2021: The Surreal & The Real

As we approach the end of 2021, we look back upon the surreal convergence of risk assets (stocks, bonds and real estate) hitting all-time highs despite open confirmations of unprecedented economic, market and currency risk.

These risks effectively stem from a global debt crisis (i.e., broken balance sheets from Evergrande to DC) which have pushed inflationary forces well beyond “transitory” levels.
 

As a result, many are wondering how long the disconnect between rising and artificially supported markets and stagnating economic conditions can continue.
 

Years of repressed interest rates and staggering levels of post-08 money creation by central banks have created the longest and most artificial (as well as dangerous) bull market in history, one which we believe is nearing its end. Here’s why.
 

Undeniable Risk Indicators

A. Unsustainable Debt Levels

Global debt levels surpassed the $300T level in 2021, with increasingly broke nations issuing increasingly unwanted IOU’s (i.e., sovereign bonds).

With less demand for more bonds, nations like the U.S. have had no choice but to engage their central banks to buy their own unloved debt, all of which is paid for with money literally created with a mouse-click.
 

B. Equity Bubbles

Such desperate yet record-breaking “liquidity” (the Fed’s balance sheet exploded past $8T in 2021) has a direct correlation to equally record-breaking and dangerously over-valued stock market:

























 

C. Negative Yielding Bonds

This central bank expansion (tidal wave) of the broad money supply and 24/7 liquidity for global bond markets has sent sovereign bond prices so dangerously high in 2021 that their yields (which move inversely to price) are collectively negative to the tune $19T.
 

Risk assets are thus unequivocally over-stimulated and overpriced, and by extension, unacceptably vulnerable to a dangerous mean-reversion, easily triggered by any number of economic forces.
 

Trigger No. 1: Inflation Rising Rather than Transitory

The most obvious risk arising from years of extreme “accommodation” (i.e., record-breaking fiscal and monetary policy) is the inflationary consequence of tossing too much money into an otherwise un-natural system.
 

Despite policy maker attempts to downplay a 5.4% year-on-year inflation spike as “transitory,” informed investors are becoming increasingly aware that inflation is rising rather than passing.
 

Sadly, these inflationary forces are colliding with increasingly apparent signs of a recession ahead.

























 

Trigger No. 2: Recession Ahead

The latest Small Business survey from the National Federation of Independent Business (NFIB), for example, revealed that general business conditions in the U.S. recently hit the 3rd lowest levels in the last 50 years.
 

Such lows have consistently operated as reliable leading indicators of a recession ahead.
 

In addition to the NFIB data, the U.S. Consumer Confidence/Sentiment indicator tanked in 2021. But even more surreal (as well as recessionary) are the latest revisions to economic growth forecasting.  
 

The Atlanta Fed’s dismal GDPNow index recently cut its end-of-year growth projections from 6% to 0.5%.
 

Thus, as stock markets ripped dangerously higher on artificial stimulus rather than Free-Cash-Flow, economic productivity sank further toward the basement of time, creating the greatest disparity between stock valuations and GDP ever recorded:























 

The foregoing data is more than just a theoretical warning of over-valued and hence dangerous markets, it’s a neon-flashing sign of current recessionary risk.
 

Heads Buried in the Sand

For many investors, however, such risk signposts are conveniently overlooked when one is riding a market bull to ever-greater wealth. As stocks, bonds, real estate and BTC witnessed new highs in 2021, it was easy for the risk-blind to chase tops rather than consider hard facts.

Such market psychology, of course, is nothing new. Everyone says “buy low and sell high,” but almost no one actually does so. Just before the Nikkei collapsed in 1989, for example, the popular phrase in Tokyo was, “If everyone is crossing the street at the same time, how can anyone get hurt?”
 

Of course, the Nikkei crashed by greater than 80% in the midst of such hubris. Now, some 30 years later, that same market has yet to recover its previous highs. We are confident that an equally brutal market drawdown is approaching, as current price and debt levels are far too high to sustain by central banks who are losing credibility as well as options with each passing day. 
 

