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The Morning Line

The Fat Lady Takes the Stage

The weekend brought an autumnal breeze to much of the Eastern Seaboard, and with it raised hopes in some quarters that seasonality will trigger a long overdue avalanche in the stock market. Even a few bulls are hoping for this, since only a rip-snorting stampede out of shares can disperse the potentially explosive, hydrogen-saturated layers of hubris that have accumulated over Wall Street since stocks bolted into the blue 18 months ago. The astounding rally during a global pandemic has made the rich effortlessly richer while doing little to help the broad middle class. It has also undeservedly burnished the reputation of portfolio managers who have done little more than throw Other People’s Money at a relative handful of stocks. They’ve been winning like crazy for more than a decade, so who could blame them for believing their amazing run of luck will continue forever? Of course that’s the way things always feel at important tops, even if the Wall Street Journal and other cheer-leaders for investors’ salacious fantasies will try their hardest to explain why this time it really is different. Love that Kamala! Most of us know better and can smell a top that is becoming increasingly pungent with each fresh instance of unsettling, if not to say appalling, news. The President’s steepening mental decline, for one. The New York Times, the Washington Post and even the Wall Street Journal  will somehow find things to like about Kamala Harris when it’s time to cheer her on, but there’s no pretending she’ll be any more effective than Biden.  And there’s the delta variant, a contagion so robust that it could conceivably put the world into a second lockdown that will make the first seem like a global street festival. You could always argue that the market has become completely untethered from such real-world concerns, but even then, you’d still have to reckon with shares at valuations that are arguably the richest ever. Building a bubble on top of the existing one seems so implausible that we are left with perhaps three logical alternatives: 1) an extended consolidation sideways that lasts for years; 2) a sharp break to lower levels that are more easily sustainable; or, 3) a full-blow bear market, even though so many are expecting it. How All Bear Markets Begin I’m in the last group and therefore heartened by my friend Peter Eliades’ recent warning about Labor Day tops. There have been some notable ones, as he pointed out, and the risks of another would seem to be heightened by the extreme concentration of capital in just a few lunatic-sector stocks favored by money managers. As if on cue, the QQQ proxy for this group double-topped last week at a new-record high before falling about 2% on Friday. That may not sound like much, but realize that all bear markets begin with a single downtick off a summit that may not become obvious for weeks or even months. But suppose Mr. Market has one more head-fake left in him? The chart of Apple, above, is meant to show how the endgame might unfold. We’ve always considered AAPL to be the most important bellwether for the world’s bourses because it so perfectly reflects the greed, folly and hubris of institutional investors. Based on the chart, I would ordinarily infer that AAPL is likely to reach the pink line, a ‘secondary Hidden Pivot’ that lies 14% above Friday’s close.  But I am allowing for the possibility of a trend failure midway between p and p2, meaning it is already under way, or perhaps between p2 and D. That’s because the actual levels have come to be over-watched and over-traded to the extent they no longer work. Thus, in order to find likely turning points, one must use the oceanic voids between the levels. Bottom line: It’s not over until the fat lady sings. Friday’s decline could prove to be the start of the Big One; but if the stock turns and exceeds the old high at 157.26, p2=166.72 would become the minimum upside target, and thence 177.32, midway between p2 and D. We’ll look to get short as opportunities develop, while remaining alert to the possibility that last week’s highs will come to mark the beginning of the end. _______ UPDATE (Sep 14, 10:45 p.m.): So far, so good!  AAPL has gotten kicked in the teeth this week and is down around 5%  Use the 144.68 target shown in this chart as a minimum downside objective, but also to get short ‘mechanically’ at 149.72 if the bounce gets there.

China’s Reforms Point the Way for Capitalism

China is easy to hate, since their leadership is at heart a bunch of double-dealing, lying commie rats. (And yes, the evidence is more than a little persuasive not only that they unleashed a deadly virus on the world, but that they took clandestine steps to protect themselves from it before going public with the bad news). There is nonetheless something to admire and even envy in the way China’s leaders have been going about economic reform. For starters, Xi Jinping has declared war on tech companies perceived as having little to contribute to China’s goal of economic, geopolitical, financial and cultural dominance. Not coincidentally, most of the targeted companies are in the same businesses as America’s hottest firms: consumer goods, advertising, real estate, ride-sharing, finance, gaming and entertainment. Xi’s denying Chinese firms in these sectors access to U.S. capital markets is akin to Biden’s issuing a fatwah against glorified ad agencies like Google and Facebook, banning Twitter for incitement and casting out the moneylenders at Morgan Stanley. The CCP’s clean-up campaign took an interesting — some might say promising — turn last week when they banned effeminate men from TV. It remains to be seen how a generation of children will fare in the relative absence of yin-saturated popular culture, but if it eventually produces a Chinese John Wayne, the West will face an even tougher adversary down the road. Terminal-Stage Consumerism It’s not simply a matter of targeting the kinds of companies we associate with America’s terminal-stage consumerism, income inequality and decadence. The CCP’s reforms are also designed to shift investment capital toward industries positioned to provide a brighter economic future for the Chinese people, and to grow an economically robust middle class. This policy implicitly rejects and rebukes an American-style capitalism that has atrophied to the point where it has become fatally unproductive. I say fatally because U.S. equities markets continue to concentrate trillions of dollars of investment capital in companies like Google, Facebook, Amazon, Apple and Twitter that masturbate Americans, even as high-tech startups that could change the world are starving for funds. I speak from personal experience as an investor in a relatively young Colorado firm that uses terawaves technologies in ways that could revolutionize food safety, homeland security, national defense and healthcare. The company, TeraBAT, has struggled for years to raise a measly $3.5 million dollars even as Wall Street has poured trillions into a real estate bubble, online dating, food-delivery apps, online messaging, driverless cars, social media, smart phones and even donuts. China has decided it wants no parts of this action and banned what U.S. investors would consider “hot” companies from raising capital in the U.S. For good measure, and to ensure that the supply of human capital is of the highest quality, the CCP has drastically reduced the amount of time kids can spend playing video games. This will never happen in the U.S., and it is yet one more reason why China threatens to succeed where Khrushchev’s Russia failed: in burying us. (Click here for a related interview Rick did last week with Howe Street‘s Jim Goddard.)

The 800-Pound Tapeworm in the Room

Jackson Hole hubris was operating at full strength last week as investors around the world anxiously awaited the announcement on Friday that would send the markets into hyperdrive. The broad averages had in fact churned impassively for several days ahead of whatever lame twaddle concerning The Tapeworm lay in store. The question of when the Fed will begin to tighten following a loosening binge that has persisted more or less continuously for a hundred years is the focus of portfolio managers’ tiny, febrile brains these days. How quickly they forget! For taken together, the last dozen or so Tapeworm utterances, hints and titillations would seem to imply that if tightening is coming at all — which everyone knows it is not — it’s unlikely to commence before, oh, maybe the end of 2022 or, for good measure, 2023. Vague enough for you? This dovish meme has been recycled so many times that it’s a wonder it can still send shares soaring. And yet it does, alternating with fleeting dips of feigned fear and dread whenever the Fed even whispers that it will someday be necessary to bring its surreal balance sheet into a semblance of control. Colloquially this is known as “taking away the punch bowl,” an annoyingly dumb cliche coined by a benighted news media to make the somewhat esoteric concept of tightening go down easier with readers who are rightly confused about the bottom line. Getting High in August Still, you have to give the charlatans who manage our expectations their due, since they’ve riveted investors’ attention whenever someone affiliated with the central bank farts, burps or clears his throat. On Friday, Fed Chairman Powell did all three, metaphorically speaking, in promising there would be some tapeworming of monthly bond purchases by  the end of this year. We’ve heard this so many times before that if you bet on it, be sure to get odds, since Powell and his colleagues fully understand that any real tapeworming would send the global economy into eclipse for a decade. Their alternative is to keep talking, and it must be conceded that this strategy seems to be working, at least for now. Considering that Powell’s mildly hawkish speech on Friday pushed stocks sharply higher, it would appear the Fed has got spin control dialed-in. If so, it would not be the first time that investor ebullience, along with the stock market, reached frightening heights in the month of August. Meanwhile, although it’s impossible to predict when the obligatory, dovish take-back is coming from the spinmeisters, it is as certain as the next sunrise and apt to follow a punitive selloff on Wall Street. Keeping the stock market pumped is all the Fed really cares about anyway, but it requires bigger and bigger lies to hide this unseemly fact.  It helps that the hacks who invent the news are fully onboard and brainwashed by the Fed’s brand of egghead razzmatazz to believe Americans can borrow-and-spend their way to wealth and prosperity. Moreover, because the news media have been conditioned to hang on every nonsensical word from the central bank, even a low-level Fed functionary can impact global securities markets just by reeling off a few scripted bullet points at a Rotary Club luncheon. This dynamic resembles the relationship between the press and corporate muckety-mucks who quiver in their Guccis whenever they have to face some hack reporter dispatched to sound them out on the topic du jour. The scribes invariably report out the story with proper awe and fear, filing dispatches that in the Fed’s case would have us believe they’ve got everything perfectly under control. Yeah, sure. Bipolar Behavior The fund managers know better, of course, even if we tend to think of them as chimpanzees whose buying ‘decisions’ mainly entail force-feeding Other People’s Money into a handful of FAANG stocks while constantly rotating a bunch of others to make investors think their savings are hard at work. So if the chimps are slightly smarter than we tend to think they are, why do they drive shares wacky every time the Fed roils the air with flatulent piffle we’ve heard a hundred times before? The answer lies at the heart of the stock market’s embarrassing histrionics, which are simply a reflex, like an earthworm writhing in strong sunlight. As implied above, investors big, small and in-between have their testicles/pudenda wired directly to the Fed’s PR ‘defibrillator’. Thus, even the smallest jolt of ludicrously mis-imagined news will tend to induce violent spasms. However, they occur not because investors or anyone else take the Fed’s insultingly stupid obfuscations seriously, but because they fear that all the other idiots in the money management business will react to those obfuscations in the way they’ve been hired to react. Machines do the actual buying and selling when the ‘news’ hits the tape, but if the algorithms appear panic-stricken, it is only because they’ve been programmed to anticipate the bipolar behavior that accounts for most price movement in so-called ‘securities’ markets. It is left to stockbrokers, analysts and the news media to explain why these reactions are not only rational, but healthy and, ultimately, bullish.

From Doug Behnfield…

[Editor’s note: The following was sent out to clients in mid-July by my friend Doug Behnfield, a financial advisor and senior vice president at Morgan Stanley Wealth Management in Boulder, CO.  Long-time followers of Rick’s Picks will be familiar with Doug’s work, since his thoughts have appeared here many times. I have always referred to him not only as the smartest investor I know, but one of the smartest guys. He still is. I am grateful to him for allowing me to share his insights with you. However, I must I must apologize for some formatting changes that were necessary due to typographical limitations on my end. Doug’s original letter was meticulously footnoted, and some text that was bullet-pointed I have rendered in paragraph form. Otherwise, the content is unchanged. RA] In all 44 years as a Financial Advisor (aka Account Executive, stockbroker), I have never been aware of any respected stock market pundit that “called the top” in close proximity to the actual beginning of a true Bear Market. However, an associate once gave me a report late in 1987 that had been issued in July, 1987 written by Justin Mamis entitled The Philosophy of Tops. He wrote it just three months before the Crash of October 1987. It has been in my permanent file for decades and I dragged it out a few months ago to remind me how utterly difficult it is to know how high is too high (or how low is too low) in the stock market. After all this experience in the business, I wish I knew, or that I knew someone who knew, on a timely basis. But, alas, it has been too much to ask. That doesn’t mean that I haven’t accumulated a meaningful amount of market wisdom over the years. As Leonardo Da Vinci said: “Wisdom is the daughter of experience”. Amos ‘n Andy had something to say about it too. So here is some of my market wisdom: 1) There are no secular bear markets that are the result of geopolitical,economic or natural disaster events, historically, that I am aware of; 2) Market crashes that occur as a result of these events tend to be “buy the dip” opportunities, and 3) Examples of this are the Covid-19 lockdown, the 9-11 attack on the World Trade Center, Hurricane Katrina and the Cuban Missile Crisis. ‘Let’s Short Everything’ I hosted a dinner in New York City several years ago with Arthur Cashin, Ray DeVoe and David Rosenberg in attendance, among others. Art told the story of the rookie trader on the floor of the New York Stock Exchange in 1962 who blurted out “let’s short everything!” when the news hit the tape that our country was confronting the Russians by blockading their ships bound for Cuba and the market was crashing. The response from Art was, “No, you buy everything. Either this gets resolved quickly or we’re all fried and we won’t need to pay for the trades” (as in nuclear holocaust). Buy the dip. On the flip side, there is a great deal of danger associated with being complacent and fully invested (whatever that means) at the top of a secular bull market when a bear market looms, for obvious reasons. Bob Farrell’s Rule #5 applies here: “The public buys the most at the top and the least at the bottom.” From Justin Mamis’ report on it back in 1987, I have a few favorite quotes:  **  “Unlike bottoms…tops seem to come out of nowhere, indeed, out of a glowing, good news climate.”  ** “A bull market itself is lulling, like lying on the beach on a lovely summer’s day: at first, feeling healthy, you play volleyball and jog a little, enjoy brief dips, and then, somehow, you can’t keep your eyes open. ‘Isn’t this marvelous?’ you whisper as you doze off.” ** “The one eternal aspect of every market top is that it occurs before we’re ready for it.” Topping Conditions Are Present Many of the characteristics that he cited as topping conditions are also present today. Which brings me to the Treasury bond market. Yields broke out of a low trading range on the upside last fall as the vaccine arrived and the Democrats won the national election. The rise in rates accelerated as the Georgia runoffs produced a Senate majority for the Democrats. This was because the one-party control of the Federal Government seemed to assure the passage of massive fiscal stimulus which was believed to usher in a stronger recovery with inflationary implications. However, the rise in rates came to an abrupt halt in mid-March, just as the last stimulus checks were being issued. Who says the markets are not a discounting mechanism? Since 30-Year Treasury rates peaked on March 18, the popular financial press has been filled with threatening (hopeful?) articles about the likelihood of inflation finally rearing its ugly head (after 40 years?) and skyrocketing interest rates due to the inevitable economic boom ahead. The fact that interest rates have declined dramatically (in the case of the 30-Year Treasury yield, from 2.5% then down to 1.9% currently), renders the debate settled: inflation is transitory. The spike really was about “base effects” from the deflation prints last fall and the short list of  components that are bottleneck victims dominating the recently elevated CPI numbers. Those factors are quickly receding into the past. Keep in mind that inflation has a closer correlation to long-term rates than any other measurable economic or market factor. Intermission The Second Quarter saw a downside reversal in interest rates on Treasuries, and Municipal bonds continued to perform well. Gold recovered too. Stocks were higher. Here are some representative Q2 (not YTD) performance figures as of 06/30/2021: The decline in interest rates that began in mid-March accelerated in midMay, just as economic data in general began to disappoint. The red-hot housing market has begun showing signs of cooling off, as has consumer spending, consumer sentiment and industrial production. In addition, the new “Delta Strain” of Coronavirus has been able to infect a broad spectrum of the global population, including those that have previously contracted the virus and those who have been vaccinated. The risk of a weaker Second Half outlook (and into 2022), is supported by the risks associated with the end of Federal fiscal direct stimulus to households, extended unemployment benefits in September, and moratoriums on rent and student loan payments by year-end. Commodity prices have been deflating recently along with crypto currencies and Meme stocks. Lumber, which hit a high of $1,733 thousand board feet (TBF) in May, recently traded at $484, near pre-pandemic levels and down 72% from the high. While the stock market continued its push higher in the Second Quarter, some market analysts are pointing out that there has been evidence of extreme bullishness and speculation being expressed by individual investors. Margin debt is at record highs and that does not include the nonpurpose securities-backed lines of credit that make it possible for all those homes in Aspen to be “bought with cash”. In addition, many arcane market technical indicators such as breadth have deteriorated markedly. Many of the current technical and sentiment conditions are reminiscent of  what was outlined in “The Philosophy of Tops”. The predominant leadership for most of the bull market that began way back in 2009; the Mega-Cap stocks, has been faltering since Labor Day. Conventional measures of valuation, including Price/Earnings Ratios (high) and Dividend Yields (low) are at historically unprecedented levels. Scariest of all is the  parabolic nature of the advance, particularly coming off the Pandemic-Crash low. The risk of a weaker Second Half outlook (and into 2022), is supported by the risks associated with the end of Federal fiscal direct stimulus to Needless to say, the apparent resumption of the Great Bull Market in Bonds can be helped along by reduced inflation caused by any economic weakness and/or a reversal in the stock and real estate markets.

