Tag Archives: The Fed



The capital markets traded to the upside in April, as the Biden administration lays out their agenda and the Federal Reserve assures everyone that they continue to have everything under control. We suggest that you come to your own conclusions. Ben Bernanke had no clue that the financial crisis of ’08-’09 was coming, though there were quite a few warning bells ringing. You never know which snowflake will start the avalanche.


For those of you that like to know the latest deficit and debt numbers look like, the US deficit for the month of March was $660 billion, up from $119 billion in ’20, just before the pandemic related spending took off. The deficit for the first six months of the current fiscal year has therefore been $1.7 trillion, up from $741 billion in ’20. Since the comparisons from here will be up against the huge spending from April through September of the fiscal year ending 9/30, the comparisons will be “tougher”, depending on what stimulus programs are implemented.

Safe to say that the deficit for the current year ending 9/30/21 will be substantially more than the $3.1 trillion of last year. No doubt the total debt, not including unfunded entitlements, will be in the area of $30 trillion somewhere in the fourth calendar quarter of 2021. This continues to be of prime importance because heavy debt burdens the recovering economy and enormous spending, mostly financed by our Federal Reserve’s currency creation, will be necessary to keep the economy from collapsing. With the 2022 very important congressional election season beginning in just a matter of months, you can bet that the Biden administration will spare no expense to make the economy look good.


There is an increasingly active debate developing as to whether inflation, or possibly some form of deflation, is in our future, and when. Keep in mind that both can happen, just as we have already seen higher prices in assets such as stocks, bonds, real estate and others. On the other hand, general income levels have not moved by much and “core inflation”, excluding food and energy, is still subdued.

Both inflation and deflation can be good for gold. The miners did very well during the deflationary 1930s, in spite of a fixed gold price, because their costs were coming down as the worldwide economy collapsed. Gold did even better in the inflationary 1970s, moving from $35 when Nixon eliminated convertibility in 1971 to $850 early in 1980. On balance, we prefer inflationary trends and that is what central banks around the world are desperately trying to provide.

There are some very obvious short term trends that point to inflation. There is major upward pressure on the minimum wage, with an apparent shortage of workers. There have been shortfalls in supply, and higher prices for semiconductors, lumber, copper, agriculture, gasoline, used cars, and housing. Interest rates, while still low, have moved upward, which could signal the bond market’s expectation of higher inflation. The M-2 money supply has moved up by 24% in just the last year, the most rapid rate in 150 years, and economics 101 dictates that more money chasing the same amount of goods should be inflationary at some point. Most importantly, consumers increasingly expect inflation to accelerate, and that expectation alone can be a critical ingredient. Lastly, the weakness in the US Dollar points to higher domestic inflation.

On the other hand, some of the most intelligent observers, including Lacy Hunt, Gary Shilling, and David Rosenberg, believe that the likely inflation coming out of the pandemic, over the next six months, will be modest. Fed Chairman, Jerome Powell, calls it “anchored” and “transitory”. Hunt and Schilling have had three decades of accurately calling for low interest rates, a sluggish economy, and subdued inflation, largely as a result of the debt burden. David Rosenberg, perhaps the economic commentator with the most well documented view, is looking for a short term economic bounce, accompanied by a modest uptick in inflation, but a return to economic malaise within six months.

Powell believes the Fed can control inflation by reversing the accommodation, allowing interest rates to rise, just as Paul Volker did in from 1979 to 1982. Hunt and Shilling and Rosenberg believe that the economy will go nowhere because of the debt and the aging demographics. The debt, in their mind, is a huge problem over the long term, but the Fed activities preclude a full scale  economic collapase. It seems to us that one of the most important ingredients in the reasoning of Powell, Hunt, Shilling and Rosenberg is that inflation is been “anchored” for the last ten years, even though the deficits and debt have gone through the roof. Therefore: the same beat can go on for the foreseeable future.

Though these are very smart people that we are trying to interpret and “second guess” to a degree, we are inclined to think that inflation will be higher, and longer, than is suggested above. Historical precedents may not apply because this monetary experiment is of a different magnitude than has ever been seen before.

Firstly, the Fed can’t “pull a Volker”, if inflation takes off, because the $28 trillion of debt now compares to $1 trillion in 1980, and today’s many trillions of unfunded entitlements were of little concern forty years ago. The annual operating deficit was only about $100 billion in 1980 compared to perhaps $4 trillion today. Even with an economy that is 6-7 times larger today, the problems are of a different order of magnitude. Raising interest rates, as Volker did, would trigger a massive decline in asset prices and a terrible depression.

