There are a number of economists and strategists stubbornly clinging to their belief that the U.S. economy is strong and that markets have decoupled from economic fundamentals. I would respectfully suggest that markets decoupled from economic fundamentals a long time ago when the S&P 500 rose three-fold since March 2009 while the economy barely grew at 2% per annum and are now merely returning to the mean.
But that won't play out in a straight line. Nothing ever does in a complex system.
So it's not surprising that last week was a very strong one for the U.S. markets and for oil. And it's no shock that Wall Street is starting to make encouraging noises about "recovery." But when did those folks ever tell you the truth?
There is one signal that never lies. It always lights up red when the system starts to fail.
The Yield Curve Is Flattening
Unlike the financial media, Wall Street, central bankers, and politicians, the yield curve does not lie. It is flattening and those that understand what that means will tell you to pay attention.
A flattening yield curve and sharp drop in yields is signaling not only economic weakness but deepening fears among investors about systemic fragility. Even in a world where the Fed has destroyed many of the signaling mechanisms of the markets, a flattening yield curve combined with all of the other negative economic data is flashing red that the economy is faltering.
Now that we've learned that we can have a bear market without, or at least before, we enter a recession or the Fed begins to aggressively tighten, it should be apparent that economic weakness is not far behind. The December 2015 unemployment number that the press and many analysts are hawking as a sign of economic strength was much weaker than it appeared. The Atlanta Fed's GDPNow tracker placed Q4 GDP at +0.6% as of Jan. 15, despite balmy holiday weather. Holiday retail sales were extremely disappointing and the year was greeted by large layoffs and store closings at Macy's and Wal-Mart. The consensus is programmed to chirp that "the American consumer is fine" while ignoring the fact that she may be just great – the only problem is she isn't spending money! While France's socialist President Francois Hollande is finally admitting that socialism doesn't work, Americans are cheering on Bernie Sanders and Barack Obama keeps burying the country in more regulations.
I can go on peddling what Mr. Obama calls fiction, but my sad if unpatriotic duty remains to point out that the facts demonstrate that the U.S. economy is struggling again in 2016. Low oil prices are a serious problem for the economy.
There's another secondary indicator I watch, a measure of fear and loss of confidence in our central bankers, and it will probably not come as a surprise to my regular readers.
Gold Prices Actually Measure Fear
The current rise in the price of gold is another indicator that investors and citizens are questioning the integrity of paper money and the policies of the central bankers destroying it.
I've said before that I expect gold prices to go up as panic sets in to the markets, and this is already happening. Two weeks ago, gold experienced its biggest rally in over seven years, rising 5.5% just that Thursday. Jordan Eliseo, chief economist at ABC Bullion, says, "In U.S. dollar terms the gold price is up around 15%, currently trading around [the] $1,250 an ounce mark."
Gold prices don't lie, either – and the worse market conditions get, the more investors will flee equity and run to "safe havens" like gold and silver.
The world's paper currencies are being destroyed by the deliberate policies of central banks because they have no other tools to promote growth or inflation and governments have no other way to pay back the trillions of dollars of debt they have created.
I think these are the wrong policies, but we must take the world as it is and not as we would like it to be. Accordingly, the only antidote to the destruction of paper money is tangible assets such as gold and silver. Sure, these could go lower, but eventually they will be worth much more than their current
Whenever I want to see what's really going on in the markets, I look for a flattening yield curve and spiking gold prices.
I see those two signals lighting up right now, and that means things aren't good.
We are still in a long-term, potentially multiyear bear market. We're still right on target for a market crash by this summer.
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About the Author
Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.