Confidence Sand Piles and Omnipotent Feelings
With the MWM “Hard Asset Difference” event on Thursday and weekend travel obligations, this week’s HAI is little more than a few brief comments. For those interested, see below for a link to a recording of Thursday’s MWM Hard Asset Difference Zoom call.
Last week HAI highlighted the “confidence bubble” as both the ultimate bubble of our time and one that may indeed be popping. HAI contends signs are increasing that the unsustainable fiscal and monetary policy trajectory we’ve been on may finally be reaching the critical point. The accrued negative consequences of decades of radical policy make further can-kick, business as usual, extend and pretend policy measures untenable. Signs of the end of the road are most obviously on display right now in what HAI sees as the breakdown of the Fed’s effective use of interest rates as a monetary policy brake.
As HAI has previously pointed out, with debt, deficits, and interest expense as high as they are now and still growing, the Fed can’t raise interest rates “as needed” without risking a debt and deficit doom loop via the interest component on federal debt. Conversely, if the Fed keeps interest rates artificially suppressed to reduce federal interest expense and keep insolvency risk in check, it does so at the risk of untethered inflation and inflation expectations.
This is the nature of any truly unsustainable practice. Unless dramatic action is taken to mend the underlying principles of unsustainable policy, unchecked unsustainability will ultimately reach a point of critical breakdown. The closer we come to such a critical breakdown, the greater the risk that the “confidence bubble” in current monetary and fiscal policy orthodoxy will fully collapse.
Last week, HAI highlighted economist Peter Bernholz’s observation that “The sand pile can tolerate a persistent trickle…for quite some time. Ponzi schemes can go on for years. For a while…we might imagine that everything is contained.” Meanwhile, Bernholz continued, “risk quietly extends across the whole system as a ‘skeleton of instability.’ When a confidence bubble finally breaks, it tends to break abruptly.”
That’s the 800-pound gorilla nobody wants to talk about at present. The dramatically underappreciated risk we face today is that before the wheels fully fall off of late stage critically unsustainable policy dynamics, the “everything is contained” confidence bubble currently holding everything together could entirely give way. Again, the unfortunate truth is that “When a confidence bubble finally breaks, it tends to break abruptly.”
This week, long time JPMorgan CEO Jamie Dimon voiced eerily similar cautionary sentiments. After announcing that, for the first time in his long tenure as CEO, Dimon would be selling approximately $140 million worth of his JPMorgan stock, Dimon said, “Fiscal spending is more than it’s ever been in peacetime, and there’s this omnipotent feeling that central banks and governments can manage through all this stuff… I am cautious about what will happen next year.”
So is HAI, Mr. Dimon. For now, however, gold as financial insurance continues to be the sleep-sound-at-night, must-hold asset until financial markets are repriced without the altering effect of rose-colored confidence bubble glasses. The recent crash we’ve seen in U.S. Treasury prices is a good indicator, however, that at least the bond market sees the imminent writing on the wall. It’s already getting a step ahead of the game.
In the face of massive secular change, markets are currently extremely vulnerable. As HAI stated last week, its best to take preparatory financial action now, as we head into a new era, while most market participants “are still playing by the old rules.”
For crucial information on this subject, you can listen to our MWM Hard Asset Difference Zoom call held Thursday of this week. (You’ll be asked to register. The audio starts at 1:01 into the recording.)
Weekly performance: The S&P 500 was off 2.53%. Gold was up 0.21%. Silver was lower by 2.60%, platinum was up modestly by 0.08%, and palladium gained 1.71%. The HUI gold miners index was down 1.22%. The IFRA iShares US Infrastructure ETF was down 1.45%. Energy commodities were very volatile and mixed on the week. WTI crude oil was down 2.88% while natural gas surged 20.14%. The CRB Commodity Index was off 0.32%, and copper was up 2.44%. The Dow Jones US Specialty Real Estate Investment Trust Index gained 0.88%. The Vanguard Utilities ETF VPU was up 1.07%. The dollar index was up 0.40% to close the week at 106.58. The yield on the 10-yr U.S. Treasury dropped 9 bps to end the week at 4.84%.
Have a wonderful weekend!
Investment Strategist & Co-Portfolio Manager