von Greyerz, Williams, Stoeferle – THE SUN IS SETTING ON FALTERING WEST & RISING FOR GOLD

Egon von Greyerz joins his dear friends and Matterhorn Asset Management advisors, Grant Williams and Ronnie Stoeferle, to address the unique risks—economic, geopolitical, military—making headlines at an alarming rate.

This timely and highly important conversation opens with the financial, political and trade moves from West to East as evidenced by the growing BRICS momentum and its near and longer-term impact on the price of gold as prosperity moves from West to East. Consumer gold demand from India and China, increased central bank demand in the East and rising gold premiums on the Shanghai Exchange suggest that the LBMA hegemony over gold pricing is shifting, as Ronnie discusses.

As to rising gold prices, Grant reminds that gold does nothing, currencies just continue to weaken. Strangely, however, investors continue to erroneously wait for gold price spikes before investing in gold, a point which Egon addresses.

Grant unpacks the failure of Western sanctions and the weaponization of the world reserve currency as the key driver away from USDs/USTs and toward physical gold. We are entering a period of tremendous geopolitical shifts for which gold’s role will be central as a wealth preservation asset, a role which Egon has steadily maintained for more than two decades. Despite such a clear direction, many Western individuals fail to make physical gold a core part of their portfolios, an issue which Ronnie addresses at length—giving particular attention to misunderstood bond markets and the total return losses therein.

Grant adds his thoughts on gold allocation percentages in the context of gold’s global market share, which is finite despite fiat money’s infinite (and hence inflationary) range. The West, unlike the East, has not fully understood inflation risk and portfolio reactions to the same.

Egon then asks if we are looking at an existential crisis given increased global conflicts, to which Grant and Ronnie add their insights/concerns. Grant sees a complete failure of diplomacy before, during and after events in Ukraine and Israel made headlines. As Egon argues, it seems the US policy is little more than sending money and weapons at every problem, not statesmen.

Of course, gold can’t protect investors from every risk making headlines today, but it has a clear role in protecting against financial risk, a point which Ronnie, Grant and Egon address at length in the closing minutes of this spirited discussion.

von Greyerz, Williams, Stoeferle – THE SUN IS SETTING ON FALTERING WEST & RISING FOR GOLD

What a bloody mess! Well, economic collapses and wars always are.

But sadly it will become a lot messier!

We now have two dangerous wars, maybe we will have a global war. We have a coming collapse of stock markets and debt markets and a banking system which probably will not survive in its present form. 

But there is always another side of the coin.

There will be opportunities of a lifetime not just to preserve your wealth but also to amass an incredible fortune. More later. 

WHERE BLACK GOLD GOES YELLOW GOLD WILL FOLLOW

Oil and gold are best friends. As the chart of the Gold – Oil ratio for 50 years shows, below, gold and oil move very much in tandem within a narrow range. So if oil now goes up due to the Middle East crisis, gold will follow. 

AS IF CLIMATE CHANGE, VACCINES, LOCKDOWNS, WOKENESS, STOLEN ELECTIONS, CBDC, DEBT etc WASN’T ENOUGH

As if all the above wasn’t bad enough, adding a Middle East war to this makes the crisis properly global and the step toward a Global or World War is very short even dangerously short. 

We thought we had enough trouble with climate change, ESG (Environmental, Social, Governance), wokeness with 27 genders and canceling history, forced vaccines and lockdowns, high taxes, high inflation and debt that can never be repaid. 

Hard to understand what happened to the world since I was born 78 years ago. 

Add to that incompetent governments in the entire Western World and not a single statesman around. All of that is more than most people can cope with. 

The US government and Biden have no policy, no ideology. They have also lost their manufacturing base and their military power is declining rapidly. 

On top of that, the US is also spending money like a drunken sailor who will never sober up but only spend or drink more to drown his ever increasing debts and sorrows. 

And then we started to get used to the “local” war in Ukraine which the poor Ukrainians could never win against a superpower. 

We are now talking about the greatest uncertainties in my 78 year lifetime which started at the end of WWII 1945. 

No one can predict where the current two wars will lead, although our worst fears can sadly be realised sooner than anyone could believe. 

At this stage we cannot say if these crises will lead to a major destruction of the fabric of the world and the death of many, many people. 

But what we can say with much greater certainty is that economic and financial risk is now at a level which is likely to lead to the destruction of wealth on a level never before seen in history. 

I was born right in between the end of WWII in Europe and before it ended in the Far East. So I naturally don’t remember anything from that era. My father was an officer in the Swedish army at the time and Sweden unofficially assisted Norway which was occupied by the Germans.

But I can well remember my early life in Sweden which was a prosperous and stable country with a homogenous population. The 1950s were a period when church doors were open and the church silver could be left unprotected. Today, the copper roof, the gates and anything of value is long gone. Obviously the silver is either locked in or stolen. Police and teachers were greatly respected with ethical and moral values very high. Now people swear and spit at them.

But the stability of the early 1950s (except for the Korean War) soon led to wars in Vietnam, Middle East etc with the invasion of Hungary and Czechoslovakia and Yom Kippur in 1973 being the first Palestine conflict I can remember. Petrol prices in the UK where I lived at the time were 7.5 pence per litre. 

That was the first major oil crisis I experienced. Today petrol in the UK is £1.90 per litre and unlikely to stay that low for long. But a 26X increase in the last 50 years of petrol (US gasoline) is probably going to be seen as a bargain in a few years time. 

let’s start with your most important decision which you need to take toDAY 

Buy as much physical gold as you can afford and then buy much more.

We have warned investors for some time that the Everything Bubble will turn into the Everything Collapse. 

Well that time is now coming very soon. 

The current pattern of the Dow looks very similar to October 1987. If that is correct, a stock market crash could be imminent. 

Stocks will be down 70-90% or more, in real terms, before this crisis ends.

Most bonds will become worthless, even Sovereign bonds. 

Higher rates and defaults will see to that. 

So get out of all general stock and all bond investments if you want to have any money left at the end of the coming calamity. 

Interest rates will continue the long term, 20-30 year uptrend, obviously with corrections. No one will want to lend to a drunken sailor who can never get sober. Defaults and a banking crisis will lead to higher debts and higher rates. But the US with record borrowings can’t afford the rising interest costs. The dollar will be sacrificed. 

So in all a perfect but vicious debt and currency cycle leading to guaranteed perdition. 

The only question is how long it takes. 

GOLD WILL BE YOUR SAVIOUR

We have been advising investors to hold important amounts of physical gold for wealth preservation purposes since the beginning of 2002. Since that time gold is up 6-8 times in most major currencies and much more in weaker currencies. 

But as I keep telling colleagues and investors, gold’s real journey hasn’t started yet. 

What I often tell our clients is that they mustn’t wish for gold to go up substantially.

Because when gold goes to the levels which I now feel certain it will, the quality of our lives will be considerably worse than today. 

The factors that will fuel gold’s rapid rise to new substantially higher levels are obvious:

WARS

It is both fascinating and frightening to follow how regional disputes lead to superpowers quickly taking sides and lobbying or forcing its allies to follow suit. 

There are always two sides to a dispute. One of my very important principles is that before you judge someone, you must walk three moon laps in his moccasins. (An old American Indian saying).  But sadly most people including superpowers totally ignore such advice. The Russian argument is that the Minsk agreement was meant to avoid a deepening of the dispute and should have been followed. The US side is that Russia must be stopped at any price and Germany separated from a dangerous rapprochement with Russia. And Europe was given no choice but to follow the US. 

As Bush Jr said to congress in 2001: 

“Either you are with us, or you are with the terrorists!”

The sanctions are severely affecting Germany and most of Europe but the worst consequences are still to come this winter. The Middle East conflict is likely to make the consequences exponentially greater. 

Like with all wars, ordinary people on either side don’t want it.  And democracy doesn’t exist when a nation goes to war. Both Ukraine and the US went to war without the consent of either the people or their parliaments. 

THAT IS HOW WARS AND WORLD WARS START – Idiosyncratic leaders with sycophantic lieutenants take erratic decisions without understanding the consequences. 

WHO IS ACTUALLY RUNNING THE US?

And when the leader is past his sell by date it makes the whole process utterly dangerous. 

Everybody gets old and I am no spring chicken either. But if for whatever reason I don’t have the wits to resign when I should, I hope that my wife and my team will tell me so.

IT IS EXTREMELY DANGEROUS FOR A SUPERPOWER TO BE LEAD BY SOMEONE WHO IS NOT CAPABLE OF LEADING.

Even more dangerous when an unaccountable and unidentifiable group takes all the decisions. 

UKRAINE AND PALESTINE – REGIONS UNDER CONSTANT STATE OF CHANGE

As Heraclitus, the greek philosopher said 2,500 years ago:

“Change is the only constant in life.”

Modern Ukraine was occupied by a number of different people throughout history like the Scythians, Greeks, Romans, Goths, Huns and the Slavs as well as the Mongols. Later Poland and Lithuania and the Ottomans were involved. In 1709 the Swedish King Charles the XII lost against Peter the Great of Russia due to the Great Frost (the coldest winter in 500 years) which weakened the Swedish Army just like during the Napoleon and Hitler invasions. 

So Ukraine is hardly a stable country with deep roots and a homogenous people.

The same with Palestine, the Land of Israel, the birthplace of Judaism and Christianity which has been controlled by, among all, Ancient Egypt, the Persian Empire, Alexander the Great, the Roman Empire, Muslim Caliphates, the Crusaders, the Ottoman Empire and the British Empire after WWI. In 1948, Britain divided the region into Israel, the West Bank and Gaza. 

The history is too long and complex to delve into the details here but suffice it to say that the modern split of the region has created a constant period of dispute (constant change again), misery, wars and deaths. 

No one is prepared to wear the other side’s moccasins and the situation could now escalate to a world war between the Muslim world and the West. This is likely to result not just in a major war but also terrorism around the world. 

Just like in Ukraine, the US and the West are more likely to send money and weapons to the Middle East rather than to peace makers. 

It is unfathomable that the West chooses war over peace. This certainly does not bode well for a peaceful solution to the two conflicts.

OIL

Since most wars in modern times involve oil, the current ones are no exception. 

There are two major camps controlling the global oil supply.

Around 22 million barrels of oil go through the Strait of Hormuz between Dubai and Iran. 

It would be virtually impossible to prevent Iran from blocking this area off, stopping all shipments of oil and gas, if necessary with the help of Russia. 

That would turn off 22 million barrels of oil or 23% of global supply. Enough to make the oil price go to $500 – $1,000 and paralyse the world. 

DEBT AND CURRENCY COLLAPSE

I have since the 1990s been certain that the world economy would end in a debt and currency collapse. That is a very obvious projection since history always repeats itself, or rhymes, and every economic period in history ends this way. 

The difficulty is to time the cycle but as I often stress, exact timing is less important. The key is to prepare early and buy the fire insurance or protection well before the fire starts. 

So whether we call it a Fourth Turning like Neil Howe or a debt and currency collapse like von Mises, the end result is the same and devastating. 

When I discuss my economic scenario most people (but obviously not our clients) call me  pessimist or a prophet of doom and gloom. 

But I am an optimist and consider life to be a wonderful journey. The key is to help other people, family, friends, and clients. Real happiness is making other people happy. It clearly doesn’t always work with people who believe you are a prophet of doom and gloom. But it does work extremely well for people who need help. 

So enjoy life with family, friends, nature, music, books etc for as long as you can. Remember that the quality of your life is determined by how you deal with adversity. 

JIM SINCLAIR – MR GOLD

Our good friend Jim Sinclair died last week of a heart attack. Since the 1970s he has been one of the foremost gold experts in the world. He traded the whole run from $35 in the early 70s to $850 in 1980 where he got out making substantial returns.

Above all Jim was Mr Gold with a superb understanding of the world economy, markets, politics, wealth preservation and of course gold. 

Many people around the world followed his wisdom through his website JS Mineset.

I had the privilege of meeting Jim many times around the world. He was always gracious with his advice and support. He often told investors to “Go to Egon” and posted both my mobile number and private email on his site. At times we were totally inundated with potential clients. He had a tremendous following.

We will miss you greatly, Jim. I know that you wanted to experience the coming surge in gold that took longer than many of us expected. But you always knew that this move was inevitable. Still, your legacy will certainly be with the whole gold community and we will send you thankful thoughts regularly as gold continues to move up.

von Greyerz, Williams, Stoeferle – THE SUN IS SETTING ON FALTERING WEST & RISING FOR GOLD

The reshaping of the world economy and the global (political) order is in full swing. It is a long process, the concrete outcome of which is uncertain in advance and associated with numerous imponderables. Nevertheless, there are powerful factors, such as the shift in economic, demographic and military weight, that are driving the readjustment in the (geo)political arena. And this readjustment is also reflected in the change in gold flows. They are increasingly shifting from West to East, since “Gold goes where the money is,” as James Steel pointedly put it.

The central banks of the states of the East are among the strongest buyers of gold – also within the West

This is also reflected in the continuing enthusiasm of central banks for gold, especially in non-Western countries. 2022 saw the largest purchases of gold by central banks since records began more than 70 years ago, at 1,136 tons. The first half of 2023 saw a continuation of this trend. Despite a weaker second quarter, central bank purchases in the first half of the year set a new half-year record. Central banks increased their gold reserves by a total of 378 tons from January to June. The previous half-year record from 2019 was thus slightly exceeded. China made the largest purchases, followed by Singapore, Poland, India and the Czech Republic. So even in the West, it was countries in the East that made additional purchases.

The following chart shows the extent to which institutional demand for gold has shifted to the East. It compares the cumulative gold sales of Western central banks with the cumulative gold purchases of the Shanghai Cooperation Organization (SCO or SOC) since 2001.

Looking at the BRICS, we also see a striking overlap, with central banks from four of the five BRICS countries – Brazil, Russia, India and China – buying a cumulative 2,932 tonnes of gold over 2010–2022.

Holdings of US Treasuries are reduced

In turn, the BRICS continue to reduce their share of the soaring US government debt. In other words, gold is becoming more and more interesting as a reserve asset because US Treasuries have been becoming less and less interesting as a currency reserve for more than a decade. The militarization of money by freezing Russia’s foreign exchange reserves just days after Russia’s invasion of Ukraine in late February 2022 added emphasis to this process, but did not kick it off.

The BRICS now hold only 4.1 percent of all US government debt, compared with 10.4 percent in January 2012. That is a decline of more than 60 percent. The rest of the world has reduced its exposure to US government debt by much less. In January 2012, the rest of the world held 22.0 percent of all US government debt on their books; currently, they hold 19.3 percent. That is a decrease of more than 12 percent.

The East is expanding its infrastructure for gold trading

However, the East is not only stocking up on gold and mining gold itself on a large scale. China and Russia have ranked among the top 3 gold producing nations for years.

Countries such as China, the United Arab Emirates and even Russia are expanding their gold trading infrastructure. This is to establish a permanent infrastructure for the detour of gold trading from gold trading centers in the West such as London, New York and Zurich. This testifies to the changing understanding of roles: The East increasingly no longer sees itself as a customer of Western infrastructures, but offers the infrastructure itself.

Key developments include:

• SGE & SFO NRA: Cooperation between the Chinese and Russian gold markets

For some time now, China and Russia have been working hard to link their gold markets through cooperation between the Shanghai Gold Exchange (SGE) and the Russian financial authority, the National Financial Association (NFA). The NFA is a Russian professional association representing the entire Russian financial sector, including the Russian precious metals market.

