This Ride is Out of Control
We’ve had a front and center seat of the disconnect in the price of physical metals and the paper price, especially in silver. The coronavirus has spurred a panic across all markets, and this panic has caused people to pour into metals despite the crashing price we saw in the physical spot price of silver.
The $12 silver spot price was a short tease because virtually no one was selling silver that cheap. In fact, eagles were selling at around a 100% premium to spot. With mine closures and mints out of metals, we have a perfect storm of strong physical demand with dwindling supply and liquidity issues starting to surface in the futures market.
The chips are settling and metals have risen to the surface of the ashes.
As unfortunate as this coronavirus has been across the board, many truths are starting to surface as a result.
After a 400% unchecked and unjustified bull market in large-cap stocks, it’s finally time for gravity to set in. During COVID, we saw complete vaporization of the stock market gains that were seen during the Trump boom. What took years has vanished in an instant. Fundamentals always win eventually but the Federal Reserve will fight it tooth and nail. Reflation, at the cost of trillions, has brought the markets back.
The Fed has thrown everything they can at the problem: not even willing to wait until the scheduled FOMC meeting, they made two unprecedented emergency inter-meeting interest rate cuts. That was their first attempt to keep the stock market propped up.
The tactics initially backfired, though, as investors construed the rate cuts as a sign that the Fed is in panic mode (which it is). Low borrowing costs ultimately aren’t going to blunt the economic impact of the coronavirus. Automotive plants shut down during COVID, Disney is STILL closed, and people are still very concerned about this new world they are living in.
Then the Fed ramped up the asset purchases. It wasn’t just the usual government bond-buying we saw in QE versions 1, 2, 3, and 4. This time, the Federal Reserve is gobbling up corporate bonds, mortgage-backed securities, and everything else they can get their hands on.
First, the endpoint was $700 billion, then $1.5 trillion. That didn’t even faze the markets, so the tanks and bazookas were deployed: a pledge to purchase assets “in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy.” In other words, endless QE.
And I do mean endless. In the first week of QE Infinity, $300 billion of liquidity was pumped into the American monetary system – two times more than the entire first QE program. They’ve decided to ignore the insane risks involved with issuing securities backed by student loans, auto loans, and credit card loans… The show must go on regardless of the consequences.
We’re ultimately in a hyper-deflation moment – not the solving of a problem, but replacing it with a new one. Once bubbles pop, they cannot be reflated, but a new bubble needs to be inflated or reality would set in and the government would bear the blame, but that would never be permitted to happen.
All they know how to do is throw taxpayer money at the problem, so that’s exactly what they’re doing. Right now, the U.S. is working on a $2 trillion stimulus package, which is the size of Amazon and Apple combined. The politicians and the Fed are trying everything possible to piece together this massive Jenga puzzle, not realizing or caring that the puzzle was broken years ago.
As we count down the final days of July, we get closer to the end of stimuli, rent moratoriums, and many of the safety nets that were in place to revive the struggling patient that was destined for death.
Every time the Fed acts, the markets get overwhelmed with reality. We’re in a 1930s-style depression with overwhelming supply and zero fundamental demand. The Dow Jones has literally gone through its worst decline since 1931 and is in the middle of reflation mode.
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That’s not a reflection of the real economy. You’ve had GE laying off 10% of its aviation department, Boeing demanding a $60B bailout so they don’t go bankrupt, Amtrak’s ridership volume declining by 92%, the U.S. Services PMI crashing from 49.4 to 39.1 (a record low), U.S. airlines planning to cut back domestic flying by as much as 40%… The list goes on and on.
It’s the beginning of the endgame for perma-bulls and bubble blowers, and QE Infinity was the Fed’s last hope of quelling the panic. The great unwinding is here, and metals are starting to put on the firework show we have already purchased tickets for.
People ask me all the time how this will get paid for and my answer is and will continue to be covert inflation.
The lender and those saving in fiat will witness their purchasing power vanish over time.
Chief Editor, CrushTheStreet.com
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