Rate Hike Cycles, Gold, and the “Rule of Total Morons”

In response to Janet Yellen’s everything is OK speech following today’s balance sheet reduction notice by the FOMC committee, I received an interesting set of comments from Pater Tenebrarum at the Acting Man Blog regarding rate hike cycles, gold, and stock market peaks.

“Rule of Total Morons”

A new bull market in gold started in late 2015 concurrently with the Fed’s first rate hike. That is no coincidence. The gold market is highly sensitive to future changes in liquidity. The more tightening moves the Fed undertakes (which it does in the face of collapsing money supply growth, because its decisions are based on lagging economic indicators), the more gold bullish and the more stock market bearish the fundamental backdrop becomes. Anyone long stocks should actually ask himself how it is possible that gold is up nearly 30% from its low, despite an ostensibly “gold bearish” rate hike cycle.

But they never do ask the right questions, which is why stocks peak with a big lag, particularly in major bubbles. Economic historians found out that the economy was technically very likely already in recession when the stock market peaked in 1929. In the 2007 to 2009 bust, NBER backdated the beginning of the recession to December 2007, but in May of 2008 Bernanke was still talking about how well the economy was doing and how the high oil price was “creating inflation” (thereafter he began to shut up about all that, but not before demonstrating for everyone to see how utterly clueless he was). And of course, stocks peaked in October of 2007, practically two seconds before the economy fell into recession.

In bubble regimes, the final stage is always characterized by the “rule of total morons”. That’s just how it is.

Missing Inflation

Central banks cannot see inflation because they are totally clueless how to measure it: Central Banks Puzzled as Global Inflation Hits Lowest Level Since 2009: Solving the Puzzle

How Much Gold Should the Common Man Own?

Understanding Bubbles

If you wish to understand the nature of the bubbles we are in, a few recent articles of mine will help.

1. Bubblicious Debate: Greenspan Says “Bond Bubble About to Break”, No Stock Market Bubble
2. Median Price-to-Revenue Ratio Higher in All Deciles vs 2007, 90% vs Dot-Com Bubble: THE Choice
3. Debunking MMT, Keynesianism, Monetarism: Reader asks “What theories do you believe?” Mish Reading List

Gold vs. Faith in Central Banks

The above chart also shows the bottom in gold right as the Fed started hiking, in agreement with the analysis of Tenebrarum.

For additional images, please see my 38 slide powerpoint Venture Alliance Presentation on trends in sentiment, asset bubbles, and gold from June 24, 2017.

Mike “Mish” Shedlock