"Time" is a hard word to define.  Does Merriam Webster's "a non-spatial continuum that is measured in terms of events that succeed one another from the past into the future" help you wrap your arms around the concept?  If this definition is correct, it would suggest that tripping and falling or touching a hot stove and getting burned is "time." A curious thing about time is its apparent elastic quality. As a child it felt like an eternity between birthdays or while having to sit quietly at grandma's dinner table while the adults droned on about topics we did not understand. But when we are immersed in a good book, it seems to fly by. Often time appears to stretch forever into the future like the rail tracks above.  But as we get older, we begin to appreciate the insight of singer/songwriter Townes Van Zandt who wrote: 
    Time, she's a fast moving train.  She's here and she's gone and she won't come again.  

 If that is the case, focusing on politics or TikTok videos is probably not a great use of it.  Planning for the future might be better.  We are often reminded that the earlier we start saving the more we can benefit from the magic of compounding and the longer we put off saving for retirement the sums necessary to meet our goals become staggering.  Time can be our friend - or our enemy.

    Time matters with our investments. When we buy a bond we are making a loan and will be compensated by the borrower for their use of our money over a period of time.  Whether the interest rate paid to us is reasonable depends on many factors but a major consideration is the maturity date of the bond.  A long-term bond is more likely to expose us to market risk than a short-term bond as more can go wrong over a longer term.  

    We might be willing to tie up our money in a six-month Treasury bill at 4% but not for thirty years considering all that might happen over that longer time - including the certainty that our money will be significantly devalued by our government. If we buy a 10-year $100,000 Treasury bond bearing a 4% interest rate and annual inflation remains at 8%, upon maturity we will receive back just over $66,000 in actual purchasing power. That is, one-third of our investment will be lost to inflation (the government's "secret tax").  To add to our misery, we will be directly taxed on the interest we are paid, further magnifying our loss.  

    Time is also a critical factor in determining our success or failure in the equity markets.  We are often told by investment advisors that when markets drop precipitously all we have to do is "sit tight" and everything will be fine because markets have always regained and then surpassed their old highs.  That is true so far, but history proves we cannot rely on it happening quickly.  This chart shows the length of time the Dow Jones took to recover from past setbacks. 

Source: Stansberry Research 

    While depressing, this chart is also misleading because it understates the problem.  It reports Dow Jones prices in "nominal" terms - that is: share prices in dollars.  Because the dollar has been continuously devalued over time, it actually took much longer for each "real" recovery (net of inflation) to take place. Between 1965 and 1982 the Dow Jones lost some 40% in nominal terms but it lost over 60% in real terms - significantly extending the time necessary for recovery.  

    As we get nearer to and enter retirement having to wait sixteen, eighteen, twenty-five or more years for our portfolio to recover from a significant downturn will be devastating.  If we are withdrawing money to live on during a market setback the recovery period is even longer because our holdings are constantly shrinking.  Market loss recovery time and inflation are critical risks that some advisors and retirement planners neglect to discuss with their clients. 

    Advisors typically try to diversify their client's accounts (i.e., hedge the equity loss risk) by putting some of their funds into bonds - typically in a 60/40 stock/bond ratio.  The theory is that when stocks suffer setbacks, bonds tend to rise in value offsetting at least some of the stock losses. While that has been a successful strategy in the past, bear in mind the admonition that "past performance is no guarantee of future returns."  For the last fourteen years the US Fed and other central banks have been "repressing" interest rates ostensibly to "stimulate" their economies.  That is, they have artificially forced interest rates below the rate of price inflation causing money market funds, CD's and bonds to pay negative real interest rates (after accounting for the rate of inflation). 

    To add to the pain, during periods of inflation a low-interest rate bond portfolio also loses market value.  The only way you can sell your 2% yielding bond when 4% is being offered on new bonds would be to "discount" (take a capital loss) on your bond.  True, you can hold the bond to maturity but that just means losing more money to inflation over a longer period of time. Consequently, the 60/40 strategy is failing to serve its purpose. It has not acted as a hedge for your equity portfolio.  Stocks and bonds have lost value in tandem.  CNBC reported in October that the 60/40 portfolio is on track to suffer its worst year ever.

