As metals people, we are already contrarians. Right now, I’m seeing lots of comments like:

  • “The fed is trapped!”
  • “They can’t let rates go up!”
  • “Once the hikes start, they have to reverse course!”

I don’t really disagree with much of the above. However, it might be short sighted and 2 moves ahead in checkers rather than 8 moves ahead in a grandmaster match against Magnus Carlsen. If we are doing some game theory here and perhaps looking down the road, it does appear they need to try and fight inflation. Perhaps we might underestimate how much they NEED to fight inflation politically?

What I HAVE noticed over the last 2 years of following markets like a hawk are that the Fed talks a big game, but in reality, the actions are slow to coming and underwhelming. One big thing you keep hearing is…”we have all kinds of tools”. Has anyone, in a Q&A ever grilled them on listing these tools? Has anyone in congress ever demanded a white paper of what these tools are, how they are used, and when to use them? If they are tinkering with the American economy at THEIR whim, don’t you think Congress should have some oversight? I can tell you I have observed their biggest tool – rhetoric. This rhetoric is then also amplified by using cautious wording of ambiguity on top of duplicity. Essentially, they may be calling a bluff on things and trying to “jawbone” markets to where they want to go without ever touching monetary policy.

Over the last 2 years, I have NOT become a Fed expert. I’ll leave that to the wonderful Danielle DiMartino Booth. But as a novice – it is clear to see that HOW they present things is taken to specific markets for specific outcomes. Every word is carefully crafted to produce a desired outcome. Talking about talking about interest rate hikes. What?

Now, it is clear that when the US and other countries “shut down” during the beginning of COVID, the jar to the economy was to be felt. However, most now don’t realize people like me in December 2019 were telling anyone who would listen that a crash is inbound.

All COVID lockdowns did was more or less be the catalyst for a strong correction everyone knew was inbound. I wrote about it a little below in this…

So…I’m not Nostradamus – everyone kind of knew this stuff was coming. But yet the stock market kept piling higher. Gainz! Stonks go higher! When that deflationary bomb went off – the Fed essentially went into overdrive to provide as much liquidity as possible. What we did NOT want was a 1929 stock market crash followed by a run on the banks with fractional reserves. Many want to commend the Fed for navigating us through these tough times – but on the flip side, many then feel we did WAY too much and stayed locked down WAY too long.

The arguments FOR limited ability to raise rates are something most agree with, including myself to many degrees. IF the rates go up, you have some really bad things happening…

  1. Cost of capital is higher and it slows growth. AS we are heading into a recession. Double whammy.
  2. Mortgage rates will go up, which then makes buying houses less attractive and slows the construction of houses.
  3. With higher borrowing costs on the ST rates, you then have a higher percentage of our taxes being spent on interest of the $30T and thus even small increments in rate hikes could perhaps make us default.

The cost of NOT doing higher rates WITH tapering WITH reducing Fed balance sheet?

  1. Inflation may not stop. The punch bowl, if you will, continues on and this makes life unbearable for the masses.
  2. Asset bubbles continue to grow making an eventual crash worse.
  3. Further dilution of the dollar – forcing others to consider other reserve currency alternatives.

So – me and you see the stock market burp, and think the political pressure on Powell will have him do a reversal like in 2018. The one big difference between now and 2018 was that we didn’t have rampant inflation. The whole reason for these rate raises would be to cool a runaway train of inflation. The Fed essentially spent the last 40 years in deep search of trying to find inflation – like a Jacques Cousteau special in the deep looking for something that they actually hid with rigging CPI.

It is possible that serious conversations were held, and the grown ups realized that IF they do not tighten policy, the US dollar is lost. What many of you on FinTwit don’t realize is that our military costs are like $700b per year. Without a USD to buy tanks and bullets, our country is lost. Meaning, not raising rates to save the dollar is actually national security at this point. Would they burn a 73 year old’s $1m 401k to the ground in order to save the military and to buy a laser guided gun on an Abrams tank? Yes. In a second.

I believe many saw this – either we save the dollar or we save the stock market. Choose one. And we need to save the dollar first, to rebuild the stock market later. If we choose the stock market and jobs, but lose the dollar, the stock market values are relatively worthless.

