Produce Or Print?

There are times when you read things that really hit home. One of those things happened to me yesterday when I read an article on Zerohedge. It stated that if the US stock markets were to drop 25% (4 times what they were down at the time) the level of overvaluation- at that point- would be equal to the dot-com bubble of the late 90s. In addition, they would have to drop DOUBLE THAT to get back to historical norms.

To me, that really shows the level of frothiness in these “markets” that still exists even after the recent pullbacks. The metric used was the “Buffett Indicator” that measures the “value” of the market relative to GDP. Recently it was measured at, not only an all-time high, but FAR beyond any level in our history. The “value” of the “market” was 255% of GDP- ridiculous.

It should be obvious that the “value” you are getting buying at these levels is miniscule and the risk you are taking is at best- elevated.

Only in an environment where central banks and their buddies are “printing and buying” could such absurd valuations happen- particularly in a period where the underlying economy has been collapsing at an increasing rate for over a decade.

While many get hurt financially by all of the manipulations and mispricing of assets the real pain- I believe- is about to be unleashed. This is when all of the mispricing of assets and all of the production problems that are caused by it manifest themselves first by inflation- then rampant inflation and finally shortages of even the most basic of items.

Most of this will be blamed on COVID, the war in Ukraine and whatever they have in store for us next. There has to be a reason for inflation and the misery it brings so that the real culprits- the money “printers” and traders don’t feel the wrath of the millions of people whose lives they are destroying to line their own pockets.

We are seeing the devastating results that the traders are foisting upon most of the population in the commodity “markets” right now. I have to use “ “ around markets because in a real market there would be true price discovery. Here- there is NO true price discovery. When the big boys start to lose the rules get changed. It became apparent last year with Gamestop and other meme stocks and now this year in commodities. For example, when nickel surged higher and caused billions of dollars in margin calls the “market” for nickel was shut and some trades were deemed to not have happened.

This reminds me of 2008 when a friend of mine thought he had made a $30 Million profit shorting the market. Of course, since the counterparty (the losers) couldn’t pay he wound up in court and collected about $3 million a few years later. This is the counterparty risk I write about when I explain that hard assets like gold don’t count upon anyone else to pay you back. One man’s asset is another’s liability- unless you own a hard asset free and clear. Could this be the reason for record gold buying by central banks, major banks and countries?

While the financial pain is significant, the real pain starts when things that we need to survive don’t get delivered. This started with the “printing” and rising prices. This led to a misallocation of capital and has led to an unbalanced economy which appears now to be coming apart at an increasing pace.

There are warnings being put out by those attending the Commodities Global Summit in Switzerland that while most are feeling the pain at the gas pump the real 800 pound gorilla in the room is the lack of diesel fuel. They are calling this a global problem that could lead to “stock outs” or- no diesel to be had.

As a matter of fact, Austria has become the first country to put limits on diesel spot sales until further notice.

I can only picture even more bare shelves and far higher prices if more of this occurs.

I believe that this situation is being made far worse by what I think will be the next up leg in inflation which is resource nationalism. The war in Ukraine has enlightened many as to how important Russia and Ukraine are for global food supply, fertilizers and all sorts of specialty commodities. Russia has stopped shipping fertilizer and many other products that the world desperately needs. Ukraine has done the same. Argentina and other countries are also either greatly curtailing or banning exports of agricultural goods.

Who do you think will suffer most in a battle of wills? Those who produce what the world needs to survive or those who produce little but have loads of debt?

I believe that while we are trying to punish Russia financially, we may get a real lesson on how important it is to be self-sufficient.

While we can freeze bank accounts and put sanctions on those we want to punish they have the ability to actually make the necessities of life either ridiculously expensive by creating real or imagined shortages or by cutting them off altogether. As a matter of fact, if someone told me that I was kicked out of the financial system and couldn’t get paid my first reaction would be that you are not getting any goods either. While both may suffer, those producing goods have tangible assets that can be sold elsewhere or used to get the masses fed.

In another twist it appears that Putin has another trick up his sleeve as he has now demanded that oil and gas that goes to the EU, USA and UK have to be paid for in Rubles. After the Ruble was trashed because of sanctions this just changed the game and creates a lot of new demand for the Russian currency.  

Russia is already selling gas and oil to China for Yuan, India for Rupees, and now it appears that the USA, EU and UK will not only be undermining the US dollar with Russian imports but they will be unwittingly propping up the Ruble.

In the meantime, amid the chaos which global “markets” have become with machines making millions of trades based upon charts, price movements and even headlines gold has shown its value to me.

While the artificially propped up stock, bond and real estate “markets” remain in bubble territory gold remains in the inverse bubble category as central banks and major banks continue to suppress the price. This is as they BUY in record amounts.

I believe the biggest risk posed by these artificially propped up markets is that they can (and likely will) all collapse at the same time. Many say it will start in the bond market. Personally, I believe there will likely be some signs that may get us out just a little ahead of what may be a record cascade lower in record short time. This may not leave any time for those who believe themselves sharp enough to “get out in time”.

By the time the action in the bond market is seen it may be too late. If you keep your eyes on global trade and we see that there is a meaningful pullback in the use of the US dollar in international trade, I believe that this will be a sign to start reducing exposure to paper assets and live to fight another day.

This, of course has already started but there will come a time when critical mass is hit and then the avalanche may begin.

At this point you may miss out on some upside opportunity for a short time but it may be the best move you ever make if the US dollar is dethroned and they can’t “print” money at will to keep the illusion alive. More than likely this would reveal itself in the bond market before stocks and real estate but the action may be so swift that there will be little warning.

If you are holding unencumbered physical assets you don’t have to worry about someone else defaulting on their promises. What is the VALUE of a promise that cannot or will not be kept?

Be Prepared!

Any opinions are those of Mike Savage and not necessarily of those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information in this report does not purport to be a complete description of securities, markets or developments referred to in this material. The information has been obtained from sources deemed to be reliable but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.

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