Why This Wall of Worry Is Different

There is increasing confusion in America about how to handle the rapid spread of Covid’s delta variant. The stock market can usually tell us how much fear is out there, but this time Wall Street seems, if not quite clueless, then certainly heedless. The broad averages have moved steadily higher in recent weeks, caused more by nervous short-covering than by any particular bullishness. There have been no dramatic surges, only a steady, ratcheting ascent that suggests an army of bears have been hard at it, trying to get short at a major top. The irony is that if they would just relax, bull-mania would end overnight, since the rally is drawing its punching power more from buyers driven by desperation than from any other source. With or without them, though, a very important peak is not likely far off. Delta-lockdown worries are bearing down on markets and nearing the red zone as state governors respond with increasingly onerous restrictions on 140 million Americans who have not yet been vaccinated. One-Upping DeBlasio Here in Florida, there are signs that serious trouble could be brewing in the nation’s school systems. In Palm Beach County last week, more than 400 students were quarantined just two days into the school year. Although most of them have not tested positive for Covid, contact tracing has put their school year in limbo. Unfortunately, such turmoil could prove to be a mere squall in comparison to the gathering firestorm in big coastal cities. In New York City, for one, DeBlasio announced last week that the un-vaccinated would be barred from indoor dining, gyms, bars and other places. Not to be outdone, California’s true-blue mayors have already one-upped him with edicts that go even further to restrict movement and commerce. As of Friday, Los Angeles reportedly was considering closing grocery stores and much else to the uninoculated. It is predictable that San Francisco and Chicago will not let L.A.’s quarantine challenge go unanswered. Things have not yet reached the level of hysteria, but once the reaction to ‘delta’ has run its course, if it ever does, we can expect many businesses that survived the first lockdown to close forever. Crazed investors may have contrived to take the first tsunami of business shutdowns in stride, but reckless obliviousness may not yield such benign results this time (if blowing an epic stock-market bubble can be described as benign).  The giddy rally of 2021 was based in part on the delusion that as long as Amazon, Google, Netflix, Microsoft and a few other category-killers were doing well, then so was America. A spectacular bull market has reinforced this absurd idea, but it flouts reality, since small businesses account for fully half of America’s GDP. Shut down enough of them and the unemployment and falling revenues that follow will eventually take down the consumer economy and the online behemoths that serve it. Rental Bubble It will also affect the real estate market, especially rentals that have attracted big players such as Invitation Homes and Zillow. Such companies have created a bubble of their own by paying outlandish prices for residential properties, remodeling many of them extensively to attract upscale tenants. In a market as hot as home rentals has been, why should they care about upfront outlays when they can count on a steady stream of ever-rising rent payments over the next ten years? The fatal weakness of this strategy is that tenants are necessarily those who cannot afford to own a home. None of this recklessness will matter as long as stocks continue to rise. Some technical forecasters seem to think the bull market has a lot farther to go and that the Dow Industrials could double or even triple over the next five to ten years. Although it is impossible to show why this can’t happen, my gut feeling is that the so-called “everything bubble” is about to pop.  It will very shortly be bucking not only seasonal headwinds, but a notorious history of stock market crashes and panics in the September-October period. If past is prelude, the broad averages are setting up for a memorable plunge. Can we actually identify The Top with technical analysis? Stop by the Rick’s Picks Trading Room and find out for yourself. Shorting lesser tops and making money at it has been our specialty, even if we’ve yet to nail the start of the Big One. The 4461.25 Hidden Pivot in the E-Mini S&P futures that was sent out to subscribers Sunday afternoon is a good example. At the moment, it is working nicely for traders who bet it would contain Friday’s ebullience, if only for a short while.  That is how we roll: take a profit and swing for the fences with the 25% that remains. You don’t need to speculate wildly to benefit from the bull market’s robust insanity.

Why ‘Work-at-Homes’ Darken America’s Future

Bloomberg missed the real news in its flippant headline, “Return to the Office Five Days a Week? How About Never Again”. The article was just family-page pap about how work-from-home employees aren’t complaining about the indefinite postponement of a back-to-the-office mandate. With the delta variant on a headline rampage, exile in suburbia seems to suit most of them just fine, and to hell with the 6:00 a.m. commute. The much bigger meaning of this is certain to become the subject of newspaper headlines in years to come, when America’s biggest cities are further along the road to bankruptcy and obsolescence. Bloomberg’s editors will probably be the last to see this trend developing, so eager have they been to cheer-lead New York City’s supposed recovery from the lockdown. They would have readers believe, for one, that the billionaires who fled to Florida, which has no income tax, are eager to return to the Big Apple, where they would face an 11% income levy just for the privilege of watching DeBlasio run New York even deeper into the ground. Paper-Shuffling Sector Bloomberg.com’s blithe optimism aside, it’s painfully obvious that the U.S. economy, most particularly the colossally large paper-shuffling sector, no longer needs skyscrapers to conduct business. Nor will workers have much use for the services and amenities associated with those skyscrapers and with city life itself. This implies that buses, trains, trolleys and taxicab fleets, restaurants, stores, concert halls, parks, theaters and so many other things that make urban living worth the hassles will be used less and less over time. Do you see the economic problems this will create? If Bloomberg’s editors do, they didn’t say so; for nowhere in the article was there any mention of the fact that user-based revenues associated with urban amenities will either have to be massively written down or replaced by taxpayers. The drop in revenues is already being felt, although vast quantities  of Federal aid to cities has both masked and delayed the consequences. But make no mistake, taxpayers eventually will have to make up the shortfall, coughing up trillions of dollars over time to keep pension checks and healthcare benefits flowing to retired government workers. And although the cost of maintaining urban infrastructure will diminish somewhat with less usage, it will still be one of the biggest items in city budgets. Deflationary Spiral To escape the burden of steeply rising taxes, the affluent will step up their exodus from big cities, creating a deflationary money spiral that will feed on itself. This will worsen when subsidies from the U.S. Government are scaled back. But what would happen, you ask, if Congress enacts a $3 trillion ‘infrastructure’ package on the heels of the $1 trillion porkpalooza about to be approved? Almost for certain, much if not most of the money will be wasted in ways so infuriating that we cringe to imagine them. Optimists and editorialists should ponder the meager results of the U.S. Government’s $20 trillion War on Poverty, lest they grow overly enthused about what a $3 trillion shot-in-the-arm to political cronies might accomplish.

Why Low Rates Can’t Save Us

If you’re worried that interest rates are about to explode because of inflation, the graph above would seem to offer comfort. From a visual standpoint, the gentle rollover that has occurred over the last several months has sapped the vigor from a menacing spike that had pushed yields on the 10-Year Note from 0.40% at the start of the pandemic to a high of 1.76% in early April. The surge also failed to surpass previous highs near 2%, suggesting there is considerable resistance at that level. For the time being, this holds positive implications for the U.S. economy, since T-Note rates largely determine how much mortgage and corporate borrowers must pay for loans. It also helps to sustain the illusion of a stability in the global banking system. That’s because even a small tightening of the interest rate screw would have dire consequences if applied to the $2 quadrillion of borrowing amassed in the derivatives market. These financial instruments are used ostensibly for hedging, but over time their use has expanded to accommodate leveraged speculation on a cosmic scale. A Network of Nerves What would it take to crash this market? No one has a clue, although it is probably fair to say that it is as complex, and therefore ultimately as fragile, as a human nervous system. The synaptic connections are based on trust rather than neurons, however, and that is why a systemic failure would likely be total rather than merely in one “hemisphere” or the other. A further implications is that if stress levels got high enough, something akin to a stroke would result. Fortunately, with ten-year rates at a current 1.24%, we are well below the danger zone. That’s equivalent to a blood-pressure reading of perhaps 130/80. Realize, however, that this seemingly normal reading exists only because it is controlled by a Federal Reserve that continues to dispense massive doses of QE stimulants. Buyers of stocks at these levels implicitly believe either that a serious panic is not possible, or that if it comes, the Powers That Be will quell it by putting Jerome Powell on the evening news to narcotize the herd. Another Possibility Even if we are not tested in this way, there remains another scary possibility that almost no one is talking about: economic collapse caused not by soaring interest rates and a plummeting dollar, but by falling asset values. Real estate and energy resources are the chief sources of worry, since they are the main collateral for borrowing that has inflated the derivatives market to ten times the size of global GDP. Were prices for homes and crude oil to fall as hard as they did in 2007-08, nominal borrowing rates of 1.5% would turn into crushing real rates. This actually happened post-2008, when homes in the U.S. lost an average 34% of their value in less than three years. We would be in an economic depression now as a result but for the fact that the Fed had plenty of room to ease credit. Mortgage rates were around  6% at the time. Now, with rates already at historic lows below 3%, that remedy no longer exists. The system is far more leveraged as well, and energy-sector collateral is in a bubble. The crucial importance of this bubble to the delusion that we can avoid a ruinous deflation is underscored by the fact the stocks and energy prices move in lockstep together. Wall Street loves higher energy prices, but the romance is fated to last no longer than the bull market in stocks. When the two begin to fall in tandem, it will be as though there were no bottom. The Plunge Protection Team, SIPC, the FDIC and other would-be heroes of moral-hazard may attempt a rescue, but like the Charge of the Light Brigade, it will be doomed from the outset.

