Tapering Will Lead to Massive Equity Declines

Through the first four days of this week, we are seeing a very significant “risk off” environment though gold and silver have hung in with only minor declines. Most noteworthy in my view is the fact that T-Bonds were hacked so hard, meaning that interest rates soared even as money was exiting stocks and commodities. The Rogers energy heavy index declined 4.12%, which was the same level of decline for the T-Bond.

Toward the end of 2021, main stream stock market cheerleaders suggested GDP would remain well over 3%, thanks to $2 trillion of “excess savings.” Actually those so-called savings were nothing more than additional monetary and fiscal stimulus created out of thin air, compliments of a very deceiving ruling elite who does everything possible to retain control of a system that keeps them on top. The major benefit of the COVID handouts went to the top 1% who can find nothing better to do with their money than to put it into stocks. That leads me to a slide I showed in my presentation yesterday at the MIF. $1 of QE leads to a $5 increase in the equity markets. But, unfortunately, when tapering takes place, $1 withdrawn with tapering, results in a $5 decline in equity prices. That was based on research undertaken by Xavier Gabaix of Harvard and Ralph Koijen of the University of Chicago.

And so with the near certainty of a ¼ rate hike this month, this week we are seeing quite a lot of air come out of equities. What it is strange though is the fact that rates on the 10-year have risen to over 2% again, after money flowing out of stocks drove them down to around 1.7% on Wednesday. Most of my talk here at the MIF was based on academic work passed along by Lacy Hunt. The primary revelation is that Keynesian economics have misled the western world down the path of poverty by telling us we can get rich by going into debt rather than saving. That seems to work for a while, but all you are doing is consuming today what you would normally consume tomorrow. Ultimately, the day comes when a nation that does that becomes impoverished. It is clear now that the Fed can no longer kick the can down the road. We had a 7.9% CPI print announced yesterday, so inflation is clearly not transitory. This ongoing inflation calls for a much more aggressive rate hike. Yet, the Fed can’t do that, or it will send equities into a dramatic crash. Instead, what it will likely have to do is print more and more money, faster and faster, which will be done at the expense of massive debasement of the dollar, meaning that real things, starting with precious metals and all commodities, will rise as measured in dollars. Only gold, and perhaps silver to an extent, will retain purchasing power.

What we do know is that whenever interest rates have been hiked into a slowing GDP and you have very high commodity prices, equities drop 30% to 50% and a recession follows. In general, it may very prudent to hold precious metals, gold stocks and higher cash levels.

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.