In the face of Western sanctions, Russian gold exports to China have already surged since mid-2022. As three Russian banks – VTB, Sberbank and Otkritie – are already members of the SGE International Board of the SGE, which was founded in 2014, this cooperation between the gold markets of Russia and China is likely to intensify in the future.

• Memberships in gold-related institutions

As gold flows from west to east and the importance of eastern gold markets increases, these markets will also have greater representation and influence in the global institutions that represent the gold market, such as the LBMA and the World Gold Council (WGC).

In 2009, only six Chinese refineries were on the LBMA’s Good Delivery List, but now there are thirteen. While just 15 years ago there was only one regular (full) member of the LBMA from China, the Bank of China, there are now seven. China’s growing influence is also reflected in the World Gold Council. In February 2009, only one Chinese gold producer was a member of the WGC; now there are four.

• India International Bullion Exchange (IIBX)

In addition to its sophisticated OTC gold trading market, India has also established a trading infrastructure for gold futures contracts on the Multi Commodity Exchange of India Limited (MCX). In July 2022, the India International Bullion Exchange (IIBX), supported by the Indian government, was officially opened for trading spot gold contracts backed by physical metal. IIBX is located in a special economic zone in GIFT City in the Indian state of Gujarat, and the gold underlying the contracts is stored there. One goal of IIBX is to allow qualified buyers to import gold directly into India without the need for banks or authorized agencies. So far, however, trading volumes have been minimal.

• Establishment of a Moscow World Standard

At the end of February 2022, when sanctions against Russia were imposed by the West immediately after the start of the Ukraine war, the London Bullion Market Association (LBMA) excluded the three Russian banks VTB, Sovkombank and Otkritie. A few days later, the LBMA removed all six Russian precious metals refiners from the LBMA Good Delivery List and the CME Group followed suit, removing the same refiners from the list of approved COMEX refiners.

As a result, Moscow announced in July 2022 that a new infrastructure for precious metals trading independent of the LBMA and COMEX would be established. According to Moscow, this is intended to break the supremacy of London and New York in global precious metals pricing. This proposal calls for the introduction of a Moscow World Standard (MWS) for precious metals trading, similar to the LBMA’s Good Delivery List, the establishment of a new international precious metals exchange in Moscow based on the MWS, the Moscow International Precious Metals Exchange, and the creation of a new gold price fixing based on the MWS so as to establish gold prices and reference prices different from those of the LBMA and COMEX.

Private gold demand shifts to the east

EAST’S increased interest in gold is also evident in the non-governmental sector. Chinese consumer demand, for example, increased from 292.6 tons to 824.9 tons (2022) since the turn of the millennium. This is an increase of 181%. Annual consumer demand in India has also increased since the turn of the millennium, albeit from an already high level in 2000. China and India, which together accounted for only 28.7% of consumer demand in 2000, account for almost half of global consumer demand (48.4%) in 2022 and together acquired 1,600 tons of gold last year.

Consumer Demand for Gold – 2000 vs. 2022

	2000	% of Global Demand	2022	% of Global Demand	2022 vs. 2000 in Tonnes	2022 vs. 2000 in %
India	723.0	20.4%	774.0	23.4%	50.0	7.0%
China	292.6	8.3%	824.9	25%	532.3	181.9%
Japan	105.1	3.0%	4.3	0.1%	-100.8	-95.9%
Middle East	457.9	12.9%	268.2	8.1%	-189.7	-41.4%
Türkiye	177.4	5.0%	121.5	3.7%	-55.9	-31.5%
United States	368.5	10.4%	256.6	7.8%	-111.9	-30.4%
France	19.0	0.5%	19.9	0.6%	0.9	4.5%
Germany	15.6	0.4%	196.4	5.9%	180.8	1,159%
Italy	92.1	2.6%	17.8	0.5%	-74.3	-80.6%
UK	75.0	2.1%	35.6	1.1%	-39.4	-52.5%
Rest of Europe	142.4	4.0%	115.1	3.5%	-27.3	-19.2%
Other	1,076.0	30.4%	669.1	20.3%	-406.9	-37.8%
Global Demand	3,544.6	100.0%	3,303.3	100.0%	-241.3	-6.8%

Source: World Gold Council, Incrementum AG

Recent developments point in the same direction. In the first eight months of the current year, Asian gold ETFs increased their holdings by 7.7%, while North America and Europe recorded outflows of 2.3% and 6.1%, respectively. Significantly, in the bars and coins demand segment, Turkey and Iran replaced Germany and Switzerland in the top 5 in the first half of the year. China now leads this sub-segment of gold demand – in the first half of 2022, Germany was still in the lead – followed by Turkey, the US, India and Iran. This is because while demand for bars and coins in Turkey shot up from 9.5 tons to 47.6 tons in the second quarter of 2023, it fell by around three quarters in Germany.

The price of gold in currencies of the East has increased significantly

As of the end of September, gold was 14.6% higher in Indian rupees than at the beginning of 2022, 18.0% higher in Chinese renminbi, 34.3% higher in Russian rubles, 22.1% higher in South African rand (all left-hand side) and 114.0% higher in Turkish lira (right-hand side). Gold thus impressively demonstrates its value-preserving properties in difficult (geo)political and macroeconomic situations in these countries.

The significantly increased premium on the gold price in China since July is an unmistakable sign that there is a structural shortage of gold in the Chinese market and thus an expression of the strong demand for gold in the Middle Kingdom, which is struggling with profound economic problems.

Conclusion

This shift in demand from West to East can be observed not only among governments or government-related entities, but also among institutional and private investors. Gold is flowing to where it is most valued and where economic prosperity and savings rates have increased. In the medium term, the shift in demand should therefore find support from the higher growth prospects in Asia and the Middle East. “Ohne Geld, ka Musi” (“Without money, no music”) – this is how the vernacular formulates this economic truism in German. And as the IMF’s most recent economic growth forecast indicates, the sub-region of emerging and developing Asia will grow at a projected 5.2% this year and 4.8% next year, while the West will grow much less strongly. This will also lead to a shift in influence on pricing from West to East.

von Greyerz, Williams, Stoeferle – THE SUN IS SETTING ON FALTERING WEST & RISING FOR GOLD

In this brief yet substantive MAMChat, Matterhorn Asset Management principals, Egon von Greyerz and Matthew Piepenburg, address the overlay of escalating geopolitical tensions, oil markets, currency direction and, of course, gold’s critical and increasingly obvious role in preparing for the same.

Egon opens by asking a repeated question: “Is this fall the fall of falls?” Specifically, he addresses rising risk levels from inflation forces, unsustainable debt levels and toping markets to banging war drums, which sadly, are a fundamental symptom and aspect of debt cycles and debt crises. Naturally, tensions in the middle east will have ripple effects in oil markets which in turn impact the USD and hence gold, a theme which Matthew addresses in greater detail.

Specifically, Matthew discusses the double-barreled stresses on US oil production as a result of increased CAPEX costs on the back of Powell’s rising rate policies and the negative impact Biden’s pro-Green, anti-oil policies have had on US oil production. Strategic Petroleum Reserves, last year at over 650 million barrels, are now clocking in at 350 million barrels, and thus getting dangerously closer to supply-driven price hikes. Adding insult to injury, we are also seeing sanctioned nations like Iran, Venezuela and Russia selling oil outside of the USD to oil-thirsty nations like China, all of which point toward a slow drip away from the Petrodollar, which will impact Dollar-demand. Longer term, this will mean more artificial USD production and hence currency debasement in favor of precious metals.

This all-too-familiar (as well as historically-confirmed) interplay of debt, currency debasement, inflation and war is theme to which Egon returns in the concluding remarks. Gold, of course, can not and will not solve all of the myriad problems—political, military and social—making headlines at increasing speed today. Nevertheless, gold’s role as a preservation asset against undeniably weakening fiat money around the world is now undeniable. As Matthew then adds, once the role of gold is fully understood, it is equally critical for investors to understand the best jurisdictions to store this asset as well as the need to avoid paper gold in ETFs and gold “storage” in fractured and levered commercial banks.

von Greyerz, Williams, Stoeferle – THE SUN IS SETTING ON FALTERING WEST & RISING FOR GOLD

In Part II of his conversation with Wealthion founder, Adam Taggart, Matterhorn Asset Management partner, Matthew Piepenburg, transitions from the broader (and increasingly unsettling and fractured) macro themes of Part I to addressing specific portfolio approaches and viable asset classes for concerned and informed investors.

