What a week! Some soothing words by Chairman Powell triggered what was only a short selling rally on Wednesday followed by 1,000 plus down day for the Dow and continued selling on Friday. I believe when Powell ruled out a 75-basis point hike, he was unconsciously sending a signal that he still had or at least wants to have the market’s back. Like Burns and Miller in the 1970s, there was constant talk about gaining control of inflation, but none of them actually had the courage to inflict the necessary pain on the economy and markets to get the job done. When inflation started to rise dramatically in the late 1970s European countries, after they could no longer exchange dollars they held for gold, they told Paul Volcker that they would no longer buy U.S. Treasuries unless America reined in
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What a week! Some soothing words by Chairman Powell triggered what was only a short selling rally on Wednesday followed by 1,000 plus down day for the Dow and continued selling on Friday. I believe when Powell ruled out a 75-basis point hike, he was unconsciously sending a signal that he still had or at least wants to have the market’s back. Like Burns and Miller in the 1970s, there was constant talk about gaining control of inflation, but none of them actually had the courage to inflict the necessary pain on the economy and markets to get the job done.
When inflation started to rise dramatically in the late 1970s European countries, after they could no longer exchange dollars they held for gold, they told Paul Volcker that they would no longer buy U.S. Treasuries unless America reined in inflation that was threatening to head toward the kind that brought Hitler to power in Germany. So, Volcker acted by slamming on the printing press brakes, sending mortgage rates to over 17%! That resulted in the deepest recession since the Great Depression. It was very painful but it proved doable. But then the U.S. debt/GDP was only ~30%, compared to 130% now. There is no way politically to tame inflation now using the same medicine, because with so much debt, the economy cannot survive with rates much higher than they are now. The 10-year Treasury yield chart above shows that rates have risen from 1.52% on January 2, 2022, to 3.142% as of Friday and that is starting to send the equity market reeling. The NYSE index is now down to the 100-week moving average, a level that triggered the following stock market declines: LTCM in 1999, the Dotcom crash in 2000, the financial market crash in 2008, the EU debt crisis in 2011, the CNY devaluation in 2015, and the 2018 crash; and the COVID smackdown in 2020 has proven to trigger major stock market declines.
Not only would the current Federal debt send the western world into a depression that would make the 1930s seem like child’s play by comparison, but Powell is facing two far more unfriendly adversaries than Paul Volcker faced when Europeans confronted him in late 1979. I’m speaking of course of Vladimir Putin, who is requiring unfriendly countries to pay with Russian rubles for natural gas they desperately need. The war in Ukraine has set the geopolitical dynamic in Putin’s favor because if Europeans want to avoid freezing to death and keep the wheels of industry turning, they will have to pay Putin in rubles, which was the same mechanism the U.S. used in the early 1970s to make the U.S. dollar the world’s currency. The magnitude of supply disruptions that Jerome Powell’s Fed is facing is a magnitude more serious than any of the oil supply disruptions the Fed faced in the 1970s. Moreover, the U.S. has switched from a manufacturing economy that still produced things the world needed in the 1970s and 1980s, while presently, that is largely no longer true. You need energy and manufactured products. You don’t have to have movies and video games to stay alive.
This week the reality of the world in which Americans consumed much more than they produced for the last 50 years has started to correct itself. We have lived on money printed out of thin air to buy foreign goods and to live beyond our means. The Fed has bought into the Keynesian economic religion that held there is no reason to produce or to save money since you can always just print it. But unlike commodity-backed dollars, fiat money has a dollar of debt behind every asset and now the debt has grown to such an extent that it is choking our ability to produce. Alas, we are about to learn that there will be little consumption going forward because we enjoyed excesses of it in the past.
Your Editor Applies Some Past Lessons
When the debt must be repaid, the “margin clerk” calls for payment. When that happens, you sell what you are able to sell and most often that is not what you want to sell. The margin clerk sent out more notices this week. Whether or not you received a personal phone call, plunging prices signal that she is very busy letting massive amounts of oxygen out of our financially hyperinflated financial markets. Now at age 75 I have been through a number of these events and the one mistake I have almost always made is to hang on too long to what I own. If only I had not been so married to my positions in the past and simply liquidated some of them early on, I would have been in much better positions to get back in the market at bargain-basement prices when the falling knife bounced off the floor a couple of times, signifying market stability.
On Wednesday, equities surged higher, following some soothing words from the Fed Chairman. More often than not the Fed Chairman sets out to con market participants into remaining confident the Fed is in charge of market laws. But not infrequently, when a real bear market is underway, markets do what they did on Thursday of this week—they turn lower. On Thursday, they not only turned lower, they plunged—suggesting that the rally on Wednesday was nothing more than a short covering rally. So, when I started my day setting out to write about the latest drill results, I just had to jump into action and take care of my own portfolio in light of the unfolding carnage. As the markets opened on Thursday morning, I set out to trim 20% of my positions wherever I could.
But in markets like these, the notion of big gains are few and far between because when financial markets deflate, they can plunge to the downside far more than imagined. And this financial market bubble is the mother of all financial market bubbles. We have had enormous amounts of inflation over the years in the financial markets. But again, the world can’t live forever on hot air money created by the Fed. We need to get to work and produce oil, gas, food, and all manner of commodities and production of goods and services rather than spending our time and energy tapping on smart phones, tweeting hateful emotions on Twitter, and writing nonsense on the internet. Not only is that all a waste of human resources and sending the American economy and financial system into bankruptcy, but our adversary nations are well aware that our self-indulgence is making us vulnerable, giving up our leading role in the world. How does an empire based on military power continue to exist if it is financially insolvent? Russia, realizing our fake economy, is calling the bluff of America and the West in general. “Pay us in rubles,” Putin says, “or freeze to death.” “It’s your choice!” he says.
While most investors assume there will be another QE to bail us out, I’m not sure that will be forthcoming. More likely in my view will be a currency reset with the dollar being phased out, because America with its debt to GDP of >130% (compared to 30% in 1980) is past the point of no return. A 3+% 10-year Treasury is starting to cause a major meltdown of the U.S. economy and equity markets. And getting rates back to free market interest rate levels where we could have a vibrant economy again seems all but impossible unless the system crashes and we start over. More than ever, I believe you need to build your portfolios on a foundation of gold. But in an effort to keep the existing fraudulent system that has helped the top 1% gain riches and political power, they will resist the notion to trade in dollars for gold as strongly as they resist Elon Musk advocating for free speech at Twitter. But you have to overlook the propaganda and do what is best for your family. Only God knows how things will work out in the long run. Owners of gold may be viewed as enemies of the state and be punished for owning gold. But history suggests that owning gold and/or silver is the only way to retain wealth, and once it becomes clear that the pain is too great to bear, either the Fed will encamp in a hyperinflationary policy or there will be a global monetary reset. Either way, history strongly suggests that owning gold is better than not doing so.
Michael Oliver put out a message to subscribers on Friday stating the following: (1) Gold and Silver markets have become synchronized since March but this will likely be short lived; (2) Both gold and silver show signs of bottoming here as does the S&P 500; (3) Look for an S&P rally to lure the bulls back in until early June when the equity bear eats bulls for lunch and precious metals rejoin the precious metals bull market.