As we enter the last few days of August and head into a Labor Day weekend it is a good time to check in on the market and where we’ve been the past few months, and where might be headed come September.
Through July and much of August we saw the US stock markets trying to reclaim some of the 20% they lost from January to the end of June. They were able to get back about ½ of what they lost before starting another descent. At the time of writing the benchmark S&P500 just broke below the psychological 4000 barrier.
We have been telling people since March to sell into any strength as we saw no fundamental reason for the markets to go up other than “hope.” That “hope” that pushed the markets up the past two months was “pure speculation” that the Federal Reserve would come to the rescue as they have the past 14 years and stop raising rates, and maybe even cut rates. But the US Federal Reserve Chairman Powell, many of the members of the board along with other Western nations Central Bankers have made it crystal clear that taming inflation is their priority even if it means some hurt in the stock markets.
Below is a chart comparing the US stock market today to 2008. As they say, history doesn’t always repeat itself but it sure can rhyme.
The above chart shows a close correlation to the last great stock market crash of 2007/08. The yellow line being 2008 and the white line being today. I don’t count the “reset covid crash” of 2020 as that was over as quickly as it started and truly appeared out of thin air.
Back in 2008 you had a real estate bubble and a banking crisis. I continue to maintain that 2008 should have been our generations 1929. Had they allowed the banks to go broke and spent the money on the public they are elected to serve we would have had our financial reset already. Instead, in 2008 they bailed out the banks such as Bank of America — $25 billion; Citigroup — $25 billion; JPMorgan Chase — $25 billion; Wells Fargo — $25 billion; Morgan Stanley — $10 billion; Goldman Sachs — $10 billion. And many more. It seems outrageous to print new money on the back of the taxpayer to bail out incompetent billionaires, but they did. But that bailout pales in comparison to the 2020 money printing that took place.
A little history. Up until the bailout of 2008 the US had survived on $1 trillion of currency that increased by $3Trillion to $4Trillion until 2020 when they printed an astounding $16Trillion to bring the USD in circulation up to $20Trillion. THIS is what has kept the stock markets going, an endless supply of cash, or better known as fiat currency. Fiat meaning “backed by nothing.” This excessive printing has but a bulls eye on how long the US dollar will remain relevant as it’s time as the world’s reserve currency may be numbered.
The history of modern finance has seen several monetary orders, from the gold standard of the 19th century to the current fiat-based era starting in 1971. Each period had its dominant reserve currency, starting with gold and then moving to the British pound and US dollar. The current system is 50 years old, about the average length of previous monetary orders.
The lesson is that nothing lasts forever. The prudent should be preparing for the next monetary order, with all signs pointing to a return to the gold standard along with a distinct possibility that it will coexists with some sort of crypto currency as the next reserve currency. How regulators and Wall Street handle this transition will significantly impact the global economy, as it seems destined to happen with or without their blessing. (I credit much of these two paragraphs to Jim Bianco of Bloomberg)
But what might the catalyst be to knock the USDollar of its pedestal. I mean, in the world of horrifically debased fiat currencies including the Euro, Yen and Yuan it is still the best of a bad lot. The way the USD has held prominence was an agreement signed between the US and Saudi Arabia in 1973 that ensured oil security for the USA in exchange for military protection in the Middle East. Thus the “petro-dollar” was born and it has dominated the world scene ever since allowing the USA to prosper immeasurably. But after the USA military “running away” and abandoning Afghanistan I’m not certain the Saudi’s have a lot of faith, or a need for that protection any longer.
The past many years has saw the slow but methodical rise of a new kid on the block called the BRICS nations (Brazin, Russia, India, China, South America). In the past year they have had 16 more applicant countries to join them including Saudi Arabia. By trading in their own currencies, they can bypass the USD such as a deal that Saudi Arabia is making with China to sell oil. This group is working on creating a more fluid trading mechanism using their own currencies or possibly even creating their own currency. Time will tell but I doubt it will be too long. If Saudi Arabia ignores the deal with the USA and starts doing as Russia has and trades in its own currency to sell its oil it might be the canary in the coal mine that exposes the overly and vulnerable USD.
I believe one can comfortably state the September will see fireworks and we might very well be witness to some of the most historic changes and transfer of wealth the world has ever witnessed.
We could witness the birth of a new world currency which would crash the USDollar creating a domino effect in the US and global stock market bubbles. But the bubbles aren’t limited to the USDollar or the world’s stock markets, we are coming off of record low interest rates that are rising making everything more expensive and threatening to crash another bubble, the real estate market further exacerbating the global financial system. You add in a global supply chain breakdown and a dystopian attempt by Liberal governments the world over to lower world food production by cutting fertilizer use, all under the disguise of saving the world from global warming and you see how precarious, if not contrived, the situation is.
Our recommendations would be to lower exposure or be completely out of the stock market, stock up on food in case the supply chains breakdown completely and they succeed in lowering the production of food worldwide, learn how crypto currencies work in case you need to use them, add gold and silver to your portfolio as precious metals are the only asset class not in a bubble zone. In fact, they have been manipulated for years and this past month, three JP Morgan traders were found guilty of suppressing the price of gold and silver for the better part of a decade.
Interesting fact is how undervalued silver is today. The gold-silver ratio is the oldest continuously tracked exchange rate in history. Historically the ratio hovered around 15 oz of silver to 1 oz of gold. It has had big gaps such as 2008 to 2011 when it went from 80:1 to 45:1. Today, silver sits at around 96:1 suggesting that it is vastly undervalued to gold.
To conclude, September is a month to watch carefully. Be mindful that when there is major change in anything, those that are prepared not only survive but thrive. One thing I believe we should all agree on is that yesterday solutions, (those of the past 40 years) are not the answer to today’s problems. Extraordinary times call for strategic, not passive tactics. This is definitely not a time to be passive or complacent.
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Preservation Capital was formed for this time in history. Our mission statement is to educate and protect hundreds, if not thousands of families from the financial devastation that wiped out the middle class in 1929.
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Yours in Faith, Family and Finance,