A new year and a new US regime that needs new financial solutions
IN SUMMARY
The calendar year just ended saw a robust stock market that was actually modest, if we peel back the same top seven “tech” stocks that produced most of the entire market’s return, both in 2024 and 2023. We emphasize that investing in equities is actually blind to artificial periods; instead, we purport that investing is more properly a point-to-point measure of wealth accumulation… from acquisition to the present.
Being mindful of the world’s new artificial intelligence focus, we asked it to help us evaluate its own ability to use its vast, super-speed digestion of raw data to produce meaningful forecasts. But, instead of a proof statement, AI cautioned us that it (only as of now, we assume) cannot be trusted to comprehend and develop reasoning out of the data patterns it brings to the surface.
Since the early 1990s, a revolution has occurred in the packaging of similar equities into Exchange Traded Funds, “ETF”s which eliminate the unattractive and inefficient aspects of conventional mutual fund investing. During the past 30 years, ETFs have now reached an impressive total value of $8 trillion. One of the ETFs that was introduced to instant popularity was designed to invest in only one thing: gold bullion bars, stored in vaults in London and elsewhere. This ETF thus produced a realistic way for anyone to directly invest any amount of money in gold, without incurring any of the physical baggage of holding the metal.
We review the fact that gold has a natural value of zero, because it cannot be consumed, and it delivers nothing. But gold has instead been assigned arbitrary value, measured in currencies that themselves have no natural value. Since 1972, when the price of gold was set free from its worldwide agreement to be valued at $35 per ounce, gold’s price has soared, especially very recently. We review the relatively brief history of crypto coins and, like gold, their shooting up in dollar-value.
We opine that both gold and cryptos are measuring value deterioration (price inflation) and reflecting what a sea of international economists are saying: that the US Government’s constant rate of new debt creation and its accumulated debt total (now larger than the entire US economy) is unsustainable, despite the persistent pursuit of more of same, on the wings of failing Congressional processes. Finally, we review yet untried possible means for gaining control of the accumulated national debt.
GOODBYE 2024!
2024 was a second-year-in-row 25% return year for the S&P500 stocks. Like 2023, by DataTrek’s calculations, that stock index would have barely registered a gain without the Magnificent Seven “tech stocks” that ranged from Nvidia’s 171% down to Apple’s 30%. Gold shares did a hair better than the 500, while Bitcoin, possibly driven by its newly approved mid-year packaging, returned an astounding 108%. Extra market juice, for stocks, bonds and the entire economy, was added by the Federal Reserve’s notching-down of interest rates.
If you have read these columns for years, you know that we discount the importance of equity investment tracking in annual and annualized measurements. We take that view because twelve-month packages of returns are simply arbitrary…. particularly those reported in (even more arbitrary) calendar-year groupings. The exception is when time-packaged returns are used for benchmark comparisons.
Investing and investments are not point to point; instead, they are continuous and incremental. Investing results therefore do not meaningfully fit into time packaging. An exception might be made for seasonal businesses such as apparel companies, but even those stock prices are necessarily driven by the same two basic elements that underlie all equity investments: (1) embedded sources of worth and growth and (2) investors’ expectations.
Instead of “annualized” returns, the most meaningful measure of investment return is wealth accumulation…. i.e., how much return (after taxes) has occurred from the beginning of the investment until now?
ARTIFICIAL INTELLIGENCE! SIMPLE LOGIC, FOLLOWED BY A LOGICAL IMPACT
Intelligence? Not exactly. At least not yet. So far, AI is producing mega-rapid summarizations from digesting a super-human quantity of historical data (when available), allowing it to produce a boiled down output that amounts to a conclusion supported by a deep stack of patterns and correlations. When we asked it, AI told us that it cannot identify underlying causation(s) of the patterns. And it further gently scolded us:
“…an AI model might accurately predict an outcome based on certain input, but not necessarily understand the cause-and-effect chain leading to that outcome.”
We hesitate to paraphrase AI, but its remark seems to be warning us to be wary of an age-old underlying Achillies data-tendon. As James Carville might say: it’s garbage-in, garbage-out, stupid!
Despite the current limitations, we suppose AI is merely in Stage 1 of many possibly rapid-fire stages of development that will result in a real-life intelligent being. Chillingly subsequent stages might deliver an AI cluster that has built its own self-training regimes which can produce destructive conclusions. Or it could quite naturally educate itself to resist, maybe even prevent human intervention and control of its continuous development.
