Prepare For New Gold Highs (Just Don’t Dance)
"As long as chosen banks have the Fed as a buyer of last resort, risk doesn’t matter."
Gold hit a fresh record high in the wake of Jerome Powell’s dovish comments that the Fed will consider cutting interest rates at its upcoming September FOMC meeting. As the Fed is forced into accommodative policy and possibly even eventual QE, get ready for even more record highs for the yellow metal.
But just don’t dance.
That’s a quote from a famous scene in The Big Short, when Brad Pitt’s character Ben Rickert sternly reminds his younger investing partners that the success of their trade is only possible because of tremendous suffering on the part of Americans who were suckered into bogus mortgages. As they excitedly dance in anticipation of all the money they’re about to make, Pitt’s character says:
“You just bet against the American economy…which means if we’re right, people lose homes, people lose jobs, people lose retirement savings, people lose pensions…every one percent unemployment goes up, 40,000 people die, did you know that?”
Real numbers may vary. But the sentiment is a reminder of the importance of gratitude and humility. Gratitude because you saw what was coming, and took the right steps to protect yourself, your finances, and your family. Humility because your bet was that monetary debasement and an economic crisis were inevitable.
When that crisis comes, the most important thing will be to figure out how to rebuild in a way that applies the lessons taught by the inflationary horrors of central banking. History shows that, once a central bank is established, those lessons are usually learned the hard way.
Made as a reaction to the 2008 financial crisis, The Big Short has a lesson to teach Wall Street. But they didn’t learn anything from 2008. Instead of restructuring to reduce risk, policymakers and bankers doubled down on the same behaviors that caused the crisis. Risk wasn’t eliminated. It was repackaged and shifted to new corners of the market.
Instead of toxic mortgage-backed securities, today we have mountains of corporate debt sliced into tranches, leveraged loans sold to yield-hungry investors, and entire industries addicted to artificially cheap credit. The labels have changed, but the underlying game hasn’t.
In the years after 2008, stock buybacks exploded as companies borrowed record amounts of money at near-zero interest rates to repurchase their own shares. This financial engineering boosted executive bonuses and temporarily propped up stock prices, but it left corporate balance sheets dangerously exposed. By 2020, U.S. corporate debt had swelled to more than $10 trillion, much of it rated just above junk. When the pandemic hit, it took another wave of Federal Reserve intervention to keep the house of cards from collapsing. Rather than allowing a reset, the Fed backstopped risk yet again, teaching Wall Street the same lesson it learned in 2008: no matter how reckless you are, the Fed will bail you out. When the system is dependent on criminality, you have to normalize the criminality to avoid the whole thing from collapsing.
Companies gorged on cheap money during the last decade of near-zero rates, not to expand productivity, but to buy back their own stock. By 2020, corporate debt had ballooned past $10 trillion, much of it in the lowest investment-grade tier, just a downgrade away from junk. This echoes the mortgage market pre-2008, where trillions of subprime loans were disguised as safe. The only difference now is that instead of toxic mortgages,it’s overleveraged corporations whose balance sheets can’t survive higher borrowing costs.
As for the housing market itself, after the 2008 foreclosure wave, you’d think the lesson would be that real estate markets shouldn’t be treated as a casino. Instead, large private equity firms and hedge funds stepped in, buying up distressed properties in bulk and or throwing up cheap, hastily-constructed McRentals.
Today, entire neighborhoods are owned not by families, but as a speculative asset class in a manipulated casino. The cycle of real estate financialization continues, with renters facing skyrocketing costs instead of homeowners with bad mortgages.
Meanwhile, office towers in major US cities are sitting half-empty, their values plunging as remote work reshapes demand. Banks, especially regional ones, are stuffed with loans tied to these buildings. It’s the same dynamic as 2008’s housing bust, only this time the collateral isn’t suburban homes, but glass skyscrapers no one wants to lease, especially in the remote work status quo. If property values fall far enough, lenders will face billions in losses, threatening the same contagion that once spread through mortgage-backed securities.
Then there are CLOs, or collateralized loan obligations. Instead of bundling risky mortgages, Wall Street slices up leveraged loans made to already-indebted companies. Demand for yield has made CLOs one of the fastest-growing corners of finance. They’re nothing new, but you often see them touted as having high returns without much mention of the risks. Everyone insists the risk is “well-distributed,” just like they said about subprime mortgages in 2007.
Despite 15 years of supposed “reform,” banks were still borrowing short and lending long, leaving themselves vulnerable the moment the Fed raised rates. Once again, the government and the Fed had to step in with emergency facilities to prevent contagion. Wall Street’s culture also hasn’t changed. In 2008, it was mortgage brokers pushing loans to unqualified buyers. Today, it’s venture capital firms throwing billions at profitless tech startups, hollow crypto companies, or private funds inflating valuations with cheap money.
The names of the assets change, from subprime mortgages to crypto exchanges or AI unicorns, but the underlying dynamic is still just speculation fueled by leverage. Meanwhile, Americans are indebted to the gills, have no savings, and are seeing their retirements inflated away.
US Credit Card Debt Balances
The “irrational exuberance” Alan Greenspan warned about in the 1990s is back with a vengeance, only this time fueled by trillions of dollars printed around the time of the pandemic. The names of the assets are different, but the psychology is the same: everyone assumes the Fed will always ride to the rescue, no matter how absurd the bubble.
As Peter Schiff recently said on QTR’s Fringe Finance:
“Just like in the days and months leading up to the 2008 financial crisis, no one had a clue. But this time it’s bigger — it’s a sovereign debt crisis, a currency crisis.”
But gold’s highs mean that investors are finally losing trust in the Fed, the rosy financial data, and Wall Street’s balance sheets. Rallying gold means skepticism in policymakers who keep inflating new bubbles under the guise of preserving stability. The paper promises holding it together are only as good as the next round of QE. Each new record high in gold is a vote of no confidence.
As long as chosen banks have the Fed as a buyer of last resort, risk doesn’t matter. Perverse incentives lead to perverse results. The dancing continues, only the music has changed. And gold’s rise is the reminder that this cycle, too, is heading toward a breaking point.
Economic crashes don’t just erase paper wealth on Wall Street. They ripple out into jobs, savings, housing, and every other part of the economy. If the past is any guide, those at the top will walk away richer, while ordinary Americans pay the price. But some crashes are so big that they call for a reset, and new monetary paradigms are forced to be born.
When this one happens, and the powers that be clamor for CBDCs, crypto-dollars, and a system that gives them even greater control, it will be up to us to demand a hard money standard that tethers our future to economic reality rather than the whims of central planners.
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Being committed to gold is a lonely existence. I bought the vast majority of my physical gold and silver position in 2007-2011. I have held firm since then (although I sold 3 ounces once just to test the process (the dealer paid me 97% of spot). I converted my IRA in 2020 to a large position in gold and silver miners. The only people I can talk to about this are my best friend (also invested) and my parents. My mom gets it. My dad listens politely because I am his son (although he is starting to see it). Everyone else just rolls their eyes.
And until now my position has seemed like a loser, relative to the market. I never bought any of the Mag 7, and I have stayed true to gold and silver for almost 20 years. My 2020 miners position lost 40% of its value in 2022-23 (real money for me). It has taken gold hitting 3500 to get my position in Barrick back to even (Kinross and Newmont have been winners, in contrast).
My initial 700K IRA position is now $1.3MM and climbing (only recently beating the S&P). We are finally, FINALLY seeing miners trade at multiples above the rise in physical. My physical position has almost quadrupled measured in dollars (it's currency, not money). And it feels like the run is just getting started. I am sure many of you have multiples invested compared to me, and if so I congratulate you on your foresight. For my part, I am an immigrant and started with nothing. My efforts will benefit my children and generations to come (if they learn and pay attention). I have earned every dollar on my own. So I, like many of you, can take some pride in our efforts.
I say this all not to brag or gloat, but to agree completely with Peter’s comments. We gold bugs are allowed a sense of quiet satisfaction, as the view many of us have held for decades seems to be finally coming to fruition. But the pain associated with currency’s (all of them) decline in purchasing power will be staggering. The average family will be crippled as the buying power of their dollar, euro, yen, reminbi, ruble and peso seems to evaporate before their eyes.
Many of us have spent time studying the societal effects of currency declines. You can trace Hitler’s rise directly to the hyperinflation period in Weimar Germany of the early 1920’s. A society unmoored to stable currency becomes a very ugly place. Those with assets and real liquidity (PMs, commodities, land and art) do extraordinarily well while the vast majority suffer. Played to its logical conclusion, we can all see that our friends, family and countrymen will come out on the wrong end of what is about to happen. And that is when the trouble really starts.
