Markets May Now Be Facing a Tectonic Shift

IDW-2015-06-26Today, I have labeled my Inflation-Deflation chart differently. I am calling it my Risk On, Risk Off Watch (IDW) because that is a more accurate description than an inflation-deflation measure. Monetary inflation and deflation accurately defined by the Austrian school of economics is simply a change in the money supply. By that definition, my IDW would be soaring exponentially. Not only is the IDW not rising exponentially, but in fact appears to be rolling over, indicating the global economy is in a heap of trouble.

The problem we have is debt, which has been a drag on the growth of the real economy. As trillions of dollars were created with QE1, QE2, and QE infinite, the same amount of debt has also been created because in a fiat money system, debt is the raw material from which money is created.

As impotent as monetary policy has been in decreasing growth, I’m guessing we are on the precipice of seeing not only a mild rollover as pictured above in the IDW, but a truly nasty economic downturn. I say that because there is growing evidence that the massive amount of money created out of thin air by quack Keynesian central bankers is about to backfire. It looks as if a major long term rise in interest rates is about to take place in an economy that simply cannot handle that. More important than the fact that rates are on the rise is WHY they are rising.

ProSharesThe Fed wants you to believe it is in control and responsible for raising rates. In fact, with long dated U.S. Treasuries showing a dramatic turn higher, it appears as though the bond vigilantes are starting to reappear as they did in the 1970s. And when that happens, it happens for only one reason. They are losing confidence in monetary policy. There is growing evidence that the markets are starting to agree with a view of Austrian economists, namely that printing money to create growth is not only pure folly but that it will lead to a devastating destruction of longer term economic prosperity by allocating capital inefficiently. It is on the basis that we have finally seen a turn to higher rates (lower prices) for long dated U.S. Treasuries that I have added Pro Shares Short 20+ Year Treasury (NYSE-TBF) to my portfolio. I also have added Pro Shares Short S&P 500 (NYSE-SH) because I believe higher rates will likely trigger a major decline in stock prices as well. At present, there still is money movement back and forth between stocks and bonds. When stocks decline, bonds rise. When stocks rise, bonds decline. But already we are seeing that relationship break down to an extent with money coming out of both stocks and bonds. But when the markets suffer a massive loss of confidence, both stocks and bonds will decline and it could trigger a decline in my IDW similar to that of 2008-09. That should once again be the time when gold and gold shares outperform other asset classes.

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.