- Gold is the "ultimate and only real money" - Former Reagan White House Budget Director David Stockman
- Trump tax cuts will lead to a 'fiscal calamity of biblical proportions'
- China downgrades U.S. over political 'deficiencies'
- Expect a 'huge reset in the bond market' and a 'massive drop in household wealth'
- 'People will flee the stock and bond markets in favour of gold and silver
- Time to buy (gold and silver bullion) is ideal
- "Only safe asset left is gold"
Editor: Mark O'Byrne
'There is nowhere to go from here' are the words that ring in your ears after listening to a recent interview on USA Watchdog with former Reagan White House Budget Director David Stockman.
This might seem a depressing perspective to take but what Stockman is referring to is the fiscal and financial crisis that is on its way. The final straw of which is Trump's massive tax cuts and the huge costs therein. It will contribute to a 'thundering collision' in the 'bond market' and the impending collapse of the third financial bubble in the last 17 years- arguably the largest bubble in world history.
For investors there is still somewhere to go, believes Stockman, and that is into gold and silver bullion:
'If you have $10,000 to put in a safe place, put it into gold and silver not in the Wall St. stock and bond market,' advises Stockman.
"Fiscal calamity of biblical proportions"
These quotes are taken from an interview Stockman gave at the end of December, on the very day the US Senate approved drastic changes to the US tax code.
Whilst Stockman has believed for some time that the gig is up when it comes to the current state of play, he expresses his concerns that the decision to implement major tax cuts will be the icing on the cake.
For bipartisan Stockman, the US government has not earnt the right or created enough value in the economy in order to make such reductions in the tax system. He is not against tax cuts per se, but feels strongly that this government has not done enough to go there and needs to cut costs.
The changes are made worse by the fact that they are 'front loaded', with a $280 billion tax cut expected to come to the fore in just nine months time
"...this bill will add $2.5 trillion to the public debt which, and this is a key point, is already going to rise by $10 trillion over the next decade based on the current law and taxes that is still in."
Previously, Stockman has done a brilliant breakdown of what the US tax changes mean in numerical terms which you can read here. His summary will paint the picture for you:
"...what you have is a sharply downward sloping taper of tax cuts and revenue losses, which makes the bill a classic Keynesian deficit stimulus through the tax code, not a supply side incentive driver; and one so tangled up in the nation's fiscal strait-jacket that it ends up in political la la land."
China downgrades U.S. over political 'deficiencies'
The disaster that is the GOP's tax plan has not gone unnoticed by those who are just waiting for the US to trip up.
Dagong Global Credit Rating Co., one of China's largest credit rating agencies, chose to downgrade the United States's credit rating from A- to BBB+ yesterday, citing increased U.S. reliance on debt. It also chose to award the US sovereign ratings a negative outlook, specifically citing the GOP's recently-passed tax-reform plan as justification for doing so.
"The perennial negative impact of the superstructure on the economic base has continued to deteriorate the debt repayment sources of the federal government, and this trend will be further exacerbated by the government's massive tax cuts...The government did not discover from the financial crises that it is the debt-driven mode of economic development that has hindered the country from making ends meet...Deficiencies in the current U.S. political ecology make it difficult for the efficient administration of the federal government, so the national economic development derails from the right track.”
The Chinese foresee exactly what Stockman is warning of - 'A financial collision waiting to happen'. With what will these tax cuts be colliding with? Well, the fallout from the massive bond buying and QE that has completely distorted markets in the last decade and even before.
Bonds no longer keeping the bubble going
The fallout from central banks realising their money printing is unsustainable is more dangerous than the damage we will see from the US tax changes, argues Stockman. But together they create a perfect storm:
“The central banks realize they cannot keep printing money at these crazy rates, and by that I mean the bond buying. Now, they are going to begin to normalize and shrink their balance sheet. . . . By the fall (of 2018), they (the Federal Reserve) will be shrinking their balance sheet by $600 billion a year. What that means in plain simple English is that they (the Fed) are dumping $600 billion a year of existing bonds into the market just as Uncle Sam will be attempting to borrow $1.25 trillion more. Now, if you don’t think that is a financial collision waiting to happen, then I am not sure what would be.