Taggart reminds that despite Piepenburg’s longer-term expectation of debilitating inflationary forces, that nearer-term deflationary or dis-inflationary forces from falling markets and recessionary economies are expected. This view provides a needed context for portfolio preparation today.

Piepenburg, like many clear-eyed portfolio managers, argues that further Fed liquidity, and hence further market support/tailwinds, won’t emerge until after risk asset markets in general, and equity markets in particular, experience at least a 30%-40% mean-reversion/drawdown.

In short, the Fed won’t pivot until markets inevitably puke.

This means investors currently falling for the “soft-landing” narrative and chasing stock market tops are doing so at unacceptable risk.

Piepenburg further reminds that investment advice does not come in a one-size-fits-all package, as there are clear and legitimate differences between those seeking (understandably) to grow wealth and those seeking (understandably) to preserve wealth.

Furthermore, there are those who have the experience to invest on their own; whereas the vast majority rely on third-party advisors. To this later group, Piepenburg underscores the importance of vetting and selecting sober portfolio managers who: 1) prioritize risk management over lofty projections in these topping markets; 2) understand the importance of cash equivalents and short-duration sovereign bonds as an allocation and risk tool; and 3) who have the proven ability to hedge, both long and short. This final skill of active, rather than passive management, is admittedly difficult for even seasoned portfolio managers as volatility twists and turns dramatically.

Overall, Piepenburg aggressively warns against the consensus-think faith in traditional risk parity portfolios of de-worsified equities and de-worsified credits. Given unhinged, post-08 monetary policies by all the major central banks, both stock and bonds are simultaneously over-valued. This means bonds, once designed to hedge stock risk, are now correlated assets and hence correlated risks.

Naturally, Piepenburg addresses his preference and style of wealth preservation through real assets in general and precious metals in particular. Although everyone claims to buy low and sell high, nearly no one actually does this. Toward this end, Piepenburg prioritizes longer-term investing and preservation goals, as well as tracking commodity cycles against stock cycles. In the end, the next many years will reward those who understand these relationships.

The conversation briefly returns to, and ends with, current political and financial leadership and the implications going forward, both optimistic and pessimistic.

Watch part 1 here.

von Greyerz, Williams, Stoeferle – THE SUN IS SETTING ON FALTERING WEST & RISING FOR GOLD

In his latest (two-part) conversation with Wealthion founder, Adam Taggart, Matterhorn Asset Management partner, Matthew Piepenburg addresses the broader global risks as well as specific market signals to make the complex simple for global investors.

In short, Piepenburg separates the media fog from the clear lighthouse signals of historically unprecedented and unsustainable debt levels. Those who follow the lighthouse, he maintains, are better equipped to make it safely to shore.

Piepenburg discusses the importance of employing empirical facts to make sense of otherwise “Truman Show-like” attempts by global policy makers to replace hard evidence with empty platitudes. In particular, Piepenburg addresses the string cite of data points which show that not only are US and global markets far from a “soft landing,” but already deeply careening into a hard-landing, the ignored evidence of which is literally all around us.

Toward this end, Piepenburg touches upon the sin, as well as orchestrated strategy, of deliberate omission used to hide disturbing market and economic indicators, all of which support inevitable stressors in risk assets as well as Main Street unrest. Piepenburg reminds that such fact-based realism can no longer be disregarded as mere “gold bug” cynicism.

Piepenburg opens with a sober assessment of unsustainable and ever-climbing debt levels at the home of the World’s reserve currency. The mismatch between increasing UST supply (and debt levels) and declining trust and demand for the same points toward greater pressure on falling credit markets, rising bond yields and unpayable (rate-driven) debt costs. In the end, Piepenburg sees an unavoidable reversion to inflationary money creation to monetize sovereign bonds following a deflationary/recessionary fall in global markets. Ultimately, central banks will be forced to chose between saving their “system” or sacrificing their currency. Piepenburg concludes that history, without exception, tells us the last bubble to pop is always the currency.

The conversation eventually turns to declining trust in political and financial leadership as markets, bonds and currencies limp toward a fiscal cliff which can no longer be blamed on a pandemic, Russian bad guy, global warming or little green men from Mars. This leads toward a deeper dive into inflationary/deflationary forces, currency direction, de-dollarization and, of course, physical precious metals. Here, Piepenburg speaks to the obvious implications of the record-breaking stacking of physical gold by global central banks as both a symptom and solution to growing global distrust in fiat money and unloved, over-issued sovereign bonds.

In Part II of this conversation (released tomorrow), Piepenburg then speaks to portfolio and investor responses/solutions to these increasingly difficult macro conditions.

von Greyerz, Williams, Stoeferle – THE SUN IS SETTING ON FALTERING WEST & RISING FOR GOLD

The foregoing title may seem a bit sensational, no?

With all the recent hype about a gold-backed BRICS currency emerging from this summer’s South African meet-and-greet vanishing like oar swirls, one can understand the argument that many gold bugs chase (and create) click-bait like teenage bloggers.

And the precious metals space is no stranger to being labeled perma “doom-and-gloomers” to keep the retail trade forever moving.

Fine. Understood. Yep. I get it. We are all “just selling our book.”

The Current Facts are Sensational Enough

But here’s the rub: One doesn’t need to be a doomer or a gloomer to interpret bond signals, basic math, historical lessons, current geopolitics, or openly obvious energy and precious metal flows with common sense.

If so, one sees the writing on the wall of nations going broke, currencies losing faith and sovereign bonds falling like rocks.

In short, one doesn’t need to sensationalize headlines or forecast doom when the current facts and numbers are more than sensational enough.

USTs: Crying Alone in the Corner

Foreigners hold about $18T worth of US assets, of which $7.5T are Uncle Sam’s increasingly embarrassing and unloved IOUs.

But those IOUs are looking a lot less attractive as an increasingly debt-soaked USA ($33T and counting of public debt) seeks to borrow an additional $1.9T (net) into the back-end of 2023 and issue another $5T of USTs into the next year, all of which has even Jamie Dimon pulling at his hair.

But who will buy those IOUs? Be honest.

And if foreigners start simultaneously dumping existing USTs into an already obvious US debt crisis, subsequent pain levels here and abroad, already felt, will only rise exponentially.

This is not fable but fact.

Even American banks, traditionally the biggest buyers of USTs, are now cutting back rather than ramping up their purchases…

And hedge funds, currently marginal buyers of USTs, could easily face liquidity scenarios where they will soon be massive sellers of these unloved IOUs.

Basic Math, Basic Liquidity

Meanwhile, as Powell’s higher-for-longer and (in my opinion) bogus war on inflation pushes the Dollar higher at the same time oil prices are inflating (shale production declining in the Permian, Russia cutting oil exports while US makes deals with Iran?), those foreigners currently holding that $7.5T worth of USTs will need liquidity to buy higher oil and pay-down increasingly more expensive (USD-denominated) debts.

This liquidity crisis mathematically means more dumping (rather than buying) of American sovereign bonds and hence more shark-fin rising yields (as bond prices fall), which, mathematically, will send debt costs fatally higher for companies, individuals, home owners and, yes, governments, already way over their skis in debt.

This is important, because, well… the bond market is important, a theme I’ve been hitting week after week, month after month, and year after year…

Gold Bulls Crying Wolf?

Again, some will still say that such basic math and blunt warnings from boring credit markets are little more than gold bulls crying wolf.

Unfortunately, history confirms that nations spiraling into a debt whirlpool always end with a currency crisis followed by a social crisis followed by increased centralization and less personal and financial freedoms.