    Some advisors recommend "target date" ETF's that are said to maximize your returns and reduce your risks with your specific retirement date in mind.  For example, JPMorgan - the largest bank in the US - touted its "SmartRetirement Fund 2025."  It includes international equities, junk bonds, emerging market stocks and small cap stocks and was promoted as the smart way to prepare for your retirement in 2025.  But its share price is down 25% over the last year through the end of October. With only three years left before retirement in 2025, owners of that fund are probably not feeling especially smart.  High inflation and the rising dollar (due to the Fed's money printing and subsequent interest rate hikes) caused that fund's holdings to suffer.  One would think that after watching the Fed force-feed $9T of newly printed money into the US economy over fourteen years, the financial experts at JPM would have anticipated high inflation followed by rising interest rates to combat that inflation.  They did not; investors pay the price. 

A Case Study In Inflation

    When trying to cope with the ravages of inflation, it is useful to study historic periods of high inflation.  Doing so helps us understand - with the benefit of hindsight - why inflation develops and how various efforts to control it have either succeeded or failed. In his book "The Death of Money," subtitled, "The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany" author Adam Ferguson recounts Germany's hyperinflation during the 1920's. It is a very interesting read.  It lays out the sequence of events leading to the breakdown of German society and rise of Adolph Hitler.  As with many government-created catastrophes it began with enormous government debt. Following World War One, the victors imposed draconian war reparations on Germany.  It justified doing so because Germany had caused many nations to suffer enormous loss of life, and the destruction of their cities and infrastructure. It seemed reasonable that Germany should shoulder a significant portion of the cost of rebuilding the Europe that it devastated.

    The problem was that post-war-Germany was as destitute as the victors.  It had consumed its wealth in manufacturing war materials, it too had suffered terrible loss of life and its cities were also in ruins.  The victors insisted on being paid in gold knowing that it was too easy for Germany to simply print worthless paper marks.  As Germany was forced to make reparations payments in gold-backed marks, this left German citizens with little currency to pay for essentials such as food and shelter.  Consequently, the government printed and distributed unbacked marks to support the basic functioning of its society.      

    That worked for a time but there was always a shortage of physical currency.  So more was printed.  As it circulated prices began to rise - slowly at first and then more rapidly.  This led to demands by workers for higher wages to pay for the increasing prices of goods and services.  More currency was printed and distributed in ever increasing quantities with the result that each new mark was of far less value than those formerly in circulation. Due to labor strife and factory closures German civil society began to break down.  Farmers refused to deliver food to the cities because the devalued money they were paid did not begin to cover their costs of production. 

    Throughout this episode, no one understood that the problem was not higher prices.  High prices were the consequence of something else.  And that something else was the vast expansion of the money supply.  They failed to appreciate that expanding the money supply does not cause goods to spring into existence. The first step necessary to end rising prices was to cease printing more money.  The second step was to tie the mark to something of real value to encourage Germans to hold onto marks rather immediately spend them to protect their falling purchasing power.  Many stop-gap measures were tried and failed (new currencies that were also printed in vast quantities).  Confidence was achieved only after years of human misery.  As a result, Germans are to this day notoriously conservative about their money and are opposed to their central bank (now the ECB) giving into political demands to print money to "solve" an endless litany of social and economic issues. 

    What have we learned from Germany's monetary disaster? The answer is: nothing. Liz Truss' life as the shortest serving British Prime Minister ended after she proposed to give money (that the government did not have and would have to print) to citizens to offset rapidly rising gas and oil prices. Similar "solutions" are being considered in other countries. French citizens have been marching by the thousands demanding payments from the government to cover the cost of rapidly rising prices. Spain is considering subsidizing the cost of rising prices with money that the government does not have. A recent US poll result: “Majority of Americans back new stimulus checks to combat inflation.” The lesson that should have been learned is that when you find yourself at the bottom of a deep financial hole, your first step should be to stop digging deeper. But the Fed, ECB, Bank of England and Bank of Japan are all still repressing interest rates and are therefore continuing to dig their financial holes deeper. Of course there is a price to be paid for this - and you will  pay it.

