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Wednesday, November 5, 2014

The elections and gold: The inevitable

With the advent of the new Republican Government the markets and the dollar are rallying.  This will be interpreted by most as a sign that the US economy loves the idea of conservative fiscal governance.

Nothing could be farther than the truth.  First, the Republicans have never been fiscally conservative.  But, more important, what the markets really love  is Gridlock.  Gridlock means No Oversight.  No Oversight means Massive Leverage.  Massive Leverage in a financial sector that has never bothered to de-lever after the last crisis means Massive Asset Bubbles - especially in  the stock market and the dollar - and real estate.

Massive Asset Bubbles will be interpreted as Prosperity due to US Financial Genius.

It will last about a year.  During this time Gold will suffer, Savers will suffer, the middle class will begin to crater under the pressure of the costs generated by the asset bubbles.  Education, Health Care, food, rents will all soar even as the CPI and salaries remain dormant.

As long as the Asset Bubbles remain a one way bet everything is fine.  The moment one of the markets turns - everyone who is levered and betting the same way will race to unwind their massively levered bets - all at once.

Then the massive Web of Asset Bubbles will deflate.

And the entire edifice will look just like 2008 - only with many times the leverage.

Then we'll really see what de-levering looks like.

On a scale never before seen.

And then gold - and all other hard assets with intrinsic value will be the only things that retain their value.

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