Do such centralization trends feel familiar to anyone with their pulse on the current Zeitgeist?

So yeah, desperate bond markets matter, especially when measured in a world reserve currency which, like all currencies marked by unpayable debts, will be the final bubble to pop.

A Broken America Going Broke

The simple, empirical and now increasingly undeniable fact is this: America is writing checks its body can’t cash.

Even the US government is cracking/splitting under the pressure of its debt burdens, as anyone tracking the soap-opera with Kevin McCarthy can attest.

And whatever one thinks of Florida’s Eddie Munster Congressman, Matt Gaetz, it’s hard to disagree with his blunt declaration before a row of cameras outside the nation’s Capital– namely that America, already reeling under de-dollarization and debt woes, is now, as he puts it: “F—ing broke.”

Is he too just crying wolf, or should we consider the foregoing math? You know, basic facts…

No Good Scenarios Left

There are no good scenarios left for a country, currency and sovereign bond which has replaced productivity, balanced budgets, trade surpluses and national income with historically unprecedented debt, twin deficits and a central bank which has become the un-natural and de-facto (yet busted) portfolio manager over our shattered economy and totally centralized markets.

As I’ve been saying/asking for years during this slow and openly-ignored frog-boil toward credit implosion (nod to any lobby-bought politician near you), who will be the final buyer of our fatal debts in a world where no private sector entities have the balance sheets to do so?

The answer is sad, simple and already obvious: The Fed.

And where will the Fed find the money to pay for those increasingly more expensive debts (nod to Powell)?

The answer is sad, simple and already obvious: Out of thin air.

The Inflationary End-Game

Such inevitable monetization (i.e., QE + Yield Curve Controls) of historically unprecedented and drunkenly managed debt levels will, of course, be inherently inflationary despite intermediary disinflationary events (i.e., falling credit and equity markets).

All of this makes me repeat the ironic conclusion (shared by even the St. Louis Fed’s June white paper on Fiscal Dominance) that Powell’s so-called war on inflation (QT + rising rates) will end in historically inevitable inflation in the form of mouse-clicked trillions to “save” our system at the expense of our currency.

Already, the US Treasury Dept (See Josh Frost) is telegraphing its plan to make US bonds more “resilient” (i.e., liquid) via a not-so-clever plan to buy-back its own IOUs.

In other words, the Treasury Dept will be drinking its own (poisoned) Kool Aide with increasingly debased (yet relatively strong) USDs mouse-clicked out of, again…nowhere.

Does this seem like a good plan to any of you already feeling the daily decline of the inherent purchasing power of your greenback?

For Now, The Dumb Gains in Consensus

Yet despite such clear and common-sense signals from the simple math of debt gone wild, consensus still favors the long-duration UST as the relatively safest harbor in an admittedly broken global ocean.

Faith in the TLT today is almost as desperate as faith in Captain John Smith of the unsinkable Titanic.

But if math and history are not altogether ignored, cancelled or forgotten, a 15-point fall in the TLT and subsequent spike in already fatally high rates seems the most probable outcome.

Why?  Because there just aren’t enough natural buyers of Uncle Sam’s criminally negligent bar tab other than a magical (and inflationary) money printer.

That’s just how we see it.

Soft Landing? It’s Already Hard

Meanwhile the Pravda-like efforts by policy makers (and the infantry and artillery support from their vertically integrated media platforms) are still pushing the “soft-landing” narrative despite nearly every indicator (bankruptcies, layoffs, yield-curves, YoY M2 growth, Fitch downgrades, Conference Board of Leading Economic Indicators and Oliver Anthony cries) making it painfully obvious that we are ALREADY in a hard-landing.

(And weren’t these the same soft “experts” who told us inflation was “transitory”?)

Folks: Things are already hard, not soft.

August in America lost 4.1 million days of work due to strikes (think Ford, GM etc.) as the West tries to tell us in one headline after the next that China (with 7 of the world’s 10 largest shipping ports) is the real problem and hence the least investable.

Hmmm.

A Global Problem

If anything, China and the USA suffering together will eventually make 2008 seem like a decent year for capital markets and global economies…

The hard reality is this: All western sovereign bonds are in historically deep trouble at the same time that China is facing real estate and debt bubbles on top of geopolitical shifts and hence supply-chain disruptions which are neon-flashing tailwinds for even greater price inflation in all those American products made in, well: China…

For all of these reasons, we favor assets best positioned to play where the inflationary hockey puck (or polo ball) is heading, not just where it sits today.

China: Changing the Gold Price

One of these assets, of course, is physical gold.

Speaking of China, what it has been doing with this asset is nothing short of extraordinary and foretells a great deal of what we can expect in the months and years ahead in the West when it comes to debt, inflation, rates, currencies and gold.

Or to put it even more simply: China is repricing the gold trade.

Unbeknownst to most who get their market data (and interpretations) from the legacy financial media, China has been quietly evidencing a clear intent (as well as ability) to weaponize gold against a now weaponized USD.

In particular, China’s central bank recently lifted limits on gold imports, whose temporary imposition, according to the Western press, was a failed effort to defend its currency and to curb USD outflows.

But as with most things legacy press-related, the real story is about 180 degrees opposite…

That is, our Google-searching, 30-something “investigative journalists” ignored the fact that: A) gold in China is bought in Yuan not Dollars and B) and that gold premiums in China jumped back to 5%.

In short, it seems that China did not fail to defend their currency but just succeeded in showing the world that their domestic policies can impact gold pricing.

In fact, the import restrictions only caused the gold price to rise within China’s boarders by a spread of over $120 per ounce over London spot.

However, once the import limits ended, the price spread fell to $76/ounce.

Stated more simply, China just proved that it can control gold, and by extension inflation expectations, rates, and even the USD.

This is because there is a clear and obvious correlation between gold flows (West to East) and gold pricing.

In the past, those flows (from London) were greatest when gold was sinking in price. But now, and for the first time in decades, the flow East is happening even as gold is rising.

Why?

The Natural Flow from Worthless Paper to Precious (Monetary) Metals

It was my consistent belief that despite no official gold-backed BRICS currency or explicit arbitrage of gold for oil, gas or other real assets, a more natural and expected trade would be unfolding with nearly the same intent and result, all of which will spur further Chinese gold buying (and Dollar dumping) over time.

Net result? Western gold pricing will be chasing/rising to the levels of domestic Chinese gold.

As the Chairman of the Shanghai Gold Exchange, Xu Luode, said in 2014:

“Shanghai Gold will change the current gold market with its ‘consumed in the East but priced in the West’ arrangement. When China has the right to speak in the international gold market, the true price of gold will be revealed.”

Please read that last line again.

As we warned literally from day-1 of the suicidally myopic sanctionsagainst Russia, the net result would be tighter relations between Russia and China, two countries already openly tired of the USD being the tail that wags the global dog.

If you haven’t noticed, Russia is selling much-needed oil to an openly oil-thirsty China in CNY rather than USD.

As gold, priced in CNY, buys more energy in China than in the west, more of that monetary metal will flow toward Shanghai, whose power over the London pricing of gold is about to ratchet upwards.

This was so easy to foresee, but the Western media likes to hide such foreseeable facts. After all, one of their greatest sins is the sin of omission.

When weaponizing the world reserve currency against Russia, the US-lead West forgot to mention what Luke Gromen described as its “Achilles Heel”—namely, the unallocated gold markets based out of London.

Changing Battle Tactics

By changing the trench lines of the gold-for-energy battlefield, China and Russia are slowly, but predictably, weaponizing gold and energy commodities against a weaponized USD.

In the long run, my bet is on gold and I’m not alone.

Just ask all those central banks stacking the physical metal and dumping America’s paper debt at record levels.

Like an army amassing troops, cannons, horses and supply wagons at the boarder, these central bank gold movements are obvious signs of a coming battle for a new trading system with less focus on Uncle Sam’s debt-based trading model and debt-soaked currency.

