My grandfather, William Paul Smith was an ordinary dairy farmer with a degree in common sense. One of his favorite sayings was, “It’s the same thing, only different.” 70 years ago, he warned me not to throw rocks at a wasps’ nest. As I cried and put ice on the sting, he explained what happened always happens – and I got stung! I thought I was different – and could outrun a wasp – and had to learn the lesson the hard way.
His sage wisdom does not just apply to children. Why is it that many lessons are constant, yet even as adults, we choose to ignore warnings and learn the hard way?
| “The four most expensive words in the English language are this time it’s different” – Sir John Templeton |
Good friend Chuck Butler, writes for Dow Theory Letters, a terrific publication. Chuck recently asked, “Will This Time Be Different?”
His headline reminded me of my grandfather. Warnings are appearing regularly – are they being ignored?
Subscribers are concerned. Mike L. recently asked:
“What do you think will happen with the dollar and today’s retirement plans if bonds tank, no one buys our debt, and other nations continue to conduct trade deals without using the reserve currency, etc.?”
Chuck warns:
“I’m only going to say this once … This is all headed for a Minsky moment. … A Minsky Moment is when a market fails or falls into crisis after an extended period of market speculation or unsustainable growth. I’ve moved that over to debt accumulation instead of a market.”
I contacted Chuck. Will the Minsky Moment appear in the stock or bond market? What can individual investors do to avoid getting stung?
DENNIS: Chuck, on behalf of our readers, thank you for taking your time for our education. Let’s get right to it.
Before I get into specific questions, you discussed a ratio of household net worth to income. I’ve never heard of that before. Can you explain it, and what it means for our readers?
CHUCK: Dennis, thank you for inviting me to share my opinions and thoughts from many years of investment experience with your readers. I get a kick from doing these interviews, just so you know!
Anyone with a home mortgage falls into this ratio… Basically, you take the house’s value, (easily obtained from Zillow.com) and you subtract what you owe on it. Simple, right?
Add up all of your income and divide it into the net worth figure you just calculated. The higher the number the higher the risk. If the house’s value falls, the income could be eaten away with just mortgage payments or increase the chance of defaulting on the mortgage.
Before we got crazy with home values in 2004-2007, this ratio was around 5.1%. In 2007 it peaked to 6.5%, and we all know what happened then. Lo and behold right now it’s 6.75%!
| Some pundits and economists are saying, “This time will be different”… I just cringe when I hear those words! |
DENNIS: I’ve noticed a lot of ads encouraging people to refinance their homes while rates are still low, suggesting they can take some of the equity and pay off their credit cards. That only works if they cut up the damn credit cards. If millions of consumers refinance, basically taking equity out of their home, what impact will that have?
CHUCK: In 2005, I told my readers that consumers were using their houses like ATM machines, taking equity out of their homes to buy SUV’s, big screen TV’s, and fancy clothes. That was all fine until the house values began to fall, and now the consumers owed more on their house than it was worth.
Never in a million years would I have thought that we would again fall for that idea that house values will never fall, especially so soon after the last crisis and collapse. But here we are again…. And it’s all going to end up just like the last crisis, but this time, it will be worse, because we never cleaned out the excesses of the last boom period.
Banks and financial institutions have more derivatives on their books now, than they did before 2007…. Like your grandfather said, same thing, only different…and worse.
DENNIS: Our mutual friend, Dr. Lacy Hunt echoed your remarks about consumer credit growing at the fastest rates in 16 years when he recently wrote:
“Consumer spending, the economic heavy lifter of U.S. economic growth, has expanded by 2.7% over the past year…. Real disposable personal income rose by only 1.9% over the past year. It was only the ability to borrow that supported the spending increase. In economic terms, borrowing is a form of dissaving.
…. the only period in which the saving rate was lower than it is today was 1929-1931…” (Emphasis mine)
Chuck, I know you call it the “stupid” Consumer Confidence Index. It’s currently 94.4, which is doggone high. Consumers are so confident, they are “dissaving” at a historically high pace.
You are warning a lot of overconfident investors they may get stung – and badly! If debt is the issue, wouldn’t the Minsky Moment start in the bond market?
CHUCK: It just may do that Dennis. You see a Minsky Moment happens when everyone is complacent about the assets and thinks that nothing bad could happen, so they get overconfident and decide to take on more risk. At that point, the Minsky Moment is just around the corner.
What could cause a Minsky Moment in bonds? Well, think about this for a minute. The U.S. Fed has been a very large bond buyer since the first round of Quantitative Easing began in 2009. They bought boatloads of both U.S. Treasury bonds and Mortgage-backed bonds. Look at their balance sheet, it increased five-fold to over $4.6 Trillion in 2017.
The Fed announced a “tapering” in 2015, but they kept buying Treasuries to replace bonds that matured. Late last year they announced that they were going to stop buying bonds altogether. No replacement bonds, no auction window buying.
The question was… “Who is going to take the Fed’s place”? Well, there has been no one, to date, and the 10-year Treasury yield has risen from 2.05% on Sept. 8, 2017, to 2.65% on Jan. 18, 2018. That’s just the beginning, in my opinion!
