portfolio. 

Please note the tight correlation of the red line with actual 12-year returns. 

That should worry current “long-term” investors:

Source: John Hussman

And there is Jeremy Grantham’s seven year projection from GMO (note his projections on emerging market value -we will come back to that again shortly):

Source: GMO

Market Psychology

Wrapping up that valuation letter last July, I said…

History also shows manias can persist much longer than most people think. Back in 1999, I and many others thought there was no way the bull market could go on. Yet it did, with the Nasdaq actually doubling in 1999.

Since then the Nasdaq Composite rose another 28%. 

Not quite doubling in a year but it’s certainly been a furious pace. 

And it’s entirely possible the pace could continue, just as it did in the 1990s. 

But it will end at some point.

Back in June, my friend Anatole Kaletsky of Gavekal wrote a fascinating analysis on “Five Features of Market Madness.” (Alpha Society and Over My Shoulder members can read it here.) 

At the time, the Nasdaq Composite was trying to break over the 10,000 level. 

Anatole said a breakout would mean a resumed bull market, with questionable companies again soaring to new highs. 

That’s exactly what happened.

But more important, Anatole explained how market psychology was in charge, just as it was in the 1998–2002 period, and he listed five reasons why. 

I’ll repeat them for you with some comments.

  1. While monetary easing usually starts a bubble, a reversal in monetary policy is unlikely to deflate the bubble once the speculative momentum builds.

This is what happened 20 years ago. 

The Fed was actually raising rates in 1999 and 2000, but stocks continued merrily higher with only short interruptions. 

This week’s FOMC meeting confirmed yet again they will keep pumping a long time. 

I think they may pause the QE activity next year if the vaccines go well and the economy picks up steam, but I see no chance they will try to withdraw the new liquidity. 

They’ll just let it gradually roll off as time passes.

  1. Valuations do not matter while a bubble is inflating, but they become very important after it bursts.

The charts above show this pretty clearly. 

Anyone who is buying stocks now obviously doesn’t care about valuations. 

But a time will come when they do care, and they will care a lot.

  1. Bubbles typically end with some huge corporate collapse, often tainted with fraud.

In past bubbles we saw scandals and failures like Enron, Lehman and Bear Stearns. 

This bubble will probably bring similar collapses from similarly well-regarded companies. 


Your guess is as good as mine. 

I feel sure a lot of accounting games are being played. As cracks begin to form, these will be harder to sustain.

  1. Bubble dynamics need not bear any relation to the strength, or weakness, of the economic cycle.

This is certainly the case. 

We are not just in recession but a deep recession, with millions unemployed and millions more having lost income. 

Yet the stock market doesn’t care. 

It just goes up, for its own entirely different reasons.

  1. Speculation increases dramatically when prices break through major highs.

This year has been a long string of “____ hits new all-time high” headlines. That’s both a sign of speculation and a cause of it. 

A new all-time high in a stock means every shareholder has an open gain. 

That both gives them confidence and makes them less interested in selling, which sends prices higher still.

This party will end. 

They always do—but they also defy the naysayers longer than anyone expects. 

We have clearly reached a point where investor psychology is far more important than any kind of corporate or economic data. 

Stocks will go up as long as people want to buy them.

But whenever they stop, look out below.

More on Where We Are Now

My friend and partner Steve Blumenthal sent me these two charts along with some explanatory data. 

We’ll start with median P/E, remembering Bob Farrell’s investment rule #3: 

There are no new eras—excesses are never permanent.

In the following chart, note the red “we are here” arrow. 

We sit in the “very overvalued” zone. 

Note also the green highlighted area and the “we’d be better off here” arrow. 

The dotted line shows the long-term median P/E is 17.3. 

The latest reading is 30.8. 

That’s higher than almost all other bull market peaks.

Lastly, take a look at the red circle toward the lower left. 

I think this is a pretty good way to estimate where you may want to buy equities more aggressively. 

