Gold up $70, the Nasdaq down 4%, the VIX up 20%: these are the effects of government stupidity. Our leaders, most notably President Obama, had a golden opportunity to inspire confidence in Americans by coming together on a debt deal that made sense. Instead, politicians confirmed they are bungling buffoons that have no clue. This is not a drop in confidence, this is a collapse in confidence. There’s a difference.
That being said, most people think stocks will drop in an environment of collapsing confidence. I know it’s counter-intuitive, but stocks are going to explode because of the flow of capital from bonds to stocks and a general decline in the dollar. Longer term, stocks are basing for a rocket shot move. It’s been in the cards since 1999. You must look at the longer term picture to capture the monster moves; it is the same with stocks as it is with gold.
Gold stocks are bucking the market trend, and we can see a late 2008 to early 2009 situation arising where gold stocks bottom ahead of the market. The divergence between crude oil and gold is extremely bullish for gold equities. Although crude oil and gold are the two classic inflation indicators, they are diverging sharply. Hmm. Maybe gold is a government stupidity hedge, not an inflation hedge?
A word on Treasuries. I know a lot of people thought Treasuries would fall sharply on the news of S&P’s downgrade, but I didn’t. Treasuries have rallied, but this has very little to do with the viability of U.S. debt and more to do with the fact that capital needs to figure things out; there aren’t that many places to park large amounts of capital. For now, some capital is parking in gold. This is still a trend in its early stages because the “dumb” big money, which includes pension funds, haven’t re-weighted their portfolios away from Treasuries and into gold. It will happen in due time, but not overnight.
The Fed is on deck for tomorrow and it will be hard for Bernanke to wiggle his way out of this one. Only a month after the apparent end of quantitative easing, the weakness of our economy is obvious. There will be helicopter drops. There will be quantitative easing. As I’ve consistently said, people were getting way too complacent. Most economic forecasters- including gold permabears, deflationists, and the “green shoots” crowd- have lost their credibility. It will soon be time for U.S. bond permabulls to lose theirs too.Follow