Long Humanity

By John Mauldin

“At the end of the day” is a trite figure of speech, but it sometimes fits. It signals you’ve used all your time, and now you’ll wrap up and begin thinking about tomorrow.

I like to say designing the Strategic Investment Conference agenda is my personal art form. There’s more to it than just picking speakers and topics. The order matters, too, as does each session’s combination of viewpoints—especially pairing the speakers in panels and letting them test their views against one another.

I try to build toward a finish so, at the end of the (final) day, attendees reach a satisfying conclusion. 

It may not be the conclusion they wanted, but it should at least be coherent and help them decide what to do next. 

That’s a bit different in an online format, but it turned out even better in some ways.

This year’s SIC closing day was a blockbuster. 

In this letter, I’ll wrap up my conference reviews by wrapping that day for you.

Four Horsemen

In recent years, I’ve asked Mark Yusko to open the final day. 

That’s partly because he is really good at waking a crowd which, at our live events, was probably up late the night before. 

His rapid-fire slide presentations are legendary. 

Any one of his points could take hours to unpack, and he always has dozens.

Another reason is that, in the range of topics Mark covers, he brings back to mind many of the points previous speakers made. 

This helps the audience remember what they heard in the last few days, often with a new twist. 

The twists are important, too.

Summarizing everything Mark said would take a dozen letters. 

You really had to be there. 

You can’t characterize him as either bullish or bearish; his outlook varies by asset class and region.

Mark isn’t optimistic for 2020’s new crop of day traders or the (somewhat) less enthusiastic investors who have piled into the “FANG” stocks. 

He noted those four (Facebook, Amazon, Netflix and Google/Alphabet) represent less than 1% of S&P 500 revenues but account for 12% of the index… and 4X the rest of the index’s gain since 2012.

Source: Mark Yusko

Mark believes this results from central bank stimulus, not just last year but dating back to the financial crisis. 

Valuation bubbles historically don’t end well, as he showed in this all-too-familiar illustration.

Source: Mark Yusko

The sad part is the kind of “mean” return shown in that dotted line is actually pretty good. 

It would suffice for most investors who have reasonable goals. 

But the allure of “more” entices them to expect too much and over time, they don’t even reach the average.

From there, Mark went on to talk about energy, gold, China, Bitcoin, and more. 

While he thinks the economy could rally a bit more, that’s not the same as a “return to normal.” 

COVID-19 and its fallout will be headwinds for years.

Source: Mark Yusko

If you can’t see the cartoon above, the “Four Horsemen of the Growthpocalypse” are unemployment, foreclosures, stagnant wages, and shrinking retirement funds. 

To which I would add—millions of Americans, approximately 50%, have no retirement funds at all except for Social Security so there’s nothing to shrink. 

Another 15 to 20% have less than $100,000.

That’s not optimistic, but Mark didn’t leave us with gloom and doom. 

He sees a lot of opportunity in Bitcoin and other cryptocurrency assets. 

But more interesting, he has a very different view of the current boom in Special Purpose Acquisition Companies, or SPACs. 

Many analysts see them as borderline shady “blank check” entities with no history or assets. 

But Mark thinks they are proving to be a useful end-run around an initial public offering process that has become slow, expensive, and unfair to both investors and company founders. 

It’s why so many “unicorn” startups are remaining private far longer, and some may never go public. 

The result is less opportunity for small investors.

I have seen the SPAC space from both sides. 

I have several friends who have created what had become successful companies. 

I will soon be involved with a private company that will be using a SPAC to go public in a much more democratic and far less expensive way than an IPO.

While it should be intuitively obvious, not all IPOs are winners. 

Perhaps the most egregious were some of the late 1990s dot-com companies (Pets.com?) 

But I imagine more than a few of us wish we could have participated in the Facebook or Netflix IPOs. 

I suspect at the end of the day, SPACs will likely have a similar track record.

Pleasing Markets

Mark Yusko was followed by Bill White and Howard Marks, both of whose presentations I discussed in recent letters. 

But I haven’t told you about Richard Fisher, former Dallas Fed president. 

In that role from 2005–2015, he sat in some interesting meetings during the crisis years I’m sure there’s much he still can’t reveal, but he gave us a few hints. 

I should point out that in his introduction, I said that he was and still is my favorite central banker.

More important, though, was the insight Fisher gave us into the current Fed’s thinking. 

