Many people are understandably concerned about the recent rout in stock and bond “markets”. Many have said to me that their best asset class has been cash recently. I agree that cash has been better than most stocks and bonds but, as I write this, gold is still up 5% YTD and I believe will have a MAJOR rally sooner rather than later.

I am also expecting silver to move meaningfully higher when the reality of our situation starts to sink in.

While I am still bearish regarding stocks and bonds, I still believe there is a rally left particularly in stocks for the same reason I believe silver will rise. Right now, it appears to me that the “markets” are expecting a deflationary event which will destroy demand and therefore lead to lower prices.

That is a rational thought but, I believe it is missing a KEY point. That is that while demand remains strong the real problem is SUPPLY. There are two types of inflation. Demand inflation where demand overwhelms supply and supply-side inflation which is caused by a lack of production or lack of goods.

While the central banks can somewhat control demand inflation by raising interest rates and making purchases more expensive and less affordable, they have FAR LESS influence over supply constraints. A good lesson to be learned here is that “money” is not the answer to all of our problems as the central banks and governments would have us believe. The last time I checked the only thing that the central banks can conjure up is paper currencies and computer blips that represent purchasing power but create NOTHING. They can’t “print up” energy, food, water, or any other necessities of life. Like they learned in Venezuela, Zimbabwe, Weimar Germany, etc. it really doesn’t matter how much “money” you have if there is no inventory of goods to buy.

Not only am I seeing that supply chains are disrupted but I am also looking at the price of diesel fuel and the lack of supply of diesel and I am hard-pressed to see any deflation on the horizon. Diesel fuel is the fuel that drives our economy. Diesel trucks move all of the things we need to where they need to be.

In addition, even if the Fed got far more aggressive than their current stance of .5% increase at multiple meetings these actions would have NO meaningful impact on inflation. Since interest rates would have to rise to a level greater than the inflation rate to actually combat inflation (keep in mind the 20% interest rates it took to save the US dollar under Paul Voelker). At this point, according to their own numbers, interest rates would have to go to 8% PLUS to have a meaningful impact on inflation. According to the real- world inflation of near 20%, interest rates would have to rise to 20% + to combat our current inflation situation.

I will not say that rates will not rise to 20% plus. They may. I will just say that it will not be central banks who will be raising rates to that level but bond investors. My guess is that if rates reached 3-4% the economy would implode because of the massive debt burden at every level of our society. Living FAR above our means for decades has led to this precarious situation.

While the financial game shows were all “SURPRISED” by the 8.3% year over year rise in CPI (greatly massaged) it comes as no surprise to anyone looking at the economic situation across the globe where competition for life’s necessities are just starting to heat up.

The countries that have hard assets or finished goods to trade for other hard assets and finished goods are likely to fare far better than those that conjure up cash from nowhere. Personally, I believe that this pullback is a gift to anyone who wants to add to positions in most commodities and the companies that produce them.

I believe that if the central banks stop “printing and buying” stocks, bonds and most assets would collapse in no time. Since it is most likely that nobody would trust any other counterparty (someone promising to repay) the price of gold and silver would likely go to heights that nobody can imagine today. They are assets that don’t rely on someone else’s promise to repay but have intrinsic value and are NOT a debt instrument.

You may say that stocks are not debt instruments either but keep in mind that stocks derive their value from the bond market and if a company defaults on their debt reneging on their “promise to repay” the first asset class to be wiped out is the common share holders (stocks).

It should be obvious to all right now that as the interest rates have moved up there has been pressure on stocks- particularly those most interest rate sensitive companies. Those companies would be companies with little-to-no earnings and are reliant on cheap financing to keep their current debt levels serviced.

I see a stunning similarity to what happened between 1995-2000 when people would complain that I didn’t understand the new paradigm and that they were missing out on fantastic gains. I have heard the same over the past 5 years. As it was then. The highest-flying companies have been the companies that should have been put out of their misery but survived on cheap money and new debt. I still refuse to buy companies that have little to no earnings, massive debts and do not appear to be good long-term companies.

While I can be wrong for a while it actually STUNS me that people who were around in the 90s can’t see the same type of mania that led to that boom and bust- just on massive steroids which has led to a larger bubble and will likely result in a larger crash. The same type of companies that are built on hope, hype and cheap money lead to many looking for easy profits and seeing no end in sight even though a cliff could be rapidly approaching. The best companies seem to have been left for dead- if only for a short period of time.

While no one can say with any certainty what the central banks will do it appears to me that they will always take the path of least resistance. That would be to keep on “printing and buying” until the dollar, yen, euro and most other fiat currencies are no longer viewed as assets that those that produce goods want to exchange for their labor, commodities and finished goods.

WHAT IS THE VALUE OF A PROMISE THAT CANNOT, or WILL NOT BE KEPT?

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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