Bottom line up front: I feel we are at a 50% chance of going into hyper inflation and with this, I feel the streamers might perform the best over the next few years.
I’d like to start this by saying no one out there has a crystal ball. No one. You have people who are taking available information derived from tools, bells, and whistles – along with those money historians who are seeing things rhyming, but no one knows. This is all a game of probabilities. My numbers below are ESTIMATES and I try and provide evidence to support my thesis.
Over the last 19 months or so in this space, my thesis has needed to evolve. I first thought there would be a second deflationary crash in early Q3 last year due to financials of all companies in the gutter. What me, and just about everyone else DID NOT see coming was stimmy checks, unemployment cushions, and the raging emergence of Robinhood and cryptos. It now seems less likely that a massive deflationary hit all at once will happen again due to how the Fed now can direct money right to the people, instantly. This mechanism can prevent a deflationary collapse, but have other side effects that aren’t desired.
I’ve covered some of this in previous blogs and videos, but I wanted this as a standalone so I can reference and point back to it frequently. Below, I wanted to address 4 scenarios, their likelihood, and what impacts they have on gold and silver
- cliff dive with stocks. Highly deflationary
- sideways/down channel movement with significant inflation. “Stagflation”
- Stocks move higher with high inflation: Weimar hyper inflation (or venezuelan)
- No crash – return to “normal”
Scenario 1: Cliff dive
In this scenario, it’s more or less leading to a depression. This is where everything sells off. We saw a glimpse of this in March 2020. While there are comparisons to the 1929 cliff drop of sorts, most people don’t realize the significance of the 1929 drop was not that drop, but the one that followed.
Above, you can see the .618 fib retracement had been touched on the monthly chart. It then did a recovery and then in 1930 the real sell off happened. This was over a period of 2 years.
During this period of time, lots of people went jobless, lots of defaults. Banks would not lend.
We saw the black swan that created the 1929-like cliff dive. But people don’t realize how overvalued these things were coming into this. When I started all of this part of my journey in Oct or so of 2019, the repo market had just blown up. For MONTHS leading up to this crash, all the financial news kept talking about how overvalued everything was. Then, COVID seemed to be a pin to pop the balloon – not the cause of the problem.
Unlike 1929, the liquidity seemed to bypass the banking system this time around, providing “stimmy” checks directly to the people. Unemployment compensation was boosted to unheard of levels. Evictions of renters were not permitted. Mortgage defaults halted. Lessons of the great depression to avoid that deflation seemed to be learned.
In this type of scenario, where a cliff dive could happen again, you saw in March 2020 how gold and silver rebounded. In the 1930s where everything was going to hell, gold stocks did tremendous.
Take a look at the 1929/30 crash and compare it to this…
Why it can happen?
There has essentially been a 40 year bull market with stocks, artificially propped up with ever-lower interest rates. This has allowed for cheap money and expansion. But the question I’d have now is – was the expansion far too much? Do we have so much development out there that there’s not enough cash to sustain the system? The economy is like a breathing lung, where it expands and contracts. It has expanded for 40 years. Now, we are facing a 1970s type of inflation scenario, which in theory should kill this. Why? Lower interest rates allow for cheap money and easy expansion. With no yields anymore, or harder to find yields, everyone expects a form of contraction to come and people will migrate to cash or gold/silver in anticipation of a drop.
Now, if we look at the last 40 years through the prism of a market psychology, this is how it looks.
One can make a STRONG argument that the crash of 2020 was a 1929 event. And…the recovery SHOULD have done the dead cat bounce into complacency like 1930 and drawn us down for 2 years. But it didn’t. We injected liquidity DIRECTLY into the population. This altered the markets and has to alter our mindsets with how to react.
Because of us once again juking a now laughable “free market system”, we have now inflated the balloon higher than before the crash. You can see the high RSI below that needs time to cool off. This can get a little higher, but all signals are this will either go sideways or correct in the next few months.
Because of the new “tools” of injecting money directly into the hands of the population AND buying corporate bonds, the likelihood of a 1930 correction downward for 2 years I’m now thinking is low probability. These are the deflationists – Dent, Rickards, Johnson, Maloney. I’m not saying they are wrong – I’m saying that the Fed and our administration appear willing to open up the money bombers to carpet bomb anywhere they see deflation.
Therefore, I believe that March 2020 was the deflation event they predicted. I also believe that event should have been far worse, but the limit downs and tinkering in the “free market” stopped a free fall in the markets, and buying corporate bonds and any other junk that is out there provided a parachute of sorts. Rather than let the free market take this down to 8,000, they used every trick they could to stop the bleeding. And, it seemed to work at the cost of $7 trillion.