It appears to have changed radically just in the few years since he left. 

Now, I would argue radical change is just what the Fed needs, but it must be the right kind of change. 

Instead, it has become even more politicized, partly because of Trump and partly because the pandemic created an entirely new kind of crisis.

There are calls from many corners that the Federal Reserve should be turned into some type of environmentalist institution. 

Shouldn’t the Fed use its balance sheet for the Green New Deal and climate change? 

Still others argue that the Fed should be thinking about social justice.

The Fed was originally charged with preventing bank crises and controlling inflation. 

In 1977, Congress—in what I think shifted responsibility from where it should be—gave the Federal Reserve an explicit mandate for full employment. 

That should be a congressional mandate, but now Congress can point its collective fingers at the Fed.

Like it or not, the Fed is now back in cahoots with the Treasury Department, to the point a former Fed chair now heads Treasury, and both Fed and Treasury work closely with Congress to “coordinate” policy that pleases the markets. 

Fisher thinks Jerome Powell is making the best of a bad situation, but he isn’t sure how long Powell will be there. 

His term expires later this year, and it looks like Lael Brainard may be the next chair. 

That might lead to some other departures, so a year from now we could have a significantly different Fed. 

I am not sure the markets are ready for that.

I am very concerned Congress will want to use the Federal Reserve balance sheet to fund a whole slew of new programs, which might sound nice in theory, but it will have the high probability of distorting the actual working of the economy.

Where the Future Is

In a conference full of highlights, our final panel was the highest. 

My good friend David Bahnsen interviewed Richard Fisher, Bill White, Felix Zulauf, and yours truly. 

In almost 90 minutes, we went around the world several times.

David kindly gave me the first pitch, asking me to sum up what we’d heard.

It's probably going to come as no surprise that I'm going to kind of pick a middle muddle through path. 

I really think that Bill White nailed it when he said it's a process. 

We have a short-term process where we're clearly going to have some inflation. 

In my conversations with Bill, short-term to him is six months, a year, 18 months. 

It's not two or three months.

Then, I think the forces that Lacy and others have been talking about, that Felix was bringing up, begin to come back in. 

Then, we have to see what happens. I think the real danger in all of this is the Federal Reserve does what Ben Hunt calls, "loses the narrative." 

If they lose the confidence and trust of the markets, it's game over. 

It would make this last week's volatility look like a picnic. 

Going back to what Richard said, I think they need to start giving us some language that makes us realize that the captain is in the pilot chair. 

Daddy's home and all is going to be right with the world.

Right now, they say we don't need a pilot. It is on auto pilot. 

We're not going to pay any attention to this turbulence. 

Don't mind the crowds. 

Nothing is happening here. 

That's not, I don't think, the proper message. 

I think the message [they should be saying] is we're here. 

We're paying attention. 

Telegraphing 30 months out [is fraught with danger]. 

They don't know what's going to happen in 30 months, let alone one or two quarters. 

None of us do.

If they have to pull that back in the fourth quarter because we don't know what's going to happen, then there is a real potential they lose some of their credibility. [Again, what Ben Hunt calls losing the narrative.] 

I think this forward guidance and trying to telegraph stuff is precisely the wrong thing, especially 30 months out… I agree with Richard or Bill. 

I think the business of setting the price for the most important thing in the world. Howard Marks said this actually earlier. 

Setting the price for money is not something that the federal reserve, central bank, should be in the process of doing.

[This has always made me uncomfortable. 

My personal feeling is that if we allow the markets to set the price for short-term rates, they would be far from where they are today. 

And if they work? 

That would mean that the market is absorbing the impact.]

Since I mentioned forward guidance, and Richard Fisher was actually one of the guides, he jumped in to expand on my point.

Looking at so-called forward guidance in terms of the dot plot and what it tells you and what they issue, I wouldn't pay a lot of attention to it, as John just mentioned, long term. 


You can never forecast very long term, except for you end up at 2% inflation because that's your target and you have to plot it as such.

Secondly, you have to remember, the people that are sitting around that table won't be there long term. Presidents turn over. 

We have two big ones next year, by the way. 

Then you also have the governor's turnover and the chair’s turn over. 

And then you have the rotation of the votes amongst the banks and how the New York Fed will turn over.

Don't put too much emphasis on this forward forecasting exercise known as guidance. 

