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Monthly Wrap Up

No Alternative but Total Systemic Collapse

MWU August

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Nearly a month after Jerome Powell said, “We have moved to the neutral rate,” the Fed is now singing a different tune. What’s behind the switch? Host Craig Hemke sits down with Sprott Money contributor David Brady to break down all the gold and silver news you need to understand what’s driving the markets.

In this edition of The Monthly Wrap-Up, you’ll hear:

  • what’s really motivating the Fed
  • why emotion is the death of wealth
  • plus: when gold and silver will go up “like a catapult”

“It’s all about financial conditions from [the Fed’s] perspective. What they’re trying to do is reduce inflation. And after that FOMC meeting and what he just said—which, you’re absolutely correct—the stock market turned up, in a big way, and you had risk on. And they looked at that and went, ‘Wait, hold on a second. This is defeating our goal. So, we need to pivot back to more hawkish rhetoric.’ Now it’s interesting, at the recent Jackson Hole, that Powell only took eight minutes to make his speech… My two cents on that was: he didn’t want anything misinterpreted.”

To hear David’s full thoughts on this month’s gold and silver news, listen here:

Craig: You're listening to Sprott Money's "Monthly Wrap Up" with Craig Hemke. Welcome back to the sprottmoney.com "Monthly Wrap Up" for the month of August 2020. I'm your host, Craig Hemke. And joining us to call a month is my old friend and fellow Sprott Money contributor, David Brady. David, technical analyst extraordinaire, a great follow on Twitter, a great follow at the sprottmoney.com website. Under Insights, you can read his work every week. David, thank you for spending some time with me.

David: Oh, thanks for having me on again, Craig.

Craig: Always fun to talk markets with you, my friend. Before we get started, just as a reminder, it is sprottmoney.com that is the sponsor of all this great content that comes to you throughout the month. So, the least you can do is thank them. Whether it's buying or storing physical metal, this is a time to do that. We've got this Sprott Money back-to-business sale that runs from the 29th of August through the 5th of September. Great deals at sprottmoney.com that you can find. Or if just simply wanna like or subscribe on whichever channel you're listening to the content, that helps Sprott Money as well spread the word, get a wider distribution, which helps all of us. So, please be sure to thank Sprott Money and give them a call for any precious metal that you might need, 888-861-0775. David, before we get started, I mentioned what a great follow you are on Twitter for people that are on that site. Maybe not so much for the politics and everything else that's on there, but financial stuff, there's really great information on Twitter. They call it FinnTwit. David, what's your Twitter handle because people should be sure to follow you?

David: It's @GlobalProTrader, all one word.

Craig: All one word, not traders, trader.

David: Mm-hmm.

Craig: All right, my friend. All right, let's dive in. We're recording this on the 30th of August. If we go back four weeks to beginning of the month, things looked a little different. You know, we came out of that July FOMC. I was actually watching when Powell said, and I quote, "We have moved, in the past tense, "to the neutral rate. And then we will now be data-dependent going forward. And markets respond, the dollar fell, the metals rallied. Now, as we end the month, it's like he never even said it, David. So, what's going on here? Where do you stand on all this?

David: Well, it's all about financial conditions from their perspective. What they're trying to do is reduce inflation. And after that FOMC meeting and what he just said, which are absolutely correct, the stock market turned up in a big way. And you had risk on. And they looked at that, and went, "Wait, hold on a second. This is defeating our goal. So, we need to pivot back to more hawkish rhetoric." Now, it's interesting at the recent, Jackson Hole that Powell only took eight minutes to make a speech. I think I said in an article, my two cents of that was, he didn't want anything misinterpreted. Put a different way. He said a lot of things at the FOMC, but everybody hung on those words you just mentioned. So, this time around, he made sure that there was no olive branch out there for those that wanted to see stocks go up, metals go up, etc., and the dollar down. So, that's my two cents on it. I haven't got anything more to add at this point.