“But the debt will be untenable”, you say. The rate raises will cost us so many billions in servicing that debt. Yes…BUT….have you seen who is in office? These people think nothing of simply raising taxes and inventing new ways of inspecting your colon for a nickel in taxes. In fact, one can argue that the CBDC will be the most efficient tax collecting tool even invented in history. IF every transaction was instantly taxed at POS (point of sale), there would also be little need for our self-reporting tax system. Where you see the dollar going to zero and rising up from the ashes is the Phoenix of FedCoin, the reality here is that it’s the USD simply put into a government-run block chain that CAN run parallel with paper dollars – for awhile. My soon-to-be 95 year old grandmother will not be converting to the blockchain anytime soon, but that doesn’t mean they cannot start the conversion to CBDCs earlier. It doesn’t mean that laws cannot create the FedCoin into existence, then all government payments start in FedCoin, then this starts getting rolled out in phases over 5 years. Paper dollars, when going to a bank, will eventually be sent in for destruction – to be converted into equal amounts of FedCoin. 1 USD = 1 FedCoin token dollar.

How many billions or trillions do you think are left on the table with our tax system as is with people hiring fancy tax accountants to whittle down a tax bill to nothing? Sure, we have our federal income tax. Then you have state sales tax. Property taxes. All kinds of taxes here. But how much illicit activity is not being recorded? Illegal gun sales. Drug sales. Prostitution. Gambling. Hot dog vendor carts. Bottled water sales outside of stadiums. Cash businesses that launder money. Think about your kid’s lemonade stand. Yard sales in this country are a BIG thing for those who aren’t affluent. As a kid, spring mornings going with the parents to yard sales to find cheap toys made my year. For $5 of my money from mowing the lawn I’d usually get a nice little haul of toys. How many of these private transactions will then have instant taxing?

So one can THINK they know that you cannot go more than a rate hike before the Fed backs down. But what if the mandate here is to rein in inflation, at all costs? I just saw a few days ago more news cycles covered the CBDC conversation. Consider that perhaps they can go to 2% Fed Funds rate before real cracks happen. Most of you reading this are convinced that after 25 bps that the ship will reverse. I mean you are utterly convinced. I’d like to you consider you might be wrong. This is a thought experiment, not a debate on who is right. I’m not saying it won’t reverse course. But the thing here is you seem to think you have a crystal ball. What we SHOULD be doing is looking at ALL outcomes and planning accordingly to reduce risk, find alpha, and try and use a probability method rather than a certainty method.

Consider the below.

When looking at the Fed Funds rate, I can see this line might get to 1.5-1.75% sometime this year before it might puke.

With the 10 year, you can see perhaps a 40 year bond/treasury market might implode with rates soaring higher as the reality of inflation hits people and no one wants to park their money for 10 years at 1.8% when inflation is 10%. Meaning, rates may significantly have to go higher – and will – now that the Fed is no longer the buyer of only resort. What happens if/when rates go to 3, 4, 5%? I know, and you know, shit gets real and things blow up. But in all markets – it’s a form of Darwinism – and perhaps this is a culling of weak ass businesses…think of SPACs and zombie companies that could be met with disaster? Think of the trillions in crypto that could mostly go to zero?

The bond guys are very confident that rates will continue to go back down, bonds will rally. One of my buddies said he buys bonds – not for the rates, but for the value. Many have bought bonds front running the potential that the Fed will eventually come back in and buy – ensuring the bond they bought at 1.8% will increase in value as rates go down with the Fed buying.

But….what if the Fed doesn’t buy? My buddies that all anticipate the Fed reversing course could lose their asses in bonds, while the others lose their asses in general equities. Basically, most common people that are in markets, could lose their asses. I watched a documentary on the crash of 1929 a few months back, and the parallels from then to now are really scary in comparison. To top it off, all of this fourth turning talk is also coinciding with this – and I believe there’s something to that. How many 24 year olds now think they are smart in the greatest bull market ever, with cryptos going up thousands of percent a month? These people lost the lessons of those who were involved in the roaring 20s. I still have that grandmother who saves wrapping paper and aluminum foil to keep me grounded. But many don’t, and the point of the Fourth Turning is people will continue to make the same type of mistakes due to not understanding behavioral history.