It's a very imperfect tool, and I actually think Powell does the right thing at his press conferences to downplay it. 

It's how he thinks at the moment, and we're basically guided by the nearest term.

They have gone out and said, though, they're not going to change for a very long time. I don't think the market believes that, and I think that will change over the year or over the next few years.

Felix Zulauf noted China’s central bank is bucking the trend, tightening policy while the others stay loose.

I think at the present time, the one central bank that is operating very differently is China. China seems to run to a different drummer. China is tightening monetary policy. They are also tightening fiscal policy. They are creating decent positive real rates of return in the interest rate markets. In the fixed income markets. Because they understand that if they want to perform well long term, you need high savings rates. You need interest rates that attract money… I think they are actually maneuvering in a much more capitalist way when it comes to economic policy.

Whereas the Western governments and central banks together operate in a much more socialist fashion by bailing out everybody and helping the system and taking the high price of leveraging up the system, which is becoming a danger over the long term.

[JM here: What kind of crazy upside-down world do we live in where a Communist central bank is the most conservative—what Charles Gave would call the Wicksellian bank—and the theoretically “free market” central banks are driving real interest rates well below zero?]

Later, Bill White talked more about this danger and how the debt Western central banks have created and encouraged is going to spark a crisis. 

How do you prepare for that? 

How do we prepare the system for it? 

Here’s Bill.

As you both said, take out some insurance. 

When you've got some money, stick it in the bank. 

I think another one of these buffers. 

Assuming you're being realistic here—and I think I am being realistic, and agreeing with Felix in particular. 

A crisis is coming and in that crisis, there's going to be a lot of bankruptcies and insolvencies. 

What steps are we taking now to ensure that those debt problems that will be resolved get resolved in an orderly way, as opposed to a disorderly way?

We know that the courts are already creaking, even in the United States and the United Kingdom, with commercial stuff. 

The IMF, the BIS, the OECD, the Group of 30. 

They've all come up with big studies in recent years to show our bankruptcy proceedings, whether in the courts or out of the courts, are inadequate. 

If you look reality in the face, and this is all part of the resiliency stuff that everybody's talking about these days, another crisis is coming. 

The least we can do is to make ex-ante preparations so that we can deal with it in as good a fashion as we can. 

I don't think that's happening and that's unfortunate.

Bill was describing what may be part of the “Great Reset” I expect. 

Much of the world’s debt is going to get liquidated somehow. 

Bankruptcy is one method, and it could be a better one if we had a better-prepared court system.

David closed by asking each of us where, ten years from now, we will wish we had invested in the 2020s. 

Bill thought Europe, which he believes has been a laggard but is poised to catch up. 

Felix agreed Europe will outperform, but said he would go with China because it is at the forefront of new technologies.

Richard Fisher? 

Noting China’s repressive system in the end can’t compete with free markets, he said he would put his money in Texas, because “That’s where the future is.” 

[I have a paper in my reading queue that talks about the economic powerhouses of Dallas, Austin, Houston, and San Antonio. Richard may be on to something.]

As for me, you won’t be surprised…

My answer is I'm still long humanity. 

I want to be long, emerging technologies, especially biotechnology. 

If we're talking 10 years I'm short governments. 

We've been talking about the problem with governments. 

I am long humanity. 

I think the coming technological revolutions and transformation are going to be astounding. 

There's going to be massive fortunes made and that's where I'm putting most of my money. It really is.

That’s what I’ve thought for a long time, and I’m not wavering.

Back in New York, Anniversaries, and Father’s Day

When I scheduled my trip to New York six weeks ago, I simply did not notice that it was Father’s Day. 

Too late to change, I made my way to the United Airlines boarding gate, feeling somewhat strange as I have flown on United maybe half a dozen times in my entire life. 

But it is the only nonstop to New York (actually Newark) where I can take the train and can be in Manhattan very quickly. 

As I walked on the plane, there was a lady buckling in a young girl in the seat next to me. 

I offered to change places with her, but she pointed out that her younger girl was sitting up with her.

The young lady promptly pulled out a large iPad and began to watch what is evidently a spin off TV series from a DreamWorks movie called How to Train Your Dragon

She sat very contentedly for four hours smiling and laughing, sometimes sharing a particularly poignant moment in the show with her sister sitting in front of her. 

I must confess it brought back memories of my own children when they were young and how much I miss my grandchildren.