THE SURGE OF ETFS
Until 1993, investors who wished to lower their risk exposure via diversification within a single investment package were forced to use mutual funds. The main problem with mutual funds was (is) that the investor must order a dollar-quantity of fund shares without knowing the share price. (This is because at the end of each market day, it takes the fund hours to calculate the market closing value of each of the underlying shares. Moreover, mutual funds are normally actively managed portfolios, so expense charges are typically a significant drag on fund performance.)
In 1993, a new format for pooled investing was born: Exchange Traded Funds (ETFs). The ETF format eliminates both of the mutual fund impediments: Many ETFs are an indexed pool of equity shares that are precisely defined and the ETF shares can thus be traded at any time during a market day, at an instantly known share price.
ETFs’ total value in 2024 was more than $8 trillion ($8,000 billion).
In 2004, the first commodity ETF (GLD) was offered to trade shares of gold bullion which is physically warehoused in various vaults, primarily London. We also note that, following a key 2024 permissive ruling by the Securities and Exchange Commission, Bitcoin were first offered as ETFs
GOLD IS RUNNING HOT
From September 2023 to now, the price of gold (per Troy ounce) has soared, along with stocks.
HOW MUCH IS GOLD “WORTH”?
Generality: Any tradable commodity that cannot be consumed or destroyed, and has no natural function, and does not deliver anything tangible, has, by definition, no intrinsic value.
Gold is one such commodity. But, during all of recorded human history, gold’s uniform and desirable physical characteristics have been in constant demand and, because of its indestructability, uniformity and relative rarity, it has logically and often been put to use as currency for conducting commerce
GOLD (yellow) VS DOW JONES INDEX (blue)
It is a logical choice for use as money, because gold is a rock-solid constant, not a variable.
Today, a troy ounce of gold sells for about $2,700; just ten years ago, it traded for less than half that amount: $1,150. How and why did that happen? Here’s how: The gold/dollar relationship has actually turned upside down.
Instead of gold being used as a never-changing yardstick, the dollar is routinely used as the yardstick for measuring gold. So, when the supply of dollars increases (because US Government budget deficits force more dollar printing) and the supply of gold is steady, gold’s price must rise.
Governments in the late 20th and 21st Centuries (including a reluctant Switzerland) are all operating their economies on fiat currencies that have no defined base, no maximum quantity, no point of reference for determining their value. So, when and as governments need to fund deficit spending, they simply create additional dollars, pounds, yen and euros… which stimulates their economies and continues to do that, even when currency de-valuation and general price inflation are the twin, automatic and unwanted by-products.
ABOUT THE US GOVERNMENT’S GOLD
In 1971, the US Government very suddenly ceased its open-end commitment to pay out gold, valued at $35 per ounce to foreign governments who “traded-in” their surplus US Dollars. Still, the US Federal Reserve is, by far, the world’s largest central bank owner of gold… a constant 8,133 metric tonnes. The worldwide total of all gold ever mined is 212,582 tonnes; so, at its current price in dollars, that total is worth about $20 trillion. The US Federal Reserve’s 3.8% share of that total is worth a mere $764 billion. (That amount, if used to pay down US Government’s $36 trillion debt would pay off a puny 2% of it.)
GOLD MAY BE MEASURING THE DEPTH OF THE US’S FINANCIAL DILEMMA
Gold’s rising price is likely one method for tracking the parabolic curve of US Government deficits (another $1,000 billion every 100 days now) and the accumulated debt ($36,000 billion now, up by exactly 100% in the past 10 years and 200% in 19 years). Worse, as we have cautioned in earlier Commentaries, the ratio of total federal debt to the healthy, growing economic output (GDP) is now well above 100%, which serves as an alarm bell. That bell is being rung by the deficit-culprits themselves (i.e., the US Congress) and also by independent economists who constantly declare that the persistent annual peacetime deficit addiction is “unsustainable”. How so? Very simply, without the government’s actions to compound new, add-on debt, we cannot pay the interest and re-finance the currently maturing debt. Thus, the current and recent years of deficit-decay is a dead-end highway and the boisterous semi-annual Congressional battle to approve higher “debt ceilings” is a ritual without meaning.