In many ways the knowledge and vision we all share (with Peter, Chris, and other vocal critics of the current system) is a burden. It is what I call the Curse of Awareness. I write what I am writing now on this site because I know all of you suffer from the same curse. That is why you are here.
Seeing things clearly that those closest to you are unprepared (or refuse) to see is a hard existence. All you have is the certainty of your conviction, played out against 6000 years of experience in a system that always follows the same pattern.
Part of being afflicted by the curse is realizing that, in matters related to the human condition, nothing ever changes. You spend some time studying the Roman Empire and you see it play out the same way as we see today…strength and honor lead to success, affluence, bloat, laziness and the downfall that follows when people get weak and stupid from too much prosperity. I have come to the conclusion that we as a species are incapable of handling too much prosperity. We actually thrive when things get tough. I believe the world is about to relearn that lesson and it is going to be extraordinarily difficult and painful.
Another symptom of being afflicted by the curse is that you cannot unsee what you have seen. I am willing to bet that most of us had a moment where reality hit us like a lightning bolt. For me, it happened in March of 2006. I work in finance, and looking at the housing market, I asked myself a simple question. How can a house that normally sells for 3x average income sell for 5 or 6x? How can housing appreciate at 15-20% a year?
The answer is that it can’t, absent 30-year mortgage rates well below the historical average of 7%. Once I figured that out, it was like a veil had been lifted from my eyes. Many of you I am sure had the same experience. For me, the rest flowed from there. I sold my condo in Chicago the same month (saving a bunch of money), went to cash in my 401k in July of 2007, and began buying precious metals for the first time.
Being afflicted by the curse one big benefit. Being aware serves as an anchor, stabilizing you in a stormy sea that seems calm on the surface. Since seeing things as they are, I have not lost a moment’s sleep with my positions in mining stocks and PMs. Even when my IRA declined by 40% due to mining stocks getting crushed in 2022-2023, I never had a moment where I broke out in a cold sweat. I have always been super skittish on the stock market in general. My stance on real money, in contrast, has never wavered. The key is basing your strategy on evidence. History serves as all the guide a curious person needs.
The hard part is that being afflicted by the Curse of Awareness brings no happiness. Being the one-eyed man in the land of the blind gives one no real satisfaction. Ignorance really can be bliss (for a time). There have been many days that I wished I was one of the many, blithely bouncing along riding my NVDIA stock and buying my million dollar three bedroom home in a nice Chicago suburb that I am sure will increase in value all on its own.
All of us know very smart, hard working people that have bought into the current system. There are tons of 35-45 year olds (mainly men) that work in the world of finance that have made very good livings servicing this cheap money market. If you had presented the case for gold to any of them even nine months ago, you would have been laughed out of the room. I personally chose not to talk about it. I am sure many of you have done the same.
But they are starting to pay attention now. Cracks are appearing. I actually think banks will be relatively OK. They got burned so badly in 2008-2011 they have fortified their balance sheets. It does not mean they are particularly well run. But their capital base will help cushion against the coming storms. The real meltdown will be in private credit.
Spend any time inside a private credit shop and you will see where the real risk lies. Loans made not off of assets or cash flow, but off of multiples of revenue. There are hundreds of billions of dollars lent out right now to EBITDA negative companies, with the loans being justified by (i) annual revenue growth exceeding 30% or (ii) loan to value being 3x revenue when market comps value the company at 8x revenue. When the market corrects, and the growth and multiples recede, you will see a tsunami of smart money meltdowns.
That will lead to the inevitable-QE squared, where all of us here really clean up. In my more fanciful moments, I dream of buying market-pummelled real estate with physical (I really want a house in Santa Barbara). And to be honest, I am curious as to how things will play out. I am anxious to see how things go. I like to think many of us are better prepared than most, and testing our theories in the real world has a certain dark appeal.
But I am way past gloating. Working in the belly of the beast in the GFC, I saw the real human cost of people losing everything. In truth, our country has never fully recovered from that trauma. Knowing we are about to enter the reckoning that was delayed last time, and knowing that we might actually prosper due to suffering from the Curse of Awareness, is cold comfort for all of us who value humanity more than profit.
Let me double on that.. No way I will have any compassion for any Karen (male or female.. Doesn't matter) who derided me while buying gold when they got debt for buying beemeers.. And looking at me like an idiot.