Gold and Central Planning

 

Big Government is inflationary.

It used to be that Central Planning was the opposite of Free Market Economy.  Now the world's premier Free Market Economy- the United States of America - is becoming all about central planning.

It used to be that the both political parties were Free Market First - but then had their own Centralized Priorities.  Then in 1913 after a particularly violent market crash the Federal Reserve Bank was invented to be the Central Planning Mechanism for Interest Rates which control the flow of money.  America was on the road to socialism.

Still, there was a mechanism that controlled the flow of money over and beyond the artificial setting of rates.  That was the fact that all money had to be convertible into Gold.

Then came the great crash of 1929.  It seemed the Fed was still not capable of averting crashes.  So a few years later, in 1933, during the ensuing depression we made private ownership of gold illlegal.  This consolidated massive power in the hands of the Fed and the Banks that owned the Fed (yes the largest banks own the Fed).  And of course in the hands of the Treasury.  Because the Treasury is the only entitiy that can legally print money.

By 1971 we had printed so many dollars that it was no longer possible to convert dollars into gold.  So we closed the gold window.  

And the Dollar Hegemony began.  But this consolidated even more power into the hands of the Fed, the Banks that own the Fed, and the US treasury. We were on the road to full blown Socialism - even though Free Market Priniciples still prevailed - at least for the larger coroporations.

At this point we still had two parties Democrat and Republican.  Democrats at this point believed in Free Market but thought that the Government ought to be involved in social justice and the Republicans said they believed that that role of the Governement outside of the Centrally Planned macro economy should remain as small as possible.

Then came the inevitable inflation of the 1970's.  Paul Volcker temporarily killed it with 18 percent interest rates.  But Government didn't get any smaller.

And then in 1980 Alan Greenspan and Ronal Reagan instituted the final nail in America's turn towards socialism - perpetual deficits and perpetual negative real rates.

Government became larger and larger (even as lip service to "Small Government" became louder and louder.)

Along with Government the largest Banks and Shadow Banks became so large that TOO BIG TO FAIL was born.  And with it Perpetual Bailouts.  And as long as too big to fail and perpetual bailouts is the central policy of a centrally planned economy the largest institutions can take unlimited risks - because there is no consequence.  Ansd they get larger and larger as the Government gets larger and larger and the folks who control it all get richer and richer.

Now both Government and Debt is so large that there isn't even lip service to Small Governement.  The Democratic Party wants unlimited funds for its social justice campaigns and the Republican Party wants unlimited funds for its Religious Justice Campaigns and the only argument is who can spend more on what.

40 percent of GDP is government spending.  That's using the funny money accounting of the government itself.  In  truth the Treasury issues debt that the Fed buys and the Government uses the proceeds to instill the illusion that the economy is still growing by whatever small percentage they can manufacture.

The truth is that inflation is so out of control that only the top ten percent of the population - that owns 90 percent of the wealth - ( top 1 percent own close to 1/3 of all the assets in the country) - can afford to comfortably navigate the massive inflation that makes everything more and more expensive day by day.

The problem is that as the other 90 percent gets more and more desperate they seek greater and greater centralized conrol to give them relief.  Fifty two percent of the population believes Amercian Democracy has failed and they would be comfortable with a strong man leader to save them from this failed democracy.  In other words they expect that an even greater centralization of the government will save them from the failures of large central govenment.  They hope to solve the problem with more of the same that caused the problem in the first place.

That is the definition of insanity.

More central planning to solve the problems of central planning.

It's also the defintion of inflation.

Inflationary policy is insane.

Inflationary policy is intensifying.  And most of America wants more inflationary policy to solve inflationary policy. 

Maybe consider protecting yourself with a little of the old fashioned sanity that is gold.

GOLD AND THE ELECTIONS OF 2024

Given the eight year cycle in gold, and given that gold will be entering its upcycle by the end of this year:

 How will the elections affect this upcycle?

