Wild price action and unprecedented interventions once again characterized this holiday-shortened trading week.
Oil prices whipsawed lower Thursday on concerns about expected oil production cuts from Russia and Saudi Arabia. But the general trend for most other assets, including metals and equities, was up – way up.
Stocks finished out the week with the major averages posting their biggest weekly gains in decades in the space of just four trading days. Investors went on a buying spree based on hopes that we will soon see a definitive peak in coronavirus cases and begin the process of restarting the economy.
The stock market also got another boost from the Federal Reserve. Yesterday, the Fed rolled out a $2.3 trillion loan package for local governments and businesses struggling with the current economic freeze.
Since they have a money printing press, Jerome Powell and company have an unlimited budget to loan out and spend -- and they’re now adding junk bonds, of all things, to their shopping list. More on that later.
Despite suffering a setback during last month’s panic selling of all assets, gold has now recouped ALL of those losses. In so doing, gold has proven the doubters and naysayers wrong yet again – particularly those in the deflation camp who tout U.S. dollar cash as the ultimate safe haven.
During mass liquidation episodes like we experienced a few weeks ago, cash is king. But such status is temporary and fleeting – lasting only as long as it takes the Fed to implement novel and previously unimaginable schemes to print and depreciate the currency. In the long run under our monetary system, cash is something to avoid like the plague.
That’s what the founder of the world’s largest hedge fund believes. In January, billionaire hedge fund king Ray Dalio made a strong declaration about paper money in a CNBC interview.
Ray Dalio: What do you jump into when you jump off the train? And the issue is you can't jump into cash. Cash is trash, because they're going to print money. What do you do? You get out.
CNBC Interviewer #1: So what do you do?
Ray Dalio: So what you have to do is you have to have a well-diversified portfolio. I think that you have to have a certain amount of gold in your portfolio, or you have to have something that's hard. I know I'm going to come out of here (and everyone will be) like “Ray Dalio's wild on gold.”
CNBC Interviewer #2: I'm going to say “cash is trash” is your headline.
Ray Dalio: But cash is trash.
Admittedly, Dalio’s call on cash looked terrible during the depths of last month’s market crash. But a mere two weeks into April, his call on gold looks brilliant. Gold is outperforming all forms of paper cash this year and is now up double digits versus the U.S. dollar.
The Federal Reserve is now adding junk bonds – the riskiest, lowest quality corporate debt instruments – to its balance sheet. Such a move by the custodian of the world’s reserve currency would have previously been unthinkable. It may even be illegal, but the central bank has long since strayed from its original Congressional mandate and nobody in Washington seems to care.
Previously in our history, the U.S. dollar was backed by gold and silver and could not be inflated to serve any purpose, let alone to bail out banks and private corporations. Then after the Federal Reserve was created in 1913 and President Richard Nixon closed the international gold window in 1971, fiat Federal Reserve notes were backed only by the full faith and credit of the United States.
After 2008, the era of Quantitative Easing began as the Fed ballooned its balance sheet with Treasury and agency bonds. In 2020, we are entering a new monetary era – the era of Unlimited Easing, the era of Federal Reserve Notes attaining the status of junk.
How rapidly the downgrading of the U.S. dollar translates into real losses of purchasing power remains to be seen.
But we could certainly see price spikes across an array of raw materials and consumer goods once economic lockdowns are lifted and pent-up demand is released with trillions of newly created junk dollars circulating in the financial system.