The Stock Market Sits On The Edge Of The End Of The World

There has never been a point in history like the one we stand on the edge of today.

There has never been a point in history like the one we stand on the edge of today.

It's a simple concept: the unprecedented combination of geopolitical volatility and flawed monetary policy, combined with domestic division, has never happened in the past the way that it is happening now.

Ergo, while it may sound sensational, it's actually a relatively common sense point: People should expect the world—and with it, financial markets—to be on the edge of volatility like never before.

"Really, Chris. More fear-mongering?" you'll say. "Isn't this just another sensational blog post to try to justify your bullishness on gold and bearishness on risk assets?"

You're welcome to think that way if you'd like, but I believe you'll be doing yourself a big disservice.

Right off the bat, let's examine monetary policy. Sure, rates have been at 5% before, but they haven't been there with $33 trillion in debt outstanding.

In other words, while interest rates aren't at historical highs, as many of my readers pointed out in the comments of my last article, they are the highest they've been with the largest amount of debt outstanding we've ever had. This chart of U.S. debt-to-GDP helps make the point of where we stand:

And it isn't enough that we face an unprecedented amount of debt-service obligations; both our monetary and fiscal policies continue to exacerbate the problem. Our government has proven it absolutely cannot cut spending and has no regard for what can only be described as its toxic and debilitating deficit, even when the nation's finances are at their most precarious.

This shot of our surplus/deficit is, to use financial jargon, fucking insane.

On top of that, we have a market that has been artificially and exponentially pumped higher through passive ETF investments, trillions of dollars of COVID liquidity, and the weaponization of the options market (Tesla, in my opinion, will be the poster boy for this assertion, if I’m correct, when the company first encounters an unavoidable piece of negative fundamental news that outruns mysterious options players constantly buying calls in the name.)

I mean, the market closed up for the 4th straight day on Wednesday, after inflation data came in above estimates (which should signal the Fed isn’t doing enough to beat inflation), after a war in the Middle East broke out (essentially doubling the potential geopolitical volatility on the horizon for the time being) and while valuations (market cap/GDP, P/E, throw a dart and pick one) remain near historic highs.

You don’t think that’s the normal “market stairs up” led by legitimate bids for stocks, do you? Doesn’t something feel…off…about that?

The old adage used to be that the stock market takes the stairs up and the elevator down. Now, with the increased liquidity, the market has taken a rocket ship up—meaning that when the elevator comes down, it won't be an orderly ride down 5 floors on Central Park West. It'll be like when that Red Bull guy did the 71,500 foot jump from the stratosphere.

“Stocks take the elevator down.”

We've overclocked the market, monetary policy, and investor psychology in a way that we never have before. It's not just the stock market that's going parabolic; investor sentiment and the mechanics of the market that drive prices higher are, too. Both the stock market and our national debt are on the last legs of a 4 a.m. Las Vegas bender. And for those who have been in that situation (not saying that I have) you know there are only hours, if not minutes, left before you have to pay the piper.

“Market participants.”

As if this horrifying setup weren't bad enough, there are also unprecedented geopolitical headwinds. Russia and China have paired up with nations like India and South Africa to start building a consortium seeking to do business outside the Western banking system. This ball is already rolling. That should be enough to give investors concern and encourage a risk-off climate by itself. When tacked onto our current fiscal and monetary disaster, it makes the situation truly unprecedented.

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And in the words of the Flex Tape guy, "But wait, there's more."

The world today seems closer to a third World War than at any time in recent memory, save perhaps for the Cuban Missile Crisis. Russia continues its invasion of Ukraine, creating a stark divide between Ukraine's Western allies and Russia's supporters. This isn't merely straining the United States militarily; it's exacerbating our fiscal recklessness as we funnel hundreds of billions of dollars in aid to Ukraine. The conflict is stretching both our military and financial resources thinner than they already were. It has also helped oil prices rise, which has prompted President Numbnuts to empty the nation’s Strategic Petroleum Reserve - our nation’s stockpile of oil generally kept around for shortages and military purposes.

As if these challenges weren't enough to give one extreme pause, another war is erupting in the Middle East between Israel and Hamas. It's yet another global conflict that the United States and its allies seem hell-bent on supporting through financial and military aid. This conflict further dilutes our resources and intensifies the pressure on our already precarious fiscal situation. Saudi Arabia, who President Magoo believes is some kind of ally (see the famous photo below), has officially lent its support for Hamas.

That’s right: two conflicts, both alike in dignity, both dealing in or around oil hotbeds. One with Russia, a massive exporter of oil, and another that has prompted some U.S. Senators to strike Iran’s oil refineries (after President I-Can’t-Even-Hear-The-Dinner-Bell has effectively put a lid on drilling for oil here in the U.S. while at the same time trying to make nice with Saudi Arabia’s Mohammed Bin Salman, best known for executing his nation’s own journalists and opposing gay rights).

Additionally, the Israel-Hamas conflict contributes to rising divisiveness in the United States. As we approach the 2024 election, the nation is arguably as divided as it has ever been. With the far-left "woke" crowd on one side and the "Make America Great Again" right on the other, the schism in our country seems to be approaching a breaking point.

Movements like Black Lives Matter have been openly standing with Palestine following recent attacks on Israel, introducing an unexpected variable and causing many liberal Jewish people who once supported the Black Lives Matter cause to rethink their allegiance. Pro-Palestinian rallies have also unfolded across the United States.

Even U.S. Congresswoman Rashida Tlaib chose to fly the Palestinian flag outside her office after the recent events. While one can understand the idea that not all Palestinians are terrorists, one is likely to question the wisdom (or total lack thereof) of such a gesture given its timing.

Stepping back, the country appears mired in a level of social unrest I can't recall witnessing recently. While I'd like to be optimistic and believe that things will eventually improve, I can't shake the feeling that we're headed toward darker days before a reversion to equilibrium. I would love nothing more than to be utterly wrong in this assessment.

On an investment note, my belief in the value of precious metals and gold miners hasn't wavered.

My October 2023 portfolio review lays out my reasoning for owning miners, along with most of the other stocks/positions I find interesting and that I own personally.

It perplexes me that people continue to conduct their personal and financial planning as though the world isn't on the cusp of dramatic change. While I hope for a return to normalcy, the setup for sweeping changes and volatile shifts seems as palpable as it has ever been in my investing career:

• U.S. monetary policy is as broken as it has ever been, swinging wildly from near negative rates and unlimited quantitative easing for nearly 20 years to raising rates at the fastest clip in recent history

• Fiscal policy has done nothing to address the nation’s debt load, which is resulting in unheard of debt service obligations. In fact, our deficits appear to be accelerating as the U.S. spends wildly

• The U.S. has effectively lowered its backup oil supply in the strategic petroleum reserve to the lowest levels in decades, increasing the risk of an oil shortage or rising prices, while encouraging military conflict with both Russia and Iran, who represent two of the world’s largest oil exporters. At the same time, the U.S. has put a lid on oil production domestically and has discouraged drilling.

• The U.S. is now lending military aid to both Ukraine and Israel in conflicts that both have legitimate chances of spreading to other parts of the world — aid that is paid for with defense spending with cash we don’t have an need to borrow from the Chinese.

• The U.S. economy, housing market, commercial real estate market and stock market all remain in bubble territory, near historic highs, and have yet to make any part of a meaningful drawdown that I believe is a mathematical necessity based on where interest rates are.

• Political division in the U.S. remains at a fever pitch with an upcoming election fast approaching. Questions about election legitimacy and the bifurcation of both major political parties in the country are foreground issues that can exacerbate all of the above and — most importantly — keep our nation in a precarious state, not just financially, but morale-wise.

I've been wrong before, and I would welcome being wrong now, but I’d be remiss if I didn’t first sound the alarm at what, to me, appears to be an obvious setup for more serious volatility.

QTR’s Disclaimer: I am an idiot and often get things wrong and lose money. I may own or transact in any names mentioned in this piece at any time without warning. This is not a recommendation to buy or sell any stocks or securities, just my opinions. I often lose money on positions I trade/invest in. I may add any name mentioned in this article and sell any name mentioned in this piece at any time, without further warning. None of this is a solicitation to buy or sell securities. These positions can change immediately as soon as I publish this, with or without notice. You are on your own. Do not make decisions based on my blog. I exist on the fringe. The publisher does not guarantee the accuracy or completeness of the information provided in this page. These are not the opinions of any of my employers, partners, or associates. I did my best to be honest about my disclosures but can’t guarantee I am right; I write these posts after a couple beers sometimes. Also, I just straight up get shit wrong a lot. I mention it twice because it’s that important.