On August 14, 2019, the Global Financial System Barometer (“GFSB”) – the nominal yield of the U.S. government’s benchmark 10-year Treasury bond minus inflation – broke through a critical monetary threshold…
It was an extremely rare event. It’s related to the “inverted yield curve” that occurred last month, but it is an even rarer and more “acute” signal. And the GFSB, also referred to as the “real” 10-year yield, plays a significant role.
For sophisticated investors, this upcoming monetary inversion will unlock trillions and trillions of dollars in additional liquidity. The chart below shows what I’m talking about…
The descending (blue) line is the GFSB… arguably the single most important financial metric in the entire world.
The ascending (black) line is the price of gold.
As you can see, when the GFSB fell below the 2% mark (on the left scale), it heralded the beginnings of a true firestorm. One of the most important impacts of this massive economic change was the first real bull market in gold since the late 1970s.
From this point (in early 2003) until 2011, gold soared from around $400 per ounce to almost $2,000 per ounce – a 400% increase in a huge asset class. From 2002 until 2012, gold moved higher each and every year.
It’s easy for people to point backward on a chart and say, “See, this is what it meant.” But that’s not what’s happening here… We’re not just looking backward. My team of analysts and I have been following this barometer for decades, and we’ve used it – in real time – to make our best and most valuable financial decisions.
This is extremely important.
Now, take a closer look back at the previous chart…
If you look closely, you’ll notice that the GFSB collapsed well past its “resistance” point at 2% in early 2008. It happened just before investment banks began failing and the entire mortgage industry collapsed.
Don’t pay any attention to the brief spike right in the middle of the crisis (in the fall of 2008). That’s an aberration related to a brief collapse in inflation expectations.
What is important is that after dropping through the 2% threshold, the GFSB continued to fall until late 2012…
Gold rallied this entire time.
And then, suddenly, something changed… What was it?
Europe’s financial system stopped bleeding. Bailouts of country after country were put into effect. The world’s financial system stopped going down the toilet. The various major deflationary holes were plugged.
The system began to reflate… It began to work again. But it never made it back to the 1% line, much less the 2% level that ultimately began this crisis.
In 2015, gold seemed to bottom at less than $1,100 per ounce.
Last month, gold broke out to a six-year high of more than $1,400 per ounce.
Meanwhile, the GFSB turned down again.
There is, as you might imagine, a tight and meaningful correlation between the price of gold and this measure of the global financial system’s stability and viability.
More important, I believe this downtrend we’re seeing in the GFSB will continue…
Based on debt levels, declining levels of fixed capital investment, and increasing levels of credit defaults (in auto loans and high-yield bonds), I believe the downtrend we’re seeing in the GFSB could broach key “support” at the 0% level… and go negative.
If that happens, the financial markets will be suddenly turned upside down.
And I mean that almost literally… At the 0% level, the markets will begin to go haywire, as though the entire system has been inverted.
If you’re an optimist, you’ll perceive this rare event – this massive monetary inversion – as the final phase of the long-predicted “Melt Up.”
That’s one way to think of it.
In the short term, this liquidity trigger could propel the markets (for stocks, bonds, property prices, collectibles, etc.) vastly higher. In fact, this is almost certain to occur… I’d expect at least another 30% increase in the S&P 500 Index and even bigger gains for growth stocks.
But what this monetary inversion means to the global economy and to the U.S. dollar in the longer term is scary and probably puts you at risk.
Remember… A Melt Up Has Two Sides
A Melt Up starts with a big run-up in debt, liquidity, and financial-asset prices. That’s the part everyone seems to like.
And then there’s the hangover from these policies – unsustainable debt loads, defaults, illiquidity, and ultimately horrendous losses to purchasing power as the government further devalues the U.S. dollar in response.
Many will perceive this coming monetary inversion as an opportunity. And it’s true…
We are approaching the second-best opportunity I’ve ever seen to make huge gains in the world’s markets.
The flip side of this massive liquidity event, however, is stark… For most Americans, what’s about to happen will destroy much of their liquid wealth.
No, it’s not fair. Not at all. It is a rigged game. If I could, I would put America on a diet of sound money, sound banking, and balanced government budgets. But I can’t do anything about it.
Hopefully, you’re skeptical that anything important is about to change. That’s exactly how you should feel. It’s also true: Most of the time, you can safely ignore macroeconomic forces like the stuff I’m going to describe today. Most of the time, you can simply sit back and let your dividends grow.
But during rare periods – periods of acute stress in the world’s currency and bond markets – you can make stupendous gains and avoid huge losses. And it seems likely – though not inevitable – that we are about to enter one of those periods. Whether it happens over the next few days or not, it’s coming.
Most people will think this is a “new” crisis… This is merely the next phase of the crisis that began in 2008.
And if you study the GFSB carefully, you’ll understand exactly why.
We Are Entering the Next Phase of the Global Financial Crisis
Explaining the bond market goes well beyond the scope of this essay. But at a basic level, everyone should be able to understand that what investors expect to earn by lending to the U.S. government for 10 years depends – most of all – on inflation rates. If investors see that inflation is going to increase, they will demand higher interest rates on their loans to the government.
The expected “real” return on these bonds is the yield on 10-year bonds that provide inflation-protected returns – the so-called “TIPS” bonds (Treasury Inflation-Protected Securities) that the Treasury also issues.