I’m starting to question in what universe anything more than 5-10% corrections can ever occur, again – IF the fed is willing to continue to do this policy. IF they decide to stop this program anytime in the next few years, your deflationary even MIGHT happen, but still – with the limit downs in a day, this likelihood becomes less as people have so much liquidity this is now seen as “buying the dip” on its way to another leg up.
While part of me still plans for the David Hunter-type scenario, I feel Hunter’s “bust” is NOT in this category, but the next.
Likelihood of occurrence: 5%
Why it would occur? Rhetoric at the nation-state level is heating up, especially with Russia and China. Some form of conflict could escalate and cause a mass sell off to get into cash, despite Fed’s best efforts. I’m not thinking all-out war as no conventional war can ever be fought again with super powers due to nukes. Some form of cyber attack or terror attack of sorts could be the pin that pops this bubble with a long way down. We have seen more cyber attacks lately, but they are not attacking nation-state items, but private enterprises which support critical infrastructure. An attack on a DHS-backed CI could be the black swan event which would then cause us to retaliate. The biggest problem you have with cyber attacks is attribution, so you could have a third party terror-state attack the US making the attribution look like Russian, Chinese, or Iranian in order to bait the US into conflict which would cost us trillions more in debt and currency debasement. Continued propaganda of how “good” socialism is along with identity politics has a possibility of fracturing the US further. Cliff drop events aren’t in this category – these are deaths by a thousand paper cuts.
Scenario 2: Stagflation
This is now the favorite word of many of YouTube, and I can see why. With low and perhaps negative interest rates and incredible debt, it’s hard to project real growth. All you may see with GDP is juking of the numbers with the fed pouring liquidity into the system with borrowed money. It’s sort of like losing your job and buying a Mercedes on your credit card and parking it in the driveway to show everyone how well you are doing, all the while you have no real stable source of income or future. The US is essentially buying a Mercedes and parking it in the driveway to show everyone that all is well. Most that understand even the most basic items of economics know there’s a massive problem. But the idea is to fool the 90% of the masses who have no understanding or clue. It’s a magic trick to trick the rubes into getting into more debt and spend even more to keep this going.
While we have sideways movement for years on the stock market, this then will see inflation continue to creep up. While the fed talks about raising rates someday, the Time word of the year, after “transitory”, is “jawboning”. This essentially means they talk about potentially talking about something to shock the markets into doing their bidding without lifting a pen. However, this type of dog and pony show has diminishing returns, and eventually, it’s the boy who cried wolf and people will eventually be like “show me the money”. I’d put Hunter’s scenario in THIS category because his bust is a drawn out deflationary event. If you look at the 1930-1932 chart, this was a 2 year bust, and not a cliff drop. I’d lump it in this category because when you add significant inflation to a sideways movement OR a down and to the right movement – there’s the same net effect – lack of growth with lack of purchasing power. In hunter’s scenario, you may have nominal values of asset prices going down. Think of evictions taking hold in Sept and mortgages defaulting finally, and suddenly a glut of houses, apartments, and even office space hit the open market. This increase supply can put downward pressure on prices to get people to occupy them. Likewise, vacancies may continue as landlords may not be able to take less than ask due to their bills. This screams debt restructuring for 2 years. Deflationary.
The main issue here is that while inflation continues to rise – we cannot raise interest rates without taking the system down. We service the debt apparently on more near term items than the 10 year, so we tend to rollover $27T in debt frequently and it’s like re-mortgaging your house every year or two on .25% lower interest rates. Over 40 years, you now can no longer re-mortgage the house.
As inflation rises, interest rates are supposed to follow to keep the economy from melting up. This could potentially mean the DXY continues to lose value over time. Your stocks stay channel bound, essentially, over long periods of time so nominally the price of your stocks stays on par – but the VALUE of your stocks lose purchasing power because of the decline of the dollar.
This means as a function of time, you get poorer and poorer with purchasing power, although you don’t realize it on a daily basis. I put the deflationists in this camp because there’s very little net difference over time when you have high inflation in either of these scenarios. In the deflationists scenario, nominal prices are lower, yes, but it’s rather immaterial to the massive inflation being seen with commodity prices – or things you build things with. This can crater demand for building new things – but here’s where you get a $3-6T infrastructure plan to ensure commodities get that boost. While jobs and housing fall…
Likelihood of occurrence: 35%
Why it would occur? It is very important for our stock market to not crash, as this can be looked at by many as the “health” of our economy. This also is where the 401k exists, and if stocks all go south, people lose value in their 401ks. Therefore, I feel there would be an extraordinary effort to backstop the stock markets at all costs on a national defense level. Meanwhile, the amount of liquidity pumped into the system constantly will have an effect of debasing the currency, driving prices up. At some point dollars start being exported from nations to the US, compounding inflation more.
