They say that nobody rings the bell at the top or the bottom of the market.
However, if you can read between the lines from what they say, there are telltale signs from those in the know.
It’s not as obvious as you may think, even deceptive if you don’t know how these people operate.
Make no mistake about it, things are about to get nastier. If you thought the markets tumbling over the last couple of months — be it stocks, bonds, cryptos, or various commodities — was painful, it could get a whole lot worse.
Yesterday, the editorial team at Fat Tail Investment Research gathered in Melbourne for an annual meeting to discuss our ideas and perspectives on the markets as well as our fields of expertise. I drove all the way from the Southern Highlands on Wednesday to attend.
It was a great gathering. I actually met over half the gang for the first time since joining last April as lockdowns and various restrictions meant that some of us worked remotely for much of the past year!
In between each editor taking to the floor, I was checking out what was happening with the markets and news headlines.
One headline caught my eye.
US Treasury Secretary Janet Yellen admitted on CNN that she was ‘wrong then [last year] about the path that inflation would take’.
She proceeded to explain that she thought that inflation would no longer be a problem once countries were through opening up after lockdowns. Then came the complications from the Russia-Ukraine conflict and the recent lockdowns in Shanghai and Beijing in China.
Basically, she wanted to point fault at events that occurred in the past three months on why she was wrong on something she could not see for almost a year.
A prophetess with an exemplary track record
This is not the first time Janet Yellen did not see something that was in plain sight. And she has been one of the most powerful figures in our financial system for almost two decades.
She sat on the Federal Reserve Board of Governors from 2010–18 and was the Chair from 2014–18. As the president of the Federal Reserve Bank of San Francisco from 2004–10, she was oblivious to the property market bubble until it popped in spectacular fashion, culminating in the subprime crisis of 2007–09.
Later, she took the reins from Ben Bernanke as Chair to preside over the first rate hike in December 2015, some seven years after the Federal Reserve brought the US (and the world) to a zero interest rate environment.
Then in September 2016, she talked about how asset valuations were not out of line with historical norms.
Well, she was kind of right about that.
A year later in June 2017, she declared there will not be a financial crisis in our lifetimes.
Famous last words.
After she stepped down as Chair in February 2018, the US markets tumbled heavily. It then again experienced a strong correction leading up to Christmas. The two steep declines caused the Federal Reserve to pause the rate hike cycle in early 2019 before reversing course to cut rates by mid-2019.
Let’s just say she has an exemplary record of forecasting the opposite of reality. Take what she says and expect the reverse to occur.
Brace for a perfect deflationary storm
Janet Yellen walking back on inflation is a powerful signal to those who can read between the lines. This stunning admission is not just about her.
It’s about all the central bankers, economists, and policymakers getting it wrong. You see, they operate as a collective and engage in groupthink.
Right now, the current expectation in the market is that there will be two more rate hikes in the US of 0.5%. The current US 10-year Treasury yield is sitting just under 3% and it may well have peaked early last month.
The bond yield declining could signal that the Fed may need to start cutting rates sooner than it wants to.
The reason for this is because something nasty might hit the markets and cause the Federal Reserve to backtrack.
You may ask, how so?
Economies around the world are already buckling under record inflation in over 40 years. An increasing number of households are struggling to make ends meet amidst rising oil and gas prices and central banks hiking rates. The US Federal Reserve also begins to remove excess liquidity from the market as of 1 June as it seeks to unload some of the loans on its balance sheet.
Add on top of that the sharp market falls in almost everything in early April to mid-May. The markets may be experiencing a bounce right now rather than reversing their bearish run.
The storm that’s raging is about to get worse, just as most people’s financial umbrella is either leaking or destroyed.
Finding the right shelter from this storm
Most conventional investments are inflation hedges that protect one’s purchasing power amidst currency debasement. However, few investments can withstand against deflation.
Look at what happened in 2008–09, when prices plummeted for literally everything.
Remember how oil peaked at US$144 a barrel in July 2008 only to fall to less than US$30 seven months later?
People are once again talking about crude oil reaching US$200 a barrel, even more. However, with Janet Yellen’s admission about her error in predicting inflation, this could signal we have reached peak inflation. Therefore, oil could have its last hurrah as the liquidity begins to dry up as businesses and households tighten the belts amidst record inflation and central banks take away the easy cash.
Weakening economies could lead to currencies imploding. But one country is likely to be standing on more solid ground in this game.
Not the US.
I’m talking about Russia.
Their ruble is now anchored to gold.
Could more countries join in as things turn nasty?
Even if they’re not, you should.
Deflationary storms aren’t about making big returns but to preserve yourself to fight another day. After the storm clears, you have enough dry powder to take part in the best buying opportunities on gold.
And some of these companies are well insulated against this upcoming storm because they have withstood two lean years when gold became increasingly neglected amidst the booms happening across the broad market.
There are other companies that could help you weather the storm. How about something more ‘diversified’ to cover other ‘black swans’ encircling the financial system?
The markets could get really rough in the coming months so act now to protect yourself!
God bless,
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Brian Chu,
Editor, The Daily Reckoning Australia