How we measure it isn’t important. What matters is that when the global financial system is functioning normally, investors can make a profit from lending to the government.
What should investors earn by lending to the U.S. government?
As the largest and most powerful country in the world, with the world’s leading reserve currency, you’d expect interest rates to be pretty low. The U.S. government is considered the world’s best credit risk… And these bonds are widely considered to be a “risk free” asset. That means there’s zero chance of default.
Even so, in a working financial system, investors have many choices. These government bonds compete for investors who can also buy other bonds with higher yields. So even “risk free” bonds should pay investors a real return after taking inflation into account.
After adjusting for inflation, the “real” rate of interest on these bonds has been between 2% and 4%, depending on the economy’s strength…
When the economy is strong, investors can choose from a lot of other faster-growing (and higher-paying) options. So the government has to pay more, too.
But what about when the economy isn’t working? What about when investors aren’t able to trust banks or large corporations… or even foreign governments? What happens when there’s no other safe place for capital?
It’s during these times that you see the inflation-adjusted yield on U.S. Treasury bonds fall precipitously – during the so-called “flight to safety.”
It’s during these periods that investors earn almost nothing by holding Treasury bonds. And it’s also during these periods that investors are more and more likely to buy gold… which, although it doesn’t pay a coupon like a bond, it does offer protection against credit defaults.
Ironically, as interest rates fall at the beginning of these periods, investors tend to bid up stock prices when falling bond payments make stocks look progressively more attractive. That happens up until corporations start to default on their debts. Then, stock prices collapse.
That’s why a Melt Up happens just before a meltdown.
Interest rates go lower… and lower… and lower. Stocks get more valuable (relatively), so they go higher… and higher… and higher. But then, the economic weakness that has led to lower and lower interest rates suddenly causes companies to default on their debts, starting a panic in the stock market.
That’s why you get soaring stock prices just before major banking and financial problems. And that’s what we’re seeing today, too.
The 10-year U.S. Treasury bond is the global paper-currency financial system’s “barometer.”
The yield on this bond sets the price on all other risk assets. And when the barometer, or 10-year “real” yield, is steady or rising, you’ll see “clear skies” ahead. But when the barometer turns sharply lower, and especially when it breaks through key thresholds, a hurricane is coming.
When you see “real” yields on the 10-year U.S. Treasury bond paying little and heading for zero, you’ll find investors fleeing riskier assets – like growth stocks – and buying things to protect themselves against credit default.
In the last few months, U.S. Treasury bonds have skyrocketed, causing their nominal yields to plummet. The 10-year Treasury note now yields less than 1.6%. That’s perilously close to the all-time low of 1.35% it reached in mid-2016.
As a result of the decline in nominal yields, 10-year “real” yields hit the critical zero threshold on Wednesday, August 14. The above updated chart of the GFSB shows what has happened with “real” Treasury yields.
The inversion is imminent. This is wildly bullish for gold.
I’ve predicted that gold would reach $2,500 per ounce. That call is already looking prescient – gold has risen by about $100 in just a few months and is now trading around $1,500 an ounce as of mid-September.
At that 0% level, there’s virtually no financial reason investors would want to hold the dollar. And at that point, the entire world’s financial system begins to turn upside down. If the dollar isn’t the base anymore, what is?
When big investors flee from the dollar, they flee into gold…
Gold, as you may know, recently broke out to a six-year high. That’s not because we’ve seen any change, whatsoever, in the supply and demand characteristics of the gold market.
Wise and knowledgeable investors can see that a return to crisis conditions is coming. And they’re positioning themselves to weather the storm in these alternatives to the paper-money financial system.
Will this new phase of the crisis be the end? Will this be the “End of America” that we’ve been predicting will eventually occur, as people all over the world flee the tyranny of the U.S. financial system?
We don’t know, of course. But it is long, long overdue.
So what should you do today? I would urge you to consider adding a significant amount of gold and gold-related stocks to your portfolio.
You wouldn’t be buying these assets because you expect gold to be a good investment or because you expect gold mining to become a great business. Instead, you’d be buying these assets as a hedge against your other holdings that are denominated in U.S. dollars.
If there’s a major capital flight away from the dollar, gold will soar.
If we see “real” yields on the 10-year Treasurys hold below zero, I expect gold will surge to more than $2,500 an ounce very quickly… on its way to $10,000 an ounce. This kind of a move will send some small gold-exploration companies up 10,000% or more. That’s why it’s a good idea to spread your gold investments around in a wide range.
Now is the time to establish a major position in gold and silver.
Editor’s note: If you think that the problems exposed by the 2008-2009 financial crisis have gone away, you’re mistaken.
U.S. mortgage debt just hit a record, eclipsing its 2008 peak… The government is spending more than ever before, at $3.7 trillion so far this year… And more than $16 trillion in debt around the world trades at a negative yield.
What could possibly go wrong in 2020? The answer is everything.
To learn more about these issues, please read The Battle for America: Why the 2020 Election Will Cause the Biggest Financial Crisis in U.S. History. Click here to learn more.
Porter Stansberry founded Stansberry Research in 1999 working on a borrowed computer at his kitchen table. Since then, Porter has written and produced some of the most important – and often controversial – work in the financial advisory business. His most recent book, The Battle for America: Why the 2020 Election Will Cause the Biggest Financial Crisis in U.S. History, can be found here.