Deflation Hinges on a Dollar that Refuses to Die

My astute friend Greg Hunter at USA Watchdog weighed in recently with such a despairing outlook for the dollar that it’s probably a good time to determine whether the charts support this view. Here’s the post from his site, which over the years has featured my own thoughts on deflation, the global economy and other topics: The Fed keeps telling us that inflation is going to be transitory, and things will fall in price and go back to normal soon. Nobody is buying this in the real world where people are watching their dollars fall in value and are paying more for just about everything. In simple terms, the dollar is tanking. Maybe this is why JP Morgan is the first big bank (with many to follow) that is putting high-net-worth clients into crypto currencies. Bo Polny says this is all part of a “Jubilee year which began in September of last year and ends in early September of this year.” Polny says, “Expect to see in the next four to five weeks a fall of the dollar, the world’s reserve currency. This could start as early as next week causing a run into tangible asset that include gold, silver and crypto currencies like Bitcoin. All hell is about to break loose on evil.” Sounds ominous, for sure. However, it flatly contradicts a forecast I’ve held to for decades – that deflation would ultimately wreck the global economy, driving the dollar into such scarcity that many, if not most, Americans would have to barter to survive. This may seem hard to believe at the moment, given the Fed’s unprecedented monetary blowout and the illusory prosperity it has created. Most of the digital cash has gone into investable assets, triggering a seemingly unlikely run-up in stocks during a year of Covid lockdowns. It has also created a real estate bubble even more extreme than the one that popped in 2008, nearly taking the global economy with it. This Isn’t the 1970s We should note that the current inflation is very different from the one of the 1970s. That was self-perpetuating to the extent wages and prices drove each other higher in a seemingly endless spiral. The current inflation is not self-perpetuating; rather, it is being fed by an increase in paper wealth that will reverse and crash in the next bear market. Nor are people desperate to trade dollars for physical assets as occurs in a hyperinflation; mainly, it has been Baby boomers spending a significant portion of their paper wealth on second homes in desirable locations away from urban centers. Still, one might ask: With the Fed and every other central bank inflating like there’s no tomorrow, how could deflation possibly result?  The answer lies in the inescapable fact that every penny of what we collectively owe must ultimately be repaid –if not by the borrower, then by the lender. This implies, for one, that when Biden and the Democrats “forgive” student loans amounting to $1.7 trillion, creditors will eat the entire loss. Twelve zeroes worth of receivables will be wiped from their books with the stroke of the President’s pen; shortly thereafter, yacht prices will begin to soften ever-so-slightly in West Palm Beach, and the market for $20+ million homes in the Hamptons will appear to totter, producing small tremors in Aspen, Scarsdale and Atherton. Now imagine this implosion multiplied a hundredfold. That’s what will happen when the inevitable bear market in stocks unfolds. It will suck far more digital dollars into a black hole of deflation than the Fed could conceivably monetize in an unrehearsed attempt to hold off a collapse. The deleveraging will not stop until it has reduced the $2 quadrillion financial derivatives market to an infinitely dense singularity. A thousand financiers working 24/7 and backed by the full faith and credit of the U.S. Government will not be able to pry loose even a dime of credit from this market for at least a decade. That’s how long it will take, at a minimum, for a wrecked middle class to push their credit scores back above 400. Dollar Short-Squeeze The collapse will end our misplaced faith in a bank clearing system that is ultimately as fragile as crystal, rendering ATMs and credit cards useless overnight. Money markets will seize up like a flash-frozen ocean as lenders refuse to roll overnight loans, instead demanding settlement in cash. That’s when we will discover that real cash-dollars are actually in short supply. In the absence of a functioning market for digital dollars, the resulting short-squeeze on real ones will be like the squeeze that pushed the shares of Gamestop and AMC into the stratosphere. The comparison is appropriate because, like debt issued by those two companies, the dollar ultimately is just a worthless I.O.U. For the time being, however, the dollar will remain under pressure despite assurances from Fed bag-man Jerome Powell that inflation has peaked. We should note, however, that the dollar has not exactly collapsed under the weight of QE derangement. To the contrary, and as the chart above makes clear, the greenback is down just 4% from the sweet spot of its pre-pandemic trading range. Moreover, a key, long-term support at 90 has survived two brutal shakedowns this year. Although the support could conceivably give way on renewed selling, nothing in the chart says this is likely, let alone that the dollar is in a condition of imminent collapse. Bear Sinks All Ships It is even arguable that the dollar index’s sideways move since early 2015 has been base-building for a moon shot to 120 or higher.  That would be extremely bad news for anyone who owes dollars, since they would be far more difficult to come by. Unfortunately, this problem will eventually enmesh us all, since it is not just a matter of mortgages and car loans, but also of our collective liabilities for private pensions, Social Security and Medicare. These are the deflationary whales that will bear down on us when the actuarial folly that has sustained them lies fully exposed by a stock-market bear. The whopping debts that we owe ourselves cannot be monetized without hyperinflating the programs themselves into quick oblivion. That’s one reason why the economic endgame is all but certain to feature deflation rather than hyperinflation. If there is a silver lining, it is that deflation will visit pain on borrowers that is more or less commensurate with their sins of excess. It would also leave intact the banking system and other institutional conduits of credit.  Hyperinflation, on the other hand, would destroy the bond markets that enable lending, throwing the economy into a state of barter indefinitely. Could things ever get that bad? Most surely. It would simply reflect the deleveraging of illusory financial wealth that has grown to more than ten times the size of global trade in actual goods and services.  Like the stock market, the world’s financial system is trading at an absurd multiple. Even more absurd is the notion that the massive debt-overhang can be stage-managed indefinitely with a sham “taper” crafted by the charlatans at the central bank.

Dollar’s Fans Needn’t Fear Biden SDRs

The latest attempt to move the global economy away from the dollar’s dominance involves a plan by Biden to issue $650 billion of Special Drawing Rights (SDRs) through the IMF. Ardent fans of the greenback needn’t worry, however, since this sum, as large as it seems, is just a drop in the bucket compared to a derivatives market that supplies more than $2 quadrillion to the world’s biggest financial players. The dollar is the only currency big enough to handle their action, which dwarfs global trade in actual goods and services of no more than $90 trillion. Under the circumstances, it’s unlikely the dollar will be replaced any time soon. The $650 billion supposedly will enhance global liquidity, as though more liquidity were needed in a world where financiers can borrow practically unlimited quantities of money for next to nothing.  China’s communist government is backing the SDR expansion, although for reasons that are doubtless different from Biden’s. One suspects that globalists have Biden’s ear and that he is unwittingly going along with them because, well, because he was witless to begin with. For its part, China undoubtedly thinks more funny-money loosed in the ether can only be a good thing, since the CCP’s main enterprise these days is helping poor countries go deeper into hock for Belt & Road projects. Pinto Beans for the Poor The SDR initiative is being touted as a way to make the world more “green” and “sustainable,” which is another way of saying that anyone who opposes it is trying to make life even more miserable for the poor. Arguably, they will in fact be better off, since even if $600 billion of Biden’s giveaway goes toward purchasing fleets of Bentleys and sumptuous vacation homes for Third World dictators, the $50 billion that eventually trickles down will still buy a lot of pinto beans, Monsanto seed, prescription drugs and sacks of cement. Meanwhile, Biden and his commie friends can gin up as many SDRs as they want and it’s not going to change things significantly. Think of it as a game of Monopoly in which a splinter group called Park Place LLP is formed to generate side-action with $1,000 worth of scrip. That’s only about 5% of what the official bank holds, but because it is not nearly as leverageable or fungible as “real” Monopoly dollars, the partners will eventually fritter away their “SDRs” paying hotel rents, utility bills and jail fines. Similarly, players who are dealt Biden SDRs will be constrained from multiplying them in the way a single real dollar magically becomes 50. To avoid having to write another commentary about why the dollar is here to stay, let me address an ungainly theory that frequently resurfaces  – i.e., that America’s energy-producing enemies will gang up on the greenback by demanding payment in other currencies. The simple fact is, the world is perfectly happy paying for something as valuable and useful as oil with a currency that is in almost infinite supply. If Russia, Iran or OPEC were to demand payment in harder money – gold bullion, for instance — sales would quickly drop to zero. End of argument.

