Big Old Bad Bear Enticing Investors

With stocks up this week, some some experienced investors are suggesting that that big old bad bear is enticing as many investors into his deadly den before he mauls them next time, he gets hungry. As Richard Russell used to say, bear markets are designed to destroy as much excessive wealth as possible. Certainly, long bond rate declines suggest a recession may be dead ahead. Even though we have not yet seen any significant signs of a decline in inflation, long-dated Treasuries suggest financial assets are facing deflation.

It is interesting to note that Danielle DiMartino Booth made a very interesting statement in her interview last week with Adam Taggart on his Wealthion YouTube channel. While almost everyone expects that the Powell Fed will crank up the monetary printing presses with the first Richter Scale hints of the next financial market earthquake, Danielle thinks Powell may have sought renomination to the Fed to in fact do exactly the opposite. Recently Powell made some allusion to the heroic monetary policies of Paul Volcker in 1980 which saved the dollar from what looked like its sure destruction. It was 20 years or so ago, long before America’s financial status was nearly as pathological as it is now that I put that question to both Marc Faber and Ron Paul at a dinner in San Francisco. Neither of them thought a replay of Volcker would be possible even then. Nor do Michael Oliver or Alasdair Macleod, who are two of my most frequent guests on my radio show. I will certainly pass along Danielle’s suggestion to Doug Noland next week on my show to see if he thinks Danielle could be right.

Personally, I think the chances of Powell doing what has to be done to save the dollar are close to zero. As Michael Oliver pointed out on my show last week, when Volcker tightened credit, stocks were already at the bottom of a bear market and commodities were roaring hot. Now the exact opposite is true. Moreover, as we reported previously, as retired Fed economist Lacy Hunt as pointed out, once a nation’s debt/GDP rises over 90, it’s impossible to raise rates without totally devastating an economy. The U.S. debt/GDP recently was as high as 130! As Alasdair Macleod recently pointed out, having kicked the can down the road so many times, the Fed is faced with two very unenviable options. It can save the currency by letting interest rates find their equilibrium level while engineering a depression far deeper than the 1930s. Or it can take the easier way out in the short term by printing massive amounts of money in an attempt to keep asset prices high but destroy the currency in the process. Alasdair points to John Law’s Mississippi Bubble as an example of the path he thinks we are on. On the other hand, if the dollar goes down, so does the American empire, as it would be ceding power to Russia and China that are now running an economic system that is based on producing life-sustaining goods, unlike the American empire that is spending huge amounts of money to perpetuate wars and overvalued stock and bond markets rather than producing things thriving economies need.

We will have to see how this plays out. Last week some weak economic numbers caused the market to replay an old theme, namely, bad economic news is good news for the market because they are assuming Powell will open the spigots when times get tough. As noted above, the bond market wasn’t buying that idea even though energy prices were very strong last week.

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.