While Big Cap Stocks Are Punished And The Fed Is Asleep At The Wheel While Politicians Spend Like Crazy, Gold And Gold Miners Continue To Shine Brightly
Investors that avoid Bitcon, extremely expensive tech stocks, fad valuations in AI stocks and other risky assets, they can be rewarded owning gold and free cash flow machines of gold miners.
The Fed is falling further behind the curve as the Wall Street stocks have been getting pummeled since their Wednesday meeting. With the stock markets all over the world panicky, including Wall Street, the best the Fed could do is send Austan Goolsbee out to say that if the market deteriorates they can fix it.
His comments were tepid and noncommittal which wasn’t what the market was looking for and the Dow, S&P 500 and NASDAQ continued to get smacked down. When asked about options that the Fed had, instead of mentioning they could cut between meetings, and will likely cut in September by up to a half-point he dithered.
He chose to keep the party line that Powell mentioned at the Fed press conference on Wednesday. Oblivious to the reality, those comments were what got the markets jittery on Thursday. When asked about the jobs market, he seemed equally as unconcerned about the Friday unemployment report that further spooked the market. He certainly failed to bring down the concerns about the correction that has been underway since the Fed meeting that continued today.
Meanwhile, Professor Jeremy Siegel from the Wharton School of the University of Pennsylvania gave it the old college try. By calling for an immediate 75 basis point cut and then another at the September meeting. His message is similar to what I thought the Fed PR people would say today, certainly not as precisely but at least somewhat in a similar vein.
I doubt the Fed will take his recommendation. As they ignored Bill Dudley (renowned interest rate hawk) who prior to the Wednesday meeting of the Fed said he had switched from the higher for longer camp to the camp calling for an interest rate cut at the meeting.
The key economic problem before us now is the weakness in the jobs market. For months full-time jobs have been dropping while part-time jobs are increasing. When a worker loses a high paying full-time job, then has to take on two part-time jobs for less money, it is undoubtedly a jobs market in trouble. Even if the government stats consider that a one job gain.
A couple other strong indicators of a recession are that the Sahm Rule has been breached and temporary help requirement is collapsing. These are very accurate indicators of coming recessions with stellar records of predicting a coming recession on the immediate horizon.
Meanwhile, with these economic issues and the panic in stocks, the Fed seems blissfully ignorant. They can put their head in the sand, but it won’t make things get better for Wall Street stocks, global stocks or the jobs market. These troubled waters are not transitory.
It is inevitable that the Fed will have to lower rates. It is a when not if situation. This weekend I thought that a cut between meetings was off the table, the Fed’s tepid reaction to developments have increased the odds of one happening. While a cut in the September meeting is a certainty.
Once again, the Fed could have tried harder to get in front of the curve and soothe fears. Only sending out Goolsbee with his evasive comments is certainly not what the market was looking for. They wanted to hear that the Fed is taking the stock market and job market weakness seriously and considering their options.
Including that they could cut rates between meetings and that a half-point cut at the September meeting are on the table.
I would imagine they are lining up other PR spokespeople (pretending to be economists) to get out there with more serious comments than Goolsbee. Likely in the next 24 to 48 hours.
When they do put their options for rate cuts on the table, it will put added pressure on the US dollar index which is trending toward a steep correction. It will also drive gold much higher.
On Sunday, Peter Schiff did a multiple hour X-Twitter Space to discuss the markets, gold and Bitcoin. It was his first podcast on the platform and it had a full house. He sure got the Bitcoin bulls worked up when calling it a Ponzi Scheme.
I was pleased to be allowed to ask a question during the podcast. I asked what he thought about my commentary that the Death Spiral of Debt was causing a return to the Gold Standard.
I went on to preface my question by arguing that the global debt needed to be backed up significantly with gold and that gold would regain its importance in international trade. Which collectively are the reasons for my call that gold will reach $20k within 10 years.
His response somewhat surprised me. He said that they won’t back the debt up with gold, they will default on the debt. Then they would have to back the currency with gold and start from that base. Which would cause $20k gold much sooner than 10 years.
He went on to say during the podcast that the reason he sees the need for a default is twofold. He says that the unfunded liabilities in social security and medicare are unsustainable and the government will have to default on them as well. And it would be unrealistic for the government to default on the unfunded liabilities without telling those holding the debt that they had to also take a haircut.
If they default on the debt, it would decimate the US dollar and as the US is an importer nation cause extreme inflation that would make the recent inflation look like child’s play.
A default on the debt would be economic suicide, but the idea that it is a realistic possibility even though likely remote is a sign of the times we are in with the Death Spiral of Debt.
The probability of that happening is remote, but certainly not off the table. If it were to happen, I would imagine the Death Spiral of Debt would have to reach a point that the debt to GDP ratio would be somewhere around 300%. It is currently around 130%, and certainly not on a good trend.
What I think is going to happen is that the Fed will start cutting, and dramatically increase their balance sheet. When the Fed started hiking rates, to tame inflation that they caused from such a long period of Free Money after the 2008 GFC, they said they would also normalize their balance sheet. It peaked at nearly $9 trillion and they haven’t been able to get it down to $7 trillion which is a scary new normal.
If they try to get interest rates back to near zero, they will drive the US dollar much lower and inflation will get out of control. And it looks like they will have to become the buyer of last resort for US debt again which will cause their balance sheet to double or more.
The Fed is in a crisis of their making and the insane spending of politicians, which makes it shocking that they are taking actions that suggest they are blissfully ignorant.
In the two terms of Obama, he set a record for spending. Trump out did him by spending as more in one term. Biden is making them both look like amateurs and will leave office after one term with a new spending record.
Since Reagan transformed America from the largest lender, into the largest borrower, it is unbelievable that almost all the presidents since have worked hard to create record after record of new debt creation. They seem to take it as a challenge, not as something to avoid.
Obama, Trump and Biden were the worst offenders. The two candidates now, Harris and Trump have already shown their true colours when it comes to spending. Sadly, I don’t see any chance they will come to terms with the Death Spiral of Debt.
They are spending junkies and the Fed is their drug dealer.
The only thing that will bring some discipline to the politicians and Fed is a return to the Gold Standard. It is happening in real time.
The economic world is changing rapidly before our eyes. The central bankers of the BRICS nations are the only ones doing the smart thing by buying gold aggressively. It is inevitable that more central bankers will do the same.
Some fear that an economic world under a Gold Standard will be very bad. I think it is the best thing that can happen. By the day, it only becomes more certain it is going to happen. Forcing discipline on politicians and central bankers is exactly what the economic doctor ordered.
My hope is that investors stop being fooled by Bitcon, extremely overvalued tech stocks, fad valuations in AI stocks, fiat currencies and insolvent debt instruments.
Instead protect their purchasing power with gold and value stocks that actually make money. Speaking of stocks that make money, the gold miners are making money hand over fist with the average price of producing gold for gold miners somewhere around $1400 per ounce. While they sold the gold they produced for around $2350 during the second quarter of 2024. That was the best average price of gold ever for a quarter and the next quarters of 2024 look to be shaping up for new record highs.
Select gold miners are free cash flow machines. As gold goes up and some are increasing their production and keeping costs steady, it will amplify their free cash flow generation. That sounds like a heck of a proposition to me.
All the best,
Allan Barry Laboucan
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