The Monster Rally and Its Deceptions

Rick’s Picks subscribers ended the week transfixed by a powerful rally in the E-Mini S&Ps whose inevitable destination was 4362.25. Why inevitable? Mainly because a chat-room ace whose trading system has been getting the big swings exactly right lately had said so the day before. If he were a pistol sharpshooter, this trick would be akin to turning a Roosevelt dime into a pinky ring at fifty paces. For not only had he chiseled the 4362.25 target in stone, he also provided the time of day when a profitable short position he’d advised earlier was to be exited and reversed for a further gain of as much as $3000 per contract.  You’d have to have been there to believe all of this, but even allowing for a little hyperbole, the feat handily refutes ‘fundamentalists’ who think technical analysis is voodoo. Fools Well Equipped Surprising as it may seem, however, the ability to predict trend and target with seemingly uncanny precision does not guarantee easy profits.  On the contrary, the opposite sometimes obtains, since the violent countertrend swings that invariably punctuate rallies tend to shake the confidence of even the most fervent believers.  In technical terms, it is a matter of valleys exceeding peaks as a stock makes it way higher. Thus does each $3 leap beget a pullback of $2 or more, subjecting the trader to at least $2 of risk for each new $1 of profit gained at the next high. Since no prudent system for managing risk can survive this rollercoaster ride, it is mostly fools who get rich, at least for a while, staying with spectacular rallies. Experienced traders understand that corrections tend to be as vicious as trends are steep, a fact that impels them to take partial profits on the upswings.  One can always play fast and loose, of course, forsaking risk management for the thrill of riding a Brahma bull. But because so many cowboys are known to go broke, buy-and-hold bets are wildly popular only among those who make their living gambling with other people’s money. I mean to impugn portfolio managers with this statement, but one could argue they are not really gambling, since they all hang together and toss every dime with which they are collectively entrusted at the pass line. A Few Daredevils Returning to that 4362.25 target we were so sure of:  That being the case, why didn’t we simply wait for the August E-Mini S&P contract to get there and then short the bejeezus out of it with a tight stop-loss?  In fact, that is what many subscribers appear to have done, judging from the discussion in the chat room. As might be expected, however, in a room that draws great traders from around the world, there were some cowboys who’d boarded near the lows and stayed aboard for the entire wilding spree. Those of us who were not so bold rationalized it thus: Why subject ourselves to a harrowing rocket-ride when we can make a one-decision trade shorting 4362.25 and know in just a few tense minutes whether we’re going to be right or wrong? Ahh, but that is where Mr Market’s deceptions are most seductive, since the ‘easy’ trade against the trend all too often winds up being harder on one’s nerves, even, than climbing aboard El Diablo near the low. In this instance, although the actual intraday high at 4364.00 was well within the limit of even the tightest stop-loss, it occurred in the final moments of the session — of the week, actually, since it was a Friday. What to do next?  Since there’s always a chance that geopolitical mayhem or Armageddon could occur over the weekend, even a trading yahoo would think twice before betting big on red/black at the bell.  If you chose to sit on the sidelines, please know that the powerful uptrend is likely to continue for as long as bulls and bears alike are scared to death of it.

So Maybe Gold Actually Does Suck

I was premature when I gave the green light to gold bulls five weeks ago.  “If you’re a bullion investor,” I wrote at the time, “you can buy the stuff now without fear or qualm.” Had you taken this advice, you’d have gotten aboard just in time to get smashed in the head, since gold was about to have its worst week in six months. I made my recommendation seem even more foolish by running it under the headline Gold Really Sucks. Here’s Why.  This was just a ploy to grab the attention of gold bulls, since the commentary itself, as readers soon realized, was quite bullish. So what changed my mind?  I’d like to say that fresh evidence on the charts swayed me. In fact, I actually ignored a flashing-yellow signal early in March, when GDX, the gold miners ETF, breached a key low at 31.22 from nine months earlier. This is shown in the chart, and it created a glow-in-the-dark ‘impulse leg’ that was unmistakably bearish. Unfortunately, my focus was elsewhere, mainly on a few subjective factors that were bound to mislead anyone looking for a long-elusive ray of sunshine in precious metals. For one, I noted, bitcoin was finally getting its comeuppance, presumably freeing up speculative energy for bullion. And for two, there had been no vicious takedowns in gold recently, ostensibly because the bad guys finally realized it was time for gold to start discounting the rising crescendo of inflation fears.  I was wrong on both counts, for gold and silver were about to get hit with their steepest two-day sell-off since November. Further selling mercifully stalled, but the jury is still out on whether another wave is coming. Rallies Died It took an email from a correspondent to open my eyes to the bearish reality of price action since last August.  The email featured the analysis of someone called ‘Plunger’ who posts on the excellent Rambus Chartology site. Plunger took great pains to separate himself from those who still cling to the notion that bullion’s slide since last summer, punctuated by exciting rallies that died, is merely corrective. It is bear-market action, clear and simple, he wrote, and I find myself agreeing. The good news is that, whether you call it a correction or a cyclical bear, it is occurring in the context of a much bigger, secular bull market that still has significantly higher to run. Here’s a chart with my target at 2285.  I should also mention that if Comex Gold were to fall a further 24% to the green line – bad enough, probably, to satisfy Plunger — it would generate a ‘back-up-the-truck’ buy signal, based on the rules of my Hidden Pivot System. How Much Lower So how much lower will gold and silver need to fall before a durable bottom is possible?  Plunger thinks we are nearing the end of bullion’s ‘disappointment’ phase and that a capitulation finale in GDX would be signaled by a drop below the March 2021 low, 30.72. I agree. Thereupon, my worst case would be 27.17, which is not too far from Plunger’s. And my best case?  I could see as little damage as 31.76, or perhaps 29.13.  Plunger evidently does not expect gold bulls to get off that easily, but his commentary seemed open-minded to the possibility — to the possibility, even, that he is entirely wrong, and that gold is about to embark on a huge bull run. That wouldn’t shock me, even if I’ve just acknowledged that the breakout I touted a month ago was more likely just a false start, one of many for gold.

Baseball a Cure for Covid Fear-Mongering

Fear of the much-ballyhooed Delta variant was nowhere in evidence recently at North Carolina’s McCormick Field, home of a minor-league baseball team called the Asheville Tourists. The team, a high Single-A farm club operated by the Houston Astros, filled McCormick’s 4000 seats to near-capacity, and there was nary a mask in sight. It was great baseball, which turns out to be the perfect antidote for non-stop Covid doomsday-porn emanating from Fauci’s office and amplified to a deafening pitch by his ignorant, Great Reset-obsessed lackeys in the news media. As fans of the game might expect, it featured entertaining highs and lows just like the majors. A towering pop-up above second base attracted enough fielders to catch a swarm of fireflies; instead, they caught nothing when the ball dropped between them. But a runner on first base looked even worse when he failed to keep running past second base even though there were two outs.  The defense redeemed itself with a spectacular diving catch in the ninth inning by the Tourists’ center fielder — a risky effort, considering there were no men on base and his team had a four-run lead.  Afterward, a terrific fireworks display sponsored by chain-grocer Ingles, rocked the neighborhood. ‘Delta’ Thrives on Ignorance For the good of America, Fauci and his Goebbelsian PR crew should take in a few baseball games this summer. Otherwise, they’ll continue to work overtime trying to convince us that ‘Delta’ is the most menacing development in all of history. But when was a virus variant ever more deadly than the original strain? If this were so, the variant, even if it tends to spread more easily, would quickly extinguish itself by killing off the host. Under the circumstances, how dangerous could it actually be, given that more than 99% of those who contracted the original strain recovered? Realize that in India, where ‘Delta’ was first detected, Covid cases declined 85% from the peak several weeks ago even as the variant became the dominant strain. And note as well that fewer than one person in 25 has been vaccinated in India. Not once have I heard the words ‘Delta variant’ during a so-far seven-week road trip that has taken me from South Florida to New England and most of the way back. Some of my friends speak of friends of friends who got sick or even died, and of how glad they are to be vaccinated. But if they feel threatened by the supposed killer variant, they are not wearing masks to guard against it. Nor are they telling their adult kids to get the jab despite the fact that Fauci, his vaccine Storm Troopers and the press are relentlessly pushing shots for everyone but infants.

