Gordon Long on Investing in a New World Order

A summary of Gordon's recent Wealthion Interview

The world is emerging from a uni polar world dominated by the U.S. to a multi-polar world. The decline in the relative wealth and power of the U.S. and its allies will change everything you thought you knew about investing. That is the general message I received from Gordon Long in an excellent interview he did with Adam Taggart on the Wealthion YouTube channel 13 days ago. The interview was conducted on September 20, 2023. I believe the following major points made by Gordon will be helpful in avoiding losing money in this impending bear market so you will have more “dry powder” to pick-up bargains when the Fed is forced into the next pivot. If you find the points noted in this outline to be of interest, you may want to view Adam Taggart’s discussion with Gordon for greater detail here:

Current financial marketsseem alright for now but great danger lies ahead over the next couple of quarters from an over leveraged financial system and massive derivative markets with shaky and uncertain ownership of collateral attached to derivative transactions. Of obvious concern for the US equity markets are ETF markets in which “the magnificent 7” stocks in the S&P 500 comprise 58% of the S&P 500 market capitalization. When these 7 stocks hit the skids, everything on the S&P 500 will decline. Overall, the nominal value of the derivative markets is on the order of $650 TRILLION dollars.

J Taylor's Gold Energy & Tech Stocks is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.

Upgrade to paid

The current global economy. Gordon can’t think of a worse global economic scenario in his lifetime than what we are facing now although he concedes the U.S. is likely in the best position of most other countries. Gordon’s great concern for the economy is an end to what he calls “the Great Moderation” that took place roughly from 2000 to 2020. The following chart pictures the Great Moderation, which was a period of time of low inflation, moderate growth and low interest rates and the new phase as we enter a new global world order.

During the Great Moderation, the markets benefited from: a) globalization that brought down costs of production and led to rising corporate profits; b) low inflation and a constant reduction of interest rates and moderate growth; and c) mercantilization, meaning that net export countries like China, Japan and Saudia Arabia were reinvesting their dollars earned from dollar denominated exports throughout the world into U.S. Treasuries.

The Great Moderation is now over!That means the perfect conditions for the Goldilocks markets and economy we have enjoyed from the turn of the century to 2020 (around the time of COVID 19) have ended. But most investors are slow to see the changes that are apparent from the chart above. As you can see, higher inflation is leading to higher interest rates resulting in greater equity market volatility. The bottom line is that the cost of capital is on the rise so that saving rather than consumption is being rewarded and corporate profits in the near term and bond markets in the longer run are likely to be in a protracted secular bear market.

Janet Yellen’s Stealth Liquidity Manipulation

Rates have risen higher than most professional investors believed possible without the markets breaking down. How has the Powell Fed been able to defy the experts as rates continue to reach up toward 5% on the 10-Yr. Treasury? Gordon explained that Janet Yellen’s manipulation of the credit markets has enabled Biden economics to implement what is effectively Modern Monetary Theory (MMT) and back door liquidity infusions. However, Gordon noted that this practice will come to an end unless the government continues to radically increase fiscal stimulus one way or another like the $6 trillion spent by the Trump and Biden administrations since COVID. But then how will that be paid for when fewer foreign nations are willing to buy U.S. Treasuries?

But, keep in mind there is a Presidential election coming up in 2024. So, the establishment is likely to seek ways to keep fooling the voters into gaining their trust and votes. Gordon offered two possible future ways that the Biden Administration is likely to manipulate the markets to retain the appearance that all is well under Biden:

· Through contingent liabilities. The government can issue guarantees to keep money flowing into its favorite projects like Green Energy or free tuition or money for illegal immigrants. Nothing shows up on the government’s balance sheet until it has to fund a default and no one has to vote on these contingent liabilities.

· Reignite the Japanese Yen Carry Trade. Massive amounts of U.S. Treasuries have been funded by global investors borrowing in yen at say 1.0 % and reinvesting the proceeds of those loans in U.S. Treasuries now paying 5%. Major investors like pension funds and banks can leverage those plays several times resulting in major profits for those large institutions. The Yen’s value was rising up until the 2008 Financial crisis at which time this means of financing the U.S. treasuries declined. To increase liquidity by way of the yen carry trade, a strong yen like that prior to 2008 is required. Because this has been a huge source of financing for the US treasury market, policies to increase this trade may be implemented with the U.S. and Japan. The abrupt discontinuation of yield control by the BOJ may be hinting at efforts to revive the yen carry trade in a coordinated effort between Washington and Tokyo.

Why Can’t We Return to Another Great Moderation?

· There is no Volcker Magic This Time!Fed Chairman Paul Volcker understood that they key to taming inflation of the late 1970s was to remove liquidity. Interest rates rose as a result of liquidity extracted from the system. Real interest rates rose dramatically as a result. That richly rewarded saving at the expense of consumption. While real rates have turned marginally positive under Chairman Powell, both the Trump and Biden administrations have increased liquidity by pumping money directly into the system via fiscal stimulus in addition to the aforementioned methods employed by Janet Yellen. I suggest you view the video for more detail on how Ms. Yellen has pumped liquidity into the system via the back door. The point is that by increasing liquidity even as rates rise, inflation cannot be brought under control.

