The Absolute Peak Of Lunacy
Let’s start by simply getting the “pink elephant” out of the way. Yesterday’s PM “drive-by shooting,” on essentially the lowest volume trading day of the year, represents an act of desperation as urgent as any we’ve seen to date. In the past month, whilst gold and silver were rising sharply from powerful “triple bottom” formations, the Cartel was naked shorting a nearly unprecedented $20 billion of COMEX futures out of shear panic – culminating in yesterday’s “mystery” sale of $1.4 billion of gold at the COMEX open. We don’t like to put too much credence to near-term predictions; but given the obvious downward spiral of the global economy, and explosion of worldwide debt and inflation, we believe Jim Sinclair’s latest comments are worth repeating.
“Long-term cycles in gold are in the process of turning long-term positive. That is fact. There is a strong possibility that this is the last take down before gold trades at new highs. I feel this is the situation. Gold will make new highs after the failure of the clearly false price construct of this morning’s illiquid time period.”
In numerous, recent articles, we have discussed how the “final straw” will be the universally recognized collapse of the fraudulent U.S. “economy.” To wit, as weak real data continues to roll in, John Williams’ expectation of a negative 2Q GDP print looks more and more possible each day. This thesis was validated again this morning, when the bogus Empire State diffusion index surged, despite plunging business expectations; whilst retail sales – you know, real economic data – came in at a measly +0.2%, compared to expectations of +0.6%. As the U.S. retail collapse continues – as validated by Wal-Mart and numerous others in recent weeks, the odds that “Yellen’s Last Stand” is shortly overrun by reality multiplies dramatically.
Later this morning, Whirlybird Janet gives her semi-annual Congressional testimony; which, by the way, is a major reason why PMs were so viciously attacked yesterday. That, and the fact TPTB were desperate to “prove” the Espirito Santo crisis was “contained,” despite its stock falling not only 7% yesterday, but 8% today. We have long written of how the various U.S. “manipulation agencies” tend to “prime the market” ahead of key Fed Chairman speeches, so as to give the Fed “leeway” to promote whatever propaganda they have in store. That said, no Fed Chairman has ever said anything materially incremental in regularly scheduled Congressional testimony; and thus, despite the media hype (and surrounding Cartel activity), it’s typically a non-event.
However, what’s decidedly NOT a non-event is the historic financial bubbles created amidst the worst economic and financial environment of our lifetimes. In reading David Stockman’s latest brilliant article regarding said excesses, it couldn’t be more apparent how close we are to the end game; and with it, the likely realization of Jim Sinclair’s expectations – and then some.
In Japan, where 2Q GDP is expected to plunge by 5% – whilst the CPI sits at multi-year highs – the Bank of Japan is not only hinting at expanded “Abenomics,” but the outright purchase of Nikkei equities. In China, rumors of a dramatic QE announcement are rife, while in Europe, the $1.4 trillion QE program proposed by the ECB last month appears likely to be launched by year-end. In fact, Draghi’s comments yesterday combined every manifestation of systemic implosion imaginable – from unfounded “deflation” fears; to aggressive intimations regarding the “final currency war”; to the ECB’s willingness to utilize “unconventional” monetary tools; and last but not least, the astounding revelation that it wouldn’t raise rates even if bubbles emerge!
*Draghi says risk to economic outlook are on downside
*Draghi says appreciating Euro would be risk to recovery
*Draghi says ready to use unconventional tools within mandate
*Draghi says ECB wouldn’t raise rates if bubbles emerge
Sadly, these ugly developments aren’t even close to what catalyzed the title of today’s article. No, those are reserved for the unholy alliance between the Fed and Wall Street; which, due to the former’s shadowy ownership structure, are essentially one and the same. To wit, back in the 1990s – and likely, well into the 2000s –the so-called “Fed model” was heavily utilized by Maestro Greenspan to guide monetary policy. Essentially, it sought to predict stock prices with an equation incorporating the markets’ “earnings yield” (EPS/price) and the yield on long-term Treasury bonds. We know, that sounds ridiculous. And it most certainly is, as look at what its use – or better put, abuse – has wrought!
And thus, when none other than the “Vampire Squid” itself – Goldman Sachs – utilized it in its research commentary yesterday, even I was astounded. To me, the “Fed model” is as discredited as the flat Earth theory. And thus, to see the supposedly “smartest” bankers referring to it, it occurred to me just how deluded the markets have become, and distorted the cumulative economic zeitgeist.
However, that’s not even the half of it – as it’s one thing to simply refer to it, and another to recommend that clients rely on it as a primary valuation tool. Which is why, when you see the below chart, you’ll realize that the institution of Wall Street is on its last legs, before the inevitable economic collapse and monetary hyperinflation sets in.
Yes, the so-called “geniuses” at Goldman Sachs – yes, the same geniuses that predict $1,050/oz gold – have based their entire stock market forecast on the Fed Model; which, as you can see, has been so bastardized by the Fed’s destructive policies, no longer purports even a scintilla of common sense.
As you can see, it gives a comically broad range of potential year-end values for the S&P 500, which closed yesterday at 1977. No, you’re not reading it incorrectly; Goldman actually forecasts a year-end range of 1,390 to 3,560! However, it’s not the ridiculous specificity of the price targets that makes this table so ridiculous, but the premise behind them.
As you can see by the progression down the respective columns, the lower the 10-year Treasury yield, the higher the S&P forecast. And thus, with real economic activity and interest rates at multi-decade lows (the latter due to the Fed’s lunatic $4.4 trillion monetization scheme), whilst debt and real inflation sit at all-time highs, Goldman believes lower rates will catalyze higher stock prices, when the only way that can happen is if broad economic expectations plummet.
Better yet, as you can see by the right-to-left progression of the rows, the lower the “yield gap,” the higher the equity forecast as well. Or, in layman’s terms, the weaker corporate earnings are, the higher Goldman expects stock prices to be. And thus, the cumulative conclusion of the report; i.e., that if both the economy in general and corporate earnings implode, the S&P 500 will nearly double within the next five months!
Here at the Miles Franklin Blog, we may not be economic “rocket scientists.” However, we’re pretty sure that if the economy implodes and the S&P doubles, we will be well on our way to hyperinflation, essentially ensuring Sinclair’s year-end forecast of $2,000-$3,500 gold. “Fortunately” for PM holders, such an ugly scenario isn’t required to catalyze significant gold and silver appreciation; as trading well below the industry’s sustaining costs, amidst the most aggressive money printing environment of our lifetimes, it strains the imagination as to how such prices won’t be reached irrespective. Will such gains be made in the next six months? Who knows, but we’re quite sure that the ultimate time frame is far shorter than most can imagine.
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