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Global Monetary and Fiscal Authorities Are About to Open the Floodgates of Liquidity - David Brady (13/03/2020)

Global Monetary and Fiscal Authorities Are About to Open the Floodgates of Liquidity - David Brady (13/03/2020)
By Leigh Bowden 4 months ago 10234 Views No comments

March 13, 2020

Since their recent peaks, this is the performance of the following assets:

  • S&P -27%
  • TLT -13%
  • Gold -8%
  • Silver -21%
  • GDX -31%
  • SILJ -54%

Several quick observations here. First, it is clear that the metals and miners have been tracking stocks lately. Both are waiting for the Fed and the U.S. Treasury to announce a combination of substantial monetary and fiscal stimulus. Basically, helicopter money.

Silver has significantly underperformed Gold. The same goes for the Silver miners relative to the Gold miners. This is also reflected in the Gold:Silver ratio, which is within decimal places of 100. All of this means Silver and Silver miners will outperform when the next rally takes hold. The miners’ high beta relative to the metals is also obvious and hurts in bad times but pays off handsomely when metals rise.

Perhaps most interesting is that TLT has been dropping lately at the same time as stocks. This has got to hurt for risk parity funds, causing further deleveraging in stocks. Bonds were extreme overbought and yields were due a bounce, but it may also signal that bonds anticipate the massive stimulus that’s coming. Fiscal stimulus will balloon budget deficits even further, increasing Treasury bond issuance or supply. Meanwhile, more money printing from the Fed to buy all of the new debt may weaken the dollar and finally move the needle higher in official inflation. Both would push yields higher. That is, until the Fed follows through on their promise to cap yields at some level in the near future, much like Japan does in their government bond market.

Whether it is (1) the announcement of full-blown QE infinity or massive fiscal stimulus in the form of tax cuts or new spending, or a combination of the two; or (2) the Fed’s decision to cap bond yields down the road, thereby putting a cap on real yields and a floor under precious metals, these will be catalysts for Gold, Silver, and the miners to explode higher, imho.

However, in the short-term, risks remain to the downside. Stocks could fall further. Having broken support at 2600 in the S&P, the risk is now that we fall down to ~2100 or 2200, dead cat bounces aside. If the correlation between stocks and precious metals continues, the latter will fall in sympathy also. I expect that correlation to continue given that Bullion Banks have clearly been using the drop in stocks to drive Gold and Silver prices lower in order to cover their record short position at a profit.

The other risk is the aforementioned pop in bond yields. Given the recent surge in concerns about deflation, a rise in nominal bond yields means higher real yields, which is typically bearish for precious metals. We’ve seen this play out in the past few days, and it could continue until the Fed caps nominal bond yields and inflation starts to rise as helicopter money hits the economy and more money chasing the same amount of goods and services drives up prices.

Courtesy of Quandl.com:

The worst case scenario right now is that the caveat to this bull market I’ve provided all along plays out, basically a replay of what happened in 2008, when real yields spiked higher as stocks fell and Bullion Banks dropped paper bombs on the metals’ futures markets up to twelve times between March and October that year. Gold and Silver were hammered. This is less likely this time around because much of the selling in stocks is already done, imho. We’re far closer to the bottom than the peak from which we came. In any case, look at what happened to Gold after that period in 2008:

It is my long-held strong belief that the Fed and the politicians will throw everything at this market to keep this Ponzi scheme alive as long as possible. They already indicated that they plan to do just that based on their recent actions and words.

  • In 2019, the Fed did a complete 180 from rate hikes and balance sheet reduction, i.e. “QT”, to rate cuts and QE-lite.
  • The Fed just made an emergency rate cut of 50 basis points. This has only occurred nine times since the inception of the Fed.
  • It has been injecting billions of liquidity into the repo market and just announced that that will increase to $1.5 “trillion”. That number is likely to increase further.
  • Fed Governor Lael Brainard has said several times that they plan to cap bond yields, most recently on February 21. This presumes that they need to because yields are rising on the back of greater supply associated with bigger budget deficits and rising inflation pressures, as I outlined above.
  • Former Fed Chief Janet Yellen and, more recently, Boston Fed President Eric Rosengren have suggested that the Fed should be able to buy stocks directly with money printed out of thin air if interest rate cuts and QE are insufficient. If that were to occur, they could literally buy a bull market.

Does that sound like the Fed is going to go quietly into the night and let this Ponzi scheme collapse? Quite the contrary.

At the same time, governments around the world are stepping up plans to substantially increase spending or cut taxes to boost the economy suffering the consequences of the COVID-19 pandemic. Just yesterday, we got word that the Senate’s recess will be cancelled to focus on getting a stimulus package completed to help people during the pandemic. A $300 billion payroll tax cut has also been floated by Trump. This is just the beginning. We could see multi trillion-dollar deficits this year and next.

Sounds like the politicians are on the case too. Keep in mind that this is an election year also. Neither side wants to take the blame for economic catastrophe.

The combination of massive monetary and fiscal policy is the only solution to this market meltdown. It may not even work. But given the unlimited money-printing capacity of the Fed and government’s unlimited spending capacity thanks to QE and the coming cap on yields—which keeps interest costs near zero, much like in Japan—I believe it will work.

But what happens to the dollar in such a scenario? What happens to all fiat currencies if other countries do the same thing? Massive devaluation and inflation. This is why I believe the endgame is Hyperinflation. What will Gold, Silver, and the miners do in such a situation? Just sit back and watch.

Short-term, we could see further downside for the reasons outlined above. Watch support at 1446 and 1340 in Gold. 14.27 in Silver. But beyond that, no paper market will be able to hold back the tide of buying as fiat currency becomes toilet paper. Ask the Germans. The gains in metals and miners will likely dwarf those in the 1970s. This is what you should focus on, because this outcome is at most months away, imho. The monetary and fiscal authorities globally are about to open the floodgates of liquidity. Stocks will go to new highs, but metals and miners will enter hyperspace, imho.

About Sprott Money

Specializing in the sale of bullion, bullion storage and precious metals registered investments, there’s a reason Sprott Money is called “The Most Trusted Name in Precious Metals”.

Since 2008, our customers have trusted us to provide guidance, education, and superior customer service as we help build their holdings in precious metals—no matter the size of the portfolio. Chairman, Eric Sprott, and President, Larisa Sprott, are proud to head up one of the most well-known and reputable precious metal firms in North America. Learn more about Sprott Money.

David Brady has managed money for over 25 years for major international banks and corporate multinationals both in Europe and the US, with experience in Bonds, Equities, Foreign Exchange, and Commodities

The views and opinions expressed in this material are those of the author as of the publication date, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.You may copy, link to or quote from the above for your use only, provided that proper attribution to the source and author is given and you do not modify the content. Click Here to read our Article Syndication Policy.

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