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We are currently living through the largest financial bubble in the history of mankind.  Stocks, bonds, real estate, private equity, crypto-currencies, and even some collectible categories are all grossly inflated in value.  Our current financial mania is broader in scope and larger in magnitude than the 1990s Dotcom bubble, the 1720s South Seas bubble, the 1980s Japanese Nikkei bubble, the 1920s Dow Jones bubble or the 1630s Dutch Tulipmania.

It is the perfect setup for a devastating market crash.

Now I understand full well that making predictions about the financial markets is a quick way to become a liar.  They are so unpredictable that you can simply never say never.  And indeed, what reasonable person would have thought that the U.S. stock market would exit the 2008-2009 Great Recession – the worst economic contraction since the Great Depression of the 1930s – and then proceed to bloom into the greatest financial apostasy of all time?

I have to admit that I didn’t see it coming.

Of course, the real question is where do we go from here?  The conventional wisdom is that we’ve entered a new era of perpetually rising asset prices.  Stock market indices, real estate markets and crypto-currencies of all types will simply waft forever higher on their own smug sense of self-satisfaction, while their owners become rich, rich as Nazis I tell you!

Reality, however, is a harsh mistress.

I suspect that rather than spiraling higher into the financial stratosphere over the next few years, we are much more likely to experience a destructive market crash, or a series of lesser market crashes.  The historical parallels and mathematical realities governing our current predicament are just too brutal to have a happy outcome.

But why would I forecast a market crash when such events are rare throughout financial history.  Is our current “Everything Bubble” really that bad?

In a word, yes.  The Everything Bubble is so enormously overvalued as to be obscene.

For example, the S&P 500 index sports a sky-high price-to-sales ratio of 3.21 as of July 2021.  From the late 19th century right up until 1995 this ratio averaged around 0.8.  Since the Fed began blowing serial bubbles starting in the mid 1990s, the S&P 500 has averaged a somewhat higher ratio of around 1.5.  But this still pales in comparison to the 3.21 price-to-sales figure the index currently enjoys.

A 50% haircut in the major U.S. markets would barely bring this ratio down to an “elevated” average.

I like using the price-to-sales ratio as opposed to price-to-earnings ratios for a couple reasons.  First, sales tend to be far less volatile than earnings.  It isn’t unusual during recessions for earnings to turn negative, but sales rarely drop by more than 10% or 15%, even in highly cyclical industries.  This makes movements in the price-to-sales ratios far more subdued, which in turn gives the observer a much clearer view of the economic fundamentals.

Earnings are also subject to a tremendous amount of hype and fluff.  For instance, companies will often tout misleading EBITDA (earnings before interest, taxes, depreciation and amortization) or operating earnings (sometimes known as EBBS or “Earnings Before Bad Stuff”) to pump up their quarterly numbers.  And it is difficult to know whether the P/E ratio you’re looking at is using trailing 12-month GAAP, forward 12-month estimated GAAP, trailing 12-month operating or forward 12-month estimated operating earnings in its calculations.  No such confusion exists with price-to-sales numbers, which always use the actual trailing 12 month values.

Finally, it is far easier for an unscrupulous company to alter its earnings in a fraudulent manner than it is to fake sales data (although both can happen).

Looking at a chart of the S&P 500 index’s price-to-sales ratio is enough to induce vertigo.  Being a valuation metric, this ratio should lazily meander around a perfectly horizontal average with relatively modest variation on either side.  Instead we see an ascent on Mt. Everest, with the ratio blasting off from the COVID 2020 lows in a nearly vertical manner.  These sorts of blow-off top moves are a hallmark of late stage asset bubbles and nearly always resolve in a market crash.

 

Photo Credit: multpl

 

Another key indicator flashing red is the market cap of all U.S. stocks and bonds outstanding compared to GDP.  Much like the price to sales ratio above, this valuation metric is very, very reliable.  I first wrote about this important barometer back in 2018, but since that time it has gone completely bonkers.

As of Q1 2021 the total U.S. securities outstanding-to-GDP ratio stands at an unprecedented 565%, having risen sharply in just the past year.  But before 1991, the ratio had never risen above 200%.  Indeed, even during the very worst of the 2000 Dot Com bubble and 2007 Housing bubble the ratio never surpassed 380%.

This valuation measurement is so important because it not only takes into account the stock market, but also the bond market.  In fact, the well known Buffett ratio, which tracks the total market cap of U.S. stocks compared to GDP, is just a subset of this valuation metric!  But the total U.S. securities outstanding-to-GDP ratio is a more holistic tool than the Buffet ratio in isolation.  Every time a barely solvent company issues an ugly looking CCC-rated junk bond or a unicorn technology startup goes public, it is reflected in this all encompassing ratio.

To call total U.S. securities outstanding-to-GDP’s current level repugnant is an understatement.  If we were to return to the historical norms that prevailed pre-1990, both the stock and bond market would have to take a combined 73% loss.  And because stock investors sit in a first loss position vis-à-vis bond investors, it implies a truly disastrous Depression-level event for equity indices – potentially an 85% or 90% market crash!

Either that or we avoid a market crash via hyperinflation.  Fun choice!

 

 

But hyperinflation – a crutch leaned on by far too many financial pundits these days – is an unlikely outcome, even against a backdrop of trillion dollar deficits and an ever expanding Federal Reserve balance sheet.

