Broken Markets, a Reddit Revolution, and Biden’s First 100 Days

Jan 29, 2021

Broken Markets, a Reddit Revolution, and Biden’s First 100 Days

Can one stock bring down our economy?

This week we explore:

• The impact of Biden’s first 100 days on investor portfolios

• How the 90-year supercycle defines where our economy is (and where it’s headed)

• The GameStop vs Wall Street saga and its impact on your portfolio

One of the most important quotes for investors to remember may come from Mark Twain:

“History may not repeat itself, but it sure does rhyme.”

This quote is perhaps more paramount today than any time in recent memory.

Every four years a new presidential term begins. Whether it’s a new administration or a president’s second term, we see a “First 100 Days” plan that is designed to offer the blueprint or revitalizing the economy and taking it to new heights.

Today, that plan is Joe Biden’s.

But just how “new” is his plan? This issue of Notes from the Inside gives a clear picture of what could happen in the next 100 days -- and the next four years overall...

FDR’s program set a precedent for what every president to follow would refer to as their First 100 Days. When FDR took office, more than a quarter of Americans were unemployed.

By the end of his First 100 days, FDR had pushed 15 bills through Congress that were the foundation of his “New Deal.” These were a series of progressive programs, public projects, financial reforms, and regulations designed to provide relief for unemployed and poor Americans, restore the economy, and reform the financial system. This was all made possible by a blue House of Representatives, and a blue Senate that were motivated to make dramatic changes in the midst of a crisis.

Sound familiar?

Fast forward 88 years, and we find another progressive president taking office in the middle of a national crisis. Instead of a depression, we have a pandemic. Instead of programs, we have monetary manipulation through fiscal stimulus.

And many politicians such as Elizabeth Warren are pushing for regulations on the banking industry.

Just like what happened four score and seven years ago, a new system is coming. And just like FDR’s first 100 days, these changes are a "reset" that signal masses inflation on the horizon. It’s a red flag screaming to investors to rethink their portfolios.

To be clear, this isn't to say a crash is coming. And it’s not to say we’re going into a golden age of the US economy. It’s to point out that a new cycle is arriving, and if you want to know what’s coming next -- just look at what happened in the past. The new circle will look different than the last, but it will most assuredly rhyme.

No matter what happens to the dollar… or to crypto… or digital central bank money, or whatever other currency may take the big stage… the one asset that’s stood the test of time through all currencies regimes, is gold. It will continue to do so.

The key fundamental that separates gold from all other forms is that it is eternal. It is physical. It is an element. The same gold that existed 15,000 years ago still exists today. The gold that one holds today will be around 15,000 years from now. This is an easy concept for investors to understand.

Unfortunately, too many investors only see gold as a safe heaven, something to turn to only during a down market when everything else falls apart. This concept is completely wrong. Stocks have been trading at all-time highs and yet the price of gold has risen 25% in the last year. Stocks are up 3X in the last 20 years, and yet gold is up 7X.

So the first misnomer that is now becoming obvious is that gold is not only appealing in downturns, it’s also appealing when stock markets rise.

But here is the thing that most people are missing right now. Physical demand for gold is at an all time highs. The US Mint reported a 700% increase in demand in the 4th quarter of 2020. This explosion in demand is something I am witnessing first hand through the gold brokerage. Many people are missing this signal because the "spot price" in the paper markets has actually come down over the last few months.

The disparity between the paper price and the demand for gold has many people fooled, thinking we’re in a great economy just because ‘demand is down’ and the stock market is up.

Except…

The market and the economy have not been the same thing for a very long time. Our real economy is hurting while the stock market is propped up artificially by the Federal Reserve. And when our real economy is finally back on its feet with new programs coming, the market is likely to fall.

The big picture?

We are at the end of a supercycle. Which means we are at the beginning of a new cycle. We don’t need to guess what’s coming, because it’s a circle. If you want to understand what comes next, let the past be your guide.

What Causes Change – 100 Days or a Crisis?

In 1932 we were a nation in crisis. FDR’s blue wave of progressive programs was designed to pull us out of the depression.

His Emergency Banking Act closed banks for 1 week and then reopened them with FDIC insurance (which is still required today).

His Federal Emergency Relief Administration (FERA) - put $500 Million into soup kitchens, blankets, and unemployment relief.

The Civilian Conservation Corps (CCC) was a public works program to get the country back on track and employed.

FDR’s Agricultural Adjustment Administration installed price controls for falling crop prices.

The Social Security Administration provided retirement benefits, disability and survivor benefits.

The list includes dozens of new programs that "reset" the direction of the economy. The key point is that this is exactly what we’re seeing today. Another blue wave in a crisis. The President, House, and Senate are all blue. We can expect progressive measures to increase because our current crisis demands action.

We’ve already seen:

• Unemployment benefits increase with $2,000 direct checks as part of COVID stimulus packages
• COVID vaccination and distribution programs
• A moratorium on evictions
• A moratorium on student debt with calls to wipe out $50,000 per loan and extend payment plans with 0% interest
• A raise in Minimum wage to $15
• A MASSIVE infrastructure package coming
• Investigations into a “rigged” Wall Street.

