Will The Ides Of March Bring A Market Panic?

‘Owning the wheelbarrow might be better than the worthless cash it’s carrying’

One week before the recent bond market meltdown, Financial Times columnist John Dizard warned his readers to beware the Ides of March – that “some sort of panic in the US Treasury and mortgage-backed securities market” might develop. The high level of government borrowing in progress and about to be augmented by the $1.9 trillion stimulus program could be enough to send rates and money printing careening higher. “If my guess is right,” said Dizard, “we have the makings of another event like we saw a year ago.” That “liquidity” problem, as Fed chairman Jerome Powell described it at the time, was later labeled what it really was – a crisis that nearly collapsed the financial system. (Please see this rendition of events from The Guardian.)

During testimony before a Congressional committee just before things got dicey in the bond market, Powell was especially careful not to undermine the perception that he would do whatever was necessary to keep the markets calm. To taper, or even hint at it, would have been to send interest rates on a tear  – and stock market investors heading for the exits. Shrugging off those assurances of ultra-easy money, sellers immediately thereafter began dumping bond positions pushing the yield on the 10-year Treasury over the 1.5% level – a .5% add-on since early February. Stocks, the dollar, gold, silver – did, in fact, all head for the exits.

Sources: St. Louis Federal Reserve, Board of Governors, ICE Benchmark Administration

And so it is that we very well could be, as Dizard suggests, right back where we were this time last year. In the days ahead, the markets will be looking to the Fed to reassert itself as the bond buyer of last resort and keep a lid on the real rate of return, as shown in the chart above. If it fails in that respect, we might end up with a full extension of late February’s bond market panic. No one is more aware of what that could mean for the economy and financial markets than the Federal Reserve’s board of governors. As for gold, the chart clearly demonstrates that it has a propensity to rise when the real rate of return is in decline and decline when real rates are on the rise. Should inflation suddenly surge, or the Fed indeed become a more aggressive buyer of Treasuries (more QE), the current uptrend in the real rate could turn abruptly.  As it is, the much-ballyhooed upward turn in real rates looks like a minor blip in a major overall downtrend.

At the moment, it does not appear that Fed liquidity operations are keeping up with an onslaught of bond selling that is pushing yields aggressively higher.  That could change overnight. We should keep in mind that the Fed moved quickly and convincingly in money markets last March at the first signs of bond market weakness. Meanwhile, the central bank’s bond portfolio continues to expand at a record pace, and we haven’t even gotten around to the $1.9 trillion stimulus package.

Potential impact on the gold market

As Crescat Capital’s Kevin Smith and Tavi Costa point out in a recent client alert, the U.S. government issued $4.4 trillion of debt in 2020, and $2.4 trillion, or 54%, was purchased by the Federal Reserve. They believe that $300 billion per month in quantitative easing will be needed to cover the upcoming tab as opposed to the current $120 billion per month. “Global central bank money printing is one of the primary drivers of the gold price,” they say. “Our current valuation target for gold based on the level of central bank assets and the inelastic supply of above-ground gold is $3,200/oz. Note, this is a rising target.”

“Really smart investors,” says Morning Porridge’s Bill Blain, the London-based commentator, “are increasingly hedging their wealth created from financial assets (stocks and shares) by putting much of their allocations into Alternatives: outright real assets or cash flow driven assets, assets that are likely to retain value while still paying attractive returns. (The cost is lower liquidity). The idea is that if crisis ever comes, then owning the wheelbarrow might be better than owning the mountains of worthless cash it’s carrying (to cite the classic example of inflationary danger from Weimar Germany…)” If runaway inflation truly does materialize, a wheelbarrow full of gold and silver might be an even better option …… 

Gold as portfolio ballast in a stormy financial sea

U.S. Mint posts biggest January so far this century for bullion coin sales

“I own gold,” says highly regarded market strategist David Rosenberg, “not to make a killing but as a ballast in the portfolio, a source of diversification and insurance policy against the gargantuan levels of outstanding liabilities… You hope your house doesn’t burn down, but you still have home insurance.” (The Market NZZ, February 2021) Since August, gold has been in a downtrend. Its descent, though, has not deterred demand, most likely for the reasons Rosenberg suggests.  Investors of a like mind, in short, are taking the opportunity to stock up. In fact, an argument could be made that the price weakness only provoked even more demand, or at the very least sustained it, as the bond market imploded, stocks went into a skid, and the dollar plunged 12.5% from its April high. 

The World Gold Council’s Louise Street reminds us that “Having languished at a relatively weak 20 metric tonnes in 2019, retail investment more than trebled to 66 tonnes in 2020. And while that remains some way below the levels seen during the Global Financial Crisis, bar and coin demand measured in value terms rocketed to almost $3.8 billion – the highest since 2011. According to recent data from the US Mint, this trend shows no sign of stopping so far in 2021. Sales of gold Eagle bullion coins topped 220,000 ounces in January (6 tonnes). That’s the highest monthly total since December 2009 and the strongest January sales so far this century.” [Emphasis added.] February Mint sales, we will add, were another 141,000 ounces – a healthy follow-up to traditionally strong January turnover.