Scenario 3: Hyper inflation
While this is danger talk, I find this scenario daily to be more likely now than all others. I don’t want to be an alarmist because it’s quite possible that this is a “controlled” hyper inflation of sorts. They DO have tools to stop this, and those tools are raising interest rates. While people scoff at this moment of raising interest rates due to high levels of debt, the concept here is to inflate items so much and so high that you can then snap things back into place with higher interest rates to stop the inflation. If you can imagine a time where asset prices, stock prices, and gold and silver are inflated all to the moon – everyone feels like they got rich – and in a sense, many can then sell stocks to pay off long term debt like mortgages. What may happen though is imagine your house is paid off but the taxes to live there eventually exceed your income. This is the type of inflation we may be talking about.
The trick is for them to find the sweet spot where things inflate enough where people can pay off debt, but not too high to unlock the scenario of taxation being more than incomes. 90% of people who are not gambling in the stock market or own lots of assets that were inflated may need a form of UBI just to pay for food. This starts going down a really, really dark path where more and more people daily get left behind. Their ONLY recourse is a form of socialism. And THAT is a danger of hyper inflation – it forces your citizens into a form of government without their consent. Those who praise socialism at this moment haven’t lived through it like those in many other countries who have experienced this. They don’t realize that when you start to print money like in MMT lala land that the currency debasement erodes the value of the money and those who are holding worthless currency need more and more just to survive.
Then, a “snap” of the fingers will take interest rates up to 10% or the like, but by this time it is humanly possible the government has been able to collect a LOT of taxes from the upper crust to pay down some debt. I think the problem with this scenario is that by doing this, it will drop the stock market 90% after you continue to hyper inflate it over time. I believe this “melt up” will go on as long as possible, perhaps years. Why? Many other currencies are pegged to the dollar and everyone can melt up together.
I believe the other end of this are the sound money people/countries. Russia is sitting there with piles of gold. China has just spent 20 years amassing 25,000-40,000 tons of gold. India has lots of gold. Nation states right now are positioning themselves with gold.
Where we think we can potentially melt up for years, the one scenario here which is a monkey wrench is if many countries start sending their dollars to us to get natural resources for it. Imagine China selling off their treasuries forcing us into a strict yield curve control and ditching all dollars. Many don’t realize this can be a form of war in a different manner. While we “think” we can hyper inflate away our debt, other nations may help in our currency demise more rapidly than we anticipated. This is also a scary outcome. No shot is ever fired, but we took our own empire down through debt. Overnight, our government could no longer fund a lot of things, as no one would take our trash currency.
What we DO have, which Marin Katusa points out is massive amounts of resources, a skilled workforce, and a can-do attitude.
I believe Katusa is right to an extent. I also believe David Hunter right to an extent. I believe our best currency is our natural resources, and THIS is why they accept the dollar. What you have seen with a democratic government in power is the lack or will to drill, dig, or exploit any form of natural resources under the guise of conservation. I hate to be the one to shake them awake out of a violent sleep walk, but our trash currency only means something because of our resources.
Hyper inflation would usher in a new resource era in the US. And we most definitely have natural resources. We just would rather print money, let you dig it up, and we’ll give you that paper money. Those days are coming to an end. Because of the upcoming paradigm of natural resources, I believe this can make Canada a powerhouse sister of the US. And I believe Marin Katusa may have his eyes on being prime minister of Canada. The business acumen of Trump, the deep pocket connections of every financier in the world, the experience with natural resource exploration, the monotone and clearly controlled communication meant to be provocative in a thoughtful manner, the understanding of the geopolitics with the dollar and swap lines, and the clear understanding of uranium and green energy interests. He is skating to the puck.
Likelihood of occurrence: 50%
Why would it occur? It is clear that no politician can ever run and win in this country ever again under the guise of cutting budgets. It is also clear any president to takes down the stock market by 90% will never be re-elected and would leave a legacy of being an utter failure. The only way out, it appears, is by easy money, deficit spending, and trying to back stop any economic failure with the fed. The only way out of this is by countries eventually dumping their dollars back on us to extract our resources. For example, take billions of dollars of US cash, hire JP Morgan to buy you gold on the COMEX. This may be already happening. If not now, then soon. These dollars will bid up commodities like you have never seen. These are the raw materials of everything, and this is what will send prices to the moon for inflation. Likewise, the US will be facing a currency crisis as the dollar has no path but lower as we continue to print more money so people can stay home and play video games. No one can cut spending, as doing so may create sharp declines in the stock market.
This may go a long, long time folks. This is why I recently hedged my “defensive” portfolio with a traditional REIT. If the stock market continues to melt up, I’ll retire off of this thing alone. If it drops, I’ll retire from the gold and silver exposure lol.
