Last Week’s Markets

This was a great week for the rich and powerful establishment. Stocks rose in value, no doubt allowing the smart money to sell and build cash. With that kind of “good” inflation the establishment was happy to see “bad” inflation decline this week, evidenced by a decline in commodities and a Major decline in gold and silver. 

And no doubt those hedge fund and institutional managers were not unhappy to see that the cash they just raised would be rewarded a tiny bit better return with a rise in the Long Bond (decline in TLT).

My IDW displayed a slight decline again this week, falling to 187.27 as the commodity declines outweighed rise in equities. This cheers the hearts of the establishment.

Earlier in the week, before the “strong” job numbers came out on Friday, my good friend Tommy the Texas cotton farmer and astute financial advisor sent me some notes on thoughts he has about the current macroeconomic setting. Here is what he observed:

  • Major currencies like the dollar, Swiss franc, and Japanese yen are trending up;
  • S. Treasuries are trending up across the 5 yr. to 30 yr. yield curve;
  • Oil, grains, lumber all heading lower with gold sideways;
  • Commercial & industrial bank loans are down; and
  • Monetary velocity is still falling.

What does this say to you? Not what “everyone” thinks.

Tommy is well known for his understanding of the dollar-based fiat system as it currently exists. And until the existing dollar system is replaced by something else, which I think may actually be in process now, I think Tommy’s inclination toward a deflationary scenario, especially in the financial system, will be correct. And by all historical accounts, with stocks the most overpriced now than at any time in our history except before the collapse of the dot-com bubble, and with this 15-year bull market way overdue for a major bear market, I think Tommy’s concerns right now are very valid.

I was listening to David McAlvany’s podcast of this last week and he pointed out that the hot stocks, the big four of which are pictured on the prior page, are starting to look very toppy and in each case after stellar earnings were reported, they sold off. Apple’s Q2 sales rose 36% and the company generated $21 billion in operating cash flows for the period. Alphabet (Google) saw its Q2 earnings beat estimates by 37% to earn $27.26 per share. Microsoft reported net income of $16.5 billion for the quarter, an increase of 47% over the like period of 2020. And Amazon reported Q2 earnings of $7.8 billion compared to $5.2 billion for the second quarter of 2020. Despite the outstanding performances of each of these giant companies, which in each case beat the street’s expectations, the stocks sold off immediately after the news release. David is suggesting that a lot of the smart money are taking their chips off the table to prepare for the inevitable equity market decline. If we get a big one, Tommy’s vision of the future will likely be right as an enormous amount of air comes out of this “everything bubble.”

But if/when the next major financial market meltdown takes place, is there anyone reading this who thinks the Fed will suddenly do the right thing and tighten credit? Of course not! There is no chance but that we will get an even more aggressive monetary and fiscal policy mix even than the current one that is insanely aggressive and dollar destructive. The bottom line in the chart on your right shows the Dollar Index. It hit a high of 160 in a loose-fiscal/tight-money environment with Paul Volcker’s double-digit rates. Then dollar became extremely weak, falling to a low of around 82 in the 2008-2010 timeframe when we had both a loose monetary and loose fiscal policy. And so, with both monetary and fiscal policy extremely loose now, we can anticipate the next leg down for the dollar in the index. Michael Oliver’s view is that we will see a low of at least 60 during the next decline. (white line = Fed. Deficit/Orange = 10 Yr. T)

In line with Michael’s expectations, the chart below on your right correlates the decline in the dollar with trade deficits. With the U.S. now running record trade deficits, the chat on your right suggests a dollar collapse well south of 60.

This week was a horrific week for gold stocks and especially our junior gold stocks. But with equity markets that may finally be topping out, and with the U.S. now joining radical left wing socialism, and, as Alasdair points out in his latest article, the derivative system used to deny true price discovery for gold by the bullion banks has happened once again this past week, I think the handwriting is on the wall for an eventual breakdown of the existing system. Investors may do well to take heart by reviewing Peter Spina’s comments on your left. With support near $1,750, this past week may prove to be the launch pad for the next major move higher in gold and silver

From a fundamental point of view, I have never been more bullish on a number of gold mining firms covered in this letter, not the least of which is Novo Resources, which I actually added personal exposure to last week. See my comments in this letter and listen to Dr. Quinton Hennigh on my radio show next week. Novo has now seemingly worked all the bugs out of its Beatons Creek Mine with its July performance actually exceeding expectations of its previous economic study.

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.