Under more normal economic circumstances, high inflation would mean rapidly growing nominal GDP and falling real debt loads.  This would make equities a more enticing proposition versus bonds because companies have an implicit inflation-adjustment mechanism – they can just raise prices for their products (if the market will bear it)!  These increased prices lead to additional revenue and earnings for firms in a persistently inflationary environment.

Market crash averted, right?

Not so fast.  The problem is that empirical observations of both U.S. and foreign economies do not reveal much evidence of inflation (excepting the temporary post-COVID spike).

Instead we see a troubling pattern where each successive recession leaves corporations, governments and average citizens more heavily indebted than before.  As the economy gradually becomes debt-saturated, more and more resources are diverted to paying the interest on these crushing obligations.  Consequently, non-essential economic activity slowly gets choked off leading to loss of pricing power, stagnant wages and disinflation, not inflation.

We can verify this by looking at a chart showing year-over-year nominal U.S. GDP growth rates over the last few decades.  I’ve added trendlines in red to show the average growth rate during periods of economic expansion.  The evidence is unambiguous – average nominal growth has been lower in every successive expansion since the United States cut the dollar’s last link to gold in 1971.

The Financial Crisis of 2008-2009 was particularly damaging, with nominal GDP averaging 5.3% before the crash and only 3.7% afterwards.  It is anybody’s guess just how low average nominal GDP will go in the aftermath of the COVID recession.  But there is at least one indisputable conclusion we can reach: absent massive changes to existing fiscal/monetary policies, nominal U.S. GDP will be lower over the course of the current expansion than the miserly 3.7% rate it achieved during the last expansion.

 

 

Persistently low growth and future disinflation does nothing to mollify fears of an imminent stock market crash.

Although I’ve peppered you with a multitude of frightening looking charts, one does have to exercise a degree of caution with valuation tools.  They can’t be used to time markets.  There have been countless instances when an already overvalued market simply ignored reason and became even more overvalued.  And there is nothing to say it couldn’t happen this time either.

But there are signs everywhere that this market cycle is far advanced, stumbling ever closer to a treacherous peak than any sort of harmless trough.

The first exhibit in our menagerie of speculative excess is the crypto-currency market.  Bitcoin, of course, needs no introduction, but it is the other, lesser cryptos that I would like to focus on for a moment.  These less well-known – although perhaps more infamous – crypto-currencies are often collectively termed “shitcoins” by a skeptical crypto community.

I measure speculative fervor in the crypto-currency space via two methods.  The first is the total market cap of all cryptos put together.  Because the space is dominated by Bitcoin, that particular token constitutes the bulk of outstanding market cap (usually between 40% and 70% of the total).  Aggregate crypto-currency market cap peaked in May of 2021 at an astounding $2.5 trillion.  To put this amount into perspective, it is believed that all of the above-ground gold in existence is worth perhaps $10 or $11 trillion.

Although the total market cap metric is quite useful, it has limited applicability with regard to shitcoins because they tend to have small market caps relative to Bitcoin, Ethereum, Tether and the other big boys.

That is where my other measurement tool comes into play – tracking the number of cryptos that have individual market caps greater than $1 billion.  In spring 2021 we hit 105 cryptos – mostly shitcoins – with a market cap of at least $1 billion.  This includes illustrious and desirable virtual currencies such as Ox (ZRX), Avalanche (AVAX), THORChain (RUNE) and my personal favorite, SushiSwap (SUSHI).  BakeryToken (BAKE) was a close second.  With names like these, how could you not be assured of great future wealth, honor and surgically enhanced women hanging off every arm?

That last sentence was sarcasm, by the way.  In reality, the price action we are seeing in shitcoins is a classic sign of financial mania.

 

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The speculation in the crypto-currency space has become so extreme that otherwise intelligent people are “investing” in shitcoins that they know are probably fraudulent because the allure of easy money is simply too great.  Bloomberg recently ran a great article on the topic titled “Crypto Scammers Rip Off Billions as Pump-and-Dump Schemes Go Digital“.

Here are a couple money-quotes from the article:

 

“‘Everybody I know has gotten rug-pulled [been the victim of a pump-and-dump scheme],’ says Titus, a 38-year-old butcher in Salem, Oregon.  ‘You know, you win some, you lose some.  Hopefully, win more than lose.'”

 

“Many who feel they’ve been ripped off just shrug. They chalk it up to the cost of doing crypto, the price of buying a lottery ticket that maybe just might hit that big jackpot.”

 

My God, is humanity dumb.  We keep repeating the same financial mistakes again and again, apparently forever.

Fortunately (or maybe unfortunately, depending on your viewpoint), this intensity of speculative fervor can’t persist for very long.  The crypto space will either have to continue delivering amazingly high returns (even taking into account all of the pump-and-dump schemes), or it will implode in on itself in spectacular fashion (while taking many peoples’ savings with it).

In any case, a future market crash is assured; it is merely the timing that is uncertain.

Another area where we see speculative price action reaching a frenzied peak is in that old favorite of market gamblers everywhere: the S&P 500 Index.  I’ve created a chart showing the S&P 500 from the spring of 2009 (which was the bottom after the Great Financial Crisis) to July 2021 (the latest data available).  I then segmented the chart into 5 distinct rallies during that 12 year period.  Finally, I drew a linear trendline in red through each separate rally.

 

 

The results are stunning.

