The Fed Tries to Keep Things in Balance

This week has to be considered a “mild” risk off week with stocks and commodities down but with the safe havens, gold and T-Bonds, up. The mild response seems appropriate in relation to the Fed minutes released last week. Peter Boockvar termed them “very slightly hawkish”). In my MIF presentation on May 20, I noted a topping pattern that may be starting to take shape in the U.S. equity markets. With each credit cycle, the level of interest that represents an insurmountable headwind for stocks continues to fall to significantly lower levels. When I did the slide shown above for the MIF presentation, the 10-Yr. was at ~ 1.7%. In its Keynesian arrogance, the Fed thinks it can thread the needle to exactly just the right interest rate to keep things in balance. It cannot! That has been proven by each and every one of the many declines we have had, especially since President’s Working Group (aka “the Plunge Protection Team”) was created following the 1987 crash. Every time the government ramps up its control of markets, it digs the economy into a deeper hole.

 

My Metals Investor Forum talk pointed out, as Alasdair Macleod has numbers of times on my radio show, how what the U.S. is doing now is exactly from John Law’s Mississippi Bubble play book. I would encourage you to watch my presentation at the Metals Investor Forum website here, https://www.youtube.com/watch?v=DC6jzE2GE6M. In the Mississippi bubble, when stockholders realized the company was going down the tube, the central bank printed money to buy shares of the company to create the false impression that the shares were valuable. Now on a much larger scale, the Fed is involved in printing money to buy U.S. Treasuries to keep the U.S. Treasury market from crashing, to create the false impression that the U.S. Government and its paper money are viable. Either the Fed stops telling that lie and the bond market collapses and all financial assets with it or it keeps printing money until, like the French livre, the dollar become worthless. Since the easiest path is to print in the short term and since no one in power wants to see a crash on their term, it’s almost certain they will continue to delay the inevitable, hoping it happens on someone else’s watch.

 

That does not mean there won’t be some serious deflationary air let out of the financial bubbles in the meantime. After all, Chairman Powell is trying to start a mild taper or use language to that extent now, tiptoeing gingerly so as not to spook the markets. But we saw this week that the equity markets didn’t like the language much. The problem is that Keynesian economics is in fact “Communism light.” Which means these arrogant Ivy League characters think they are so smart they know better than the collective wisdom of millions of market participants what the interest rates should be. Moving away from free markets may win lots of votes from a very ignorant public. But it will only lead to death and destruction of an economic system. Sadly, we are well on our way toward that end, which makes owning gold and silver more necessary than ever.

 

So I think it is most likely that gold has started its next major move higher. As you can see from my monthly average gold price chart on your right, the average monthly price bounced off of the 20-month average in April and is now decidedly higher so far in May at $1,839.50. Michael Oliver’s view is that gold will really gather steam once air is let out of the equity market bubble. At first, he thinks, Treasuries will benefit as investors still believe in the Fed’s PhD standard. But as with the Mississippi bubble, at some point it will be impossible for even the most ardent establishment defenders to drink the Keynesian Kool-Aid. Then the bond market will cave, too, which it would have done a long time ago were it not for massive market manipulations by the Fed now for decades. But the interference with the natural market dynamics is now taking place on a hyper-inflated basis.

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.