Jim Sinclair's Economic Formula – QE to Infinity
Jim Sinclair is one of the world's foremost experts on gold, currencies, trading and commodities and has been accurate on virtually every prediction on the price of gold he has made as to price goals even if the timing was slightly off. And who's isn't. This formula, is playing out even though in a bit of a convoluted way with the rising interest rates being capped by infinite monetization at the beginning rather than the end but the results are the same, infinite debt and credit leading to infinite internal monetization, leading to currency debasement and economic stagnation. While Bernanke is hedging his time, possibly waiting for a massive market sell off for political cover, the longer he waits, the less effective his printing press will be. I am seeing each phase of this formula playing out. It is vital for long term investors who are seeking to preserve their wealth to understand this formula in my opinion. The Fed has painted itself into a corner, QE to Infinity or Default in the death of existing financial order in my and I believe Jim's opinion.
1. First interest rates rise affecting the drivers of the US economy, housing, but before that auto production goes from bull to a bear markets.
2. This impacts many other industries and the jobs report. An economy is either rising at a rising rate or business activity is falling at an increasing rate. That is economic law 101. There is no such thing in any market as a Plateau of Prosperity or Cinderella – Goldilocks situations.
3. We have witnessed the Dow rise on economic news indicating deceleration of activity. This continues until major corporations announced poor earnings, making the Dow fall faster than it rose, moving it deeply into the red.
4. The formula economically is inherent in #2 which is lower economic activity equals lower profits.
5. Lower profits leads to lower Federal Tax revenues.
6. Lower Federal tax revenues in the face of increased Federal spending causes geometric, not arithmetic, rises in the US Federal Budget deficit. This is also true for cities & States as it is for the Federal government.
7. The increased US Federal Budget deficit in the face of a US Trade Deficit increases the US Current Account Deficit.
8. The US Current Account Balance is the speedometer of the money exiting the US into world markets (deficit).
9. It is this deficit that must be met by incoming investment in the US in any form. It could be anything from businesses, equities to Treasury instruments. We are already seeing a fall off in the situation of developing nations carrying the spending habits of industrial nations; a contradiction in terms.
10. If the investment by non US entities fails to meet the exiting dollars by all means, then the US must turn within to finance the shortfall.
11. Assuming the US turns inside to finance all maturities, interest rates will rise with the long term rates moving fastest regardless of prevailing business conditions.
12. This will further contract business activity and start a downward spiral of unparalleled dimension because the size of US debt already issued is of unparalleled dimension.
Therefore as you get to #12 you are automatically right back at #1. This is an economic downward spiral.
I heard all this “slow business” as negative to gold talk in the 70s. It was totally wrong then. It will be exactly the same now.