"I'm telling you right now. We are going to have a crash and it is going to be terrific. I don't know when it is going to be. I think maybe in September or October, but it is going to happen."
-- Mark Yusko Morgan Creek Management
In 49 BC Julius Caesar led a single legion of soldiers across the river Rubicon and changed the Roman Empire forever. Since that time the phrase "Crossing the Rubicon" has come to describe an individual or group that commits to a high risk and irrevocable course of action. Global central bankers, led by our own Federal Reserve, have taken the world of global finance down a path from which there is now no return. Vast quantities of time and resources have been spent and there can now be no turning back. The question remains, however, have central bankers found a path capable of defeating the business cycle or have they only delayed and exacerbated the inevitable?
According to Zero Hedge, one-third of all tradable global bonds, or $18 trillion out of a $54 trillion market, are presently owned by central banks. If this position were ever attempted to be unwound it would most certainly cause an extreme and unwanted market reaction. A "slow" unwinding of this massive position is exactly what central bankers are now promising.
Combine this truth with the current reality that Ambrose Evans-Pritchard, International Business Editor of The Daily Telegraph, describes as the most serious credit saturation since the 2008 crash and we have the formula for a major financial dislocation. Unfortunately, central bankers, from Janet Yellen to Mario Draghi, continue to wax poetic about the state of their economies and how everything is working out just fine according to their plans.
The sad truth is this: Central banks have aggressively pursued the most aggressive debt creation in history over the last eight years. They have done this harboring the belief that they would create inflation within their economies and this inflation would be enough to overcome the debt. Unfortunately, minimal inflation or actual deflation has been the order of business and the debt loads are becoming a greater and greater drag on economic growth as they gobble up more and more cash.
It is an odd circumstance when a major bank being sold for 1 euro is hailed as a great victory but this is exactly what has just occurred as Banco Popular (BPESF) was forced to sell to Santander (SAN) . Santander must now raise 7 billion euros just to plug the gaping debt hole Banco Popular gave it.
The word out of Spain and the European Union is "problem solved" and no further trouble or contagion is anticipated in the region's banking system. But that's hard to believe, even for central bankers who have been wrong on economic growth projections and banking failures since the "Great Recession."
This disconnect continued this week with the Fed raising rates 25 basis points. Chair Yellen and crew seemed to ignore tepid economic data points and focused their narrative on "normalizing" policy. After eight years of monetary expansion and zero interest rates, normalizing policy is tough to comprehend, as the economy shows clear signs of being stuck in the same slow- to no-growth pattern of recent years.
What Yellen is really telling us is that the Fed has a plan and it will stick to the plan regardless of circumstances. We have crossed the Rubicon; there is no turning back!
The good news is that all is not lost and a solution does exist for this coming calamity. The overused and rarely understood catchphrase "think outside the box" comes to mind. The box we all think in is the current financial system that has molded and formed our financial universe for the last 60 years.
Fiat currency, debt creation and the investing models of Modern Portfolio Theory have brought us to this point. The constant drumbeat for return on capital has gobbled up the savings of a great plurality of the population and pushed that wealth into far riskier assets than the average investor realizes.
True diversification has become nearly extinct, as most asset classes are fundamentally valued based on permeating debt and immeasurable counterparty failure risk. Some assets still remain insulated from this financial Pandora's box, however.
Precious metals are outside the box. Gold is money and it carries no counterparty risk. You own it, it is real, and it is yours. Physical gold, owned and unencumbered is real wealth saved. It does not depend on any other parties promise or ability to pay.
Gold stands outside the financial system dependent on debt. In these turbulent times it would be wise to own an asset outside this system.
David Yoe Williams Jr. is a principal at Strategic Gold, a Naples, Fla.-based firm that buys and stores physical gold for investors.