The assumption by Powell and the others is that, based on the lack of inflation the last ten years, as deficits and debt built up, there is reason to believe that further monetary accommodation will, similarly, not create an inflation problem. We have seen that, though the Fed took its balance sheet from $1 trillion to $8 trillion in the last ten years, financing most of the annual deficit with newly printed dollars, the “velocity” of the monetary aggregates collapsed at the same time so the new currency did not pressure the CPI upward.

The Fed wants 2%+ inflation, and $7 trillion of new currency did not get the job done. In an extreme example, do you believe that $100 trillion of new currency, chasing the same amount of goods and services, would drive prices higher? We would say: highly likely. Seven trillion dollars didn’t get the job done. One hundred trillion dollars probably would.

The only remaining question becomes: What amount of new currency, between $7 trillion and $100 trillion, would kick off inflation? We think we are going to find out. Nobody knows how the above discussed elements will interact, but we expect a stagflationary period during the foreseeable future, likely with an even weaker economy and higher inflation than in the 1970s.  We also expect gold and the gold miners to be among the very best asset classes to own in the turbulent period ahead.

Roger Lipton.



FOREWORD: This report is early because major developments are practically daily, all very supportive of higher gold prices.  Gold bullion, and the gold miners are up sharply this month. Relative to our Investment Partnership, RHL Associates, LP (almost entirely invested in gold mining stocks):  Considering the pace of news and the volatility  of prices, new investors (minimum $250,000), or additional investment by existing investors (no minimum), will be allowed to add funds as of closing prices on Wednesday, April 15th. If interested, call at 646 270 3127 or email at lfsi@aol.com. (This is not a solicitation, which can only be made by way of an offering circular, to be provided.)


We have long held the view that the worldwide economy  has been built, for forty years but especially over the last ten years, on an  increasingly dangerous foundation of credit and debt. The necessary financial measures to deal with the current health crisis are being imposed on a system that is already loaded down with far too much debt, short term and long term. With interest rates artificially suppressed, many trillions of dollars have been mis-allocated as investors in both equity and debt have reached for yield in increasingly risky ventures. Governmental deficits, after ten years of steady, if tepid, worldwide growth, were already approaching record levels. The US Federal Reserve asset base, which expanded from $1T to $4.5T to cope with the last financial crisis in ’08, had been lately reduced to  only $3.7T. So much for Keynesian economics, where the central bank stimulates the economy in bad times, and removes the stimulus in better times. The result, predictably, is that there is now no margin for error.

Less than six weeks ago, on March 3rd, when the coronavirus crisis was just emerging, we said:

“It is important to note that the monetary stimulus that supported the worldwide economy ten years ago……will of necessity be dwarfed by today’s needs.

“Today’s starting point for the Fed balance sheet is just over $4T and the ending point could be $10T. It always takes more (financial) heroin to maintain the (monetary) high.

” Our conviction is that the Fed, and the other Central Banks around the world have become impotent. Each round of stimulus the last twenty years has been increasingly less effective in stimulating growth. It is called a “diminishing marginal return on investment”. Monetary stimulus has run its course. It then falls back to the need for more fiscal stimulus, in the form of tax cuts, etc. That will have a limited effect, also, but will explode the deficit.”


The US government (followed by others worldwide) are throwing trillions of dollars around like confetti. We are together watching the daily news as everybody, large and small, is being supported for an indefinite period. (Turns out that Bernie Sanders didn’t have to get elected.) The Fed assets are already over $6T, up almost $1T in the last two weeks alone. Ten trillion dollars is the consensus, but our bet is at least $15T within a year, and more later.  They have to purchase most of the US  Treasuries that will be sold to finance a US operating deficit that will be something like $4-5T this year. They are also buying securities of all types, including High Yield Debt, Mortgages and Municipal Bonds. Since capital gains tax receipts are important to cities, states, and the Federal government, their absence will compound the problem for all. We have seen no discussion yet on the news about the $6T of underfunded pension liabilities, which the Fed will be called upon in a declining stock market.


“Where are we in this process ??  In addition to the negatively yielding fixed income government securities, the Bank of Japan (that has been doing this for almost thirty years) now owns about $250 billion of Japanese ETFs, or 75% of that entire market of ETFs. On the fixed income side, the Bank of Japan owns about 45%, or $4.5 trillion worth of all the Japanese government bonds outstanding. With it all, the Japanese economy is still running well below 2% real growth, with inflation at well under the 2% objective. It is of course an important sub-text that central banks worldwide are trying to stimulate inflation, rather than subdue it, which was the original objective.  Closer to home, we have been informed that our Fed is abandoning QT, preparing for a new form of QE, which, some have suggested, could include the purchase of US equities as well as bonds.