Politically, it appears to me that the Democrats are about to be swept in everything here for 2022 based on how they treated COVID. Like, wiped off the map. However, when they lost Virginia due to some woke ass stuff, a major pivot happened that many aren’t tracking. That was the day they decided they aren’t dying on the woke hill. And they pivoted immediately to going after inflation – first by what appeared to be mandating Powell to crush this. But they can’t, right? To me, I don’t see them having any problems increasing our tax revenues. These are tax grabbers that were elected, to “drain the wealth” of the “greedy” to then give to them. Remember, FedCoin can come in and perhaps maybe capture another $500b or so in revenues IF they move away from paper dollars. This tax revenue raising helps – but so does reversing Trump’s tax cuts on businesses – making them “pay their fair share”. There’s a few more hundred billion. If you can perhaps raise another trillion dollars in tax revenues, this allows rates to go higher, for sure. I don’t think people are calculating this. We may not be close to FedCoin implementation, but a quarter a point for 8-12 quarters in a row would buy them 2-3 years to get it going WHILE they reverse corporate taxes AND make capital gains taxes extremely harsh.

IF the Democrats have ANY political hope it is to beat inflation down. They have to be looking past 2022 at this point to controlling the system more. This can also go for things like voting to ensure a victory in 2022/24 (make it look close, of course), but I won’t put the tin foil hat on for this episode. I’ll leave that rage for another day (80 million votes, for a guy with 33% approval on a good day. Right). I will only tell you that the Democrats slim hopes at this point is to try and show the middle class they defeated inflation. Tackling inflation IS possible by raising rates, significantly. And…they will not do this by cutting spending. Because if they have nothing to dole out to people, then they don’t have anything. I am expecting mad campaigns to raise more taxes.

Consider who will be hurt by a stock market 50-75% draw down. Sure, 401k holders will be hurt. But how many people got into the stock market the last 2 years with COVID? They could get their asses handed to them. FOMO might wipe out these people. 38% of the S&P companies I heard are zombie companies. Bye.

With China’s rhetoric going bananas lately, we are then faced with potentially finding other trade partners. Our best weapon against China is simply turn off the spigot of literally buying anything there – and having our allies follow suit. IF the dollar was to firm up, while most other countries’ currencies are going down (relative values, that is), it then bodes well for us to switch trading partners as a financial weapon without firing a shot. No longer will we get $5 jeans from China, but perhaps we get $5.75 jeans from Vietnam. $5.13 jeans from Sri Lanka. My point is that China’s growth is a direct reflection of us and our partners buying from them. But if our dollar sinks much lower into the 70s and below, these goods from other countries are double the cost we have now – essentially stoking price inflation. So essentially, if they want to STOP inflation, they need to do all they can to save the dollar.

That doesn’t mean defaulting on debt. Or printing more. It means collecting more. And we elected a bunch of goddamn socialists who don’t have a problem of confiscation and taking what is not theirs.

Let’s then also consider California, who has been floating the idea of a “wealth tax”. So if you are worth $2b, they may then demand a portion of your wealth. Remember that whole FedCoin thing? Well, I can imagine that if they own all of this on the blockchain, it’s easy enough to turn off your wallet if you do not comply. About 10 years ago, there were 1 million millionaires here in my country. And there’s a lot of people running this government right now than would love nothing more than to start more tax revenue streams.

Today, taxes are overly complicated – we pay so much in, then spend money on accountants to fight for us to get this money back with various tricks and laws. I can see a day where this ends, where all of those deductions simply stop and our taxes are essentially submitting our financial holdings and they then find ways of taking portions of your wealth on top of earnings and transactions. To me, this could start as a “temporary” means of “emergency” powers to “fight the war on inflation”. Basically, they need to reverse course of the debt problem, and no democrat will ever cut spending, so I imagine a period of confiscation to soon start.

So you think they CANNOT raise rates. Well, think about all of the billionaires who run these big companies. If you are Musk, does it matter if you have $250b or $50b? My point is that those who are the wealthiest will find ways to skirt problems, but most of these money grabs won’t terribly hurt the wealthiest. I remember reading years ago that after WW2, the tax rate for the wealthiest income earners was 90%. Remember, this was after we spent the mother lode defeating the Nazis. And….we just spent $30T fighting the commies, then the terrorists. And the checks are coming due. I can see a period where the top earners get even more hosed with higher and higher income/cap gains taxes.

I’m not saying they are able to raise rates without pain. But look at the S&P.

What I’m seeing here is asset inflation that went crazy that they may want to dial back to put back into the channel. We could see this correct all the way down to the bottom of the channel, if not more. Who is hurt by this? This will be spun as these people “paying their fair share”. Consider the capital gains taxes they want to go after? Think about this scenario here…..

