Economic Collapse Approaches - But First - Euphoria!

Today, while most are looking for an imminent collapse of markets due to a recession – we expect a flood of liquidity instead - causing all markets to rise - along with greed, complacency and euphoria - only to be ultimately followed by a brutal and “unexpected” collapse. Why? First, let’s break down where we currently sit. 

 

The “wall of worry” - are we nearly above it?

Google searches for the term “recession” recently spiked.

 

The “wall of worry” is a term used to describe the period in financial markets where price continues to ascend, amid a variety of negative factors. Climbing the “wall of worry” can be a confusing phase for market participants. With fears left and right, events can feel like the end of the world, in the moment - and participants expect markets to crash - however these events only cause short-term volatility – and prices keep going up overall, in a macro bullish trend. Since the bottom of 2022, we have faced the Silicon Valley banking crisis, U.S. debt ceiling fears, recession fears, attempted assassinations, WWIII fears, and most recently - extreme fear with the yen carry trade. None of these have affected the macro price structure and caused short-term volatility.

 

Notice how the extreme fear around the "Japanese Yen Carried Trade" has already calmed down significantly? Most participants might not even remember the emotions around the U.S. debt ceiling or the Silicon Valley banking crisis of last year - however the emotions around these events, in the mainstream, were intense at the time. With most markets consolidating around their all-time high prices - it might be that the wall of worry is nearly behind us. Once markets are above the wall of worry - prices tend to increase exponentially.

 

Bond yields are dropping, and central banks are cutting - amid dovish Fed speeches - Are the U.S. Fed about to start cutting interest rates? The U.S. Bond markets, the biggest and “smartest” money in the world - have historically front-run the U.S. Fed’s interest rate policy. 

With bond yields falling off - the U.S. interest rates usually follow - with the big players signalling an expectation of rate cuts coming soon. To back this up, the U.S. Fed Jerome Powell adopted a decisively dovish tone in his recent annual address at Jackson Hole saying the “time has come” to reduce interest rates. 

 

Central banks in the UK, Eurozone and Asia have started cutting interest rates - paving the way for the U.S. to follow - in today’s globalised economy, central banks will usually move policy in tandem. While rate cuts can cause short-term volatility and corrections in asset prices - they tend to lead to a longer-term boost in asset prices. 

 

Why might lower interest rates boost asset prices? 

It comes down to the yield on the U.S. dollar - and the supply-demand dynamic of this “safe haven” asset.

 

With lower interest rates on U.S. dollar deposits and lower yields on U.S. government bonds - investors are encouraged to move capital away from the U.S. dollar to seek returns elsewhere - moving liquidity towards assets like gold, silver, land and stocks. 

 

Additionally - lower bond yields result in higher bond values. With banks holding massive reserves of U.S. bonds, their collateral holdings increase in value - increasing their overall capacity to issue debt. Lower interest rates also increase borrowers’ capacity to service larger debt. This dynamic injects additional liquidity into the system - further driving leverage (and eventually speculation) on assets like land, stocks and gold. 

 

Furthermore, increasing the supply of dollars (liquidity) also reduces the value of the individual dollar units - raising the value of assets priced in dollars like gold and bitcoin, U.S. land and U.S. stocks. 

 

Briefly shifting focus east - the second largest central bank - the People’s Bank of China - has recently injected significant stimulative liquidity. This is expected to continue - as it has entered a seasonal phase of easy monetary policy - further adding to global liquidity levels, a driving factor for increasing asset prices.

We can see a sharp uptick in the PBOC liquidity injections

 

Looking forward, at the macroeconomic picture - a flood of liquidity, leverage and market speculation would be nothing out of the ordinary to see. This also aligns from a timing perspective - on the final phase (called the “winner's curse” phase) of the 18.6-year economic cycle- which we are currently on track to enter. 

 

This phase of the macro cycle is typical of assets becoming exponentially overleveraged and overvalued - leading to parabolic price increases across the board. However, as history has shown time and time again - parabolic price increases tend to resolve spectacularly to the downside - amid broad-based complacency - leading us into…An “unexpected” crash.

 

Looking at the U.S. dollar, land, stocks and gold

The dollar acts as a global safe haven asset - but it loses value amid increased liquidity - so it loses value in the euphoric phase and gains value during the crash. However, Gold is a global safe haven asset, and it also benefits from increased liquidity - this places it in the unique position where it gains value when liquidity increases in the euphoric phase (along with stocks and land) - and continues to gain value during the crash (while stocks and land take a beating).

 

This is why gold, land and stocks can move up in tandem for the euphoria phase while liquidity is increasing - but eventually, all the overleveraging and speculation in the system tends to cause a systemic crash (approximately once every 18.6 years) - often decimating stocks and land - while investors seek shelter from the storm - in the dollar, gold and silver. 

 

So, while gold and silver can experience some short-term volatility during the crash phase - their long-term uptrends tend to remain intact, as they continue gaining value during the crash - while stocks and land struggle - as investors and institutions seek shelter during the storm of systemic collapse. 

During the GFC in 2008, gold (pink) continued gaining value while the S&P spent years recovering

 

Fear, Greed and Collapses - why God’s money is the antidote.

The recession fears during the wall of worry phase that we are currently experiencing, can keep most participants out of the markets, until things are already over-leveraged and overvalued - only entering just in time for the final moments of greed and euphoria - before experiencing a collapse. 

 

This makes navigating markets like land and stocks - emotional and confusing during these final years of the macro 18.6-year cycle - rife with emotions like fear, euphoria and panic - as these markets rise slowly, then parabolically and then collapse. All while gold continues to gain steady value, all through the fear, the euphoria and the panic phases. 

 

Emotions like Fear and greed in market participants are exploited, cycle after cycle, moving money from smaller to larger hands.

 

Gold, on the other hand, is God’s money. For thousands of years, it has provided individuals and institutions with protection and freedom from exploitation - and will continue to do so - till the end of time.