There is a narrative that says the market has lost its mind, and that divergent market signals no longer make sense. The market is broadcasting multiple messages, and the messages are in deep conflict.
Through this interpretation, three areas in particular — gold, bonds, and equities — are in direct conflict, and seem to be at odds with each other. Here is how that looks:
- Gold at nominal all-time highs, surging above $2,000 per ounce, says times are bad and inflation is coming, so investors should prepare for inflation.
- U.S. interest rates at all-time lows, with the yield on the 10-year U.S. Treasury Note falling to 52 basis points, and the 2-year to just 11 basis points, say times are bad but deflation is nigh, rather than inflation, so investors should prepare for harsh deflationary conditions.
- Equities at or near all-time highs, with the Nasdaq leading and the S&P 500 not far behind, say times are good, rather than bad, and investors should be confident and optimistic about what the future holds.
Through this interpretation, the market indeed makes no sense. Gold, bonds, and equities appear to have very different messages, like three different versions of Goldilocks’ porridge: One too hot, the other too cold, and the third just right.
We take a different view, however. The divergent messages are actually the same message. If you understand the uniting factor, the conflict disappears, and all three areas of the market — gold, bonds, and equities — are saying the same thing.
The puzzle-solving element is the systematic destruction of the U.S. dollar. When the total picture is interpreted via that lens, the conflicts are resolved and all of it makes sense.
To unpack the assertion we’ll start with gold, which is reacting to an episode of currency debasement so willful and destructive the U.S. dollar may never recover from it.
For nearly four decades — ever since the early 1980s — the Federal Reserve sought to retain the inflation-fighting credibility earned by Paul Volcker, the Fed Chairman who famously “broke the back of inflation” by raising interest rates sky high.
That is completely gone now. Under Chairman Jerome Powell, the Federal Reserve has vowed to become an inflation-stoker, rather than a longtime inflation-fighter. The switch is deliberate, with clear and deliberate messaging to the public.
They want us to know that, by any means necessary, inflation is coming. This is because, by whatever means necessary, the Federal Reserve is going to make inflation happen.
And why are they doing this? Because the current mountain of debt — with trillions more in stimulus to be thrown on the pile — is no longer sustainable. Without a persistent wave of inflation to ease the weight of that debt burden, the U.S. economy is in danger of being crushed.
And thus inflation — that which the Federal Reserve promises to deliver — is what will save us. If that act of mercy requires destruction of the currency to be brought about, so be it.
Inflation salvation requires currency destruction. This is what gold is responding to. Investors see what is happening, and they are horrified, and so they are buying gold with both hands. (And silver, and Bitcoin, and other things too.)
So, one of the first things to clarify is that gold is, indeed, forecasting inflation, but it is a specific type of inflation — the kind that is born of currency debasement. This is the inflation you get when a currency is gradually shunned, as those who hold it decide, on balance, that they’d rather be holding something else.
Okay, so what about bond yields at all-time lows? Why are U.S. Treasuries forecasting a message of outright deflation as yields head toward zero?
To understand bonds, first recall that the bond market is artificially supported. The Federal Reserve has promised to buy unlimited quantities of U.S. debt if required.
“When it comes to this lending, we’re not going to run out of ammunition. That doesn’t happen,” said Fed Chairman Powell in his March 26 interview on NBC’s TODAY show. He might as well have said, “To infinity and beyond.”
This means that, even if U.S. Treasuries are perceived as toxic waste, and the whole world shuns them, yields will stay low, because the Federal Reserve can — and will — step into the market to purchase any and all excess supply, in order to keep rates near zero.
As such, U.S. interest rates are low because the Fed prefers them to be low, and the Fed can control this dimension of the equation through unlimited bond market support.
The trouble, as we have explained before in these pages, is that in order to support an abandoned market, the Fed has to flood the world with new quantities of dollars — which is exactly what gold is signaling.
Then, too, we would argue, U.S. Treasuries are still being purchased by investors and institutions who haven’t gotten the memo.
When the economic outlook is scary — and especially when it is very scary — buying U.S. Treasuries has historically been a safe and prudent move.
That rule of thumb — buy Treasuries when the outlook is scary — has held true for decades. As a result, a great many investors, and institutions, still adhere to it as a kind of natural reflex.
This means that, for now at least, U.S. Treasuries are also seeing inflows from investors who anticipate very dark times ahead, and who are buying Treasuries in response. (Bond prices rise as interest rates fall, in a relationship that is 100% mechanical — so if yields are going down, bond prices are going up, which means buyers.)
Eventually, it will dawn on the late adopters that U.S. Treasury bonds are no longer a safe-haven asset, because the Federal Reserve’s new pro-inflation policies have turned them into garbage.
When this happens, the result will not be a violent dislocation in the bond market, but an even greater dislocation in the currency market — because, again, the Fed will step in to support the bond market in even larger quantities, which will mean an even larger flood of freshly created dollars glutting total supply.
Given the conditions as just described, skyrocketing gold prices and plummeting bond yields are not in conflict. They are two sides of the same coin, in terms of the accelerated destruction of the world’s reserve currency and a deeply dystopian economic forecast.
And what about the third factor, relentlessly rising U.S. equities?
The equity bull market makes sense in light of endless stimulus, a worthless paper currency, and a U.S. pandemic response so sluggish that millions of small and medium-sized businesses are simply left to die.
In a world like that, Americans will still have spending power, because the government is enacting “helicopter money” policies to counteract the deflationary impulses of Great-Depression-like economic conditions.
At the same time, though, the currency in question is semi-worthless, due to the large and increasing supply of it — and publicly traded companies are reaping the rewards of being bulletproof survivors, the hardy merchants left standing in a pandemic-wracked landscape.
If you still can’t get your head around an equity bull market in the face of dwindling currency values, consider what we know about episodes of hyperinflation.
In Zimbabwe, where a multi-year bout of hyperinflation resulted in utter and total destruction of the currency by July 2008, a select basket of Zimbabwean equities could have returned tens of thousands of percent (or far more with leverage applied).
In a far older episode of hyperinflation — the Weimar Germany hyperinflation episode, lasting roughly from 1921 to 1923 — the German stock market also went vertical.
“Going vertical” is what equities tend to do when the underlying currency, which sets prices for the whole system, gets systematically destroyed in a hyperinflation episode.
The United States isn’t anywhere near hyperinflation, of course. If we get there, the road will be winding and long. When a central bank responds to the debt burden by printing too much currency, “the end” does not come about overnight. The process instead happens gradually and plays out over a period of years.
What we can say definitively, here and now in 2020, is that the process has begun.
Taken separately, the divergent messages from gold, bonds, and equities appear to make no sense. But taken as a collective omen of systematic currency destruction, the messages all converge.
In U.S.-dollar-as-world-reserve-currency terms, we are witnessing the beginning of the end. And if “the end” sounds incredibly ominous, well… it probably should.