The fundamental proposition of the moment is that owners of significant amounts of capital liquidity have some difficulty seeing where to store it. Bank deposits and negotiated bank instruments (purchased from JPM in New York) were not only a fairly safe deposit, they also paid above market interest. But JPM has ceased making those available and has notified everyone who has them open to liquidate them and convert to T-Bills (without much explanation for why). However in the context of new regulations treating bank credits as bank capital under certain circumstances, it is pretty easy to contemplate that in any kind of real estate or general corporate liquidation, many if not most of the major institutions will become insolvent and many bank accounts are going to be subject to bail-in charges.
Stock Market ‘Monetized’
The stock market? Whether you buy the argument above or not, a number of factors point to a significant liquidation period over the next 90 days. Fed and Treasury policy has effectively monetized the stock market. In talking to owners of capital in Hong Kong and other Asian location, it becomes clear that US stocks are the only vehicle for any kind of safe storage of liquidity with any hope of a real return, and those investors are all in. Many of them already recognize their exposure to losses in a liquidation — general recognition is developing.
Treasury instruments? That is really where I am at present–in money market funds that invest only in T-bills and notes with maturities in less than 13 weeks. But those credits are initially exposed to a significant political hazard in the immediate future — whether the Planned Parenthood appropriation or the outright Continuing Resolution itself, there is a very good prospect that Democrats will shut down the government.
Looking for Liquidity?
So where does liquid capital go for storage? Seeing this set of conditions develop, I posted here during the spring that the bottom in gold would be seen before Labor Day. I have since had second thoughts, in part because of the technical analysis we have seen in Rick’s Picks; and in part because I know that negotiations in D.C. offer the prospect of settlement of the shutdown issues. However, at present I am a little more negative than I was several weeks ago, and I see the current spending situation as a small part of the long-term federal fiscal crisis. The federal government is insolvent. Cash flow at adequate levels continues only so long as federal taxes get paid at something like current levels with interest rates at something like current levels. I don’t see much that is likely to prevent a significant liquidation in the stock market, and once that gets established as a firm trend (and I don’t see it stopping at a mere 400 S&P points), capital conditions that support continued activity that generates tax revenue are also likely to disappear.
So with all due respect to those of you who see gold as just another imminent general commodity liquidation away from $850 or lower, I think that is not exactly the way it is going to play out. We may see more sell-off coming as current conditions develop; yes, I may still be a little early; but gold still represents the ultimate store of value for liquid capital.
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