It shows that each successive resurgence in the S&P 500 during the recent bull market has enjoyed a steeper slope than its immediate predecessor.  As “investors” (I put that term in quotation marks because they are really gamblers) become more assured that the stock market is a perpetual escalator up, they buy the next dip more aggressively.  As a result, each subsequent rally is more extraordinary than the previous one.  It is true that each runup in stocks is interrupted by a brief sideways market action or minor decline, but this merely serves as a prelude to the next dramatic ascent.

When you zoom out, it is clear that the entire edifice takes on the appearance of an exponential curve – a hallmark of financial market manias spanning the ages.  Perhaps most worryingly, the trendline angle of our current rally is well in excess of 70 degrees – a thoroughly unsustainable angle of attack.  For all you geometrically challenged people out there, a 90 degree rally would be perfectly vertical.  This doesn’t mean we can’t have another market drawdown or consolidation followed by an even more extreme melt-up, but such an outcome is cosmically improbable.

Instead it is far more likely that our speculative mania reaches its natural endpoint and swan-dives into a magnificent market crash – Fed be damned!  Few financial market participants are prepared for an event of this magnitude.

The final area where speculation has exploded within the past couple of years is certain niches within the collectibles market.  Magic the Gathering cards, comic books, modern sports cards, video games, sneakers and Pokémon cards are all collectible categories that have experienced frenzied trading and price increases.  Although an important catalyst for these moves was undoubtedly the spring 2020 lockdowns associated with COVID-19, pricing has since taken on a life of its own.

For example, a 1993 Magic the Gathering Black Lotus (alpha) card is more than $50,000 in the summer of 2021, a 300% increase from its price just 3 years ago.  A 1999 Pokémon Charizard Holo 1st Edition certified PSA 10 is $350,000, a nearly 800% increase over the same time.

Meanwhile, in the world of vintage video games a factory sealed, Wata 9.8 certified copy of 1996’s Super Mario 64 for the Nintendo 64 console brought a cool $1.56 million in a July 2021 auction.  And that record-breaking sale eclipsed a Wata 9.0 certified early production run Legend of Zelda Nintendo game cartridge from 1987 that had sold for $870,000 just days earlier.

The speculative excess in these collectable categories is truly breathtaking.

 

Photo Credit: MTG$

 

If you read my website at all, you know I’m a proponent of using fine antiques as an investment vehicle, but that enthusiasm does not extend to the collectible space.

The collectibles that are skyrocketing in price are largely made of plastic, paper and cardboard.  Most can’t even be used for their originally intended purpose without destroying their value as collectibles.  They are nothing like the antique jewelry, sterling silverware, old coins and other high value objets d’art that I recommend savvy investors accumulate.  These venerable antiques are made from some of the most enduring, desirable substances on earth – stuff like gold, silver, gemstones and exotic woods.

I would also like to point out that the piranha-like price action in the vintage collectibles space is tightly confined to those items from the 1980s, 1990s and early 2000s.  This is not a coincidence.  I believe that collectibles from this time period are shooting up in price for one very good reason.

The Millenials in their 20s and 30s who are speculating on these items have never seen a real market crash in their adult lives.  The last truly significant market decline was the 2008 to early 2009 timeframe.  Since that time, the Federal Reserve’s Everything Bubble has persistently risen regardless of the macroeconomic backdrop.  Young people – anyone below the age of about 35 or so – have come to believe that bursting bubbles and crashes are myths told by old investors to scare them out of the markets.  They have also conflated gambling with investing due to having no point of reference for what a normal, reasonable market looks like.

In contrast, most collectibles from the 1960s and 1970s – Hot Wheels cars, Barbie dolls, PEZ dispensers, Hummel figurines, etc. – are dead in the water.  These older collectibles have seen effectively no price bump at all during the last few years.  In fact, their prices have been declining!  I attribute this to the fact that older collectors who would normally be buying these items are too experienced to fall for the ridiculous arguments about never ending demand and perpetually rising prices.

We are in the midst of the greatest investment mania of all time.  But as euphoric as investors, speculators and gamblers in various asset markets are today, there are sure to be tears tomorrow.  A market crash is coming.  I can’t tell you when and I can’t tell you how, but it is coming.

I will leave you with a quote that famed economist Roger Babson made in a speech on September 5, 1929, just weeks before the Dow Jones bubble burst:

“Sooner or later a crash is coming, and it may be terrific.”

I believe we are living in similarly dangerous times.  Protect yourself.  Buy cheap assets like precious metals and high quality antiques.  Make certain to hold large cash reserves.  Don’t use leverage.  A market crash may be frightening, but you can survive it if you act now.

 

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Hyperinflation is on everyone’s lips today.  Investors are scared to death that they will wake up one morning and look out the window only to find that the world has devolved into a monetary Venezuela.  In this fantasy world, desperate people will frantically shuttle around huge stacks of rapidly depreciating cash in wheelbarrows, all while looking in vain for a business or shop that will exchange their increasingly worthless fiat for something – anything – of value.

Unsurprisingly, I have a different opinion.

I think the developed world is currently experiencing a multi-decade long “soft” depression, where economic growth, wages and consumer demand all remain stagnant.  In this scenario it is disinflation, not hyperinflation, that we need to watch out for.  Disinflation is defined as a monetary phenomenon in which inflation is still positive, but tends to move asymptotically towards zero over time.  It is important to note that disinflation is distinct from deflation, where prices tend to decline over time.