First, in an election year it is highly unlikely that either the Fed or the Treasury will do anything (on purpose) to overtighten the economy going into November.  However the Long and Variable Lag of economic action means that their conrol over what happen as we approach the election if far less than they would like to think.  So a shock of some kind coming near the election (due to the recent tightening jag)  is certainly not out of the question.  The response of course will be to add even more liquidity than normal to inusre that the economy is flooded with liquidity going into the election and this should give a strong boost to gold.  

If there is no shock you can bet that the Treasury will use every facet of their copious means of suppling liquidity to make sure the economy appears to be sailing along as smoothly as possible.  Liquidity means money printing which is always gold positive.

So this fall should be a good time for the start of the gold upcycle.

What about after the election?

Well, if Biden wins we can expect massive spending.  There will never be budget cuts because no politician will ever touch social security, medicare or defense.  So it's always just a question of how much more spending.  And even without the support of congress there are so many ways the Treasury can control the supply of liquidity to the various markets.   And the Fed is certainly at the end of its tightening regime and no matter how many cuts you might expect, it is clear they will be easing liquidity by lowering rates and expanding their balance sheet as needed - especially to help buy the massive issuance of Treasuries and to bail out the 2 trillion dollars of corporate refinancing on line over the next 2 years.

So this will provide a good tailwind for Gold.

If Trump is elected there will be also be massive spending - because without it the stock market would crash and we all know Trump measures success by the Stock Market.  On top of that there will by massive Tarrifs and Trade Wars which will send inflation into overdrive.  There's no need to explain the obvious: it is the consumer that ends up paying for every penny of every tarrif.  

This is very Gold positive.  

And finally Trump has pledged to replace the Washington Beaurocracy with loyalists which will certainly extend to the Fed.  He will have his stooge at the Fed drop rates back towards zero as he will see this as positive for real estate (as it would be - at least for the owners of real estate) and the stock market.  This will send Gold into Hyperspace.  Gold will certainly double and triple under this regime.  The gold price doubled uinder his last tenure, and that was during a gold 8 year downcycle!  

Low rates, high spending, deglobalized inflationary pressures, and trade wars - and hot wars - during an upcycle will lead to unprecedented heights in the gold price.

Think Japan.  Because either way, that's where we're headed.  The long end of the yeild curve is the only thing the Fed and Treasury and the Government have no control over.  Unless they institue Yeild Curve Control.  Which is exactly what they will have to do.  Which will put us in the exact same position Japan is in now: Contol rates and let the currency devalue (which also whittles away the debt) or let long rates blow out and watch credit markets implode.  The choice is easy.

So Trump will be ideal for gold.  And Biden too would be very gold posisitive.

Either way, if nothing else, the next four years should be very good ones for Gold.

GOLD AND THE EIGHT YEAR CYCLE

 

Everything in the natural world moves in cycles.  The four seasons.  The rour "turnings" of social structure.  The four ages of man.  Even the Ancient Holy Scientists have identified the four ages of the natural world: Material, Electronic, Magnetic, and Etherial.  These take many thousands of years, and we are right at the beginning of the electronic, in case you're interested,

Everything in the world of Mankind moves in cycles.  Financial cycles have been studied by analysts ever since there have been financial markets.

Two of the great living market technicians one a billionaire who manages billions: Felix Zulauf and the other the preeminent technical analyst Tom McClellan, have both determined that the gold price moves in an eight year cycle. The first four years enjoy the primary upward force, while the second four continue to rise under the momentum created in the first four years.

2024 is the last year of the descending cycle, but Zulauf and McClellan believe most of the directional power of the cycle has been spent by the final year.  Zulauf in particular believes that by the end of 2024 the power of the the next 8 year upcycle will already by firmly in place.  This is because so many analysts and investors are aware of this cycle and will be front running the powerful surge that defines the first four years of the upcycle.

All technical analysis provides insight.  If you're interested check out cycles research for yourself.

It is notable however that in this final year of what many technical anaslysts feel to be the end  of downward pressure on gold, the gold price is still hovering near all time highs.  And this with a very strong dollar and presistently high rates, nominal quantitative tightening, and what is widely believed to be a reviving economy.  All things that tend to force gold towards lower prices.