Scenario 4: Return to normal
My buddies that live in the DC and north Jersey area are convinced we will be seeing a full recovery and life will return as we knew it pre-COVID. They think I’m an idiot for my gold and silver investments. They could be right. However, I live in York, PA and my malls are empty. Stores are closed throughout the mall. And this is how it was before COVID. They turned an anchor store into a casino. While some metro areas like DC and NYC have money pouring from the rafters, I’d say my small city is more of a proxy for most of the country. The don’t see it. They can’t see it. It’s not reality to them. They see people with $90,000 cars pull into a full mall parking lot and shop at high end stores. I see empty parking lots, vagrants, and stores closed everywhere, never to re-open.
The problem with their scenario is they have no real answer for the debt we have right now. The government seemed to hit the “snooze” button on the cliff dive, and because of this, people in bigger areas get a faux sense of reality.
The reality is that food prices continue to increase. Those with cash bought up the real estate market and bid it up so high that no “regular” person can afford a house. Those “with” are now creating a larger chasm with those “without” and they cannot see the space being created. There was essentially a “gap up” in this chasm. Look how many billionaires got even more rich with COVID.
Likelihood of occurrence: 10%
Why this will happen? Those puppeteers who manage our “free market” also tend to change and re-write the rules as it suits their agenda. While I don’t think a full recovery is likely, simply based on the debt load and inflation nature of things, you cannot rule out those in charge one day just trying to “jawbone” and gaslight everyone into an alternate reality scenario where they get the puppet media to then also go along with it to tell everyone “all is back to normal”. This is how I envision that press conference.
How will gold and silver fare?
In all but the last scenario, I feel extremely well. If we DO have a cliff drop, I could see that gold and silver would drop with everything, and Dent could get his $800 or $1000 gold, but the 1930 drop where we lost 80% or so of the stock market is not a cliff drop. The drop in 2020 was severe and quick. THAT type of event would take everything down. But if it’s like the 1930-1932 drop over 2 years, it seems more likely in this scenario that gold and silver would move up as traditional equities went down.
The cliff drop of 2020 had a spike in the DXY up, and this is potentially what caused the drop in metals. With a sustained 2 year move down I don’t see the DXY spiking up, but moving down in tandem with this as the government is debasing our currency at break neck speeds with money printing.
I feel that with the scenarios of the stagflation gold will do extremely well. What causes some issue with me with the hyper inflation scenario is that equities could slingshot up as well. Meaning, if you can get a 5x with ABC bank and a 2x with gold, it might be more likely that dollars chase the momentum plays up. While I don’t see this as making gold go down, I could see equities outperforming gold. This is what I have seen over the last year or so, and this sort of thing could continue. The xfactor here with hyperinflation is that I believe commodities will be the place where there’s most value. So ABC bank could go 5x, but it’s possible that Moose pasture gold goes 20x. So gold itself might only move 2x in the next few years, but the gold equities might scream.
Likewise, IF there’s a hyper inflation and oil and labor prices skyrocket, it’s possible the BEST plays are Wheaton Precious Metals and Franco Nevada gold. They are paid in gold and silver and don’t have that downside of fuel and labor costs. The hyperinflation scenario might best suit the streamers above any investment on the planet, period.
In 85% of the scenarios above, I see inflation causing much higher prices where metals do well and streamers probably have the best go of it. I can imagine the streamers may also become high-dividend stocks very soon. In 5% of the scenarios here, I see gold and silver taking a beating, but recovering very quickly with my biggest downside risk with the most illiquid junior miners if I needed to get out of everything quickly. The BIGGEST threat to my profile is a scenario where everything recovers just fine and gold and silver take a beating over a year or two and the miners go in the tank. I put this at 10% only because the people they right the rules don’t play by them, and I have to hedge my portfolio with something I feel could do extremely well during a recovery.
The REIT I have picked is WPG, which I spotted at $1.50 a few weeks back. When I did a deep dive, I saw they have been in discussions with debt restructuring and possibly going into bankruptcy. I saw the equity of the company was something like $22 per share book value and the stock at the time was $1.50. I loaded up on the stock and options, and last week it exploded, to my delight. If they avoid bankruptcy, this is a company that could be a $50-$100 stock with the dividends it used to pay out (this REIT I heard paid 95% of its profits as dividends?) Likewise, IF there’s a hyper inflation, their rents will go up and this stock price might do a 50x from where I bought it, and the dividends could be nuts. Point is – if you feel there is a possibility of recovery (or hyper inflation), hedge your PM portfolio with something that would reflate very nicely and could have increased revenue streams with inflationary pressures. Disclaimer – I now have a large position with WPG, but this is an EXTREMELY high risk/high reward play. Do your own research!!