Signal and Noise
This was an important week in the wild world of markets. The broad market is suddenly down big, down hard, and down fast. Given the abrupt slide in financial assets and the resulting oversold technical condition, the everything-bubble playbook for the post-GFC market is now screaming “buy the dip” to anyone still reading the old script. That buy-the-dip instruction could, and in fact should, work for short-term upside in major market indexes that are now overdue for an oversold bounce (as we saw on Friday). The question is, will that bounce actually happen? The imminent answer is probably. But the bigger question is, are current oversold conditions also a promising set-up for the next rally-leg deep into new all-time high territory in our bubble markets? The answer to that question, in HAI’s view, is don’t count on it!
There are indeed some serious problems with that old buy-the-dip everything-bubble playbook at this market’s present oversold juncture. Excess liquidity previously supplied has been falling sharply since mid-January. At the same time, cash as a percentage of total assets is currently hovering at 20-year lows, even as we just confirmed an emerging bear market signal according to Dow Theory technicals.
In addition, for the first time in seemingly forever, market participants seem to understand that overt Fed intervention is less likely at current inflation levels than in previous similar instances. We can see strong evidence of that already on display. Despite recent weak U.S. economic data and a rather vicious market sell-off (all the excuse previously needed for the Fed to ease policy), probabilities for a rate cut at either of the Fed’s next two meetings have actually dropped over the last week. At the same time, current political policy ramifications may well have larger market impact than that of any other political policies in recent memory.
As Treasury Secretary Bessent recently explained, “Over the medium term, which is what we’re focused on, it’s a focus on Main Street… We have a focus on small business and consumers. We are going to rebalance the economy. We are going to bring manufacturing jobs home.” But as HAI has been discussing for weeks, according to this administration, bringing manufacturing jobs home means a structurally weaker dollar and necessarily disrupting the capital flows that have defined the post-1971 petrodollar system and the resulting “dollar recycling” that has largely facilitated the everything bubble in U.S. dollar-denominated assets.
Furthermore, the current political reality is that it wasn’t the wealthy that elected Trump to his second term. Voters with incomes over $100,000 represented the Democratic party’s best performing voting demographic. While 58% of households own stocks, according to Federal Reserve data, the top 10% of richest Americans own 93% of all stocks. The poorest half of Americans own only 1% of stocks. This is why attempting to prop up the stock market may be much less of a political priority for Trump 2.0’s attempt at a MAGA revitalization of the country. And as Bessent pointed out, “The market was up 20% last year, 20% the year before. Did the Biden administration succeed? The American people weren’t buying it just because the market was up—they voted out the Democrats.”
So, it seems the financial assets that dominate the broad stock markets may face stiff headwinds from Trump policies, and may also have to face those headwinds without the reassuring backing of a “Trump put” aimed at keeping asset prices inflated.
And, as HAI has asserted previously, even if the impact of aggressive Trump political policies is ultimately positive for the U.S. (and there is no certainty of that), a transition period, one that could potentially be extremely painful for both markets and the economy—should be expected.
And of course, all of this financial asset risk and uncertainty comes on top of record high valuations already in place that John Hussman describes as exceeding the highs “observed at the 1929 and 2000 peaks.” Furthermore, in light of those record valuation extremes, even without the added potentially negative fundamental developments already discussed, Hussman continues to “view the period since early 2022 as the extended peak of the third great speculative bubble in U.S. history—implying the most negative prospects for expected S&P 500 total returns on record.”
Again, those record valuations in and of themselves leave this market extremely vulnerable to a hundred risks, not just one. And at present, we do seem to have closer to a hundred risks, each with the potential to be the pin that pops the bubble.
To be clear, in HAI’s view, we have a mighty big old bubble on our hands. Since 2022, bullish price action and expectations for further bullish price momentum have built the bubble even larger. But now we suddenly have elevated volatility and obvious cracks in the market’s bullish price action façade. Market tops are notoriously hard to call, but after a solid retracement bounce, HAI would prepare for this market to roll-over yet again and threaten some real damage on the downside.
