A Buying Opportunity for the Patient
Over recent weeks we’ve seen funding stress resurface as a significant and growing issue for markets. Back in the infamous 2019 “Repo Crisis,” once the fed funds rate went above interest on excess reserves, it was a sign that U.S. deficits had begun to crowd out and overwhelm the U.S.’s own banking system. The crisis resulted in a brief spike in repo rates to 8-10% that would have quickly collapsed the system had the Federal Reserve not started to aggressively grow its balance sheet to offset the stress.
In the last few weeks, something very similar has started to happen. This time, it is the secured overnight financing rate that is above interest on reserve balances. Importantly, however, the implications are basically the same. Massive U.S. fiscal deficits have begun crowding out and overwhelming U.S. repo markets all over again.
It was this growing funding stress that caused former NY Federal Reserve trader Joseph Wang to write last week that, “The end of QT [Fed quantitative tightening, or balance sheet reduction] is coming soon, and further growth in the Fed’s balance sheet will necessarily follow.”
A return to Fed balance sheet expansion would certainly be a significant development. The Fed is already cutting interest rates into record high stock prices, record high stock valuations, and 3% CPI inflation after inflation has already been above target for well over four and a half years. A return to balance sheet expansion (overt or covert quantitative easing) now would seem to be the last confirmation that the U.S. is indeed all-in on a policy commitment to run the economy hot, inflate the debt away, reindustrialize the atrophied U.S. manufacturing base, and attempt to preempt (with these stimulatory measures) any economy and/or market crisis that threatens to break the system. To be clear, the trade-off for this policy prerogative is very likely to be inflation and a seriously negative impact to the purchasing power of the U.S. dollar.
Now, this week, HAI was down south on the banks of the mighty Mississippi River at the famed New Orleans Investment Conference. After endless presentations, many great conversations, and a couple of memorable French Quarter dinners, this author is most tired and very ready for a restful weekend.
But before hitting the showers (so to speak) after a long week, HAI will say this: not even the traditional gold bull community (let alone skeptics) seems to grasp (yet) the full magnitude of what HAI believes is actually unfolding in this gold bull market—nor do they yet comprehend the gold bullish implications.
No presentation over the course of four days in New Orleans made a case that this gold bull market is any different than what we have already seen in the 1970s and in the 2000s. In other words, this bull market is seen as merely another periodic flaring-up of the newly dubbed “debasement trade.”
In HAI’s view, though that analysis is partially correct in some very important ways, it is also woefully incomplete. While we are certainly in a secular dollar debasement trade, we are also in the midst of a major global monetary regime change out of the post-1971 petrodollar system.
For a more detailed explanation of exactly what the “debasement trade” explanation of gold’s strength misses, this author recommends readers turn back to the October 17th HAI for review.
If HAI is correct, this is extremely important because it implies that the re-monetization of gold within the global system as primary reserve asset has not only been missed by the mainstream, it hasn’t even been marked to market by gold bugs. That suggests two possibilities: 1) this author is crazy (certainly possible), or 2) we are still very early days into the ultimate revelation of gold’s true value in a post-petrodollar global system (probable, in HAI’s view).
This week we received the latest in a string of recent confirmations that HAI’s view of a major monetary regime change away from the post-1971 petrodollar system is far from crazy.
Rabobank’s Global Strategist Michael Every is, in HAI’s view, one of the sharpest minds active in markets today. This week on MacroVoices Every said, “I think the next part of the discussion on currencies and the Fed is…do we want the same global reserve status for the dollar and U.S. Treasuries that we have now, whereby when people want to buy U.S. assets, that forces the U.S. to run a trade deficit, forces the U.S. to run a fiscal deficit, forces the U.S. to de-industrialize, and all of that is done to keep the dollar the way it operates now? And logically, the answer to that will be—no!”
In other words, Every is acknowledging that the negative impacts of Triffin’s Dilemma (defined in paragraphs 11-13 here) have hit the U.S. hard—and the U.S. knows it! The implication is that at this point a monetary regime change isn’t just a top foreign agenda but is now a home-grown U.S. national security priority. Furthermore, the added implication is that almost no one understands the extent to which gold is about to be brought back onto the center stage of a new global monetary regime.
China wants to internationalize a gold-based yuan, the U.S. needs a new neutral global reserve asset, and this is all while dollar debasement policy prerogatives will continue to dominate. That, in HAI’s view, is the reality of our modern moment, and that reality has profoundly significant bullish implications for gold. As long as that view remains outside of consensus, gold (and related assets) remain among the best opportunities available in markets today—a truly generational opportunity. And as long as that’s true, pullbacks in gold like we have seen over recent weeks remain an excellent buying opportunity for the patient.
Weekly performance: The S&P 500 was off 1.63%. Gold was nearly flat, off 0.11%, silver was down 0.97%, platinum was lower by 1.27%, and palladium lost 3.11%. The HUI gold miners index was down 0.23%. The IFRA iShares US Infrastructure ETF was down 0.44%. Energy commodities were volatile and mixed on the week. WTI crude oil was off 1.87%, while natural gas gained 4.82%. The CRB Commodity Index was lower by 0.54%. Copper was down 2.91%. The Dow Jones US Specialty Real Estate Investment Trust Index was up 0.97%. The Vanguard Utilities ETF was higher by 0.73%. The dollar index was lower by 0.25% to close the week at 99.55. The yield on the 10-yr U.S. Treasury was up 2 bps to close the week at 4.10%.
Have a wonderful weekend!
Best Regards,
Morgan Lewis
Investment Strategist & Co-Portfolio Manager
MWM LLC
