In a recent publishing, the award-winning global macro asset management firm Crescat posted a letter to investors written by the founder and CIO Kevin C. Smith, and partner and portfolio manager Tavi Costa describing how markets are expected to perform over the next phases of the collapse and outlining how policymakers have set our economy for its greatest demise. The strategists point out that markets are cyclical, and currently, while stocks trade at record high valuations commodities are historically undervalued. That’s the set up for a major change in the performance of both asset classes. As they presented in this chart, similar conditions were seen during the 1972 Nifty Fifty and 2000 Dotcom bubbles.
As capital tends to move towards the highest growth and lowest valuation opportunities, investors are expected to rotate or completely move away their assets from expensive deflation-era growth equities and fixed income securities and head towards cheap hard assets, ultimately reversing the 30-year downward trend of money velocity. Our current system based on Modern Monetary Theory and its two-fold and monetary stimulus is colliding head to head with an accumulation of years of reduced investments in the basic industries such as materials, energy, and agriculture. That’s why, according to their analysis, the “end game” for both of the Fed’s asset bubbles in stocks is inflation. And it has already arrived on the commodity front.
For that reason, Smith and Costa advise that investors should turn to hard assets such as gold and silver to protect their wealth. The monetary metals are amongst the most scarce resources on the planet, however, they have been facing a fresh surge of investor demand. By scrutinizing the supply conditions, the precious metals have been in the disinflationary zone since the precious metals mining industry’s latest peak in 2011, when gold and silver miners started to be criticized by investors as being capital destroyers. As a consequence, the industry’s spending patterns have completely changed over the past decade. Major companies have purposely underinvested in replacing their reserves to create a supply cliff for the industry while also significantly boosting free cash flow.
Another key driver for the upsurge in gold prices in terms of demand is the falling real interest rates, which, according to the experts, are a combined reflection of central bank interest rate suppression tactics and investors’ rising inflation expectations. The lastest plunge lower in real yields, which is being shown inverted in the chart, was different from the price of gold – a clear signal of a strong imminent upward trend for the metal once again.
Overall, the outlook for gold is connected with the major imbalances we are seeing in the U.S. economy right now. The Federal Reserve’s ability to prevent inflation is severely impaired at this point. Instead, it has actually become the main funding mechanism to it through its monumental purchases of US Treasuries, allowing the US government to run a large fiscal deficit. In reality, the Fed has no independence in the matter whatsoever. It has to keep funding the government’s fiscal stimulus programs as the lender of last resort. And as we learned with the repo crisis, liquidity can also be necessary in the short-run to avoid the collapse of the equity and corporate bond markets, but only to a certain extent – not at all as a firehose inside the markets as we are witnessing right now, because, in turn, it pushes commodity prices up and unleashes a massive real-world inflation. That’s the direct byproduct of the newly printed money, and it is the killer of record overvalued financial assets. In other words, even if everything else fails to spark an apocalyptic stock market crash – which seems highly unlikely since our economy is already shaking to the core – inflation most definitely will. And that’s, my dear viewers, is how the game ends with a major economic collapse and a new one era begins.