The driving force behind this price rise has been the central banks of the wolrd.  The central banks do not share the rosy perspective of most stock market analysts and investors.  The central banks are very worried not just about inflation but about global liquidity.  This is why even as they have been fighting inflation with higher rates, they have been providing liquidity to the markets through many facilities like the BTFP.

Inflation and illiquidity are two of the most powerful forces that push the gold price higher.

The central bank response to illiquidity is to flood the markets with cash, and bail out institutions and governments that are overwhelmed with debt.  This debases the currencies and sends gold higher.

It is impossible to fight inflation and illiquidity.  Bailing out illiquidity forces inflation higher.  FIghting inflation causes illiquidity when debt levels are high.

The last eight years of near zero rates (until this recent rise) were enabled by a confluence of the forces of globalization and global peace which are both deflationary forces as lower input prices force goods prices downward and low defense spending is an enormous relief on global budgets.

The next eight years of de-globalization will put  a steady upward pressure on prices, and nations that are aleady drowning in debt will have to commit untold trillions to ramp up their defense spending with two hot war raging and more on the horizon.

All these factors that have held gold down the past eight years will reverse over the next eight.

Especially since all the nations of the world, especially the United States, used the last eight years of deflationary force and artificially low rates to ramp up debt to obscene levels.

If you believe cycle analysis this is very clear.

Even if you don't, surely the pressures involved, regardless of the time frames, should be obvious.

And if it is not obvious now it soon will be, and then you will see investors following the lead of the central banks as they become aware and worried about liquidity themselves.

This is why cycles analysts are very bullish on the next eight years for gold.

Something to consider.

REASONS NOT TO OWN GOLD

 

Right now the market feels that nobody needs to own gold.  The vix is at an all time low.  The gold premium is at an all time low.  Gold is still over $2000 - but it's been stuck there for almost 8 years.

Why Gold is irrelevant: Growth is about to pick up,  Inflation is back under control.  Debt is not really a problem in the modern financicalized economy.  War is not a problem for the US because we have the strongest military on earth.  And we're about to relelect a strong man president/ruler who will strike terror in the bearts of our enemies.  Artificail Intelligence is going to turbo charge efficiency and productivity.  We are the most honorable country in the history of the world, blessed by God who will reward the righeous with wealth and power.

All that makes gold irrelevant.  If you believe that you should sell all your gold right now and buy stocks.  Stock is ownership of American Industry, the greatest industry on earth and in the history of the world.  Strong men and women own that.  Weak ineffectrual naysayers who always think the sky is falling are the only losers who buy gold.  = which after all, produces nothing, creates nothing, and has no yeild or earnings.

That pretty much sums up the argument against gold.  And it's a strong argument for strong men and women.

But if you dare question any of that maybe start with the idea that debt just doesn't matter.  I know if rates are at zero debt may not matter.  But what about at 4 or 5 or 6 or 7 or 8 percent.  Does debt begin to matter at some rate of interest?  Doesn't debt require interest payments - espcecially when interest is high.  

It kind of does.

Also you might questioning the idea that inflation is back under control.  Starter houses at a million dollars may seem expensive to some people.  Food, energy, education (none of which count in core CPI) still seem expensive to some people.  College at $70,000 a year and  cars starting at $30,000 and a latte at Strabucks at 6 dollars still seems expensive to some people.  Not big strong people maybe but to the rest of us.  

And inflation is cycliccal.  It's always been cyclical and unlesss the nature of economic reality has changed we are in an inflationary up cycle where it goes up, comes down a bit then goes higher.

What if that happens?  Probably it can't.  But what if history is a guide, just in this one case?

What happens to growth if inflation stays up abover 3 or 4 or 5 percent?  Then growth goes down by the same amount.  Mathematically speaking.  I hate to bring up math,  It's so weak ane UnAmerican.  But math still exists, I think

High debt, High inflation, low growth?    

Well, that sounds like the beginnings of an argument for Gold.  Not that I'm saying those most unAmercian things will happen.  But it does seem in the realm of possibility.

And what if the hot war in the middle east expands and the hot war in Central Europe expands?

