Category Archives: Gold

Does Larry Kudlow Fear Gold?

One of the first comments about the economy from Larry Kudlow after his appointment as Trump’s chief “economic” advisor was to advise anyone listening to “sell gold.”   But why?  Gold is irrelevant in the United States.  Very few Americans care about silver and even less care about gold.  So why bring attention headline attention to gold?

The simple, if not obvious, answer is that gold is the number one threat to the U.S. dollar. It’s the antithesis of gold.  For a born again Catholic like Kudlow, gold is the anti-Christ.

Silver Doctors invited me onto its weekly Metals and Market Wrap show to discuss the February employment report, the appointment of Larry Kudlow and, of  course, gold and silver:

Use these links if you are interested in learning more about IRD’s   Short Seller’s Journal or Mining Stock Journal.   Many of my short sell and junior mining stock ideas have been successful despite the lofty stock market and sideways trending precious metals market. I review both short and longer term trading/investment ideas in each issue.

The supply of gold, unlike paper money, is limited. Alchemists have tried for centuries to turn other metals into gold — but have never succeeded. Gold is a beautiful metal on its own and the lust for gold seems to be built into the DNA of mankind. If you own ten thousand ounces of gold, you can say that you will ALWAYS be wealthy. – Richard Russell

Navin R. Johnson Goes To The White House

(Note: with apologies to Carl Reiner and Steve Martin, who directed and co-wrote “The Jerk,” respectively)

Just when you thought Trump’s “leadership” could not get any more insane, he adds a third ring to the circus going on at 1600 Pennsylvania by hiring “economist,” Larry Kudlow to be the head of his economic advisors.

For those of you not familiar with financial market history beyond the last 10 years, which includes the majority of money managers and other sundry financial “professionals,” Kudlow was the chief economist at Bear Stearns from 1987 to 1994.  His tenure at Bear ended infamously when it was revealed that he had developed a nasty cocaine and alcohol addiction at some point in his career.

Prior to Bear, Kudlow began his post-college career as a Democratic political operative.  He parlayed his political connections to get a job as a junior staff “economist” at the Fed.  I use quotations marks around the term “economist” in reference to Kudlow because he does not have a degree beyond undergrad  from the University of Rochester, where he majored in history.

At some point Kudlow, likely for political expedience given the political “winds” of the country in the early 1980’s, became a Republican. He wheeled his political connections into a job in Reagan’s OMB (David Stockman was the Director).  From there, he moved on to Bear Stearns.  The rest is history.

I thought  it would be interesting to peer into the mind of an untrained economist to examine the thought process.  Clearly Kudlow excelled at wheeling and dealing his political connections.  But is he qualified to be the president’s chief economic advisor, especially at a time when the U.S. is systemically collapsing?

In November 2007, Trump’s new Chief Economic Advisor, Larry “Señor Snort” Kudlow wrote an article about the economy titled, “Three More Years of Goldilocks” for which he should receive the Darwin Award (credit goes to @RudyHavenstein for posting the article).  Let’s examine some excerpts – keep in mind Kudlow wrote this about 5 months before Bear Stearns collapsed, triggering a financial crisis that anyone with more than two brain cells could see coming:

“I think the election-year economy will be stronger than the Fed’s estimate — closer to 3 percent. Too much is being made of both the sub-prime credit problem and the housing downturn.” IRD note: Many of us predicted and made big bets on the outcome of “too much being made of the sub-prime credit problem;” a caveman could see what was coming.

“What’s more, the entire market in sub-prime debt is just 1.4 percent of the global equity market.” – IRD note: Maybe 1.4% of a global stock bubble – but that’s like saying a small nuclear bomb in the hands of a madman is just 1.4% of the total stockpile of nuclear weapons. Notice that Kudlow overlooks the $10’s of trillions of OTC derivatives connected to the sub-prime debt, something that was obvious to many.