Craig: Well, let's talk about, from a technical perspective, a few things. And let's start with the stock market or more specifically, let's just look at the S&P 500. It was in April that former head of the New York Fed, goon Dudley, as I call him, was adamant and clear in a couple of interviews that the Fed's goal was to inflict losses, his words, inflict pain on stock and bond investors to kind of drive a reverse wealth effect and demand destruction. Now here we are in August and that's what Powell is saying as well. Well, how far will they go, David? I mean, we got down 20% earlier this year in the S&P and then bounced, like you said. You know, we fell about 20% in the fourth quarter of 2018, and that was Powell pivot number one. Will it take a drop to new lows below 3,600 in the S&P, maybe all the way down to 3,000? You got any levels like that, that are on your screen?

David: Well, my first and only level was 3,500. Now, yes, there's a risk that we go even lower than that. The issue here is obviously they say they're trying to bring down inflation. But the bigger thing that becomes very clear to me or has become very clear to me is that Powell says he doesn't wanna be the next Arthur Burns. So, he's trying to be Volcker. He mentioned Volcker by name in his Jackson Hole speech. Powell is no Volcker. And Volcker said himself, back in 2016, that there are too many promises that can't be kept. And what he meant by that was that the debt today, relative to when he raised rates to 20% back in 1981, the debt today is dramatically higher. We have a debt to GDP of 125%. That's at the federal level. It was at 30% in 1981. But you have to take into consideration all of the other debt, state, municipal, corporate, household.

Craig: Household, yeah.

David: Yeah. And once you add all that up and include unfunded liabilities...Bridgewater did an analysis on this back in 2011, Ray Dalio's group, and they estimated that the debt to GDP, total debt to GDP was north of 1100%. Now, is that ever gonna be repaid?

Craig: No. Right.

David: So, I look at what Powell is trying to do right now. And this is why I lean toward...like, there's two scenarios for the Fed. They're either the 1929 Fed or the 2018 Fed. And the 1929 Fed, it basically means that they just keep jacking up rates. Now they moved to QT as well, and they're going to drive the economy even further into recession and depression. And it's game on, cue the great reset. I still think that the probabilities weigh in favor of a pivot, that they're going to pivot. And the reason for that is, well, there's multiple reasons, but the main reason that I see is that if they want a new global reserve currency, and let's...Sorry, let me step back for a second here. The Fed is part of a bigger group of central banks, which all report to the bank of international sentiments. And they've made no secret of the fact, along with the WEF, and the IMF, and so forth, and the Chinese and the Russians, and you look at what they're doing now, that they want a new global reserve currency.

Well, if you want a new global reserve currency, you're gonna have to take down the existing one, and that is the dollar. Well, how do you do that? Well, you print, just print the currency into oblivion. They're all doing it now. But if the Fed has to do an about-turn to basically prop up the stock market, prop up bonds, and so forth, and I believe they're eventually gonna have to buy everything, the people, especially foreigners, lose all confidence in the dollar and the dollar goes south. That will enable or pave the way for the new global reserve currency, which I believe will be the SDR, which will be a basket of currencies, including the ruble and the yuan. And so for that reason, they still have to do that. If they push the economy and financial markets into a systemic collapse, the dollar will probably go up because it's the safe haven currency you run to. The rest of the world, emerging markets will be crushed first, and then it'll spread like a domino effect across the world.

So, I still lean to the pivot. And my belief, my strong belief is that what the Fed is doing right now, all they're doing is building up their ammo for when something breaks. In other words, whether it's the economy, we get a credit default, whether it's the Taiwan invasion, you name it, they need ammo to be able to address that breakdown. And that's why they're jacking up rates now. That's why they're talking about QT, which, in my opinion, won't last long. It can't. They can't go much higher in interest rates because the debt mountain is so big that the interest costs and the debt will probably match the biggest expenditure of the U.S. government, which is Medicare, if you just do the math. On top of that, if you drive the economy into recession or depression, what happens to tax receipts? They go down the toilet. You're gonna see...unemployment's already rising. Ignore the BLS numbers, look at jobless claims. And as unemployment goes up, what goes down? Income tax receipts. Businesses, well, they got hammered in the lockdowns and now they're getting hammered by operational costs associated with electricity. I saw a poor guy in Westmeath in Ireland has a coffee shop...