Target one: 2,669.14 (though still overvalued, that is likely where the Fed steps back in should the market correct that much. 

Likely sooner in my view but just a guess). T

arget two: fair value at 2,035.36.

Source: Steve Blumenthal

This next chart shows stock market capitalization as a percent of gross domestic income. 

I feel it is informative in terms of coming returns.

Note the red “we are here” arrow. 

This shows the stock market’s current value as a percent of GDI. 

The lower section plots the amount over and under the blue dotted long-term trendline that appears in the middle section of the chart.

The data box in the upper left shows the 1, 3, 5, 7, 9, and 11-year subsequent returns achieved when the market was in the top quintile—overvalued zone (red highlight in the data box) and when the market was in the bottom quintile—undervalued zone (green highlight in the data box).

We currently sit in the red zone, so expect negative annualized returns over the coming 11 years.

Source: Steve Blumenthal

There’s Always a Bull Market Somewhere

From Gavekal’s Will Denyer.

For various reasons, some countries tend to trade at higher multiples than others. 

So the spread must be normalized. In the chart below, a reading of zero indicates a normal spread vs. the world MSCI (based on the median of the past 20 years). 

A reading of 1 indicates that the spread is as positive as it has ever been in the past 20 years and is a strong warning signal. 

The US, currently at about 0.7, looks very expensive compared to other markets.

Source: Gavekal

As Jeremy Grantham noted, there are some significant relative valuation opportunities outside of the US.

It’s Actually a FANG (and Now Tesla) Market

This chart is from Ed Yardeni.

Source: Yardeni Research

Note that almost all of this year’s outperformance has been from just four stocks. 

The “S&P 496” has been relatively flat. 

Those top four names now represent over 12% of the market and Tesla will soon add another 1.5%.

I have no idea where the top is, but history tells us there is a top somewhere out there prior to another steep drop. 

I will speculate about that in my forecast issue in January. 

But as a reminder, friends don’t let friends buy-and-hold index funds. 

Index funds make excellent trading vehicles. 

Use them appropriately. 

And tighten your hedges.

I will leave you with this bit of wisdom from my friend Doug Kass:

The Dunning-Kruger effect is a cognitive bias in which people with low ability at a task overestimate their ability. It is related to the cognitive bias of illusory superiority and comes from people's inability to recognize their lack of ability. Stated simply, the Dunning-Kruger effect observes that people who are the most ignorant about something will be the least aware of their own ignorance; they have the highest sense of false confidence.

With the benefit of a zero-commission trading app it is now easy and costless to trade, and the COVID-induced "stay-at-home" factor coupled with the desire of many to reclaim agency has contributed mightily to 2020's trading fever. 

As I have mentioned previously, the big marketing push of Robinhood's platform is taking advantage (selling orders) of those who don't understand and are likely to wind up losing plenty of money.

Perhaps, with so much out of their control this year, some have seen trading as a way of reclaiming the wheel and making risky bets on their own terms (or so they think).

Holiday Wishes and Some Schedule Changes

We will all be glad to see 2020 over. 

Like market valuations, the calendar is artificial but it has a psychological effect. 

The new year makes us pause and reassess. 

That’s certainly what I will do. This year both Christmas and New Year’s Day fall on Fridays so I am going to take a little writing break. 

My editorial and production teams could use some time off, too. 

I’ll be back on January 9 with my 2021 forecast issue.

Shane and I will spend the holiday season at home, using Zoom to connect with our children. 

It’s not the same, and I am really looking forward to when I can get my vaccine and get back on the road every now and then. 

I think it will take longer for the vaccines to roll out that most people anticipate, but I hope I am wrong. 

In any event, it will happen.

I think we will look back in five years and realize that the primary economic effect of COVID-19 was how it accelerated change faster than any of us had anticipated. 

It’s as if the world went on fast-forward. 

Not a bad thing, just a lot to adjust to. 

But periods of rapid change also bring lots of opportunities.