In issuing a forecast for 2008, Kudlow goes on to say:  “Both consumer spending and business capital investment are advancing…Right now, stocks are in a classic declining-profits correction. This downward trend has so far reduced the Dow by roughly 8 percent. As a rough guess, a 10 percent correction ought to spell the end to the Dow’s slump. And Fed rate cuts should be a big booster for stocks.” IRD note – Where on earth was he getting his data on consumer spending? By November 2007, households that weren’t living in fear of foreclosure were living in fear of losing their job. Between October 2007 and March 2009, the S&P 500 collapsed 58%.

Kudlow’s assertions back in 2007 were a joke.  What happened to Kudlow’s “Goldilocks economy?”  This is the person who is now Trump’s lead economic advisor.   Now Kudlow once again is asserting that, “the profit picture is good. It’s looking real good, and growth is not inflationary just let it rip for heaven’s sakes. The market is going to take care of itself.”

Based on his track record of issuing bullish forecasts right before a collapse,  I’d suggest that the economy and financial system is closer to taking care of itself by  “ripping” off a cliff without a parachute than it is to producing real growth. Retail sales have tanked three months in a row, the housing market appears to be headed south, auto sales plummeting, restaurant sales have dropped 19 out of the last 20 months. Where is this growth you seeing, Larry? Please do tell…

U.S. Gold Corp: Home Run Potential In The Cortez Trend

Some geologists believe that the Cortez Trend could be bigger than the famed Carlin Trend.  U.S. Gold has a project that sits about 10 miles south of Barrick’s mammoth Cortex Hills gold mine. I’ve spent about five hours with the CEO and co-founder – in person and on the phone – and over two hours in person with the head geologist understanding why USAU’s Keystone Project has potential to be the next big gold discovery in Nevada.

I published a report on Seeking Alpha that reflects specifically the wealth of information I learned about Keystone from Dave Mathewson, who is considered one of the leading experts on Nevada’s geology:

For Mathewson, the key to starting the hunt for a deposit is to find areas with the “right host rocks.” With Keystone, it has “rocks, system and geological characteristics – nothing is missing.” The “scout holes” drilled by the Company were used to identify the “stratigraphy,” which shows the geological layering of the rock formation and can help identify gold-bearing formations. According to Mathewson, the stratigraphy of Keystone looks almost exactly like Barrick’s Cortez Hills property stratigraphy – but even better.

 You can read the rest of this report from Seeking Alpha here:   US Gold – Home Run Potential

I first presented U.S. Gold to my Mining Stock Journal subscribers in mid-November at $1.45. It has traded as high as $3 since then. The latest pullback in price is a great entry point. The Mining Stock Journal has had several home run stocks since it’s inception. You can learn more about this newsletter here:   Mining Stock Journal information.

Mr. President, If We Don’t Have Gold, We Don’t Have a Country

The consequences of Gold Truth, such as it is but has not yet been revealed, are beyond sobering. If the Gold Truth is that USG, Inc. does not possess and own the gold it has promised the world that it owns and possesses, every last shred of monetary, fiscal, financial, economic and moral authority that USG, Inc. still possesses would be destroyed in a matter of seconds. And it is virtually impossible to see how the U.S. dollar could survive such a revelation without plummeting.Stewart Dougherty

Stewart Dougherty has written another compelling, thought-provoking essay about gold and the United States Government’s intentional omission of gold as the foundation of monetary and fiscal policy.  Please note that Mr. Doughtery’s view of Trump does not represent IRD’s view of Trump or his efforts as President.

“Passivity is fatal to us. Our goal is to make the enemy passive. … Communism is notlove. Communism is a hammer which we use to crush the enemy.” Mao Tse-tung, proclaiming the founding of the People’s Republic of China, 1949

Circumstantial evidence is mounting high that there is something seriously wrong with the amount of gold reportedly owned by the United States government, or more precisely, the American people.

After nearly two generations of being brainwashed into believing that gold is a meaningless relic, western citizens have lost all concept of gold’s crucial monetary importance. If it turns out that the United States does not, in fact, possess and own the gold it claims to, the monetary, fiscal, economic, and humanitarian fallout will be unprecedented in its destructiveness. Unfortunately, the people have no idea what is at stake.