Then I get to the hotel where my children, along with their children, had arranged a Zoom call for all of us to get together. 

Shane and her son joined in. 

Zoom isn’t quite the same as being there, but I am grateful for it.

Then it was nonstop meetings. 

Ian Bremmer graciously gave me 90 minutes for lunch, where we mostly talked about common business issues as opposed to geopolitics. 

Steve Blumenthal came in to talk with clients and then we had dinner with Rory Riggs about upcoming opportunities. 

A few biotech meetings (which were off the record) and then Tuesday night I met with David Bahnsen and René Aninao at Hunt and Fish. 

We all remarked that the last time I had been in New York was with the same two gentlemen last March when we left the next day just as the COVID crisis was hitting the city. 

The restaurant graciously gave us five hours at the corner booth to sit and randomly free-associate all sorts of ideas (some of which you may read here soon).

The next evening I was with Ben Hunt, Peter Boockvar, Constance Hunter, and Brent Donnelly, who gave me one of the first copies of his new, soon-to-be blockbuster book called, Alpha Trader, where I was surprised to see my name on the front cover with an endorsement. 

Again, the conversation was amazing and the conclusion was the same for every dinner and even the Father’s Day call. 

Zoom is useful, but it’s just not the same.

This Saturday, Shane will celebrate her (something annual) 39th birthday as well as we will celebrate our wedding anniversary. 

Only one day for me to remember, but it still requires two presents. 

Since we have moved to Puerto Rico, we get the same corner table literally on the beach early enough to watch the sunset. 

It is a glorious time of celebration. 

And with that, I will hit the send button. 

You have a great week and I hope you do something fun for July 4. And don’t forget to follow me on Twitter.

Your glad to be back and traveling analyst,

John Mauldin
Co-Founder, Mauldin Economics

Free exchange

When does transitory inflation become sustained?

Core inflation in America exceeded 3% in April, but is unlikely to stick

At nearly 43 years old, the median American worker had never in her career experienced an annual rate of “core” inflation, which excludes volatile food and energy prices, above 3%—until April this year. 

Figures published on May 28th showed that core personal-consumption-expenditure inflation, a measure closely watched by the Federal Reserve, rose to 3.1%. 

Some economists sense the first stirrings of an outbreak of sustained high inflation, like that which afflicted many countries in the 1970s. 

But prevailing theories of inflation suggest that, for now at least, this threat remains remote.

The Great Inflation, as the episode in the 1970s is often called, led to radical revisions in macroeconomic thinking. 

Until then Keynesian economists believed that a permanently lower rate of unemployment could be achieved by accepting higher inflation. 

Critics of this view, like Milton Friedman and Robert Lucas of the University of Chicago, thought differently. 

In the long run, they argued, the unemployment rate was determined by an economy’s structural features. 

A government using easy money to push joblessness below this “natural” level would fail. 

Instead, inflation would accelerate as people learned to expect faster price growth.

The Great Inflation lent credibility to the critics. 

But Friedman’s monetarism—the view that inflation in the long run was determined by growth in the money supply—also proved inadequate. 

Central banks that tried to target money growth found its relationship with inflation to be unstable. 

They have since been guided by a hybrid “New Keynesian” framework, where inflation is determined by three main factors: the effects of supply shocks; the extent to which the economy is operating above or below capacity; and people’s expectations of inflation. 

The debates around the probable trajectory of inflation today hinge on these variables.

Start first with supply shocks. 

The current inflation spike is clearly rooted in disruptions relating to the messy process of reopening. 

Supply shocks featured prominently in the Great Inflation as well, which might suggest that a short-term problem can quickly become entrenched. 

But a closer examination of that episode provides some reassurance. 

Work by Alan Blinder of Princeton University and Jeremy Rudd of the Federal Reserve suggests that the Great Inflation in fact reflected two distinct phenomena: a persistent problem of too much demand, overlaid by short bursts of supply-side pressures. 

Shocks to food and energy markets led to dramatic spikes in inflation in the 1970s. 

But Messrs Blinder and Rudd point out that inflation quickly dropped when these shocks abated. 

Headline inflation in America rose by nine percentage points from 1972 to 1974, but by 1976 had fallen by seven percentage points. 

That suggests that supply pressures today should ease when disruptions are resolved.

An economy that is operating beyond its capacity could perhaps create more enduring inflation problems. 

Here again history is instructive. 