“Here’s a quick economic lesson for the hundreds of PHDs that are working within central banks. Don’t intervene in a market unless you are prepared to BUY IT ALL, because you will, eventually. Witness the holdings of the Bank of Japan, who have been at this game the longest, still without the result they have been reaching for. Aside from a long list of unintended consequences that have yet to play out, the attempt to lighten the inventory, (Sell to whom?) has just been demonstrated in the US. One down month in the stock market (December ’18) with the two year treasury rate approaching 3% and the US Fed caved. Whom do you think the Japanese Central Bank can sell to?”


Governments and Central Banks, around the world, are doing precisely what is described above, buying all kinds of securities at prices higher than the free market would call for.  The end result is that they will own it all. The previous owners are getting a gift, with an unnaturally high price. 


It’s been said that “In every crisis, you can look like a fool either before, or after”. The fiscal/monetary trends we have been “foolishly” describing “before”, along with the predictable consequences, are now being all too vividly demonstrated.  However, there is another, unexpected by all of us, consequence.

The long term trend of increasing deficits and increasingly sluggish growth (burdened by the higher debt) is now being compressed in time and very substantially magnified. What might have played out over ten years is now taking place in a matter of months. The Fed balance sheet, for example, which we always believed would get to $10T, perhaps in 5-7 years, will now get there late in 2020.  Operating deficits, scheduled to grow steadily in the 2020s from comfortably over $1T this year to $2T or more by 2030, will now have a much higher baseline. Just as we have said, however, the economy will be far too burdened by debt to grow strongly, if at all. There may well be a short term rebound when the cabin fever breaks, but it will be short lived. Consumers will have been traumatized. Businesses will be trying to rebuild balance sheets, and there will be new rules for all to play by.

Stock investors, at Thursday’s closing prices , have generally given back about five years of gains, and could give up the previous five as well if there is another downleg.

On the other hand, gold, the “real money”  has protected purchasing power over the very long term. Gold bullion after bottoming several years ago at $1050, has been steadily higher and is now selling only about 15% below its all time high of $1900 in 2011. Our preference, the gold mining stocks, have not done as well since 2012, still down more than 50% from their highs in 2012. Our choice has been admittedly costly, but we wanted the operating leverage that the mining companies provide with a rising gold price.  This continues to be the case, and we think the upside opportunity in the gold mining stocks is greater than ever. Coming off the lows of early ’09, gold bullion doubled in price and the miners more than quadrupled. The opportunity is even larger today since (1) balance sheets are better (2) management teams are improved (3) energy prices represent 15-20% of operating costs. Crude oil was between $80-120 per barrel back in ’09-’11, now a fraction of that, so profits at these higher gold prices will be that much more impressive.

We have been heavily invested in this area for 6-7 years, writing on this subject for the last four years. The articles are available, for FREE, on this website.

We believe that gold bullion will go up 3-4x or more and the gold mining stocks by a multiple of that.  We can not think of any other asset class that offers nearly as much opportunity. We had previously thought that this would play out over perhaps five years, we now believe that it could be a much shorter time frame.

Roger Lipton



The general equity market continued strong in February, while the precious metals complex consolidated the strong gains of December and January, with hardly any change. Gold bullion was down 0.6%, the gold miner ETFs (GDX and GDXJ) were down an average of 1.8%, the three mutual funds that we track (Tocqueville, Oppenheimer and Van Eck) were up an average of 0.6%. Our gold mining oriented investment partnership is performing in line with those ETF and mutual fund benchmarks, for the month and the year to date.

While we have a lull in marketplace volatility, it seems worthwhile to reflect on at least part of the essence of our conviction, why gold is the “real money”, proven to be so over literally thousands of years, currently representing probably the most undervalued asset class of all. It is true that there are other asset classes that have protected purchasing power as well or better than gold over chosen periods of time, such as: stocks of well run companies, well situated real estate, art created by legendary artists, to name just a few. Gold, however, the same gold that was produced in the days of King Tut (1341-1323 B.C.E.) has protected purchasing power without the uncertainty of stock picking, location analysis, or artist selection. An ounce of gold reflects roughly the same number of hours worked, and value of goods and services as it did 3,000 years ago, 200 years ago, 100 years ago, 50 years ago, and 20 years ago. (Not 6 years ago, to be sure, but give it time!)

