I’d originally thought I was an Armageddon obsessive. I get a kick out of seeing analysts on TV scoff and dismiss the stock market volatility as Trump threatens tariffs, just tell you to ‘Buy the Dip,” and then get pissed as we drop 700 points on the Dow the next day.
I thought I’d seen the beginning of the next bear market, but it was really something else.
It’s tough to keep these two thoughts in your head at the same time. The US economy is doing well, most of the rest of the world…is not. How?
The US economy is doing amazingly, despite the occasional tinfoil hat pockets of doubt as to “employment numbers being faked” and not being accurate. But overall, companies like Home Depot and Lowes are still raking in renovation money in the US. The economy still looks prosperous, and employment is still expanding.
But here’s where I became paranoid.
The underlying companies of US stocks are doing well domestically, in the United States…but the rest of the world is NOT doing well financially.
China is watering down its money, increasing the odds of them having out-of-control inflation [think $10 gasoline.] As they tit-for-tat water down their currency to offset Trump tariffs, their currency will get very weak. Perhaps…too weak. Perhaps they will need some kind of anchor to keep their money from running out of control. Something safe, bought in dollars. Something like US Treasuries.
Meanwhile banks overseas can’t give loans away. They’re literally paying you 0.7% to take out a loan. And 53% [46%?*] of bonds throughout the world, including in mother Germany…pay a negative interest rate. The banks are paying people to take loans to try to manufacture demand. Chilling, I know. Those banks still are required to maintain a minimum amount of capital to mitigate risk. Something backed by the might of the US Army. Something like US Treasury Bonds.
Here is how bonds work.
Say you have a bond that costs $100 and pays you 3% over 1 month. You end up with $103 at the end of the month.
But then, say, the bond cost goes up to $110. But it still pays $3. So you end up with $113 at the end of the month.
So you paid more to make $3 in a month. You made less than 3%, which is what you made when the bond cost $100. You now made 2.72%.
That’s how bonds work. The price of a bond goes up when risk events happen, and to a limited extent when the stock market falls. If stocks look risky you have more of an appetite for bonds, you’re willing to pay more for the safety of a bond, a higher price and a lower interest rate paid out…because the bond is above that $100 level.
That’s why bonds are sexy right now. Whatever happens, bonds are safe and should go up in value. Several major world power countries are in financial trouble, there is aggression in China, and the Italian government is very unstable at the moment. All roads point toward bond demand. Perhaps bonds will go up past levels we’ve ever seen, because the world needs them, and a super demand level will push prices to super levels.
This may also push gold prices to unprecedented levels, in my humble opinion. If bond prices are falling, the dollar is effectively getting weaker. The US pays less interest on its money per year, so it takes more dollars to buy that same ounce of gold.
Gold is already at $1,540 an ounce. The highest it’s ever been was in 2011, around $1,900 an ounce. We’re already headed in that direction, and the stock market has not even begun to fall. China and Korea have not even begun to go to war. Italy has not even begun to collapse.
The stock market broke out of all time ranges in 2013, and shot up parabolically. Partially because the stock market had not been above its first peak put in around 2000-2001. Part of that is the market adjusting for what the dollar bought 20 years ago versus what it buys now.
That is what I think gold can do. It previously had a high of $1,900 an ounce, perhaps with the increased aggression and risk in the world now it can go much higher. Now that 2007 is 12 years ago, the time when the economy began to slow and snowball into 2008, and 2009’s malaise. Perhaps despite the safety of cryptocurrencies [sarcasm mine] gold will push above $2,000 and toward $3,000 an ounce.
All of this can happen without…or even before a major economic slowdown begins to seep into the US from the rest of the world. Perhaps it’s not that unlikely.