by Egon Von Greyerz, Gold Switzerland:
Well, right on cue, it looks like the endless creation of fake money by the Fed has now poisoned both the stock market and the bond market. The Dow was down 1,000 (3%) points in two days and the Nasdaq down 7% in two weeks.
Gold and silver are also falling in sympathy. This was expected short term, but the outlook for the precious metals look excellent as I will discuss later.
Is this what the 16th century Swiss doctor Paracelsus ordered? It certainly looks like it. He told us that too high a dosage of anything is toxic. And with a world flooded with toxic money with little value, the levels of poison have reached extremes.
The toxic financial system needs to be cleansed but as we have warned many times, this will have dire consequences for the world.
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FRANTIC STOCK BUYING BEFORE THE MUSIC STOPS
Buy high and sell low is the mantra of many investors. And as the stock market surges – buy more! And when it falls, buy still more.
But this time, the method of always being long, which has been fool proof for decades and underwritten by the Fed, will fail hopelessly. Whether investors buy on strength or buy the dips, they will get slaughtered.
As often the case at the end of a cycle, we have in recent weeks seen frantic buying of anything that moves just like with tech stocks in 1999-2000.
Just look at the incredible 16 week inflow to stocks of $414 billion. This is 2X the 2018 peak of $200b and an all-time record.
Investors are clearly jumping on the bandwagon just before the music stops.
There are many indicators that point to a market top currently and a secular bear market for many year as I have pointed out in recent newsletters.
The graph below is a clear red flag for stocks. It shows that all the higher highs since October 2017 have not been confirmed by momentum indicators (bearish divergence). So in spite of the Dow having gone up almost 6,000 points since Oct 2017, the RSI (Relative Strength Index) has shown lower tops for each new high in the Dow. That is very bearish.
There are a number of other technical indicators pointing to a top at this time.
TOXIC SPECULATION AND HELICOPTER MONEY
Coming back to toxic speculation, this caused the crash of the sub-prime market in 2006-9 when the global financial system was minutes from implosion. This led to the Great Financial Crisis. But an economics professor from Princeton University, who was chairman of the Fed at the time, “saved the world.” It was Helicopter Ben of course.
But Bernanke didn’t save the world. All he did was to take the orders of his masters, the heads of the major investment banks like JP Morgan, Goldman Sachs and Morgan Stanley. These banks had everything at stake. They were on the verge of bankruptcy and only a massive rescue mission by the Fed and other central banks could save them.
The rest is history. $10s of trillions of loans and guarantees later the US banks and the world were handed a stay of execution. And even that year in 2008, the bankers received the same mega bonuses as the previous year! Hmmm….
The 2006-9 crisis was never resolved and today, over 14 years since it started, the world is being hit by a crisis which is more than twice as big in debt terms with global debt up from $125 trillion in 2006 to $280t today.
The problem is that as debt has doubled, risk has gone up exponentially. And this time, the old cure of just printing worthless money will have ZERO effect on solving the problem.
But it will lead to the final collapse of the dollar and other currencies, massive problems in the financial system and hyperinflation.
IS GOLD MONEY?
Between 2000 and 2011, gold went from $290 to $1920. In 2011, Congressman Ron Paul questioned Bernanke about the role of gold: (click on the picture)
So Bernanke made it clear that gold is not money. When Paul pressed him, he came up with that “it is an asset”.
“So why do central banks hold gold” asks Paul. “Tradition” replies Bernanke.
Yes Ben, it is a wonderful tradition that gold has been money for 5,000 years but you don’t even understand it. (EvG’s words)
Bernanke also argues that gold is held as “protection against tail risk, a really bad outcome”.
Bernanke obviously couldn’t tell congress or the world that gold is held as protection against central banks’ mismanagement of monetary policy. Nor did he point out that since 2000, the dollar had lost more than 80% of its value against real money which is gold.
Well Bernanke clearly didn’t teach Austrian Economics (Sound Money) at Princeton. No, he is a true prophet of Keynesianism and MMT (Modern Monetary Theory). He was a clear wizard of money printing and still has the absolute record. During his reign, from 2006 to 2014, he doubled the US debt from $8.5 trillion to $17t.
A remarkable achievement and he didn’t even have to lift a finger!
Yellen took over Bernanke’s mantle at the Fed but wasn’t there long enough to set a record. But now we have the dream team BY (Biden Yellen) running the US economy.
BY will most certainly print more money and create bigger deficits than any president and treasury secretary in history. They will break all records. They have already spent $2 trillion before they started. And that is clearly the mere beginning.
The BY team are no spring chickens and the question is if they will last four years. But if they do, they will have increased US debt by many tens of trillions. They will also have crashed the stock market as well as the bond market.
BY BY TO ASSET BUBBLES AS YIELDS RISE
So it will by BY, BY to all these bubble assets that their predecessors have managed to inflate to extremes.
As we enter an era of massive money printing, increasing deficits and debts, there will also be inflationary pressures that will see interest rates increase substantially.
The Fed will use all the trick they know to hold rates down. Still, so far the 10 year treasury is up from 0.38% in March 2020 to 1.5% today.
Until now, this is primarily a US problem. As the graph below shows, German and Japanese 10 year rates are rising but still very low with German’s still negative at -0.25% and Japan’s just positive at 0.16%.