Last month former Treasury Secretary Tim Geithner warned that another financial crisis is going to occur again and the Federal Reserve and government will need to act accordingly with more Treasury buying to take on these hazardous market risks. So, let me get this correct…more Free Money is on its way? What happened to the Fed raising interest rates sometime this year?
Let’s look back starting in November 2008 with QE1 and then again in August 2010 with QE2 and then again from September 2012 with QE3 that lasted every month until October 2014 when the Fed finally pulled the plug on the free money. The S&P 500 went from an all-time high of 1400 when the recession started in 2007, and made a huge correction down to around the 700 level in 2009 when the ultimate bottom occurred. What’s startling about all of this is most individuals who were invested in stocks lost anywhere from 40-60% over that time span. Most of the big money was already safe and secure on the sidelines while the general public was hemorrhaging from their retirement savings trying to get their broker or financial advisor on the phone to figure out how to stop the bleeding.
Now, here is where things really get interesting…As you were finally selling your stocks because panic took over, guess what the big money was doing? They were entering back into the market to take advantage of the market lows and have been cleaning up ever since. Guess what? The super cycle is coming to a screeching halt and guess what the big money is saying now? Stifel strategist Barry Banister just released a note to clients warning them that the S&P 500 in the coming months will make another huge correction. He says that the three key signals of the market continuing to climb higher are about to all turn because the fumes from the QE programs are no longer fueling the markets. Banister’s report shows that the S&P 500 index and the Fed’s balance sheet were in bed together. What does that mean? Well, it indicates that the Federal Reserve single handedly moved the S&P 500 close to 250% since 2009’s bottom with Treasury purchases in 2008 through 2014. Obviously, there is more to it that just Fed’s QE while more than doubling our National Debt from $8 trillion to $18 Trillion. The other key factor is how they bought these treasuries at a near 0% interest rate. That is the wild card in all of this.
- Forget about all the corruption from the big banks that occurred from 2007 all the way up to 2013 with the manipulation of currency rates and also the hundreds of smaller community banks that shut their doors due to bad policies and toxic loan debt.
- Forget about the surplus of funds flooding to the stock markets around the world that have caused a massive expansion of the stock values.
Let us look at how the commodity Gold did during 3 major economic corrections over the past 40 years: Inflationary period of 1976-1980, the dot.com bubble in 2001-2005, and the Great Recession 2007-2011. All three of these time periods there was a formula that was driving Gold prices soaring and bringing the value of Gold to new highs. Inflation traditionally drives the price of Gold. Gold was at $105 back in 1976 and the Fed rate was sitting around 5%. Keep in mind that President Nixon just a few years prior shut the Gold window for good that essentially left our Dollar standing alone in a fiat status so they could fund more federal programs like welfare.
That meant the government could spend, spend, and spend without any restrictions since Gold was no longer tied to the Dollar. Then all the sudden the Federal Funds Rate rose to around 20% which caused inflation like we’ve never seen before as a nation. Guess what Gold did? It jumped up to $850 or 700% during the same time that the S&P 500 only went up 30%. The one good thing about President Nixon taking the dollar away from Gold would be that individuals could once again hold Gold privately after a 40-year period of being confiscated. Now in 2001, when the bubble burst on the NASDAQ, gold went from $250 to about $750. This was a precursor to what we would see Gold do from 2007 until 2011 when Gold hit an all-time high of $1920 an ounce.
Why do I highlight these three time periods for Gold? It’s simple. Gold historically hedges bad markets and a weak US dollar and high inflation. Guess what? This trilogy is coming to fruition once again according to Barry Banister. He says the S&P 500 has hit the end of the road which will cause commodities to rise, the dollar to lose its value, and inflation with the 10(year) yield. Based upon this historical precedent you will see Gold in the near future testing new highs in these types of volatile market conditions like what Timothy Geithner and Barry Banister are warning us about.
This blog was written by Jesse New, Account Executive at Landmark Capital. If you have any questions we can be reached at info@landmarkgold or by phone at 602-287-9200.