With that, let me wish you the best of holiday seasons, and sincerely thank you for the gift of your time and attention. 

I really do write these letters thinking of one reader, and for all practical purposes, that one reader is you. 

I hope you enjoy our weekly time together. 

We will resume our weekly chats in January. All the best!

Your finding opportunities in change everywhere analyst,

John Mauldin
Co-Founder, Mauldin Economics

A year of raising furiously

Companies have raised more capital in 2020 than ever before

What now?

IN MARCH THE corporate world found itself staring into the abyss, recalls Susie Scher. 

From her perch overseeing global capital markets at Goldman Sachs, a bank, she witnessed firms scrambling for money to keep going as the wheels of commerce ground to a halt amid the pandemic. 

Many investors panicked. Surely, the thinking went, public markets would freeze in the frigid fog of covid-19 uncertainty—and then stay frozen.

Instead, within weeks they began to thaw, then simmer, kindled by trillions of dollars in monetary and fiscal stimulus from governments desperate to avert an economic nuclear winter. In the past few months they have turned boiling hot.

According to Refinitiv, a data provider, this year the world’s non-financial firms have raised an eye-popping $3.6trn in capital from public investors (see chart 1). 

Issuance of both investment-grade and riskier junk bonds set records, of $2.4trn and $426bn, respectively. So did the $538bn in secondary stock sales by listed stalwarts, which leapt by 70% from last year, reversing a recent trend to buy back shares rather than issue new ones.

Initial public offerings (IPOs), too, are flirting with all-time highs, as startups hope to cash in on rich valuations lest stockmarkets lose their frothiness, and venture capitalists (VCs) patience with loss-making business models. VCs still plough three times as much into American startup stars than public investors do. 

But proceeds from listings are now growing faster than private funding rounds (see chart 2). The boom is global (see chart 3). On December 2nd JD Health, a Chinese online pharmacy, raked in $3.5bn in Hong Kong. A week later DoorDash, an American food-delivery darling, and Airbnb, a home-rental platform, both more or less matched it in New York.

In a world of near-zero interest rates, it appears, investors will bankroll just about anyone with a shot at outliving covid-19. Some of that money will go up in smoke, with or without the corona crisis. What does not get torched will bolster corporate haves, sharpening the contrast between them and the have-nots.

The original spark that lit capital markets on fire was the $6.25bn in debt and equity that Carnival Cruise Lines secured in April, remembers Carlos Hernandez of JPMorgan Chase, a bank. Investors reasoned that cruises will one day sail again—by which time some of Carnival’s flimsier rivals will have sunk. Other dominant firms have benefited from this logic. 

Boeing, part of a planemaking duopoly, has sold $25bn in bonds this year, even as its bestselling 737 MAX jetliner has remained on the ground and the near-term future of travel up in the air. Many Chinese companies have taken to issuing perpetual bonds, which are never redeemed but pay interest for ever, to repair their balance-sheets.

By the summer, notes Ms Scher, “rescue capital-raising” had given way to something less defensive. Investors’ ultraloose purse-strings allowed opportunistic firms to lock in historically low coupons. 

S&P Global, a ratings agency, calculates that the average investment-grade bond paid interest of 2.6% in this year’s covid recession, down from 2.8% in 2019. Thanks to a boom in online shopping and cloud computing, Amazon, which is a leader in both areas, can now borrow at 1.5% for ten years, more cheaply than any American firm since at least 1980—and than some governments. 

Indebted giants like AT&T, a telecoms-and-entertainment group, are lengthening debt maturities. 

In November Saudi Aramco, an oil colossus, sold $2.3bn-worth of 50-year bonds, in spite of looming climate policies that may cripple its business of selling crude long before 2070.

Even cheap debt, of course, must be rolled over and, perpetuities aside, eventually paid back. With stockmarket valuations propped up by loose monetary policy, and only a slim prospect of tightening, many firms opted to shore up their balance-sheets with new share issues. 