Of course AMerica is so strong is probably doesn't matter, But isn't war expensive?  Where do we find the money for it when we're running 3 trillion dollar yearly deficits for the last 8 years?  Not that 3 trillion is a lot for us Real Strong Americans but to a weakling 3 trillion might sound like a lot.  And an expanding hot war will cost a lot more than that.  

Anyway, obvioulsy things are great.  So sell all your gold.

Unless you think debt, inflation and low growth and war might be possible.  (The US economy trend growth for the last 8 years has been 2 percent - if you use vastly undercounted inflation measures.  If you use the same inflation measures we used in 1970 trend growth over the last 8 years is zero).

Then maybe think about gold.  Just a tiny little bit.

GOLDILOCKS IS A FAIRY TALE

 

The equity markets are at all time highs selling at a fowards PE of 20 (in the historic top ten percent).  And this with an earnings growth expectation of 10  percent (as opposed to an historical year over year earnings growth of 2.4 percent)  And if you simply normalize the multiple down to the mean you find a 35 percent earnings growth expectation embedded in the current multiple.  If earnings estimates come down that embeded multiple is much higher.

The general public is immensely bullish on stocks.  That means the top 10 percent of the economy that owns 90 percent of equties is tremendously bullish.

Which also means the top 10 percent has little to no use for Gold.  Gold though flitting around $2000 to $2100 is pretty much at an all time low as far as investor interest.  The physical gold premium at 4 percent confirms this.

Just as the Vix is now matching its all time low that it hit twice before (just before the GFC crash of 2008 and the covid crash of 2020) shows that investors have no fear except FOMO.

The story line: Perpetual soft landing, lower inflation, a Fed pivot.  An AI revolution.  Wow, things economically are amongst the best in the nations' history.  And with tons of money on the sidlines!!!!!

AAII (individual investors) bulls are 2 to 1 over bears.  Inverstors' Intelligence survey has bulls at 3 to 1 over bears.  the CNN pure greed index is off the charts at the Greed end.

THINGS ARE GREAT.  Noboy needs gold.

That means gold being near an all time high while universally hated by investors has been driven there soley by Central Bank Buying.

So what do the Central Banks of the world know that US investors don't know?

And why then is the Fed cutting rates?

According to the latest Fed beige book 2/3 of the economy in already in recession.  That's what the Fed sees and why it is cutting.  And when you ask people how optomistic about the direction of the country which is tied firmly to the direction of the economy - 78 percent feel things are headed seriously in the wrong direction.

And this with the ten year at 5 percent and showing no signs of backing off, (fed cutting only affects the snort end) with 2 Trillion dollars of corporate debt fincanced at 0 that will need to be refinanced over next 2 years at over 5 percent.  With Fiscal deficits running at 3 trillion dollars a year for the las 7 years that all needs to be refinanced each year.

Can you see a problem developing here?  No.  Well the Central Banks can.

Even the Fed can.  That's why they are in the middle of a multi trillion dollar bailout the BTFP that is propping up the banking system as I write.

And with 2 hot wars raging on right at this very moment that could easily metastacize into global war.

And with an election that threatens to unravel our democracy.  And several other global elections featuring hard right fascist candidates with highly protectionist anti globallist predilections which means years of much higher inflation for everybody.

You may not see that.  But the Central Banks do.

And despite the inflation RATE coming down, inflation is already so far out of control that nobody coming out of college can afford to pay off their college loans, buy a car or buy a house.  And just buying food is a challenge.  Throw a kid or two into the mix and the inflation times are tough.

This worries the Central Banks.

So what aren't investors worried?

We are INURED. 

We have become inured to violence, to hatred, to greed, to swindling, war, mass shootings, Private Equity buying up all the housing that nobody can afford to live in, to Politicians kicking the can down the road and never reigning in a cent of spending, to the Fed giving away our tax money to every corporation and bank that becomes overleveraged, to every Private Equity House that makes a bad trade that could end up being 'Systemic."  

We are INURED.  We believe in Goldilocks.  Why? Because the Central Banks have been bailing out the wealthy 10 percent for the last 50  years.  So why worry.  LTCM was bailed out with a trillion.  The GFC was bailed out with 3 trillion.  The Covid Crisis was bailed out with 10 trillion.  The level of current indebtedness implies the next bailout will have to be around 30 trillion.  

