These Pictures…What Is Wrong?

Sometimes details obscure the bigger picture. The following graphs do not show most of the details and “noise.” These log-scale graphs show one bar every four years (plus April 2018) based on official debt on July 1st, or the average of monthly closes every fourth year for M3, stock indices, houses and commodities.

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#1: The official national debt of the United States.

#2: M3 – currency in circulation – data from the St. Louis Federal Reserve: Deficit spending, fractional reserve banking and central bank “quantitative easing” (monetization) add currency into circulation. The rapidly increasing quantity of dollars along with a slowly increasing economy devalues all dollars and creates higher prices.

#3: As commercial and central banks devalue the dollar “currency risk” affects the debt markets and interest rates rise. Higher rates applied to $230 trillion of global debt require larger debt service payments and “squeeze” debtors including all sovereign governments.

#4: The DOW and NASDAQ rose exponentially as the dollar devalued. But markets often move too far and too fast. The corrections, such as 1987, 2000 and 2008, can be painful for everyone.

#5: Dollar devaluations push commodity prices higher. Bubbles occur in commodities and in stocks. Examples: 1980 gold, 1974 & 1980 sugar and 2008 crude oil. Commodities can fall hard after a rapid rise. Examples: The 1980 gold peak remained the all-time high until 2007. Crude oil fell about 75% from mid to late 2008. Silver fell over 70% from 2011 to December 2015.

SO WHAT IS THE PROBLEM?

1. Debt is too large. Either sovereign debt will default (unthinkable) or will be paid with devalued currencies. Argentina “over-printed” and dropped 13 zeros from their inflated currency during the past 70 years. Many other currencies inflated and fell to near zero value. No fiat currency is immune!

2. Rising interest rates. The ten year rate bottomed in July 2016. The five year rate bottomed under 0.60% four years earlier. Higher rates benefit banks (read this article) but they hurt debtors because of higher debt service payments. That includes the U.S. government.

3. The on-going devaluation of dollars encourages people to protect their assets by investing in whatever is climbing. The Dow has risen from under 7,000 in early 2009 to 26,600 in January 2018. Stocks rise and then correct. Netflix stock rose from under $8 in 2012 to over $400 in June 2018. Does this chart look sustainable?

1. Stocks will correct or crash—they always do after an extended rally—and capital will seek the safety of silver and gold.

2. Commodities often rally for years and then collapse. The all-time crude oil peak occurred in 2008, gold and silver peaked in 2011, and they have not regained those highs. The bull market in commodities has resumed and prices should rise substantially. China’s “one belt, one road” project will use a huge quantity of many commodities.

SO WHAT?

My estimate: Stocks peaked and will fall for several years. Silver and gold bottomed and will rise for several years. Do your own due diligence and invest accordingly, or trust the Federal Reserve and Congress to represent your best interests.

As George Bernard Shaw said, “You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the government. And, with due respect to these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold.”

CONCLUSIONS

Debt is rapidly rising. Higher interest rates take dollars from individuals, businesses and the economy. Marginal borrowers will suffer.

The stock market has risen too far and too fast. Expect a lengthy correction or crash. The DOW correction (probably) began following the high in January 2018. The NASDAQ peaked in June.

As the dollar is devalued, silver and gold prices will rise:

1. To compensate for diminished purchasing power of the dollar.

2. As capital runs from declining bond and stock markets.

3. As investors seek the safety of real money and avoid the risk of a falling stock market.

China and Russia add to their stockpile of gold every month. The U.S. adds to its load of unpayable debt every second. Which has more long term economic utility – gold or debt?

From a reader:

“Take a chill, I need no pill,

Gold and silver fill the bill.”

Buy low, sell high. Stocks are high, silver and gold prices are low. It is a simple choice.

Miles Franklin – 1-800-822-8080.

WhyNotGold – 1-888-966-8465.

Gary Christenson