Danaher, a high-rolling industrial conglomerate, raised over $1.5bn by selling new stock just after its share price returned to its pre-pandemic highs in May; it has risen by 39% since. On December 8th Tesla, an electric-car maker whose market value has grown eight-fold this year, to $616bn, said it plans to issue $5bn-worth of shares.

With shareholder payouts trimmed or suspended until the covid fog lifts, the cash held by the world’s 3,000 most valuable listed non-financial firms has exploded to $7.6trn, from $5.7trn last year (see chart 4). Even if you exclude America’s abnormally cash-rich technology giants—Apple, Microsoft, Amazon, Alphabet and Facebook—corporate balance-sheets are brimming with liquidity.

It is still too early to tell what firms will do with all that cash. The merger market is showing signs of life, though mostly as deals put on ice during the pandemic are being revived. Many companies will content themselves with maintaining liquidity, at least until a covid-19 vaccine becomes more widely available.

Startups, for their part, will use IPO proceeds to blitzscale their way to profitability. 

The pandemic has made business models that might not have matured for years, such as digital health, suddenly viable. Many will fail. But for now giddy investors are pouring money into any firm whose IPO prospectus features the words “digital”, “cloud” or “health”. 

Headier still, “special purpose acquisition companies”, which go public with nothing but a promise to merge with a sexy startup later on, and which have raised $70bn in 2020, mostly on Wall Street, are shattering previous records.

Markets seem no more discerning in mainland China, where proceeds from listings hit $63bn, the most since 2010. Hong Kong added another $46bn. Shanghai’s STAR Market, a year-old technology board, this week welcomed its 200th member, bringing its IPO haul to $44bn. 

In September demand for shares to be traded on the Hong Kong Stock Exchange by Nongfu Spring, a water-bottler, outstripped supply by 1,148 times. Even the authorities’ last-minute suspension of Ant Group’s record-breaking $40bn IPO in Hong Kong and Shanghai, after the fintech titan’s co-founder annoyed regulators, may not frighten other listers. 

And so long as geopolitical tensions between America and China persist, more Chinese firms with an American stock ticker may avail themselves of a Hong Kong one, observes Julien Begasse de Dhaem of Morgan Stanley, a bank.

For now, capital is likely to keep flowing. Mr Hernandez says his bank’s pipeline of IPOs looks “the most robust in years”. The ten-year Treasury yield is below 1% and the spreads between American government and corporate bonds have narrowed to pre-pandemic levels. 

As a result, even riskier firms’ paper yields less than 5%, according to JPMorgan Chase. Investors expecting meaningful returns are therefore eyeing stocks. 

For the pandemic’s corporate winners, the choice between cheap debt and cheap equity is a win-win.

Will bitcoin end the dollar’s reign?

Digital currency poses a significant threat to greenback’s supremacy

Ruchir Sharma

The dollar has been the world’s reserve currency for 100 years, but fearful that central banks led by the US Federal Reserve are debasing the value of their currencies, many people have bought bitcoin in bulk since March © REUTERS

When the pandemic hit, the US dollar was as mighty as ever. Despite talk of faltering American supremacy, the dollar ruled as the medium of international trade, the anchor against which other nations value their currencies, and the “reserve currency” most central banks hold as savings.

Before the US, only five powers had enjoyed the coveted “reserve currency” status, going back to the mid-1400s: Portugal, then Spain, the Netherlands, France and Britain. Those reigns lasted 94 years on average. At the start of 2020, the dollar’s run had endured 100 years. 

That would have been reason to question how much longer it could continue, but for one caveat: the lack of a successor. 

There are contenders. Europe had hopes for the euro, introduced in 1999. But the currency has failed to gain the world’s trust, owing to doubts about the effectiveness of the eurozone’s multi-state government. China’s aspirations for the renminbi have been stymied for the opposite reason: concern about the arbitrariness of a one-party state.