Needless to say, this is bullish for gold, which unlike the US markets and economy, is the true “resilient” asset, holding its price power despite positive (though manipulated) real rates and spiking UST yields.

This may further explain why the downside volatility for long-duration USTs is now higher than the downside for physical gold, something not seen in almost half a century.

Just saying…

von Greyerz, Williams, Stoeferle – THE SUN IS SETTING ON FALTERING WEST & RISING FOR GOLD

The health of the world economy is clearly linked to the health of global leaders. That clearly raises the question if unhealthy leaders create a diseased economy or if an ailing economy creates sick leaders. 

It doesn’t really matter what came first since the Western world economy is now as close to being terminally ill as it has ever been and its population is continuously getting unhealthier. 

And weak Western leaders focus on peripheral political issues, whether it is climate, ESG, Covid vaccines, gender and other woke topics. 

Nothing new in that. Arranging the deck chairs on a sinking world economy clearly seems meaningful to hapless leaders rather than preventing the ship from sinking. 

Gargantua in the picture above/below personifies, gluttony, greed and a self-indulgent world. But we don’t need to turn to a 500 year old story book by the French author Rabelais to study the vices of mankind. 

The health of a nation is clearly also reflected in the health of its leaders. 

Recent health leaders in the USA, Belgium, Canada and Britain certainly don’t give a signal of “mens sana in corpore sano” or “a healthy mind in a healthy body” as the Roman poet Juvenal wrote 2000 years ago.  

Or as the Greek philosopher Thales said 2600 years ago: “What man  is happy? He who has a healthy body, a resourceful mind and a docile nature.”

We must also ask if the poor health of the global financial system is linked to the choice of the chief of the Bank of International Settlement (BIS, the central bank of central banks). 

The latest BIS quarterly review refers to the opaque off balance sheet derivatives market. I am still of the opinion that total derivatives including the shadow market could easily be $2-3 quadrillion. $2 QUADRILLION DEBT PRECARIOUSLY RESTING ON $2 TRILLION GOLD

Well, it certainly seems like Gargantua was a role model for many of these leaders. But unhealthy living is not just the privilege of leaders. Only 10% of adult US population was obese 50 years ago and today 45% are obese. So the trend is clear and within the next 10 years, over 50% of the US population will be obese. And Western Europe will of course follow the US example as they always do. 

So why am I talking about obesity in a financial newsletter? Well because as I said above, it comes from self-indulgence and greed which is the current state of the Western world economy.

As I have discussed many times, we are coming to an end of a major economic and cultural cycle.

Only future historians will  know if this is a 100, 300 or 2000 year cycle. If I ventured a guess, I would have thought that it could be a very long cycle like 2000 years. 

There are many similarities with the ending of the Roman Empire like, debts, deficits, taxes, decadence, self-indulgence, wokeness etc. 

Empires don’t disappear overnight. It is a long outdrawn process. If we take a starting date for the beginning of the decline of the current Western Empire, dominated by the USA, it would probably be the creation of the FED in 1913. This private central bank was the great enabler for bankers and industrialists to control the system. As Mayer Amschel Rothschild said in the late 1700s: “Give me control of a nations’s  money and I care not who makes the laws.”

The mighty US economy emerged after WWI as a major economic power whilst the European continent was suffering from the effects of the war. In spite of superior economic performance, the US already started to accumulate  budget deficits in the early 1930s. And since then buying the people’s votes was the number one criterion rather than a balanced budget.

So far, in the last 110 years there have been less than 10 years with a real surplus in the US. As I often point out, the Clinton years produced fake surpluses since the debt continued to rise. But plus ça change – things never change. 

As long as there has been any form of money, governments have always found ways to destroy its value. 

There are many ways to debase a currency, like less gold or silver in a coin or using a cheaper metal. Paper money has obviously been the perfect tool for corrupt governments. This is “the Finger Snapping Method” as a Swedish central banker explained when asked how money is created. Just snap your fingers and the money arrives. Or as my colleague Matt Piepenburg calls it “Mouse Click Money”. 

EMPIRE OF DEBT AND MEDIOCRITY

Having driven through Corsica this summer, you realise that wherever you go in these parts of the world, you are in the midst of history, a history which was so much more glorious than the current Empire of Debt and mediocrity.

Corsica was ruled by the Republic of Genoa from 1284 to 1768 when it was ceded to France. Napoleon was from an Italian noble family and was born in Corsica in 1769 a year after the island became French. So by just one year, history could have looked very different with Napoleon as an Italian General and leader. 

Napoleon wasn’t the only famous Corsican, Christopher Columbus was born there 3 centuries earlier and became famous for having led the way to the colonisation of the Americas when he in 1492 sailed across the Atlantic believing that he would reach Asia. 

But sadly, those glorious periods of history are long gone. Today there are no heroes and few statesman or explorers who make history. 

Not a single one of today’s “glorious leaders” will be remembered by history, whether we talk about Biden, Sunak, Macron, Scholz, or Meloni.

Sadly the world has a motley crew of aspiring statesmen who will be forgotten the day after they have left office. 

But they will all have left a memorable legacy – a debt burden of $340 trillion plus derivatives and a shadow banking system of $2 quadrillion at least. 

And it is this debt and the irresponsible deficit spending that leaders should focus on if they intend to cure their economies. 

But sadly no one has the courage to rein in unlimited deficit spending. Because buying the favour and votes of the people is the only way to conclusively hang on to power. 

So what will happen next is self-evident:

MORE DEFICITS & RUN AWAY DEBT

As the graph below shows, US debt will at least be $40 trillion at the beginning of the next presidential period. I forecast this already 7 years ago when Trump was elected president. No genius required for this forecast just pure extrapolation of the trend. On average US debt has doubled every 8 years. 

But $40 trillion debt by 2025 is just the beginning. Just look at the next graph. 

With the same extrapolation of debt doubling every 8 years which has been very accurate, debt will be $100 trillion in 2036. 

As the interest rate cycle continues to rise, we will at a minimum see 10% by 2036. Personally I think it can be a lot higher. 

Still at 10% on $100 trillion debt, just the interest cost will be $10T against $1T currently. 

I would be surprised if the budget deficit in 2036 will be less than $10T!!

So there we have it, the road to perdition for the US seems very clear. 

Sure, it could be argued that this is all speculation.  Of course it is, but it is more than that since all it does is to extrapolate historical trends. So dismiss it at your peril. 

HIGHER INTEREST RATES AND INFLATION, COLLAPSING BOND MARKETS, 

Interest rates peaked in 1981 with the 10 year treasury at 16%. We saw the cycle bottom in 2020 at 0.5%. Rates are now going up for probably decades but with the normal violent volatility. 

Long term inflation has just started an uptrend. No one should be fooled by the temporary correction of the rising trend.  

HIGHER COMMODITY PRICES, ESPECIALLY OIL

As fracking returns now have peaked, the world has seen peak oil. Add to that the increased cost of producing energy as I have written about in previous articles and we will have the perfect energy storm. 

LOWER ASSET PRICES

The Everything Bubble will now turn to the Everything Collapse as I have outlined in previous articles. 

HIGHER GOLD PRICE

As gold buying continues to move from West to East with gold most probably becoming the new Reserve Asset for central banks instead of the dollar, there will be a total repricing of gold as I have covered in previous articles, such as A DISORDERLY RESET WITH GOLD REVALUED BY MULTIPLES. Gold demand will increase substantially. Since gold production cannot be increased, an increase in demand can only be satisfied with higher price, not more gold. 

IT IS NOT ABOUT BEING RIGHT BUT ALL ABOUT NOT BEING WRONG

As I often say, forecasting is a mug’s game. So it is easy for critical voices to reject my predictions above. 

However, no one should focus on if my predictions are inaccurate. 

Instead, everyone should consider the massive risk cloud that is hanging over the world currently. And I haven’t even discussed geopolitical risk. 