Everyone talks about how inflation is “non-existent”, in spite of the monetary “accommodation”, which means money printing, unbacked paper currency creation with no limitation, debt levels worldwide still increasing. Even our Federal Reserve PHD’s are scratching their collective heads as to why inflation has not resulted from the trillions of paper dollars injected into the monetary system by the Central Banks. The new theory, dubbed Modern Monetary Theory, is postulating that the paper unbacked currency creation doesn’t matter. Remember the last “new paradigm”, the dotcom bubble of 1999-2000?

Let’s keep it simple. Put a few people in a small city, perhaps on an island, with a fixed amount of goods and services, and a fixed amount of money in circulation. If suddenly the money supply doubled, and there was no change in the goods and services available, what do you think would happen to prices? Of course everyone would have more “money” to spend, and they would compete for the “stuff” and prices (the quoted required paper exchange value) would of course rise. By the way: it’s the currency creation that’s the inflation, the cause, which we’ve already experienced.  The price rise is the effect of the inflation (insertion of more currency), and is coming.

So why hasn’t the price rise, following the “inflation” happened in the last ten years? The answer is, IT HAS! The Central Banks created trillions, which governments used to buy bonds and stocks around the world, keeping interest rates low in the bond markets, forcing fixed income buyers to reach for yield in the bond market and sometimes buy stocks in desperation while governments (Switzerland and Japan & others) bought stocks as well. This “misallocation of resources”, this “financial promiscuity”, this unprecedented monetary “experiment” has created not only artificially high stock and bond markets but private market valuations approaching $100 billion for unprofitable companies such as Uber and WeWork. Why do you think $100M (and higher) transactions in residential real estate are becoming commonplace and $200M was spent for a Van Gogh. People of substantial means are trying to get at least some of their resources out of “cash”, which they know is being diluted all the time. They don’t know what their Central Park West apartment or Van Gogh will sell for fifty years from now, but they are certain that the colored paper in their pocket will buy a very small fraction of today’s purchasing power. Grocery prices, certain Chinese or Mexican produced apparel, or increasingly powerful consumer electronics may not be quoted higher in price, but almost every important asset class other than gold has appreciated substantially, especially over the last ten years.

One last point for this installment:

While the hue and cry for a higher minimum wage has been a constant feature of our political and economic dialogue, let’s think for a moment about the way the economic world really works, and always has. Workers get a raise, $15 minimum hourly wage now in 20 states, and feel good for a little while, because they immediately have more discretionary income. However, the higher wage comes from their employer who produces goods and services and that production has to generate a return on investment. Since that employer’s profit margin has just been materially reduced, in probably a matter of months they will raise the price of whatever they are selling. So the employee who received higher pay fairly quickly finds that he or she is paying more for the stuff they are buying. This is why, it’s the middle class that really gets screwed by the inflationary process. The wealthy have their stocks, bonds, homes, art, stock options, etc. The impoverished have their various government benefits, food stamps, and emergency care at the hospital if they really need it. It’s the middle class, playing by all the rules, that can’t seem to get ahead. They are making more “money”, but don’t ever seem to get ahead.

Wrapping this up, the “Inequality of Wealth, the “Wealth Divide”, as the rich get richer and the poor left behind, that everyone talks about has been a feature of the last 47 or 48 years. Various charts clearly show that prior to the 1970s the purchasing power of the rich and poor was increasing at just about the same rate. The divergence in discretionary purchasing power clearly began in the late 1970s.

I don’t believe it is coincidental that Richard Nixon “closed the gold window” in August of 1971, eliminating convertibility of the dollar into gold. This predictably allowed for unfettered money creation, kicking off the double digit inflation of the 1970s, a fed funds rate that was 18% when Ronald Reagan took office, and the move in gold from $35 to $850/oz. The 1971 Dollar is worth about $0.15 today in purchasing power, and that seems to me like just yesterday. This is why it’s been said that “inflation is the cruelest tax”.

It just so happens that the gold owned by the US Treasury as well as the major trading countries collectively, relative to the unbacked (fiat) paper currency that is circulating, is almost the same very low percentage (6-7%) that it was in 1971, before gold went from $35 to $850/oz. in eight years. Most economists, even non “goldbugs” would agree that gold represents an alternative currency. This particular currency, gold, is mined, with great investment and risk, at the rate of about $140 billion per year. The colored paper that we all carry around in our pocket is being created worldwide, with the tap of a computer key, at the rate of trillions of dollars annually. Which currency would you suspect will maintain its purchasing power better over time?


Roger Lipton