US officials were thus confident that, in response to the Covid-19 lockdowns, they could print the dollar in limitless quantities without undermining its reserve currency status, allowing the country to keep running large deficits without apparent consequences. 

But a new class of contenders is emerging: cryptocurrencies. Operating on peer-to-peer networks ungoverned by any state, cryptocurrencies such as bitcoin are being pitched by their champions as decentralised, democratic alternatives.

The pandemic has made those crypto-pitches sound less like pure digital hype. Fearful that central banks led by the US Federal Reserve are debasing the value of their currencies, many people have bought bitcoin in bulk. Its price has more than quadrupled since March, making it one of the hottest investments of 2020. 

From its launch in 2009, bitcoin’s builders have aspired to establish it as “digital gold,” a trusted store of value that offers a safe haven in tumultuous times. But doubters find it hard to feel safe investing in an asset that is so volatile: the last bitcoin bubble popped less than three years ago, and its daily price swings are still four times larger than gold.

The sceptics are particularly well represented among those who did not grow up with digital technology. They tend to prefer gold, which has been purchased as protection against the decline of standard currencies for hundreds of years. 

In a recent survey, only 3 per cent of baby boomers said they own a cryptocurrency, compared with 27 per cent of millennials. Still, those numbers are rising, and there are reasons to think this bitcoin rush has deeper roots.

It comes at a turning point for the dollar. Last year, after mounting for decades, US debts to the rest of the world surpassed 50 per cent of its economic output — a threshold that often signals a coming crisis. 

Since then, with the government borrowing heavily under lockdown, those liabilities have spiked to 67 per cent of output, deep in the warning zone. The dollar’s reign is likely to end when the rest of the world starts losing confidence that the US can keep paying its bills. That is how dominant currencies fell in the past.

Moreover, the US and other major governments show little enthusiasm for reining in the mounting deficits. Money printing is likely to continue, even when the pandemic passes. Trusted or not, bitcoin will gain from widening distrust in the traditional alternatives. 

Bitcoin is also starting to make progress on its ambition to replace the dollar as a medium of exchange. Today, most bitcoins are held as an investment, not used to pay bills, but that is changing. 

Smaller businesses are starting to use bitcoin in international trade, particularly in countries where dollars can be hard to come by (such as Nigeria) or the local currency is unstable (Argentina). 

And in recent weeks PayPal and its Venmo subsidiary have started storing bitcoin with an eye towards accepting it as payment next year.

Bitcoin’s surge may still prove to be a bubble, but even if it pops, this year’s rush to cryptocurrencies should serve as a warning to government money printers everywhere, particularly in the US. Do not assume that your traditional currencies are the only stores of value, or mediums of exchange, that people will ever trust. 

Tech-savvy people are not likely to stop looking for alternatives, until they find or invent one. 

And stepping in to regulate the digital currency boom, as some governments are already considering, may only accelerate this populist revolt.

The writer, Morgan Stanley Investment Management’s chief global strategist, is author of ‘Ten Rules of Successful Nations’ 


by Matthew Piepenburg

After an extraordinary rally, gold recently entered an anticipated correction phase, which both math and history suggest is about to re-enter a continued trend dramatically upward.

A primary driver for such sustained precious metal strength is an historically undeniable (as well as approaching) paradigm shift toward rising inflation.

When properly understood, the topic of inflation, seemingly academic and even” boring,” in fact becomes rather exciting, as well as predictive, for informed and sophisticated investors.


The great inflation debate continues, with many investors wondering why hyper-inflation has not been the norm given the trillions in fiat currency creation.

Just consider the US money printing in the last 16 years:

And yet despite such torrents of fake money creation, U.S. inflation has annualized at a reported 2% rate with no “Weimar-like” wheel barrels of inflated money in sight.

In short, many are asking: Where’s the inflation?

Toward this end, it is critical to first distinguish true vs. popular notions of inflation.

From the Austrian School to Milton Friedman, the true definition of inflation has always been understood (and measured) by money supply.