What if….all of these people bought in for years and had these paper gains. And they are slowly allowing the stock market to draw down. If you had 300% gains and are sitting on these unrealized gains for years, there’s no taxes to be collected. But what if the reality that if you do NOT sell, those 300% gains are getting evaporated? You may then actually consider the government is telling the truth and sell – and thus realize these gains at higher tax rates than before. In that case, the government FORCED liquidations of these stocks which then…raised revenue. To me, this is also how you can see a 90% draw down in the stock markets. Anyone with any form of gains may be selling. Bag holders might turn into 30 year holders.

So the government just said, “thank you very much” by doing a one-time face rip off move to collect massive capital gains at a “temporary” high rate. If I was a dem, this would have to be done in the next 6 months to ever get passed. How does drawing the stock market down hurt them in the short term? Well, we can consider jobs – and all of these companies laying people off. However, now consider “stimulus” and CBDCs that can go directly into your wallet. They may then run on the ability to give people money with 8+% unemployment. Think of the infrastructure bill then getting passed at 10% unemployment to “get the nation working again”. Meaning, the country may be in a dumpster fire, but the Dems would have invented a way to directly inject some of those collected revenues directly to the poor. Do NOT underestimate that as a tool to get people to vote for them.

But what about the housing market? What about it? If rates start running up, my house that was listed on Zillow worth $450,000 will go down to $300,000 with a high enough rate. Perhaps even lower. most people have been boxed out of the housing market lately – with prices rising extremely high due to lower rates and tons of cash in the system. Consider a situation where rates may be 6% for you and me, but “low income” people who “qualify” can then use a government program to buy that $300,000 house with no money down and 2% interest – outside of the banking system, perhaps right from HUD using FedCoin as payment. Think about how many people who don’t make a ton of money would vote for that? I’m in my house for the next 30 years, so how would the unrealized value of my house going down $150,000k negatively affect me? It really won’t, but I’m also part of the top 2% or so. My house didn’t appreciate $150,000 in a few years, it was an asset bubble.

So housing rates through private banks might go up and slow housing – but government programs for lower income could make homes more affordable for their voting bloc. The 5%-6% rates help repair the banking system a little by getting them profits back and getting people to then invest in real yielding assets, but most definitely pops the real estate bubble in the process. Who is affected by this bubble? Those who bought overpriced homes at the top of the market – NOT the demographics the dems care about.

Conclusion

Many are convinced we are going to correct….then once the Fed sees the errors of their ways, we then melt up to all time higher highs in everything before a rug pull – to Hunter’s 65-80% or so deflationary event. Some citing the Great Depression and 90%. Others like Yellen are convinced there’s never to be a recession again. Others like OAC simply think MMT is the only way to go and you just make more money. Anyone who tells you they KNOW what is going to happen, back away slowly.

IS there a possibility that we already experienced the Great Melt Up? Could this 20% correction turn into a 75% wipe out IF they do not intervene? I can’t see why not. Everyone reading this probably expects an intervention, and soon.

Perhaps the melt up already happened?

IF you think the people in charge won’t raise rates because you think they cannot afford the interest on $30T, consider they will just raise more revenue. For those of you who think a 20% correction will force a reversal like in 2018, consider we didn’t have 7% inflation then and we do now – meaning reducing inflation may be more important than keeping the 5% top earners happy. For those of you who think they cannot raise rates because it would blow up the housing market – they may actually want this to make housing more affordable to their constituents.

Consider they are not trapped, but got all of the people in all of the markets before they now to a rug pull and collect their money. Think about the capital gains taxes from those stock market sales above? Consider how a stronger currency can bring us leverage with the Chinese to take our business elsewhere? Consider how a stronger dollar and higher tax revenues allow us to continue to write a blank check to our military?

To me, I am still in on gold, silver, and the miners for life. I believe that even with a potential controlled demolition of the system, that many themes will be present:

  1. Oppressive system will continue to create a market for those who want to escape the system with gold/silver
  2. Silver has many industrial aspects with green – solar/EVs. I believe the supply/demand fundamentals will make this go parabolic, despite a Facebook pulling a Hindenburg. While the investment demand should remain strong, to me the goliath is the overwhelming understanding of the supply/demand imbalance coming. Whether the dollar is 72 or 110, silver melts up when the 1000 oz bars available at this price are gone. And, the refineries are hopeless to keep up with anything over 200m oz or so from scrap per year.
  3. I believe that battery tech will result in work trucks that are “green” that can mine “clean” and thus potentially open the US up to more mining with EV trucks battery powered by solar/hydro/wind/nuclear – permitting regulations may force this hand.
  4. Supply chains are broken and there are biblical times coming for the industry to do a reset on where they source. This bodes well for higher commodities prices.
  5. The wealthiest will sell and get theirs first. They will not be hurt by any draconian tax measures, where the top 1-5% that do not have many millions will probably get smashed the hardest.
  6. Even if the USD strengthens, most other currencies risk going into a form of hyper inflation or super inflation. IF a majority of gold is sold as jewelry, worldwide, I can see demand for this continuing to be strong. IF currencies are risking hyper inflation, I can continue to see central banks buying. And, with a potentially steep recession/depression coming to deflate a lot of values/assets and stop inflation – I can see gold being a strong store of value during deflationary times.
  7. Resources will be continually harder to find – starting with oil. If costs continue up for getting things out of the ground, you can see how while assets deflate, we still need the basics of life and these items will continue to have price inflation. Meaning, if oil costs you $150 a barrel to get it out of the ground, you aren’t producing it for $50 a barrel. While there could be a deflationary shock with the stock market short term that hurts everything, to me oil and commodities rise from these ashes and will be where the only growth is. You can see that gold/silver track higher with higher oil prices as it then costs more to get the metals out of the ground.
  8. Russia and China are directly challenging the US. This will not be world war 3 like you think. It will be a resource war for the next 20 years along with currency, space, technology, weapons, and cyber wars. Right now, I believe the game is allies who have things you want and you being able to deny your enemy things they need. Think uranium in Kazakhstan, resources in Africa, natural gas in Europe, coal in China, DMZ territories around your spheres of influence (Ukraine), and chips in Taiwan.
  9. I believe the last 4 years has shown a lot of countries they need to work on their domestic supply chains. I believe my country has so many resources – but it’s easier for us to use USD to buy what other people produce until they can no longer produce it. You have things like rare earths that China monopolizes that are essential for permanent magnets and EVs. Uranium will be crucial for power generation. I think I’m in line with Hunter’s thinking that on the other end of a deflation, commodities are the place to be – especially domestic production of these goods.
  10. Africa will become more important over the next 30 years than any other continent in the world. This is where growth is. So many nations are not developed. Electrification = copper and uranium to soar for years. Natural resources. Labor. China has a head start here, but I can definitely see nations flocking there. Why? Cheap goods. Trade routes. Untapped resources. While my stock market may collapse – or reverse down, I can definitely see BRICS countries starting to get more of our USD where it leaves overvalued US companies and goes to undervalued African companies. M&A may happen with US companies buying African companies. Jurisdiction issues are problematic here, but if AFRICOM gets more involved in stabilizing regions, it’s then open for business. IF the USD is to remain a reserve currency – then we would need to invest in other countries with USD so they use/spend/save USD. Africa has many, many, many different opportunities and challenges, and the next Rick Rule/Eric Sprott may make their fortunes in Africa.
  11. The blockchain is here to stay. How will countries use this for national currencies? How will banks survive? Could resources be owned/traded on the blockchain like how Kinesis does gold/silver, and soon to be emeralds? In a future where commodities are king, maybe I want to buy barrels of oil through Kinesis? Maybe I want to own shares in farmland through Kinesis? I think we are at the early stages of the blockchain and while the pioneers of the blockchain wanted their name to carry a blank spot on the blockchain – version 2.0 will have ownership of THINGS tied to the blockchain.
  12. Gold and silver are pretty much undervalued to relatively everything else by historic margins. While the dems like the concept of the MMT, I believe the decimation of the stock markets and real estate markets increase these ratios – by a lot. I choose silver over gold due to the undervalued 78:1 GSR now and the consumption of silver in products makes it more and more scarce at this price.

Overall…

  • If the markets DO correct and launch into orbit, gold and silver moonshot on easy money
  • If the markets DO correct and go into a deep dive, silver to me is even more valuable as a green commodity and relative value to gold as many may fear a depression. Gold did well during the Great Depression. If there is a deflationary shock, you cannot hide how much it costs to extract raw materials from the ground. A PAPER commodities price might get smashed at first, but I feel this is where all currencies eventually flow.

In my investment thesis, I do not need to be cute and predict “the fed is trapped”. I can also use a form of chess playing to see multiple scenarios all sort of lead to the same end game for my metals. Most of the daily/weekly stuff turn into annoying noise, but doesn’t change my endgame. My physical holdings are skewed in favor of silver for scenario 2, but have significant gold/silver miner holdings for scenario 1. In both scenarios, commodities overall will do extremely well. I plan to add to my holdings copper, uranium, and battery metals as a path becomes more clear.