This week has most certainly been a risk-off week. Money flowed into stocks and commodities and the speculative Bitcoin while flowing out of safe havens of gold and Treasuries. All the talk about AI, which I’m personally finding very interesting, is no doubt a momentum play that is sucking a lot of naive investors in toward the end of this long-term equity bull market. BofA’s Hartnett said, “It would be so ‘on-brand’ for stocks to melt-up into recession, suck them all in right before the hard landing.”

If you are wondering why stocks continue to rise even as rates are on the rise and when the economy looks bleak, Cameron Dawson might have at least part of the answer. On CNBC last week she explained that the debt ceiling story is the best buy-the-rumor sell-the-news story she has seen. She explained that until the debt ceiling is raised, the Treasury is drawing down its cash reserves to pay its bills rather than issuing more Treasuries to raise money. She said that not issuing more Treasuries has had the effect of basically offsetting QT. This positive impact on liquidity is what is enabling money to continue to flow into stocks.

However, when the Treasury starts competing in the market for savings, there is likely to be a decline in liquidity, which can be expected to put downward pressure on stocks. Yet despite the indexes rising considerably it is mostly because of the mega cap tech stocks in the indexes. She noted that large cap “safe” stocks are where people put their money near or at the end of bull markets. In a healthy bull market, the markets would have much better breadth, meaning that a larger number of stocks would be participating in the uptrend. https://tinyurl.com/2mbrxfng

Then there is this insight put out by Jesse Felder. He notes that “Despite the stock market rally so far in 2023, the S&P 500 Index has not come close to regaining its all-time high put in early last year. What has soared to new highs, however, is the stock/bond ratio. In fact, its ascent has been so strong that, over the past two decades, the SPY-to-TLT ratio has only been as overbought (as measured by quarterly RSI) as it is today at the 2007 top heading into the GFC. It came close back in late 2018, just before the steep fourth quarter selloff that year, but didn’t quite manage to reach the level we see currently.

“So, it would appear that stocks need bonds to rally hard and soon in order to justify current levels. However, if bonds rally because the economy weakens significantly, that would likely not be bullish for equities subject to significant earnings downgrades. And if bonds can’t rally, whether the economy falters in a meaningful way or not, that too could prove problematic for a stock market that appears far out of equilibrium with competing financial assets. In short, it looks like Mr. Market is still in denial over TINA’s passing.”NOTE: TINA stands for “there is no alternative to stocks.”

If you buy the notion that interest rates are likely to rise after the debt ceiling is raised and liquidity dries up because the Treasury starts to borrow again, you have to think equities are likely to face some very strong headwinds. Treasuries won’t be the place to go because with rising interest rates, they will lose value. What safe haven will there be other than gold?

By the way, my old friend and Vancouver resident Bob Hoye responded to my recent YouTube show titled “Can Gold Rise in a Recession?” by reminding me that recessions are in fact the best time for gold and gold shares. The reason is simple. It is during recessions when the real gold price tends to rise especially compared to basic commodities used to produce gold profitably. Oil, for example, represents on average about 60% of mining costs. So, when oil prices drop as they generally do during recessions, that tends to work well for gold miners. Also, it is during recessions that the Fed usually starts to ease monetary conditions, thus leading to higher nominal gold prices as well. We saw this happen in 2008-09 when gold went on a long bull market leading stocks for the next few years. Could we be close to the time when that happens again? I think so.

But Bob also refreshed my memory about the idea of how important it is to watch the real price of gold. He notes that through history there have been a number of times when devastating bear markets and depressions were followed by massive bull markets. The chart on your right displays four examples in the UK and one during the Great Depression in the U.S. where the real price of gold rose for several years after the paper market bubbles collapsed. By the way, Bob also argues that during these periods of time, the senior currency also gets stronger. That would be in sync with those who expect the dollar to become stronger vis-à-vis the currencies in the dollar index. That may indeed be the case. However, I also believe you have to keep in mind that the U.S. may in fact be nearing the end of owning the world’s reserve currency. Indeed, the BRICS as well as a very large number of nations wanting to join that group are also cheering for the dollar’s demise. No one knows for sure how this will all turn out. It is indeed possible that over the next several years the dollar will survive and get very strong relative to the euro, pound, and yen and other lesser currencies in the index, in which case we could indeed witness a “strong” dollar and a very strong “real” gold price, which would be very, very good for gold miners.