As the supply increases, inflation follows.

The popular/media-driven definition, however, uses consumer prices as measured by such broken scales as the CPI to measure inflation.


Unfortunately, the CPI scale, which has undergone over 20 alterations since 1980, is an openly comical and deliberately inaccurate inflation measure.

It’s akin to a bathroom scale that measures your body weight yet magically omits calories attributed to chocolate, beer, pasta or pizza.

That is, the CPI scale magically under-weights (discounts) medical, housing, energy, education and other key costs—all of which have openly skyrocketed while the CPI rates have “mysteriously” fallen to the floor of history.

This is no accident, as treasury departments and global central banks fully understand that if inflation, as measured by such scales as the CPI, were accurately reported using 1980-based metrics, we’d already be looking at greater than 10% inflation rates today.

If such truths were honestly confessed, then inflation-adjusted/real return on sovereign bonds would be so openly (and shamefully) negative (i.e. > -8%) that no one would buy government IOU’s.

Of course, that’s a big problem in a now broken world where government IOU’s (i.e. global debt to the tune of 280 trillion) is all that keeps our otherwise Frankenstein economies walking—arms outstretched.

Thus, rather than confess true inflation, the fiction writers at places like the Fed or the Bureau of Labor Statistics resort to a trick which all desperate policy makers inevitably embrace when their experiments fail: They fudge the numbers.

Stated otherwise: They lie.

But then again, and as empirically shown elsewhere, the highest offices are not necessarily filled by the highest minds.

Dishonesty at the policy level is nothing new.

Since Nixon welched on the Gold Standard in 1971, policy makers have been acting like college party boys without a chaperone.

They can borrow and spend with money created by a mouse click for the simple reason that it is backed, by well…nothing.

This fully explains why the US public debt to GDP ratio rose from 33% in 1971 to 106% by 2019.

By the end of this year, thanks to unlimited QE (money printing), that ratio will hit 120%.

By the true definition of inflation (above), such desperate money creation can only mean one thing: More inflation.


Remember, of course, that Nixon had said the dollar’s de-coupling from gold was only a “temporary measure.”

That was 50 years ago and the “temporary” continues… DC and Wall Street continue to party without a golden chaperone.

In 2009, as the Great Financial Crisis (caused by great debt) raged, Fed Chairman Bernanke equally assured the world that such money creation was a purely “temporary emergency measure.”

This too was purely untrue, as over a decade later, Bernanke’s “temporary” and “emergency” policy has since become a policy norm.

Hence the market’s reaction: Party on.

Today, the Fed and the central banks of the world do nothing but print fiat currencies to pay for unpayable deficits and give liquidity to an artificial and historically unprecedented securities bubble.


COVID and the misguided policy reactions thereto, have only accelerated such insane debt levels and the creation of fake money to pay for it—all of which points to more inflation—namely, the kind that kills currencies and sends gold prices significantly upward.

The vast majority of investors, of course, pay no attention to these creeping inflationary forces and superficially supported risk assets, as they see only one thing: Rising markets riding a wave of fake liquidity over hidden rocks of unpayable debts.

But as we’ve also warned, the vast majority of investors are simply wrong.


That’s still the trillion-dollar question.

As of this writing, inflation in prices has not hit the Main Street (yet bogus) CPI scales, but has gone directly to Wall Street, as the bulk of the fake money printed since the GFC of 2008 went from the Fed to the primary dealer banks, and then to the publicly-traded corporations they serve.

In short, “price inflation” went to places like the S&P, not the deliberately false CPI.

This explains why the DOW and S&P can break new highs as the real economy endures record lows.

Such artificial risk-asset support in a time of open economic decline is disgraceful—but that’s what central banks do: Support banks and markets, not economies and real-world issues.

Central bank experimentation and market “accommodation” is a direct cause of the growing wealth disparity seen in the U.S. and around the world, and hence explains the populist movements which made the headlines in 2020.