The Fed may not be the only “no show” at the auction window. China is considering slowing down their Treasury purchases or halting them altogether! Guess who else has been slowing down their Treasury purchases? Saudi Arabia, and Russia… Oh-no! Say it ain’t so, Joe!
This is the Minsky Moment for bonds…no big Central Bank buying, will drive yields much higher. It could easily be followed with another Minsky Moment for stocks.
When interest rates hit historic lows, money flooded into the market as investors were desperately searching for yield. As yields rise, the tide will quickly turn, and mom and pop stock investors will take the risk out of their investments and go back to bonds.
DENNIS: One final question. Many of our readers are clearly seeing the signs, fearing a Minsky Moment is inevitable, but not sure about imminent. They don’t want to get hurt. When the Minsky Moment eventually happens, I believe it will be different – it will be uglier than most investors have seen in their lifetime.
What advice would you give our readers to protect themselves?
CHUCK: Well, you know me well enough Dennis that you could answer this question for me! But here it goes…
First of all, the dollar is going to be held hostage by all this chaos, expect high inflation. Diversify into euros, sterling, Aussie dollars, kiwi and some others would be prudent. In addition, either a new purchase of up to 20 to 25% of your investment portfolio in Gold & Silver, or an increase in your holdings.
I feel that Gold & Silver are going to replace all the hoopla of Bitcoin, and I also feel that once that happens there will be supply problems, thus raising the prices of these metals even higher.
There is a positive side. Those who heed the warnings will be presented with some terrific buying opportunities.
I thank you for allowing me to give my opinions and thoughts, Dennis. You have very astute readers, and I’m sure they will hear the calls to take defensive moves in their investment portfolios. As I said before, I get no kick from champagne, flying too high with some gal in the sky, is my idea of nothing to do, but I get a kick out of writing for you!
DENNIS: (chuckles) That was clever! Chuck, once again, on behalf of our readers, thank you.
Both Chuck and Lacy Hunt clearly point to similar warning signs of previous “Minsky Moments” where millions of people lost a lot of money. The same thing, only different?
We have a new generation that’s not been stung badly enough and learned a lesson. The warnings are there for all to see – some will heed them, take precautions, diversify, keep debt under control, keep stop losses current – and take advantage of some great opportunities when they appear. Others will ignore the warning signs. Why do so many of life’s lessons have to be learned the hard way? You can’t outrun a wasp!
|
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And Finally…
“If you always protect your offspring in a cocoon they will never learn how to fly…”
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Dennis
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Hi Dennis, great article, as most of your articles are. However, I always have to take exception with anyone that says to load up on precious metals, for the same reason as I never got involved in bitcoin. Besides the obvious ponzi math on bitcoin, Gold / Silver have some of the same inherent problems, and one great big one; Outside of a few states that have “officially” recognized Gold / Silver (Arizona being one) as “currency”, how would I purchase things with it if things got really bad. I understand the arguments made that you could trade with locals in Gold / Silver etc. but we are forgetting two big elephants in the room here. A: The US federal government and by extension the IRS. I doubt strongly that they are going to just look the other way if the dollar collapses, and you have “gains” from precious metals, and in a more practical vein: How will I buy every day items / pay bills or even conduct commerce if the folks I am dealing with do not except Gold / Silver coins etc. as payment. A currency is only as good as what it buys. And in the most extreme case, there is precedent (about a half century ago) of the government outright outlawing it.
The convertibility problem, is the same problem with all of these alternative currencies or hedges. How do you get around that? Gold looks pretty, so does silver, and has some actual uses in the world, but as a currency it seems just as bad as every other “hedge”, simply because the guys with guns ultimately dictate what is “official currency”, and one must still eat.
What say you….
…you Horde the gold, for the long term, and only 20% of your portfolio, that’s what I read
Read some of the real world accounts in Venezuela, gold and silver (and USD) are being used on the black market to buy food. A family can eat for a month on a single oz of silver. The next collapse may be catastrophic and if so we may very well be in Bartertown. Just sayin’.
Load up on that SPAM for barter!
Dear Trader Jim,
I’m going to pass on something for all readers first.
A one ounce gold piece, in times of high inflation is good to own; however if you took it to the store for groceries – should they accept it you would likely get a couple wheelbarrows full of worthless dollars for change.
Black market requires barter so you might need smaller denominations. I have “junk silver” which is circulated dimes, quarters etc. that have 90% silver content. You would be less likely to be robbed with some of that in your pocket, plus it would be easily bartered.
Second, please go to my website http://www.milleronthemoney.com You can find my email address and drop me a note – I have some other comments I would prefer to send to you personally.
Regards,
Dennis
“I have “junk silver” which is circulated dimes, quarters etc. that have 90% silver content.”
No doubt those fine people “at the store” are going to know or care about ‘pocket change’ style coins… “but they are 90% silver”
-“pay or step aside pal, that’s 2 Dollars of quarters and dimes” the ignorant clerk says
Hi,
I agree with you. It’s barter or can be sold at a coin dealer…..or someone who understands silver – not a clerk at a grocery store….which is not likely to be open after having been looted.
