Just as was expected, Jerome Powell (Federal Reserve Chairman) announced that the Fed is ready to let inflation run hotter than the 2% mandate that they have set. What this means in English is that we can expect low to possibly negative interest rates for as far as the eye can see and more conjuring up of cash in unprecedented amounts to make sure that most everything we buy will cost more going forward.

Just how does that help US? With the economy in the tank (nearly a 32% DECREASE in GDP in 2Q) and this week yet ANOTHER 1 million people filed initial unemployment claims (for those keeping score that is 22 of the last 23 weeks) where over a million new claims were processed and let’s not forget that during just 2 weeks over 10 million were added to the unemployment lines during this time.

What could go wrong as people are losing their means of survival while the Fed tries to get prices to rise faster?

Of course, the news has propelled stocks higher, at least in the short-run, as the “markets” just dismiss the fact that the BEA calculates that profits from current production dropped 11.1% in the quarter (44% IF annualized) after a 12% drop in the first quarter. In addition, corporate profits DECREASED 20.1% in Q2 compared to a year ago- BUT don’t worry! Stocks sit at valuations that have NEVER been seen before! The valuations are FAR higher than even in 1999! Nothing to see here! All is well!

Gold on the other hand, after an initial rally was pushed back down shortly after Powell’s announcement. Initially the rally was straight up and then- straight down. Classic intervention in my opinion. Why in the world would gold be falling when the Fed just announced another dagger in the back of the US dollar? As Dr Paul Craig Roberts says “Fraud”.

The banks are still VERY short in the gold and silver markets and appear to me to be doing all they can to exit these positions before they get more overrun than they have already been. The clock is ticking for those who have been impacting actual production and prices by selling paper gold and silver into the markets and artificially suppressing the price.

Just think of the impact this has had on producers, their employees and of course, investors- who are the only ones who are causing courts to take at least a little action.

Personally, I cannot think of a more bullish setup for hard assets and particularly gold and silver as we have today and I can’t think of a better way to dilute the US dollar’s value than to continue to conjure up trillions out of nowhere and  buy almost all assets but in particular government bonds. These purchases allow for the planned low-rate environment and low-cost borrowing for governments that are already drowning in debt. Without the Fed largesse, the game likely would have ended at least 12 years ago.

In addition to allowing governments to continue spending far beyond their means it also forces investors to take more risk so they can achieve their investment objectives. This is true for individuals, companies, pensions, etc.

I have made the analogy many times that I believe the central planning here will meet the same fate as that of the Soviet Union in the 1980s. Central planning has NO history of success but a long list of failures throughout the generations. No matter how “smart” those at the top think they are they are no match for a willing buyer and seller agreeing on a price thousands of times per day. This type of trade does not allow for the massive imbalances to build up as they often do with central planning where winners and losers get chosen instead of winners winning and the weaker hands losing.

It appears that all of the intervention is propping up the 1%- who have seen their “wealth” explode during this latest crisis and the 99% are bearing not only the risks but also the pain and hardship of this economic downturn which appears to have only just begun and is being masked well by those in charge with transfer payments and bailouts.

It appears to me that there will be a lot more pain before we can get to a meaningful and lasting recovery. As a matter of fact I believe our renaissance will start from a FAR lower level of economic activity than we are currently seeing right now. My reasons:

  • Our economic activity is artificially propped up with transfer payments and they may, at some point, be reduced as we are already seeing, eliminated, or just plain old will buy less goods.
  • Many job losses are permanent and the numbers seem to show that likelihood growing rather than receding. This is the third year in a row for record corporate bankruptcies. Most of the bankruptcies that I am citing do NOT include the tens of thousands of small businesses that have closed for good also where 70% of all jobs are actually created.
  • Individuals, companies, cities, states and even nations are drowning in unprecedented levels of debt that will likely hamper economic recovery for years. That is unless there are major defaults and a large revaluation of assets so that the pain is swift. That could lead to a short yet very painful downturn but could, in turn, lead to a lasting recovery unlike the fake recovery we have seen in the past 11 years.
  • Riots and discord in our major cities- along with draconian shutdowns have made once- bustling centers of commerce not only undesirable but downright dangerous. All of the bad elements are accentuated while all of the advantages like, art, theatre, dining and culture are all shut down. Many businesses will not survive this.
  • Uncertainty. There appears to be no end to the Covid scare. It also appears that this election cycle could turn into a real nightmare if the election is not handled in an efficient manner so that we can determine winners and losers in a timely manner.
  • As virtually the entire world is in some sort of turmoil there is a lot of saber-rattling between countries like China and India/Taiwan/ Hong Kong, India and Pakistan, Russia and the US, the entire Middle East, etc.

We seem to be entering a period of great turmoil ahead. The dominance of the US dollar will likely be undermined even more than it has been already. For those who don’t understand the profound changes that the loss of having the world’s reserve currency will have on our standard of living it would pay to do some research. It just may be the information you need to not only survive but, hopefully thrive in our REAL new reality. That reality is we will have to produce things ourselves because the rest of the world is getting tired of doing the work while the central banks click up cash and buy stuff. Particularly since the “cash” is buying less and less of other “stuff” that they need to survive.

I believe that buying assets that can protect purchasing power is far more important than how many dollars you have at this time.

Be Prepared!

Any opinions are those of Mike Savage and not necessarily of those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information in this report does not purport to be a complete description of securities, markets or developments referred to in this material. The information has been obtained from sources deemed to be reliable but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.

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