For now, though, it is hyperinflation that has caught the imagination of nervous investors.  In February 2021, genius hedge fund manager Michael Burry (who was favorably portrayed in the movie The Big Short) publicly warned that the United States is going down the same hyperinflationary road as Weimar Germany.  Since then, the financial media has been filled with breathless articles about how we are teetering on the brink of a dollar collapse as we transition into a hyperinflationary regime.

But I want to focus on one specific article I recently read titled Trading “Project Zimbabwe”.  It was written by “Kuppy” of the Adventures in Capitalism blog.  I’ve referenced him before in a post I wrote in the summer of 2020 called Money Printer Go Brrr – The Hyperinflation Myth That Won’t Die.  I chose to highlight his latest work because it is typical of the hyperinflationary scare genre that is so popular right now.

I’ll excerpt a few choice quotes below:

 

“I like to joke with friends that if they want to hedge their portfolio, they should buy the 2022 SPY $1,000 call [with a strike nearly 2.5x current levels] because they probably do not have enough right-tail [inflation] protection.  They roll their eyes or laugh a bit, but this is only because they have not studied the period we are about to go through.”

 

The author then follows up with this gem:

 

“Part of what is so misunderstood about the Weimar period is the extreme volatility. Traditional charts simply show an index going parabolic. Even log charts look rather similar.  However, there were multiple dramatic market crashes along the way.  There were many speculators who recognized what was happening, pressed too hard and got liquidated during one of these crashes.  Others survived the margin calls but sold out through sheer panic.  Even if you know the road-map, you can get whipsawed.”

 

Then he finally knocks it out of the park:

 

“I have written about this multiple times in the past year, but put selling is literally the gift that keeps on giving…in a world where JPOW has eliminated the left tail, yet retail investors are crazily overpaying for calls, implicitly juicing put implied volatilities, why would I do much else but write puts with my capital?”

 

This investment strategy is a huge red flag to me.  I have a fair amount of experience with options and writing puts is effectively writing an insurance policy.  You are pledging to bail out the put buyer if anything goes wrong with the underlying stock.  It doesn’t matter whether it is an adverse political event, generalized financial collapse or company specific fraud – the put writer will be forced to deliver cash and take devalued shares in return.

It is akin to picking up nickels in front of the proverbial steamroller.  Everything might go swimmingly well for years at a time, only to have your carefully constructed strategy spin apart in a couple days dominated by “impossible” multi-sigma moves.  Financial history is littered with the corpses of similar trading strategies that, although back-tested perfectly over a 5, 10 or 20 year time period, nonetheless failed spectacularly within a few years of their implementation.

My philosophy is that if you write put options on overvalued or junk stocks you will, sooner or later, end up being the proud owner of a portfolio full of those same loathsome stocks.

Now Kuppy is no fool.  So why is he so enthusiastic about a trading strategy that has bankrupted countless speculators before him, especially when he understands the concept of tail risk?  What is really going on here?

In my opinion, Kuppy is getting rich by speculating.  He, along with most other market participants, has discovered that you can throw your money at almost anything during our ubiquitous Everything Bubble and still make good money.  But the problem with participating in a financial bubble is that it is a case of easy come, easy go.  You will inevitably lose any money you’ve made if you don’t cash out.  But cashing out means walking away from future easy gains and few people have the intestinal fortitude to do that.

Therefore, most speculators resort to rationalizing their bubble antics instead.

The conventional wisdom right now is not that we are experiencing a series of obscene bubbles rife with grave financial risk, but instead that we are facing the progressive, accelerating debasement of the U.S. dollar.  This renders savings, conservative investing and prudence ineffective – indeed downright stupid – but only if the hyperinflationary narrative is true.

Unfortunately for Kuppy and company, I think disinflation is a far more likely monetary outcome over the course of the 2020s.  And if disinflation doesn’t happen, then deflation (not hyperinflation) is next in line as being the most likely result!

I hold this unpopular opinion for a multitude of reasons.

First, it must be unequivocally stated that commercial banks, not the Federal Reserve, have been the unquestioned driver of money creation in the United States since World War II.  A commercial bank is just a fancy term for any deposit-taking institution that also engages in fractional reserve lending.  In our modern world, governments located in developed economies made a deal with the devil whereby politicians effectively outsourced money creation to the commercial banking system.  This means that it is private bank loan creation that drives growth in the money supply, not the Fed printing up new reserves via quantitative easing.

 

Photo Credit: Alhambra Investments

 

As you can see from the chart above, private lending in the United States has been anemic ever since the 2008 Financial Crisis.  And why wouldn’t it be?  Consumers and small businesses that might need or want a bank loan are already debt-saturated.  Everybody has much weaker balance sheets than they did just 20 or 30 years ago.  Most banks take one look at the credit risks involved and sensibly walk the other way.

As a result, the growth in borrowing in our economy is currently driven by governments, government agencies and mega-corporations – all of which have relatively strong balance sheets and direct access to capital markets.  But floating a new bond issue through an investment bank isn’t fractional reserve lending; hence it results in no new money supply growth.

I would be much more sympathetic toward inflation fears if we did not have any good data on the subject.

However, we have two modern counterfactuals that cast doubt on an inflationary outcome: Japan and the Euro area.  Both of these economies lowered their interest rates to zero (or below zero in some cases) and had central banks that engaged in rampant balance sheet expansion.  Regardless, inflation rates in both regions have been perennially lower than in the United States for many years running with no prospects for an imminent change in the situation.

