Another Market Crash Coming

If these key market numbers mean anything this week it’s that the markets may be sniffing out some inflation. I say that because the Rogers Raw Materials Index, which is heavily weighted toward energy, was up while the T-Bond was down (yields up). I note that Light Sweet Crude was up 16.23% to a still pathetically depressed $19.69.

An interesting article in Zero Hedge this week titled, “Here is the one indicator that convinced BofA another market crash is coming,” pointed out that it is the derivative desk at BofA that is predicting a retest of U.S. Equity market lows before we can count on a real recovery. Equity optimists are suggesting that, given the very rapid decline in stocks followed by an almost equally opposite stimulation response by the Fed and fiscal policy as well as a sharper than normal decline in the decay of the VIX, we have already seen the bottom in equity prices.

However, what the derivative desk at BofA is pointing out is that the six-month VIX has actually been rising, not falling. Moreover, they point out that since 1990 there have been 105 days when both the spot VIX and 6-month VIX were above 30, as has been the case with the latest market downturn. In all but three of those instances was the stock market not in a bear market six months later. 

While it is true, as David Rosenberg has pointed out, that there is only about an 8% correlation between the real economy and stocks, one has to wonder when looking at the current situation—which looks much more like a 1930s depression or worse—whether there won’t be a return of correlation between the real world and the stock market, especially as the U.S. Treasury will be sucking up huge amounts of money for which there will be no Treasury buyers at these fictitiously low interest rates.  So, we can pretty much count on massive monetary inflation. That won’t fix the real economy which is not only burdened with a lack of liquidity but a lack of savings and a massive insolvency problem. Printed money isn’t savings! So, the work of the derivative folks at BofA seems likely to me. They suggest equities are likely to heading to test the recent lows soon. And if Michael Oliver is right, equities won’t successfully test those recent lows but will plunge through them to much lower levels. Michael sees the remainder of this massive bear market to be of a slow time-consuming water torture sort of event that gradually breaks confidence. Economic & market headlines on the next page support this dire prediction.

 At some point, as confidence in stocks wanes and they head lower even amidst massive amounts of money creation simply because companies’ earnings crash and thousands more go out of business, I believe we will see gold and gold shares shining very brightly. Why? Because I think gold miners will be one of the few sectors that have soaring earnings. Already GDX has rallied sharply, as you can see from the three-month chart below on your left. And there is good reason for that. Earnings are picking up for the kinds of companies in the GDX, like those listed in the table on your right. And the past two years’ earnings for mid-sized companies (below left) and small gold producers (below right) are also collectively provided by Scarsdale Capital. As you can see, earnings are poised to rise dramatically this year and into 2021. 

It is very difficult to predict the future now. My own view is that we are going to see some price declines in the immediate future as the debt bomb causes masses of bankruptcies. But government and the Fed are promising to unleash unfathomable amounts of money that will most certainly be inflationary. Even if the dollar remains as the world’s reserve currency for the foreseeable future, measured against gold it is going to decline massively. The only answer the Keynesians have is to deficit spend and print money to fix our problems. And if you don’t think we have problems even greater than our great grandparents had in the 1930s, just check out a few of the headlines I posted at last week, shown on your left below.


Meanwhile, the chart on your right pictures the average monthly London PM gold fix. If you are looking for a bullish chart, how many have you seen that look more beautiful than this? For April, the average gold price was $1,682.93. The 20-month average was $1,400.97 and the 40-month average was $1,336.35. Now if the Fed could allow interest rates to rise to the level required to finance the U.S. debt and private sector borrowing needs, I could make a case for a bear market in gold. If you can see that happening, tell me how.

About Jay Taylor