The fall of the dollar is not the fall of the dollar… It’s the fall of the American empire.
– Hugo Chávez
RANCHO SANTANA, NICARAGUA – Bad action yesterday. But a big bounce is again in the cards for this morning. Bernie? C virus? Who cares? We’ve got Joe Biden and an even lower Federal Reserve rate!
We still don’t know which way the markets are going. But the confusion… absurdity… and volatility bespeak not merely a routine market correction, but a 21st-century nervous breakdown.
This giant Humpty of an empire – debt-drenched, bent by age and debauchery, befuddled by decades of wacky monetary policy – is slipping off the wall. And the Fed can’t do anything about it.
Note what happened in our favorite indicator – the Dow-to-Gold ratio. As colleague Tom Dyson wrote here, its 200-day moving average crossed over to the downside. In other words, it gave us a “buy” signal. Buy gold that is. Dump stocks.
We didn’t really need the signal. Sticking with our core timing program, we buy stocks when we can get the Dow for five ounces of gold… or less. We stick with the position until the Dow stocks are worth more than 15 ounces of gold, then we trade our stocks for gold. Easy peasy.
The Dow-to-Gold ratio went over 15 in 1996. So the bulk of our money has been out of stocks ever since. (The exception is that our old friend Chris Mayer still manages a nearly permanent portfolio of deep-value stocks for us. We stick with it no matter what the stock market does.)
So we missed the fireworks from ’96 to 2000, when the Dow hit its all-time high in terms of gold. But we also missed the crash that followed… and the crisis of ’08-’09, too.
And now, stocks are nominally four times higher. Did we miss a 300% run-up? Nope. Because gold ran up, too. Measured in gold – the only true money – stocks are almost exactly where they were 24 years ago. And during those 24 years, we believe the empire peaked out.
In other words, with the gold we got when we turned in our stocks in 1996, we can now buy back into the market on the exact same terms.
But we’re sticking with our plan. We’ll hold gold until we can buy the Dow for five ounces.
But the Dow-to-Gold ratio isn’t the only thing cautioning us out of the stock market. There are two other warning signs…
First, take a look at the transports. According to classic Dow Theory, it’s the transports that tell you what is really going on.
The Fed might jive up stock prices generally… but the transports tell you if the goods are moving.
Trucks, trains, ships – all products have to get where they are going somehow. So, if there is no upward trend in the transports, a boom in stocks will be false… tentative… and short-lived.
And yesterday, while the whole market sold off, transports sold off even more. A midday report from MarketWatch:
The Dow Jones Transportation Average is falling 195 points, or 2.1%, and has given back everything it gained in the previous session’s big stock market bounce, and then some. All 20 index components were losing ground. […]
The Dow transports, on track for the lowest close since Jan. 7, 2019, had gained 0.9% on Monday after plummeting 14.9% over the previous six sessions. In comparison, the sister Dow Jones Industrial Average fell 2.5% on Tuesday, after soaring 5.1% on Monday, which followed a 13.0% drop the previous six sessions.
The Dow transports has now lost 18% since Jan. 16, when it closed at the highest level since Oct. 3, 2018.
And there’s one further straw in a strong wind: The yield on 10-year Treasury bonds – the common brick upon which rests the whole U.S. financial world – fell below 1% for the first time ever. Since consumer price inflation is running over 2%, the net real return for lending money to the feds is MINUS 1%.
This means three things: First, people are running scared. They want what they see as the safest refuge in the financial world – U.S. bonds. Second, the economy is softening. The falling T-bond forecasts recession ahead. Third, speculators expect the Fed to buy more T-bonds at higher prices.
Of course, it is not our place to advise the august Fed governors on how to do their job. But in the spirit of civic mischief we offer this little hint about how an Inflate-or-Die economy works.
Once you begin inflating… you have a period in which, by decisive and steadfast action, you can undo the damage and return to a more-or-less healthy and honest economy. That is what Paul Volcker did in 1980.
It’s too late for that now. When an economy becomes fully addicted to your funny-money stimulus, you can’t take it away. The withdrawal pains are so severe that, politically, it is impossible to do.
Businesses, larded up with debt, will fail. Rich campaign contributors will close their wallets. The voters will howl for more giveaways just as tax revenues decline and deficits soar.
And economists at Harvard and the International Monetary Fund will tell you that you are a fool for “withdrawing stimulus” when the economy needs it most.
So, you have to keep adding stimulus (inflation… liquidity… etc.). But it’s not enough to add what the market expects. That is the error the Fed made yesterday. A 50% rate cut had already been fully priced in.
“Buy the rumor, sell the news,” say the old timers. Speculators know as well as we do that the Fed is in an Inflate-or-Die trap. Then, when the Fed only cut the expected 50 basis points, they sold.
An economy that depends on inflation (more money and credit from the central bank) is inherently unstable. It can’t stand still. The feds have to up the ante all the time or it collapses in on itself.
So heads up, Jerome Powell. If you want to join Alan Greenspan on the “Committee to Save the World”… or join Ben Bernanke as The Atlantic magazine’s “Hero,” you’ll have to do better than a measly 50 basis points.
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