Is Repo Madness Predicting a Crack-Up?

[The following was written by a San Francisco friend from the hedge fund world, Shawn Brown. It buttresses the suspicion that while there seems to be plenty of credit money available for speculation, the collateral behind it is getting thinner and shakier by the week.  The Fed, with $8 trillion of Treasury paper and other top-shelf collateral on its balance sheet, has monopolized the supply, leaving lending banks to scramble for collateral of their own that hasn’t already been hocked twentyfold. As a result, central bank interventions are becoming more frequent, more complex and bigger, to the point where even the experts are having trouble determining whether the banking system is headed for a crack-up far larger than the one that took down Archegos a few months ago.  RA] Why is the Reverse Repo Facility breaking records daily and the Federal Reserve returning hundreds of billions in foreign currency swaps weekly?  These two concerning but mostly overlooked items seem to coincide with Bill Hwang’s disaster at Archegos Hedge Fund. We still have very little clarity on exactly what happened with conflicting reports on the actual fallout. Whether the fund was naked short derivatives or concentrated long media companies, these positions resulted in tens of billions in losses to a number of Too Big To Fail banks. Whatever occurred, shock waves are still rumbling throughout the intertwined global financial system. Who Are Those Guys? The current explosion of usage from the Fed’s Reverse Repo facility began on March 26 — the same day Archegos ceased operations — with 12 Participating Counterparties exchanging $11.45 billion for Treasury securities. We aren’t allowed to know who they were because it might cause a run on the institutions, or so the story goes.  Fast forward to this past Friday morning and 61 Counterparties wanted to swap their idle cash for nearly three-quarters of a trillion dollars, or $747 billion, of T-Bills, -Notes and -Bonds.  Is this is why we are hearing the Temporary Open Market Operation might become permanent? Another curious happening at the Fed also began in earnest around the same time.  The FRB H.4.1 release for the week of April 1 noted Central Bank Liquidity Swaps returned over $325 Billion to Foreign Central Banks, which continues through this week’s release of another $350B.  Again, no information concerning which foreign central banks are receiving these mountains of fiat or why the FRB is returning the currency.  Prior to the Archegos collapse, H.4.1 releases have required infrequent and minuscule usage of foreign liquidity swaps. Blow-Ups ‘Concealed’? A Reuters dispatch dated April 2 appears to agree with our sentiment, “The meltdown of Archegos Capital Management LP, a New York investment fund run by former Tiger Asia manager Bill Hwang, has sent shock waves across Wall Street and drawn regulatory scrutiny in three continents.”  Is this type of risk-taking isolated, or are more blow-ups being concealed through Fed data releases?  As Former Fed Chairman Alan Greenspan famously stated, “I know you think you understand what you thought I said, but I’m not sure you realize that what you heard is not what I meant.” We live in a time when everyone seems to forget what happened yesterday, let alone “way back” in late March of 2021. Perhaps it’s time to stop providing custody and execution services to guys like Hwang, who was fined $44 million in 2012 for insider trading?  Who and why was this convicted scam artist allowed market access to trade through his renamed “Family Office”? Maybe the Prime Brokers who traded with Archegos were confident they’re also now TBTF. It appears the Fed will backstop everything from MBS to Corporate Bonds, why not total return swaps, too?  Paging the Ghost of Bobby Thomson to a white courtesy phone.

State Budgets Shout ‘TOGA!!!!’

Flush with stimulus, the states are in a spending mood that can be summed up in a single word:  TOGA!!!!!  Take Oklahoma. Their latest budget reflects an annual increase of nearly 18%, according to a report from the Associated Press. It includes bigger earmarks for education, corporate and personal tax cuts, credits for school choice and even for film producers.  In Florida, outlays will rise by about 11% to a record $101.5 billion.  The extra spending will provide “bonuses for teachers, police and firefighters, and new construction projects at schools and colleges.”  Believing they will still have money to spare, Florida lawmakers have also expanded sales-tax breaks for school and hurricane supplies and created a tax-free week for purchasers of museum and concert tickets and recreational gear for camping, fishing and surfing.  In New York, a $212 billion budget is nearly 10% higher than last year’s, most of it coming from Federal relief. The Cuomo government is planning to boost aid to schools by $1.4 billion, and spend another $1.3 billion to overhaul Penn Station, among other projects. What Could Possibly Go Wrong? Federal aid amounts to fully 15% of what the states took in during fiscal year 2019, according to Moody’s. Since they have until 2024 to spend the most recently disbursed Covid money, some states are waiting until later in the year to budget their windfalls. No question, increased spending by the states will have a bullish impact on the U.S. economy for the next several years. Even so, some are wondering what will happen when the money runs out. “I’m afraid that we are spending money and making commitments that we will not be able to sustain once that one-time federal money goes away,” said Sen. Bob Rankin, a Republican who sits on Colorado’s joint budget committee. Perhaps Rankin shouldn’t worry so much, since there is no law that says the federal money must “go away”.  This seems particularly true now, since the idea of free lunch is more popular than ever, gaining political support because it seems to be working so well. As how could it not? Besides financing a blowout in state spending, fresh digital dollars from Uncle Sam have caused stocks and residential real estate to skyrocket, consumer spending to overwhelm lockdown lethargy, and the economy to recover as though a world war just ended.  So what if grocery prices have shot up and no one wants to work!  Such concerns are a small price to pay for stimulus that has made the middle class wealthier than ever, at least on paper.  And never mind that if every dime of stimulus were banked against the states’ unfunded pension liabilities, the liabilities would swallow the entire sum without leaving an economic trace. Keynesian Quackery The biggest threat we face is that the short-lived, seeming successes of stimulus will make everyone a believer in Keynesian quackery. The British economist John Maynard Keynes hoodwinked many politicians and colleagues into believing the economy would benefit if the federal government paid workers merely to dig holes and refill them. This absurdity, never out of fashion on the left, ignores the common-sense fact that investment capital would take the hit and that its egregious misallocation would make us all poorer in the long run, not richer. Multiply the hole-digging brigades ten-thousandfold and you arrive at our current spending spree, a Covidpalooza of misallocation.  And who will pay for it?  Although the question has surfaced in recent debates on Capitol Hill, that doesn’t mean anyone takes it seriously enough to confront the answer. But make no mistake, the money-from-trees that has encouraged such extravagance by the states is just borrowing in disguise, and that means it will have to be repaid.  However, since the sums involved have grown far too large to repay with higher taxes, there are just two alternatives: 1) hyperinflation, which would screw lenders and reward borrowers while destroying all institutional conduits of borrowing and credit for at least a generation; or 2) deflation, which would leave the financial system intact while visiting pain on borrowers more or less in proportion to what they owe and what can be squeezed out of them. There are no other possible outcomes, even if politicians continue to pretend that trillions of free lunches can be served up indefinitely without burdening anyone but “the rich”.