I attended a conference a few years back and they had speakers from three countries who experienced hyper-inflation (Zimbabwe, etc.). They were in chaos and it was a total barter system, and not very safe.
Regards,
Dennis
PM’s can be used for a few reasons aside from vanity and conductivity.
In a monetary sense, they can be useful in some ways more than others. They have intrinsic value. They can be bartered as a trade medium, akin to the ways fiat currency have been post 1971. And PM’s are good long term, which works well for security during times of large-scale economic woe.
I’ve said it before and I’ll say it again, if you can’t hold it in your hand you don’t own it (even holding it in your hand is subject to GovCo “allowing” you to own it). The only way to avoid getting taken to the cleaners is to live within your means and GET OUT OF DEBT, invest in hard assets like your house, land, car, Au, Ag, Pb, etc. That doesn’t mean carrying zero debt, that’s almost impossible in today’s world, just keep your debt to a minimal and manageable level. Another word for DEBT is SLAVE, keep that in mind.
As a side note, I find it interesting that both Bonds and Stocks, as well as the USD are all tanking at the same time.
https://www.youtube.com/watch?v=ABbc-O_3_Ac
This government could just do what Hitler did and take back control of the currency. Issue it debt free / interest free and as value.In other words issue sound ?. It’s not a cure all but it’s a start.Will our government do this probably not without a fight.
The Banksters wont let them, presumably you know this.
I am going long on lead.
The fatal fundamental flaw:
1 dollar is loaned (debt)
1 dollar + X% interest is due back.
Where do the dollars come from to pay the interest? Someone else must also borrow or it all comes crashing down.
96.9% of all circulating dollars are debt dollars.
3.1% of all the circulating dollars are debt free dollars ($50 billion of coin/outstanding silver certs and USN’s)
https://www.federalreserve.gov/faqs/currency_12773.htm
Thanks Dennis. The first two paragraphs just stopped me from making (rather re-making) a major mistake in my life. You just saved me from my own not-better judgement.
You don’t have to outrun a wasp. You just have to kill it.
America Is Doomed Because the Mentally Deranged and Morally Deficient Are In Control – Andrea Iravani
Android. – please stop crapping on the site with your personal ads.
Gold and silver have not really gone up in value, the dollar has gotten weaker. In ‘64 a gallon of gas was about 30 cents and dimes were 90% silver. In 2018 the same three dimes are worth $3.75, more than enough to buy a gallon of gas. A simplistic example but it demonstrates what has happened to the dollar. Gold has always been a storehouse of value. Gold got Jewish folks out of Germany and pilots in Vietnam were issued survival kits that contained a gold coin. Having a little PM as insurance is a good idea.
Price of silver in 2001 = about $4.50/oz. One dime = $0.14 worth of silver.
Price of gas = $1.42/gallon, or 10 dimes didn’t quite make it.
It’s a cute example that I have seen before, but it does not really track all that well through time.
By the way, I picked 2001 out of the air. And, I also have a stash of PMs.
Track through time you say?
Perhaps you are not familiar with the ole’ Gold to Silver Ratio.
2 thousand years ago it was about 12 to 1. Currently gap has expanded to nearly 6 fold. The 20 c. average is widely accepted at 47-1.
I am familiar.
Has fuck-all to do with my comment.
Thanks for playing.
“It’s a cute example that I have seen before, but it does not really track all that well through time.”
Perhaps you missed the first sentence of my comment, forgot the second part of your above cited comment or both.
What was provided by me was a widely accepted method used to track the value of PM through time. Nothing more, nothing less. No need to get your feathers in a bunch.
Perhaps you are unaware that gold was a widely used and near universally recognized form of money used through most of the history of mankind. Perhaps I misunderstood. Maybe ‘gas’ really does track that well through time…
No sense in talking to people that have bought into the Central Bank’s narrative on precious metals Cyn. You and I know that an oz. of gold/silver buys almost exactly the same thing it bought in the 1800’s. The only difference is fiat money used to be measured against gold/silver, CB’s have changed the narrative to be ass-backwards. Simple trick to keep the sheep in their place, so they don’t realize how inflation is “planned theft”.
yup
If this debt based fiat ponzi scheme really falls off the edge, what will do better
gold+ upvote
crypto – downvote
what say you….
Gold and Silver OK , but how about Bourbon , Scotch , Vodka , Gin etc… a case or 2 of MRE’s and a few 100,000 rounds of popular ammo calibers with delivery platforms
With that stuff in a real collapse I can get what ever I want including a small band of tough sons of bitches for insurence . My real friends keep help our shit wired tight !
Add to that basic knowledge on how to produce your own food, and you got a chance. Stocking up only takes you so far. Remember the rule of 3’s, 3 minutes without air, 3 days without water, 3 weeks without food, 3 months without friends (the last one I add myself). You can only stock so much.
The fed is still rolling over all but $6 billion in treasuries and $4 billion in MBS every month. It has plans to increase those amounts quarterly, but if the SHTF, it could reverse those plans. Also, iff interest rates rise and start crashing the market, it could roll out QE4. Not to say it won’t kill the currency, but make no mistake, the fed WILL do what it can to TRY and keep the plates spinning.