Everybody is blaming Coronavirus for the collapsing financials markets. This is not the reason. The reason is the reckless Federal Reserve.
Imagine a situation when an individual has AIDS and he/she dies from a light cold. It is not the cold that killed the person. It is AIDS that caused the person to have no immune system. Light cold was just the last straw on the camel’s back that finished the job.
Our economy and financial markets are sick. The Federal Reserve poisoned them with cheap money and low interest rates. During the Internet Bubble in 2000s, the Fed slashed interest rates to save us. This created the housing bubble. Do you think that there would have been a housing bubble if the Fed didn’t lower the interest rates? No. So the Fed created it. The Fed provided the heroin and everybody took it.
As a result, we got the 2008 Financial Crisis. What did the Fed do? It slashed interest rates again to save the world. It also bailed out the banks and did massive QE. I should not call it massive QE because it is nothing to what the Fed is about to do now.
Should the Fed not have bailed out the system in 2008? It was already too late. The Fed should have never rescued the markets from the Internet Bubble because once you do QE, you always have to do QE. There is no way out. You get hooked on heroin, you can’t stop.
Now, we have a much bigger problem. The Fed created another huge bubble. Over the last 12 years, the Fed’s cheap money made everybody be extremely irresponsible and reckless. Corporations borrowed huge amounts of money to grow and buy back their stocks. There are huge amounts of derivative bets in the system.
Now the music temporarily ended because of the Coronavirus and the market participants are caught with their pants down. What we are seeing in the financial markets is not just some panic selloff. We are facing a complete meltdown of the financial system. Don’t be surprised if the stock market has to close for some time to avoid this.
The Fed is already doing what it does best – printing a lot of money to try to save us again. Will it work? Maybe. I am not smart enough to know this. But what I do know is that the medicine that the Fed is providing is not going to cure anything. It will inflate another bubble which will be bigger and uglier than Internet Bubble, Housing Bubble, and Today’s bubble combined.
You can’t cure a heroin addict by giving him/her more heroin.
Gold is going up. Last week, gold was at $1,700. This morning, it is was below $1,500. This is because when market participants face margin calls because of their overleveraged bets, they have to sell anything they can. This includes gold. Today, gold is soaring again.
I have absolutely no doubt that gold will blow through $2,000 very soon. There are already shortages of physical gold. The dealers are running out of gold inventory because people are buying physical gold like crazy to protect themselves. GDXJ is finally moving up after huge selloff last week.
Gold miners which produce physical gold have been in a bear market for 10 years because everybody thought that the Fed had everything under control. Over the next three years, I believe they will experience the best bull market in the history. Some will be up 10x, 100x, and even 1,000x.