Poor Borrowing From the Broke

Dear Reader,

Few hardworking middle-class Americans fully understand how deeply entrenched they are in the stock and bond markets. Chances are, you or someone you’re close to is invested in assets with a highly unfavorable risk-to-reward profile.

I’ve tried to cover this in detail over the past few articles I’ve written but this time I wanted to attempt to connect some dots.

Even if you don’t have a pension or retirement fund through an employer, you’re still part of a massive experiment as the U.S. Federal Reserve is now buying up highly speculative junk-bond exchange-traded funds and risky corporate bonds. And, there’s talk that the government will be buying stocks next.

This isn’t far-fetched at all as the U.S. government has a history of directly influencing asset prices. Just a couple of weeks ago, using the CARES Act as its excuse, the Department of the Treasury announced that it will be loaning $700 million to a shipping company called YRC Worldwide Inc. The company’s stock (YRCW), which is classified as a penny stock, immediately shot up like a rocket ship.

But that $700 million example is miniscule compared to the Federal Reserve’s asset purchases, which recently pierced the $7 trillion mark:

It’s easy to see why traditional big bank money managers recommended a portfolio of 60% stocks and 40% bonds in past generations. Government bonds offered solid yields, protection against a stock market crash, and little to no risk (or so it seemed at the time).

Bond prices move in the opposite direction of bond yields, so 1981 marked a low point for bond prices. Back then, hardly anyone expected the incredible bond-price bull market that has persisted for the past four decades.

With government bonds yielding next to nothing in 2020, their value as a hedge against stock market volatility has clearly diminished. The traditional allocation of 40% bonds in one’s portfolio doesn’t have the same appeal that it once did, especially as bond yields aren’t even keeping up with the inflation rate anymore.

After the financial crisis of 2008-2009, the bull market in bonds kicked into fifth gear as the Federal Reserve furiously purchased bonds, thereby keeping the prices high and the yields low. However, the bond-price bull market will come to an end soon.

We are literally 40 years into a bond bull market. This is unsustainable and will not go on forever, as hard as it is to bet against a four-decade bull.

With the Fed funds rate pegged near zero through the year 2022 at least, the Social Security Trust Fund doesn’t stand a chance of making any substantial returns on its investments. It’s just another example of how central banks rob the middle class to fund its own moneyed interests.

And if you’re relying on a pension fund for a secure retirement, don’t count on it. The average return assumption for public funds is more than 7%, but that’s an assumption based on a once-in-a-lifetime stock-market bull run in which the S&P 500 returned 400% in a decade.

That’s a feat that’s practically impossible to replicate in a time when Covid has thrown the economy into a tailspin. Thus, a traditional mix of stock-market index funds and bonds will undoubtedly provide substandard returns.

There’s a lot at stake here: As of December 31, state and local government retirement systems held roughly $4.8 trillion in assets. The threat of insolvency loomed even prior to Covid, and now the nation faces a fiscal cliff that’s largely unrecognized and wholly unresolved.

One possibility is that the federal government will come to the rescue again with more bailout capital. But if the government itself carries $26.5 trillion in debt, it’s just a case of the poor borrowing from the broke. Clearly, the safety net isn’t just broken – it never really existed in the first place.

And now, the world is going to start preparing for the threat of a Biden presidency. The fact is, Biden is promising to overtly come after the populace with higher taxes and burdens on businesses that will need to get priced into the stock market in an already flailing environment.

Quite frankly, it’s been a good time to own gold. We still need to see all-time-highs to start to get excited about what is ahead for this metal.

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