The largest corporation in the world, by far, is the United States government. No other corporation has anything even close to its $3.4 trillion in annual revenues, and $4.4 trillion in annual expenses. And no other corporation has ever suffered multiple annual losses exceeding $1 trillion dollars, nor could it have, as such losses would have financially annihilated it. To be able to print money at will and without limit, as USG, Inc. can do, has blinded it to the powerful beast called Consequences that is slowly and methodically hunting it down.

USG, Inc. employs thousands of accountants, many of whom work at the Congressional Budget Office. The CBO prepares detailed budgets, one of which looks forward thirty years, and then extrapolates the numerical trends for an additional forty-five years, for a total forward horizon of 75 years. The 2015 report examines USG, Inc.’s projected performance until the year 2090. According to that report, not only will USG, Inc. lose money every single year for the next 75 years, the losses will actually accelerate each year and total more than $300 trillion. In 2047 alone, the deficit is estimated to be $5.3 trillion, on a cash accounting basis. On an accrual accounting basis, it will be far worse, if USG, Inc. even makes it to that point in its current state, something we find it difficult to envision. It is arithmetically impossible for the dollar to avoid destruction in such a scenario.

It should be no surprise that USG, Inc.’s finances are such a disaster, because for the past generation and longer, the CEOs of USG, Inc. have never in their lives held real jobs in the productive economy, other than GW Bush’s brief stints as a member of an oil and then a baseball investor group, which is not the kind of real job we mean. Instead, these CEOs have all been professional politicians, who by definition do not contribute to the real economy, but rather, feed upon it.

This pattern was about to repeat itself in 2016, with the Deep State’s planned installation of Hillary Clinton into the CEO role at USG, Inc. Clinton, too, has never in her life had a real job in the productive economy, and has precisely zero experience managing anything even beginning to resemble a massive corporation with millions of employees and projected $1+ trillion, accelerating annual losses extending as far as eyes can see. This is exactly what the Deep State wanted: a corrupt, financially clueless, ideological figurehead, who would be oblivious as they ramped up the looting of USG, Inc. to a new level of rapaciousness while she was busy hectoring the nation’s producers and taxpayers about their deplorable selves. It is this looting that is the precise reason why USG, Inc. is now drowning in losses and debt, and is strategically paralyzed.

While anyone with any common sense would immediately understand that it would be ridiculous to expect that someone with zero education, training or experience in engineering could oversee the design of a spacecraft capable of landing on Mars, or that someone with zero medical education, training or experience could successfully conduct brain surgery, for some unfathomable reason, people think that someone with zero business education, training or experience can successfully manage the world’s largest corporation. USG, Inc.’s catastrophic financial results demonstrate the regrettable stupidity of that thought.


America’s Pension Crisis Is About To Detonate

Dr. Paul Craig Roberts sent me an article by Catherine Austin Fitts and asked if I had read it.  The article is titled, “The State of America’s Pension Funds.” The article is worth reading, though I believe Ms. Fitts underestimates significantly the degree to which political and Wall Street criminality – along with money management incompetence – has infected and destroyed the U.S. pension system – both public and private. Furthermore, I believe she errs in her believe that the pension crisis can be fixed.

I’ve re-posted below my view of the looming pension system melt-down that I shared with Dr. Roberts.

“My guestimate for the amount stolen or shifted illegally through these mechanisms is $50 trillion, although I can argue the number higher.” I agree with her assessment there.

Craig, I concluded in 2003 that the elitists would hold up the system with printed money and credit creation until they had swept every last crumb of middle class wealth off the table and into their own pockets. Back then, I said housing was next asset to be drilled and cored. Let’s review: The first bubble removed at least $5-10 trillion of wealth from the public via the bailout of the banks and the wealth lost by people who chased home prices higher and then lost those homes to foreclosure or short-sale. Most of those homes are now sitting in the rental portfolios of large Wall Street investment funds like Black Rock and Colony Capital.

