Reflections on the Economy and the Markets

We have gotten off to a reasonably good start so far in 2019. What has become fairly obvious is that the Fed, even under Jay Powell, is held hostage to the stock market. The fear is of course that we will have another financial crisis. So, even a reasonably free-market-oriented economist like Mr. Powell has apparently succumbed to that pressure, which has at least for now reversed the start of a major bear market in stocks.

Our Model Portfolio would be considerably better were it not for the Fed-induced reversal of stock prices. Last week during the first four days of 2019, the equity market was up only 1% and the debt market was down a bit more too. But don’t think for a minute that just because stocks have rallied here that we are out of the woods. To the contrary, the private sector debt market is hurting and likely to hurt a whole lot more very soon. The poster child for the corporate debt market hurt this past week has become PG&E, the gigantic California electric utility company that was just downgraded by both S&P and Moody’s—downgraded it to junk. The state of PG&E is being compared by some to AIG ten years ago that was at the start of the 2008-09 liquidity crisis. Simply put, the U.S. and most of the entire world is going broke because of the institution of Keynesian economics. Like any kind of drug- or alcohol-induced high, it may bring pleasure in the short term but ultimately it becomes pathological. And we are at that point now. In my view the economy is on a razor’s edge. By that I mean a tiny move either toward tightening or loosening could result in either in an extreme deflationary implosion most likely much worse than that of 2008-09 or the beginning of a hyperinflation. It is all very unpredictable because there are too many variables in human behavior to predict which way it will go.

But what we do know is that you can’t have massive amounts of debt-based money that grows exponentially while income grows in a slow, linear manner. But that is exactly what the world has brought on itself by the institution of Keynesian economics funded by immoral debt (as opposed to asset-based money, meaning gold and/or silver). That is why I am so focused on gold and gold-related assets and also on the best technical analyst I have found for me as an investor, namely, Michael Oliver. Following is what he wrote about gold on January 6.

Three layered upside breakout levels by momentum (defined in prior reports) have escorted gold beginning from $1200 in early October to an intraweek high last week just above $1300. The key level to watch now is one that everyone can see. So we turn to the monthly price chart below. You can add on above the multi-year red line if you like, but our preference is to heed momentum signals (circled) and let price breakouts occur later—for others to chase. We would define crossing that red line on price as taking out $1350. That’s where analysts and investors will awaken.” Michael told me on my radio show that a break about $1,350 would open the skies for a very quick run up toward $1,700!