Inflation Fears

We witnessed a slight whiff of deflation last week as fears of inflation drove interest rates higher to the point where they started to give stocks a bit of competition. The 10 Yr. Treasury rose to 1.75%, which compares to the 1.34% on the S&P 500. True, you get a 1.82%% dividend yield on the Dow but if it’s income you are looking for, why would you want to own stocks for a mere 7 basis points especially when stocks are at historically high levels and when U.S. Treasuries bring much, much less volatility? Certainly, insurance companies and pension funds must be thinking like that even if retail investors generally are not.

Ten Year U.S. Treasuries

At least before the market started melting down this past week, some people were suggesting that the Fed should allow rates to rise rapidly, given growth projections of upward to 8%. Some were even fantasizing of double-digit GDP growth. But when rates started to compete with stock dividend yields and a very strong decline in equity prices, the Fed assured the markets on Wednesday that rates would be left alone.

But in addition to fears of a financial market meltdown, as James Turk tweeted out last week, there is another good reason the Fed will have to keep printing faster and faster and it is that the U.S. Treasury cannot afford rising rates. As James pointed out, the U.S. now has $28 trillion of debt. A 1% increase in rates adds $280 billion of spending just to pay interest, which is equal to 8% of the revenues the U.S. took in over the last 12 months. Higher rates are really needed to put the economy on a sustainable and efficient growth path but the U.S. Treasury, given its bankrupt state, cannot stomach it because higher rates will only worsen the deficit and accelerate debt growth. That in turn will cause bigger deficits, putting the U.S. government and U.S. dollar on a hyperinflationary debt spiral. Why? Because there are no longer any foreign trade surplus nations willing to recycle the dollars they earn back into U.S. Treasuries as they once did. So the U.S. is in fact on a downward financial spiral. It is indeed not a foreign adversary that is leading to our ruin. It is our own extravagance, which was enabled by President Nixon when he detached gold from the dollar. That made it possible for us to party for several decades by using money created out of thin air to buy up cheap products overseas manufactured many times by corporations that moved abroad, leading to the destruction of our middle class.

The only thing our Fed can do, as they demonstrated last week, is print a sufficient amount of money to keep rates from rising and to keep the financial markets from spiraling into a deflationary implosion that could take the entire global monetary down with it. Our adversaries won’t need to spend a dime to dislodge us as the number one power in the world. We are taking ourselves down through a self-inflicted state of bankruptcy. This virtually guarantees that buying commodities starting with the most liquid form—that being gold and silver—will be profitable at least as measured against U.S. dollars. And I would direct your attention to the category that is enabling my Model Portfolio to stay in positive territory. Base Metals, Energy and Tech Stocks are up 98.33% so far this year. I believe we are about to see gold and silver begin to move. I think those monetary metals will distinguish themselves, especially after gold becomes negatively correlated with U.S. Treasuries. By the way, regarding that topic, I suggest you view this extensive video interview with Michael Oliver. It includes charts here:

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.