Is it just me, but can anyone envision the eventuality of a deflationary crash and the unwinding of much of the credit built up over the last several decades? Basically since Reagan?
My last article was a bullish one for the stock market and it has gone up ever since, continually hitting record highs. While gold went up also, it did so without the retail market. U.S. Mint sales were pathetic in November and December as they have been all year and this month, January, is lagging last years pathetic buying of American Gold Eagles. Yes, it is still the Trump effect hitting metals, as primarily it is those who are on the right who buy metals. Not everyone mind you, but the majority.
During the Obama administration, the U.S. Mint sales continued strong, even with the pullback from 2011 to 2015. But once Trump got elected, the sales have crashed. The latest move up nothing more than a blip up in an overall deflationary environment, fueled by speculation the Fed would (and did) lower rates. But what about that deflationary scenario? Is it still intact? Is the deflationary credit contraction still something that can knock gold down? Let’s analyze this.
We know who the perma bears for the markets are; Schiff, Rickards, Daily Reckoning Crowd and many others. But there are parts of Austrian economists writings that make sense, like Mises “crack up boom.” Eventually. But not yet. No one dare talk hyperinflation (John Williams every year) without first understanding deflation.
The second I mentioned I was in the deflation camp in 2010 when I wrote my first gold book, I was ignored by the Austrian camp. I didn’t quite understand it, but believed in my research. It was the work of John Exter that seemed to make the most sense. But the one thing that many Austrians have got wrong is the timing. This is simply because of the kick the can down the road efforts and maneuvers by the Fed.
The first article I ever wrote on my blog was when Ron Paul was running for office in Sept of 2008. It was called The Fed Is Still Relevant, for Now. Paul is as Austrian as they come and a big gold fan as well and naturally anti-Fed. I had to learn to walk way from the Ron Paul phenomenon back then and understand things for myself. First was the mistreatment of Ron Paul by right wing media, throwing him under the bus as a conspiracy theorist, and thus his economic philosophy. The article hit at the heart of the problem for Ron Paul and many others and it’s they haven’t given the Fed enough credit.
As a seller of gold, it’s easy to get caught up in the fear game; the dollar will crash, gold to the moon, hyperinflation, etc. But there is a reason for gold in a portfolio or I wouldn’t sell it. It’s insurance against the inevitable. And in this sense, the inevitability of all those mentioned above being right. I plan on catching that wave too, but we know the Fed will fight any issues with the economy tooth and nail. They will fight their enemy; deflation.
They did it in 2009 with the $7 trillion band aid and will do it in the future with the “whatever it takes” mentality. Austrians get caught up in the M2 aspect of money printing and don’t realize this small cash and cash equivalents market is dwarfed by the trillions in the credit market. The M2 is pushing on a string as much as this economy is with all the Fed’s efforts to spark it. Just look at the Atlanta Fed’s GDPNow for the truth as it is under 2%. GDP has fallen the last couple years. Consumers are in more debt than before the 2009 crash. Banks it seems are lending freely again. Real estate has gone up but not in all areas. And the stock market, which should be viewed separately from the economy, is hitting all time highs.
The Fed will go to negative interest rates if they have to when the economy turns further south, just like Europe has. While I do think things implode elsewhere, before the U.S., and the U.S. will still be viewed as a bastion of safety, perhaps the last bastion of safety (besides Switzerland and maybe Singapore), don’t discount the Fed while the frog is boiling in the hot water. Know they still have some tricks up their sleeves. They think whatever they will do is temporary in nature till the economy gets ticking and they can hit their inflation goals of 2%. They don’t have to worry about hitting their inflation goals after the deflationary bust is over. They have to worry about the crack up boom to come and gold to the moon. Give it time.