Inflation had been creeping up in America well before the 1970s, rising from less than 2% in the early 1960s to nearly 6% later in the decade. 

That was the result of a policy error: the Fed consistently let demand exceed productive capacity. 

Why it did so remains the subject of debate. 

It may have failed to grasp that productivity growth was slowing, thereby overestimating the economy’s potential. 

Or it may have been reluctant to incur the social or political costs of inducing unemployment to rein in inflation. 

It took the grim determination of Paul Volcker, who became the Fed’s chairman in 1979, to expunge this inflationary inertia.

Some economists worry that today’s stimulus-powered growth could lead to a repeat of the errors of the past. 

Employment in America remains nearly 8m short of its pre-pandemic level, pointing to plenty of spare capacity. 

But even the Fed reckons that this might quickly be hoovered up, with unemployment falling below its long-run rate by the end of 2022. 

Yet though the disappearance of slack could add to inflation pressures, it may not do so by very much: shifts in unemployment seem to have had smaller effects on inflation in recent decades. 

In fact, research by Jonathon Hazell of Princeton University, Juan Herreño of Columbia University and Emi Nakamura and Jon Steinsson of the University of California, Berkeley, suggests that this phenomenon may not be new. 

They find that the relationship between unemployment and inflation has been fairly weak across American states since at least the late 1970s. 

The drop in inflation that occurred on Volcker’s watch owed less to high unemployment, they argue, than to a profound shift in the public’s inflation expectations.

What to expect when you’re not expecting

Expectations are the trickiest piece of the inflation equation. 

Measurement is one problem. 

A survey by the University of Michigan suggests that consumers expect average annual inflation of 3.1% over the next five years; market-based measures imply a rate of about 2.6% over the same period, before falling to about 2.2% over the subsequent five years. 

That is above the Fed’s 2% target but still well short of a 1970s-style rerun. 

Perhaps punters are less worried about price pressures. 

Or perhaps they trust in the Fed’s commitment to price stability. 

Mr Hazell and his co-authors posit that inflation expectations dropped dramatically in the early 1980s because the public perceived a “regime shift” at the Fed. 

A repeat of the Great Inflation, then, might require another big change to central banks’ frameworks, and time for the public to perceive it.

Is such an about-face imminent? 

The Fed recently amended its approach, and says it will accept periods of above-target inflation to offset past undershooting. 

Whether this represents a “regime shift” is another question. 

The Fed still promises inflation of just 2% on average. 

It has not dropped its commitment to keep control over prices, nor does the public believe it has. 

Middle-aged Americans may get a taste of modestly high inflation this year. 

But they are hardly returning to the economy of their parents.

Fighting for the scraps

Will poorer countries benefit from international tax reform?

Yes, but not by as much as they want

International tax reform pits tax-hungry governments against giant multinational companies and their armies of tax advisers. 

It sets high-tax jurisdictions against low-tax havens. 

And it requires rich- and poor-country governments to somehow reach agreement. 

The 139 countries haggling at a forum run by the oecd, a club of mostly rich countries, have yet to reach a consensus. 

Poorer countries worry that the proposals on the table discussed are too complicated, inflexible and unfair.

Developing countries are thirsty for revenue in general, and reliant on corporate tax in particular. 

In 2017 African countries raised 19% of their overall revenue from corporation tax, compared with an average of just 9% for oecd members. 

That is partly because large informal sectors mean that they raise less in, say, personal-income tax.

The current system for global tax dings poor countries in two ways. 

For a start, multinational companies shift their reported profits to low-tax havens, depriving them of revenue. 

Then the rules allocate taxing rights to countries that are home to company headquarters, which tend to be rich. 

Poor countries’ tax revenues are depressed by as much as 5% relative to an alternative system in which profits are taxed based on the current location of companies’ revenues, their employees and their wage bills, according to an estimate by Petr Jansky of Charles University and Javier Garcia-Bernardo of the Tax Justice Network, an advocacy group. 

By contrast, those in rich countries are only 1% lower.

The reforms being discussed, and supported by America’s Biden administration, would reallocate the right to tax a slice of some companies’ profits, and agree on a global minimum corporate-tax rate, perhaps of 15%. 

Poor countries want to crack down on tax avoidance as much as rich ones. 

But a lack of cash and personnel makes it harder for them to engage in negotiations. 

