While most people are busy earning a living and contemplating how they are going to keep up with rising prices and a crumbling society there are many things taking place that many are not paying attention to.

One great example is what is happening in Europe. This really ties into what I am talking about when I say that there is NO price discovery in almost any asset and that everything we are seeing is an illusion.

It can’t be argued that in Europe there are countries that can be considered “haves” like Germany and “have-nots” like Italy and Spain. Because of this, in a real market those “have not” countries would have to pay FAR more in interest because of the additional risks associated with funding their debts. The problem here would be that those countries would likely be insolvent in no time if they had to pay a true market price.

Since we have no real markets the central banks- in this case the ECB- can manipulate prices not only by buying bonds to keep rates low and bond prices high  (this also allows governments to carry FAR more debt than they should be able to) but they can also manipulate the spreads (difference between rates of different countries). They are currently doing this by buying the bonds of the “have  nots” and selling the bonds of the “haves”. This gives the Illusion that all is equal when it is certainly not.

If they were not doing this, it is likely that the Italian and other “have-not” bond yields would spiral higher and could propel the country into insolvency. This is a great example of how the central banks can help countries pretend they are solvent when it is readily apparent that without trillions of currency units created out of nowhere-they are not.

In the meantime, even though the central banks are intervening massively in the debt “markets” we are seeing unprecedented volatility in rates. This appears to me to be a case where even though there is massive intervention in the “markets”, since the debt is growing exponentially it appears that, at times, it is not enough.

The real problem here is that these actions take TRILLIONS of dollars, euros, Yen, etc. These actions don’t just happen out of nowhere. The cash has to be conjured up and assets have to be bought (or sold) to manipulate the price.

Keep in mind that I am focusing on bonds here but the very act of keeping rates low also keep stock and real estate “markets” elevated. Low rates allow for cheap borrowing and a lot of leverage. Rising rates reverses that flow.

As we look forward to fall, I am expecting a few things.

·        Far higher prices for all the goods we need. I am particularly worried about energy and food. While we are paying far more already than we are used to paying, I believe prices will rise substantially for quite a long time. There are MANY reasons for this. At the top of the list would be the US dollar losing its lone reserve currency status and countries in the East looking inward and trading with each other making all natural resources more scarce in the West. I’m not even sure if a depression would give us any relief from this.

 

·        Lower prices for homes and other goods that people may forego because of the rising cost of essential goods. With interest rates rising and the cost of daily living skyrocketing home affordability will likely take a massive hit.

·        Large move up in the price of silver, gold and the companies that mine both. I saw an interview with Andy Schectman and he has stated that the banks have been amassing massive amounts of silver and that the banks have reduced their short positions (one of the mechanisms to keep the price artificially low) to record LOWS. It makes a lot of sense that an asset like silver which has been used as money in the past but also has MANY commercial uses- which means at some point there could be a physical shortage- should be FAR higher in price in my opinion. I believe that the banks see it coming and are getting ready for a massive U-turn. I believe that because of these actions we are getting close. When? I believe VERY soon- but who knows?

·        Large move up in profitable companies that produce hard assets. I believe many of these companies who are producing things we need and are already making record profits have been beaten down recently because of the rising interest rates and also the fear of recession which, in the past, would have led to lower commodity prices. This time, however, we are in a situation where there are severe supply constraints and many countries are looking to keep their products at home to assure that their populations have adequate supplies. This could be a situation where demand could fall but prices (particularly for importing countries) could rise substantially. I have recently sat in on two meetings. One with Goldman Sachs and another with Invesco (people who run their commodity desks). After both meetings I came away with the feeling that my hypothesis is correct. There are SEVERE supply constraints that should lead to FAR higher prices.

While there is no guarantee that I am right at all here and it is Far less likely that I could time these things I am as sure as I could be that, at some point, all of the debt-based assets are going to implode together. At that time, I believe all that people will accept will be something real- whether it be gold, silver, oil, food, water, etc.

A good question for investors would be what assets will thrive in a situation like this and what assets could suffer in this scenario. Do you own assets that are at risk of rising or falling if the economic storm being predicted by almost all of the major banks along with the IMF and many governments comes ashore?

Is your portfolio positioned correctly?

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.

Commodities are generally considered speculative because of the significant potential for investment loss. Commodities are volatile investments and should only be a small part of a diversified portfolio. There may be sharp price fluctuations even during periods when prices are overall rising.

Precious Metals, including gold, are subject to special risks including but not limited to: price may be subject to wide fluctuation, the market is relatively limited, the sources are concentrated in countries that have the potential for instability and the market is unregulated.

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