    The reason is that politicians always reach for the easy answer even when that answer is obviously flawed.  For example, President Biden raided the nation's strategic oil reserves in an effort to lower gasoline prices before the mid-term elections.  That reserve is now at a forty-year low.  It was not created to be a piggy bank for politicians but it has been used for that purpose.  The price per barrel that will have to be paid to replenish the reserve will likely be very high.  Biden's solution?  Make nice with the dictators of Iran, Venezuela and Saudi Arabia so that more oil will be produced to lower the price.  His plan includes frustrating the importation of Canadian oil (from a nearby, friendly and reliable democratic regime) and hampering the production of domestic US oil. Thus, the US will become ever more dependent for essential energy sources from autocrats who routinely express their deep animus toward Americans.  Most people have no difficulty understanding that Germany's dependence on Russian gas was a monumental strategic error, yet they are oddly oblivious to the comparable danger of Biden's plan.  

Central Banks - From A Good Concept To A Disaster In Practice  

    Investors have come to believe that central banks exist to support the investment markets and should come to their rescue whenever they face setbacks.  They are further encouraged to believe that central bankers have the knowledge and expertise to act as ring masters for their nation's economy. In order to dispel these myths it is useful to review why central banks were created and what they have morphed into over time.  

    All banks are illiquid.  They take in short-term deposits (savings and checking deposits) which can be called away on a moment's notice and give out long-term loans (30 year home mortgages, 5 and ten year business loans).  They keep some cash on hand to cover expected withdrawal demands.  Occasionally, they are met with unexpected withdrawal demands.  The movie "It's a Wonderful Life" portrays such a crisis.  During these "runs" banks were often forced to close and default on their depositor obligations.  FDIC insurance was created in the US to protect depositors and discourage sudden demands for cash by nervous account owners. 

    The US Federal Reserve Bank was created to provide temporary liquidity to banks during stressful times.  However, the rules were clear.  The Fed could only provide money to a distressed bank in an amount equal to its "sound" loans - and then only at a "penalty" rate of interest to discourage frivolous use of the system. Such Fed-supplied loans allowed the threatened bank to meet the unexpected circumstance and live to fight another day.  If the bank did not have sufficient sound loans on its books, it was to be closed and its assets sold off. One can argue whether this scheme created "moral hazard" (an incentive for banks to take ever-larger risks knowing they will be bailed out if things go wrong) but the system worked reasonably well for a long time. 

    The problem started when the Fed decided that it wanted to play a far larger role in the economy than being "lender of last resort" to solvent banks.  There is always relentless political pressure on the Fed, from whichever party is in office, to make cheap money available to "stimulate" the economy in order to benefit current office holders.  The Fed should be deaf to these calls.  The problem is that Fed officials are political appointees and therefore are highly subject to political pressures.  

    Elected officials tend to get thrown out of office when the economy suffers so they endlessly badger the Fed to take actions that may have short term benefits for the politicians but long-term detriments for the economy.  The Fed should never allow itself to be used to advantage political careers but they do so regularly. This creates an obvious problem: how is the Fed to know whether the economy really needs stimulating, in what amount and for how long?  It makes these decisions by relying on its 400+ Ph.D economists who create complex mathematical "models" of the economy that they believe will reveal just the right action to take, at just the right time and in just the right amount.

