Weekly Article 08-30-2017
There are plenty of things going on in the world that I could write about right now. There is catastrophic flooding in Texas, reported ICBM launches by North Korea, falling auto sales, rising delinquencies in auto loans, student loans and revolving credit. However, I have been writing about many similar things for years and since the central banks seem to “print” money up out of nowhere and have not been shy about propping up markets and purchasing many assets, events that would typically lead to a rout in the stock markets appear to turn into little more than a detour on the way to higher and higher asset prices.
At the same time it appears that many actors in the major banks use “paper gold and silver” to keep the price of the monetary metals from rising. As an example- as usual- the price of gold and silver started to take off this morning after the report about the North Korean missile launch. I woke up at around 4AM and the gold price was up to $1325.00. I looked again at about 6AM and sure enough there was a cascade decline at around 5:30 to around $1315.00. A little late but not unexpected. (Kitco.com)
Will the same be true this time? Certainly it could be but I believe there will come a time in the near future that what appears to be a serious downtrend will actually be just that in the stock and bond indexes and a breakout rally in metals will not be able to be contained.
Many people ask me “when?” I can only answer like this:
Does it matter? If you are heading toward a cliff- you know it’s out there but you are unsure of how close you may be to it- would you rather take your chances of getting too close and not being able to avoid it or consider changing course before it gets too late?
I also believe that anyone who is waiting for the precious metals to get cheaper may also be playing a game of Russian Roulette. One of these days I believe that all of the manipulation in this market will be unwound in a violent manner. There is plenty of talk about our President wanting to partially back the dollar with gold. It is rather interesting that Treasury Secretary Mnuchin was checking on the status of our gold at Fort Knox just last week. I also heard a presentation by Jim Rickards where he believes the government may revalue gold to $10,000.00. Maybe- maybe not. However, the presentation made sense to me. I believe that the days of cheap gold in dollars is coming to a swift end. Whether gold is revalued or whether we may not actually own all the gold we are believed to have the price would rise significantly in my opinion in either case.
Pretending that things are fixed by creating “money” out of thin air only postpones the most likely outcome which is, in reality, that we have been living above our means for decades and making promises to ourselves that would be difficult to achieve even if the financial markets were to avoid any major hiccups going forward. Eventually the masses may conclude that those in charge have gone too far and have destroyed the currency and economy. This outcome appears to me to be playing out right before our eyes as the dollar has been plummeting all year and the economy is slowing down in many ways.
It is obvious to me that there are many critical events that are going to take place shortly. In Illinois there is a severe funding shortage that is too large to ignore or hide anymore. 1 This reality is about to become well-known by many and could lead to problems in many other states also. Since Illinois is not in the club of being able to “print” money and their spending has been out of control for decades the future has now arrived. Difficult decisions will have to be made about what bills get paid and which don’t. Let’s not forget that much of this spending is worth far more to the economy than just the original spending. Much of it is for the welfare of citizens and that money gets spent a few times over at least. Think of food, healthcare, housing, education, etc. If spending decreases it will have an outsized effect on the economy on the way down as it did on the way up. It is likely that this problem is only weeks to months away.
Many other states are in similar positions but still may have a way of masking the problem a little longer- like my state of Pennsylvania where there are still assets to “borrow” from to plug large deficits that are currently plaguing our state. Again, this doesn’t fix the problem of overspending and living above our means but transfers the problem to the future where it will just be larger and harder to deal with then.
I haven’t even mentioned the derivatives at the major banks. These “assets” have been referred to as “financial weapons of mass destruction” by Warren Buffett. These dwarf the debt and equity markets and are highly leveraged in many cases. Leverage (borrowing to invest) increases gains on the way up and magnifies losses on the way down. At least since the 2008 downturn these “assets” have added fuel to the fire during the booms and the busts. Actually, the derivatives reportedly caused the 2008 bust.2
As I always say this is not a time for complacency. Personally, I would try to be as diversified as possible because of the tenuous nature of virtually all markets and the uncertainty about what the central banks may do in a crisis situation going forward. I can’t think of anything that I could rule out after what I have just witnessed in the last 10 years or so.
Mike Savage, Financial Advisor
2642 Route 940 Pocono Summit, Pa 18346
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1- Chicago Sun Times, Fox Business, CNNMoney, etc.
2- Investopedia Kristina Zucchi 2-19-2010