As most of the world knows, we had a government shutdown recently that was focused around a non-budget item DACCA. After the government was shut down for 3 days, Congress passed a short term Continuing Resolution (CR) Bill that keeps the government open until February 9th. Since President Trump has been in office there have been four times now that they have not agreed upon raising the Debt Ceiling.
Our President has had laser focus addressing everything he believes is important first, repeal and replace Obamacare, pass a tax bill, fix trade deficits through opting out of trade agreements, pass a $1 Trillion infrastructure spending bill, fund the wall, and take care of the looming DACCA challenge. While those have taken a front burner, what has been simmering on the back burner is a budget.
We have had four “kick the can down the road” events of not raising the Debt Ceiling, and the last time it shut our government down. February 9th is just around the corner. If Congress again only passes a few short term CR to buy more time, that just brings us much closer to where the timer on the debt bomb will run out. Continuing Resolutions average 3 weeks to 6 months, but this time we have only until mid-April when the government will run out of money. We have somewhere around 45 days and if no agreement is made, for the first time in history we will default on our debt.
Sell Off US Treasuries?
China announced in mid-January that it was halting buying U.S. Treasuries and is considering selling them. While the dollar has been on a downward trend for about a year now, that trend sped up from 2nd to 3rd gear. Last week Treasury Secretary, Steve Mnuchin said at the Global Economic Forum, that a lower dollar was beneficial to U.S. trade. The Dollar market drops precipitously and Gold surges upward. Two days later President Trump puts the brakes on this by announcing America needs a strong Dollar, contradicting his statement in April of 2017 saying the Dollar is too high and is hurting trade. I believe that if President Trump would have not made this turn of events announcement, then this week there would have been a massive sell off of the dollar. Unfortunately, this is just buying time since we all know there will be this massive sell off of the dollar by the largest holder of the Dollar, our Central Bank, The Federal Reserve. They have made the announcement they are going to do this. Also they have confirmed their intentions a multitude of times, yet have waited to start the process. All of this is happening while the biggest bubble in history is forming, Bonds, i.e. U.S. Treasuries. Take a look at the chart of a clear break out of the yield on the 10-year Treasury.
It is screaming “Bubble”. Bond Kings Bill Gross and Jeffery Gundlach have warned intensely such an environment would come and they were right, we are here. Gundlach warned about a specific number break out at 2.6% and it did that. Now the analysts that are ignoring this warning are saying this is ok, what the “new” normal yield should be is 3%. That is like saying the new normal for your house temperature should be 90 degrees. Yields going up like this will only force the Federal Reserve to sell their Treasury holdings and other Central banks also will continue to do so. Treasuries are the foundation that supports our country and it’s appetite to spend. It is also the largest market in the world. The red lights are now flashing “sell”!
Saying this creates a dilemma for the United States is an understatement. The picture has now become reality of the little Dutch boy holding back the mammoth pressure from the wall of water. Does he have enough fingers to plug the holes?
Recently I have been talking more about Gold, the Dollar, the Debt, and other related topics this year. I am now a regular guest on with TD Ameritrade, the largest trading platform in the world. Being interviewed by well-known analyst, trader, and guest on CNBC, the host of TD Ameritrade FUTURES, Ben Litchenstein, has been now almost a weekly event. Although I have in the past done short term trading, I was not asked to come on TD Ameritrade for that, instead for specialty of economics and how Gold and precious metals relate. You can check out the recent interviews on our website by clicking here.
Sell Off of Stocks?
Many financial analysts have confirmed that the creation of Quantitative Easing I, II, and III, allowed the Federal Reserve to create more U.S. Treasuries. Creating an artificial bubble of enormous size. This created a stock market rally of unhistorical precedence. It was also fueled by President Trump implementing deregulation put on businesses by the prior administrations. Stocks have been on a rampage last year and the beginning of this year, and now a bubble has formed. Herbert Hover said “A chicken in every pot, and a car in every garage”, in 1928 after the roaring 20’s, and a year before The Great Depression. Americans were not paying attention then to the bubble being formed and human behavior has not changed much. Ignorance is not bliss though. Today the modern version would read “Crypto currencies in every retirement and a 5 car mansion owned by all.” Yet the quote of practical nature should be “Eye glasses for all, and Gold coins in every safe”. That way the obvious bubble would be seen and the means of protecting oneself is done in advance.
Many experts have predicted an imminent correction or even a full-blown crash in the US stock market. Currently today’s stock market is the most overvalued on record, more than in 1929, 2000, and 2007. Just consider one fact; over a 50 year span the average return in the Dow is 7%. So far this year the market is up 7.1%, not quite a month into the year. This is far beyond abnormal. I have been saying since the beginning of this year, “It is not a matter of “IF”, but “WHEN” the market corrects. Oliver Bate, CEO of Allianz said last week “it is not a question of “if” but “when”. We don’t know when a correction is going to happen, but it’s absolutely clear it is going to happen.”
We are now in the 3rd year of a Bull market in Gold. The first year it went up 9.6%, last year it went up 12.9%, and so far this year it is up 3.1%. When the correction happened in 2008 Gold went up 50% while stocks went down 40% plus. My advice is start taking some of your profits off the table and secure them by buying Gold. Historically you will have another asset growing in value but also Gold goes up when stocks correct.