The U.S., Japan and Europe have been engaging in remarkably similar fiscal and monetary policies for some time now.  Disinflation, sometimes devolving into outright deflation, has dominated in the latter two cases.  So why in the world would we expect there to be a different outcome in the U.S.?

Securities markets agree with my assessment as well.  Both U.S. Treasury bonds and the foreign exchange market have been remarkably sanguine about the future of the U.S. dollar.  If hyperinflation – or even simply elevated inflation – was lurking on the horizon for the dollar, you would expect bond investors to be a little skittish about tying up their money for 10 years at a nominal yield of only 1.5%.

Yet that is the going yield-to-maturity on a 10 year U.S. Treasury note as of June 2021.  It sure smells like disinflation to me.

Naysayers claim that the Fed’s $120 billion per month purchases of Treasury and agency debt invalidate any pricing signals coming from the bond market.  But it is important to note that out of the approximately $4.5 trillion of net new Treasury issuance in 2020, only around $2.4 trillion was purchased by the Federal Reserve.  The free market happily absorbed the other $2.1 trillion with nary a complaint – and all at or near record low yields.

And that leads us to our next problem.

Economists really don’t have a proper definition for the U.S. dollar and, therefore, can’t accurately measure its supply.  I know, I know…the green paper stuff in your wallet is dollars.  That is absolutely true, but physical currency makes up a tiny fraction of the dollars in existence.  Most dollars these days are purely digital in nature, existing only as a series of 1s and 0s in some database.

Not only that, but dollars don’t even have to be domestic to be considered dollars.  The Eurodollar market refers to all the U.S. dollars that are deposited or domiciled outside of the United States.  These are typically concentrated in tax havens like the Cayman Islands, the City of London, Switzerland, Singapore, etc., but they can reside in any foreign locality.  The Eurodollar market is massive and has a huge influence on interest rates and international capital flows.

In any case, we don’t have a good definition of exactly what a dollar is.  After much contemplation, I’ve come to the conclusion that the commonly cited monetary aggregates published by the Federal Reserve – M0, M1, M2, MZM, etc. – are far too narrow in their scope to be useful.

The closest I’ve come to a good definition is this: the dollar is a currency unit that can extinguish U.S. tax liabilities and dollar-denominated debts.

But even that leaves a lot of wiggle room.

 

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Is your money market fund dollars?  Probably not, considering that it holds short-term corporate or government debt (which is a pledge to pay dollars in the near future, but not quite yet).

How about an Amazon gift card?  It might be denominated in dollars, but you sure can’t pay your income taxes with one.

And what about stable-coin crypto-currencies like Tether?  They are pegged to the dollar and (purportedly) backed by reserves, but they ultimately aren’t dollars either.

In spite of these monetary instruments clearly not being dollars, they can all act very cash-like under many circumstances.  During the good times, these cash-substitutes (which are typically privately issued) proliferate, leading investors to falsely believe there is far more money in the economy than there actually is.  But when the bad times come and people need money, they quickly discover that cash-like doesn’t always mean cash.

As you can see, this gets very messy, very quickly.

It also leads to the next reason I believe disinflation is in our future rather than rampant inflation: deflating asset bubbles.  Bubbles are both self-referential and self-reinforcing due to their intrinsic nature.  Persistently rising prices in an asset class (any asset class) gradually draw in more and more speculators who believe they are making a one-way bet.  Eventually, even otherwise conservative investors buy-in, deluding themselves into thinking they are prudently investing when they are really gambling.

Although primarily financial creatures, bubbles create a host of real world side-effects in the mainstream economy.  The first is the infamous wealth effect, where investors spend lavishly on vacations, home improvements and fancy dinners because they feel flush with unrealized portfolio gains derived from skyrocketing asset markets.  This is the transmission mechanism that the Federal Reserve is explicitly targeting with its reflation-oriented, low interest rate policy.

Unfortunately, the wealth effect is much less powerful than central bankers originally believed.  Rich people own most of the world’s assets, but have already bought as many Greek islands, Rolex watches and bottles of vintage wine as they care too.  Piling another million or two on top of their already prodigious mountains of wealth is unlikely to spur much more consumption.  On the other hand, your average 401-k investor with a 9 to 5 job is probably not going to splurge on a new $50,000 SUV just because his Apple stock netted him a cool 10 grand.

But where bubbles really do goose the real economy is in respect to employment and wages!

The investment banks that are cranking out worthless technology IPOs by the dozen need an army of bankers, lawyers, accountants and marketers to do the grunt work involved.  Likewise, our gargantuan housing bubble is keeping an entire fleet of real estate agents in the lifestyle to which they have become accustomed.

Perhaps most interestingly, the profitless prosperity companies – Netflix, WeWork, Tesla and others like them – are directly pumping up employment in a big way.  These are often good jobs that deliver high salaries and generous bonuses.  Private equity is the typical funding mechanism for pre-IPO profitless prosperity firms.  And much like workers in investment banking and hedge funds, private equity employees also receive generous compensation.

Taken together, it is clear that the true transmission mechanism for low-interest rate fueled bubbles is through the salaries and bonuses they provide to those employed in bubble sectors.  These strong wages help keep consumption and, by extension inflation, higher than it would be otherwise – probably much higher.

Of course, we must naturally ask ourselves what happens when our dear bubbles inevitably burst?

