Holy Trinity of Debt & Easy Money
by Gerardo Del Real
Last month, I told you the Roaring 20’s were back and that — unlike previous cycles — we can be confident that the era of cheap cash and debt will last for years.
If you are still unclear about the official policy let me spell it out for you: Central banks around the world are making debt the cheapest it’s ever been.
The availability of cheap capital — globally — has ignited a rush for yield as capital is looking for the comfiest home.
That rush is, and will, continue to inflate asset prices of anything that can catch a bid.
Governments have issued over $12 trillion in fiscal stimulus and central banks have partnered with those governments to make sure everything stays awesome.
As of December 2020 there was $17.8 trillion in debt that was trading with a negative yield — meaning governments are essentially getting paid to borrow.
Where’s the cash going?
Dividend paying stocks? Check.
Cryptocurrencies? Check. You knew that.
But how about less cited assets?
A Mickey Mantle baseball card recently sold for a record $5.2 million this month. That same card sold for $2.8 million in 2018.
Only ten baseball cards have ever sold for more than $900,000. Eight of those happened in the past 12 months.
The first vintage issue of Batman recently sold for more than $2.2 million at auction, breaking the record for the highest amount ever paid for a Batman comic book.
Real estate? Check that box as well.
Where I live, just outside of Austin, Texas, homes are selling for above full price with many receiving dozens of offers within days.
I purchased a second home last year that required some work. A little over a year that home has nearly doubled in price. I’m not telling you that to brag, I’m trying to highlight that we are in the midst of a transfer of wealth unlike any I’ve seen in my lifetime.
U.S. home prices jumped this past November at the fastest pace in six years.
So why isn’t gold performing the way many expected it to and why aren’t our metals stocks performing better?
Quick answer for gold is it doesn’t like the real interest rates rising.
Despite record low rates and despite the nearly $18 trillion in negative yielding debt, real interest rates have been rising the past several months... hence the consolidation in the gold price.
Over the past two decades there is a -0.9 correlation between the gold price and real interest rates.
The 10 year recently hit a nine-month high and frankly I’m surprised gold has held up as well as it has considering it’s competing with record highs in cryptocurrencies, home prices in low tax states, art, pot stocks and baseball cards.
Don’t be surprised if gold pulls back to the $1,790 level.
Don’t be surprised if the dollar — which appears to have bottomed for now — perks up a bit for the next quarter.
The consolidation will be short-lived for the same reasons that cash is sloshing around all over the place: The Fed.
The Federal Reserve will start implementing its yield curve control policy framework and force rates back down.
The holy trinity of easy money —Yellen, Powell and Biden — will soon get to work providing fiscal and monetary support while forcing rates down.
It’ll work... until it doesn’t.
You should use this opportunity and do exactly what I’m doing... which is rounding out your portfolio by adding to quality and even more speculative names.
Let's get it!
Gerardo Del Real
Editor, Resource Stock Digest
For the past decade, Gerardo Del Real has worked behind-the-scenes providing research, due diligence and advice to large institutional players, fund managers, newsletter writers and some of the most active high net worth investors in the resource space. Now, he is bringing his extensive experience to the public through Resource Stock Digest, Junior Resource Monthly, and Junior Resource Trader. For more about Gerardo, check out his editor page.
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