“Calm” Before The Storm
For centuries, if not millennia, the concept of financial “calm” had a patently obvious, nearly objective, definition. Which was, for the most part, steady economic activity; modest market volatility; and, for the most part, no major cataclysms – either perceived or actual. Sure, stocks had big moves – both up and down. However, within a largely free-market environment, such moves were neither worrisome nor particularly impactful on other business sectors; let alone, assets classes, global economics, or sovereign stability. When “major events” shocked the markets – such as the 1987 crash, for example – they rarely lasted long; particularly in the post-1971 fiat world, when an unsuspecting world didn’t realize the artificial debt capacity it was “papering over” such events with would inevitably run out.
Prior to 1971, financial and economic shocks were, for the most part self-correcting. Whereas, after the gold standard was abandoned – particularly after the global economy peaked in 2000, and broke in 2008 – said shocks were, as a policy, “absorbed” by extraordinary monetary policy. To wit, this incredible chart depicting the expectation that, for the first time ever, Central banks are expected to monetize more than half of all 2015 issuance.
I have been a financial analyst for 26 years, and never could have imagined that the profession I so diligently studied would be rendered useless by such manipulation. However, this “new financial order” decidedly has a “fatal flaw”; which is, that no matter how much markets are rigged; economic data fudged; and perception “molded” by propaganda, “Economic Mother Nature‘s” immutable laws cannot be usurped for long. When losing money in financial markets, “not long” may be an irrelevant term. However, in the big picture of things, it really and truly isn’t – particularly if one avoids catastrophic investment risk (like mining shares, for example).
I mean, consider that the Euro currency, a massive project uniting the economies and finances of 500 million people, is on the verge of collapse after just 15 years; or, for that matter, that the supply/demand balance of physical and gold and silver, after 15 “long” years of historic price suppression, has become historically tight. Conversely, just seven years after crude oil and copper prices surged to $150/bbl and $4/lb, respectively, their supply/demand imbalances have never been larger; and likely, care of said “extraordinary monetary policy,” will be for years to come. In other words, financial and economic relationships – and dogma – can change quite rapidly, and usually do.
Presently, we are at the crossroads of political, economic, and social history. No singular event yet defines it; but clearly, the pending breakup of “Europe as we know it” has the potential to lay such a claim. Or, for that matter, the escalating Ukrainian conflict; emergence of the “Sino-Russian Economic Bloc; or perhaps, widespread social unrest, as an exploding dollar causes rapidly rising global inflation. And this, amidst a broadly “deflationary” economic environment destroying nations, corporations, and individuals alike; whilst, paradoxically, their costs of living inexorably rise, as inexorable money printing pushes the price of nearly all “need versus want” items higher. And by “need versus want,” I’m not just speaking of food, health insurance, and rent – but “indirect” costs like fees, surcharges, and taxes. Not to mention, the lethal combination of zero interest rate policy and said fees and surcharges at banks; causing savings to actually decline, as the cancer of “negative interest rate policy” prevents savers from keeping up with inflation, no matter how “low” the government purports it to be.
This past month alone, we have witnessed more “horrible headlines” than I can remember; at the least, on a par with the darkest days of the 2008 crisis. Yet, the unprecedented money printing, market manipulation, and propaganda scheme that accompanies it has created a perception of “calm”; that is, a “new” kind of calm, in which catastrophic political, economic, and financial events are temporarily ignored. Instead, we see record valuations of financial assets, amidst the objectively worse fundamentals in memory, and the lowest valuations of gold and silver in decades – if not centuries – relative to their own, wildly positive fundamentals. Clearly, no one knows exactly how long such dichotomies can last; but one thing we do know, is that physical gold and silver cannot be manufactured at will, even if mining shares can.
Not to mention, actual economic activity, as opposed to the flat-out lies reported by the Bureau of Labor Statistics. To wit, this morning’s unexpected plunge in small business sentiment, and GDP-busting collapse of corporate inventory growth, yielding America’s highest inventory-to-sales ratio since…drum roll please…mid-2008. Let alone, the giant pink elephant in the room of $51/bbl oil, which is tightly strangling the highest paying, largest capital spending industry in America; and, for that matter, much of the world. TPTB attempt to counter said reality with a blizzard of hyped-up, propagandized “bullish data points” – accompanied by perception-altering financial market algorithms. Not to mention, said algorithms’ utilization around myriad “important events” – like Fed meetings and Greek elections, for example – to prevent destabilization of said “calm.”
Today, for example, we’re being fed “rumors” that the Euro Group may grant Greece a six-month bailout extension; which care of PPT stock buying, and gold suppression algorithms, is being spun by the MSM as “bullish.” The fact that such rumors, as usual, have not been confirmed; or more importantly, that the explosive debt accumulation such an event would entail is not even remotely positive, is yet again, temporarily ignored. Not to mention, the real significance of such an event, were it to be true. Which is, that Greece can in fact “take down Europe” if it undertook a “Grexit” from the Euro currency, and defaulted on its debt.
I’m quite curious to see what occurs at Wednesday’s EU Summit; as given the February 16th ultimatum given to Greece last Friday, if the Euro Group truly intends to “back down” – in what would amount to an historic show of political weakness from the Euro Group’s “Goliath” to Greece’s “David” – it will likely reveal such a stratagem at this meeting. And trust me, if they do in fact back down, it will decidedly NOT be considered “bullish” for the cancerous Euro; particularly as much bigger PIIGS – like Spain and Italy, for example – will demand similarly lenient treatment; not to mention the Syriza-like political parties rapidly overtaking them.
Frankly, the singularly most comical aspect of today’s artificial “calm” – before the political, economic, financial, and social “storm of the century” inevitably arrives, is this week’s comical attempt to push the benchmark U.S. Treasury yield above 2.0%, following its massive plunge last month. In other words, can TPTB really convince the world of a U.S. economic “decoupling” that doesn’t exist, solely on the basis of an historically fraudulent employment report?
Only time will answer these questions; but again, “Mother Economic Nature” has never been defeated. And today, against the weakest enemy she has ever faced – in terms of its dire economic and financial condition – the odds are heavily in favor of an onslaught. Be it Greece, the U.S., or otherwise, something will break up the “calm before the storm.” And when it does, if you haven’t already protected yourself from its waves and gusts, you may never again have the chance.
Courtesy of http://blog.milesfranklin.com
Andrew ("Andy") Hoffman, CFA joined Miles Franklin, one of America's oldest, largest bullion dealers, as Media Director in October 2011. For a decade, he was a US-based buy-side and sell-side analyst, most notably as an II-ranked oil service analyst at Salomon Smith Barney from 1999 through 2005. Since 2002, his focus has been entirely on precious metals, and since 2006 has written free missives regarding gold, silver and macroeconomics. Prior to joining the company he spent five years working as an investor relations officer or consultant to numerous junior mining companies.