"The Coming Retirement Income Squeeze"
The average interest rate on US Treasury bonds is near 5%. Priced in gold, the Dow is down 21%. In order to catch up to the December 2021 high, in real terms, the Dow would have to go over 48,000.
by Bill Bonner
“Something will have to give.”
- IMF warning the US this week about its growing debt.
Dublin, Ireland - "‘Stocks down. Interest rates up.’ That was our message in the autumn of 2020. Amid the falling leaves... and the general gloom of the Covid epidemic... we thought the Primary Trend had shifted.
Music, leaves, lives - there are patterns to everything. A single swallow does not a summer make. But keep your eyes on the flock and you’ll time the seasons. Here in Europe, they migrate to Africa in the winter... and then come back in the Spring. So too, for days, weeks, months... stock market trading seems chaotic. Without rhyme or reason. Maybe an AI program can make sense of it; we can’t. But beneath the surface chop are long patterns that persist over decades.
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In July 2020, after 40 years, the interest rate cycle finally hit bottom. The US 10-year Treasury bond yielded all of 52 basis points (0.52 of one percent) - the lowest rate in 500 years. We predicted the obvious; now they would go up!
And if rates were rising, stocks would fall. A year and a half later, they did.
Nothing since then gives us a reason to believe the Primary Trend will not continue - stocks down (inflation adjusted)... interest rates up. Today, the average interest rate on US Treasury bonds is near 5%. Priced in gold, the Dow is down 21%. In order to catch up to the December 2021 high, in real terms, the Dow would have to go over 48,000.
Megapolitics
Meanwhile, there are patterns in political affairs too. Sometimes it is hard to connect the two - finance and politics (a field we call Megapolitics). But the record highs in stocks in 2021 and bonds in 2020 were clearly the product of government policies. Two key policies - debt and war - brought the Dow to over 36,000 and bond yields under 1% (starkly negative when adjusted for inflation).
The stimmies, wars and debts increased, so did consumer prices. And then inflation forced the Fed to abandon its support for the stock and bond markets. Stocks fell. Bond fell too (yields rose). In the stock market, the damage was sharp... but later disguised by inflation. In 2023, prices on Wall Street rose... even though, adjusted for inflation, they were still well below their Dec. 2021 level. Bonds suffered the worst sell-off ever recorded.
But the full impact of the bond market decline has not yet been felt. Pension funds, insurance companies, and banks hold billions in US government bonds. Many were required to buy bonds as “safe” forms of capital reserves. Then, when the bonds lost value, their owners held on... counting them at face value, pledging to hold them to maturity, and pretending that they would not lose money.
This is why there is so much talk of lowering interest rates as soon as possible. There is nothing inherently good about lower interest rates. People pay interest. But they also receive interest on their savings. Interest rates are just information.
But the key players in our financial system - banks, Wall Street and the federal government - all are massive owners and sellers of US bonds. And $7.6 trillion worth of existing US bonds are maturing this year. They need to be refinanced. So do current deficits, bringing the total financing load to nearly $10 trillion.
Bond sellers and refinancers (the borrowers) want lower interest rates. And yet the volume of their borrowing itself naturally drives up interest rates.
When interest rates go up, not only is it harder for them to borrow more money, the value of their bond holdings also goes down. The banks are said to be holding more than $600 billion in unrealized losses on their bond portfolios.
The feds themselves - including the Fed - are the largest holders of US Treasury debt. Total US debt is now over $34 trillion. About $25 trillion of it is in the hands of the public. The rest - $9 trillion - is held by US government agencies.
Squeezing Social Security: The Social Security trust account, for example, has about $2.8 trillion in US bonds. As those bonds lose value to inflation, Social Security gets squeezed on both sides at once. Its outflow - payments to retirees - are adjusted to inflation, but its Treasury bonds are not. The feds then need to raise more money to cover the shortfall in their reserves. This requires more borrowing... which pushes interest rates higher.
Meanwhile, more and more people are retiring... putting further pressure on US government finances. Retired people spend. They depend on Social Security and Obamacare.
This pattern of fiscal and monetary policies tracks the Primary Trend patterns of the markets. Fed policies - notably, extremely low interest rates - tricked up the stock and bond markets to extreme highs. Now... over the decades ahead... their policies - war and debt - will likely push them to extreme lows. Stay tuned."