Evergrande as Symptom

Like the Evergrande scandal in China in which a single property developer was caught with over $300B in liabilities for which it will soon default, fears of another contagious (as well as global) Lehman moment (i.e., liquidity crisis spawned by extreme over-indebtedness) are both rising and familiar.
 

The damage as well as implications behind the Evergrande disaster extend well beyond the enterprise itself.
 

China, home to the second largest economy in the world with over $14T in annual GDP, is experiencing its own debt-crisis of which Evergrande is merely the most recent headline. Given that just about everything in the Western supply chain originates in China, whenever this nation begins to sniffle, the rest of the world gets sick. 
 

Price inflation driven by supply chain constraints out of China is a genuine threat, as is the quantifiable fact that the overall Chinese land market is heading into a massive downturn. Land auctions across 128 Chinese cities in September saw tanking demand by developers with less access to funds and increased fears of default. In fact, defaults by property developers in China have recently hit a record high.
 

As the 2008 Great Financial Crisis reminded us all, a real estate implosion in a major world economy can have a dramatic impact (i.e., domino effect) on the entire (and increasingly debt-fragile) global market system. 
 

Systems Fail as Faith Fails

The staggering level of corruption and mismanagement evidenced by Evergrande has been matched only by recent and growing evidence of insider trading among members of the U.S. Federal Reserve. As faith in magical money printing (as well as the magicians who print that money) slowly unwinds, so too does the entire market bubble driven by that magical (i.e., fiat) money.
 

But again, memories get short when markets grow taller by the day. The fear of missing out replaces the signs of getting burned. For informed investors, however, the longer lessons of history are far more telling than the short-sighted joy-ride of grotesquely inflated asset bubbles.
 

The Ignored Golden Era

Gold, for example, which rose by 25% in 2020, was considered a “hated” asset in 2021. As tech, crypto and real estate prices hit nosebleed levels, gold could not compete against such irrational exuberance.
 

The great irony, however, is that history, math and economic indicators remind far-sighted wealth preservers (as opposed to near-sighted wealth chasers) that gold is now ideally suited for the converging (as well as grossly mismanaged/deteriorating) market forces gathering before us all. In the coming months, for example, the Fed, like other central banks, plans to slightly “taper” its money printing while simultaneously promising to keep rates low.
 

Despite any headline taper, however, the Fed has other liquidity tricks up its greasy sleeves in the form of the Standing Repo Facility and international swaps to continue otherwise distortive monetary expansion (as well as extreme fiscal spending). Such continued and extreme fiscal and monetary policies, of course, just means more inflation ahead.
 

Accepting What Others Ignore

For realistic as well as history-informed investors in precious metals, this obvious trend toward negative real rates presents the perfect setting for gold, which shines brightest when inflation rates greatly outpace interest rates and sovereign yields.
 

Thus, as the majority of speculators chase SPACs, cryptos, and PE-deranged growth stocks to new highs (and inevitably new lows), patient gold investors have been buying the gold dips and preparing for a gold surge. This is because far-sighted and wealth-preservation investors know what 2/3 of retail investors (based upon a recent Bank of America poll) don’t want to know, namely: Inflation is not transitory, it’s sticky, growing and dangerous.
 

Inflation, moreover, slowly kills the purchasing power of fiat currencies, which, when measured against a single milligram of gold, are losing value with each passing day.





















 

Once the rest of the world accepts the dark yet inevitable reality of inflation and the new abnormal of a debt-drunk financial system mis-managed by debt-drunk policy makers who seek to dig their way out of debt via deliberately negative real rates, demand for gold, one of the scarcest assets in the world, will surge—as will its price.
 

Thus, for patient investors seeking a soft place to land in a backdrop of obvious debt, financial, market and currency risk, history as well as common sense are all pointing toward that patient, time-tested and soon-to-surge asset: Physical gold.   EG