Craig: I saw that too.

David: ...there, €10,000 for the past month.

Craig: Amazing.

David: I was, "What?" And then capital gains taxes. Well, show me somebody who's got capital gains right now. Maybe the guys who are along the dollar, but everybody else has got losses to report. And at the same time, then Biden's going out with his Inflation Reduction Act, which is nothing of the sort, it's just another trillion dollars in spending. If you wanna reduce the debt or you wanna reduce inflation, where you start is with spending, you're spending. So, you got spending going up, you got tax receipts going down, and you're gonna have interest rate costs or interest costs on the debt skyrocketing. What happens to the deficits? They blow up. And here's where I get to the key points with regard to the pivot, who's going to buy the debt? I mean, who's going to buy the debt? It's not the Chinese. Look at their balance sheet, they're dumping it. Yes, the Russians have dumped theirs. Japan is spending all of their printed money on keeping yields down on the JGBs. ECB's got its own problems with Italy and so forth. So, who's gonna buy U.S. debt? The Fed. "Wait. Hold on, David. The Fed's raising rates and doing QT, what are you talking about?" Who's going to buy the debt?

Craig: Who's left?

David: Yes. So, when you come to that conclusion, it's obvious. What's the alternative, Craig? Outright default? Show me a politician anywhere in history that says, "You know, we're gonna default on our debt." Debt Jubilee, the Fed cancels the debt that they own. Well, what happens to the dollar? My point is there is no alternative except total systemic collapse. Could that happen? Yes, it is a probability. But from my perspective, it's low at this point. And no politician in the right mind is gonna wanna be in office when that happens. So, they'll just kick the can down the road as they always do. But unfortunately for them, this is not gonna last much longer. You know, the printing of money will jack up stocks next time. Will housing go to the same peak? I doubt it. Once born twice shy after what's happening, especially here in Canada. It's only starting to begin in the U.S. on a broad scale.

Housing's going down the toilet. Bonds are probably gonna get into trouble, you're gonna see a sovereign debt crisis. And the currencies around the world are all being devalued. And I think the dollar...if and when the Fed pivots, the dollar is gonna be the biggest casualty. So, I don't see any other way out for the Fed in the short-term other than to pivot. But when they do that, it's only going to delay the inevitable. And what is the inevitable? The collapse of the everything bubble, total systemic collapse, the beginning of the...I believe the great depression has already begun. But the beginning of the great depression in earnest and the great reset, whatever that turns out to be. Sorry, go ahead.

Craig: No, that's okay, David. In the big picture, again, it's just a rhetorical game that they're playing, and trying to keep the plate spinning. And we'll go right down the same road we've gone down several times now in '16, and at '18, and in '19, and again, '20 to '21. And when that curtain gets pulled back and attention gets shined upon, you know, how they're just playing games, that's when the precious metals sore. And we've had, you know, even this most recent example from '18 into '20, gold went up 75%. So, this is coming again. So, we'll watch for...you know, we gotta wait, though, for that perceived pivot, you mentioned it's probably economically-driven, maybe not market-driven, but maybe they're one and the same.

So, two things I wanna ask you about technically, and then we'll begin to wrap up, that clearly drive the machines that buy and sell the futures contracts. One of them is the dollar index, maybe not tick for tick, but it's either headwind or a tailwind. And the other thing is real interest rates, you know, where you take the nominal rate and you subtract inflation. And if it's negative, that's generally good for the precious metals. Let's talk about the dollar first. It seems like everybody's, everybody is on the side of the boat thinking that the dollar index is going through 110% to 120%, maybe even higher. And usually, and though you can't seem to see an obvious catalyst to a turn, usually, when everybody's on one trade, it's usually the wrong side. What are you looking for in the dollar index that might show you a top and a turn?

