My IDW Is Nearing a Twelve-Year High

The Fed is supposed to be tightening credit, and rising interest rates sug­­­gest they are at least not engaging in QE (mone­tizing debt). But as Alasdair Macleod noted on one of my recent radio shows, as rates start to rise, banks that had held massive amounts of government debt start to sell that debt and use the proceeds to make loans. They do that because holding debt in a rising interest rate environment leads to losses. With trillions of dollars of Treasuries held by the banks now being made available for loans, money is now getting out into the economy and so indeed growth in the real economy—while still very tepid and perverted by past money creation—is taking place, thus sending prices of goods and services higher. And so what we have at this point in time are rising stocks and rising commodity prices.

Alasdair points out that sooner or later in this environment, rising rates serve to tank the stock market. Certainly, that notion is in sync with what Michael Oliver’s longer-term momentum work is suggesting with regard to the U.S. stock market. As Michael pointed out in his October 29 issue, the S&P 500 needs to rise to above 2570 by mid November to avoid a breakdown.  It’s already done that. In fact, as of the end of this past week, the S&P 500 stood at 2582.75.

What we know now is that virtually all the politicians in Washington are invested in the stock market and there is little doubt in my mind that they see nothing wrong with the Plunge Protection Team continuing to put a floor under the equity market to keep it from tanking. Besides, from the point of view of Democrats and perhaps even a number of the so-called “moderate” Republicans, they may rather see the stock market tank in 2018 a few weeks before the Congressional elections to ensure a change of government.

Alasdair’s cyclical explanation makes a great deal of sense to me. However, we are living in unchartered times. Never before in history has the entire globe been engaged in endless amounts of fiat money and never before has unlimited QE been applied to keep the global economy from righting the wrongs caused by irresponsible central bankers who have essentially destroyed capitalism by disallowing the price discovery for capital.

I believe Alasdair’s explanation of the cycle is correct as long as the system remains intact. However, when it breaks down and a reset begins to take place, I would suggest old rules and patterns may no longer apply. Look at hyperinflationary Germany in the 1920s; when the currency tanked, everything rose in price even as interest rates rose dramatically.

This week my IDW rose to 159.51 compared to its all-time high on July 11, 2017, of 159.87. With trillions of dollars previously sitting in the banking system now starting to escape and with no ability for the new Fed chairman to put his foot on the monetary brakes in a serious manner, as Volcker did in 1979, and with adversarial nations like China, Russia, Iran, and now Turkey setting out to destroy the dollar, I can only wonder if we are on the precipice of a very serious hyperinflationary breakout. I pray it isn’t so. But such an event seems like a possible if not reasonable expectation to me.

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.