Enjoy Inflation While It Lasts

If we’d known the pandemic would trigger the most reckless monetary blowout in history, could anyone have imagined that the U.S. dollar a year later would have fallen by just 14%? That doesn’t even qualify as a bear market, just a middling correction of a powerful bull run begun in 2008, a year ahead of the historic rally in stocks.  The Dollar Index was trading around 70 at the time, about to embark on a nine-year climb to 104 early in 2017.  It subsequently swooned as low as 88 early in 2018 but hasn’t traded any lower since; it’s currently at 90.12. That’s with the Fed showering trillions of dollars in helicopter money on America, a feat that achieved a dubious milestone recently when central bank purchases of Treasury debt exceeded purchases by foreigners. Biden for his part has been ramping up outlandish spending proposals, promoting the timeless Democratic canard that “the rich” will pay for it all. The proposals are likely to grow even more outlandish, since Biden fears that a Republican Congressional victory in 2022 could close the window of opportunity for a fiscal expansion dwarfing FDR’s New Deal. Stimulus ‘a Drop in the Bucket’ So why do I continue to insist nonetheless that we are headed into a catastrophic deflation? The short answer is that even tens of trillions of stimulus dollars is just a drop in the bucket compared to a deflationary juggernaut poised to suck inflation into a black hole. When the bubble finally pops, here’s a list of things that will deflate like a tire with a hole in it before the central bank has a chance to even attempt a resuscitation:  * A hyperleveraged derivatives market valued notionally at $2 quadrillion  * The public-pension systems of two-dozen states  * Residential and commercial real estate currently valued at around $55 trillion  * Money market instruments worth $3.8 trillion that lubricate the financial system short-term Can you see the problem?  Not that anyone doubts the Fed’s determination to keep the system liquid at all costs.  It’s just that the central bank’s statutory and logistical ability to do so will be outmatched by the precipitous shrinkage that some black swan is destined to cause. A Powerless Fed In the meantime, it is a given that the dollar will continue to sink, pushing the price of everything higher. But don’t confuse this with 1970s-style inflation, when wages and prices interacted to produce a steady rise in both over a period of years. In contrast, today’s inflation is feeding off an asset bubble that could collapse overnight. When this happens we’ll discover that although the Fed excels at Ponzi schemes to fatten investable assets, it is powerless to rescue agencies that spew real cash-dollars continuously. The public pension system, for example. Imagine what will occur when the Treasury starts sending out monthly checks totaling $30 billion or so to retired Illinois workers. Within days, two dozen more states whose pension funds are nearly as bankrupt will line up for their bailouts. Rescuing all of them would be tantamount to hyperinflation — a self-defeating exercise, since, by the fourth or fifth month, a $2,500 check would not even buy groceries.  And well before then, of course, private-pension managers would march on Washington seeking handouts for their clients. Together, these problems and sundry others will ultimately overwhelm whatever short-lived, nuisance-inflation lies just ahead.  But hyperinflation? That would require the mass epiphany that bogus dollars are about to be printed in such quantities as to render them absolutely worthless. This seems highly unlikely, given that Biden’s rampant stimulus proposals have stirred opposition, including from a few Democrats whose votes would be needed to enact his plans.  There is also the question of where people would stash their money in lieu of holding dollars perceived as sinking fast toward worthlessness. The stock market and real estate are obvious answers, but they are already in bubbles doomed to collapse. Any way you slice it, deleveraging is how this bubble will end.  “Inflate-or-die” policies have just about run their course and will require only a shove from a bear market to go over the cliff. But if you believe that bear markets no longer happen, then by all means, bet the ranch on inflation.

Gold Really Sucks. Here’s Why…

Sucks? Yeah, sure. Maybe in the eyes of crypto fanatics and the quacks who re-invent monetary policy every month. In actuality, few things in the material world suck less than gold. Sorry to resort to headline flim-flammery to get your attention, but it was time to upgrade our enthusiastic endorsement of gold — and silver! — to an outright declaration of love. If you’re a bullion investor, this means we are confident you can buy the stuff now without fear or qualm. And if your safe deposit box is already filled to overflowing with ingots and precious-metal coins purchased when gold was $300 an ounce, it’s time to rent more space. You can even tell kin and friends that bullion is about to embark on a long, profitable ascent without having to worry about their getting burned. More likely is that they will thank you profusely a year from now, especially if the money they’ve plowed into metals was drawn from tech stocks and other appallingly overpriced shares being distributed to greater fools these days by Wall Street’s mountebanks. Bullion’s Correction Is Over Regularly readers of Rick’s Picks will know that we quickened our bullion drumbeat earlier this month after Comex futures exceeded a small but technically significant price peak on the daily chart just above $1800. Nothing as promising as this had happened since December, and it suggested that the painful correction begun from around $2060 last August was close to an end. There were more bullish signs to follow. For one, minor ABCD rallies began to exceed their ‘D’ targets, even as corrections fell shy of them. Under the rules of our proprietary Hidden Pivot System, this was unmistakable evidence that the dominant trend had shifted from bearish to bullish. Perhaps even more noticeable was the absence over the last couple of months of vicious takedowns. Gratuitous swoons of $80 or more had become an increasingly frustrating feature of a stagnating bull market that was taking its sweet old time preparing for an assault on last summer’s record highs. At least one other factor seemed to have been working against bullion: crypto craziness. Much of the speculative capital that ordinarily would have flowed into gold and silver because of inflation fears was instead flowing into bitcoin. Some highly visible players even asserted that bitcoin was the better hedge against inflation. It was only a matter of time before they smartened up and began to reverse the investment flows. The shift accelerated recently went Elon Musk criticized the ‘mining’ of bitcoin as environmentally wasteful, and China announced a crackdown on bitcoin speculators. Silver Supply Tightens  And then came this epiphany: A friend of ours from the hedge fund world who has been accumulating silver aggressively since December said it is getting harder to buy. Last week, for instance, he ordered a hundred 1000 oz. bars worth about $2.9 million from Monex.  Usually it takes no more than four business days for the ingots to arrive, but this time Monex told him there would be a three-week wait, even if he reduced the size of his order to as few as 20 bars. Monex also recently discontinued a program that allowed customers to trade against warehoused silver with 25% margins. If physical silver is in critically short supply, the evil wizards who manipulate its price would prefer that you not know the extent of it, at least not yet. Late Sunday night, July Silver was up a measly 25 cents, an eerily becalmed dinghy in the path of a gathering tsunami. Gold looked just as sleepy, with a gain of just $5 in thin trading. Don’t be fooled by quiet markets.  According to my hedge-fund friend, some of the biggest funds have been accumulating silver, presumably before they allow all hell to break loose in the form of a short squeeze. With evidence mounting that demand from such sources is close to overwhelming supply, it’s hard to recall a moment when owning bullion as an investment was more attractive than now. _______ UPDATE (June 3, 10:21 a.m. ET): Ha-ha. Just when I mention “no takedowns,” DaSleazeballs hammer down gold by $45. The proximal cause of this fake selloff, abetted by evidently still abundant, fearful clowns, was allegedly ‘bullish’ unemployment data. Stay the course!

Why Tax-Free Munis Are Still a Buy

Investors who feared muni-bond defaults when the pandemic first hit created unusual opportunity for those willing to buck the tide. One of the winners was Doug Behnfield, a Boulder-based financial adviser at Morgan Stanley whose ideas have been featured here many times over the years. Doug is not only one of the savviest investors I know, he is one of the savviest guys. Now, he is quite bullish on municipal bonds for reasons spelled out in a report that went out to clients in April.  He also thinks Fed Chairman Jerome Powell’s confidence that the inflationary effects of stimulus and fiscal spending will be “transitory” is well founded and that this has already been discounted by stocks and bonds. Doug and his clients enjoyed an exceptional year in munis because he started buying them when others were dumping them. Prices subsequently recovered and then some, yielding excellent gains for anyone who’d faded the panic.  Doug is a canny contrarian who shares your editor’s view that deflation poses a greater threat to the U.S. economy than inflation. More immediately, he expects pent-up demand to produce a subdued recovery rather than boom times. It will take years for growth to recover, he says, in part because consumers have learned beneficial lessons of frugality. A Limited Supply There are additional factors that have made Doug especially bullish on municipal bonds. For one, they are exempt from federal income tax. Substantial tax hikes planned by the Democrats will therefore make municipal bonds even more attractive.  Munis also are exempt from a tax that affects mainly the wealthy: the 3.8% levy on investment income under the Affordable Care Act.  Limited supply is another reason munis stand to do well over the next couple of years or longer, he says. Cities will not have to raise as much money with bonds because the states have received hundreds of billions of dollars in stimulus grants. You can access the full report by clicking here.