    As we have recounted many times, the Fed's models have proven to be grossly flawed.  They have repeatedly failed to anticipate monetary problems and then allowed monetary interventions to continue for far too long.  This creates new problems flowing from their "solutions" to the last problem. Fed officials are routinely wrong about the state of the economy. Alan Greenspan refused to admit that the stock market was in a precarious bubble in 2000. Disaster followed. Ben Bernanke insisted that there was no bubble in the real estate market and that the towering property prices in 2007 were fully justified.  A short time later, major US banks were brought to their knees as the real estate market collapsed.  The Fed's go-to "solution" was to bail out the banks that had foolishly brought about the bubble by printing and distributing trillions of dollars to them that then generated new asset bubbles that later deflated creating new crises.  

    The Fed has proved time and again that it has no powers of prediction concerning the state of the economy or the consequences of its actions.  Chairman Powell assured us in 2021 that, based on Fed monetary models, price inflation of just over 2% was "transitory" and no action was required of the Fed to stem it.  He was egregiously wrong. History proves that the Fed is not competent to manage the vast US economy much less supervise the major Wall Street banks (its real job, that it neglects).   It should be returned to its limited role of lender-of-last-resort to solvent banks. The US economy is far too big and far too complicated to be micromanaged by a handful of bureaucrats in Washington DC - few of whom have actual business experience in the real economy.  There is collective political and economic amnesia about the USSR's centrally-planned economy debacle. Yet, the public still looks to the Fed to solve the current inflation problem - that it created.

The US Economy

    Despite everything Americans are told by the media and their political leaders, there is very little about the US economy to cheer.  The labor force is still far below trend.

                                                                    Source: Wolfstreet

Not only is the economy missing millions of workers, it is also missing all of their productivity.  It is true that many elderly workers decided during Covid to retire, but that does not begin to account for all of the employment loss.  There are millions of job openings.  Each one of those open positions represents lost growth of the GDP.

    Another blow to the US economy is the falling productivity of those who are employed.  This chart show rising wages in red and black but falling productivity per worker (blue).  The result is less output, at higher cost, and that necessarily leads to higher prices.

                                                    Source: St. Louis Federal Reserve Bank

 Here we see that "core" inflation (less essential food and energy) remains high. Fed chairman Powell has not expressed his specific intermediate price inflation goal but if it is to return it to his previously championed level of 2%, he has a very long way to go.

Price inflation for "services" remains very elevated and will continue to pressure prices higher.


As mortgage interest rates have doubled, home sales have tanked as ever more home buyers are priced out of the market due to a doubling of monthly mortgage payments.

 In addition to rising housing costs that typically consume 25-40% of most worker's take-home pay, falling "real" wages (wages net of price inflation) are forcing more people to pay for necessities with their credit cards.  The first chart below shows the drop in real wages.  The second shows the surge in credit card debt.  Wage earners are being rapidly squeezed as credit card interest nears 19%.

Source: St. Louis Fed. Reserve Bank

Source: Fed's Bank of Governors

    American's falling real wages are leading to a host of problems.  More than 20 million Americans are behind in paying their electric bills.  When winter sets in they and many more will fall further behind with rising heating costs. The U.S. savings rate has dropped to 5%, its lowest level since 2009. Nearly one out of every three American families lack sufficient savings to cover three months of expenses should the breadwinner lose his or her job. Even in households earning $200,000 or more, 30% report living paycheck to paycheck. Nearly 60% of all Americans are living paycheck to paycheck. Does this support politicians' assertions that the economy is growing ever stronger?

    Are US stocks now a "buy" following their drop in price? Many advisors claim that stocks are "on sale" tempting "buy-the-dippers" to load up.  While stock prices are indeed down, they still remain above the level from which they crashed in 2000 during the dot-com bubble. The chart below shows the "Warren Buffett Indicator."  It is his favorite method of analyzing the state of the economy.  It compares the price of the market to the GDP.  When the indicator is high you get less for your money.  Caveat emptor.

