Paul Brodsky Just Exposed Why Gold Is About To See A Big Reversal, Along With Equity And Credit Markets

On the heels of the recent post-election market turmoil, Paul Brodsky just exposed why gold is about to see a big reversal, along with equity and credit markets.

 
We knew 2000 was a tech bubble and 2007 was a credit bubble. Current market action seems to be built on the hopes of building a political/fiscal bubble. It may work for a time…or it may be a year-end melt-up of enthusiasm rationalized by best case fiscal execution Donald Trump’s first 100 days. We think the latter…

We attended a hedge fund conference this week at which there was near unanimous consensus that global equities and interest rates will rise based on Donald Trump’s Keynesian success. The state of crowdedness was overwhelming. Not only is our macro view in stark contrast to the short-term expectations of the levered crowd, but the potential violence of a reversal in the near term is extreme. 

We think stocks and bonds are behaving in a way not warranted given the global economic setup. The prospects of lower tax rates, broad de-regulation, renegotiated trade deals and trillion dollar infrastructure spending are exciting investors. The reality, however, is that aggressive Keynesian stimulus in the current environment would strengthen the dollar further, suffocate global trade and reduce US and global output. No combination of fiscal stimulus can stop naturally occurring deflationary globalization or stand in the way of the natural economic trend towards consumer balance sheet de-leveraging. Higher interest rates leads to immediate debt deflation, which is economically toxic. In opposition to market consensus, we think Donald Trump’s anticipated policies will accelerate a structural economic shift that takes equities and treasury yields lower. 

Big Picture 
There is no need to panic when we look at the big picture. The US has been the world’s preeminent economy thanks to many factors, including its reserve currency; the most diverse and deepest asset markets; the world’s largest fighting force; almost unilateral control of global shipping lanes; well- established laws; and a compliant and mostly tolerant society. Nothing on the horizon threatens to immediately undermine America’s relative standing in the world, including: the rise of Chinese economic influence; the re-establishment of Russian influence in Eastern Europe; corporate media that equates rapid consensus with intelligence; ubiquitous global connectivity that threatens privacy and domestic political authority; a domestic population that cares less and less about maintaining a preeminent global economy if it doesn’t serve them; and even a rogue politician who captures their angst. 

The United States is unlikely to experience greatly diminished influence anytime soon given the near universal display of international compliance to its doctrines and the foreign and domestic political incompetence from potential belligerents. In a world where all nations and economies have already agreed on a financial architecture to fund resource distribution and agreed to financial relativism to define wealth, and in a world where more people are fed and cared for than ever before, it seems highly unlikely that politicians or populations anywhere would choose to undermine the status quo. 

Heavy is the head that wears the imperial crown; heavier is the blond head that tries to rebuild the empire when it hasn’t fallen. There is no need to make America great again in the international community when it hasn’t lost its stature. But that doesn’t mean America’s almost unilateral control over global economic and political doctrines won’t be compromised. 

The US today remains analogous to Tiger Woods’ dominance over the PGA tour a decade ago. He was the overwhelming favorite in every tournament he entered, yet to bet on him to win every time would have been foolish. Someone in the field won many more times than he. Sports commentators would say that every tournament was Tiger’s to lose, just as American politicians and media promote the idea today that every global event is America’s to muff. In a more competitive global economy America will win less. 

The game changed when China, Russia and other formerly closed nations opened their economies to global trade and abandoned strict authoritarianism. The West accepted them with open arms, trade deals, and synthetically high consumer prices supported by credit-driven demand. Twenty short years later, “advanced economies” (i.e. mature, high-wage, defined-benefit economies loaded with debt and high expectations) find themselves commercially inefficient and debt-dependent. The finance-driven inefficiencies and distortions advanced economies used to exploit have become the rope around which they are now hanging themselves. 

What American political and economic elites seem slow to grasp is that established centrist domestic and foreign policies that designed a working global architecture since World War II succeeded thanks to economic inefficiencies. These inefficiencies created trade and wealth distortions, which in turn created relative winners and losers. This allowed the winners – the US and its allies with advanced economies, strong central banks and trade treaties – to take advantage of economies with less access to funding. Benevolence, domestically in the form of social welfare and internationally in the form of foreign aid, allowed the winners to keep power domestically and control the game internationally. 