It is difficult to see how it couldn’t be a massacre.  Layoffs will be widespread and disproportionately hit bubble employees making relatively high salaries.  The freshly unemployed will be forced to tap equity portfolios and retirement accounts in order to put food on the table, but those securities will be worth much less due to falling markets.  Many formerly middle-class peoples’ houses will be repossessed as continuing to pay the mortgage, property taxes and insurance will prove to be untenable.

This is the stuff of nightmares.  It is the reason the Federal Reserve is so frightened that the bubbles they’ve created will collapse, dragging the economy down with it.

Here is the kicker though.  The inflation rate in the U.S. since the 2008 Financial Crisis has been anemic at best.  And this is with the benefit of the Everything Bubble pumping up employment and wages.  In fact, the United State’s prominent position as bubble factory to the world is probably one of the only reasons why our inflation rate has been consistently higher than in either Europe or Japan.

It isn’t too difficult to imagine a near future where the bubbles stop bubbling and disinflation or deflation results.

 

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There are other good reasons to expect disinflation, of course.

The rapid expansion of private sector debt during the 2020 COVID debacle springs to mine.  Additional borrowings by large corporations, small businesses, landlords and their tenets (leases are just another form of debt) will all weigh on future economic consumption.  All that new debt will eventually have to be repaid (with interest) or defaulted upon – a highly disinflationary prospect.

We can expect tax rates to climb in the future as well.  This will be driven by the need for the U.S. government to appear at least somewhat responsible in the face of continually escalating deficits.  Tax increases, even if insufficient to close the budget gap, will be a powerful signal to markets that the government will not spend itself into ruin.

But tax increases reduce consumption in an economy and contribute to deflationary impulses.  Rising taxes on corporate profits would be especially devastating because so many investors have come to expect the companies they invest in to pay little to no tax.  However, I think the generational low for such taxes came with the passage of the 2017 Trump tax cut, when U.S. corporate taxes were dropped to a flat 21%.  Higher corporate taxes are almost a given in the current political environment, which will contribute substantially to future disinflation.

I would like to note, however, that disinflation does not mean that prices drop.  On the contrary, I think it highly likely that nominal prices will be higher 5 years, 10 years or 20 years from now.

And I’m no inflation denier, either.

2021 has seen a major upward adjustment in prices due to the lingering supply-chain disruptions caused by the COVID pandemic.  These price increases are very real and very sticky too.  We won’t be giving them back, short of falling into a severe deflationary spiral.

Disinflation merely means that going forward we are likely to see slow, modest price increases, rather than dramatic, galloping ones.

The important take away from all this inflation/disinflation/hyperinflation talk is that the best way to protect yourself is to have a healthy cash cushion and to invest in reasonably priced assets.  The cash part is easy enough, even if relatively boring.  Finding reasonably priced assets in our massively overvalued markets is much harder.

This is where antiques, bullion, art and gemstones can play a vital role in your portfolio.  These are the asset classes that time forgot.  While financial pundits are hysterically shrieking about hyperinflation, many tangible assets have been curiously ignored by bubble-obsessed investors.

But their loss is your gain.

Because they are so cheap, a prudent investment in fine antiques or bullion will do well in almost any conceivable monetary future.  And it doesn’t matter whether we ultimately face disinflation, deflation or hyperinflation, tangibles will navigate them all with equal aplomb.

 

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The ongoing silver squeeze has been 2021’s seminal event for precious metal stackers and hard asset investors alike.  But what exactly is a silver squeeze?  Where did it come from and where is it going?  The Antique Sage will answer all these questions and more, so read on!

Oddly enough, 2021’s silver squeeze saga all began with GameStop (ticker: GME) – a U.S.-based brick-and-mortar retailer that specializes in selling gaming consoles, video games and peripherals.  The firm’s physical retail-centric business model is in terminal decline as the video gaming industry slowly but inexorably moves to an online digital distribution system.  As a result, Gamestop’s physical sales have been slowly drying up as time goes by.

I consider companies in this predicament to be in “run-off mode”.

If GameStop’s management was honest, they would be distributing almost all of the company’s earnings as dividends.  Shareholders would have to hope that they could collect enough dividends to recover their original investment before the firm goes to corporate heaven.  Of course, in reality GameStop’s management is hoarding its earnings so that they can extend the life of the (almost certainly) doomed company.  It is effectively a make-work program for C-suite executives.

I mention this because a Reddit message board populated by Millennials called Wall Street Bets recently engineered a spectacular short-squeeze in GME stock.  A short-squeeze is where buyers pile into a stock that has been heavily shorted (in the expectation of its impending bankruptcy), forcing those shorts to cover (buy-back stock) and thus driving the price skywards.

In a rational market, GME would be worth $2 or $3 a share as investors wait to see if management can (improbably) save the company from bankruptcy.  But the short squeeze was so intense that the stock momentarily reached a 52-week high of $483!  Proponents of the strategy considered it vindication for the little guy, as retail investors (theoretically) stuck hedge funds and other sophisticated speculators with massive losses.

 

 

A portion of the Reddit crowd decided to apply the same logic to silver and spontaneously self-organized under the banner of “Wall Street Silver“.  These silver fanatics refer to themselves as “apes” or “silver-back gorillas”.  They commonly declare that they have “diamond hands” (i.e. they’ll never sell).  And they love to post hilarious memes about stacking silver.

As strange as it might sound to more traditional investors, the Wall Street Silver crowd’s strategy is simple.

