This Sunday was a historic day when the Federal Reserve took rates to zero, announced a new big QE program, lowered the reserve requirements to banks and the stock futures dove that night in response. It meant the markets are not what they have been for the past eleven years.
Yesterday – just like they did on Friday – gold stocks ETF’s GDX, GDXJ, and JNUG diverged away from their true underlying net asset value. JNUG is once again completely malfunctioning. Take a look at the stocks that make up GDX or the XAU and compare it to the GDX action yesterday and you’ll see the divergence. Weird things like this are happening in the markets, because there is no liquidity. I laid out the mechanics of these gold stock ETF malfunctions in the Sunday Power Investor update.
What that means is that there are very few real buyers and an overwhelming number of sellers in the markets. Some assets – such as some of the bonds in bond ETF’s are priced at values that are probably not even real as they cannot be sold at their listed theoretical prices as they have no bids. Mass liquidations are happening all over the stock market in what is not panic selling, but the destruction of swaths of capital across the financial system.
I thought this type of thing could happen one day, but I never thought it would happen this year. The biggest thing happening is that the bond market peaked out. That’s why the Federal Reserve has announced two or three massive QE programs in the past seven days and there will be more to come. Everyday now it seems like they do something new.
This is why the TLT is not going up now as a safe haven during these market declines. With all the coming bailout programs and expected loss of tax revenue the US government budget deficit is going to completely explode. What was a 20% stock market drop two weeks ago has now become a debt crisis. They play out with an attack of deflation (witness the big 20% drop in oil yesterday) and when they are over lead eventually to huge inflation.
Everything is falling now and nothing is going up as a safe have at this moment. Gold has fallen below $1500 an ounce. It has had stabs up and then drops on some of the days of big stock market weakness. We are in a mass liquidation in the markets. I didn’t think this type of thing would happen this year, but it is happening now.
One reason is that much of the market became simply a pure bubble and is now imploding. That’s the story of the debt market where the yield on BBB junk bonds got down to less than 3% just a few weeks ago and the yield on the ten year Treasury bond went to 0.666% – a price no human being would buy it at. So the Fed had to do a QE last week to become a buyer.
I am sure there are margin maniacs being liquidated in the markets, but now millions of responsible people are facing an economic downturn and can’t afford to lose any more money. So some are selling to raise necessary cash to finance debts or to simply have cash reserves to ride out the coming months. That’s just smart prudent business.
But the impact is making it so that at the moment safe havens are not working when everything is being sold. However, the bond market as we know it is broken. The good sign for precious metals is that gold is trading less volatile than the stock market and will go up more than the stock market does when this market decline is over. Gold is going to go completely crazy when things turn, because it is going to replace bonds as a safe haven for many.
The investment implications are simple – gold and precious metals are still the best investment for the next ten years and cash reserves are also a position for people so that they will be able to buy when this storm is over.
My guess is it will end in April.
That doesn’t mean the markets fall everyday, but until it ends these will continue to be the most treacherous markets we have ever seen. The speed of the drop so far has even exceeded what happened during the 1929 stock market crash. Check out this chart someone posted on Twitter: