Another Risk-Off Week

By the following key market metrics this was a “risk-off” week. But if major analysts like Danielle DiMartino Booth and BofA’s chief investment strategist Michael Hartnett are right, the handwriting is on the wall for some very dark days ahead. Perhaps those who are reading those warnings written on the wall are the ones who bid up TLT, gold, and silver this week.

In a great interview at Wealthion this past week, Danielle opined that there are still a majority of investors who are counting on the Fed coming to the rescue with another Fed put. But Danielle, who held significant positions at the Dallas Fed, more than anyone has accurately predicted Jerome Powell’s future policies; though she said she was flummoxed by his go along with the “transitory” fib when inflation first reared its ugly head in the first year of Biden’s presidency. However, she has explained Powell’s softness then to his desire to be renominated by President Biden because otherwise, the next Fed Chairman would likely be a radical leftist MMT proponent. Certainly, after he was renominated, Powell’s policies have been exactly as Danielle expected when he was first nominated.

With respect to the current situation, Danielle paints a very grim picture, noting that there are two major differences between now and the 2008 financial crisis. First, there will be no ZIRP, as most market participants expect. Second, there will be no global stimulus coming from China to pull the rest of the world up as happened during the financial crisis. When I get to Michael Hartnett’s comments, I will have more to say about a lack of future stimulus from China. But regarding the current economic picture in the U.S., Danielle pointed out that the lag effect of higher interest rates is now only just starting, as most corporations took advantage of lower rates before they began to rise. Now as those loans roll off, they will have to refinance at levels that for many will be lethal.  She noted that bankruptcies are just now starting to accelerate, which will lead to massive layoffs. For example, she noted that there were 10 bankruptcies in July, and 29 so far in August with the latest count being 4 or 5 per day!

Danielle believes that inflation will continue to decline and perhaps even hit Powell’s 2% level, at which time, given that we are entering an election year, he is likely to declare victory and lower the Fed Funds Rate to perhaps 3%, but not 0%. And she points out that even at 3%, that will be a huge problem for zombie companies that borrowed closer to 0%. She notes that with respect to commercial and residential real estate, there is a huge shadow inventory that must come out, which she thinks will be more of a “death by a thousand cuts” than any quick and dramatic event. But this will all add up to large-scale layoffs.

Regarding how to invest in this environment, she is suggesting that we might want to follow the behavior of pension funds, which are extremely thankful for rising rates. Get out of stocks and invest in Treasuries or other high-quality investments like municipal bonds at 5% or 6% and wait for the dust to clear. But for obvious reasons, she suggests running away from high-yield bonds.

Danielle is not a gold bug so she is not suggesting gold and silver and commodities in general, though she has, in the past, admitted to owning some gold. But Michael Hartnett’s view is more in sync with mine, which is to place at least some of one’s portfolio into commodities and the monetary metals starting with gold. For me personally, it’s hard to argue against owning a quality company like ExxonMobil. It’s sitting on a mountain of cash at a time when oil is arguably extremely cheap despite bullish factors caused by ridiculous ESG and other nonsensical socialist policies and growing geopolitical tensions thanks to the neoconservative sanctions policies of the Biden Administration.

Providing a bullish picture for oil and other essential commodities is a very real concern voiced by Hartnett caused by likely supply shortages resulting to a large extent from the rise of the BRICS. If you are not aware, coming out of the BRICS meeting this past week in South Africa was an increase of the membership in that club to 11, scheduled for expansion starting on January 1, 2024. The new members to join at the start of next year are emerging market countries like Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates. Considering the fact that the U.S. dollar was given reserved currency status largely because of its arrangement with Saudia Arabia, it’s easy to see now how this powerful new club of 11 countries will become a formidable challenge to U.S. dollar hegemony. Speaking of oil, three of the new countries joining the BRICS are major oil producers, Saudi Arabia, Iran, and the United Arab Republic. Those oil producers have ready markets for oil in China and India as well as Argentina, Egypt, and Ethiopia.