At some point that number becomes too large and the result is stagflation.  30 trillion sounds too large to me.  But, we'll soon see.

The central Banks seem to fear we are there.

The investing class doesn't see it.  

Yet.

That's why the gold premium for physical is at about 4 percent, when during times investors are really worried - premiums can blow out to 20 percent.

But I fear Goldilocks is a fairy tale.  It doesn't exist.  It never has existed.  It just means that the problems that everyone should be able to see haven't manifested themselves YET in the markets.  

Why not?  Who cares, really. Policy Lags are long and variable.  They hit when they hit.   Policies that haven't yet been felt are Trump and Biden ramping up the yearly deficits to 3 trillion and the Fed rasing rates from 0 to 5 in the shortest time span in history.  2 Hot wars in oil producing areas starting within a year both of which are ramping up not down.  The near overthrow of our government.  The rise of militant fascism around the world.  And a zombie corporate world with 2 trillion dollars of bad debt.

And a quadrillion dollars of derivative debt  bets that nobody really understands.

The point is if you believe that these things won't have economic consequences because they haven't yet - you are inured - and you deserve everything coming to you.

For those who see that there is no new era.  This times things aren't different.  AI changes nothing.  The business cycle still exists.  Goldilocks is a fairy tale.

And Yes, the Fed can and will step in a bail everything out.  But that will and does create runaway inflation.  

For those of us that see what is happening, and don't really worry about the timing of the effects,  this is an incredibly cheap time to buy the insurance that is Gold.

And for those chasing the last few equity dollars in this cycle, good luck.  

Gold V Bitcoin and the New Technologies

 

To a new generation Bitcoin may seem like a good alternative to gold as a hedge for the same economic and political conditions.  Both appear limited.  Both appear to have no counterparty risk

But whereas Bitcoin may be limited - an unlimited amount of Crypto currency can be wished into existence.

Whereas Bitcoin appears to have no counterparty risk - if the electrcity goes off it ceases to exist.  If you try to trade it through an exchange - the exchange could confiscate it.  SAM BANKMAN FRIED. If you simply forget your code - it ceases to exist.  

And lastly, and most important, when governments issue their own Central Bank Crypto Currency all other cryptos will be outlawed and thus cease to exist.

That doesn't mean you can't make money in Bitcoin - but it's a pure gambling play.  It hedges  nothing.  It safeguards against nothing.  It is a way to make money through gambling.

After all it's been around now almost 20 years and the only application for it has been to circumvent drug and terrorism laws.  Hardly the Fintech Revolution that was predicted.

In fact if you go back through the Tech revolutions of the last 20 years your arrive at the same place: Nowhere.

First there was the 3D printer that would revolutionize industry.  You could print everything from weapons to cars and aiplanes.  Turns out all you can make are little plastic parts.  Anf fake plastic bouquets.  Wow.

Then there was the Drone revolution.  Remember when all packages would be delivered by Drones and people would even be able to fly their drones down the street to visit their friends?  Turns out the only real application has been in  dropping bombs.  Great if your jobs is killing people.

Then The Driverless Car was going to change everything about city life.  Turns out the only place to try it was Arizona where half the population is to old to drive anyway and even there it's constantly running over old people.  Maybe they'd do well to just take an Uber.

Now it's AI.  I ran a few paragraphs I'd written through AI.  It obfuscated the meaning enough to turn it into meaningless word soup.  Great.  That will be very useful for anyone who wants to write something with no meaning at all.  So I guess political speeches.  And Corporate conference calls.  Oh, and textbooks for the Florida public school system.  Apart from that it's a dud.  But I'm sure it will kill a tremendous amount of dead end capital.

Right now we only understand what about 10 percent of what the human brain does.  I'm sure when we get that figure up closer to 90 percent we'll invent some type of AI that's useful.  We're a few centuries away.   