I also concluded that the last remaining middle class asset was retirement funds (Pensions, 401k’s, IRAs) and that looting that asset class would be the elitists coup de grace. Retirement assets are by far the largest middle class asset in aggregate (something like $20 trillion now). Let’s review: Every dollar of under-funding is a dollar of wealth transferred away from the pension plan members to either current beneficiaries or the promoters of the fund investments. A lot of money is also paid to “professionals” who skim huge salaries and benefits to put money to work with hedge funds and private equity funds, most of which will be wiped out in the next big bear market.

I have a close friend who works at a pension fund. It’s an off-shoot of a big State pension plan which happens to be one of the more underfunded pension funds in the country. My friend has to be a member of the pension fund as an employee of the fund he helps manage. He told me that as of Jan 1 he now has to contribute 12% of his pre-tax income to the pension fund. It’s criminal. That’s in addition to the amount his employer has to match. The money helps fund current beneficiary payouts. He needs his salary/job to support his family so he does not have a choice but to keep working at his current position unless he can find something else that pays equally as well. The job market for investment fund analysts is extremely difficult right now. His wife has to work for them to make ends meet (their kids are all under 12)

Based on a detailed study he did internally, he estimates the true underfunding of all public pensions in aggregate is at least $8 trillion. Not the $3.5 trillion referenced by Catherine Austin Fitts. He’s an insider and has access to better data than the outsiders and academics who have done studies that conclude $3-5 trillion of underfunding. THAT’s with the stock AND bond markets at all-time highs. How in the hell is that possible? The difference, or funding gap, is the wealth that is being confiscated.

The under-funding device is a very subtle and brilliant mechanism of wealth transfer. No one thinks about it that way but that’s what it is. A massive wealth transfer  mechanism.

I worked for some of these insiders at Bankers Trust. I can tell you first-hand, for a fact, that these people will do ANYTHING to take money from ANYONE, legally or illegally. I saw this first-hand. They are all very bright, well-educated and completely devoid of morals or ethics.  My direct boss was like that and everyone above him was even worse. They hate nothing more than leaving, literally, even dimes and nickels on the table.

That’s why the system is doomed.

Almadex Minerals Is A Potential 5-Bagger

I first presented Almadex (AXDDF, AMZ.V) in the April, 14th 2016 issue of the Mining Stock Journal at 27 cents.  After announcing  on Monday an investment from Newcrest Mining in its flagship El Cobre Project, the stock traded as high as $1.31.  I present the case for Almadex to be at least a 5-bagger from here in this Seeking Alpha article just released.   As soon as I have time to analyze the new “Spinco” stock that will be spun-off from Almadex to shareholders, I’ll present a detailed analysis to MSJ subscribers.

Almadex Minerals (OTCQX:AXDDF) was formed as a spin-off from Almaden Minerals (AAU) in mid-2015. Almadex is comprised of several exploration properties plus Net Smelter Royalty interests on projects managed by other companies. The idea behind the original transaction was that the value of the parts was greater than the sum of the parts under one corporate umbrella.

The crown jewel transferred to Almadex is the El Cobre copper-gold porphyry project in Veracruz, Mexico. A porphyry deposit is a deposit in which minerals like copper, gold and molybdenum are disseminated in a stockwork of small veinlets within a large mass of hydrothermally altered igneous rock. World-class copper-gold porphyry deposits can be worth several billion dollars.

Follow this link to read the rest: Almadex Minerals Is Extraordinarily Undervalued

Powell Is Not An Economist – And The Fed Is Not Tightening Monetary Policy

Fed Head, Jerome Powell, is not an economist. He’s a politician who made a lot of money at the Carlyle Group. He has an undergraduate degree in politics and went to law school. After working for awhile as a lawyer at a big Wall St. firm, Powell migrated to investment banking at Dillon Read. Powell must have built a relationship with Nicholas Brady at Dillon Read, because he jumped from Dillon Read to positions in Brady’s Treasury Department under George H. Bush. From there he took an ill-fated position at Bankers Trust and was somehow connected to the big derivatives scandal that eventually forced BT into the arms of Deutsche Bank. Information about Powell’s role at BT have been cleansed from the internet but he resigned from BT after Proctor & Gamble filed a lawsuit that exposed a large derivatives scandal.