Persistent rumors have circulated for years that a cabal of large Wall Street investment banks has suppressed the price of silver by shorting huge quantities of the metal on the paper futures market.  If a coordinated silver squeeze were to force these investment banks to cover their shorts en masse, the price of the precious metal would theoretically explode higher.

That’s the theory anyway.

No one knows exactly how high silver could go in the event of a successful silver squeeze.  On the low end numbers range from $50 to $100 an ounce.  But some hardcore stacking enthusiasts speculate about $500 or even $1,000 an ounce silver.  In any case, if you owned the physical metal under these circumstances, you would instantly become rich (or at least much better off financially than you are right now).

Well, Wall Street Silver members put this radical idea into practice (sort of) in early 2021.  Adherents to the cause began to buy silver in whatever quantities they could afford.  Those of modest means bought a little, while those with fat bank accounts bought a lot.  On Thursday, January 28th (before the silver squeeze got underway) London’s silver market closed at $25.21 a troy ounce.  On Friday, January 29th, it closed at $27.42.  On Monday, February 1st, it popped to $29.59.

And that’s where things started going sideways.  Instead of the silver spot price continuing to rocket skyward, it gradually fell back into the mid $20 range over the course of the next several weeks.  This definitely wasn’t a repeat of the GameStop scenario.

However, all those physical silver buyers taking part in the silver squeeze did have an effect.  Although the paper futures market hardly blinked, the physical silver market experienced a severe shortage.  Precious metal dealers sold out of most silver products almost instantly.  And despite refineries’ and mints’ concerted efforts to keep the proverbial shelves stocked, they simply cannot fabricate retail products fast enough to meet the burgeoning demand.

Consequently, the silver squeeze is very real, but only for the sorts of products that small investors like: silver bars, government-issued coins and privately-minted rounds ranging from 1 to 100 troy ounces in weight.

 

Pre-1965 U.S. Junk 90% Silver Coins for Sale on eBay

(This is an affiliate link for which I may be compensated)

 

My personal silver scrapping story starts just a bit earlier than the 2021 silver squeeze drama, though.  Back when the COVID-19 pandemic hit in March 2020, the spot price of silver momentarily plunged to less than $12 an ounce.  However, it was impossible to buy physical silver bullion anywhere near that price at the time.

As the bullion supply shortage began to ease going into early summer 2020, I resolved to add some silver to my portfolio.  But I am always cost conscious and wanted to invest in the most cost effective way possible.  I targeted two different strategies: buying pre-1967 Canadian junk 80% silver coins for stacking and vintage sterling silver flatware for scrapping.

Throughout my antiquing career, I haven’t been shy about scrapping precious metal items that are damaged or don’t measure up to my standards.  This has mostly been confined to 20th century sterling flatware patterns from U.S. manufacturers – largely incomplete sets with monograms, random souvenir spoons or other orphan pieces.

American sterling silver flatware design went downhill during the 1930s and the 1940s.  I attribute this to the rise of stainless steel as a cheap, versatile alternative to sterling silver.  Silverware manufacturers began designing flatware patterns for stainless first and sterling second – or, to be more precise, they made patterns that would work in either metal in order to save money on design and tooling costs.

But stainless is a very tough material that doesn’t conform well to stamping, so stainless flatware designs must be in low relief with relatively spare details.  Unfortunately, this negates silver’s primary advantage of being wonderfully malleable, which means it takes complex, high relief designs well.

As a result, mid 20th century silverware patterns can be…well…boring, particularly when compared to their wonderfully ornate Victorian and Art Nouveau counterparts.

When I buy scrap silver I am very careful to salvage anything truly rare or worthwhile.  The silver pieces I scrap aren’t cultural treasures that will be missed – I’m not trashing 18th century Georgian silver here!  And yet, I still have a twinge of guilt when shipping material off to the refiners.  I am keenly aware that I’m consigning these silver items to be melted down and lost forever.  While this does leave me a little emotionally bifurcated, the fat check I receive in return will have to console me.

I chose to start accumulating scrap sterling silver in the summer of 2020 for one very good reason: it was the absolute cheapest silver around by a wide margin!  As the price of silver rose to the high $20s in late summer, I bought every sterling silver spoon, fork and knife I could find with a melt value below $22 an ounce.

 

 

And here’s the surprising thing – I found quite a bit of it.  According to the efficient market hypothesis this shouldn’t be possible, as any rational person would price the items they sell online at or above melt value.

And yet here I was buying scrap silver with both fists on platforms like eBay and Etsy for significantly below spot.  For example, I purchased a set of vintage Gorham sterling silver butter knives in the Camellia pattern at -32% under spot.  In another instance, I bought a lot of random Lunt sterling flatware for -58% below spot.  One of my biggest coups was buying $100 face value (5 pounds or 2.2 kilos!) of pre-1967 Canadian junk 80% silver quarters for -33% under spot.  I didn’t even bother to melt these coins, but instead added them directly to my silver stack.

Throughout my investing career I’ve repeatedly found the concept of efficient markets to be bullshit.  The (highly abridged) list of deals I’ve enumerated above is proof of that.  Even after accounting for shipping charges, refining fees and sales tax, I was still ahead of the silver squeeze wave.

So I bought…and then I bought some more.  In the end I acquired over 16 pounds (7.3 kilos) of scrap silver.  My original plan was to ship this off to be refined immediately.  But the 2021 silver squeeze has raised the fabrication fees most refiners charge.  This is the cost to have your silver turned into bars or rounds and is only charged if you want physical silver returned to you rather than a check.