David: Well, we're already seeing it, to some extent, because you're seeing multiple negative divergences here from a technical perspective on the DXY. But I don't think the euro and the yen are as dead and buried as the markets think. The ECB is talking about raising rates 75 basis points in September now. And that's the principle component of the DXY relative to the dollar. And you may see a yen resurgence short-term. I think the yen is toast like all the other currencies. But it's become a little extreme, everybody's on one side of the boat, it's overbought. And if we get any sign of weakness or talk of a pause from the Fed, I think the DXY can come off slightly. But when you see the Fed start to inch away from this tightening cycle, the dollar is toast in a big way. And that's my two cents on it.

I don't see...could it go to 120? Yes. But here's the thing, they're all being devalued. The only difference between the dollar, and the euro, and the yen is the dollar is being devalued at a slower rate than the euro and the yen because the U.S. is going through a tightening policy right now. The ECB is just kind of starting to kick it off, but nowhere near what the Fed is doing. And Japan is still doing full-blown QE to keep its yields down. So, it's obvious that, as they say, the dollar is the cleanest dirty shirt and the hamper, but they're all covered in shit.

Craig: Right.

David: Sorry.

Craig: Right. And that's a distinction that always gets lost. Because people just say, "Well, the dollar is stronger today." Versus what? But do you see some signs technically at the top?

David: Yeah. As I said, if you look at...and you can look at multiple timeframes, but I like to look at the daily, the weekly, and the monthly. And the daily and weekly, in particular, are showing negatively divergent higher highs here, where you've got a higher high in price but the indicators such as the RSI and the MACD are lower. They're not confirming that high. Now, that doesn't mean that the peak is in, what that means is that it could still go higher. But the more these divergences pile up, one after the other, it means that when it eventually capitulates, it's going to be brutal.

Craig: Yeah. Well, yes. And when everybody's on the wrong side, things can move quickly. So, that would help. That'd be something probably to watch. The other thing I mentioned is real yields. Hard to always get a handle on the inflation expectation part of the real yield. But on the nominal rate side, David, you know, we've seen the yield on the 2-year note is making new multi-year highs, but the 10-year note isn't confirming that yet. It seemed like there's buyers of longer-term bonds because of the expected recession. Will you watch something in the bond market too as kind of a tip that...no pun intended, kind of a sign that real yields have peaked and are heading negative?

David: Yeah. Look, bonds have gotten absolutely hosed over the past year. And everybody...And that's actually supported the dollar, higher yields on a relative basis. But I believe that there's a rally coming here, a big rally coming in the 10-year. Posted this on Twitter. My two cents is that we could get a higher high in yields before it drops, but I'm looking for 1.5% on the 10-year.

Craig: That would change things.

David: Yeah. It would change things. But 1.5% is still well above the 0.4% low that we had. And that would be the bottom before bonds begin their collapse. So, you'd see far higher yields unless the Fed pivots and they start pulling a BOJ which is capping the yields. But if and when they do that, then the dollar goes south. Look, you know, back years ago, I talked about the Fed's Trilemma, which was first proposed by Luke Gromen. The Fed can only save two markets out of three, and those three markets are stocks, bonds, and the dollar. Which one do you think they're gonna sacrifice? They're gonna sacrifice the dollar to protect stocks and bonds. But ultimately, they all crash. So, I think bond yields are going to go down soon. It's not happening yet, but I believe they're gonna go down. But if you consider the fact that the Fed has to buy the debt, they're the ones that are driving it down. So, you can assume that they are pivoting.

