Understanding the Reverse Side of the Flight to Quality


QUESTION: I’m having trouble reconciling your call between the next downturn (due to start in 2015.75 and your call on the Dow potentially doubling or more.  Aren’t equities historically a very good predictor of the economy?  Or do you think this time will be different dynamics driving the downturn (cyclical) vs. the rally in the Dow (influx of capital flows).  Could we have a situation where equities rally AND the economy enters a recession?  Thanks for all your hard work and eye-opening articles.


ANSWER: Equities decline with the confidence in the public sector. People run to the government bonds, and this we call the Flight to Quality. What happens when the crisis is confined to government? The gold promoters characterize this as hyperinflation, where money becomes worthless. I have explained that we are not facing that stage EVER in the US economy. The currency will be replaced electronically before that ever takes place.


Nonetheless, when CONFIDENCE collapses in government, the Flight to Quality will reverse. People will invest in the private sector and sell government bonds, smelling a default in the wind.We are more than likely going to get the first kneejerk reaction, where equities will DECLINE and people will rush into government bonds, even with negative yields. This should create the final bubble top in debt, and then it will reverse in a Flash Crash type move. Traditional people will buy bonds and lose a fortune. Others will sell their stocks at the lows and jump on short positions. This will set the stage for a crazy period that comes around every so often, measured in hundreds of years.


We are waiting for the CONFIRMATION. The computer will give us that signal and we just have to go with the flow. It may be worse than trying to give a 5-year-old cough medicine. Yes, it tastes horrible, but it is necessary for the cure. The majority will not be able to make that transition thanks to their preconceived ideas and preconditioning. Many pilots who flew prop planes could never fly a jet because they could not make that transition to faster travel requiring quicker reaction times. This is the type of transition we face. We just have to abandon all prejudice and go with the markets. As they say – the trend is your friend.