The key is to protect yourself, your family and your investors.

Wealth Preservation is absolutely critical and physical gold is historically one of the best investments for protecting your assets. 

Everyone is going to lose out in coming years. The ones who lose the least will be the winners. 

von Greyerz, Williams, Stoeferle – THE SUN IS SETTING ON FALTERING WEST & RISING FOR GOLD

In many recent articles and interviews, I’ve warned that Powell’s “higher for longer” war against inflation will actually (and ironically) lead to, well… greater inflation.

That is, the rising interest expense (nod to Powell) on Uncle Sam’s fatally rising 33T bar tab will inevitably need to be paid with an inflationary mouse-clicker at the Eccles Building.

I’ve also consistently maintained that Powell’s war on inflation is mostly just optics, as he secretly seeks inflation to help pay down that bar tab with an increasingly inflated/debased USD.

Powell achieves this open lie by publicly declaring a steady decline in inflation by simply misreporting the true CPI number.

As John Williams recently argued, true inflation using an honest (rather than the openly bogus BLS) measure is now closer to 11.5% rather than the officially reported headline rate of 3.7%.

This should come as very little surprise to those whose eyes are open to the Modis Operandi of debt-soaked/failed regimes. As former European Commission President, Jean-Claude Juncker confessed: “When the data is too bad, we just lie.”

But even for those who still believe the current Truman Show inflation (and “soft landing”) narrative out of DC, the Bezos Post or legacy media A, B, or C, there’s more fire adding to the inflationary flames than just bogus narratives and calming platitudes.

In particular, I’m talking about oil-driven inflation, and nothing burns faster.

Scary Flames in the Oil Supply

Left or right, the dumb out of DC just keeps getting dumber.

Between rising rates (nod to Powell), which make capex investing untenable for US oil producers, and a Weekend at Bernie’s White House, which has spent years effectively legislating US oil into oblivion, US energy supply is falling, and we all know that weakening supply leads to higher prices—and inflation.

Meanwhile, Saudi Arabia, whom that same White House called a “pariah state,” has not been warming to Biden’s awkward fist-pumps and increased production pleas, but rather joining other OPEC leaders in cutting, rather than expanding, oil production.

Gee, what a geopolitical shocker…

Net result, both national and global oil inventories are falling, and falling hard.

The Awkward Oil Two-Step

The once “go green” White House realized that the world, and inflation scales, still revolves around oil, especially after sanctioning Western Europe’s former energy supplier in one of the most short-sighted (i.e., stupid) policy decisions since the Iraq war.

This may explain why Biden changed his stripes and why there was a sudden pivot toward allowing greater US shale output in 2023 by pumping more cash into those shale fields at a pace not seen in 3 years.

Unfortunately, however, this may be too little too late (like Powell’s QT) to prevent oil price shocks and higher inflation into year end, thus adding insult to an already injured (and rising) US CPI measure of inflation.

As oil supply tightens, oil prices, and hence inflation rates, rise together with bond yields and interest rates—a perfect storm for over-inflated bond, stock, and real estate markets.

Those prices and inflation rates would be even worse if Chinese oil demand rises—which is why current Western headlines are literally praying for China to implode first. This might explain why The Economist has had two consecutive cover stories about an imploding China.

See how big media and big government sleep together?

Tying it Together

Regardless, we need to tie all this together.

If, as I see it, inflation (however misreported) becomes obviously more real and felt, the consequent rising bond yields will make the USD stronger and Uncle Sam’s bar tab more expensive, which hardy bodes well for America’s twin deficit black-hole of unpayable debt unless…

…Unless the Fed starts printing more fake and inflationary money to buy its own IOUs and weaken its export-killing, and BRICS-ignoring, USD.

Again, no matter how I turn the macros, the Fed will eventually have no choice but to pivot toward more instant liquidity and hence more inflationary policies to save/monetize its broke(n) bond markets.

Once this inevitability becomes a headline, the temporarily rising USD will be seen for what most of the informed world already recognizes—just another fiat monster backing a world reserve currency in the hands of a nation whose debt to GDP and deficit to GDP ratios mirror that of any other banana republic.

Reality is Hard to Look at Directly, But not for the BRICS

Many in the US or EU may not wish to see this. Bad news, like death and the sun, is hard to stare into.

But the BRICS nations, no strangers themselves to embarrassing balance sheets, are seeing this clearly.

Although I never bought into the gold-backed BRICS currency hype, I have zero doubt that this amalgam of commodity-heavy nations has a common enemy in the current US-dominated (and USD-driven) international trade system, whose hegemonic days are now numbered and whose alliances, as we warned from day-1 of the Putin sanctions (economic suicide), are forever de-dollarizing away from DC.

Moreover, the BRICS don’t need an “official” gold backed currency to trade their real assets in gold rather than Dollars. All they have to do, as Marcus Krall and I recently discussed, is request payment for their exports in gold.

The BRICS+ nations are hardly the perfect marriage of unlimited trust and efficient coordination. Nevertheless, they share an existential threat from an over-priced USD and negative-returning UST.

Furthermore, and as I recently noted at the Rule Symposium, they may not trust each other completely, but they do trust gold completely.

System Change is Now a Matter of Survival

Never has the phrase the “enemy of my enemy is my friend” found a better home than among the rising list of BRICS+ actors who recognize that their very survival hinges upon escaping the suffocating death of paying > $14T of USD-dominated debts whose rising costs (rates) they can no longer afford lest they become vassals of DC.

As Luke Gromen recently observed, from the perspective of the BRICS nations, it’s “either hang together or hang separately.”

A Changing Petrodollar?

China, for example, can not abide forever by a petrodollar system of oil purchases. As the world’s largest oil importer, it mathematically recognizes that it will eventually run out of dollars to buy that oil.

In short, China needs to come up with a better plan—outside the Greenback.

And they will.

By the way, have you noticed the next BRIC in the wall? It’s Saudi Arabia.

See a trend? See a looming change in oil currencies?

Just saying…

As I warned months ago, this Saudi trend away from DC and closer to Shanghai could eventually be a key driver in slowly unwinding the current petrodollar system between a once “friendly” US-Saudi relationship toward a now weakening relationship which hitherto ensured the global demand (and hence the survival) of an otherwise debased paper Dollar.

If the petrodollar system radically or even slowly unwinds, this will do far more to destroy demand and the inherent purchasing power of the USD (and send gold skyrocketing) than any gold-backed BRICS trade currency.

And yet with all the recent sensationalism preceding the BRICS summit in South Africa, almost no one saw this—at least not in the legacy media.

Imagine that…

Other Tricks Up the BRICS Sleeve: More USD Assets than Liabilities

Aside from knee-capping the USD via a shift (gradual or sudden) in the petrodollar trade, it’s worth noting that but for South Africa, the remaining BRICS nations have more USD assets than liabilities, which means they can start dumping USTs to the detriment of Uncle Sam in order to raise USDs.

Many idealogues and US-thinktankers still think the US has all the power over these silly little BRICS nations who allegedly suffer from a dollar shortage.

The chest-puffers still see the USD as all-powerful and all-controlling, after all, just ask Iraq or Libya…

But the dollar-forever crowd is missing the forest for the trees or the basic math of fantasy debt.

If you haven’t noticed, the US just added an extra $1.9 trillion of insane borrowing to the back end of 2023.

And they did this as rates are rising and with the Fed still in full QT/suicide mode.

This mathematically places downward price pressure on bonds and hence upward cost pressure on yields, a scenario America simply can’t play out for much longer at $95T+ in combined public, household and corporate debt.

If the BRICS nations chose to add a layer of US asset dumping to this toxic mix, the ramifications for Uncle Sam would be even more staggering/painful for a debt-based system already on the cliff’s edge.

This is Bad, Really Bad

To repeat: The macros, no matter how I turn them, have never been this bad, this vulnerable and this foreseeable.

