By Dave Kranzler
The Fed is trapped. If it stops adding money to the money supply, the stock market will crash. It’s already extended the repo money printing program twice. The first extension was to February and now it has extended it again to April.
What was billed as a temporary “liquidity problem” in the overnight repo market is instead significant problems developing in the credit and derivative markets to an extent that it appears to be putting Too Big To Fail bank balance sheets in harm’s way. That’s my analysis – the official narrative is that “there’s nothing to see there”.
The delinquency and default rates for below investment grade corporate debt (junk bonds) and for subprime consumer debt are soaring. Privately funded credit, leveraged bank loans, CLO’s and subprime asset-backed trusts (credit cards, ABS, CMBS) are starting to melt down. The repo money printing operations is a direct bail out of leveraged funds, mezzanine funds and banks, which are loaded up on those subprime credit structures. Not only that, but a not insignificant amount of OTC credit default derivatives is “wrapped around” those finance vehicles, which further accelerates the inevitable credit meltdown “Minsky Moment.”
The point here is that I am almost certain, and a growing number of truth-seeking analysts are coming to the same conclusion, that by April the Fed will once again extend and expand the repo operations. As Milton Friedman said, “nothing is so permanent as a temporary government program.”
Gold will sniff this out, just like it sniffed out the September repo implementation at the beginning of June 2019. I think there’s a good chance that gold will be trading above $1600 by this June, if not sooner.
Click Chart to Enlarge
Eventually the market will discover the junior exploration stocks and the share prices will be off to the races. This is part of the reason Eric Sprott continues to invest aggressively in the companies he considers to have the highest probability of getting enough “wood on the ball to knock the ball out of the park” (sorry, baseball is right around the corner).
Precious metals mining stocks are exceptionally cheap relative to the price of gold (and silver). Many of the junior exploration stocks have sold down to historically cheap levels in the latest pullback in the sector. As such, this is a good opportunity to add to existing positions in these names or to start a new position.
- Dave Kranzler