We are living in extraordinary times -- and they could end unpleasantly.
The world is looking to central banks to sort out economic problems, but the central banks are clueless about what to do. Never in history has the world seen 30% of global government debt at negative yields. This is an experiment that is unlikely to end with a good result.
"Conventional monetary policy has less room to stimulate the economy during an economic downturn," San Francisco Federal Reserve Bank President John Williams wrote in an essay on the bank's website.
"This will necessitate a greater reliance on unconventional tools like central bank balance sheets, forward guidance and potentially even negative policy rates. In this new normal, recessions will tend to be longer and deeper, recoveries slower and the risks of unacceptably low inflation ... will be higher," Williams wrote.
Since the third quarter of 2015, the total earnings of S&P 500 companies have dropped during every subsequent quarter, yet the stock market has reached all-time highs.
In addition, the valuations of S&P 500 stocks are second only to the lofty valuations of 1999, which ended with the bursting of the dotcom bubble. Nonetheless, the stock market continues to trade higher this year but for how long?
These days, there is a big disconnect between the real economy and the stock market.
The best example of this is the Venezuelan stock market. Although the Venezuelans don't have food, there is rampant hyperinflation and unrest in the South American country, and the stock market rose 10 times between 2012 and 2016.
Hence, investors should be wary of the stock market's rise. The markets won't allow an opportunity to exit in a proper manner, as demonstrated by the downtown during the first two months this year.
Smart investors are recognizing this opportunity, which has led to a rise in both gold and silver prices and purchases, as shown in the chart below. Both are among the top four commodity performers this year.
Meanwhile, total U.S. debt has reached gigantic proportions, increasing by a factor of 14 since 1980, as shown in the chart below. On the other hand, the GDP of the U.S. has only increased by a factor of 6.2.
Such a mind-boggling debt cannot be repaid ever. "Nobody is prepared to accept that we might have to wipe out decades of growth just to eliminate leverage. Banks go, there are defaults, bankruptcies, layoffs," said Viktor Shvets, the global strategist of the investment bank Macquarie Group, reports Zero Hedge.
Gold and Silver will be the only saviors is what I have been warning my readers, that all this excess will lead to a "Great Reset," which will be a period of great turmoil and the only asset class that will help you survive the onslaught are the precious metals.
"If you think of gold, the only way gold loses is if normal business and private sector cycles come back. If that is the case, gold goes back $100 per ounce. The other outcomes: deflation, stagflation, hyperinflation are all good for gold," said Shvets.
There are talks of moving away from the dollar as the global currency of the world. An option being explored is setting up a global currency, which will be a derivative of the five international currencies, the dollar, euro, pound, yen and the yuan.
Nevertheless, this experiment is likely to fail even before it starts, because, not only are these highly flawed currencies, the Central Banks of these countries also own the largest money printing machines in the world.
So what is left?
A return to the gold standard in some way may be possible solution, because it renders the Central Banks jobless. Nevertheless, Shivets points that the gold standard is likely to come after a war and not before that.
I have been warning that the stock market will top out and eventually the large cap stocks will roll over. There is a huge amount of manipulation by the Fed, however, as investors, we can be ready for any eventuality by investing wisely in both gold and silver. Soon enough, we can add a net short position on the stock market.
Every crisis also brings an opportunity with it, hence, lets' make the best use of the opportunity before the price of gold and silver blows through the roof. It is better to invest now and see our investments multiply, instead of waiting for the crisis to start, as, by then, more than half of the rally would be behind us.
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This article is commentary by an independent contributor. Chris Vermeulen is full-time trader and research analyst for TheGoldAndOilGuy Newsletter.