It just takes a single catalyst, one event, that can start a chain reaction, a domino effect, to bring about a much-needed change. History is meant to be a great guide, to teach us of what not to do, to avoid the mistakes of the past. Although, this mere fact is lost on central banks that see Japan as their model, instead of something to avoid. The Bank of Japan now owns about 80% of all ETFs domiciled in Japan, and did it do any good, or help them reach their targeted 2% inflation? No, but the U.S. central bank keeps following down their path, and towards zombification.
It is said the trigger for World War 1 was the assassination of Archduke Franz Ferdinand of Austria, when in 1914 a Serbian nationalist terrorist group assassinated him. It was perhaps the match that lit a much bigger fire. We were at the heights of nationalism, imperialism and militarism. Sound familiar?
The protests against the brutal, ignorant and unnecessary murder of George Floyd, seems to have caused a massive reaction across the U.S. It is reflective of a system that has been ignored for the past decade or more. The divide and inequality was boiling for some time. Today, the Coronavirus lockdown has resulted in 40 million Americans losing their jobs -- mostly those below 45k income and minorities -- with no signs of it coming back. This event could be the straw to break the camel's back. People are tired of the political and financial system.
As central banks are printing trillions of dollars, who is it going to? Certainly not to the small business owners, or the people who lost their jobs and received a mere $1200 stimulus cheque. It is being handed out hand over fist to all the large corporations, companies that have abused the system and mismanaged their balance sheets for years. Instead of being punished, the central banks are rewarding them with even more cash.
On top of that, the system is so perverse that Technology companies, who have a lot of cash, are being allowed to raise even more in the debt markets, to buy back even more of their stocks. Indeed, $65 billion in buybacks were announced in just the last three months -- they borrow cheap money and buy their own stock, inflating their stock prices. If this is not highway robbery, then I am not sure what is.
The Fed is buying back zombie company debts instead of letting them go bust. Why bail out cruise liners, airlines, businesses that have been running at a loss? Because the Fed knows this entire Ponzi scheme is built on a fake valuation of "asset prices". Once that deflates, everything will come crushing down. They cannot and will not let that happen. It eats into their mandate.
What an economist or central bank should do is let things fail, to clean the system out, to then rebuild again -- not on leverage, but on pure demand growth. But they do not have the will nor the incentive to do that, instead they want to pursue the political agenda. This is not subtle anymore and people are noticing it as there is a massive social divide. The Fed needs to be careful as no amount of money printing can save this once there is full-out civil unrest . They would be wise to hand over money to citizens and businesses, not to their Wall Street buddies.
This divide was slowly building when the first "major" crisis hit in 2008. The Fed at that time printed a trillion dollars through quantitative easing over years. Now, there has been unprecedented printing of $3-4 trillion dollars done in a matter of 3-4 weeks. This is because of unprecedented debt levels and inflated asset prices. It takes a whole lot more to "cover up" the real problem, and the Fed knows it.
But this is now not under the radar. The average citizen is noticing and feeling it. For years, the stock market was growing, but the real economy was not. The Fed has been desperately trying to get to their 2 % inflation target, incentivizing consumers to spend, but instead this is causing a deflationary spiral. It is a vicious cycle as they cut rates even more and their 2% target is never reached. Instead of asking themselves why this experiment was not working, they blindly went on doing the same.
At a time like this, there is only one thing for certain. We will be entering a period of hyper or stagflation. Most advisors have about 10 years under their belt, and probably cannot even spell inflation. The 60-40 Equity/Bond asset allocation model is dead. The new normal is Gold and its more racy sister, Silver. Look at what is happening to prices today. This is just the start. We are in a deflationary mode, but soon, once inflation starts, hard assets like Commodities will be bought.
The thing about Commodities is that not all will benefit as they are still dictated by their demand supply dynamics. So, choose ones with the tightest of fundamentals, together with the macro backdrop, they will rally the most. The risk/reward in Equities today is to the downside at these levels, especially given all the geopolitical risks, civil unrest, global dollar debt servicing and stretched valuations on earnings that are still not known.
The only viable asset classes have been, and continue to be, Gold and Silver, as central banks keep on making the same mistakes. This is a secular theme over the next few years. There will be periods when bouts of dollar rallies and profit taking can cause pullbacks, but those will need to be added to, not shied away from.