The six keys to successful gold ownership

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Open Access

Blowing up the “Everything Bubble”

“What the average person fails to understand,” writes Lance Roberts in an analysis posted at the Real Investment Advice website, “is that the next ‘financial crisis’ will not just be a stock market crash, a housing bust, or a collapse in bond prices.  It could be the simultaneous implosion of all three. Whatever causes that change in sentiment is unknown to me or anyone else.  I am not saying with certainty it will happen, as I hope sanity prevails and actions are taken to mitigate the consequences. Unfortunately, history suggests such is unlikely to be the case.”

And, we might add, it is not likely the damage will be restricted to the United States. All the largest and most advanced economies are engaged in rate suppression and quantitative easing schemes. In fact, an implosion in one location could cause corresponding meltdowns in multiple locations. Easy money and heavy leverage have greatly influenced price levels in all markets heightening rollover risks. And then there’s the derivative problem with notional exposure estimated at more than $1 quadrillion, according to Investopedia (4/28/2020)

Past gold bull markets have begun with a surge in the money supply

If the Fed is looking for inflation, it will find it in the money supply – something that did not happen with authority in the aftermath of the 2008 credit crisis. From June 2019, the money supply has grown by $4.5 trillion – an eight times factor year over year. Recently, the rapid growth resumed its uptrend after about six months of moving sideways. During the financial crisis that began in 2008, the Fed sterilized its money creation by routing liquidity back to its coffers in the form of commercial bank excess reserves – a strategy that kept the inflation rate from running out of control. As you can see, the money supply growth this time around goes beyond anything that occurred during the prior crisis. Whether or not it will translate to price inflation down the road remains to be seen – though we have begun to see some signs of inflation taking root, most notably in the surge in commodity prices.

“Every gold bull market over the last 50 years has begun with a catalyst that propelled significant growth in the money supply,” writes Manning & Napier, the money management firm, in a report posted at Seeking Alpha titled The Value of Gold in a Portfolio. “Each of those prior bull markets was proceeded by substantial US dollar money supply growth, making monetary expansion a key indicator. It is important to note that this alone does not guarantee a gold bull market, as there are many other variables at play. … We see the status of each of these economic factors, money supply growth, inflation, and real interest rates, as supportive of higher gold prices ahead. Policymakers have been remarkably forceful in responding to Covid-19, resulting in substantial recent money supply growth in the US, and they appear willing to continue to throw money at the crisis in the year ahead.”

Sources: St. Louis Federal Reserve, ICE Benchmark Administration • • • Click to enlarge

The next stock market meltdown will be a white swan event

Veteran market analyst Harley Bassman says the next stock market meltdown, should it occur, will be a white swan event. Why a white swan? Because, as he explains in an analysis posted at the ZeroHedge website, unlike a black swan which by definition is a surprise, anyone can see a white swan coming, and that’s what he sees on the horizon brought on by debt and printing money. He recommends “real assets” and reminds his readers that stocks survived Germany’s Weimar monetary debacle inflating along with everything else.

However, that is not what happened during the 1970s inflation. The Dow Jones Industrial Average seesawed wildly, going from just over 1000 in 1972 to roughly 600 in 1974 (as gold peaked), then back to 1000 in 1976 before dropping to 750 in 1978. It finished the decade right at 800 – the point being that the 1970s were a lost decade for the stock market. Stocks, on average, certainly did not keep up with inflation. It is anyone’s guess what will happen the next time around.

“When one hears hoofbeats,” says Bassman, “look for horses, not zebras. There is no reason to ruminate over exotic possibilities when the problems we face are quite clear. Once again, ignore the merits of the public policy response – what is important is that there is wide support from both the Democrats and Republicans to offer significant Fiscal relief supported by massive monetary expansion. Will this be inflationary – Yes; but it is unclear how soon.”

Notable Quotable

 “I think if you end up stuck in a desert and arrive at the proverbial oasis, the proprietor will sell the last bottle of water to the traveler with the gold bar rather than the one brandishing a crypto-wallet.” – Bill Blain, Morning Porridge, on the three choices available to investors under current financial market circumstances.

“I haven’t spent enough time talking about the alternative scenario: That the Fed would actually lose control of interest rates.… Right now, gold is suffering through a transition phase as inflation data and expectations are lagging the bond market responses. Eventually, gold will benefit as sentiment begins to regard the metal as not only an inflation hedge, but also a bulwark against risks to the financial system. This phase could end tomorrow or it could last months. There’s really no telling. In the meantime, we’ll have to suffer through times when the market, which doesn’t yet appreciate the true role of gold, will reflexively sell it when yields surge.” – Brien Lundin, Gold Newsletter

“My research team and I believe the recent downside trend in Gold has reached a support level, near $1765, that will act as a launching pad for a potentially big upside price trend. This support level aligns with previous price highs (May 2020 through June 2020) after the Covid-19 price collapse, which we believe is an indication of a strong support level.  As you can see from the Gold Futures Weekly chart below, if Gold price levels hold above $1765 then we feel the next upside rally in metals could prompt a move targeting $2160, then $2400.” – Chris Vermeulen, Technical Traders. Ltd.