The US is now trapped in a vicious circle of debt for which there is no way out other than a currency-destroying return to more artificial, QE “stimulus” and the mother of all inflationary waves.

The horizon is now clear: Yields are up, twin deficits are up, inflation, even the mis-reported kind, is up, and yes, GDP is up too, but as I recently wrote, debt-driven GDP growth is not growth, but just debt.

Unless DC cuts spending at record levels (which kills election results for political opportunists and thus won’t happen), the only tool Washington DC has is more fake money and more real inflation, which means the Dollar in your wallet, checking account or portfolio is about to insult you.

von Greyerz, Williams, Stoeferle – THE SUN IS SETTING ON FALTERING WEST & RISING FOR GOLD

Have you heard the good news?

The Atlanta Fed GDPNow estimates a 5.9% growth in real GDP for Q3 2023. In nominal terms, we can even boast of an 8.9% surge.

What fantastic news! Growth! Productivity!

This must mean we can all breath a collective sigh of relief as Powell continues his valiant war against inflation as GDP rises, right?

I can almost hear the champagne bottles popping from the Eccles Building to the Bezos-owned Washington Post.

The financial wizards have saved us once again, right?

Wrong.

Oh, so, so, so, so WRONG.

Why?

Debt-Driven Growth is Not Growth, but a Slow Death Trap

As usual, the answer lies in math, history and, of course, THE BOND MARKET.

For years and years, I have tried to make one point (and indicator) almost reflexively clear, namely: The Bond Market Is the Thing.

This is because the bond market reflects debt forces, the most cancerous of all market killers once they metastasize from the acceptable to the fantastical, and the cheap to the unaffordable.

Today, we stare upon the greatest national and global debt bubble in history.

And the cost of that debt is getting higher, not lower.

This should be the key theme of every conversation, but instead, our citizens are arguing over gender neutral bathrooms and exciting politicos (opportunists) scurrying for power like donkeys fighting for hay.

Far better, in my opinion, if the people understood boring things like sovereign bonds…

In particular, they just need to consider and understand yields on Uncle Sam’s IOU (with particular emphasis on his 10-Year UST), which tells us the market’s measurement of the cost of debt.

And given that debt is the sole (rotten) wind beneath the wings of the post-08 American dream, when those yields rise like approaching shark fins, we all need to pause and think deeply, realistically and, hence differently from the consensus pablum which currently passes for financial reporting.

The Open Secret Hiding in Plain Sight (Ignored Shark Fins…)

As Luke Gromen has been warning for quite some time, and as my partner, Egon von Greyerz, has been arguing/expecting for even longer, we are now seeing rising yields on the 10Y UST while inflation rates (intentionally misreported) continue to fall—temporarily.

Folks, this is worth understanding. It’s not hard to do. But it’s critical.

That is, we need to understand how scary it is to see GDP rising alongside 10Y Treasury yields.

So, let’s dig in.

Debt-Based Growth is the Oxymoron of, Well…Morons

GDP is rising because government deficit spending (on everything from yet another preventable yet losing war in the Ukraine to stimmy checks for migrants [“asylum seekers”?] pouring through Texas) is rising well beyond sustainable levels.

Near-term, spending always leads to growth. But when that spending is done on a maxed-out national credit card, the short-term growth (i.e., GDPNow forecasts above) come at a comical, yet serious price.

Stated otherwise, spending, even deficit spending, has quick benefits; the debt consequences, and economic pains, however, take longer to show their economic (moronic) effects.

But when they do, the sickening results are as mathematical as they are historical.

A Tale of the Drunk & Stupid

If one, for example, were to hand a college frat boy his rich uncle’s credit card and permit him unlimited credit, that frat boy would undoubtedly throw the kind of seductive campus parties which would ensure his popularity along side many, many weekends of extravagant bacchanalia and a campus filled with smiling, drunk undergrads.

Soon, the frat house would construct its own elaborate bar, with weekly transports of unlimited beer kegs, a billiards room adorned with flat-screen TVs and 24-hour ESPN.

Others, even from universities miles way, would embark upon a joyous pilgrimage, crowding their Friday-night gatherings with shouts of awe and cries for more vodka shots.

The fun would seemingly never end.

Until, that is, the credit card bill came and the rich Uncle was tapped out.

At that point, the frat house’s growth story devolves into a comical escapade of the drunk and the stupid, which effectively describes the profiles and policies of our so-called financial elite.

The DC Frat House

When GDP spikes on the tailwind of deficit spending, the Fed starts to suffer from the beer-goggle effect of blindness to reality.

It then feels even more pressure (or drunken confidence) to raise short-term interest rates, which also sends the USD higher in the near-term but just about everything else (i.e., stocks, bonds, real estate and tax receipts) lower.

This means the risk of a market implosion in a setting of rising GDP increases exponentially, which is precisely what we saw near the end of 2018 when Powell tried to tighten the Fed’s balance sheet and raise rates at the same time.

Net result?

Markets tanked by Christmas, and as the new year rolled in, the Fed was bailing out the repo markets to the tune of hundreds of billions/week and printing inflationary money quicker than Nolan Ryan’s fastball.

Ignored Patterns, Ignorant Polices

But this otherwise ignored pattern, like a fast-ball, is pretty easy to track. The more the Fed hikes rates, the fatter and more expensive are Uncle Sam’s deficits as GDP rises on drunken (deficit) spending.

This leads to a mathematical case of “fiscal dominance,” which even the St. Louis Fed confessed in June (and of which I recently explained here)—namely, the ironic scenario in which the war on inflation (fought with rising rates) actually causes more inflation.

Why?

Because rising rates don’t just stimulate a GDP frat party (as per above), but they make America’s debt costs (interest expenses) skyrocket into the trillion/year category, which can then only be paid by a Fed mouse-clicker, which is the inevitable inflationary consequence of Powell’s deflationary “higher-for-longer” policy.

Stated otherwise, Powell, like Robert E. Lee, Napoleon, Paulus, Westmorland and Zelensky, is fighting a losing war.

Or for you film buffs who recall Maverick “writing checks [his] body can’t cash,” America is issuing IOUs its Treasury Dept. can’t pay—unless, of course, it prints a lot more fake/fiat money.

And those IOUs (i.e., USTs) are rising at a sickening rate, which means bond prices (which move inversely to supply) will fall and yields (which move inversely to price) will rise.

Read that last sentence again. It’s our bond market (and nightmare) in a nutshell.

And when yields on US 10Y USTs rise, the interest expense on Uncle Sam’s $33T bar tab becomes a bayonet wound to the economy and the market.

Horribly, Horrible Bad News

Thus, when we see GPD growth rising at the same time UST supplies (and hence yields) are climbing at a rate not seen in 55 years, this is not good news—it’s horribly, horribly bad news.

Not only are rates rising along side GDP, but our deficits are growing even deeper and hence this vicious circle of debt just gets deadlier and darker.

And this means the need to cover those deficits by printing trillions out of thin air becomes clearer and clearer, which means inflation is no longer a debate, but as fatally foreseeable as Pickett’s failed charge at Gettysburg.

We Need a Bigger Boat

In the coming months, or early into 2024, Egon and I foresee rising US sovereign bond yields and rising rates which will be near-term deflationary for risk assets and disturbing for Main Street economies no longer able to re-finance their way out of a national debt trap.

At some point thereafter, the cost of those debts will demand a monetary response (money printing to the moon) which will be, by definition, inflationary for regular Joes and no help to mean-reverting markets.

In short: We not only see inflation ahead, but stagflation to boot.

In such a setting, the USD, like the stern of the Titanic, will go from rising, and then temporarily pausing, to sinking fast to the bottom.

Again, the bond market is the thing.

Those yields matter. They are the approaching shark fins racing toward our shores which no one wishes to see.

Instead, we get to watch another billionaire running for office bare his naked chest (and hidden will to power) for the camera…

But as warned already, these shark fins matter, and we are most certainly gonna need a bigger boat…