Ironically, the vast majority of those angry crowds, like the vast majority of happy investors, can’t even point to the central bank source of both their woes and false comforts.

This is due to a fundamental ignorance (or ignoring) of basic economic forces.


The core lessons of economics, math and history repeatedly confirm that diluting currency power via fake money policies never leads to economic growth, just temporary (and fatally dangerous) asset bubbles.

That is, for every dollar of printed growth, it takes four dollars of debt. Hardly a good trade.

The U.S. (like the other major economies of the world) are effectively running uphill in roller skates using gobs of debt to essentially churn in place, and then paying for that debt with fiat money.

Does fiat currency creation still seem like a wise, long-term plan to you?

For this, investors can thank “honest brokers” like gold-welching Nixon for taking US budget deficits from 2.8 billion in 1970, to $1 trillion in fiscal year 2018-19, and now $3.3 trillion for 2020.

In turn, investors can also thank print-happy central bankers like Greenspan, Bernanke, Yellen and Powell for fattening total U.S. credit market debt from $1.6 trillion in 1970 to $80 trillion today.

Folks, debt like this can never be repaid. Never.

So, what’s ahead?


Now, let’s get back to that elusive inflation question.

Just like families with more debt than income, the best option is to find ways to grow your income.

But as we’ve seen above, that kind of growth just isn’t there for a global economy whose debt to GDP ratio is now well past 3:1.

The kind of economic growth needed to squelch such debt levels requires a near-perfect alignment of debt-free consumer strength, rapid growth in working age populations, massive productivity booms in manufacturing and free trade as well as a central bank providing discipline rather than punch bowls to the markets—none of which is likely or possible today.

Full stop.

The next (and desperate) option, however, is to make one’s currency weaker, inflate the same, and pay yesterday’s debt with tomorrow’s inflated/printed currency, a policy now openly embraced by the Dr. Frankensteins at the Eccles Building in D.C.


This, I’d argue, is far more possible and far more likely, namely to finance deficits with inflation-diluted currencies, a policy aptly named “inflationism.”

Thus, despite years of deflationary headlines and yield-curve controls by experimental central banks, inflationism is slowly (and I mean SLOWLY) becoming the new paradigm right under our noses.

As debt levels soar, fostering massive pricing bubbles in stocks, bonds, commodities and real estate, we are seeing the classic pattern of boom leading toward “uh-oh” and, in turn, a final shift toward rapidly rising inflation and hence rapidly declining currency valuations.


In the current paradigm shift, gold will rise not because gold only rises in inflationary periods (after all, gold recently hit new highs in an openly deflationary global setting).

Instead, gold will rise simply because currency purchasing power will tank (and is already tanking) as inflationism progresses from a slow trot, to a cantor and then to a full gallop.

That is, gold will rise because currencies (diluted daily via money printing) are falling by the second. This is not an opinion, but a mathematical certainty.

Like Picket’s charge at Gettysburg, currencies are marching straight into a deadly (i.e. inflationary) cannon barrage.

One look at the recent rise in gold prices, for example…

…is literally nothing more than taking a chart of the dollar or euro’s purchasing power and turning it upside down, like this:

In short, gold has nowhere to go but up simply because currencies, in an inflationary paradigm shift, ultimately have nowhere to go but down.


Informed investors see this.

They are not nervously day-trading in and out of gold price fluctuations subject to extreme, near-term volatility and “spoofing” in the paper-gold trade (for which banks like JP Morgan and Scotiabank are paying massive, $100M+ penalties).


Informed investors are precisely that—investors, not traders.

They buy gold and hold, not because they watch price swings, but because they understand currency forces.

It’s that simple.

Informed investors hold gold because the dollars and euros in their pockets, banks and markets are getting weaker by the second, regardless of the amounts listed on their ledgers, statements and portfolios.

Or stated even more simply, gold is their fire insurance for a currency that is already burning to the ground.