At the moment, though, it’s not at all bad out there for market participants playing outside the narrowing lane of our record financial asset bubble. Gold is shining, and it seems that both the Western financial media and the Western investor are starting to take note. According to Bloomberg, on Friday, “Gold prices passed $3,000 an ounce for the first time ever, driven higher by a central bank buying spree, economic fragility worldwide, and President Donald Trump’s attempts to rewrite the rules of global trade.”
Using Bank of America as a proxy for Western investor sentiment is telling. According to BofA’s Michael Widmer, “For [gold] to hit $3,500/oz, investment demand would need to rise 10%… That’s a lot, but not impossible.” HAI loves it. Stay skeptical, BofA! Because if what HAI believes is the ultimate driver of gold’s ascent (the growing global shift from “dollar recycling” toward “gold recycling”) plays out as this author expects, then a mere 10% increase in investment demand won’t even come close to accounting for the size and scope of the change we will experience within the global monetary system and the resulting shift towards gold as primary global reserve asset.
To underscore the point, just last week, in response to a Financial Times article titled, “Europeans move towards seizing €200bn of Russian assets,” Kathleen Tyson, an expert in global financial market plumbing, commented simply: “Steal these Russian assets custodied in Euroclear, and it ends the ‘sovereign debt as reserves’ charade that the U.S. and U.K. imposed on the world from the 1922 Genoa Conference to the Basel Accords.” Again, unless one believes that foreign reserve managers will exit the sovereign-debt-as-reserves “charade” in a large-scale flight to crypto currencies, then we are talking about a large-scale flight into gold as the post-1971 dollar recycling system transitions to a new era of gold recycling. In HAI’s view, that’s gold’s mega catalyst, and again, it implies much more than BofA’s 10% increase in investment demand. By extension, it also implies a move much higher in the gold price—far in excess of $3,500/oz.
After all, even without the global monetary regime change catalyst favoring gold, the yellow metal has already gained 10-fold in price over the last quarter century. That’s outperformance that even surpasses the everything-bubbling-S&P 500, the benchmark for financial assets, which “merely” quadrupled over the same period. In other words, gold’s performance, as major U.S. stock markets stumble, is now beginning to force the Western investment community to pay attention.
And when Western investors take a look at adding gold exposure, HAI strongly expects them to bid for what’s lagged and to bid for what is cheapest within the sector. That means the precious metals producers and royalty and streaming companies are currently likely poised at just the starting gates of a significant outperformance leg over physical that HAI fully expects to play out over the next couple of years.
Expect some volatile choppiness in the precious metals sector surrounding the psychologically significant $3,000/oz level, but HAI suggests that readers not mistake meaningless noise for the meaningful signal. To be clear, that signal is a fundamentally driven golden bull-market breakout decades in the making, with the related companies only now at the start of a much-deserved upside repricing cycle.
Weekly performance: The S&P 500 was down 2.27%. Gold was up 2.99%, silver was up 4.95%, platinum gained 3.05%, and palladium was up 4.83%. The HUI gold miners index was up by 4.89%. The IFRA iShares US Infrastructure ETF was up 1.01%. Energy commodities were volatile and mixed on the week. WTI crude oil was up 0.21%, while natural gas was off 6.54%. The CRB Commodity Index was off 0.12%. Copper was up 3.95%. The Dow Jones US Specialty Real Estate Investment Trust Index was off 1.36%. The Vanguard Utilities ETF was up 2.08%. The dollar index was off 0.08% to close the week at 103.70. The yield on the 10-yr U.S. Treasury was up 1.6 bps to close at 4.317%.
Have a wonderful weekend!
Best Regards,
Morgan Lewis
Investment Strategist & Co-Portfolio Manager
MWM LLC
