The Crack-up Boom Is Ending and That’s Very Bullish for Gold

This is a rather short missive this week because I have been involved in traveling to and participating in the Metals Investor Forum at the Rosewood Hotel Georgia in downtown Vancouver. In addition, as the markets are in a state of anxious limbo while the world awaits a new king, King Trump, I have been kind of waiting to see how the chips will fall after Mr. Trump’s inaugural address. I do not think it is not an overstatement to suggest now is one of the most perilous times in history that I have lived through in my nearly 70 years on this earth. The world is in great disequilibrium, both with respect to the global economy and geopolitics as well. The emergence of both economic and geopolitical imbalance has occurred due to the introduction of “fake money” in 1971 by President Nixon.  By owning the world’s reserve currency and then detaching it from gold and backing it with oil and military force, the U.S. has been able to lead the world into bankruptcy and force us to the brink of WWIII. Aside from God’s handiwork, I do not see how an eventual global catastrophe can be avoided as Neocons in the U.S. want nothing less than total control of all governments on all continents on Earth. Do you suppose Russia and China will go along with that without launching a few nukes? Will the John McCains of this world even allow Trump to avoid war with Russia? We shall see.

I say “it is all in God’s hands” and I believe that with all my heart. But from a human perspective you can also see how the U.S. is rotting from within as well. Empires come and go and, as Eisenhower warned, it does not usually happen at the hands of foreign enemies but rather from internal rot and decay. And do we and the other western countries ever suffer from rot and decay!

Straight out of the Ten Commandments was “Thou shalt not steal”! But massive robbery has been institutionalized by the petrodollar orchestrated by Kissinger after Nixon defaulted on the U.S. obligations under Bretton Woods. With that, the ruling elite pulled off the biggest heist by far in human history. By combining America’s military power with the petrodollar, not only did it enable the U.S. to rob the rest of the world with its fake currency—the dollar—it also paved the way for our eventual ruin. Like a drug addict that gets addicted to crack cocaine, the American Military Industrial Complex and other government entities became addicted to never-ending greater and greater government expenditures. But there is one problem with the fiat dollar and that is that it is itself a big fat lie. The dollar has no value. It is not backed by anything of value. In fact it is manufactured by debt and as such contains value only to the extent debts can be repaid.

This has resulted in what Austrian economists refer to as a “crack-up boom.” Austrian economist Ludwig von Mises pointed out many years ago that once a central bank indulges in expansion of credit by lowering the rate of interest it charges on loans, it cannot stop expanding credit; it has to go on expanding credit by lowering even more the interest rate it has set. If the central bank decides to let the market once again set the interest rate (which is now happening in the U.S.), then the previous expansion will turn into a general liquidation to clear out the mal investments created by the artificially induced expansion. If the central bank does not allow the market to set the interest rate, then the expansion of credit will continue until it produces the crack-up boom, which is followed by a massive debt liquidation.

The chart above suggests the world has entered that point where a general liquidation had to set in. This major pathology was not Trump’s fault, but if he follows up with attempting to keep imports from coming into the U.S. he may very well be blamed for a depression far greater than that of the 1930s. It will be greater simply because the excesses this time are far greater than during the 1920s that were the cause of the Great Depression. At least at that time, much of the world was on a quasi gold standard that kept debt money under much greater control. Now there has been no control. We have witnessed the mother of all crack-up booms, which unfortunately can only be followed by the mother of all busts.

This past week Fed chair, Janet Yellen, started a war with Trump. To bring jobs back to America, Trump will need a weaker dollar. But Yellen is saying “the economy is so strong” that there will be “several” rate hikes in 2017. With that, the dollar strengthened still more and gold took a temporary hit. But inflation, as it is defined by our government to include tangible items but not financial inflation, is also on the rise, which effectively reduces the “real” rate of interest. And since the price of gold depends on the real price of interest the real question is what the “real” rate of interest will be. And as far as gold stocks are concerned, that is the biggest question. As this chart below shows, when the real rate of interest declines, gold generally rises. When the real rate of interest rises, gold usually declines.

Yellen’s battle with Donald Trump in raising rates may have to do with a political power struggle, with Yellen obviously favoring the ruling elite who own the Fed and who have been picking the pocket of Americans living in flyover country and who voted for Trump. Or it may simply be that Mr. Market now has the upper hand with the laws of nature, ruling that the grand theft of fiat money has met its physical limits. Whether the crack-up boom is over or there is somehow another round of monetary stimulus to keep the fraud going longer, it should be obvious that confidence in the fiat money is on the wane. 

This year, something has got to give! Michael Oliver pointed to a major plate tectonic shift in the markets during mid 2015. When I checked the components of my Inflation/Deflation watch, I was amazed to see what a pivotal year 2016 was. From the peak of my IDW in 2011 to the end of 2015, stocks and bonds as well as housing and autos, which were related to artificial credit creation, did very well while commodities and China stocks did very poorly. But 2016 was exactly opposite, as you can see from the illustration on your left. Indeed Oliver’s financial plates created major tremors during 2016 and, given the long-term nature of his momentum readings, it seems pretty certain to me that these are new trends that are just starting.

Certainly gold shares have gotten off to a very good start this year. See below the year-to-date performance of our Model Portfolio.

About Jay Taylor