“It’s frightening debt growth – with too little to show for. And no end in sight. Parabolic expansion of debt of increasingly poor quality. ‘Terminal Phase Excess’ on an unprecedented global scale. Intensifying Monetary Disorder. Manic market Bubble Dynamics – and an ever-widening chasm between inflating asset prices (perceived wealth) and deflating global prospects. Record stock prices versus a near catastrophic collapse of Texas’s power grid. American society is taking too many blows. The Intensifying Drumbeat of a Wrecking Ball. If ramifications of a bursting Bubble are not worrying, you’re not paying attention.” – Doug Noland, Credit Bubble Bulletin

Cartoon courtesy of MichaelPRamirez.com

“Going forward the outlook for the silver price in 2021 remains exceptionally encouraging, with the annual average price projected to rise by 46 percent to a seven-year high of $30.00. Given silver’s smaller market and the increased price volatility this can generate, we expect silver to comfortably outperform gold this year. … Further upside is expected this year for physical investment, which is anticipated to rise to a six-year high of 257 million ounces, though short of the record high level of over 300 million ounces achieved in 2015. This projection reflects current demand in the all-important U.S. market, which has enjoyed a robust start to 2021, with overwhelming demand causing product shortages.” – The Silver Institute

“If you look at the inflation of the 1960s and 70s, inflation came in the mid to late 1960s, from basically very low levels, they didn’t see it coming. They, meaning the policymakers, the central bankers, and when it came, they thought it was temporary and one-off, and one thing leads to another. So we know about the oil embargo of 1973, which took oil prices up three or four times. So wages, prices, guns and butter, the Great Society, the Vietnam War, and increases in the money supply, all combined. But once inflation lifted off, it just kept on going.” – Paul Singer in an interview with Grant Williams and Bill Fleckenstein

“For thousands of years, people have used gold to trade goods and services, store wealth, and protect against the pernicious effects of inflation. While gold may not be as essential to the plumbing of our financial system as it was decades ago, it remains a popular investment.…We are always monitoring gold for its investment potential, keeping an eye on its supply and demand balance, as well as other variables such as money supply, inflation, and real interest rates. We believe that current financial conditions favor a position in gold.” – Manning & Napier, Seeking Alpha, The Value of Gold in a Portfolio

“If we are lucky, the next Fed-caused downturn will cause only a resurgence of 1970s-style stagflation. The more likely scenario is the type of widespread economic chaos not seen in America since the Great Depression. The growth of cultural Marxism, the widespread entitlement mentality, and the willingness of partisans of various sides to use force against their political opponents suggests that this economic crisis will result in civil unrest that will be used to justify new crackdowns on individual liberty. Those who understand the causes of, and cures for, our current predicament have two responsibilities. First, prepare a plan to protect your family when the crisis occurs. Second, do all you can to spread the truth in hopes the liberty movement reaches critical mass so it can force Congress to make the changes necessary to avert disaster. Since the crisis will result in a rejection of the dollar’s world reserve currency status, individuals should consider alternatives such as gold and other precious metals.” – Dr. Ron Paul, September 2018, Ron Paul Institute for Peace and Prosperity

“George Bernard Shaw famously observed that he knew three types of economists. Those who were brilliantly right. Those who were brilliantly wrong. And those who taught. Judging by her tenure at the Federal Reserve’s helm and her advocacy now as Treasury Secretary of a super-sized budget stimulus package, it would seem that Janet Yellen falls into Mr. Shaw’s brilliantly wrong category. For this, the country is likely to pay dearly.” – Desmond Lachman, Janet Yellen Could Create an Economic Crisis

Final Thought

Nine Lessons from Prosperous Investors

We first introduced our readers to these nine lessons all the way back in 1999. They were passed along to us by the legendary commodity market analyst R.E. McMaster, formerly editor of The Reaper newsletter. The nine lessons’ source was a highly regarded money manager who handled accounts for wealthy Greek and Mexican merchant families.

1. It is easier to make a fortune than keep it.

2. Intelligence is an inadequate substitute for wisdom. Wisdom fears, respects the unknown and fosters humility. Intelligence can lead to self-destructive arrogance and ultimate failure.

3. Risk must have premium, and we must understand it well.

4. There is no order. There is no formula. There is no equation that works all of the time. It works just long enough to fool just a few more of us just a little longer.

5. What we fail to remember is that a paper gain is just that. Paper. Worth nothing. Not until we say sell, and not until we get cash. Anything less is just that.1

6. When the Bass Brothers in Texas write a check for real money, their money, to buy 25% of the Freeport McMoran Gold Series II, we take notice. When the Fidelity Magellan Fund buys a fifty-million in Dell computer, we yawn. So, should you. It is other people’s money.

7. Slick advertising budgets, powerful computers and few slabs of marble do not, by themselves, make a great financial institution.

8. Never invest in anything you do not feel comfortable with or understand well.

9. When a thousand people say a foolish thing, it is still a foolish thing.