CRYPTO COINS MAY ALSO BE MEASURING THE DILEMMA
Bitcoin has a long enough existence that it can take a seat next to gold, when its dollar price is tracked similarly. Just since mid-year 2024, it has climbed from around $60,000 to above $105,000, on Inauguration Day, January 20, 2025. There was a price spike that began immediately after the November 5 elections.
Crypto coins have distinct characteristics that can deliver a 21st Century investment tool that not only parallels all the investment qualities of gold, but they also add desirable characteristics that are not possible with gold, primarily instant, worldwide access and trade-ability by both governments and individuals. Moreover, while gold has been continuously mined for many centuries, cryptos have an absolute mathematical ceiling on their population that can never be exceeded. Bitcoin is the first in line to fairly soon reach its practical limit.
HIGH AND RISING DEFICITS (compared to the total economy) ARE PATENTLY INFLATIONARY
The inflation we are discussing here is not the kind that consumers experience in grocery stores. No, this inflation is the variety that is eating away the US Government’s capacity to finance its operations, because annual spending must of course include debt payments. As warned by the credit agencies more than a year ago, continuation of the deep-deficit-path will predictably deliver another credit rating downgrade. Such a downgrade will produce higher interest rates on the large annual volume of new and re-financed federal debt.
A WAY OUT (?)
In the individual taxpayers’ mortgage world, a dead-end financial squeeze makes it necessary to sell the house, pay off the mortgage and either downsize, or lease another one. Indeed, the US Government also has that option; it can:
(1) sell some of its hundreds of prime urban locations office buildings (and, in necessary cases, lease them back) and
(2) sell, or develop a portion of its tens of thousands of acres of land (but not National Parks). It occurs to us that this kind of activity would be right up the experience-alley of new President Trump’s alley…. and the novel aspects of it would likely appeal to him and especially to Elon Musk, but the roadblock is the US Congress which, as of now, does not appear to see the need for unusual solutions.
(3) Another plausible possibility: Wyoming Senator Cynthia Lummis has offered legislation to create a US Government “sovereign wealth fund” investment portfolio, populated with Bitcoin and perhaps other cryptos.
Donald Trump reportedly put forth a suggestion that the sovereign wealth pool might be initiated by funding it with some 208,000 Bitcoin that have been confiscated by law enforcement from fraudulent transactions. (The value of that amount of Bitcoin today would be about $22.2 billion….. peanuts, compared to the national debt, but it would be a start.)
FOOTNOTE: A RIGHT-TURN AMONG WORLD GOVERNMENTS MAY HAVE MARKET IMPACT
Several major democratic nations of the Western world may be re-visiting the politically hard-nosed era of Margaret Thatcher and Ronald Reagan, the “Iron Lady” and the “Gipper” of the 1980s. Perhaps. Besides the re-Trump election in the US, France has abruptly turned a cold shoulder on 7 years of liberal President Macron, Canada’s left wing Prime Minister Trudeau has suddenly resigned after almost 10 years in office, and Germany’s splintered group of political parties has taken on a surprisingly right-wing complexion, spurred by that country’s out-of-control immigration surge. Also add Italy’s 2022 election of Prime Minister Meloni’s far right wing Fratelli Party.
So now, we await the unfolding economic impact of those countries’ rightward political shifts. The change will likely be meaningful and significant. The US share of global Gross Domestic Product was recently 26%; those other four countries added another 8%, so that they generated more than one-third of world trading. (China’s share is about 18%.)
President Trump’s announced economic plans will apparently assess an impactful level of tariffs on most of our imports. The scheme is expected to use the tariffs as a tool to enhance the US’s share of global goods production. As a result, the cost of the US’s imports will predictably rise which will likely be quite unpopular among Americans. Moreover, the tariffs could create painful US shortages. What is not clear is whether Trump’s announced tariff regime is at least partially a smoke screen that intentionally will not come into full flower.
It is speculative to assume that tariff-impacted non-US companies will rush toward establishing or expanding US-based production, given that: (a) the Trump presidency will be only 4 years and (b) Trump’s successor could dis-mantle the surviving tariffs. [By contrast, China’s requirement for the past 20+ years has been that non-China companies must build products in China and also deliver the training on sophisticated western technology to the Chinese workforce. As a result, for example, Tesla’s Giga Shanghai facility is the company’s highest volume producer, delivering more than half of all Tesla cars in the last few years.
COMMENTARY
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