Greasing the Slide Toward Deflation

With home prices pumped to record levels, we are hearing more and more about Uncle Sam’s plan to avoid sticking it to taxpayers when the next crash hits. Although it’s always wise to have a plan to deal with catastrophe, especially one that is inevitable, there are reasons to doubt that a mortgage market valued at $12 trillion could unravel without taking the economy and much else — including, conceivably, our system of governance — down with it. Consider that Fannie and Freddie, ground zero in the 2008 crash, still own roughly half of all U.S. mortgages — as much as the three largest banks — but lack reserves sufficient to cover more than a small fraction of bondholders’ losses if it happens again. Of course, the next crash could conceivably be worse, since the financial system is much more leveraged than then. That’s a concern the Feds may not have fully considered when they created “living wills” for financial institutions under the 2010 Dodd-Frank bill.  The law requires large banks to file workout plans that would seek to mitigate the risk of upending the financial system and the economy while accountants deal with the quagmire. Extending this rule to the GSEs reportedly is the last piece of legislation needed to complete the Dodd-Frank reforms. ‘Affordable Homes’ a Gimmick We should all be grateful that someone in Washington has thought this through. But how deeply? As former heavyweight champ Mike Tyson famously said, everybody has a plan until they get punched in the mouth. And what a devastating punch this one would be. My own forecast, which predates the 2007-08 real estate collapse by more than a decade, calls for a 70% plunge in home prices, with losses on vacation homes reaching as high as 90%. This may sound overly pessimistic, but recall that we got nearly halfway there in the aftermath of the 2007-08 crash, when the average home lost 35 percent of its value. In the recovery since, unfortunately, prices have gotten even more pumped, goosed to a significant extent by private equity’s aggressive move into the home rental market. They’ve bought or built homes to lease to people who manifestly cannot afford to buy them. Arguably, a financial whiz could not have come up with a better scheme to reconstitute the weaknesses in subprime lending that gave the 2007-08 crash such a wallop. Under the circumstances, when that punch in the mouth comes, it seems likely to inflict more damage than those who think we’re prepared for it may be imagining. It’s not difficult to foresee what would happen next: Most homeowners would be underwater on their mortgages, with lenders neither wanting, nor able, to evict them. To avoid this, most mortgages would eventually have to be rewritten as leases. This would be the best way to squeeze blood from a stone, tailoring monthly payments so that even the nearly destitute could avoid homelessness during the coming Second (or Third if you count 1873-1895) Great Depression. The Global Ponzi It also explains why America’s economic day of reckoning will be marked by ruinous deflation rather than by an inflationary spiral that nearly everyone these days seems to expect. Forget about Biden’s fiscal blowout and rampant Fed stimulus, which supposedly are about to send prices out of control. Only for the time being will this illusion persist.  For in the end, both Biden and the Fed together will have added only mere trillions of inflation to the economy — a pittance compared to the deflation that will occur when the financial system’s $1.5 quadrillion derivatives Ponzi — that’s $1,500,000,000,000,000 — implodes. The deleveraging tremors to follow will reduce the asset side of the global ledger by perhaps nine or ten zeroes as deflation runs its course. The sucking power of this black hole will come from a stock market crash, a collapse of asset values in general, and from tens of millions of strapped homeowners who owe more on their homes than they will ever be worth. Although a decision by The Government to hyperinflate would rescue them, allowing them to effectively stiff lenders with worthless $100,000 bills, does anyone actually believe this could happen?  Not if the banksters and their lackeys on Capitol Hill have their say, it won’t. And that is why deflation will rule the endgame; for there is no way borrowers will be allowed to skip free on their mortgages. The real burden of what they owe will increase with each deflationary turn of the screw, and the economic devastation this will cause cannot be legislated away. As for the Rich… Nor will the 1% get automatically richer during what will be fundamentally a deleveraging event. What they own now is heavily salted with inflated paper assets that will be as worthless as Pokemon cards when the dust has settled. What income they are able to derive from investables of the highest quality’- — i.e., prime rental property and energy resources —  will depend on having desirable tenants and a modicum of economic activity.  Bugatti Veyrons, Patek Philippes and Hermes handbags will still be selling — just not as many of them.  Ingots of gold held for such a day will still buy such luxuries, but don’t expect to trade bitcoin for them at the current rate of exchange.

When Bulls Turn Certain

We went out on a limb here last week with speculation that, just maybe, the bull market was topping. Alas, Friday ended with a short-covering orgy that bloodied bears, leaving the boldest of them festooned on the ropes. My hunch had been rooted in technical factors, including an ominous head-and-shoulders pattern that has been evolving since January in IWM, a vehicle that tracks the small-cap Russell 2000. Unfortunately for bears, rather than dropping into a steep dive like the textbook says it should have, the index tacked on five new bars to the right shoulder, turning its promising symmetry into asymmetrical dross — a mocking, rubberized Mona Lisa smile. Similarly, the E-Mini S&Ps had seemed well poised for a long overdue plunge. They’d turned down sharply the week before after getting within an inch of a major ‘Hidden Pivot’ resistance that was capable in theory of stopping a buying stampede. By Friday’s close, however, El Toro had gored the resistance and was snorting flames. In both instances, the geniuses who purport to be “managing” your and Other People’s Money provided bullish spin and buoyancy. But when the rally threatened to turn ballistic on Thursday, bears scrambled to buy ’em back lest they get trampled this week by Wall Street’s recurrent homage to Pamplona. Can you blame them for panicking? With the Fed monetizing full-tilt and Joe Biden hawking a version of the New Deal that makes FDR’s look miserly, who would be so foolhardy as to bet against the asset bubble? Add corporate share buybacks to the raucous mix of monetary and fiscal stimulus and it becomes difficult to imagine how the bull market could possibly end. Apple’s announced $50 billion buyback alone will help sustain the illusion of health in the U.S. pension system while eliciting more unearned huzzahs for Wall Street’s best and brightest even though they’ve been on autopilot since 2009. Bitcoin’s Awesome Rumble And yet, there was the sobering spectacle of bitcoin, the most wildly deranged vehicle of them all, acting like there might actually be a tomorrow. It has been flouncing ungainfully since early March, belching fire and making hellacious noises like a dragster waiting for the amber light to change. But amber has persisted for too long and undoubtedly is making the crypto crowd stir-crazy, since none of them doubts that $100,000 bitcoin is coming eventually. Seasoned commodity traders know better, however, and are doubtless preparing not for inflation to go vertical, as nearly everyone seems to expect, but to be asphyxiated by some turn of events too mundane to have been predicted. In the meantime, bullish sentiment appears but one strong rally removed from becoming bullish certitude. If the upsurge in shares comes amidst a summer of post-lockdown jubilation, that would be good reason to secure the hatches and reef the sails. Hurricane season has produced no disasters on Wall Street that crypto’s most avid traders would recall, and that is all the more reason to take seasonality quite seriously with the approach of autumn 2021.

Here’s One Fraud We Can Eliminate

First, let me titillate all of you die-hard permabears with a ray of hope:  A potentially important top may have formed last week in, respectively, the E-Mini S&Ps and in IWM, a proxy for the Russell 2000. The former stalled inches from a ‘Hidden Pivot’ resistance at 4222.82, while the latter turned down precisely on schedule after tracing out the right shoulder of a nasty-looking head-and-shoulders pattern. I must caution you against making too much of this, however, since the stock market since 2009 has blasted free of a dozen similarly daunting predicaments, even achieving enormous gains during an economically devastating pandemic. Still, one can always hope that the time for a long overdue and presumably healthful correction has finally arrived. Just one additional note of caution: If stocks bull-doze their way higher next week, the S&Ps should be presumed headed to at least 4536, a level that would equate to a 3000-point Dow rally. Now on to something with more impact on our day-to-day lives: auto-warranty scams. This plague interrupts tens of million of us each day with robotic phone calls offering worthless car-service agreements. All of us have received scores if not hundreds of these nuisance calls over the years, sometimes two or three of them in a single day. Supposedly, if you follow the voice prompts, you can purchase an extended auto-service policy for $3,000 that will turn out to be useless when it comes time to file a claim. Big Money Despite this, the scam is obviously making some crooks a lot of money, since the calls — billions of them — just keep coming and coming and coming. Mine come mostly from spoofed Colorado numbers (where I lived for 20 years) and hit in the late afternoon or early evening. Although I use a call-blocker that cuts the robot’s message short, my Android phone still rings or vibrates to announce the call. One might think there would be effective ways to deal with this nuisance, but as far as I have been able to determine there are none; that’s why the calls never cease.  Although there are web sites that allow one to file complaints with the FTC or the FCC, this is like emailing a county clerk in San Francisco, Los Angeles or New York trying to get a pothole filled. So what can we do about it? My suggestion is to set up crowdfunding sites to accomplish what the government evidently cannot, or will not, do — i.e., find the perps and punish them severely. Publicly hanging these scumbags would enjoy strong popular support and doubtless discourage imitators. But short of that, we might hope to put a few of these cockroaches behind bars for a few years. There’s always the possibility we’ll be dealing with some Kazakhstan hacker who’s as difficult to corner as a Yeti. But where there’s a will there’s a way, and with enough donations it should be possible to bring auto-warranty douche bags to justice, if not to the scaffold.

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