Because I want physical silver in exchange for my scrap, I have resolved to wait until fabrication fees become more reasonable.  Luckily, this is easy to do with close to zero risk.  I simply have to sit on my hoard of scrap silver until the situation normalizes, content in the knowledge that the money I’ve invested is immune to the ravages of inflation.

If you’re a silver squeeze enthusiast who is interested in trying out silver scrapping for yourself, I have a few pointers.

First, stay away from silver plated items – they have no precious metal scrap value!  If you don’t know the difference between solid silver and silver plate, then you are in over your head.

Second, just because a piece of silver flatware is marked sterling, it doesn’t mean that it is exactly 92.5% fine (which is the theoretical standard for sterling silver).  Back in the late 19th and early 20th century, large-scale silverware manufacturers had a lot of incentive to cheat on the assay.  When a silver item is being mass-produced, a 1% or 2% drop in the purity will pad out the manufacturer’s profit margins nicely while being impossible to distinguish by the retail customer.

As a result, I always assume that “sterling” silver is actually 90% fine for scrap purposes.  This applies to other silver flatware and hollowware purities as well.  So I treat 90% coin silver as if it was 87% fine and 83% silver (which used to be popular in Scandinavia) as 80% fine.  British hallmarked sterling items are an exception to this rule because the government rigorously enforced their assay standards.  Silversmiths who broke these hallmarking laws suffered harsh penalties.

Old (1960s and earlier) circulated silver coins struck by national governments will generally adhere pretty closely to their stated purity as well.  But I still deduct 1% from old silver coins to account for dirt, tarnish and the fact that most silver alloys are not perfectly homogenous.  A sheet of silver used to fabricate coin blanks might nominally be 90% pure, but that doesn’t mean the alloy was evenly distributed within the sheet.  As a result, a silver coin punched out of one end of the sheet may end up being 89% fine, while another coin struck from the other end of the same sheet may be 91% fine.  This issue is more pronounced when dealing with very old (pre-1900) coinage struck by less technologically advanced national mints (i.e. those from Latin America, South Asia and the Middle East).

Third, expect to only receive around a 90% payout (at most) on the actual silver content of the items you send to the refiner.  The refiner needs to make a profit and it is tough for them to make money if they charge less than about 10%.  So if a sterling silver spoon assays at 90% fine and you receive (at best) 90% of that, it means your payout will be 90% x 90% = 81% of the gross weight.

 

Scrap Sterling Silver Flatware Lots for Sale on eBay

(This is an affiliate link for which I may be compensated)

 

A refiner’s fee is also impacted by the amount of scrap material you send them.  A small lot of 10 troy ounces of silver scrap will generally be charged a much higher refining fee than an industrial-sized lot of 1,000 ounces of scrap.  So the more scrap you can send to a refiner at once, the better.  Each refiner has its own fee break-point policy, so be sure to check out their terms first.

Make sure that the overall assay of your lot is better than 75% or 80% fine.  Most refiners charge a higher fee if the total assay comes out lower than this amount (although the exact cut-off varies by individual refiner).  This is because it requires more chemicals and time to refine lower purity silver, driving up costs.

This is one reason I avoid buying U.S. silver war nickels (which are 35% fine) or U.S. silver-clad Kennedy halves (which are 40% fine).  If you ever have to send a bag of these coins off to the refiner, you will pay dearly in refining charges.

However, it should be alright to judiciously mix a few lower purity coins into a large lot of higher grade sterling silver, provided the overall assay remains above the magical 75% to 80% cut-off.  Many nations historically struck lower-purity silver coins that can be disposed of in this way.  For example, the Netherlands, Mexico and Austria have all struck 720 fine coins in the past, while Great Britain, Canada, Australia and South Africa minted 500 fine coins at one time or another.

Also make certain that your silver lot has been thoroughly stripped of any iron or lead contamination if at all possible.  Iron is poison to precious metal refining and will foul the assay of both silver and gold.  If it makes it into the initial melt it will float to the surface as a semi-solid slag, but will trap a lot of precious metals with it.  This will lower your final assay results considerably.

I recommend using a magnet to screen for iron in your scrap.  Old knives with silver-plated steel blades and sterling handles are a common trap for new scrappers.  These have to be dissembled before they can be sent to the refinery.  Worse yet, only 25% to 30% of the gross weight of an average steel-blade, silver handle knife will be good sterling.

Lead is a less damaging contaminant than iron, but has a special affinity with both gold and silver.  As a result it makes the purification process of silver alloys more complicated than it would be otherwise.  Happily, you won’t usually find lead mixed in with silver items (although it can occur where soft-solder was inappropriately used for jewelry or hollowware repairs).

As a final warning, if you hope to make a profit with scrap silver you must buy it substantially below spot.  -20% below spot is a good starting target.  Even when buying scrap that cheaply, it still only implies a meager 5% to 10% net profit margin after shipping costs, sales taxes and refining fees.

In addition, most of the really cheap (i.e. sub-$20 an ounce) silver flatware that used to be available online is gone.  I should know, I bought much of it.  But even if Etsy and eBay aren’t great venues for picking up cheap silver scrap right now, garage sales, estate sales and thrift stores remain viable sources of cheap material for the adventurous silver squeeze investor.

 

Read more thought-provoking Antique Sage editorial articles here.

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Read in-depth Antique Sage investment guides here.