If you thought things were uncertain before, they’re really uncertain now; so much has happened over the past month, it’s hard to prioritize which is most important, cautions Mary Anne and Pamela Aden, economic experts and editors of The Aden Forecast.
The point is, any one of several factors could take a turn and send most of the markets reeling. In other words, there seem to be wild cards all over the place.
We’ve often discussed the importance of wild cards. These are events that are often brewing in the background. But then they come out of left field, surprising everyone and sending the markets into a frenzy, primarily because they were unexpected.
On the international front, there is China and the growing tensions surrounding Taiwan. This situation alone would have many repercussions, especially if China decides to invade and take Taiwan back.
The U.S. and other countries would likely get involved and a bigger world war would not be out of the question. This in turn would obviously affect the global balance and the world markets.
The same is true of Russia and the war in Ukraine. Putin is not backing down and he’s pushing NATO to its limits. Making things worse, he keeps throwing out suggestions that the use of nuclear weapons is a possibility. It goes without saying this would wreak havoc worldwide and the consequences, retaliation and end results are essentially unthinkable.
Meanwhile, the Middle East is now heating up again. Israel and Lebanon are reacting as tensions grow. And while this is not nearly as serious as the potentials in China and Russia, it’s important to keep an eye on this region as events unfold.
At the same time, China, Russia, Saudi Arabia and Brazil are all using their own currencies for certain exports and/or for oil purchases.
Meanwhile, global confidence in the dollar is eroding and this is adding to downward pressure on the dollar. A weak dollar is going to keep upside momentum on the gold price and, in our view, gold is currently set to head much higher.
Everyone knows that gold is real money. It has stood the test of time. It has a 5000 year track record and it’s essentially the only global currency in the world. It’s also the world’s favorite safe haven and that’s why central banks worldwide have been stocking up on gold and easing out of dollars.
They see what’s happening on the economic and geopolitical fronts and they want to play it safe by accumulating real money.Private investors are starting to do the same. And once gold takes off, we believe it’s going to skyrocket.
Unfortunately, that would clearly be the case if gold’s rise also coincides with a geopolitical wild card blowing up at the same time. The bottom line is that a big financial shift looks like it’s set to happen. And we just don’t know yet what the trigger will be.
On the domestic front, there are plenty of wild cards as well. The banking crisis is a big one and we don’t think it’s over yet. The main problem is that many banks are holding U.S. government bonds and if interest rates don’t come down soon, bonds will stay low, adding to the ongoing pressure on many of the banks.
Due to the banking crisis and recession signs hanging overhead, our guess is that the Fed is going to pause and stop rising rates, and then it’ll likely pivot and lower them, probably sooner rather than later.
The Fed can’t afford to truly tighten. The Fed’s balance sheet topped out last year when the Fed started to tighten, and it came down. But at the first signs of trouble, it shot up, essentially wiping out about half of its tightening. So the Fed is now taking an easy money route, hoping to avoid a recession.
In other words, easy money will continue to be the way to go and this too is going to affect most of the markets. That’ll be especially true if this inflationary environment is also combined with a recession. If so, stagflation will rule.
Stocks liked the idea that inflation is easing and the Fed may soon take a break hiking interest rates. But signs that a recession may be coming are making the market nervous.
Recessions have always been bearish for stocks, regardless of what interest rates are doing. And if the economy is indeed headed for a recession as many experts are predicting, then the current bear market decline in stocks has even further to go.
Remember, stocks are still very expensive. That is, they have not yet wrung out all of the excesses of the previous bull market, which started in 2009. That bull market was fueled by super low interest rates and tons of easy money. So it would be unreasonable to think the resulting bear market is going to be quick and easy.
Keep in mind, average bear markets tend to last 20 months. And they tend to fall 41%. The current bear is 15 months old and it’s only declined 21%. And even though stocks could bounce up further in the weeks ahead, the market is still poised for a steep decline in the months ahead. For now, we continue to advise staying on the sidelines and avoiding traditional stocks for the time being.
Gold is the best safe haven in an environment like we have today. Gold can protect investors from the Fed’s monetary ups and down, and much more.
The gold market’s merger & acquisition activity had its strongest run in a decade last year, This year M&A activity continues to soar. This is bullish for gold. The need for gold as a constant store of value in times like this has never been more credible. And this is what the world’s central banks believe, and why they are piling up their gold reserves.