Americans Grabbed Fate By The Throat Electing Trump
Today in America the haute bourgeoisie is failing because it lost the petites that formerly strived to be them. Our takeaway from Donald Trump’s election is that it was a sign of national introspection, a triumph for democracy, and a shift from previously ossified social mores that defined a political hierarchy based mostly on demeanor. Over the last nine years Americans have redefined what its president should look and act like, which is to say the people of the United States have, in no uncertain terms, grabbed their fate by the throat and re-established their society as a meritocracy. 

Barack Obama was the smartest of the lot in his two campaign cycles, but his government was not able to overcome the natural economic headwinds experienced by half the population. Donald Trump was the angriest in the most recent campaign, which is what half the voters valued most. Fear and loathing directed at Trump by political and economic establishments seemed to be derived from his insouciant approach to problem solving (and to them). His rhetoric threatened to flush seventy years of cold war- based doctrine promulgated by four generations of elite world improvers. His cabinet appointments so far seem less threatening to the status quo, and in fact may prove to be a necessary domestic economic offset to the more recent US overemphasis on globalization. 

What Trump voters seemed to get is that shift happens. Disenfranchised, angry white men were joined surreptitiously by more educated pragmatists – let’s call them domesticats – who sized up the domestic economic trend and concluded it to be dim. 

The Problem 
Trump will not be able to satisfy domesticats by doing anything he promised because nothing he promised solves the primary problem facing them. There is no conventional or semi-conventional policies he or anyone else could initiate that can erase the cumulative sins of past economic policies. Fiat currencies in a fractionally reserved banking system can last only as long as the majority in the world remains apathetic towards sustainable money, the ability to save, true capital formation and the realization that these pillars of capitalism and democracy are being destroyed. (As it stands, there is no evidence yet that the majority cares about any of it.) 

The excitement of a Trump administration by those that supported him is centered on a renewal of domestic output and productivity growth. Even if Trump successfully delivers more US output through aggressive domestic fiscal initiatives, tax reform and trade renegotiations, it would most certainly come at the expense of declining or negative growth in real terms. The result would be soaring public and private sector debt, a stronger dollar and higher interest rates that would make it that much harder for the majority to carry on.
 
The Debt Trap
The markets expect unadulterated Keynesianism coming from Washington. We think this would be the last gasp of political economics (i.e., financialism) posing as capitalism. In the long history of US and global affairs, his first term could be the penultimate paragraph that, by pointing out the flimsiness of the counter-argument, strengthens the validity of the main argument: debt is ultimately a productivity killer. 

Nothing in America is permanent except the willingness to lead. The chin music that set elites on their heels last month does not doom America’s place. Despite predictably hysterical rhetoric from the losing side (the same sky-is-falling rhetoric heard from the other losing side following Obama’s victories), nothing Trump’s administration can do will threaten US preeminence throughout the world any more than naturally occurring economics will. 

Tax and spend liberalism (by Democrats and Republicans) is giving way to balance sheet nominalization. Issuing one hundred-year bonds will give breathing room to treasury ministries around the world, but it does not address the fundamental problem. Official purchases of equity in an effort to balance asset and liability values will give the appearance of solvency, but it would further widen wealth and income gaps and lead to social unrest. Such cynical policies can only be meant to delay and betray; delay the inevitable debt jubilee (in nominal or real terms) and betray the people and their progeny who would be harmed.

Expectations – Reversal Of Weak Gold Prices, Equities and Credit Prices 
The reason the US will retain its preeminence in the world is because it is best positioned to survive the inevitable hard rain. At some point, when the last spasm of global Keynesianism produces the unintended consequences of price hyperinflation, debt deflation, and broad hardship across labor markets, America’s relative standing will allow it to have the most influence to redefine global economic terms. Donald Trump is merely the accelerant. His victory was a referendum to destroy the system, and THAT is what’s scaring the hell out of the decorous men and women ostensibly in charge. 

We are convinced that the best case economic scenario being built into financial markets today is the mother of all bull traps. It anticipates an economic melt-up justified by peak-Trump enthusiasm. Correlations and extrapolations of all kinds across all asset classes are dangerous. The case for a flattening US treasury curve and a violent swing to new lows in yields is becoming more compelling, as are the cases for reversals of weak gold prices and strong equity and credit prices (See A November to Remember.) The opportunity set in Q1 appears very attractive.

(King World News) December 8 — Peak Trump: Paul Brodsky, Macro Allocation Inc.