The Next Minsky Moment

Ignore the Stock Market—Look at Gold.

Gold just recently hit another record high. It’s now north of $2,800 per ounce.

The gold market is clearly worried… about America.

For almost all of last year, gold prices marched persistently higher, increasingly fearful that Uncle Sam’s political peons were pushing the country close to a Minsky Moment for the US dollar and, more importantly, Treasury bonds.

These Minsky Moments are rare but painful.

They mark an abyssal plain, where asset prices, driven by years of ill-advised reliance on debt or mounting currency pressures, collapse spectacularly into a void. One good example: the subprime housing crisis of 2007 that was born out of under-capitalized Americans relying on excessive amounts of easy-to-obtain debt that fueled a real-estate bubble that, well, collapsed spectacularly.

What’s happened over the past year is even more concerning…

That’s what gold’s push to new highs is telling us… or at least those who are listening.

As I wrote yesterday, America’s debt continues to grow larger and larger… and a debt crisis is now inevitable.

Gold climbs higher when folks are worried their fiat currency will be worth less—usually what happens in a crisis…

But the gold price continues to march higher because goldbugs are also worried about other aspects of the US economy right now…

Case in point: Trump imposing head-scratching tariffs on Canada and Mexico (albeit now delayed for a month), and threatening similar tariffs on the UK and the European Union.

In soccer, they call this an “own goal,” when one of your teammates scores against his own team.

Narrowly targeted and well-crafted tariffs can be useful in certain situations.

Blanket tariffs on every product arriving from a particular country—or from multiple particular countries, in this case—mmmm, not so useful, really. Tariffs cause consumer prices to rise and lead to the target countries imposing their own tit-for-tat tariffs on the aggressor nation, which then just causes higher prices and job losses in the aggressor nation.

As these knock-on effects roll across multiple countries, economies begin to seize up.

I see lots of posts on Twitter from people spotlighting their economic ignorance with comments like, “See lots of Libs worried about the tariffs. I’m not worried about two countries that only supply 5% of our GDP. It’s worth the lives being saved.”

My brother from another mother, that is not how any of this works.

Tariffs don’t just hit, say, lumber coming from Canada or avocados coming from Mexico. They also hit about 1.69 bazillion component parts that go into between 60% and 70% of everything Americans buy at home. There are some products that start in Canada, come to the US for certain processes, head to Mexico for other processes, then back to Canada for final assembly before landing on some store shelf at Uncle Fester’s Knick-Knack O’Rama. Imposing tariffs each time that product crosses a border is going to radically increase the price of said product.

Moreover, lots of the components exposed to tariffs are items the US doesn’t make and has no capacity to make… and has no capacity to build the capacity to make. (I used coffee beans and bananas as an example in a previous column… The US has nowhere to build nearly enough coffee or banana plantations to meet US demand.)

The point here, though, isn’t America’s inability to sate its desires for a double-half-caff skinny latte with a caramel swirl, or our pressing need for banana cream pies.

It’s that the gold market reflexively sees where this trend goes. And where it goes is nowhere good for the dollar or the US economy.

At the end of this line, the dollar is a huge loser, and the Federal Reserve has to step in with beaucoup cash and much lower interest rates to save the economy.

That’s wildfire fuel for the gold market, which is exactly why gold is having a handwringing moment as it eyes $3,000 not too far away.

Every time the quantity of dollars ramps higher, gold looks even shinier up there on the hill.

Every time the quantity of dollars ramps higher, America moves that much closer to a Minsky Moment because of the amount of annual interest payments the US faces now, and the greater than 0 risk that the expanding size of those payments precipitates a fiscal crisis in the District of Clowns we call Washington, DC.

The gold market sees what I see… A major economic crisis in the US happening soon…

Now, all of this has begun to seriously freak out the bond market.

If global bond investors reach a point where they throw up their hands and say “to hell with it—I’m outta here!”, that’s going to prove very, very ugly for paper assets including the dollar… but it’s going to prove very, very lovely for the holders of gold.

As the dollar crashes down on one side of the see-saw, gold prices will rise on the other side.

Gold will offset financial losses elsewhere and, more importantly, will counteract the inflation that will arise.

It’s at this point I want to say, “These are the crisis moments when you want to own gold.”

But the truth is, the entirety of the 21^st century so far has been a never-ending crisis moment… which explains why gold is now north of $2,800 after starting the century in the $250 range.

Sad to say this, but gold’s price going forward could see four zeros instead of three…

The dollar’s Minsky Moment is coming.

Prepare.