Though low-income countries represent 22% of negotiating members, they make up only 5% of those attending important working-party meetings. 

Those constraints apply to the ability to administer tax and police evasion, too. 

On May 12th the African Tax Administration Forum (ataf), a group of national agencies, criticised the idea of reallocating the right to tax the portion of multinationals’ profits above some “routine” level, as “far too complex”, suggesting that a share of total profits be reallocated instead.

Another worry is that the new deal will become a straitjacket. 

The Biden administration has proposed a “binding, non-optional” dispute-resolution process as a way of reassuring anxious companies that they will not be taxed several times over. 

But some poor countries fear being on the wrong end of rulings too often, and see broadly applied binding arbitration as a “red line”. 

(A process applying to a narrower set of disputes could fly, however.) 

Another concern is that a minimum tax could threaten poorer countries’ use of tax incentives to reel in investment. 

But a minimum rate of 15% is still well below most poor countries’ statutory tax rate, leaving room for enticement. 

A global floor might encourage some countries to go the other way, by emboldening them to raise taxes on profits that are reported at home.

Perhaps the biggest complaint is that rich countries may get the bulk of taxable profits being grabbed back from havens, while poor ones are left with the scraps. 

In October the oecd estimated that a reallocation of taxing rights on some companies might help raise corporate-tax revenues in poor countries by around 1% (a newer proposal from the Biden administration should yield a similar sum). 

One negotiator for an African country called that a “disaster for developing countries”. ataf suggested that more companies be included, by drastically lowering the revenue threshold from €20bn ($24bn) to €250m. 

It is hard to imagine rich countries agreeing to that. 

The complex knock-on effects of a proposed minimum tax of 15% could raise poor countries’ corporate-tax take by another 2-4%. 

Even so, rich countries will probably make bigger gains still. 

Be prepared

The Fed should explain how it will respond to rising inflation

The Fed’s “average inflation targeting” regime remains too vague

The inevitable has begun. 

America’s consumer-price index (cpi) in March was 2.6% higher than a year earlier, when prices collapsed as the pandemic struck. 

The increase in inflation from 1.7% in February was the biggest rise since 2009, the last time the economy was recovering from a deep shock. 

Several more months of high numbers—by rich-world standards—are coming. 

The cpi could reach over 3.5% by May. 

On the separate price index used by the Federal Reserve, inflation will soon rise above the central bank’s 2% target.

The Fed is rightly unworried by cosmetically higher inflation that reflects what happened a year ago. 

Yet the central bank does have an inflation problem that will trouble it when the economic recovery produces sustained price pressures. 

A new monetary-policy framework it adopted in August dictates that it should push inflation temporarily higher than its target after recessions, to make up lost ground. 

The problem is that nobody knows by how much or for how long it wants inflation to overshoot after the pandemic. 

With the risks of an inflationary episode greater than they have been in years, the ambiguity is an unfortunate additional source of uncertainty.

The idea behind “average inflation targeting” is to make sure that inflation averages 2% over the full economic cycle, rather than falling short over time owing to recessions. 

It is a welcome corrective to the old regime, which took too long to restore the economy to health after the global financial crisis due in part to a misplaced fear of inflation.

Yet the new framework remains vague. 

Richard Clarida, the Fed’s vice-chairman, has suggested that it means waiting to hit inflation and employment goals before raising interest rates, and then operating as normal—a bit like a driver waiting to hit the brakes until the car has arrived, regardless of its stopping distance. 

Other Fed officials have hinted that they want to make up more precisely the ground lost to downturns.

But it is unclear whether to measure from March 2020, when the present crisis struck, or from August, when the new regime came into effect. 

Include the spring and there is a shortfall; start in August and there is none, because prices have risen at an annual pace of more than 2% since the autumn. 

Then again the Fed could argue that, as long as long-term inflation expectations stay around its target, it is already set for 2% on average and need not overshoot by much. 

Policymakers also disagree about how far above the target it is reasonable to go, temporarily, in the name of catching up.

Central bankers often differ over the state of the economy or the probable impact of their monetary-policy decisions. 

Failing to articulate what they are aiming for is more unusual. 

The ambiguity is contributing to uncertainty over inflation and interest rates, which has also been heightened by the novel circumstances of the pandemic and President Joe Biden’s enormous fiscal stimulus. 

A gap has opened between financial markets, which expect the Fed to raise interest rates in 2022, andthe median monetary-policymaker, who does not expect rates to rise until 2024 at the earliest. 