The European Economy   

    Europe is beset with problems.  Inflation, energy costs and availability are the biggest. German inflation is near 11%; the EU overall 10%; the Netherlands 17%, and Estonia 24%. The war in Ukraine puts Western Europe in a severe energy crisis. Russia's gas cut-off has threatened Germany's manufacturing economy and puts the nation at grave risk should the winter be harsh. France, a supplier of electricity to Germany, used to generate 70% of its electricity from nuclear power but 26 of the country's 56 reactors are offline, some for routine maintenance and others because of cracking problems that will require costly and lengthy repairs.

    The UK faces 11% inflation, unchecked masses of immigrants coming by small boats from France, crime, strikes by its rail workers, nurses, the Home Office, Border Force, Department of Transport, and Royal Mail. Its National Health Service is in tatters with patients having to wait months to be seen by GPs and longer to have diagnostic testing. The more money the government spends on the NHS the worse it seems to get. Camilla Tominey at the Telegraph comments on Prime Minister Sunak's "sound budget" proposal,
There is nothing remotely “sound” about Britain’s welfare bill being set to rise by almost £90 billion, funded by a stealth raid on wages and higher levies on business.

Nor is it “sound” to be pumping an extra £6.6 billion into the NHS over the next two years without any reform whatsoever. What is sound about recruiting more doctors and nurses and rebuilding hospitals when patients still can’t get a GP appointment or an ambulance and have to wait months for an operation? This country is fast resembling a health service with a government loosely attached.
    Government debt threatens to sink the economy necessitating rising taxes making the UK an ever-less desirable place to do business. Government spending is expected to consume 47% of GDP this year. That leaves precious little in the public's pocket. Lack of energy threatens winter blackouts for hours at a time as electrical generation fails to keep pace with demand.  An aging population consumes an ever-growing percent of GDP but contributes little to it.  Rising interest rates burden the home buyer, debtor, corporate borrower and the government.  To add insult to injury, London recently lost its top spot for stock exchanges to Paris.  Jeremy Warner sums up the grim situation.
Just about everything in Britain these days seems to be in decline or otherwise going to hell in a handcart. Increasingly paralyzed by strike action, idleness, and bureaucratic obstruction, the UK economy is once more slipping into the sea, just as it was in the 1970s, with hopelessly poor levels of productivity, plunging relative living standards, and crumbling infrastructure. 

It almost beggars belief that the profound loss of international competitiveness that defined that troubled decade should now be repeating itself. It's going to require similar shock therapy to once more pull things back from the brink.

Yet there is little sign of the political appetite, let alone will, for it, or indeed wider recognition of quite how parlous the UK's position truly is. It is not as if the UK is objectively any more insolvent as a nation than much of the rest of Europe, or even the US, where if anything public debt metrics look even more troubling. 

But there is a crucial difference; Europe is underwritten by hair-shirted Germany and its northern satellites, while the US has the world's dominant reserve currency, and can therefore borrow with impunity almost however bad the public finances look. The UK by contrast is on its own. It also has massive household debt and a yawning current account deficit to maintain. Ever since Brexit, international investors have had a deepening downer on the UK. Britain is in a downward spiral from which there appears little prospect of escape. Almost unbelievably, nearly a quarter of our working age population is reported to have some form of long-term illness or disability.
The major difference in the UK's economy between today and the challenges of the 1970's is that government debt was far lower then, there was a younger and growing work force, the country still had a large manufacturing base, productivity was rising and North Sea oil and gas had been discovered promising energy self-sufficiency.  Today, the UK has none of these things going for it making its healthcare and welfare spending manifestly unaffordable.   Brits have long been living beyond their means (as have many nations) and the piper will have to be paid.  That will mean a substantially reduced standard of living.  No one wants to consider that reality but they will be forced to do so. 

