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Fundamentals

Interest rates are affecting the market with the Fed meeting this week. The fear is that the Fed will raise interest rates. The question is whether it will be a quarter or half a point, possibly signaling to the market that they are serious about controlling inflation.

The S&P is down 2 percent, extending its rout from the past few weeks. We do have some selling in the markets and it appears to be panic selling that interest rates are going to go up. A rise in interest rates is going to recalibrate the whole system. The market is deleveraging all of the overleveraged accounts that took advantage of the low-interest rates. Investors could borrow at a fraction of a percent and invest in the market or Bitcoin and make a huge return. The Fed’s loose money policies, the stimulus, has overleveraged the markets to the point where even a rumor of the Fed raising rates causes a temper tantrum.

“We do not even know the Fed policy,” Equity Management Academy CEO Patrick MontesDeOca said, “but we are getting a great deal of selling.”

In the long term, this will be good for the market since it is getting overleveraged individuals institutions, and speculators out of the market. As the markets come down they are providing an incredible buying opportunity.

Global Debt Exponential Rise

World debt since 1971 has increased 200 times to close to $300 trillion. That's about 125 percent of world GDP. By 2030, some predict that debt may increase ten-fold, if current rates since 1971 continue, to $500 trillion. It's hard to see how this debt bubble can be maintained by raising interest rates. The short-term part of the yield curve, the 10-Year Note, is rising faster than the long-term, the 30-Year Bond. So we have short-term inflation and the issue is whether inflation will be long term.

Fed Balance Sheet Exploding

The Fed balance sheet now exceeds almost $9 trillion, which they will need to offload at some point. The Fed needs to start tapering their buying, which is planned to finish in March when interest rates are expected to go up–no one knows by how much. With so much money created, global currencies are facing devaluation. With 20 or 30 percent total stimulus packages since the pandemic began in relation to GDP, that means the US dollar has decreased in value by 20 or 30 percent.

For governments, inflation is the best thing that can happen for heavily indebted countries. The weaker the currency, the easier it is to repay that debt. Governments, to a certain degree, see inflation as a blessing enabling them to pay off massive debt. However, we're seeing this inflation in the face of negative interest rates. If interest rates go up, it will implode the world financial markets because the cost of the debt payments will skyrocket. We already see globally that markets are being deleveraged in the face of the risk of rising interest rates. The government appears to believe that the economy can withstand a slight rise in interest rates, yet even talk of raising rates is causing major selloffs.

The Fed is caught between a rock and a hard place. If they raise interest rates, it risks collapsing the markets, which are highly leveraged. If they do not raise rates, then they have to let inflation rise and see what happens.

In 1971, we had $1.5 trillion in debt. Today we have $300 trillion in global debt, so raising rates is a much more difficult proposition. It becomes far more difficult for the Fed or government to attempt to manage the markets. In part, this is why Bitcoin is doing so well as an alternative to currencies or markets that the Fed seeks to manage. Bitcoin took off after the 2008 financial crisis because of a lack of trust in government-backed securities or currencies and the U.S Dollar devaluation.

Russian Invasion

"The potential invasion of Ukraine, even if without violence, is likely to have a major impact on the world. What makes such an invasion more likely is that Russia historically considers Ukraine to be part of their empire.

The situation between China and Taiwan is very similar. China considers that Taiwan is theirs and a Chinese invasion would not be a major surprise…Egon von Greyerz"

In the geopolitical sphere, tension over Ukraine is likely to cause more stress on the global economy. China and Taiwan are also facing rising tensions with global implications.

The Markets

Silver

There is a lot of volatility this morning. Silver is down 60 cents at $23.71. We have some anomalies as silver is coming down into what the Variable Changing Price Momentum Indicator (VC PMI) says is an area where you want to accumulate. A close above $23.97 will activate a weekly bullish price momentum and a daily buy trigger. For silver, $23.19 is a weekly level below at the bottom of the accumulation zone. Silver appears to be reverting from the expected level.

Gold

Gold is coming down to the weekly average price of $1,830 and the Buy 1 level of $1,834 daily.

We're expecting reversions from these levels in gold and silver. We're coming into cyclical lows for both, increasing the probability of a reversion unfolding. This is an excellent area in which to add to your gold and silver positions.