The point of this is that it would be a mistake to analyze anything Powell says in his role as Fed Head as anything other than the regurgitation of previous oral flatulence emitted by Bernanke and Yellen. First and foremost, Powell’s agenda will be to protect the value of private equity investments at firms like the Carlyle Group. In this regard, Powell’s wealth preservation interests should have precluded him from assuming the role of Fed Head. Then again, he’s not an economist. The last Fed Head who was not a trained economist was G. William Miller, appointed by Jimmy Carter in 1978. How well did that work out?

While many “analysts” have looked to statements made by Powell in 2012 that expressed a somewhat “hawkish” stance on monetary policy, it’s more important to watch what the Fed does, not says. Since the balance sheet reduction process was supposed to begin starting in October, the Fed’s balance sheet has been reduced from $4.469 trillion as October 16, 2017 to $4.458 trillion as of February 21. “Qualitative tightening” of just $11 billion. This is well behind the alleged $10 billion per month pace that was established and highly promoted by the Fed, analysts and the financial media.

Powell stated to today that the Fed will continue with “gradual rate hikes.” What does this mean? Over the last two years and two months, the Fed has implemented five quarter-point rate “nudges.” Less than one-half of one percent per year. Since 1954, the Fed Funds rate has averaged around 6%. This would be a “normalized” Fed Funds rate. Based on the current rate of Fed Funds rate “hikes,” it would take six years from December 2015, when the “rate nudges” commenced, to achieve interest rate “normalization.”

But here’s why it will like take a lot longer and may never happen:

The chart above shows the dollar amount of consumer debt that is in delinquency. It was $33.3 billion as of the end of Q3 2017. It is at the same level as it was in Q2 2008. The data is lagged. I have no doubt that is likely now closer to $36 billion, which is where it was in Q3 2008. If anything, we will eventually see “faster-than-gradual” drops in the Fed Funds rate.

With Government, corporate and household debt at all time highs, and with delinquency rates and defaults escalating quickly – especially in auto and credit card debt – the only reason the Fed would continue along the path of tightening monetary policy as laid out – but not remotely adhered to – over two years ago, is if for some reason it wanted blow-up the financial system. Au contraire, hiking rates and shrinking the Fed’s balance sheet is not in the best interests of the Too Big To Fail Banks or the net worth of Jerome Powell.

Is Fed Pumping Stocks To Keep Pensions Solvent?

The pension crisis is inching closer by the day. @CalPERS just voted to increase the amount cities must pay to the agency. Cities point to possible insolvency if payments keep rising but CalPERS is near insolvency itself. It may be reform or bailout soon. – Steve Westly, former California controller and CalPERS board member.


In a story buried in the business section of the February 18th NY Times, it was reported that the spending budget passed by Congress included a provision that creates a 16-member bipartisan congressional committee to craft legislation that would provide for the potential bailout of as many as 200 multi-employer” pension plans. Like most State public pension plans most of these multi-employer plans are about to hit the wall of insolvency. A multi-employer plan is a union pension plan that covers employees of union working at different companies.   This minor little detail was not reported anywhere else.

A good friend of mine who works at a public pension did an internal study of all major State pension plans and determined that a 10% or more decline in the stock market for an extended period of time would blow up every single public pension in the country.  “Extended period of time” was defined as more than 3-4 months.  Every pension fund he studied is a monthly net seller of assets in order to fund beneficiary payouts – i.e. the cash contributions from current payees into the fund plus investment returns on capital is not enough to fund current beneficiary payouts.  Think about that for a moment.

As such, State pensions have dramatically ramped up their risk profile and most now invest at least 40-50% of their assets in stocks.  If you include private equity allocations, the overall exposure to equity investments is 70-80%.  CalPERS allocates 50% of its AUM to the stock market; the State of Kentucky  is now at 60%. Historically, pension stock allocations have typically – and prudently – ranged from 25-35%.

The stock market has now experienced three 9-10% drawdowns since August 2015. Assuming the “V” move  higher from the latest market plunge continues, each drawdown has been aggressively and swiftly negated by obvious Fed intervention.  The Fed does not deny this allegation and even subtly alludes to a non-explicit goal of targeting asset prices.