    Italy’s benchmark MIB stock index hit an all-time high of 47,000 in 2000. Currently the index is at slightly over 20,000. Over the last 22 years Italian investors have lost more than half their money. The European Central Bank has been keeping the Italian government afloat by buying its bonds in disproportionate amounts in order to keep Italy's bond rates from blowing out.  The ECB may soon be forced to either expand its bail-out of Italy in violation of the EU charter or save what little credibility it has left in Germany by ceasing to do so. Italy has another new government that has yet to prove itself.  Its populist tendencies are not likely to address, much less solve, the nation's underlying problems.  There remains the risk that Italy will be forced to withdraw from the EU in order to return to the lira which it can then devalue in order to ease its debt burden.  Devaluation of its currency is every government's time-honored method of "soft" defaulting on its obligations.  Hard or soft, taxpayers and creditors always pay the price.  

Asian Economies

     Japan, with an aging and shrinking population, continues to rely on money printing and repressed interest rates to keep its economy spinning.  "I believe we won't be introducing a rate hike anytime soon," Bank of Japan Governor Haruhiko Kuroda told a news conference. "We have decided to continue the monetary easing after thoroughly discussing what the most effective monetary policy is by analyzing the Japanese economy, price trends and future development in depth." While Japan has largely avoided the pain of high inflation that is being suffered in the West, it cannot do so forever.  Its shrinking population is most noticeable in the youngest ages (0-14 at the bottom, below) and working ages (15-64 in the middle).  Fewer workers leads to shrinking GDP and less ability to support the elderly and the government.

Source: Wikipedia  

For those who invested in the Nikkei stock index, the suffering continues.  It hit a high of 40,000 in 1990.  It has never recovered.  It is currently around 28,000.  That is a thirty-two year lesson in the damage inflicted on the nation by its central bank-induced real estate bubble.

    China still struggles with Covid because Xi Jinping has maintained a "zero Covid" policy even though that is imprisoning whole cities and adversely affecting Chinese GDP.  Xi continues to consolidate political power and replace high officials with his sycophants. His adamant position that industry be subservient to the state may help him to consolidate power in the near term but it will eventually retard China's industrial progress.  The biggest international concern is his insistence that China will dominate and control Taiwan.  That is a far more serious issue than Putin's war in Ukraine.  It threatens world calamity.  

    The shrinking of the Chinese working age population compared to the 65+ population is a huge problem over which he has no control.  This growing catastrophe directly flowed from the government's ill-conceived "one-child" policy.  The chart below shows the rapidly shrinking working-age population (black lines) compared to the 65+ population (red).  Absent stupendous productivity growth, this is will lead to a financial and social disaster. 

Source: Shanghai Academy of Social Sciences

    China's economy has been dependent on real estate development but that industry is suffering major defaults by developers that have taken advance payments for units not-yet built and that may never be built. The life savings of millions of Chinese are at risk. Xi cannot risk another period of wide-spread civil unrest so one supposes that a government bailout is likely even though that has predictable ill-effects on the value of the currency and causes price inflation.   Evans-Pritchard writes,
Xi Jinping’s China is in an economic trap with no easy way out. Debt saturation has passed the point of diminishing returns – indeed, classic debt deflation has already set in – and the growth model built on construction and heavy industry is beyond exhaustion.
“They know they can’t keep putting their foot on the credit accelerator and wasting money on useless infrastructure,” said George Magnus from Oxford University’s China Centre.

Youth unemployment has doubled to 20pc over the last four years and this is a red flag for the Communist Party, still haunted by the student defiance of Tiananmen Square in 1989. 

Political stability depends on finding a way to draw 11 million graduates each year away from the hothouses of Weibo and Wechat, and safely into the Leninist bourgeoisie. The path of least resistance is to export China’s unemployment to the rest of the world with a beggar-thy-neighbour trade strategy, boosting exports through a stealth devaluation of the renminbi or through (further) covert subsidies.      

Western nations will strongly resist this effort as it imperils their own economies.  The best we can hope for is that China's many internal problems will demand Xi's full attention so that he does not press for the reunification of Taiwan any time soon.  

Important Message: The foregoing is not a recommendation to purchase or sell any security or asset, or to employ any particular investment strategy.  Only you, in consultation with your trusted investment advisor, can select the strategy that meets your unique circumstances, investment objectives and risk tolerance.  © All rights reserved 2022