Price Extremes, The Trapped Fed And Scapegoats

February 19, 2020
Market Analyst, Author, and Founder of The Deviant Investor

Since 2009 stocks have risen into a bubble fueled by inexpensive debt, buybacks and QE. Most commodities have not matched the price increases. Palladium is an exception—more later.

The ratio of the commodity index to the S&P 500 Index sits at a historic low. Commodity prices are relatively low, and the S&P 500 is too high. That ratio will reverse.

WHY? The banking cartel and central banks have boosted debt to (unpayable) $75 trillion in the US and $250 trillion globally. The created dollars, yen, euros, and pounds poured into stocks, bonds and housing, but not into most commodities. Inexpensive debt encouraged stock buybacks that levitated share prices and CEO bonuses. The debt must be serviced.

Read: Brandon Smith: “The Corporate Debt Bubble

Boeing bought back over $40 billion of its stock since 2013 and now must scramble for a loan. Read “After Blowing $43 Bn.”

Apple is a $trillion-dollar company. Its stock closed at $318 on January 24. Examine the monthly, weekly and daily charts. They show extreme price action and over-bought conditions. Fed repo operations and low interest rates can levitate stocks for a long time, perhaps until the November election, but maybe a correction happens now.

Consider other extremes:

EXTREMES IN MARKETS:

Amazon in Nov. 2008 $35. Today $2,135.

Microsoft in Feb. 2009 $13. Today $185.

Apple in Jan. 2009 $10. Today $325.

Palladium in Dec. 2008 $165. Today $2,316.

Silver in Oct. 2008 $9. April 2011 $48. Today $18.

Commodities are priced too low compared to the S&P. What if commodity prices and the ratio rise for several years? Suppose…

  1. The ratio rises from 1 to 6,
  2. While the S&P drops 20%…

Then crude oil could sell for $260 instead of $55.

Silver could sell for $85 instead of $18.

Gold could sell for $7,500 instead of $1,570.

From Jared Dillian:

“You don’t have to be Garry Kasparov to figure out what happens next; stocks go down, long-term yields go up, and the Fed goes into overdrive to forestall what looks like a recession. It cuts short-term rates – a lot, possibly into negative territory – and the yield curve steepens dramatically.”

The inflation in paper assets will shift into commodities. Prices for food, energy, metals, cement etc. will rise far higher, as they did during the stagflation of the 1970s. Resulting consumer price inflation will traumatize our economic world.

  • Real consumer price inflation will jump higher.
  • Higher crude oil and gasoline prices will create a recession.
  • Paper profits will crash and burn. Gold and silver prices will spike upward.
  • $trillions of unpayable debts will default.
  • Central banks will “print” to save the wealth of the political and financial elite while proclaiming QE4ever is necessary to rescue the economy.
  • Economic nonsense and fake money will fall back to earth from current delusional heights.
  • The implosion and consolidation might not occur for several years. Perhaps it has already begun. The extreme ratios shown above, bubbles in stocks, bonds and real estate, political craziness, and long cycles suggest extreme risk.

Nonsense! Doom porn is counterproductive! Well, maybe. Let’s speculate.

Option One: The boom will continue for many more years. (We want to believe this comforting delusion.)

  1. Interest rates, “official” inflation and “official” unemployment remain low.
  2. President Trump shouts that everything is great.
  3. The Fed will inject QE as needed to keep interest rates low and the S&P high.
  4. New currency units must find a home and the stock market is the “best game in town.” Dow 30,000 and 40,000 are coming…
  5. It’s an election year! QE4ever will push the market higher.

Option Two: The boom will implode. Watch out below.

  1. Debt has risen faster than GDP for decades. Even with zero interest rates, debt service can become impossible as nominal debt skyrockets.
  2. Negative interest rates make no sense. Central banks and governments are desperate, otherwise interest rates would be higher.
  3. Bubbles always implode. Examples: Internet stocks in 2000, real estate and most stocks in 2008, maybe tech stocks in 2020.
  4. Coronavirus could be the pin that pops the bubble. We’ll see.
  5. QE4ever and repo madness may delay the crash, but they fix nothing. Those newly created QE4ever dollars are borrowed into existence and fed into corporate, individual and Treasury debt, which require debt service payments. Corporate profits are diverted to pay debt service. Government revenues are used to pay interest. A squeeze is coming.
  6. The delusions and narratives change. The boom-bust cycle continues.
  7. Interest rates must rise to contain the coming consumer price inflation. But higher interest rates will crush markets and the economy, so they can’t rise. Solution: Find a scapegoat!
  8. THE FED IS TRAPPED. Read “There is No Way Out.”

PALLADIUM – An Early Warning?

Read Craig Hemke: “The Magic Palladium Bullet In 2020  ”

“As gold and silver investors, we await the day when a ‘run’ on these bullion banks exposes the lack of physical metal behind the system. The current price action in palladium suggests the possibility that this ‘run’ may have already begun.”

Prices for gold, silver and palladium are set in the futures markets, which are mostly paper contracts. If real metal were traded instead of paper contracts, then honest price discovery would occur for physical gold and silver.

Skyrocketing palladium prices hint at future gold and silver prices.

Examples:

Palladium in June 2010 $450. Palladium January 2020, $2,316.

The ten-year rise was a factor of 5.

Silver low in December 2015 was $13.61.

Apply the palladium ten-year rise and silver could sell for $70 by mid-decade.

Gold low in December 2015 was $1,045.

Apply the palladium ten-year rise and gold could sell for $5,000 by mid-decade.

Apple low in 2010 $30. Apply the palladium ten-year rise and Apple could sell for $150 in 2020. Oops, it already sells for $318.

Yes, much higher prices for commodities are likely after paper assets implode. Global central banks will create fake money infusions – QE4ever.

CONCLUSIONS:

  • Central banks will protect the political and financial elite. The rest of us need silver and gold bullion held in private vaults, outside the banking system.
  • Read: “A Tale of Two Markets.”
  • Read: “Don’t Be Too Sure

“Don’t be too sure that the coronavirus will blow over and have no effect on global growth.

Don’t be too sure that ‘the Fed has our back’ so stocks will always resume their steady climb after every spot of bother.”

  • Paper assets can crash and burn. They might remain levitated beyond the November election, but perhaps not.
  • Debt is rising rapidly compared to the economy that must support the debt service. Debt may not collapse tomorrow, but it will not increase forever.
  • The Fed has created bubbles in stocks, bonds and real estate—the Everything Bubble. Bubbles always implode.
  • Even with zero-interest rates, profits, at some point, won’t support the required payments. Debt can’t increase forever. Pick your poison – default or hyperinflation.

Protect your savings with gold and silver bullion – not paper substitutes.

Miles Franklin sells bullion, not paper. Call them at 1-800-822-8080.

Gary Christenson

The Deviant Investor

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Gary ChristensonGary Christenson is the owner and writer for the popular and contrarian investment site Deviant Investor and the author of the book, “Gold Value and Gold Prices 1971 – 2021.” He is a retired accountant and business manager with 30 years of experience studying markets, investing, and trading. He writes about investing, gold, silver, the economy and central banking.

According to the Talmud you should keep one-third of your assets each in land, business interests, and gold.

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