Rate Hike Cycles, Gold, and the 'Rule of Total Morons' [Video]
|In response to Janet Yellen’s everything is OK speech following today’s balance sheet reduction notice by the FOMC committee, I received an interesting set of comments from Pater Tenebrarum at the Acting Man Blog regarding rate hike cycles, gold, and stock market peaks.
“Rule of Total Morons”
A new bull market in gold started in late 2015 concurrently with the Fed’s first rate hike. That is no coincidence. The gold market is highly sensitive to future changes in liquidity. The more tightening moves the Fed undertakes (which it does in the face of collapsing money supply growth, because its decisions are based on lagging economic indicators), the more gold bullish and the more stock market bearish the fundamental backdrop becomes. Anyone long stocks should actually ask himself how it is possible that gold is up nearly 30% from its low, despite an ostensibly “gold bearish” rate hike cycle.
But they never do ask the right questions, which is why stocks peak with a big lag, particularly in major bubbles. Economic historians found out that the economy was technically very likely already in recession when the stock market peaked in 1929. In the 2007 to 2009 bust, NBER backdated the beginning of the recession to December 2007, but in May of 2008 Bernanke was still talking about how well the economy was doing and how the high oil price was “creating inflation” (thereafter he began to shut up about all that, but not before demonstrating for everyone to see how utterly clueless he was). And of course, stocks peaked in October of 2007, practically two seconds before the economy fell into recession.
In bubble regimes, the final stage is always characterized by the “rule of total morons”. That’s just how it is.
Missing Inflation
Central banks cannot see inflation because they are totally clueless how to measure it: Central Banks Puzzled as Global Inflation Hits Lowest Level Since 2009: Solving the Puzzle
How Much Gold Should the Common Man Own?
Understanding Bubbles
If you wish to understand the nature of the bubbles we are in, a few recent articles of mine will help.
-
Bubblicious Debate: Greenspan Says “Bond Bubble About to Break”, No Stock Market Bubble
-
Median Price-to-Revenue Ratio Higher in All Deciles vs 2007, 90% vs Dot-Com Bubble: THE Choice
-
Debunking MMT, Keynesianism, Monetarism: Reader asks “What theories do you believe?” Mish Reading List
Gold vs. Faith in Central Banks
The above chart also shows the bottom in gold right as the Fed started hiking, in agreement with the analysis of Tenebrarum.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.