World financial markets are poised for a major phase transition. We are witnessing a bubble trifecta where a bubble in bonds, equities, and housing are beginning inflate beyond sustainability, which poses a very real threat to what is left of the real economy. Add to this that the underlying unit of measure is a currency backed by debt and politics.
Phase Transition
In his best-selling book "Currency Wars", James Rickards describes the type of transition into which we are headed.
According to Rickards, the system must be in a critical state to experience a phase transition. “This means that the agents in the system are assembled in such a way that the actions of one trigger the actions of another until the whole system changes radically. A good example of a phase transition in a critical state system is an avalanche.”
The Rich Hold Assets, The Poor Have Debt
Housing is approaching a similar nadir, where the recent rise is interest rates forces the urge to lock in rates while new inventory disrupts as more for-sale signs go up from the smell of a top. Still, deeply embedded in the psyche of western culture, the housing meme has not hit bottom and neither has the bond bubble.
It is quite astonishing that a large majority hold their main asset as a debt instrument. And yet, most will say they naturally own their homes. This may be true in an existential sense. But in reality, state ownership via taxes is the ultimate owner.
Stock Market Phase Transition
We are beginning to witness a phase transition in stocks, in which investors go from climbing the wall of worry to an "only fools don't own stocks" attitude. (Certainly would not apply to the precious metals mining sector).
This is in comparison to previous U.S. phase transitions, most notable 1900-1903, 1927-1929, and 1998-2000. But it's still quite possible from 2013 to 2016.
“We're not smarter than the people in 1930. We're not harder working than the people in 1930. We've just got a system that works.” - Warren Buffett
Of course, the problem with the above statement is that the system only works for the .01%.
The blow off top in equities will likely be driven by global money flows pouring into the U.S. This could push up stocks a lot more than most experts assume at this point.
Inflation Assumptions
According to themainstream financial commentator, inflation hasn't happened yet. The Fed continues to hold court over a congregation of analysts that worship its policy and methods and marvel at their ability to manipulate prices and socialize crisis fallout.
It brings to mind the analogy of a man falling from a tall building, where half way down he notes that everything seems fine so far.
The point is that inflation is here – its distribution so far is uneven but clear in the luxury end of the economy.
Precious Metals in an Equity Up-Draft
Albeit that price performance makes market commentary (and the prices of literally everything from interest rates to equities has been embraced), if the current ramp in equities continues we could see more downside. Or, at least sideways or range bound trading for gold and silver.
The push higher in stocks could leave gold and silver as the temporary black sheep everyone forgets about. We may be close to that now, though based on the occasional ridicule heard in the mainstream, it is difficult to gauge accurately.
Obviously, this doesn't mean the end of either, for nothing has changed fundamentally. There has been only a temporary change of human behavior which will be limited by the inevitable crash. Once the dust settles, the metals will get more attention.
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