Investors are also pricing in a growing risk that inflation will run well above the Fed’s target for quite some time.

Jerome Powell, the Fed chairman, has said that it is deliberately avoiding committing itself to a numerical rule. 

Sometimes central bankers must avoid excessive specificity, and forging consensus on a committee can be hard. 

But sooner or later the Fed must decide what it wants as inflation rises. 

It should do so soon. 

The monetary-policy meeting that starts on April 27th would be a good time to clear up some of the ambiguity. 


Chris Vermeullen

In Part I of this research article, I tried to highlight the major market cycle phases that often drive volatility, uncertainty, and bigger trends in the US/Global markets as well as Precious Metals.  

Additionally, my team and I highlighted the technical confluence pattern that has setup as Gold prices have rallied above downward sloping price channels (price Flags) recently.  

This confluence of technical patterns, while we are transitioning into a post-COVID-19 global economy, suggests that excess credit/debt issues throughout the global financial markets are seeking safety in preparation for some type of market reversion event.

The recent move above $1900 in gold shows that precious metals are likely entering a new bullish price phase.  

We highlighted this in a May 3rd research article suggesting that a new advancing cycle phase may push Gold to levels above $2100.  

If our research is correct, Gold may continue to rally higher – reaching a peak sometime near mid-October 2021.

Our current Custom Metals Index chart shows the recent strength of the upside price trend in precious metals.  

Once Gold clears the $1960~$1965 level, prices should continue to advance to $2067, then $2305 moderately quickly.  

The $2067 level represents resistance just below the recent highs from August 2020 near $2087.  

It is important to understand how price moves in advancing/declining waves/phases over time.  

At this stage of the precious metals rally, which I believe is very similar to the 2003 to 2006 Gold rally, we may see Gold continue to rally higher while the US/Global markets continue to trend moderately higher.  

This is a shift in how capital is being deployed in anticipation of the US Fed and global central banks entering a tightening phase.  

This process also took place in 2005~2007 as the US Federal Reserve raised interest rates attempting to deleverage the markets in an orderly format.  

The major stock market indexes and precious metals continued to rally throughout this event because traders/investors had already started hedging risks of an unknown market event while the Fed continued to raise rates.

Currently, we know the US Federal reserve is planning on acting to potentially raise rates in 2022 or 2023 and there has been some discussion that the US Fed may need to take action earlier to avert inflation concerns.  

The similarities between the 2004~2007 gold rally to what we are seeing in Gold right now, are uncanny.  

We are seeing Gold rally to levels close to $2000 near an early stage of concern related to any potential deleveraging/reversion event.  

In 2004, Gold was trading near $350 and reached a high of $1923.70 in 2011 – a rally totaling over 450%.  

If something similar happens based on the recent price lows, Gold could rally to levels over $6500.

Our researchers are focused on a target level near $3750 right now.  

We believe the next advancing wave in Gold, over many months, will target $2300, then $3200, then $3750.  

See this research article from May 16th for more detailed price targets/setups.

As we move into the early Summer months, the one thing that everyone seems to be asking is “When will the markets start the next downside price correction or reversion event?”.  

A lot of the emails and questions we receive are related to our recent Gann research article as well as some of our other research articles related to the Excess Phase Peak patterns we’ve highlighted in Bitcoin, AAPL, TSLA, and others. 


- We don’t have any clear timing regarding if or when a reversion event will take place yet.

- We do have research, our Gann research article, that suggests this type of event would likely happen between April 2021 and August/September 2021.

- We also have some evidence that certain sectors have already started to execute the Excess Phase Peak pattern that we’ve highlighted in many interview and research articles recently.

- Currently, the markets have moved into a broad sideways Flagging pattern, which may be the start of the broader market peaking pattern.  

We don’t have any confirmation of this type of setup yet though.

- Our researchers are watching for a confluence of technical patterns across various sectors to help confirm our understanding of how and when any breakdown or reversion event may occur. 

We strongly advise technical traders watch the Transportation Index for signs of weakness ahead of any bigger reversion event.

Our Custom Volatility Index Monthly chart highlights how fast and far the post-COVID recovery event has come.  

In prior years, 2017, 2018, and 2019, this index was able to reach levels above 12~13 fairly consistently (a topping/peak price range), which was often followed by a moderate reversion event (in most cases 8% to 26% pullbacks).  

