Stocks Up, Metals Down and the Inevitable Reset

Stocks finished higher last week while metals and long-term US Treasuries finished significantly lower.

The Dow rose by 1.22% as noted in the databox above while gold declined more than three and a half percent.

Yields on the 30-Year, US Treasury Bond rose to 2.43% as bonds significantly declined.

My opinion is that there could be a little juice left in this stock rally, which could mean a little more downside for metals and US Treasuries, but the fundamentals haven’t changed.  Long-term I am bullish metals and US Treasuries.

With sovereign debt in much of the rest of the world yielding negative rates, it’s my opinion that there is a lot of room for a US Treasury rally especially given where stock valuations are presently and the high likelihood of a future stock price correction.

We live in interesting times and the word interesting is an understatement.

In reading John Mauldin’s excellent “Thoughts from the Frontline” newsletter this week, I found Mr. Mauldin referenced an article published by Ray Dalio who is a billionaire hedge fund manager.  Mr. Dalio’s article is titled, “The World Has Gone Mad and the System is Broken”.  Among the things Mr. Dalio Points out in his piece (Source:

-Presently, money is free for creditworthy borrowers.  Investors making the loans are willing to get back less than they loan at some future point.  And, there is no requirement to pay back principle ‘for the foreseeable future’. 

Mr. Dalio states (emphasis added):

 They are doing this because they have an enormous amount of money to invest that has been, and continues to be, pushed on them by central banks that are buying financial assets in their futile attempts to push economic activity and inflation up. The reason that this money that is being pushed on investors isn’t pushing growth and inflation much higher is that the investors who are getting it want to invest it rather than spend it. This dynamic is creating a “pushing on a string” dynamic that has happened many times before in history (though not in our lifetimes) and was thoroughly explained in my book Principles for Navigating Big Debt Crises. As a result of this dynamic, the prices of financial assets have gone way up and the future expected returns have gone way down while economic growth and inflation remain sluggish.”

At the same time, large government deficits exist and will almost certainly increase substantially, which will require huge amounts of more debt to be sold by governments—amounts that cannot naturally be absorbed without driving up interest rates at a time when an interest rate rise would be devastating for markets and economies because the world is so leveraged long. Where will the money come from to buy these bonds and fund these deficits? It will almost certainly come from central banks, which will buy the debt that is produced with freshly printed money. This whole dynamic in which sound finance is being thrown out the window will continue and probably accelerate, especially in the reserve currency countries and their currencies—i.e., in the US, Europe, and Japan, and in the dollar, euro, and yen. 

At the same time, pension and healthcare liability payments will increasingly become due while many of those who are obligated to pay them don’t have enough money to meet their obligations. Right now, many pension funds that have investments that are intended to meet their pension obligations use assumed returns that are agreed to with their regulators. They are typically much higher (around 7%) than the market returns that are built into the pricing and that are likely to be produced. As a result, many of those who have the obligation to deliver the money to pay these pensions are unlikely to have enough money to meet their obligations.

Mr. Dalio goes on to say that while pensions have some funding, healthcare obligations are typically ‘pay as you go’ and there is an ever-smaller pool of workers to support an ever-growing group of retirees who expect that these benefits will be paid.  Mr. Dalio points out, as I often do, that there are only three ways to deal with the funding shortfall: raise taxes, cut spending or print more currency with the easiest option being the latter one.  Mr. Dalio points out that this course of action threatens the value of existing currencies as a store of wealth.

Short of printing money to solve these problems, Mr. Dalio says, the rich and the poor will quarrel about how much benefits get cut and to what extent taxes get raised.  He adds that the wealthy will have the option to move to another jurisdiction with more favorable tax rates, but he sees politicians doing more to trap the wealthy before such a move is possible.

Mr. Dalio concludes his article with this conclusion:

This set of circumstances is unsustainable and certainly can no longer be pushed as it has been pushed since 2008. That is why I believe that the world is approaching a big paradigm shift.

I agree.

What that paradigm shift will look like remains to be seen, but no matter how you look at things politically, centrist politicians are becoming rarer as the voter base is becoming more frustrated.

On this week’s RLA Radio program (now available at, I interview long-time “Forbes” columnist, Dr. A. Gary Shilling who makes the point that much of this voter frustration is rooted in the fact that weekly earnings growth is down from one year ago.

Couple that with the fact that the real median income of 25 to 34-year-olds has gone down since 2000 and one can understand the source of the frustration.

Mr. Dalio says it well in his piece when he states (emphasis again added):

At the same time as money is essentially free for those who have money and creditworthiness, it is essentially unavailable to those who don’t have money and creditworthiness, which contributes to the rising wealth, opportunity, and political gaps.

As I have long stated, central banking policies are to blame for this wealth gap that is likely to grow as central bankers pursue the same policies.

Central bankers are unlikely to change course until a reset occurs.  The only option that you have is to be as ready as you can be when the reset occurs.

That’s why I suggest a two-bucket approach to managing assets. 

One bucket containing assets that are selected to survive a reset and another bucket containing assets that are chosen to protect purchasing power from money printing.

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