With pensions now 50% or more invested in stocks, it seems pretty obvious that one way to inflate away the looming pension catastrophe is for the Fed to inflate the stock market.  Two weeks ago the Fed reflated its balance sheet by increasing its SOMA holdings with $11 billion in mortgages. The SOMA account is the Fed’s QE account.  An $11 billion SOMA injection to the banks translates into $100 billion in liquidity – through the magic of the fractional banking system – that can be pumped into the stock market.  Who needs retail stool pigeons to chase extreme valuations even higher?

Most, if not all, pensions are quickly reallocating their equity investments for active to passive funds. “Passive” = indexing.  This means that the Fed only has to worry about inflation the broad indices like the Dow, SPX and Nasdaq.  That’s why an increasingly few number of stocks, like AMZN and Boeing, are driving the indices.  There’s still plenty of stocks that continue to decline – GE, for instance.

I laugh and sometime sneer at those who think new Fed Head Jerome Powell will impose monetary discipline by raising interest rates at least up to the real rate of inflation and reduce the Fed’s balance sheet according the schedule as laid out by Yellen.  After all, Powell is heavily invested in Carlyle Group, which  owns many companies that are covered by union pension plans.  He’s incentivized personally  to keep the monetary gerbil running on the wheel.

And better yet, if the Fed can keep the pensions thinly solvent by pumping up the stock market, Congress and State Governments can defer the inevitable taxpayer bailout of public pension funds – for now.

The “Russia Threat” Tragicomedy

I’m still trying to understand how this nation became so deeply embroiled in this idiotic investigation into “he said, she said” about the Russians interfering in U.S. politics.  I can tie it back to the presidential election campaign when Hillary Clinton asserted, during one of the debates, that the Russians hacked her email.  LOL.  As it turns out, we know that is false.

The only real connection to corruption, bribes and Russia is Hillary and her husband.  The connection between millions in donations from a Russian company to Clinton “charitable funds” which paved the way for uranium sales to Russia is definitive.  Where’s the investigation into that?

The Russia situation, like the “war on terror,” is nothing more than a State-sponsored propaganda prop crafted to distract the public’s attention from the massive theft of public wealth.  The elitists are robbing the country blind and the citizens are blinded by fraudulent news reporting.  Every major “respected” news organization, print and television, has been forced to withdraw fabricated stories.  And yet, allegedly educated and “enlightened” people continue patronizing these same news sources.

My good friend, John Titus of Best Evidence video productions, and I were exchanging text messages earlier this week on the insanity that has gripped the U.S.  I wanted to share some quotes from him because they are too insightfully entertaining to keep to myself.

“The slaves [i.e. the public] will debate the merits of the red puppet and the blue puppet all the way to the gas chambers” [Republicans vs. Dems].  Note:  to anyone really paying attention, there’s no difference between Repubs and Dems – they are both controlled only by money and answer only to those who pay for their elections.  Anyone who believes that voting makes a difference is severely mentally challenged.

In reference to Russiagate:  “That story is actually so f–king dumb that I think it’s a national IQ test to see how much broad-daylight theft the criminals can get away with. ‘Can we,’ the criminals must be asking themselves, ‘drain every cent out of people’s bank accounts, 401k plans and pension funds and, in the morning, have CNN blame it on malicious gun-slinging right-wing hacker hobgoblins and still get away with it.’  The answer is most certainly ‘yes.'”

Of course, to that he added:  “Well, to be fair (and balanced), Fox News would undoubtedly fire back with a rash of its own ‘experts’ blaming the crisis on Black Lives Matter and lesbian abortionists for gun control.”

The Fed’s “Catch 22”

Before diving into the topic, let’s be clear about one thing:  The economic definition of “inflation”  is the increase in money supply relative to the marginal increase of wealth output (GDP) in the economic system for which money supply is created. This is differentiated from “price inflation,” which is “a general rise in prices.”

