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.