Market Note, by Dan Denning: "Social Security began running a deficit (paying out more in benefits than it's taking in through taxes and other sources) a few years ago. It was a dangerous ‘cross over’ point. Regular deficits would eventually mean reducing the size of the Trust fund to pay benefits.
The most recent report from the Trustees who manage Social Security was published in November of last year. It says that without any changes, and under current projections, the Trust fund would be depleted by 2034. Or, that benefits will have to be cut to 80% of the expected level to correspond with insufficient FICA tax receipts and interest income.
Before you panic, the same situation happened in 1983. The deckchairs were arranged by Congress to allow the various Trust funds to fund each other in the event one was running a deficit. And immediate crisis averted. And 83 million Baby Boomers were years from retiring anyway. But long-term?
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Social Security benefits could always be paid out of a direct transfer of cash from the Treasury to beneficiaries. This would be wildly inflationary, of course, printing money to pay old age pensions. And even before that, taxes on benefits could be increased to generate more income.
More likely is that long before drastic measures are required, the Social Security Trust Fund will be be forced to start selling its $2.8 trillion Treasury stockpile that Bill mentions above (see chart). It won't be a buyer anymore. Without annual surpluses, the Trust fund won’t be able to buy any of that debt Treasury Secretary Janet Yellen has to sell to fund annual US deficits and refinance our $34 trillion in debt.
It's not exactly the family silver. Or even the National Silver (or National Treasure). But when the Trust fund has to sell assets to pay benefits, the clock is ticking on US government finances. All of this raises the issue of having enough retirement income to beat inflation in retirement. It’s a problem we have front and center in 2024 and beyond."
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"The 'Everything Bubble' Expressed in Terms of Gold"
by Tom Dyson
"The Dow/Gold ratio made a new three-and-a-half-year low Monday... it’s now at 15.82. Meaning, it will take you roughly 15 ounces of gold to buy the DJIA. For new readers, a falling Dow/Gold ratio shows gold is beating stocks. The Institute of International Finance tracks the size of the global debt pile. It recently published the figure for 2023. Its finding? In 2023, the global debt pile increased by more than $15 trillion, reaching a new record high of $313 trillion. For every dollar of this debt, there’s also an over-inflated asset somewhere backing it.
What if Earth itself were a single financial entity? Would all these highly valued assets and debts mean Earth Corp. was getting more valuable? The human race works hard every day, building stuff and improving stuff. And the efficiency of our labor goes up slowly over time. So we’re definitely accumulating some real wealth.
But for years, the Fed and other central banks kindled a gargantuan credit inflation by motivating speculators with all kinds of crazy incentives and reassuring them with all kinds of safety nets. And then they printed reserves to make sure it was easy for speculators to write new debts. The rising market value of assets and debts has far outpaced any real value creation or output. This chart shows this phenomenon in the US. Here’s wealth charted against GDP, indexed to 1950 and using a log scale.
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A hundred trillion here... a hundred trillion there... these debt and asset values all just look like mountains of overpriced paper to me. If this is true – that it’s all just been massive credit inflation – the forces of debt deflation must now be immense.
Our core position is that asset prices have to collapse, and much of the attached debt will need to be written off and erased. History is pretty clear about this. All credit bubbles deflate and asset valuations return to “fair” and then “cheap.” It’s how nature restores equilibrium. We call the adjustment that’s coming “The Big Loss.”
The critical insight is this: the Big Loss in stocks will occur in terms of gold. A debt deflation... priced in gold. So when you see the price of gold rising on your screen this week, don’t think “gold is going up.” Instead think “the Everything Bubble is deflating” because that’s exactly what’s happening. The world’s pile of debt and equity is deflating... in gold terms. This is why we watch the Dow and other asset prices exclusively in terms of gold. And why we’re recommending such a large allocation to precious metals in our asset allocation model.
This bubble has already started to collapse five times – in 2000, in 2008, in 2018, in 2020 and in 2022 – and each time they doubled down with huge new incentives to speculate and other stimulus to re-inflate the bubble.
Now it’s the most patched-up, bolted-on credit bubble in history... a true mutant. We must be close to another debt bubble zenith. So it goes..."
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