· Destruction of the Petrodollar.Unlike the 1970s, the Biden Administration is exacerbating the energy crisis now by discouraging production. That is opposite the 1970s when Secretary of State Kissinger solved the energy shortage by working with the Saudi Arabian government to form the Petrodollar. Saudi Arabia has now thrown its support behind the anti Petrodollar BRICS + 11 while Biden’s “green new deal” policies to discourage domestic production as well as its alienation of Saudi Arabia has led to an American energy crisis. Saudi Arabia and other Gulf states have joined Iran and Russia in exiting dollars as a medium of exchange in the international oil trade. Trillions of fewer dollars will be circulating globally that would otherwise have found their ways into the U.S. treasury markets. In the past Saudi Arabia was a major buyer of U.S. Treasuries. That is no longer true thanks to the Biden policies.

· The Japanese Cary Trade. Due to rising inflation and rising rates in the U.S. the yen has weakened which has led to a decline in this major means of funding for the surging U.S. budget deficits. As noted above, there is some reason to believe the change in BOJ policy may have been put in placed in an attempt to restore this means of financing. But rising rates across the globe caused by the administrations inflationary policies also increase the vulnerability of stable global financial markets.

Investment Ramifications

Financial markets are likely to come under pressure in the near term as the lag effect of higher rates begins to put pressure on corporations that need to refinance large amounts of debt and also due to the longer-term dislocations caused by continued liquidity infusions via the back door and the destruction of the Petro dollar and energy markets by the Biden Administration. Here is a summary of how Gordon views the markets near term (next two quarters) and years into the future.

· Near term the financial markets will be in trouble. In general, avoid equities. Stay in cash, preferably T-Bills that pay ~ 5% so when the markets turn with the next forced QE, you will have dry powder to buy up bargain basement stocks.

· Now is a good time to buy gold and silver in preparation for an inevitable pivot by the Fed as the financial markets break down. But keep in mind that when gold and silver skyrockets higher, the government will likely tax the heck out of those assets. Be prepared for a “windfall” profits tax.

· Following the move by gold and silver, look for commodities in general to rise dramatically as a new round of QE is likely to be greater than anything we have seen to date take place. I should mention that this view as well as the view to buy gold and silver is in sync with Michael Oliver.

· Ongoing inflation and disinflation cycles are likely to lie in our future as far as the eye can see given the assumption that policy makers have no new ideas regarding the cause of inflation and market instability. However, Gordon emphasizes that the government will stop at nothing to keep the system in tact as long as possible. He points to the 2008 financial crisis when suddenly regulators allowed securities not to be marked to market in order to encourage fantasy investing.

Your Editor’s Summary Views

The notes above reflect a summary of my understanding of Gordon Long’s market views. I find them to be much in line with my own.

If you can preserve capital before the big meltdown takes place, you will be in a position to enjoy some incredible bargains when the Fed pivots. Gold and silver ownership should help maintain wealth during the near-term financial market decline although initially both of those metals may decline a bit more as they did in 2008 before rising dramatically and outperforming stocks for years to come as illustrated on the following chart.

Gordon’s warning of a government hostile toward precious metals is important to keep in mind. I can see a Democrat or Republican President pushing for a “windfall profits tax” against gold or silver to help fund a budget deficit that is gaping out of control. I even think a repeat of the gold confiscation program of President Roosevelt is possible after gold makes a major run higher. In fact, I believe the move on the part of the BRICS to back their trading system with gold will eventually force the United States and its allies to do the same. For more logic behind that view, I would suggest you read a recent article by Alasdair Macleod https://schiffgold.com/commentaries/the-end-of-the-road-for-the-dollar/

Certainly, to rebuild the equity side of the Government’s balance sheet to support trillions of dollars of U.S. debt, gold valuation for the ounces of gold the U.S. pretends to own may well lie in our future. (Note: a true audit of the U.S. gold supply has not taken place since President Eisenhower let office). Regarding gold shares, keep in mind that when Roosevelt confiscated gold, major fortunes were made by owners of gold miners like Homestake Mines and Dome Mines. There are several emerging multi-million-ounce gold deposits in the making that I cover in my newsletter, J Taylor’s Gold, Energy & Tech Stocks. To keep up with the development of those investments, you can sign up for now at the reduced price of US$150 per year or $16.50 per month. https://taylorjay.substack.com/subscribe

J Taylor's Gold Energy & Tech Stocks is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.

Upgrade to paid

Invite your friends and earn rewards

Invite Friends

© 2023 Jay Taylor
Box 780555, Maspeth, N.Y. 11378
Unsubscribe