We are heading for a thundering collision in the bond market that will drive yields upward far more than the market is expecting. The stock market operates on the illusion of permanently low interest rates. When interest rates start to rise, everything is going to come apart because cheap debt has been priced in forever, and we are heading for far more expensive debt. . . . Bond prices are going to collapse when yields begin to rise. . . . Stock prices are going to collapse big-time when the underlying predicate of cheap debt, massive stock buy backs and M&A deals and everything else supporting the market today finally reverses. So, we are going to have deflation in the canyons of Wall Street, and that will not be a happy day.”
No liquidity crisis here
The above will not necessarily lead to a liquidity crisis. After all, the money (read: liquidity) that the Fed created is still out there. Stockman believes this will be a 'value reset'. Values have been pumped up massively and soon the air will be let out.
For those who think we haven't experienced inflation as a result of the printing-spree central banks have been on, then you have been looking in the wrong place. It hasn't been showing up in the all the places standard inflation calculators look at. Instead, it has been rearing its head in financial asset prices.
One just needs to look at the performance of the S&500 and the individual stock prices of FAANG in order to spot inflation. Or, says Stockman look at net household wealth. At the start of the last crash (in 2009) net US household wealth was $55 trillion, at the last 2017 measure it was $97 trillion. Where does this come from? 'Huge amounts of bottled air' says Stockman.
When interest rates start to rise it is here that we will see a massive drop in values. The reset will have begun.
How will the man on the street survive?
Stockman believes standard retail investors, savers and pensioners have 'been punished pretty badly' and seen their 'savings savaged' thanks to central banks' quantitative easing policies.
On the upside, the inevitable increase in interest rates will do some good for those who have been prudent in recent years. However, how safe will it be to even put your money into the system given the impending 'collision'? You understandably want to have some diversification.
For Stockman, this is the safe investments that are gold and silver bullion.
“I think the time to buy (gold and silver) is ideal. Gold is the ultimate and only real money. Gold is the only safe asset when push comes to shove.
They tell you to buy the government bond, that’s a safe asset. It’s not a safe asset at its current price. I am not saying the federal government is going to default in the next two or three years. I am saying the yield on a 10-year bond of 2.4% is way below of where it’s going to end up. So, the only safe asset left is gold.
This crazy Bitcoin mania has drained off what would otherwise be a demand for gold. . . . When Bitcoin collapses, spectacularly, which it will because it’s sheer mania in the markets right now. When it collapses, I think a lot of that demand will come back into gold, as well as people fleeing the standard stock and bond markets for the first time in 9 or 10 years...Put $10,000 in gold or silver not in the Wall St stock or bond market'
We would take Stockman's advice further and specify that you invest in physical gold and silver bullion that is both allocated and segregated. By avoiding digital gold platforms and paper and electronic gold, you are ensuring that you are owning your safe haven investments and financial insurance in the safest way possible.
News and Commentary
Gold Prices (LBMA AM)
17 Jan: USD 1,337.35, GBP 969.45 & EUR 1,092.48 per ounce
16 Jan: USD 1,334.95, GBP 970.38 & EUR 1,091.32 per ounce
15 Jan: USD 1,343.00, GBP 971.93 & EUR 1,092.93 per ounce
12 Jan: USD 1,332.90, GBP 978.75 & EUR 1,099.78 per ounce
11 Jan: USD 1,319.85, GBP 978.14 & EUR 1,104.45 per ounce
10 Jan: USD 1,321.65, GBP 976.96 & EUR 1,103.31 per ounce
09 Jan: USD 1,314.95, GBP 972.01 & EUR 1,102.19 per ounce
Silver Prices (LBMA)
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16 Jan: USD 17.10, GBP 12.43 & EUR 13.99 per ounce
15 Jan: USD 17.12, GBP 12.58 & EUR 14.14 per ounce
12 Jan: USD 17.12, GBP 12.56 & EUR 14.12 per ounce
11 Jan: USD 17.01, GBP 12.64 & EUR 14.24 per ounce
10 Jan: USD 17.13, GBP 12.64 & EUR 14.27 per ounce
09 Jan: USD 17.05, GBP 12.60 & EUR 14.30 per ounce
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