Brief Thoughts on Financial Markets

I rarely discuss financial markets these days. Although I pay attention, it’s not in the obsessive manner I did a decade ago. I mainly keep my eyes out for potential big macro turning points, and if I see something interesting in that regard, I try to share it with readers. This means I might not mention markets for months at a time, if not longer. I think the setup right now is unique enough to provide a few thoughts.

The only chart or ratio I really pay attention to is SPY/GLD, which is a proxy for the S&P 500 priced in gold. In my view, a real equity bull market is characterized by equities rising and hitting new highs in gold terms, not just in nominal terms.

Let’s take a longer-term look at this ratio.

Although equities bottomed in nominal terms back in early 2009, the post-financial crisis low for equities in gold terms didn’t occur until the second half of 2011. From there, stocks in real terms soared for seven years in an extraordinary and historic bull market. Then, in September 2018, something changed.

Equities suddenly stopped outperforming gold, with the ratio topping out just under 2.60. Gold even outperformed the tech-heavy Nasdaq since then, though not by nearly as much. Point is, if you can just own a shiny rock and outperform all the broad stock indices then what you’re witnessing isn’t really an equity bull market, but something else. Something much bigger.

Throughout 2019, I paid close attention to the SPY/GLD ratio and felt the 1.95-2.0 area was important. My sense was when this level broke it would represent some sort of watershed moment. This level broke in early 2020 as covid-19 spread around the world.

That area broke easily, and the ratio quickly plunged all the way down to just north of 1.50 in the course of a few weeks. Then the Federal Reserve took out its nuclear weapons in order to artificially support financial asset prices, and equities soared. SPY/GLD has jumped 25% over the past three months, and is all the way back to 1.88.

As such, we’re pretty much right back to that original breakdown area I discussed previously. If I’m correct and September 2018 represented the real high for equities this cycle, this ratio should start to turn back down pretty soon. This also lines up with my view that we’re still in the early stages of a monster bull market for precious metals, one that will really get going later in 2020 and last several years.

This doesn’t mean equities will go down in the years ahead. They could go down, they could stay flat or they could rise, but I think precious metals (and bitcoin) will vastly outperform, and what we just saw over the past three months was more of a snapback in a SPY/GLD ratio that moved too far too fast. Based on thoughts I have around price and cycles, this should start to become clear over the next 2-3 weeks. If it’s not obvious by then, my thoughts around timing are likely wrong.

Bottom line, I think the big snapback move we just saw in equities vs. gold is now on shaky footing, and I suspect the recent trend could reverse by early July.

Like everyone else who makes such forecasts, there’s a good chance I’ll be wrong. I’m not a guru and I don’t pay particularly close attention to this stuff anymore, so take it all with a grain of salt. This is me sharing thoughts because many of you like to hear my market opinions from time to time. Hopefully it helps.

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8 thoughts on “Brief Thoughts on Financial Markets”

  1. I totally agree, and have watched the ratio, very closely. I think the most alarming ration for bulls on equities is the Gold to Nasdaq ratio, trading at 5.78. 2018 high was 6.47, and more alarmingly, the ratio high was 6.14. A new high in the nominal Nasdaq is not making new highs against gold. Very bad divergence!

    Reply
  2. As the European countries move to electronic currencies, and the ECB being the sole purchasing agent of defunct government bonds throughout Europe
    , we certainly can see an aggressive index market in the US to the upside .
    Nevertheless we should not mistake it for a “ healthy market “ simply money running from the tyranny of communist governments throughout Europe .
    Nancy Pelosi tried her best to slip in a digital dollar in the last stimulus package , but was denied .
    Unfortunately young university students are so brainwashed by the overwhelming numbers of socialists / communists professors, that eventually America will acquiesce to the same ideology being preached in governments throughout Europe .
    A good friend of mine who came to Canada to escape communism in the eastern block , is so angry at the young here in North American. He says these idiot kids know nothing about communism, yet proudly wear and chat the virtues of that sick ideology. He goes on to say how he escaped the tyranny , for it only to be catching up to him again here !! 🙁
    As for any chart we look to today , I would be VERY CAREFUL to extrapolate anything from it . I simply don’t think people understand the magnitude of the changes taking place in the world , not to mention sovereign defaults & their impacts going forward on world markets !

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    • We have to be careful when we point our fingers at those who see the world differently. The struggle is not either fascism (yes righties, while yer arming yerselves against the perceived threats of socialism, heaven forbid, and communism, YIKES, yer not paying attention to the tyranny brewing right their in yer own socks) While the anger exploding pretty much everywhere around the globe is intensifying the political divisiveness, truth be told, what we could be talking about is how far to move the capitalism / fascism socialism dial to find a clear channel that supports those governed rather than those governing. Problem is, even if we find the optimal position for the hybrid econo-poitical system, we are currently suffering a shortage of true leaders. Not just speaking Trump shakalaka. It is way more widespread / endemic this bipartisan crisis of leadership .The fascist-socialist-free billionaire class is taking full advantage of our pretty much juvenile political noise as they convert Federal Reserve digital trillions into the more real wealth of gold, real estate, you name it. Methinks, that if the antifa and the white supremacist fascists stopped for one moment and looked behind themselves, they’d find they are back to back with somebody who is also afraid of and opposed to tyranny, whatever ball cap or t-shirt they are wearing. While we fight, the rich are robbing the Bank.

    • Its a nice sentiment, but when real power is stripped from a person, all that they have left for themselves is ideology. And that ideology is cultural marxism as taught in every single university in the west.

      Its funny in a sad way, since Marx was an economist and all of his writings deal with economic matters, and one can learn everything there is to know about capitalism vs. socialism from the man who defined both terms. Yet none of these raving mobs have a single economic demand of substance. “Land and capital” in vague terms is the only demand a few BLM activists have made.

      We have an entire generation of hopeless ideologues completely and willingly at the mercy of multinational corporations who pander to their bizarre cult of beliefs, but who are incapable of petitioning for genuine economic justice — something Occupy Wall Street similarly let loose from their grasp just as it seemed like they were going to make progress on that front.

      OWS was clearly guided from within by FBI infiltrators. BLM no doubt has its infiltrators guiding the useful idiots along. But to what end?

    • Your good friend should be angry at the Fed, not at the kids. We are intentionally fostering a third world model with a small cadre of elites and teeming masses of poor people. In that environment, it’s no wonder that people find varying forms of socialism appealing.

  3. The central bankers will not stop printing money like it’s confetti until they have destroyed the fiat currencies.
    They are lunatics with giant egos.
    They are the exact equivalent of democrat state governors who lock people in their houses using questionable statistics.

    This country is not going to get better. It is on a one way trip to oblivion. The politicians just got down on their knees to a group of people who are rioting, looting and burning cities down. Anyone who thinks the madness is going to end here is a complete idiot.

    Reply

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