It Looks Normal But it Ain’t

It Looks Normal But it Ain’t

Buy equities and sell gold because the economy is strong and the Fed is supportive? Really?

We think you should not be fooled by the reigning narrative. Consider the following:

  • In 2018, US real GDP growth was the best in years. Nominal GDP rose more than 5% while the national debt grew by more than $1.2 trillion, about 6% of nominal GDP. Government spending counts in calculating GDP. So, if the national debt had not risen, economic growth in 2018 would have been negative. Strip out the annual deficit, which is borrowed, and the US economy is actually shrinking.
  • The last three quarters, the US economy registered real growth totaling $83 billion, which was celebrated. Strip out the inventory build of the past three quarters and you lose 83% of that growth. Inventories must be reduced and that means lower prices, lower margins, lower profits and reduced employment ahead as production slows.
  • When the Fed moved Quantitative Tightening to the maximum…$50 billion per month…in October 2018 after two rate hikes earlier that year, the market began to crash three days later. Coincidence? We think not. The economy has now been structured around ultra-low rates and excess liquidity. The Fed has no flexibility to take back its stimulus.
  • When $122 billion in GE debt began to trade like junk after its bonds were downgraded by Moody’s on Halloween, the junk bond market shut down 14 days later. We had a record 41 days with no issuance at all. No wonder the Fed abruptly panicked and changed course.
  • Half of all Investment Grade non-financial corporate debt …more than $3 trillion…is one step above junk. Corporate debt levels are at all-time highs. Downgrades and reluctance to roll this debt are major risks.


  • Money supply growth has been falling rapidly despite the immense increase in public and private debt. Why? Because the economy cannot profitably use new money so it is not being loaned into existence by the commercial banks. The velocity of money has slowed to a crawl because the economy can’t use it. The corporate sector is already choking on too much unproductive debt.


  • Capital investment is anemic at best. Zombie firms stay in business due to the availability and low cost of credit, reducing the incentive to invest and suppressing productivity gains as the most efficient producers do not invest in new plant and equipment.
  • Fed policy may help markets but NOT the economy. Lower interest rates have led to slower growth, the reverse of Fed and market expectations. Developed economies already have too much unproductive debt but convertible currencies attract capital anyway. Existing debt weighs on the economy, inhibiting real investment, so the best use of new debt is to buy back shares or rationalize via M&A.

Will the Fed cut rates aggressively and reintroduce QE if the US economy moves towards recession? Sure thing. Will it work? Probably not, in our view. Debt levels are already too high. Will this monetary stimulus help the stock market? Probably not. Aggressive Fed policy did not prevent the crashes of 2000/1 or 2008. And this time around, we know two things we did not know back then: Fed stimulus doesn’t work and it can’t be taken back. We can’t imagine a more favorable environment for gold.

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