Currently, this custom index has reached levels above 14 and has begun to stall near 12~13 – well within the topping range.

Any price weakness resulting after reaching these lofty levels is likely to prompt a fairly large 11~20% pullback in the markets.  

If the right conditions setup, after we’ve seen a big global market recovery rally, the reversion event may be even bigger than we expect.

When will it happen?  

We are not confident in trying to make any date/time predictions at this point.  

How will it happen?  

Our guess is that it will happen as traders rush to the sidelines as a result of perceived market extremes and perceived general weakness in trends.  

How deep could it pull back?  

Our estimate is a minimum of 11% to 20% right now – possibly targeting the 2018~2019 lows.

What we can tell you is that the upward move in precious metals appears to be a leading trend suggesting global traders are moving to hedge risks related to the global market reversion event (very similar to 2004~2007).  

In this early stage hedging event, traders move capital into precious metals as a hedge against broader market risks and declines. 

Welcome To The “Pre-Taper” Tantrum

In 2018, the Fed tried to moderate its post-Great Recession emergency policy of low interest rates and torrential money printing. 

It reduced (or tapered) its asset purchases and, in a series of tiny steps, boosted short-term interest rates by about one percentage point.

pre-taper tantrum

And the financial markets, by then addicted to easy money, threw what came to be known as a taper tantrum.

pre-taper tantrum

The Fed immediately backed off and started lowering rates, culminating with a plunge to zero when the pandemic hit.

pre-taper tantrum

But those simpler times — when the Fed actually had to raise rates to elicit a backlash from the financial markets — are apparently over. 

Today, all it takes to panic “investors” is a few sentences about maybe possibly tightening just a smidge at some indeterminate date in the future.

Last week, for instance, the Fed directed its trail balloon specialist, James Bullard, to find out what the markets think of slightly less money printing in late 2022. 

Here’s how MarketWatch covered his comments: 

Bullard says he expects first rate hike late next year

St. Louis Federal Reserve President James Bullard said Friday he expects the central bank to raise its benchmark interest rate in 2022 given his forecast for above-target inflation.

In an interview on CNBC, Bullard said it was “natural” for the Fed to tilt hawkish at its meeting earlier this week given recent strong inflation readings.

Bullard said the Fed was surprised how strong the economy has been this year. Last December, the central bankers forecast a 4% GDP growth rate this year. Earlier this week, they raised their estimate to 7%. They upped their core PCE inflation forecast to 3% from 1.8% in December.

“We were expecting a good year, but this is a bigger year than we were expecting, more inflation than we were expecting. And I think it’s natural that we’ve tilted a little bit more hawkish here to contain inflationary pressures,” Bullard said.

The Fed is buying $80 billion of Treasurys and $40 billion of mortgage-backed securities, along with keeping interest rates close to zero, to support the economy.

Bullard said he expected “in-depth discussions” of slowing the asset purchases would start now that Fed Chairman Jerome Powell had opened the door for the debate. It may take “several meetings” for the Fed to “get organized,” he added. The Fed meets every six weeks. The next meeting is in late July.

Bullard said he was “leaning” toward supporting an end to the purchases of mortgage backed securities given the “booming housing market” and talk about a bubble in the sector.

“I would be a little concerned about feeding into the housing froth that seems to be developing,” Bullard said.

“I’m leaning a little bit toward the idea that maybe we don’t need to be in mortgage-backed securities,” he said.

The Fed holdings of mortgage-backed securities have risen almost $1 trillion since last March, according to economists at Jefferies.

To summarize, the Fed might stop buying mortgage backed securities twelve or so months hence – in the face of 7% growth and 5% inflation in the here-and-now. 

To which stocks responded with what can only be described as pre-taper tantrum.

pre-taper tantrum

The Fed got the message and immediately walked back Bullard’s speculations, promising instead to — get this — demand something more than just high inflation before it starts tightening.

And so we’ve arrived at that long-awaited monetary policy endpoint where it becomes clear that the government will never be able to tighten monetary or fiscal policy. 

Never ever. 

The plane is now officially on autopilot, heading straight for an inflationary mountain with no ability to steer over or around it.

Let’s finish with Peter Schiff’s explanation of how the markets “called Bullard’s bluff” – and how ridiculous it is for the Fed to claim to know what will happen a hear hence: