Posted on March 26, 2025 by admin

ShareFinder’s prediction for Wall Street for the next 3 months (top) and the JSE (bottom).

If you have a friend who would like to receive this free publication, please send their name and e-mail address to support@rcis.co.za

---

Securing your assets

By Richard Cluver

Seldom has South Africa spent more time and as many news columns on how to create a National Budget capable of delivering both economic growth and the items of spending our politicians deem to be politically vital – like how to both provide for a social grant which keeps fully half of our population from starvation and still have sufficient left over to rebuild our energy and rail transport systems!

It has been a vivid demonstration to our citizenry of how an effective democracy works: the first real fruit of the creation of the Government of National Unity and the first genuine stab at a working democracy in many of our lifetimes. More importantly, perhaps it has taught the ANC the reality of losing its former absolute power. No longer is it able to foist anything it desires upon an increasingly unhappy electorate with which it has clearly lost contact!

The result has inevitably been a compromise in which few are likely to end up with everything they want. But that is not necessarily a bad thing because, for example, South Africa has long laboured under the delusion that a few wealthy (Whites) live off the fat of the land while the rest struggle to put bread on the table. Actually less than a tenth of one percent do and they are far too few to make any difference when it comes to balancing the national budget.

Though there remains a still influential group in this country which believes the fiction that the “Wealthy” got there by exploiting honest working people and that the solution to all South Africa’s economic woes would be to impose wealth taxes and radical monetary redistribution, the new reality is that every Parliamentarian is now a member of the economically exclusive ‘Top One Percent Club.’ That, furthermore, is our best guarantee against any future Minister of Finance trying to sell citizens the fiction that Budget shortfalls can be solved by taxing the “Rich.”

Clearly politicians have absolutely no intention of taxing themselves into oblivion!

The fundamental truth about South Africa is that we are no longer a wealthy country and indeed, our economic profile has been so radically re-worked by 30 years of socialism that one in ten of the folk we define as “Super Wealthy” is actually a civil servant. There are actually 40 000 civil servants earning over R1-million a year.

So it can be no surprise that our Treasury now clearly understands that – were the Government able to convince South Africans that it justifiably needs to spend more – the ONLY remaining source is the people as a whole. That’s why the initial budget sought a 13.33 percent of VAT and, by eliminating the ‘bracket-creep’ concession the Minister of Finance hoped to tax everyone many billions more. But South African households are financially broken.

In fact though, even the dramatically reduced “half a percent” VAT increase is untenable since it actually represents a 3.33 percent additional burden on the “poor” who already spend half their income just to feed themselves.

Since, furthermore, the principal reason for the VAT increase is to fund a 5.5 percent pay increase for civil servants who already collectively number among South Africa’s wealthiest people, it is a morally indefensible move by government. After all the increase is nearly twice the country’s 3 percent average inflation rate! Indeed, for an ANC which still claims to be pro-poor, this effective transfer, from the meagre incomes of the poor to folk who now rank at ultra-rich, is the ultimate hypocrisy!

But who are South Africa’s “Super Rich” whom an increasing number of social influencers have recently tried to argue should bear the burden of any additional Government taxation? Clearly in a country with the dubious distinction of having the highest differential between rich and poor, it’s understandable that some might think it correct to tax the rich to benefit the poor, but actually the rich are such a tiny minority that even were a wealth tax used to confiscate EVERYTHING they have it would still spread so thinly among the poor that it would barely make a difference.

Furthermore, the wealthiest Top 0.01 percent who already pay well over half of all the taxes Government collects, are highly mobile people easily capable of folding their tents and leaving. In 2023 alone, 1,700 millionaires left the country, representing R5-billion in taxable income and almost R2 billion in assessed tax.

In 2024 a further 600 left taking over R11-billion with them and adding their numbers to the 11 300 dollar millionaires who have left in the past decade!

Though there is no doubting the accuracy of the statistics from the World Bank which regularly point out that the top ten percent of South Africans own more than 85 percent of the country’s wealth, the figures merely attest to the poverty of this country after 30 years of ANC government mismanagement.

So who are the ‘Wealthy?’ According to the South Africa Wealth Report 2019 published by The AfrAsia Bank, private wealth in South Africa totalled US$649-billion. Just under 40,000 people had net assets worth more than US$1 million, with just over 2,000 people worth more than US$10 million.

However, given that in order to be numbered in South Africa’s Top One Percent you need a net wealth of just R4.2-million, the real truth is that ALL South Africans are poor by world standards.

To be considered part of the World’s top one percent, World Bank figures suggest you need assets of at least $13.7 million. That, at a current exchange rate of R18.36 to the US$ means you would need to own assets worth R251.5-million if you wanted to enter that league….that’s 60 times greater to play in the global top one percent league!

Actually the only truly wealthy South Africans are a tiny minority of 3 500 people who make up the Top 0.01 percent whose average individual wealth is R486,2-million, that’s 1 500 times greater than the average per capita figure of R326 000. Entry-level wealth for this most exclusive South African club is R150-million. But here’s the vital thing, despite the regularly-touted claims that the wealthy own massively more than the combined wealth of all the rest of us put together, the sum of their wealth adds up to just 14.9 percent of the total wealth of the country.

Though their average income is colossal by most standards at R17-million a year, it would not however, go very far even at a tax rate of 100 percent in solving the country’s poverty problems.

So who are they these Top One Percenters? If you are surprised by how low the bar is actually set in South Africa, the other surprise is that most of our millionaires are hiding in plain sight. Those with fancy homes and expensive cars are decidedly the exception. Indeed the most likely profile of South Africa’s wealthy is that of the friendly uncle living next door to you in the middle-class suburbs of this country.

Furthermore, few if any of them consider themselves wealthy. Actually most are just about getting by! Let’s consider their average budget. Assuming that of that R4.2-million total wealth our average South African multi-millionaire has most of his capital residing in his paid-off home: which, in suburbs like Durban North, is worth around R3.5-million. The balance of his savings thus amounting to R700 000 might be invested in RSA bonds which would, on a current yield of 10.53 percent give him an annual income of R73 710 or a monthly R6 142.50.

Mr One Percent is obviously no Captain of Industry. Indeed, according to recent data from BankservAfrica, if he is retired, he probably draws a pension of around R10 000 a month. So, adding in the income from his investments, this suggests he might have a monthly pre-tax income of R16 142.50 or R193 710 a year.

If he is in his 70s, the first R165 689 of that income is fortunately tax-free because without that abatement he would not be able to come out on his income. Given that abatement he will accordingly pay income tax of R5 044 annually leaving him with R188 666 a year to live on. But, out of that sum he will likely pay Municipal Rates on his home at an alarming annual R47 495, Medical aid of R113 400, an annual electricity bill of R25 500 and an annual water bill of R12 000.

Add those up and you can immediately see that he is already R9 729 under water and he has still not bought one can of baked beans on which to feed himself for a year! Unless his wife also has some income with which to meet the grocery bill, our average Top One Percenter is actually in deep financial trouble. And things are about to get considerably worse for him when the 12.5 percent Eskom tariff incomes comes in in July! They will cost him an additional R3 188 a year. That’s an extra R266 a month!

So now you understand why so many South African homes are on the market. Indeed there is a glut of such middle class homes and sales are relatively few and far between

The irony, however, is that our ‘Formerly Disadvantaged’ citizens who have made it into this income bracket are able to live in places like the Ingonyama Trust lands which, in KZN, thanks to colonial social planning, have long fingers penetrating deep into what was formerly land designated for White occupation. Here they have in recent years been building substantial homes on land which attracts NO municipal rates. The picture above was, for example, taken in Umbumbulu on the KZN South Coast near Amanzimtoti. It falls under the Sobonakhona Traditional Council under the leadership of Inkosi Makhanya of the Makhanya clan.

It is small wonder then that the Ingonyama Trust land have been the subject of such political turmoil in recent years since the previous Zulu King Goodwill Zwelithini kaBhekuzulu tried to convert such property to leasehold in order to create an income stream to supposedly facilitate proper urban development of these per-urban areas. Many of his subjects, however, believe it was simply to further enrich the Royal Household, but that is another story for another day.

To return to our National Budget, as our Tax Supremo Edward Kieswetter regularly reminds us, the fundamental truth is that the ‘Wealthy Few’ like our top one percenters are demonstrably grossly overtaxed. That might be understandable given the level of unemployment and poverty besetting the rest of South Africans. But it is totally unacceptable when a large proportion of our tax money is squandered on wasteful expenditure, A DA research project has uncovered that Ministerial Departments, State-Owned Enterprises, and various entities under the ANC administration have collectively incurred a staggering R40-billion in fruitless and wasteful, irregular, and unauthorised expenditures in the 2022/23 financial year alone.

Furthermore, though it is clear that a large portion of our politicians have never run so much as a spaza shop and accordingly are unlikely to have even a fundamental grasp of basic economics, what most of them clearly do understand is that being rich is a relative thing in South Africa….. but that being in politics WILL likely make you rich.

So it should be no surprise that recent ANC comment has frequently alluded to the fact that “taxpayers are somewhat overburdened by tax. Clearly many have woken to the fact that they are the Rich! SARS statistics have recently shown us that more than 40 000 public servants earn more than R1-million annually. Compare that with SARS figures which indicate that they are thus one tenth of the 425 000 South Africans who earn more than R1-million a year

Why should we be surprised that, since politicians have become the country’s top earners, they have apparently quickly changed their minds about wealth taxes. It has after all happened once before back in the 1950s when, not too long after they gained control of Parliament, National Party politicians quickly moved to abolish the “Super Tax” once they realised the impact upon their own pockets!

To understand all of this you need to appreciate that income tax is, historically, a very new idea. It was levied for the first time in South Africa in 1913. Back then it consisted of a ‘Normal Tax’ whose maximum level was one shilling and sixpence in the pound: thus equal to a rate of 7.5 percent and it was paid by some 58 000 South Africans whose incomes at the time exceeded £300 a year.

Given that official census figures for South Africa in 1913 estimated a total population of just 6-million people of all races, Income Tax was clearly only levied on the richest one percent. In 1915 a ‘War Budget’ Super Tax was introduced at three shillings in the pound on the 2 000 people who earned more than £2 500 a year.

If you care to calculate that number you will determine than only the top one third of one percent paid the Super Tax. But the National Party – the party of the “Poor Whites” who had seen their fortunes decimated in the Anglo Boer War – were rich enough 12 years after coming to power in 1947 to push through legislation ending the Super Tax.

Today South Africa boasts half a million Rand millionaires. But are they as so many believe, a group who got there by inheritance, or perhaps were they greedy resource-grabbers who got their money by unfair means by exploiting honest labourers and who might thus justifiably be stripped by wealth taxes and the like because they represent a blight on society?

Given the global reality of a century during which, arguably with the best democratic intent, most governments have sought to eliminate poverty by overseeing the greatest transfer of wealth this world has ever seen, and in the process have built the biggest ever debt mountain, what is the truth about the global wealthy?

Perhaps the most important starting fact to take in is that detailed research in the US by two academics; Thomas J. Stanley and William D. Danko – which saw them interacting with thousands of millionaires. Their findings have absolutely dispelled the above long-held assumption that most wealth was inherited.

Their study, which ultimately resulted in a best-selling book entitled “The Millionaire Next Door,” detailed their complete surprise at discovering that 86 percent of US millionaires were entirely self-made. Furthermore, only a small percentage had achieved their wealth like the Bill Gates and Elon Musk’s of this world by making ground-breaking inventions and achieving extraordinary business success!

Moreover, since my own work in South Africa has brought me into close contact with many thousands of wealthy people in this country, I am able to confirm the same overwhelming understanding that Danko and Stanley discovered: that the simple formula for achieving wealth both in the US and here in South Africa has been old fashioned thrift.

Most of the wealthy that I have interacted with achieved it in the same way as the American study by the simple process of diligent saving – by sacrificing many of life’s little luxuries during their early lives in order to build investment nest eggs. It should thus come as no surprise that without exception this is a group which fiercely guards its portfolios against anyone with ideas of plunder.

That is why the Laffer Curve exists: the point at which taxpayers always fight back; the point beyond which they collectively opt to slow down and work less rather than hand their money over in taxes!

Arguably, though the Wealthy are still public enemy number one in their eyes of socialist politicians, trade union leaders and who here and everywhere in the Western World regularly make disproportionate claims upon the wealthy for the simple reason that they are sitting ducks whenever there is a revenue shortfall, the belief is now understood to rest simply in jealousy and ignorance.

The existential reality of modern South Africa is that 30 years of ANC government, which saw Business as “The Enemy” and applied wealth-redistribution policies and starved the economy of growth-promoting development capital, has inevitably crippled commerce and industry and created the world’s highest rate of unemployment.

Hardly surprising then South Africa is now on the brink of being declared a “Failed State,” which will soon be unable to service its debts. Meanwhile Political leaders, fat from years of rent extraction and aloof to the desperation of ordinary folk, have furthermore chosen to ignore the rumblings beyond our borders where rioting has broken out in country after country when, rather than trim their spending have sought to raise taxes even further. Indeed, have they already forgotten the July 2021 ‘Zuma Riots?’

Given all of the above and, furthermore recognising that the whole world is gripped in what could soon develop into the worst monetary crisis since the Great Depression of the 1930s, that the ANC imagined it would be able to burden the masses with its originally contemplated increase of VAT from 15 to 17 suggests a level of irresponsibility bordering upon criminal.

Why should we encourage thrift and wealth creation? Read Brian Kantor who says it better than I ever could!

---

The value of ‘Wealth’

By Brian Kantor

You are only wealthy if you have saved a good proportion of your income over the years, rather than consuming it all to sustain your lifestyle. It is your wealth that makes a large income and consequent spending tolerated by the wider society.

This essential understanding makes it possible for the talented, diligent and hard-working and, most important for a growing economy, the enterprising and innovative successful risk-takers, to earn high incomes legitimately and enjoy their consumption.

These are the savings that add to wealth and, most important, are invested productively by income-seeking businesses that also save and borrow on behalf of their owners. These firms are given the responsibility to manage the capital stock and all the complementary scarce resources that are entrusted to them — including workers and managers, whose wages and rewards will depend on the returns on capital (savings) their employers are able to realise.

The more such capital is created and made available to the economy in the form of plant, equipment, dams, roads and ports, and the more efficiently they are managed, the higher will be the incomes earned by poorer households. More capital raises the relative scarcity of labour and improves productivity and incomes, which makes people understandably willing to protect wealth against damage, theft or violent expropriation.

The protection and respect for property (capital or wealth) in turn encourages potentially higher-income earners to venture more, to earn more, and to save and invest more in capital stock. This too serves the essential interests of the wider community.

The spending of others is not helpful to you — it adds to the competition for scarce resources. However, saving, accumulating wealth and realising its productive disposal is helpful to the many without much wealth. It is the large-scale waste of capital, extracted by taxes — as has been the case with our state-owned enterprises — that should be condemned.

Such willingness to protect property is to be found in the Bible and the rabbinical commentaries on it, as I was pleased to discover at a recent joyous bar mitzvah. The substance of the readings that day were the laws and regulations governing the protection of property and compensation for damage. All food for my economist soul.

I said I would ask this question of the Torah and rabbinical commentary, the Talmud, using AI. Rab AI, so to speak. Here is a summary of the responses received, with my reactions in brackets:

“The Talmud places a strong emphasis on the importance of hard work and diligence. It acknowledges that while effort and work are important, ultimately one’s success may also depend on divine blessing.” (Unbelievers will call this luck.)

“The Talmud establishes the principle that those who are wealthy have a responsibility to support the less fortunate. The act of giving is seen as a valuable pursuit, and generosity is highly praised. Wealth is viewed as a trust that comes with significant responsibilities — that one should use their wealth not just for personal pleasure but also for the betterment of society. This includes supporting community needs and contributing to public welfare.” (My point about the social purpose of wealth being the creation and preservation of the productive capital stock for the benefit of the greater society has not apparently been recognised.)

“The Talmud warns against excessive attachment to wealth. A person should not let the pursuit of wealth dominate their life to the detriment of their spiritual and ethical responsibilities, that through work and the creation of wealth one can achieve personal and communal fulfilment.” (Ancient wisdom that is clearly consistent with human aspiration and economic development that implicitly recognises inevitable differences in economic outcomes as socially helpful.)

---

On Stephen Miran’s Critique of the Global Monetary System

By Steven B. Kamin

Last November, President Trump’s designated chair of his Council of Economic Advisors (CEA), Stephen Miran, published a lengthy paper entitled “A User’s Guide to Restructuring the Global Trading System.” 

The paper starts by laying out the intellectual justification for Trump’s aggressive interest in trade barriers. Miran argues that the preeminent role of the dollar in the international financial system has boosted the demand for dollars, pushing the dollar’s value above its equilibrium level.

This overvaluation has in turn led to reduced export competitiveness, persistent trade deficits, and most importantly, the erosion of US manufacturing. Accordingly, Miran outlines some decidedly outside-the-box suggestions for depreciating the dollar while still preserving its dominant global role, including a “Mar-a-Lago” accord with our trading partners to intervene against the dollar, a “user fee” on foreign holdings of US Treasuries, and browbeating foreign governments into lengthening the maturity of their Treasury holdings.  

The first part of Miran’s argument, that dollar dominance has boosted the demand for dollars and thus appreciated the exchange rate, is neither implausible nor particularly controversial.  Certainly, the demand for dollars is substantial, as evidenced by the 57 percent of all foreign international reserve holdings that are in dollars, compared to a share of the United States in global GDP of only 26 percent. 

Although the exact extent to which the dollar exceeds its equilibrium value is quite uncertain, our external deficit has probably widened somewhat in response. The chart below indicates that among the G20 countries, the US current account deficit has been the third largest, suggesting some degree of dollar overvaluation. On the other hand, the US deficit trails that of a country with little reserve-currency status (Australia) and one with essentially negative reserve status (Turkey). Taking a different approach, studies have found the US current account deficit to be several percentage points of GDP too large, once controlling for economic growth, fiscal deficits, and other factors. All told, it looks like the dollar’s preeminent role probably has widened our external deficit, but by how much remains unclear.

Figure 1: G20 Current Account Balances 2000-2019

A strong dollar, however, is not the reason for lower manufacturing employment. The chart below shows no correlation between the steady erosion of the share of manufacturing in US employment and the wide swings in the value of the dollar. 

Figure 2: The Manufacturing Share of US Employment and the Dollar

In fact, the declining share of employment in manufacturing is hardly limited to the United States. As indicated in the chart below, countries with persistent trade surpluses (Germany, Japan, South Korea) as well as trade deficits (UK, US, Australia) have all experienced trend declines in the share of manufacturing jobs, and of roughly the same extent. These shared trends importantly reflect the rapid pace of productivity growth in manufacturing, which shrinks the need for labour even as it boosts manufacturing output.

Figure 3: The Manufacturing Share of Employment Internationally (percent)

Once it is conceded that the dollar is not a primary cause of the decline in US manufacturing employment, the justification for taking aggressive measures to lower the dollar goes out the window.  

As I’ve noted in previous writings, the trade deficit per se is not a problem: with unemployment near record lows, our spending on imports is no threat to our economy, and, in fact, it reduces the likelihood of overheating and inflation.  Rather, as evidenced by the recent declines in household confidence and consumer spending, one of the greatest threats to our prosperity is uncertainty about Trump’s future actions in the realm of international economic policy.  I hope the future head of the CEA is prepared to acknowledge that fact.

Intriguingly, there has been no announcement by the Trump administration or even a tweet by Trump, but Miran’s paper — along with various utterances by Treasury Secretary Scott Bessent — have led Wall Street observers to believe such an initiative is indeed in the offing. And that’s too bad, because a Mar-a-Lago Accord would be pointless, ineffectual, destabilising, and only lead to the erosion of the dollar’s pre-eminent role in the global financial system.

The Mar-a-Lago Accord is premised on the view that the dollar’s global dominance is bad for America. Unnatural demand has caused gross overvaluation. This has in turn led to reduced export competitiveness, persistent trade deficits, and the erosion of US manufacturing. In response, an Accord would call for the US and its trading partners to intervene in foreign exchange markets to sell dollars for foreign currency in a bid to get the dollar down.

However, since foreign sales of US Treasuries and prospects of dollar losses could push up US interest rates and jeopardise the financing of federal budget deficits, foreign governments would have to increase the duration of their remaining holdings of Treasuries, even buying 100-year zero-coupon bonds from the US government — in essence, free financing for a century!

And because they could not be expected to do this voluntarily, they would be threatened with higher tariffs or the loss of American military support if they failed to comply. So, what’s wrong with all that?

First, contrary to Miran’s view that the dollar’s global role is harmful for America, it is actually a net plus, facilitating our business activities abroad, lowering the cost of capital, and increasing our geopolitical reach. And even if the plan succeeded in lowering the dollar, it would do nothing to help the US economy or its workers.   

Much of our trade deficits reflect a buoyant economy and large fiscal deficits, not the strong dollar. Moreover, our trade deficits aren’t really a problem per se. Despite them, US economic growth has outstripped that of our major trading partners, and the unemployment rate is only 4 per cent — very low by historical standards.

In fact, there’s no logic to the notion that all countries should have balanced trade. We need trade deficits in order to provide an outlet for spending that otherwise would show up as economic overheating and inflation. Moreover, the strong dollar clearly isn’t the cause of the shrinking share of US workers in manufacturing (now less than 10 per cent of total employment). The same trend has been at work the world over, in countries with both trade surpluses and deficits, on account of the rapid productivity growth in this sector.

Second, the plan would not succeed. As countless studies have shown, pushing the dollar down on a sustained basis would require the Federal Reserve to lower interest rates and foreign central banks to raise rates; but with US inflation stubbornly exceeding the Fed’s 2 per cent target and foreign economies languishing, that’s not going to happen.

By the same token, if foreign governments were busy selling Treasury bonds in order to depress the dollar, it’s unlikely that increasing the duration of their remaining dollar bonds could be enough to keep US interest rates from rising. And while threats of higher tariffs and ejection from the security umbrella might coerce Japan and Europe to play ball, China — which should be America’s main concern — is going to be less willing to kowtow to Trump.

Third, a Mar-a-Lago Accord risks undermining the global dominance of the dollar. That dominance is based not only on the safety and liquidity of US Treasuries, but also on the long-standing historic prudence of US economic policymaking and its support for a stable, rules-based global trading and financial system. Mistreating our allies, breaking trade agreements, and undermining support for global institutions, as is now under way, will only encourage other countries to seek alternatives to the dollar.

Trump has threatened countries with tariffs if they abandon the dollar, but nothing could accelerate that process more effectively than reckless actions against our trading partners.

Finally, an effort to force a Mar-a-Lago Accord on resistant trading partners could trigger a global financial crisis. The stock market is already in freefall on account of Trump’s capricious tariff policies. Consider what would happen if Trump threatened our allies with ejection from the US security umbrella, a “user fee” on Treasury repayments abroad, or a selective freezing of Treasury repayments altogether, as Miran has suggested in his magnum opus.

Ditto forcing others to “reprofile” into 100-year zero coupon bonds. As the safest and most liquid asset in the world, US Treasury bonds are the bedrock of the global financial system — if they suddenly became less safe and less liquid, a financial panic akin to the Lehman Brothers and coronavirus meltdowns could ensue, taking the US and global economies down with it.

The dollar might indeed fall, but not in a way that Trump would like. All told, a Mar-a-Lago Accord would represent huge downside risk for approximately zero upside gain. It is doubly amazing that Trump officials seem to be drawn to it when there is another policy that could simultaneously lower the dollar, narrow our trade deficit, reduce interest rates, and put the federal budget on a sustainable path for years to come: cut spending, responsibly raise taxes, and reduce the fiscal deficit. Instead, we get DOGE, tariffs with a half-life of 1 1/2 hours, threats to our closest allies, and the trashing of America’s credibility. It’s going to be a long four years.

Propagating Price Pressure Plotting

by Danielle DiMartino Booth

“Please allow me to introduce myself

I’m a man of wealth and taste

I’ve been around for a long, long year

Stole many a man’s soul and faith”

—Sympathy for the Devil, by The Rolling Stones

Whoever controls the narrative… Such was the unoriginal thinking that drove a professor of law at the University of Ingolstadt, Bavaria, to hatch a secret society he called the Orden der Illuminati.

In Adam Weishaupt’s mind, to be among the “Illuminated Ones” raised one above the muck of the monarch’s and especially the church’s brainwashing. And so it began in 1784, in a nearby forest. There, bathed in torchlight, five men crafted the rules of admission with the proviso that all candidates be of the highest societal standing, men of “wealth and taste,” to quote Mick and Keith in what many, myself included, agree is one of the best songs of all time. And like the iconic lyrics, seen to glamorize the darkest of figures, the Illuminati were castigated as atheists and anarchists.

No surprise, because the Orden der Illuminati was forced to disband under the threat of the death penalty, a reverent following has been sustained forever more. The allure of a “world-dominating” cabal was too perfect for those prone to fomenting conspiracy theories. The rise of social media couldn’t help but fuel the romantic idealism inherent in the battle against the evil elite, a war that continues to recruit soldiers enraged by the seemingly unstoppable widening of the inequality gap.

And then came Biden. As reported in The Week last November after the US presidential election had been decided, four years ago: “Joe Biden unwittingly fanned the conspiracy theory flames when he referred to a coming ‘new world order’ during a speech. ‘He was referring to the shifting sands of geopolitical relations in response to Vladimir Putin’s invasion of Ukraine,’ said The Independent. However, for conspiracy theorists, such comments are seen as further evidence that there is a ‘puppet-master overlord, hell-bent on global domination and busy manipulating international events to achieve his villainous ends.’”

And while historic luminaries including David Rockefeller, Henry Kissinger, Jacob Rothschild, and Queen Elizabeth II were among those rumoured to be members of the Illuminati, it’s been performers who’ve done the heavy lifting in growing its cult-like status. Those linked to the movement include Madonna, Kim Kardashian, Beyoncé and her husband Jay-Z, Rihanna, and even Taylor Swift. As The Week added, “Katy Perry once told Rolling Stone the theory was the preserve of ‘weird people on the internet’ but said she was flattered to be named among supposed members: ‘I guess you’ve kind of made it when they think you’re in the Illuminati!’”

In our world, those deemed shrewd enough illuminators to “make it” talk their books. As countless can attest, successful trades need not be grounded in fact when accessorized by the financial media and a convincingly credible sell side. If the bonanza wasn’t bountiful enough, supported as it is by this cast, an unwitting ally in the Bureau of Labour Statistics further amplifies the narrative’s windfall.

But what of the truth about inflation? Last year, the founders of Truflation granted QI access to their full history of real-time daily inflation prints harvested using blockchain technology to collect and analyze 18 million data points from more than 60 data providers. The output was a .97 correlation with the headline US consumer price index (CPI). Per Truflation, on a time continuum, their metric tells you with near-perfect accuracy where the CPI will be 45 days hence. There was thus no irony in TJM Institutional Services’ Mark Gomez sharing first thing this morning that Truflation had printed at 1.32%, down from 2.70% when Federal Reserve policymakers last convened on January 31.

The Truth About Inflation Via Truflation

Zoom into the more recent history of Truflation and you can see that as recently as mid-December, the year-over-year (YoY) rate was as high as 3.11% on December 14. Understanding the drivers of both the upward and subsequent downward pressures to land at today’s 1.32% YoY is key to appreciating the simplicity of what’s played out in the CPI with a lag.

Note the lilac line in the left chart—Other Lodging. The first days of the last six Januarys have been marked by my traveling to Los Angeles to film DoubleLine’s Annual Round Table. The difference this year was that the neighborhood of Pacific Palisades was on fire and evacuated when I landed at LAX on January 8. On that day, Truflation hotel inflation peaked at 10.38% YoY.

Can a mass evacuation press up hotel inflation nationwide when it occurs in the nation’s sixth-largest hotel market? Though that was a rhetorical question, the visible spike and retrenchment in hotel prices as residents found longer-term solutions or, in the case of the lucky ones, were able to move back to their homes is clearly visible. As of today, hotel prices are in outright deflation, at -5.32% YoY. Note also that Rented Dwellings saw their fastest pace of price appreciation of 3.08% YoY last April and are now flirting with deflation, at 0.30% YoY.

In the righthand chart, you see evidence writ large of the decimation of discretionary spending. After a last hurrah to mark the holiday season, when apparel pricing topped at 2.55% YoY on December 27, Clothing & Footwear prices have come tumbling down to today’s -3.0%. Recreation & Culture has continued its yearlong decline, from 2.66% YoY last March to the current read of 0.14%.

Small Factors Held Huge Sway Over Recent Rise & Fall in Truflation

Some of the other big drivers of the hotter-than-forecast CPI were eggs, which spiked by 15.2% in January but “settled” down to 10.5% in February. Still, they’re up and are up an eye-watering 58% YoY, which conflicts with February’s Food Away from Home’s 0.4% rise, which took that discretionary category to 3.7% YoY.

Before settling back to 0.9% in February, used car prices were their own outlier in January, rising 2.2% for the month, the biggest increase since March 2023. Two notes there—Hurricanes Helene and Milton and the Los Angeles fires created a one-time surge in replacement purchases. On top of that, annual seasonal adjustments announced every February amplified the weight of used cars in January, which should continue to fade into the second half after the usual bump catalyzed by income tax refunds.

Those who were able to access auto financing should consider themselves lucky as lenders are increasingly pressed by regulators to tighten standards. The starting point of January’s reported 4.0% unemployment rate was sufficient to produce a subprime auto loan delinquency rate of 6.6%, the highest since Fitch Ratings began collecting more than 30 years ago. Not illustrated, but equally notable, are recovery rates on subprime repossessions collapsing to 32% in March, a far cry from the 75% at which recoveries peaked during the pandemic when cars were impossible to source.

The silver lining that should amplify auto disinflation is that auto dealers are sitting on too much inventory. At 84 days’ supply, according to CarGurus, the hope is that the threat of tariffs spurs fence-sitters to pounce on the cars gathering dust on packed lots. The risk is that income tax refund season has seen its best days, with the volume of processed returns 2.7% lower year over year. It’s human nature to file the minute you can if you know a refund is coming your way. For those taking advantage of the child tax credit, that window opened the week of February 21. If past is precedent, the filers who follow fall into that other category—those who will have to write Uncle Sam a check on Tax Day, a.k.a., “taxpayers.”

Spurred by Tightening Lending Standards and Packed New Car Lots (For Now), Auto Disinflation Should Offset Tariffs

 Before leaving the subject of revisions behind, most in the media were quick to disregard (or didn’t take the time) to properly dissect what hit the wires alongside the “hot, hot, hot!” inflation data for January. Bloomberg’s Anna Wong, who has become a friend and is a refreshingly unbiased media economist, did do the legwork. Her takeaways are both cogent and materially alter the narrative:

• Every February, the Bureau of Labor Statistics (BLS) re-estimates seasonal factors to include data from the previous year—this year, the re-estimation covers 2017–2024. This didn’t change non-seasonally adjusted values but changed the contour of seasonally adjusted CPI and core CPI.
• The revisions strengthened the disinflation narrative for the second half of 2024. Both the three- and six-month annualized rates of core CPI for December 2024 were revised down to 3.1%, from 3.3% and 3.2% respectively.

* Details of the report help us understand why the print was so strong, and none of them convinces us core CPI is in the midst of reheating. One obvious factor is residual seasonality—the idea that BLS’s seasonal factors haven’t properly accounted for typical January price gains.

As Wong rightly predicted, the surge in 2025’s first month was nearly fully reversed in February. At the headline level, CPI tumbled to 0.216% to the third decimal, less than half January’s 0.467% and an appreciable decline from December’s 0.365%. Meanwhile, the core rose 0.227%, exactly half of January’s 0.446% and lower than December’s 0.210%. Finally, the so-called supercore services gauge, on which the inflationistas have been fixated since Fed Chair Jerome Powell conjured the construct out of thin air last year, sank to 0.22% in February from the blistering 0.76% spike the prior month. As Wong noted, “It’s clear the disinflationary effect from softening services outweighed the uptick in goods inflation.” Bloomberg Economics’ proprietary nowcast for CPI pegs March CPI to come in at 2.5% YoY.

As for the rest of the financial media, the hyperfocus was on market-based inflation expectations, which can obviously be fueled by the narrative that helps traders positioned to profit from short-term bets against Fed rate cuts. Going into the report, five-year breakevens were at the highest since March 2023 and have risen further since. Fearmongering does work if it’s persistent and sufficiently alarmist. “It’s pretty clear inflation expectations are rising, and not just in the immediate term,” Bloomberg’s Markets Live declared.

Representing the sell side, Bank of America’s economics team chimed in with, “To the extent that residual seasonality is boosting January inflation every year, it would be suppressing inflation in other months. So we think it makes sense to stay focused on year-over-year inflation rates, instead of seeking comfort in three- or six-month rates late in the year, as the Fed has done for the past two years.”

The fatal flaw in this thinking is what’s materially changed in the last two years. As Zelman & Associates (ZA) pointed out after the CPI hit, “Peak annual rent growth occurred 29 months ago while CPI growth peaked 22 months ago, implying decelerating housing CPI through the summer at least.” The marked decline in the Cleveland Fed’s New Tenant Rent Index validates ZA’s observation as it swung from +1.6% YoY in 2024’s third quarter to -2.6% YoY in the last three months of 2024.

To draw parallels to the patterns of the last two years dismisses the downward momentum built into the CPI’s biggest weight. And believe it or not, the construction pipeline still matters. As conveyed by Redfin on March 7, “Less than half (47%) of newly built apartments completed in the third quarter of 2024 were rented within three months. That’s tied with the fourth quarter of 2023 for the lowest share on record aside from the start of the pandemic. This is according to a Redfin analysis of the US Census Bureau’s seasonally adjusted absorption rate data for unfurnished, unsubsidized, privately financed rental apartments in buildings with five or more units, dating back to 2012. The most recent data available covers apartments completed in the third quarter of 2024, and either rented or not rented within three months of then. Apartments are filling up slowly because renters have a lot of options to choose from; there were 142,900 new apartments completed in the third quarter—the highest number on record.”

Rising Unemployment & Still-Swollen Supply Should Continue to Depress Rents

With any luck, home prices will follow that of rents, fueled similarly by a long-awaited swell in existing home listings. That train appeared to finally be pulling into the station. Last month, Redfin noted that, “New listings of US homes for sale rose 7.9% from a year earlier during the four weeks ending February 2, the biggest increase since the end of last year.” The upshot is that there is now a five-month supply of homes on the market, up from 4.4 months a year ago and the highest reading in six years. Redfin added that, “The uptick in new listings, along with slow sales, is contributing to a growing pool of supply for homebuyers to choose from. It has also led to the typical home selling for 2% under asking price, the biggest discount in two years—but housing costs are still ultra-high.”

Relief, if you can use that term to describe recession, could arrive with spring flowers. As The Wall Street Journal recently reported, the number of homes sellers pulled from the market in December hit a nine-year high. The article’s conclusion was that this pent-up inventory could combine with the typical wave of homes listed in time for the critical spring selling season to create a tsunami of supply. Two factors work in favor of this hypothesis. Airbnb jocks are rapidly losing access to financing even as US household travel plans hit a 15-year low last month, the pandemic notwithstanding. And natural sellers will soon reject their realtors’ vapid reassurances that “prices always rise” as they’re barraged with recession headlines. Growing awareness of US taxpayer-funded fraud at the FHA won’t help either as the new administration is pressed to rectify the illicit practices associated with a high portion of more than one million FHA mortgages that are in default.

Isolating the new home sales market, in its latest weekly pulse of western markets including Arizona, California, and Nevada, released Wednesday, ZA reported that, “At 0.87 sales per community, Southwest net absorptions were down 9% sequentially and down 3% on a year-over-year basis. California net absorptions were down 17% sequentially to 0.69 sales per community and were down 30% year over year. Last week’s absorptions fell roughly 20% short of the typical pace observed during this time of year across our data series dating back to 2000, and fell 21% on a year-over-year basis, marking the fifteenth straight week of declines and the steepest in four weeks. Foot traffic per community declined 4% sequentially for the second consecutive week. On a year-over-year basis, traffic was down 10%—marking the eleventh consecutive decline.” You would agree that cold weather has not been a factor in these states. More concerning yet is that California absorptions are down 10 times that of the Southwest, as if the fires had never burned so many homes to the ground in Los Angeles. Still rampant market prices and an unemployment rate of 5.5%, which is 25% north of the 4.1% national rate, apparently trump cooling mortgage rates.

Market-Based Inflation Expectations Have Recently Risen Appreciably

Note that the same inflation expectations hysteria the media is hyping was evident in the University of Michigan’s (UMich) one-year and five-10-year expectations. And yet, we’ve seen scant follow-through in what the New York Fed has tracked via its Survey of Consumer Expectations. Convergence better describes what’s taken place in the last year. At work are two very fundamental influences on households. Per the NY Fed this past Monday, mean unemployment expectations “jumped 5.4 percentage points to 39.4%, its highest reading since September 2023. The share of households expecting a worse financial situation in one year from now rose to 27.4%, the highest level since November 2023.”

I cannot end, however, without observing that Wall Street, by its best measures, currently remains optimistic with its investment markets telegraphing confidence in the US economy. Even Bitcoin which offers the wealthy a means of moving their capital away from the prying eyes of governments, has recently come off the boil – see graph on the right. So perhaps the crash we fear might not be so imminent as some fear!

---

Is Wall Street Over-valued?

By John Mauldin

Recently we explored the Crestmont Stock Market Matrix and its insight into the drivers of stock market returns. The graphic resembles an assembled jigsaw puzzle with enlightening messages about realized returns over multi-decade investment periods.

 Today I will again join forces with Ed Easterling of Crestmont Research to explore this data more deeply. Currently we have several powerful trends that have combined to create a nirvana like market. We will give you the data and you can decide whether those trends can continue or not. We’ll explore together an unassembled puzzle of economic and corporate data. We’ll also look at a number of charts, all as accurate as possible, describing the various economic realities we and the markets will face in the coming years. We’ll seek to put enough pieces together to understand the economic and market environment that may be approaching. Beware, we’re headed into provocative territory. Recession Signal?

To start with, let’s set the table with the current economic situation. The Atlanta Fed recently dropped a surprising bombshell. On February 19th, their model’s estimate for Q1 real GDP growth was +2.3% (seasonally adjusted annual rate). Last Friday, the GDPNow forecast was revised down to -1.5%.

That’s not a typo—it swung from positive to negative. (The Atlanta Fed GDPNow number is based on a mathematical relationship of dozens of economic indicators released during the quarter, revised in nearly real time with each data release. It can change sharply during the quarter. I find it useful as a trend indicator—certainly more useful than “blue-chip economists” who tend to run in herds.) Based on economic reports released Monday, March 3, GDPNow revised the forecast for Q1 ’25 GDP to a negative -2.8%.

Today, the Atlanta Fed appears pessimistic compared to human forecasters. As the nearby chart shows, not long ago, GDPNow was the clear optimist. We may be witnessing a battle between very tight psychological anchoring among a large group of Blue Chippers versus an unconstrained AI model… time will tell.

The New York Fed has a different method they call their “Nowcast.” It runs about two weeks behind the Atlanta model and is still showing around 3% Q1 growth. But two weeks ago the Atlanta number was also comfortably in positive territory. How accurate is the Atlanta Fed number? They quite transparently tell you. Here is their tracking error.

Note that with the exception of the COVID-influenced periods, the tracking error was generally 1% or less, either up or down. If you add 1-1.5% back into that GDP number as tracking error, it is still negative for the quarter. But there is a lot of data still to come out. At this point, we have a hazy outlook, at best, for Q1 ’25 GDP.

Nonetheless, storm clouds have moved in. Where else can we look for data that might affect stock market returns?

Earnings Conundrums

Since corporate profits emanate from corporate sales, let’s explore measures of current and projected corporate profits. Last week, Standard and Poor’s updated their 2025 forecast for S&P 500 quarterly earnings per share (EPS). The update also included quarterly forecasts for 2026. Crestmont Research incorporated S&P’s projections into its EPS History & Trends chart.

The main body of the chart includes EPS reports since 1970 and forecasts through 2026. The historical reports are shaded with dark blue. The forward-looking values are shaded brown (2024 estimated), pink (2025), and teal (2026). The 2025 surge reflects EPS growth of 18%, followed in 2026 by additional gains of 15% for a cumulative 36% increase! Such growth is not unprecedented, but that dramatic change follows already sizable gains over the past several years. We will dive deeper into this chart, as it has a lot of things we need to understand.

Two dashed lines are included as trend-lines for normalized EPS. Normalized means the data has been adjusted to smooth the business cycle of fluctuating earnings, partially by averaging the data over 10 years. The black hashed line is Crestmont Research’s GDP-regressed normalized EPS which allows for forecasts. The purple dotted line is the implicit EPS from Robert Shiller’s CAPE P/E 10 which is only backward looking. Both are useful.

The two methodologies use unrelated approaches to normalize EPS, yet they produce only slightly different results. The relative consistency between the two measures, however, validates their reasonableness. Why smooth the valuations? P/E ratios can become enormously volatile, especially during recessions. You can see a P/E ratio rise above 60 briefly as earnings collapse. That’s just not useful for any real analysis. It would distort the picture. In our chart, note that historical EPS fluctuated around the normalized measures for five decades from the 1970s through the 2010s (as it has for almost every decade since 1900). It recovered quickly after the Great Recession of 2007–2009, then remained slightly elevated near or above the normalized measures during the 2010s.

Then, blast off! The short COVID-related EPS pullback in 2020 acted as a slingshot upward. Extremely aggressive fiscal and monetary policy has pushed EPS well above the normalized baseline. Previously, we included a chart from the St. Louis Fed’s FRED data site. The chart presented corporate profits relative to a surrogate for GDP (GDI or Gross Domestic Income). In effect, the chart shows corporate profits relative to aggregate sales. That ratio is a measure of corporate profit margins.

The chart includes private and public companies. According to Cole Campbell and Jacob Robbins (University of Chicago), public and private companies each account for approximately half of the aggregate sales and profits of the US economy.

Like Crestmont’s EPS chart, the recent surge in corporate profit margins has dramatically driven the measure out of its 70-year channel. The FRED chart emphasizes the historical significance of the past five years.

There are significant implications from combining the information from Crestmont’s EPS chart with the FRED profit margin chart. The EPS forecast from S&P included in the Crestmont chart shows earnings increasing 36% over the next two years. Since public and private companies have each represented about half of the sales and earnings in aggregate corporate profits, let’s assume private companies have margins similar to public companies over the next few years.

Also, let’s assume nominal GDP growth averages 5.5% during each of the next two years (2–3% growth and 2–3% inflation). If so, the profit margin line in the FRED chart would mathematically have to increase to approximately 11% if earnings are to reach $287. That level would be approximately twice the average for 1940–2010 and a major breakout above the channel for the same period. Most important, for stock prices and future returns, it may not be reasonable to assume current profit margins are sustainable. Since EPS growth is one of the three components of stock market returns, a reversion of profit margins could significantly detract from returns.

Further, note the shaded recession bars in the FRED chart. Profit margins are most susceptible to downward adjustment going into recessions. The two-month technical recession in early 2020, as COVID shocked the world, barely reset the profit cycle. Now that profit margins have reached such extreme heights, it may take another recession to reset profit margins. Alternately, time may confirm some currently unknown factor(s) that justify an upshift in the profit margin channel.

Market Multiplier, Multiple Expansion Beyond

EPS, the other driver of stock market gains and losses is the price/earnings ratio (P/E). Many factors affect P/E, including investor sentiment, economic growth rates, inflation, and others. P/E is particularly significant because the multiplier effect applies to total earnings, not just earnings growth. This is called multiple expansion and has been the primary driver of the recent bull market. Across historical investment periods, sometimes P/E has more than doubled returns from EPS alone (multiple expansion), and other times, it has more than offset EPS growth.

The chart titled “P/E10 Ratio” presents a measure of P/E using the methodology popularized by Robert Shiller (Yale). P/E 10 is inflation-adjusted and smooths the variability of EPS across business cycles. Without normalizing, years with EPS dips would show artificial surges in P/E since EPS is the denominator in the ratio.

P/E has had its ups and downs over more than 12 decades. Over time, conditions drove P/E to cycle between single digits and near the mid-20s. The culmination of the tech bubble in 1999 surged P/E above its previous peak in the Roaring ’20s. Today’s value of 38 is less than one point shy of being the fourth-highest value for P/E in the past 125 years.

P/E is currently more than twice its historical average. And, saving the geeky details for a later time, the current P/E 10 would likely be the highest on record if profit margins were not elevated above the 70-year channel in the FRED chart. The relative level of P/E is important because P/E is the most significant factor affecting subsequent returns. As P/E rises, dividend yield falls.

The current level of P/E has dividend yield at less than one-third of the historical average. That removes a lot of the juice from total returns. Also, an elevated P/E is more prone to fall than an average or below-average P/E. A decline in P/E over an investment period decreases returns. The following table highlights the effect of P/E on subsequent returns.

The analysis organizes the 116 ten-year periods since 1900 into deciles (10 equal portions) based on total return (i.e., index gains plus dividend yield). Each decile consists of 11 or 12 periods. The table reflects the lowest and highest return for each decile. In addition, the fourth column shows the average return for each decile. The last two columns reflect the average P/E at the start of the 10-year periods in each decile and the average ending P/E

The closest peer to today’s environment is the first decile. We say “closest” because, for perspective, the 10-year period starting in 2025 starts with a P/E of 38 (the 2024 year-end P/E), well above the 26.6 average.

These comments are not intended to be alarming. We can’t predict the future, and there could be factors making today’s environment different from the past century. At most, consider these sobering comments as encouragement to review portfolio holdings and exposures. Now let’s dig into some of the risks.

Concentration Risk One of the top principles of prudent investing is diversification. Research published by Lawrence Fisher and James Lorie in the 1970s determined that 32 stocks achieved 95% diversification. Subsequent research and analyses have concluded that similar diversification can be achieved with 20 to 30 stocks.

As with most rules of thumb, assumptions matter. Mutual contribution is the primary concept in studies on diversification. Whether the analogy is a multi-cylinder engine or a team of rowers in the crew boat, the stocks in a portfolio should have some level of relatively similar contribution to returns. That doesn’t mean each stock should have the same weight, but it does mean that no stock or set of stocks should dominate the portfolio if a major objective is diversification.

David Bahnsen is the Chief Investment Officer and Managing Partner of The Bahnsen Group. His recent weekly letter astutely contrasts five factors in the market. His first point relates to valuation —that valuation matters, and it doesn’t. David highlights that valuation matters when investing across the overall market. Such a portfolio diversifies away company risk and embraces market risk (i.e., beta).

When market risk is your investment, the measures of market valuation (e.g., P/E) matters a lot. In contrast, David’s approach to investing involves the diligent selection of companies based on other value measures. Quoting David: “I care not a whit about not participating in certain excess moves forward of companies outside our philosophical orientation, and identify valuation in the dividend yield, the Free Cash Flow Yield, and the growth of the Free Cash Flow and actual dividend payouts, themselves — not the stock prices.”

For David, value matters much more than valuation. The second point in his letter builds on his first. Diversification and concentration don’t mix. His portfolios are built with a range of allocations for effective diversification. “We have companies that are 4% of our portfolio and companies that are 1.5% of our portfolio, and various weightings in between, but we do not have companies that are 6% while others are 0.01%. Each company has attribution to the result, positive and negative, and the diversification reality is no different in concentration, weighting, and attribution than it has ever been.

For today’s index investor, however, concentration has begun to dilute diversification. A small group of companies have increasingly dominated the supposedly diversified S&P 500. Historically, that basket of 500 stocks was highly diversified. In recent years, however, an investor with a mutual fund or ETF comparable to the S&P 500 effectively has 40% of their investment concentrated in 10 companies and 60% diversified across 490 companies.

Since the performance of the concentrated set has exceeded the overall market, investors have benefited thus far. However, this sword has two edges, and the increased concentration may be its own indicator. The fact that such a small group of companies has become such an over-weighted portion of the market may indicate a speculative overvaluation. Thus, be aware of the current embedded concentration in portfolios. In addition, be mindful that such concentration may be in stocks with potentially above-average risk. Unless you want that risk, which should be a decision and not a passive result, be aware!

If Things Can’t Continue, What Stops? We don’t know the future but it’s hard to reconcile the fact that for earnings to grow to $287 on the S&P 500 we would have to see 11% corporate profit margins — assuming that the economy rolls along in the 5 to 6% nominal GDP range without a hiccup.

So what could change? First, and historically most likely, those earnings estimates could fall. I am going to highlight a portion of our first P/E chart, the history of earnings forecasts by year.

Note that in general, a given year’s earnings estimates trend down over the year. Sometimes not much at all and sometimes dramatically. An exception would be 2021, coming off a terrible 2020 when earnings dropped from $170+ to under $100. Analysts predicted that earnings in 2021 would come back to that $170 range. Over the year the earnings estimates continued to drop to below $140, then jumped up to almost $200 by the end of the year. Good times.

2023 saw another large forecast jump but it trended down as well. Now we have a situation where the 2025 forecast sees a large jump from 2024 and a monster jump for the 2026 forecast. While it is entirely possible that profit margins go to 11% and earnings rise to $287 for 2026, I won’t hold my breath.

What is more likely is that earnings estimates and reality both fall, like they typically do. In fact, earnings estimates could drop significantly while the market goes sideways as P/E ratios stay the same. Or an economic pullback could reduce earnings and animal spirits. We simply don’t know.

What we do know is that for corporate profit margins to be 11.5% and earnings to be $287 by the end of 2026, the entire country would somehow become the most efficient allocators of capital in human history in just two years. That’s what some breathless proponents of artificial intelligence say will happen, just not in the next two years.

And are we going to become this efficiency machine in the midst of the economic turmoil that seems part of our current landscape? I am not saying to get out of the stock market. But rather than being invested in the “stock market” I would suggest that you invest in particular strategies and stocks. I like high and growing dividends paired with curated alternatives.

I have friends who have been quite successful in investing in small defense-oriented tech stocks. Others look at special situations and do their own work. But they do it with a strategy and an understanding of the risks. The dividend strategy that I like has significant risks. Typically such a strategy recovers quicker than indexes, but it is not a bank CD.

My friends who trade their own very idiosyncratic portfolios spend a great deal of time focusing on the risks they assume. If you are not spending a great deal of time on your own portfolio and in-depth analysis, then maybe you should consider getting someone to do that for you. There are a lot of great managers out there with very diverse strategies. But what I would not do is allocate new capital to an index fund and, depending on your tax situation, would consider lightening up. (If you have 15 years of capital gains you have to take that into consideration.)

The historical data suggests that index market returns are going to be muted for the next 10 years. But remember, even during the first decade where returns were flat for the decade, there was a three-year bull market for the stock market doubled.

Time horizons matter. In short, longtime readers know I expect a debt crisis by the end of the decade. Volatile markets are highly likely. You have the opportunity to prepare a strategy to get you through that period. There are multiple options. But choose one rather than passively accepting whatever the market gives you, because the market can both give and take away.

Many investors don’t have the stomach for big drawdowns and get out at the wrong time. Think through what you want to do. Write it down. But most of all, make a decision. If you are uncomfortable making your own decision, then find someone you can trust to help you make that decision. And as Sgt. Phil Esterhaus of Hill Street Blues reminded us every week, “Let’s be careful out there.

Who’s Got the Gold?

by Jeff Thomas

In 1971, the US abruptly went off the gold standard, and in making the public announcement, US President Richard Nixon looked into the television camera and said, “We’re all Keynesians now.”

I was a young man at the time and had previously bought gold, albeit on a very small scale, but I recall looking into the face of this delusional man and thinking, “This is not good.” However, the world at large apparently agreed with Mister Nixon, and within a few years, the other countries also went off the gold standard, which meant that, from that point on, no currency was backed by anything other than a promise.

Party Time

It didn’t take long before countries began playing with their currencies. At one time, the German mark, the French franc, the Italian lire, and the British shilling had all been roughly equivalent in value, and four or five of any one of them was worth about a dollar.

That had already begun to change prior to 1971, but following the decoupling from gold, the governments of the world really began to see the advantages of manipulating their own currencies against the currencies of other nations. From that point on, a currency note from any country, which was already no more than an “I owe you,” was increasingly degraded to an “I owe you an undetermined and fluctuating amount.”

This fixation with monetary manipulation began much like the 1960s youths’ experimentation with drugs, and by the millennium, had morphed into something more akin to heroin addiction. Unfortunately, those who had become the addicts were the national leaders in finance and politics.

Well, here we are, in the second decade of the millennium. The party has deteriorated and is soon to come to a bad end.

As we get closer, those of us who have, for many years, predicted an eventual realisation that Mister Keynes and Mister Nixon were dead wrong and that the world will once again look to gold are, at this late date, gaining a bit of traction. We’re seeing an increase in the number of people who recognise that all fiat currencies eventually come to an end and gold will continue to shine.

But there are two remaining questions that have even the best of prognosticators puzzling.

What Will the Role of Gold Be in the Future?

* When currencies collapse, will there be an immediate and complete switch to gold? Unlikely.

* Will further fiat currencies be put forward as solutions to paper money? Almost definitely.

* Will future currencies be backed by gold? Probably, especially as so many governments and banking institutions are quietly scrambling to buy gold whilst trying not to let on the extent of their stockpiling.

* Will gold-backed currencies stabilise money for the rest of our lives? Quite unlikely.

Even those countries who may agree to audits to demonstrate they own the gold they claim to own will, at some point in the future, look for ways to “do a Nixon” and once again get off the gold standard. (The short-term benefits of fiddling with currency are too tempting.)

---