Make no mistake, this is your reset. It’s a NEW new deal. And the only way it could get passed is in a crisis. We won’t need a 60% agreement in the Senate. These programs can be pushed through with Reconciliation Bills and will require zero bi-partisan support. It’s all in the name of crisis.

Remember this: “What seems crazy in normal times becomes necessary in a crisis.” Would you eat bread out of a gutter? No. Unless you were starving. The crisis becomes the catalyst for extreme action. The bigger the crisis, the bigger the government reaction. The Democrats now in power need this crisis to be bad in order to push through their progressive agenda.

Would a stock collapse help motivate these programs? You bet it would. Would a new variant of COVID that rages be considered a crisis? Yup.

Make no mistake, right now our country is in the middle of a terrible crisis. While Wall Street may be enjoying a tremendous rebound, Main Street businesses are suffering. This gets overlooked while the stock market continues to soar. Many people think there can’t be a crisis while the Fed props up an artificial market. But the stock market is not the economy.

We will see more and more inflationary acts passed to increase spending and generate stimulus, all the while keeping interest rates at zero (or less), making investors focus on the now and short term gains instead of long term returns. For proof, look no further than the artificially inflated stock market...

(Game)Stop the Broken Market

The market is broken. A few million lower income traders have just teamed up to exploit the weaknesses of the system. Just look at the craziness around GameStop, AMC, Blackberry, and Nokia.

In 1933, the Glass-Steagall Act was passed to separate investment banking from retail banking after the Pecora Commission investigated Wall Street and uncovered massive self dealing. That law was repealed in 1999 by the Gramm–Leach–Bliley Act (GLBA), which is one BIG reason why we see so much leverage in today’s markets.

It’s perhaps why Citadel (who owns the majority of Robinhood) was able to loan Melvin Capital $2 billion to maintain their short position on GameStop (GME) and then stop trading on the stock on Robinhood after a group of retail traders organized on Reddit to spike the stock and target the fund. That hard stop is the only thing that saved Melvin Capital (and Citadel who loaned them the money) from losing billions.

This isn't about value, this is a game. These retail traders know GameStop isn’t worth its ballooning stock price, but their goal isn't to hold it, it’s to make money crushing hedge funds. For these traders, the only thing that matters is the price is going up and screwing over the fund’s short squeeze. This isn't investing. And that's the whole story.

This is the Fed’s fault.

Interest rates at zero have forced investors to make short term moves instead of finding long term value, because our money will be worth so much less very very soon. The wallstreetbets gang wreaking havoc on hedge funds isn’t concerned with long term value, they care about making money today and exposing a corrupt system.

Wall Street hedge funds are getting burned by their own game. Their history of insider dealing and access to capital flows that was once the property of the big banks is now available to the masses. And they are using that information to inflict pain. The only way to stop it has been to shut down the ability for retail traders to trade in order to protect the hedge funds from massive losses.

But could this take down the entire market? When hedge funds are forced to cover their shorts, they must sell other stocks that they otherwise wouldn’t. That’s why in a liquidity crisis even the good companies must be sold. This contagion can spread very quickly.

It is estimated that hedge funds have lost 10%-50% in the last three weeks. The size of these funds is estimated to be $80 billion in assets under management. Consider that hedge funds are leveraged 7X-10X and we have a potentially $600 billion problem on our hands. For reference, the hedge fund problem that caused contagion in 1998 with LTCM was only $120 billion. This wallstreetbets situation that may seem like it’s just in a small corner of the market could lead to a serious liquidity issue.

There is another issue we must examine. Mindset. When young traders are more interested in the mission than making money, it’s the bleeding ground for a revolution. When the emotion for justice outweighs the fear of being accused of being a traitor, revolution becomes possible. Today’s short squeeze movement is as much about inflicting pain on the Wall Street machine that was bailed out and got off scott free in 2008 as it is about making money.

Here’s the thing about revolutions...

They always start in secret because they go after the leaders. But who are the leaders today? Anonymous forums. With millions of members participating. And you can bet your bottom dollar that institutional players are feeding them info and are involved in using their forums as opportunities to front run their own books.

The other thing about revolutions is that they always need a scapegoat. Someone will need to take the fall for manipulating markets, but who?

Reddit?

Melvin Capital?

Citadel LLC?

However this plays out, the effects will be felt throughout the market and the economy. Rules and changes will be called for. There will be outrage at the broken system, the manipulation, and the insider dealing. These changes will come under the guise of “consumer protections”. This could be Glass-Steagall all over again.

The Great Devaluation playing out in front of our eyes. Of course, I laid all of this out in my book, far in advance of what we are seeing today. So if you want to know what happens next, just read the book.

And for anyone with a 401k or IRA, I invite you to see the special offer from Advantage Gold below where you can claim a free copy of my Wall Street Journal #1 bestselling book The Great Devaluation. Just click the image below, fill out the short form, and Advantage Gold will send you a physical copy absolutely free (they will even cover shipping).

I believe that this information is more important today than ever before, even 90 years ago.

Keep an eye out for our Weekly Gold Report video series this Tuesday as I dive deeper into this topic.