Prepare for New Gold Highs (Just Don’t Dance)

Gold hit a fresh record high in the wake of Jerome Powell’s dovish comments that the Fed will consider cutting interest rates at its upcoming September FOMC meeting. As the Fed is forced into accommodative policy and possibly even eventual QE, get ready for even more record highs for the yellow metal.

But just don’t dance.

That’s a quote from a famous scene in The Big Short, when Brad Pitt’s character Ben Rickert sternly reminds his younger investing partners that the success of their trade is only possible because of tremendous suffering on the part of Americans who were suckered into bogus mortgages. As they excitedly dance in anticipation of all the money they’re about to make, Pitt’s character says:

“You just bet against the American economy…which means if we’re right, people lose homes, people lose jobs, people lose retirement savings, people lose pensions…every one percent unemployment goes up, 40,000 people die, did you know that?”

Real numbers may vary. But the sentiment is a reminder of the importance of gratitude and humility. Gratitude because you saw what was coming, and took the right steps to protect yourself, your finances, and your family. Humility because your bet was that monetary debasement and an economic crisis were inevitable. 

When that crisis comes, the most important thing will be to figure out how to rebuild in a way that applies the lessons taught by the inflationary horrors of central banking. History shows that, once a central bank is established, those lessons are usually learned the hard way.

Made as a reaction to the 2008 financial crisis, The Big Short has a lesson to teach Wall Street. But they didn’t learn anything from 2008. Instead of restructuring to reduce risk, policymakers and bankers doubled down on the same behaviors that caused the crisis. Risk wasn’t eliminated. It was repackaged and shifted to new corners of the market. 

Instead of toxic mortgage-backed securities, today we have mountains of corporate debt sliced into tranches, leveraged loans sold to yield-hungry investors, and entire industries addicted to artificially cheap credit. The labels have changed, but the underlying game hasn’t.

In the years after 2008, stock buybacks exploded as companies borrowed record amounts of money at near-zero interest rates to repurchase their own shares. This financial engineering boosted executive bonuses and temporarily propped up stock prices, but it left corporate balance sheets dangerously exposed. By 2020, U.S. corporate debt had swelled to more than $10 trillion, much of it rated just above junk. When the pandemic hit, it took another wave of Federal Reserve intervention to keep the house of cards from collapsing. Rather than allowing a reset, the Fed backstopped risk yet again, teaching Wall Street the same lesson it learned in 2008: no matter how reckless you are, the Fed will bail you out. When the system is dependent on criminality, you have to normalize the criminality to avoid the whole thing from collapsing.

Companies gorged on cheap money during the last decade of near-zero rates, not to expand productivity, but to buy back their own stock. By 2020, corporate debt had ballooned past $10 trillion, much of it in the lowest investment-grade tier, just a downgrade away from junk. This echoes the mortgage market pre-2008, where trillions of subprime loans were disguised as safe. The only difference now is that instead of toxic mortgages,it’s overleveraged corporations whose balance sheets can’t survive higher borrowing costs.

As for the housing market itself, after the 2008 foreclosure wave, you’d think the lesson would be that real estate markets shouldn’t be treated as a casino. Instead, large private equity firms and hedge funds stepped in, buying up distressed properties in bulk and or throwing up cheap, hastily-constructed McRentals. 

Today, entire neighborhoods are owned not by families, but as a speculative asset class in a manipulated casino. The cycle of real estate financialization continues, with renters facing skyrocketing costs instead of homeowners with bad mortgages.

Meanwhile, office towers in major US cities are sitting half-empty, their values plunging as remote work reshapes demand. Banks, especially regional ones, are stuffed with loans tied to these buildings. It’s the same dynamic as 2008’s housing bust, only this time the collateral isn’t suburban homes, but glass skyscrapers no one wants to lease, especially in the remote work status quo. If property values fall far enough, lenders will face billions in losses, threatening the same contagion that once spread through mortgage-backed securities.

Then there are CLOs, or collateralized loan obligations. Instead of bundling risky mortgages, Wall Street slices up leveraged loans made to already-indebted companies. Demand for yield has made CLOs one of the fastest-growing corners of finance. They’re nothing new, but you often see them touted as having high returns without much mention of the risks. Everyone insists the risk is “well-distributed,” just like they said about subprime mortgages in 2007.

Despite 15 years of supposed “reform,” banks were still borrowing short and lending long, leaving themselves vulnerable the moment the Fed raised rates. Once again, the government and the Fed had to step in with emergency facilities to prevent contagion. Wall Street’s culture also hasn’t changed. In 2008, it was mortgage brokers pushing loans to unqualified buyers. Today, it’s venture capital firms throwing billions at profitless tech startups, hollow crypto companies, or private funds inflating valuations with cheap money. 

The names of the assets change, from subprime mortgages to crypto exchanges or AI unicorns, but the underlying dynamic is still just speculation fueled by leverage. Meanwhile, Americans are indebted to the gills, have no savings, and are seeing their retirements inflated away.

US Credit Card Debt Balances

The “irrational exuberance” Alan Greenspan warned about in the 1990s is back with a vengeance, only this time fueled by trillions of dollars printed around the time of the pandemic. The names of the assets are different, but the psychology is the same: everyone assumes the Fed will always ride to the rescue, no matter how absurd the bubble. 

As Peter Schiff recently said on QTR’s Fringe Finance:

“Just like in the days and months leading up to the 2008 financial crisis, no one had a clue. But this time it’s bigger — it’s a sovereign debt crisis, a currency crisis.”

But gold’s highs mean that investors are finally losing trust in the Fed, the rosy financial data, and Wall Street’s balance sheets. Rallying gold means skepticism in policymakers who keep inflating new bubbles under the guise of preserving stability. The paper promises holding it together are only as good as the next round of QE. Each new record high in gold is a vote of no confidence. 

As long as chosen banks have the Fed as a buyer of last resort, risk doesn’t matter. Perverse incentives lead to perverse results. The dancing continues, only the music has changed. And gold’s rise is the reminder that this cycle, too, is heading toward a breaking point.

Economic crashes don’t just erase paper wealth on Wall Street. They ripple out into jobs, savings, housing, and every other part of the economy. If the past is any guide, those at the top will walk away richer, while ordinary Americans pay the price. But some crashes are so big that they call for a reset, and new monetary paradigms are forced to be born. 

When this one happens, and the powers that be clamor for CBDCs, crypto-dollars, and a system that gives them even greater control, it will be up to us to demand a hard money standard that tethers our future to economic reality rather than the whims of central planners.