Seeking Fortune

Our article last week was entitled Why Experts Are almost Always Wrong; so could it be that a good old fashioned Fortune teller might be a better guide for those seeing to create, or at least, preserve their wealth and fortune? Approximately fifty years ago, my father, R. J. O’Brien, told me that if I could be right only half the time, I could still make money, as long as I made sure to be disciplined enough to not hang on to the losers. So, how have we been doing with our forecasts?

Back in November of last year, in our article entitled So Long Grandma, I made a number of predictions:

“Given the high probability that Republicans will control at least the House of Representatives, we think it is a very good bet that the President and Congress will continue to kick the can and delay making a decision on curtailing entitlement spending. In addition, confronted by the twin menace of Russia and China, they will not curtail military spending; and the interest on the huge US debt will continue to mount. With that being the case, it will be hard to curtail inflation, and interest rates should remain high. Gold has probably already bottomed and should move higher; and although equities got a big boost from this week’s lower inflation number, it is hard for us to believe that equities can maintain a strong upward trend.”

The graph we show below depicts percentage price changes from the same time one year ago. Ever since we published our article, gold futures are up 8.9%, while the S&P 500 stock Index is up 1.5%, so at least those markets, so far, are acting like we think they should. In regard to interest rates remaining high, the picture is not complete. The Federal Reserve is almost certain to raise short term rates again this week, but big money investors are betting that the Federal Reserve will then be forced to reverse course and start to lower short term rates later this year.

We like to focus on the longer-term picture. Although Republicans in the US House of Representatives are now talking tough on the debt ceiling, they have taken entitlement spending “off the table,” which, as we showed in Mandatory Monies, comprises 71% of the Federal spending. While they do talk about eliminating the waste in military spending, we don’t believe that will amount for much, especially when there are so many news reports that the US military needs to replenish its armaments that are being significantly depleted in the Ukraine-Russian war. That leaves domestic spending as their major target for reductions in spending, and that effort won’t get far in a divided Congress, and in the face of a President who has proudly proclaimed that he “has no regrets,” and that he will not compromise.

If you take a good look at the recent trend of the US dollar, you will notice its sharp decline, which started in the fourth quarter of last year. It is not a coincidence that gold prices accelerated higher about the same time frame, for a weaker dollar can definitely lead to a higher inflation rate, and gold has long been considered the ultimate inflation hedge. In any event, an inflation rate that stays high for longer will directly translate into an interest rate that stays high for longer, and that should definitely curtail financial returns in the stock market.

Over the longer term, I am concerned that the United States is slowly moving on a path to a place where dollar will lose its status as the only world reserve currency. We have written recently how China and Saudi Arabia have tentatively agreed to use the Chinese Yuan for Chinese oil purchases. Now, it appears that private investors have started to tread on that very same path. Yesterday, the Wall Street Journal headline proclaimed Private-Equity Funds Turn to Yuan Offerings. Right now, it’s more of a trickle, but if private investors start joining large foreign central banks in using Yuan instead of dollars in international transactions, it will lead, in our opinion, to further inflation, and higher long term interest rates. The rally in gold would then accelerate, and the equity market would stall, and probably get stuck in a long term trading range.

It is not too late for Congress and the President to become more responsible, but don’t hold your breath.