Plunging over into the Abyss

IDW-2015-08-21

After today’s 530-point plunge on the Dow, the talking heads on CNBC’s Fast Money were suggesting we are setting up for a good buying opportunity. But they are not seeing what I’m seeing and what I think my “Inflation/Deflation Watch” is suggesting—namely, that last week we were on the precipice of a plunge over into the Grand Canyon and that this week we have begun that frightening fall. I’m not talking just about the U.S. stock market, which is the only one in the world that has stayed elevated. I’m talking about an increasingly panicky global economy, not based on “bad animal spirits” as the fraudulent Keynesian proponents would have you believe. But in fact panic is warranted because global economies, including that of the U.S., are heading for a global depression thanks to overconsumption and mal investment. The result of excessive consumption and virtually no legitimate savings has been to push the world economy into insolvency.

I’m not saying that only because despite trillions upon trillions of dollars of money created by the Fed, the BOJ, BOC, and many others has failed to drive the global economy higher, as evidenced by the rounding top on my IDW. I’m not saying that now because of the plunge in my IDW this past week. But I’m saying that also because as you will read below from the insights of John Lee, there is a panic move of capital out of China now with no place to go. And Dr. Quinton Hennigh confirms what John is saying. In Australia, such a large number of wealthy Chinese people are trying to immigrate there that the Australian government is cracking down on their migration into the land of the kangaroos.

My IDW has been rolling over for some months now. With commodity items falling dramatically since the IDW high of 2011, the only thing that held my IDW up was U.S. stocks. (Chinese and Indian stocks have been weak to dramatically lower). And now that the U.S. markets are finally hitting the skids, I think we are starting what Dr. Robert McHugh has warned is likely the beginning of a huge global equity market crash and the start of a global economic depression the likes of which will make the 1930s look like a Sunday walk in the park. To those of us who follow Austrian economic theory, what we are facing has been totally predictable, even if the time has been way off. Keynesian theory defies logic. You cannot consume your way to prosperity. Overconsumption, low or non-existent savings, and mal investment can only lead to poverty. And I’m sorry to say, that looks like exactly where we are heading.

John Lee explains that he thinks the rise in the gold price that has taken place alongside the devaluation of the yuan is suggesting we are now seeing a major shift away from paper assets to gold and that some very big money is involved, especially given the fact that silver, platinum, and palladium are not participating, at least not yet. My thinking is that it makes total sense that gold rather than industrial commodities is getting stronger, because as we head into a depression, demand for industrial commodities (which to a degree also includes silver) will at the very least decline or more likely fall off the cliff. To the degree smaller investors accept silver as a monetary medium of exchange, silver should decline more modestly than most industrial metals and could in fact rise dramatically. But clearly it has been the largest loser among “commodities” in my IDW a you can see from the charts below.

Change graphOn the left is a chart of the performance of the items in my IDW since the peak in 2011. Notice that the items related to consumption have performed the best and the items applied to capital formation have performed the worst. But now, with those items related to consumption (primarily U.S. equities) starting to plunge and thus causing my IDW to plunge below the five-year moving average, it Change chartlooks to me as though the consumption of our seed capital is now leading us over into the abyss. I’m not saying this decline will be straight down. I’m expecting it to be a stair-step experience and it is likely to be one that plays out over the next five to seven years. But I do believe we are beginning a period in our history that will not be like anything this 68-year-old man has experienced. And it is not likely to be as pleasant as my time on Earth so far, not only because I’m aging.

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.