The market is finally beginning to signal the end of the forty-year everything bubble. By QTR’s Fringe Finance, via ZeroHedge.
Background: The current bubble of rapidly increasing money supply started in 1982, after the inflation of the 1970s was quelled. The private sector created the money through the banking system until it stalled in 2008, creating the global financial crisis (GFC). Then government largely took over the heavy lifting of rapid monetary growth, so the right people could continue getting rapidly rich. Now that, too, is stalling. Your life is about to change.
Gold is the old money. It is signalling a large problem developing.
The gold mining stocks still have not provided any leverage to the price of gold. In fact, in the first quarter they did not even keep pace with the increase in the price of gold. With gold up 8.1% in the quarter, the gold mining indices were up 2%.
Typically, gold miners provide 2x to 3x leverage in terms of returns; so with gold up 8%, the miners would typically have been up 16% to 24%. This supports our thesis that the miners are still undervalued and are going to mean revert with a vengeance as this bull market in gold continues. The gold mining shares have a long way to go before they reflect fair value. …
Gold, Silver and Bitcoin are reacting to both that recent intervention plus front running the next round of money printing or monetary accommodation that will occur in the coming crisis (and given the debt load, the next crisis could be massive).
This move in sound money assets is different.
This is best demonstrated in the chart below which shows the price of gold compared to the “real yield” on the U.S. 10 Year bond (inverted). Note that the “real yield” is the yield on the 10-year U.S. Treasury bond minus the current expectation for average inflation rates over the next 10 years. For example, today the 10 year treasuries are yielding about 4.5%, and 10-year inflation swaps are priced at ~2.5%, reflecting the expectation that inflation will average 2.5% for the next ten years. (we don’t think it will). This leads to a “real yield” of 2% as shown in the chart below.
One of the long-standing relationships in finance is that when real yields are higher, gold is less attractive. Gold pays no yield, but it protects against debasement. When real yields are positive or trending positive, gold suffers. When real yields are negative or trending negative, gold does well. Note the tight correlation from 2006 to 2020 in the chart below.
Now, the important point is to look at what happened starting in 2022. Due to the Federal Reserve’s rate hiking campaign, real yields have gone up substantially and YET, gold went up!
In our opinion this is a huge clue. Something is different. We believe the gold market is sniffing out the global debt and fiscal problems that are present in the United States and that it is anticipating future monetary debasement. …
Given this dramatic de-coupling of the price of gold from the underlying trend in real yields/interest rates, we cannot help but wonder: have conditions changed such that the Fed is impotent and interest rates no longer have such a strong impact on the price of gold?…
The change in the gold price behavior, when compared to real interest rates, demonstrates the economic conversation is changing. Broadly speaking, the narrative is shifting, and the mainstream financial world and investment markets are waking up …
The entire world is coming to understand that the Fed is trapped and will soon be forced into additional monetary accommodation. The U.S. Government’s Fiscal situation is out of control, and people and investors are losing trust. Many people sense that something is wrong, and they are moving to protect themselves. Remember that the faith in the dollar, as opposed to gold, is based upon trust in the U.S. Government. As the schedule below shows, the government is not doing too well in the trust department.
We wondered who the 20% were and then we were reminded that the government employs about 20% of the population. …
Perhaps all of the awareness that we described above is because it is very hard to ignore the math and the recent headlines like the one below from March 4, 2024:
Keep in mind that this is all with a relatively healthy economy and stock market. If the debt were to continue to grow at this rate, it … would imply an annualized growth rate of 10.7% in the total debt burden. Annual debt growth of 10.7% compares very unfavorably to estimated GDP growth of 2.0-2.5%.
GDP funds the interest payments on the debt and this is why the math is unrelenting. Something has to give. …
Tthe Biden Administration just proposed a spending budget of $7.3 Trillion for fiscal 2025 which represents a 13% increase in spending. Keep in mind that tax revenues in fiscal 2023 were only $4.4 Trillion.
Coming soon: naked printing.
The Federal Reserve is clearly trapped. …
We are beginning to think that Fed Policy does NOT matter anymore.
- If the Fed doesn’t cut rates, something blows up and then we get a massive rate reduction and the big print.
- If Powell does cut rates, he keeps the game going but at the cost of higher inflation.
The markets have taken away the car keys from the reckless teenager: The Fed. …
Our conclusion: the Fed and its banks, sooner or later, will provide more monetary accommodation or the entire debt structure will collapse. That is just math. Now, they will do everything they can to mask it, deny it, or create programs that they claim are not “money printing” … But, they will have to print money or else the system will collapse. The gold and bitcoin prices demonstrate that the markets know this.
This might seem arcane and far away now, but soon it will be much closer. The resulting financial upheaval will blow away most other news into irrelevance.