All this is happening while America’s Military Industrial Complex that President Eisenhower warned us about is joining with Klaus Schwab’s fascist World Economic Forum (WEF) aimed at dramatically reducing the world’s population by impoverishing the masses into becoming their servants—climate change as well as COVID policies are geared toward impoverishing the middle class and turning us all into their servants. Incidentally, the Biden Administration is already planning to get us ready for the next pandemic prior to the 2024 elections and mail-in ballots that are sure to follow.

So, Hartnett is very bearish on the financial markets as is Danielle DiMartino Booth. Shrinking global trade is just one reason Hartnett thinks the wheels are about to fall off of the wagon. Here are a couple more reasons:

• NASDAQ requires central bank balance sheets to expand. At least there appears to be a very strong correlation between the G3 central banks (the Fed, European central banks, and the Bank of Japan). But, as you can see from the chart on your right, there is a very significant disconnect between the NASDAQ and the collective balance sheet of the G3 central banks. Hartnett believes that the “tech=H2” trouble rather than an era of AI dominance much like “excess savings” of Main Street ran out of liquidity for Wall Street.

• The Asian economies are collapsing. The collective GDP decline for China, Japan, Korea, and Taiwan amounts to a shocking 18% so far this year! And China’s real estate bond market has crashed downward by 55% in 2023.

• Regional bank stocks are still down by 37% YTD even though problems of higher interest rates are just now starting to generate bankruptcies.

• Mortgage rates of over 7% are resulting in a massive decline in home purchase mortgage applications and there appears to be a double top in homebuilder stocks that suggests a housing recession is in the cards, which will lead to more unemployment and more bad loans on the books of those regional banks.

• Speaking of “double tops,” Hartnett thinks that is what’s in the cards for the “Magnificent Seven” (AAPL, AMZN, MSFT, META, NVDA, GOOGL & TSLA). That portfolio is up 93% this year, largely on the back of the AI bubble lead by NVDA, which by the way fell from a spike of over $500 per share to $460 in the last two days of this past week despite beating analysts’ earnings predictions by a mile.

Michael Oliver provided a chart for Nvidia on August 25 comparing it to Cisco Systems in 2000, which spiked up to $82 in March of 2000. Cisco survived the 2000 crash but the highest it’s shares have risen since 2000 was to ~ $63 in 2021. Cisco is a terrific company. Nvidia may be too. But when markets get to blow-off cuckoo stage levels, many stocks that hit extreme valuations may never see those highs again. If I’m right in thinking we are facing a 1970s’ stagflation in spades, buying “real” assets starting with gold should serve you well.

And don’t forget gold. Since this new century began on January 1, 2000, gold has outperformed the S&P in dramatic fashion as this chart illustrates.

These data displayed in the chart above are as of January 1 of each year. growth in the value of the S&P includes annual interest for the S&P 500. The assumption was that $1,000 was invested in both the S&P 500 as well as in gold bullion on January 1, 2000. But the real point to consider is that there are times when you would do well to lighten up in general on stocks and allocate more to gold such as the period from January 1, 2002 though January 1, 2013 and during the 2008 financial crisis through now. While gold has pulled back from its all time high in May 2022, it clearly remains in a secular bull market as we wait to see how the impending economic train wreck plays out.

Of course there are times to lighten up on gold and allocate more to stcks like during the gold bear market from 2013 to 2018. But with stocks remaining in nose bleed territory even as the lag effect of higher interest rates is just now starts to play out in the real economy and as gold relative inflated monetary aggregates remains at historic lows, I know of few times better to aggressively buy gold and gold shares since I began writing this letter in October of 1981.

Even more depressed than gold are gold mining shares which are selling at the lowest levels ever relative to the yellow metal. I am extremely excited about Snowline Gold and New Found Gold to name just two of several little known junior gold stocks that are developing world class deposits. I cover in J Taylor’s Gold, Energy & Tech Stocks.

When gold starts its next serious run higher, you should expect gold shares to significantly outperform gold itself. That’s why I’m planning to soon make available a one month free trial subscription of my weekly and monthly newsletter to Substack subscribers. Stay tuned for further announcements and be sure to tell your friends to subscribe as soon as possible!