Maybe not centuries.  But face it, we're still in the age of the engine and the computer.  We're in the electrical/mechanical age.  Engines run by fossil fuels will power machines for the foreseeable future. And computers are just machines that crunch data faster than most humans.  Advances wil be slow and grinding not spectacular and world changing.  Nobody's going to live on Mars.  And our air and water will get fouler and fouler until we curb our appetites.  And the most significant change, Social Media, has been a giant step backwards, enabling middle aged adults to act like bitchy little middle schoolers at best, and at worst, prividing cover for hatred and murderous intentions that used to need to hide in the dark.

Eventually humans will figure out magnetism and real advances will be made.  But we are far off from that.

So right now if you want a good old fashioned hedge against the insanity of Fintech, and all the rest of Financial Engineering that exsists only to suck money out of the pockets of everyone and into the pockets of a few Private Equity executives...

Stick with gold

Gold exists.  It is inert so it will never tarnish.  You can melt it but it still exists.  You don't need an exchange to trade it.  You can take it physically to any dealer in any country and they will give you whatever currency you want for it.  If the electricity goes out, gold doesn't care.  You only need to remember where you put it.  If you can't do that, not much will help you anyway.

Finally the central banks of the world all buy gold, store gold and use the gold as part of their reserves.  It has had that particular USE for 5000 years now,

They could outlaw private ownership, but most of the central banks are actually encouraging their citizens to own gold so if some central banks try to outlaw it they will be global outliers.

There is really very little similarity between bitcoin, fintech and gold.  Right now they do tend to rise and fall together, as liquidity rises and falls.  In the very short term that may continue.  

But when the central banks inevitably shift to central crypto so  that every transaction can be monitored and taxed, all private cryptpo will be history.

And gold will remain, as it has for the last 5000 years as the true store of value.  

DE-DOLLARIZATION - GOLD'S LONG TERM WEAPON

 

If the cornerstone of the global economic system is Liquidity and Trust - both indicating trends supportive of a higher gold price - the third pillar of the gold story is really a direct result in rapidly rising dollar liquidity and a rapidly plunging Trust in the US System that suppots the global dollar hegemony.

This is the De-Dollarization that is being actively engineered by China/Russia/Iran with strong support from commodity rich Saudi Arabia, UAE, Argentina, Ethiopia, and a host of African and South American countries with bilateral mining agreements with China and Russia.

Now, the dollar is supported not only by the World's strongest and deepest economy with the world's most powerful military but also by a Eurodollar system that is five times as deep as the US economy.  So the dollar isn't going to be replaced overnight.

But that's not the point, is it?

The point is that all investing value turns at the margins.  And now that Biden has weaponized the dollar against Russia following Trump's Trade War that attempted an early stage weaponization fo the dollar against the entire globe - and further weaponization is being threatened against China should they invade Taiwan for example - every country that uses the dollar as part of their own reserves is rapidly De-Dollarizing.

What does that mean.? 

A) All countries have stopped buying US Treasuries at a time when the US has an overwhelming need to ramp up Treasury Issuance.

B) That means the Fed will have to step in and buy US Treasuries in order to keep long rates from blowing out.  This weakens the dollars, increases real inflation, and institutes effective Yeild Curve Control.

C) All countries switching out of US Treasuries as part of their Currency Reserves must replace the dollars with something - and that something for China and Russia and many other countries includes a healthy increase in their Gold purchases.  

Not all these increases show up immediately in the price structure US futures dominated gold market.  But over time, it put inexorable upward pressure on the gold price.

Because the US Gold Futures market is dominated by the Federal Reserve Bank of the US that can trade through proxies like JP Morgan (a principal owner of the Fed) in size that can not be matched by any private  institutional traders - the US futures gold price can be managed.

But managing something that trades Globally on markets throughout the Global Economy can only be a temporary measure.  Over time, as massive Government purchases in China, Russia, Iran, Saudi Arabia, UAE, Argentina, India, continue and accerlerate you will see the Gold price rise.

And many of these countries - especially China - are strongly encouraging their private population to purchase gold as a means of securing their own private wealth.

What happens when Americans eventually catch on?  We may be slow to catch on,  but once a trend gets established we can be very persistant.