Million Dollar Gold and Global Liquidity
Million Dollar Gold and Global Liquidity
Gold, the election, and Powell taking his shirt off
Gold has been making headlines this week for crossing $2500. That’s the threshold at which, apparently, the average gold bar is worth $1 million.
It's a strange fact but a good headline.
Gold has quietly done very well for a few years now. I say quietly because outside of a few headlines here and there, as it has broken through milestones, you don’t hear about it much.
This year, it’s really breaking out.
One interesting thing about gold is how wrong the headlines seem to be about it. In 2022, people were writing about gold doing well as a war-time hedge, while the Fed was aggressively hiking rates.
Now, gold is supposedly doing well because the Fed is cutting. Curious.
I own gold in my core portfolio and trade it here and there. I believe in gold for the same reasons I believe in crypto: Gold is a sponge for global liquidity, and we are in a global liquidity feedback loop.
Modern Monetary Theory
Since the economists came up with this tremendous new theory (MMT) on why governments can spend whatever they want without a second thought, the writing has been on the wall.
The US Government is in a deficit spiral. As we borrow more to spend more, our interest payments rise, and the deficit increases.
If you’re a history student, you know these situations only end one way: major upheaval.
I don’t want to get too deep into history here, but if you allow me one quick digression into Poli Sci, I think we’ll both be better off for it.
Rulers who want power in a democratic system have to promise voters something. Then, to stay in power, they have to promise them more. Meanwhile, their opponents face a similar dilemma—how to get more votes than the other guy promising bread and circuses.
The answer is simple: Promise more bread and crazier parties.
Autocratic rulers have the same issue, but the transfer of power in those regimes happens so infrequently that the cycle plays out much slower.
In a democratic system that cycle plays out every election.
We are seeing it now with our current election. Both candidates have proposed child tax credits. Trump first proposed $5k, Kamala noticed that was working, so she proposed $6k.
The story's morale here is that the deficit is not going away.
The Endgame of Deficits and Debt
I’m not one of these doomers saying the deficit is a looming problem. Those people end up being Chicken Little, calling for disaster for years.
Chicken Little aside, a real spiral is happening. As the government continues to run deficits, interest rate expenses go up. That leads to higher deficits, which leads to higher borrowing, etc. Note the chart below is slowly angling upward.
The only endgame to this is:
Hard Default: We just don’t pay
Soft Default: Currency debasement
I believe Gold is picking up on this endgame possibly because other central banks have decided to hold more Gold instead of holding Dollars. Possibly because someone in the US Treasury Department has realized it makes sense to exchange dollars for Gold today, given the endgame we are headed toward.
This is the basis of most of what we do in this publication: Bob and weave around risk assets to ensure we aren’t holding the doomed Dollar.
Structural Doves
Jackson Hole is this week, and when we think about the Fed, it’s crucial to remember this fiscal predicament for one key reason. The federal government's interest expense is not one of the Fed’s mandates, but it is a reality they have to face. The higher the Fed Funds Rate stays, the more expensive it is for the Government to finance its spending.
This is why “higher for longer” in the true sense of the term has always been a bit of an impossibility. Yes, we have had higher rates for longer than the preceding 20 years. But there will never again be a 20-year period of 5% Fed Funds rates in the USA, or anything like it.
At the last few Jackson Holes, Powell has been hawkish. Markets have reacted negatively to them.
This whole situation tells me that Powell has been hawkish because he has to be to get inflation to fall. Deep down, he is dying to cut like everyone else.
Still, he has shown great composure and discipline as Fed Chairman. We can’t expect Powell to “capitulate.”
The market is pricing in a 70/30 chance of 25/50 bps cuts. I think the chance of a 50bps cut is lower than that. To me, it’s very, very likely that Powell will put us on a -25 bps per meeting plan for the foreseeable future.
People are pretending that the Fed's failure to cut 50 bps will crash the market. I don’t believe that.
The most bullish outcome has always been an economy that slows, because you need slowing to fight inflation, but doesn’t crack. Followed by a non-reactive Fed slowly and deliberately easing policy back into an expansionary zone.
The Writing On The Wall
Cash is trash. The Fed wants to cut as strongly as you do. We just need to fade a recession; then, we can all get rich watching the cycles play out as we have foreseen.
Provided we click the right buttons.
Good luck out there.
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Disclaimer: The information provided here is for general informational purposes only. It is not intended as financial advice. I am not a financial advisor, nor am I qualified to provide financial guidance. Please consult with a professional financial advisor before making any investment decisions. This content is shared from my personal perspective and experience only, and should not be considered professional financial investment advice. Make your own informed decisions and do not rely solely on the information presented here.