We are almost exactly one year since the world began Covid shutdowns and the results have been bubbles everywhere. Real business activity and thus cash flows, have crashed unlike anything since the Great Depression. Left alone, markets would have crashed and taken the entire financial system down without central bank and sovereign treasury intervention.
Instead of collapsing, markets fuelled with thin air “stimulus” monies have risen to all time highs. Equities have risen to valuation levels never seen before, no matter which measure you look at. Whether you look at PE ratio, price to book, dividend yield or nearly any other measure, equities have never been this expensive.
Commodities in general, turned higher last year as soon as the multi trillion dollar monetary firehoses were unleashed. Lumber for example has tripled since this time last year, lumber alone increases the building cost for an average US home by $24,000. Oil, which actually traded to negative numbers last year, has retaken the $60 level and up about 50% from a year ago. Wheat, corn etc., have moved sharply higher and are beginning to severely pressure food prices. My point is this, inflation has already arrived!
INFLATION GENIE IS OUT OF THE BOTTLE
Even before seeing these “effects”, we knew the inflation genie was out of the bottle. The formal definition of inflation is not rising prices, rather, inflation is defined as an increase in money supply. Did you know that 78% of all dollars now outstanding, were created since March 2020? THIS is inflation. It is so embarrassing that the Fed recently announced they will no longer publish M2 statistics. They discontinued publishing M3 numbers nearly 10 years ago. Why? As mentioned, it is just plain embarrassing, the world’s reserve currency just tripled in supply. You see, it is the explosion in money supply that is inflation itself, the “cause” if you will. Rising prices are the merely the resultant effect.
Why would any central bank do such a thing? I assure you it was not their choice because they have none, it is and has been “inflate or die” for many years. Global central banks have only one option at this point, they absolutely must increase the money supplies in order to service existing debt. Total debt outstanding is now over 350% of global GDP. How would this debt have been serviced if it were not for central banks creating money out of thin air to do the chore?
When all is said and done, the gross increase of debt over the years is now forcing central banks to explode their money supplies. Economic activity does not throw off enough cash flow to service the debt, central banks have become the final backstop to collapse. It is no longer debatable whether the financial system implodes. Collapse is a mathematical certainty at this point because there is too much debt to ever be repaid, and if it is repaid it can only be done in severely debased currencies!
Let’s switch gears and take a look at which asset classes will be hit the hardest? First and foremost, anything “financial paper”. This group contains bills, notes, and bonds of all sorts, derivatives/financial contracts, and of course the currencies themselves. Long term, interest rates have only one direction to move, higher. Higher rates will discount coupon bonds by definition. Then add in that many financial assets are held with margin attached; the discounting due to higher rates will create a systemic margin call which cannot be met no matter how much currency is printed.
We should also mention real estate. While many see it as a real asset, I see it as a highly levered asset. Real estate is probably THE most levered market of all. Yes, it is a real and tangible asset, but prices could never have gotten to where they are today without the availability and use of debt to make purchase. The pin has been pulled on some real estate already. Would you be comfortable owning a mall today? Or how about real estate in many riot ravaged big cities? Lastly, how well do you believe real estate will perform when credit becomes scarce or unattainable in a reset? How will buyers fund their purchases? The simple answer is ...they will not!
DERIVATIVES MARKET IS A TIMEBOMB
The biggest problem of all are derivatives. The $1.5 quadrillion (yes, with a Q) derivatives market will soon move front and centre. Once the margin calls begin, everyone will lose in this market which dwarfs all other markets combined. When I say everyone, I do mean everyone. You see, this is a market where the losers must pony up capital to pay winners. Payments are triggered by margin calls. When losers are presented with a margin call larger than they can pay, they become bankrupt. Back in 2008, many of the huge bailouts were aimed at getting capital into the hands of losers...so they could pay the winners. Central banks will be overrun this time around!
What is one to do? Richard Russell always said that when the great credit unwind comes, “he who loses the least will be the winner”. His work nearly always circled back to gold as it is the only money without the liability of an issuer. Silver, gold’s smaller cousin also fits that description but is an extremely small market. Not much more than 2 billion ounces exist in deliverable form, Barely more than $50 billion at current prices. Silver is also in a global deficit at this point, more is purchased and used each year than is produced.
SILVER WILL BE GOLD ON STEROIDS!
Silver (and gold) also has a huge but yet unseen, ace up its sleeve. While nearly all other asset classes have employed debt and derivatives to support their pricing, gold and silver have seen debt and derivatives used to suppress their pricing. We may very well find out that 300 “paper” silver ounces have been sold for each one real ounce in existence. In other words, many investors may find that their silver holdings on paper is just that, on paper only. There have been questions recently regarding several mints and dealers, because they seem to have difficulty delivering from pooled accounts when asked to deliver. COMEX has also been pushed very hard for deliveries. In fact, deliveries requests have more than doubled over the last 18 months as compared to prior. Can they continue? And if they do, for how much longer?
The current financial bubble is larger than all previous bubbles combined. There is absolutely no way to predict all the fallout from the coming margin call. There is though one certainty. When financial assets cascade into the insolvency/bankruptcy waterfall, what will remain? As a reminder, gold (silver) can never bankrupt, because they have no liability in a world built entirely on liabilities. At a 70-1 gold to silver ratio, if you like gold...silver will be gold on steroids!
Look around, do you see prices of nearly everything you do and use, rising unlike anything in the past 40 years? Historically, rising prices have occurred either because of an overheated economy where demand outstrips supply and pushes prices higher, or because the money supply grew too quickly. Global economic activity crashed last year due to the lockdown response to Covid. The included chart of money supply gives you the answer as to why inflation is so visible.
REPO MARKET BREAKDOWN
To finish, the overnight repo market blew up in September 2019 as rates spiked to 10% from about 1%. Coincidence, or not, Covid came along a few months later and relieved some pressure on credit markets as the real economies went into reverse and cooled credit demand. But just as any Ponzi scheme always needs new investors to satisfy previous investors, the same goes for fractional reserve credit systems.
Under cover of “Covid relief”, trillions of monetary and fiscal monies have been thrown into the mix. 10 years ago after the GFC, people screamed and yelled at the printing/spending amounts but it was ultimately accepted. 20 years ago there was no way the public would have accepted any policy resembling the current. And here we are now, people are begging for bailouts, the bigger the better! Cities and states have been bailed out, underfunded pension plans have been bailed out, but who will bail out the issuer of the reserve currency to the world? The answer of course is NO ONE will. Which is why the term “reset” that for years was considered words only of ‘conspiracy theorists’, is now mainstream and even spoken publicly by global leaders. Central banks have grossly debased their currencies and the only options available to them is to debase further. Expect the unexpected, the elites know they must kick the table over so the public cries to “build back better”. They know, the worse things get, the more the public will beg for MORE safety and security. The dollar has already been hyper inflated and now we are seeing the “effects”, which most likely will be pointed at as the reason to press the reset button! EG