Money and credit creation in excess of wealth output causes currency devaluation.  It is this currency devaluation that arises from money and credit printing that causes “price inflation.”  More money (and credit) chasing a relatively less amount of “goods.”

Furthermore, the commonly used price inflation reference is the Government’s CPI.  The CPI measurement of inflation has been discredited ad nauseum.  And yet, 99% of analysts, commentators, bloggers, financial media meat-with-mouths, etc uses the CPI as their inflation trophy.   But the CPI has been statistically manipulated to mute price inflation since the early 1970’s, when then-Fed Chairman, Arthur Burns, correctly understood that the currency devaluation that was going to occur after Nixon closed the gold window would have adverse political consequences.  Today, the CPI measurement of price inflation is not even remotely close to the true rise in prices that has occurred over the last 8 years. Over the last 47 years, for that matter.

This notion of rising inflation seems to be the en vogue “economic” discussion now.  But the event that causes the evidence of currency devalution – aka “inflation” – has largely occurred over the past 8 years of global money printing.  If your general basket of expenditures for necessities – like housing, healthcare, food, energy,  and transportation – has risen by a considerable amount more over the last 5-7 years than is reflected in the CPI, ask either the Bureau of Labor Statistics, which publishes the  CPI report – or the moronic analysts who insist erroneously on using the CPI as the cornerstone of their suppositions – why that is the case.

The Fed’s Catch 22 – It’s been estimated that the Treasury will need to sell $1.4 trillion new bonds this year to cover the spending deficit that will result from the tax cuts combined with the record level of Government spending just approved by Congress and Trump. With the dollar declining, foreign Treasury buyers are sitting on significant losses on their Treasury holdings. As an example, since March the dollar has dropped 16% vs. the euro. Add this to falling Treasury bond prices (rising yields), and European holders of Treasuries, especially those who have to sell now for whatever reason, have incurred a large drop in the euro-value of their Treasury bonds. The same math applies to Japanese Treasury bond investors, as the dollar has fallen nearly 9% vs. the yen since March.

One of the primary fundamental factors causing the dollar decline is the continuously deteriorating fiscal condition of the U.S. Government. If the Fed continues hiking interest rates at the same pace – 1.25% in Fed Funds rate hikes over two years – the dollar will continue declining. The pace of the rate hikes is falling drastically behind just the official measurement of inflation (CPI). Imagine the spread between the real rate of inflation (John Williams estimates actual inflation to be at least 6%) and the Fed funds rate, also known as “real interest rates.” Real interest rates using a real measure of inflation are thus quite negative (6% inflation rate minus 1.25% Fed funds = negative 4.75% real rate of interest). As negative real rates widen, it exerts further downward pressure on the value of the dollar.

The Fed could act to halt the falling dollar by hiking rates at a faster pace and actually sticking to its stated balance sheet reduction schedule. But in doing so, the Fed risks sending the economy into a rapid tail-spin. Higher rates and less banking system liquidity will choke-off the demand for the low-cost credit – auto, credit card and mortgage loans – that has been stimulating consumer spending. In fact, I have made the case in recent SSJ issues that the average household is now near its limitations on taking on more debt. Consumer borrowing, and thus consumer spending, will decelerate/decline regardless of the cost of borrowing. We are seeing this show up in retail sales (more on retail sales below) and in stagnating home sales.

As it stands now, based on its reluctance to reduce its balance sheet at the $10 billion per month rate initially set forth by Janet Yellen, it appears that the Fed is fully aware of its Catch 22 predicament. Last week, in response to the nearly 10% plunge in the Dow/SPX, the Fed actually increased its QE holdings by $11 billion. It did this by adding $11 billion in mortgages to its SOMA account (the Fed’s QE balance sheet account). This is an injection of $11 billion in liquidity directly into the banking system. This $11 billion can, theoretically, be leveraged into $99 billion by the banks (based on a 10% reserve ratio). The dollar “saw” this move and dropped over 2.2% in the first four trading days this past week before experiencing a small technical bounce on Friday. The 10-yr Treasury hit 2.93% last week before settling Friday at 2.87%. 2.87% is a four-year high on the 10-yr.