I mean, they said they were gonna do QT. I look at the Fed balance sheet and I see a little reduction in the balance sheet, but I don't see much. They can be doing QT...QE in the background and buying the debt. If they do that, the bond yields go down, but what happens to inflation? Inflation's gonna go right back up. In the short term...Let's talk about inflation for a second because...Get this through the door. I've been saying that I believe we're gonna see short-term disinflation or deflation, and that be maybe another cause for the pivot. And why do I believe that? Because we've got a lot of inventories in the U.S., it's becoming mainstream news. You know, Target, Walmart, and Restoration Hardware have talked about it. They are washed in inventories, they have warehouses packed with inventories. They need to slash prices to get rid of them. That's gonna cause prices to come up. And then you see where the oil is too, it's still trading below hundreds. It's gone up a little bit recently, but it came off big today. If that remains stable and you see prices at the checkout, at least in these various stores come off, you're going to see...you'll still have inflation but much lower inflation. So, you could see 9%, 8%, 7%, 6%. And that may be enough for the Fed to say...

Craig: "Look at us."

David: "We did it." Yeah, "We did it." And then they pivot, and what happens next? Fifteen percent, 25%, 35%. So, my point is if you get yields coming off with the help of the Fed but you get inflation going up again, what happens to real yields? Yield minus a higher inflation rate equals negative real yields. And that's where I think we're going. And that's why going to gold and silver, big picture, everybody's focused on the short-term. And I understand why we've been drifting sideways for two years, sideways to down for two years, everybody's fed up. But take a big step back, look at the central banks buying gold, like, you know, hand over fist, look at the trajectory for real yields going forward. Look at the premiums, if you wanna buy a 1-ounce silver coin. Everything is telling you that once we get through this nonsense, metals are going skyward. That's why people are bashing me, you know, "I'm sick and tired of hearing it's gonna go up." Okay. But when it goes up, it's gonna be a binary move.

Craig: What are you gonna do?

David: It's gonna be like a catapult straight up. And you don't sell at bottoms, you buy. You sell at tops. And this is the problem with most retail investors, they do the exact opposite, that's why they always lose. But if you step back and look at the big picture...I'm heavily weighted in precious metals. I have miners. And I look at the big picture and I see, unless the Fed plans to collapse the entire U.S. economy and global economy, because it will hit everywhere, unless they're willing to do that, immediately, I think I believe that's gonna happen inevitably. But immediately, gold and silver are going to go higher because they're going to pivot. Even if they don't, what do you think is gonna happen to stock prices, housing prices, bonds? They're going to collapse. Look at the ratios for gold versus the mean housing price. Look at gold relative to the S&P going back decades. Tell me where it's at. My point is gold and silver are going to go up and value either on a relative basis or an absolute basis in a big way here soon. I understand the pain in the short term, but I referenced this in a tweet this morning about 2018. You remember 2018, the U.S. trade war?

Craig: Yep.

David: And all the indicators, the technicals, the sentiment, the positioning, it's all showing that gold and silver going up. That was in May. We didn't bottom until August. You know, it just kept going down and down and down. That's why I always say, you have to wait for a break of resistance. And I believe that resistance in gold is $18.24. In silver, it's $22 on a closing basis, $22.57 on intraday. Once we get through those, see ya. And people say, "Oh, yeah. Well, that's like, you know, they're 10% higher, we're gonna lose that out." Not when you consider where it's going, $23-plus in gold and well over $30 in silver. So, I understand the pain, but we've seen this before, $10.45 in 2015, $11.24 in December '16, $11.67 in 2018, and $14.50 in March 2020.

Craig: That's right.

David: We've seen it every single time. And what were the conditions that every...same ones we're seeing today, everybody's bearish, it's extreme oversold. I hate this. I give up, blah, blah, blah. And what happens next?

Craig: That's right.

David: I can't say it enough. But unfortunately, emotion is the death of wealth and people let their emotions take over. And it's the same thing that's happening now.

Craig: It's like, and I quote this often...I've known Brent Johnson at Santiago Capital for years. And his famous quote, besides talking about the dollar milkshake, his famous quote was always, "You can either believe in magic, or you can believe in math. And if you believe in math, then you've gotta own some gold." And I think he's absolutely right. My friend, this has been fascinating and fantastic. We're gonna have to do this again soon. I encourage everybody, though, follow David Brady on Twitter and check-in, usually every Thursday or Friday at the sprottmoney.com website. Go in the navigation bar for Insights, look for Sprott Money Writers, and look for David's contribution. Usually Thursday or Friday every week, he's got a new article completely for free right there on the site. David, what are you gonna be writing about this week?

David: Probably going to be talking about what we just talked about.

Craig: What we just talked about. [inaudible 00:26:38]

David: Yeah, about the Fed and how they're trapped, the trap that they made themselves. But again, you know, forgive me, but I'm optimistic. When I see everything as bad as it is, I'm looking in the opposite direction.

Craig: Right. As you should be.

David: And my last words to your listeners is hang in there. I know...Look, we should be used to feeling this pain, but you're going to get paid...in my opinion, humble opinion, but you're going to get paid, just hang in there. And when it happens, when that tour comes, it's gonna be something to watch.

Craig: I agree. It has been in the past, and it will be again. And I wonder if this time, you know, they won't shift back either. The main thing is, though, for everybody listening, if you don't own physical precious metals, your protection against this madness, now it's not too late to get started. If you do own physical precious metal, that's not too late to buy some more either. So, please be sure to always visit sprottmoney.com whenever you're in the market for physical metal or a place to store it. And, of course, you don't have to just do it online. If you want to talk to an actual human being, they got a staff waiting by the phone to help you out. You can call them at 888-861-0775. We've been speaking with David Brady at Global Pro Trader, technical analyst extraordinaire, and an old friend as well. David, thanks so much for your time.

David: Hey, Craig, thanks. Also, I really appreciate our conversations. But can I just add one last thing about buying physical metals? You need to buy them, at least some, now. And because when this rally, next rally, if and when it takes place, and I believe it's when, you're not going to be able to find any. They are gone. So, think about that. I'm not telling you to load up, buy some.

Craig: And David, and I've been banging this drum for years, it seems like now. If you're in one of these...especially in Canada, these silver certificate schemes at some of the banks or unallocated accounts at some of the mints and stuff, man, you do not wanna be the last person standing there with your handout trying to cash that into physical metal. You gotta do that before it all hits the fan. So, you're right.

David: Yeah. And PSLV is the only ETF I would even consider, or FIZZ [SP], for gold and silver. It's not a promotion for Sprott, it's just simply the best because it's backed, fully backed by the physical gold and silver, not like SLV and GLD. The problem that you run into, whether you own miners or any of these ETFs of the metals, is that when the time comes...there's two problems. One, is the counterparty going to be around to pay you? That's number one. In other words, if you own the GLDF, is the custodian still around? No, he's bankrupt. See ya. Second, you get paid. You sell your miners, what do you get? The worthless fiat currency you're protecting against, you know, increasingly worthless. And then you turn around, oh, I can always buy gold and silver. Physical gold and silver will be gone. Period. You need to buy some physical gold and silver in your hand, you can see it. Buy some now, please.

Craig: Couldn't agree more, my friend. Again, sprottmoney.com, 888-861-0775. David, thank you so much for your time. It's been fascinating. And hopefully, we'll do this again soon.

David: Yes. Thanks very much, Craig. Bye-bye.

Craig: Sounds good. And from all of us here at Sprott Money News, sprottmoney.com. Thank you for listening, and look for more great content in September.

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About the Author

Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities.

Since 2010, he has been the editor and publisher of the TF Metals Report found at TFMetalsReport.com, an online community for precious metal investors.

*The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, 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.

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