mortgage industry collapsed. Don’t pay any attention to the brief spike right in the middle of the crisis (in the fall of 2008). That’s an aberration related to a brief collapse in inflation expectations. What is important is that after dropping through the 2% threshold, the GFSB continued to fall until late 2012 ... Gold rallied this entire time. And then, suddenly, something changed... What was it? Europe’s financial system stopped bleeding. Bailouts of country after country were put into effect. The world’s financial system stopped going down the toilet. The various major deflationary holes were plugged. The system began to reflate... It began to work again. But it never made it back to the 1% line, much less the 2% level that ultimately began this crisis. In 2015, gold seemed to bottom at less than $1,100 per ounce. Last month, gold broke out to a six-year high of more than $1,400 per ounce. Meanwhile, the GFSB turned down again. There is, as you might imagine, a tight and meaningful correlation between the price of gold and this measure of the global financial system’s stability and viability. More important, I believe this downtrend we’re seeing in the GFSB will continue... Based on debt levels, declining levels of fixed
capital investment, and increasing levels of credit defaults (in auto loans and high-yield bonds), I believe the downtrend we’re seeing in the GFSB could broach key “support” at the 0% level... and go negative. If that happens, the financial markets will be suddenly turned upside down . And I mean that almost literally... At the 0% level, the markets will begin to go haywire, as though the entire system has been inverted. If you’re an optimist, you’ll perceive this rare event – this massive monetary inversion – as the final phase of the long-predicted “Melt Up.” That’s one way to think of it. In the short term, this liquidity trigger could propel the markets (for stocks, bonds, property prices, collectibles, etc.) vastly higher. In fact, this is almost certain to occur... I’d expect at least another 30% increase in the S&P 500 Index and even bigger gains for growth stocks. But what this monetary inversion means to the global economy and to the U.S. dollar in the longer term is scary and probably puts you at risk. REMEMBER... A MELT UP HAS TWO SIDES A Melt Up starts with a big run-up in debt, liquidity, and financial-asset prices. That’s the part everyone seems to like. And then there’s the hangover from these
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September 2019
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