It's only been about three weeks since I last advised taking a position in gold-mining stocks through the Market Vectors Gold Miners ETF (GDX). I've been getting a lot questions asking whether it's too late to get in now because the ETF is up about 38% since that column. The short answer is no, it is not too late.
The gold miners are experiencing an upside correction from the terribly oversold level they'd reached last year, which I wrote about in December. I expect GDX to double from current levels this year and, from a longer-term perspective, my expectation is for a 1,000% increase over the next decade, which is a 25% average annual rate of compounding.
Currently, the markets are experiencing the effects of the asymmetry of risk that Federal Reserve Governor Lael Brainard spoke about last year, just before the Federal Open Market Committee decided to raise rates, in a speech about normalizing monetary policy while the neutral interest rate is low. I wrote about the asymmetry of risk in December. In short, the risk asymmetry is that the probable negative consequences of raising too early are greater than moving rates late in the cycle, and that the prudent direction for monetary policy would have been to punt on a rate hike decision in December. That, of course, did not happen.
The reason for the global market action that has taken place since the FOMC's decision to raise interest rates in December 2016, however, is not simply in response to that move. That was just a catalyst.
The big issues are debt and demand.
Bloomberg News reported in January that a $29 trillion corporate debt hangover could spark a recession. There is no historical precedent for the scale of corporate debt today as a share of wages and GDP -- not even close. Total cumulative claims accruing to the existing debt preclude growth of world real GDP per capita in perpetuity, which leads to a binary outcome. Either demand increases immediately, allowing for the growth in income needed to service existing debt and add new debt, or a debt-deflationary wipeout unfolds and resolves.
That's all folks.
For institutional investors, the hiding place in the event that demand does not immediately increase is U.S. Treasuries. For retail investors, the only place to hide is gold and similar hard assets.
Even if the Fed were to immediately reverse course and begin to stimulate again, it would not be able to provide the immediate increase in demand necessary to prevent contagion. That can now only come from fiscal intervention by the world's largest countries. That does not mean that the Fed won't reverse course. It is highly probable that it will reverse course very soon, and it is probable that the global capital markets will respond positively to such action.
All that will do, however, is buy some time for fiscal authorities to act.
The problem is twofold. There's no guarantee they will, especially during an election year in the U.S., and there's no guarantee that doing so would be successful at preventing a debt-deflationary spiral from occurring. The reason for this is the systemic and structural changes to the operations of economies that have become increasing evident since the 2008 financial crisis. (Dr. Jack Rasmus offered an excellent synopsis of this issue in a January presentation in San Francisco on the systemic fragility of the global economy, which I also wrote about a year ago here.)
Awareness of all of these issues and their implications and potential consequences is the real driver behind the action in global capital markets in the past few months, and it is likely still in its early stages. As the degree of awareness among capital market participants grows, concern about the potential for a flight to safety similar to what occurred after the Russian sovereign default of 1998 -- and perhaps become self-validating -- will increase unless governments take steps to prevent it.