This article was published by The McAlvany Intelligence Advisor on January 1, 2020:

By all appearances, the remarkable run on Wall Street should continue into 2020. So says President Trump’s trade advisor Peter Navarro. On Tuesday, he told CNBC‘s “Squawk Box”: “I’m looking forward to a great 2020. Forecast-wise, I’m seeing closer to 3% real GDP growth than 2%. I’m seeing at least 32,000 on the Dow.”

He added: “It’s going to be the roaring 2020s next year. [Dow] 32,000 is a conservative estimate of where we’ll be at the end of the year.”

Navarro, it will be remembered, told “Squawk Box” the morning after Trump was elected in 2016 that his election would be “a very bullish thing for the markets,” and then proceeded to predict 25,000 on the Dow which was then trading at about 18,000.

Navarro, in retrospect, was too conservative. The Dow has gained more than 172 percent since 2010, the fourth-best decade-long performance in the past 100 years. For 2019 the popular averages all notched gains of more than 20 percent (for the record: Dow +22%; S&P 500 +28%; NASDAQ +35%).

U.S. citizens are enjoying the ride and predicting that it will continue. A USA Today/Suffolk University poll reported earlier this month that 80 percent of those polled predicted that their lives will be even better in 2020, with just 11 percent disagreeing.

What a turnaround from a year ago! The Federal Reserve had raised interest rates, and Trump’s trade war with China was heating up. The stock market dropped in anticipation of a recession when the so-called “yield curve” indicator turned negative.

And then the Fed lowered interest rates in July for the first time in a decade, followed by additional cuts in September and October. This was followed by promises from Chairman Powell that he wouldn’t be intervening in the markets for the foreseeable future.

With the Fed stepping aside and consumer and business sentiment reaching all-time highs, what could go wrong?

The outlier is gold. After languishing at around $1,300 an ounce since the summer of 2017, the precious metal jumped in May from $1,280 to close the year at $1,525, a gain of nearly $260 an ounce, or 20 percent.

What does the gold market see that Wall Street doesn’t? Leave it to the Fed to answer that question. Despite protestations to the contrary, the Fed is in fact intervening in the markets, but it is refusing to call it such. It added $500 billion to the money supply to “support” the “repo” market, which was having trouble digesting the enormous flood of new spending by the Treasury. Most of those billions went to help fund “repurchase agreements” between secondary parties handling the tsunami of new debt, with the balance used to purchase Treasury bills outright.

The U.S. dollar has steadily weakened since early October, falling more than 2.6 percent in response to the flood of new currency entering the financial markets. Bond yields, as measured by the 10-year bond, have dropped from nearly three percent a year ago to less than two percent currently in response. Experts think those yields could fall further, especially as global central banks try to stimulate economic growth abroad.

Fawad Razaqzada, a technical analyst at London’s City Index, thinks the stock market is long overdue for a correction: “If U.S. stocks were to correct themselves in 2020, then this surely could lead to elevated levels of safe-haven demand for gold. As the U.S. equity market bubble finally bursts, safe-haven demand could nudge gold past its 2011 peak of $1,920 [per ounce], before tagging the $2,000 hurdle.”

Lukman Otunuga, senior research analyst at FXTM trading, says that escalating tensions in the Middle East could provide the catalyst for that stock market selloff in 2020: “If geopolitical tensions increase in the Middle East, there will be more reasons for investors to increase their allocation in gold. Otherwise the gold rally makes little sense while equities are making record highs.”

Both cannot be right. Either Wall Street continues its tear while gold returns to the $1,300 level. Or gold marches higher while equities finally enter a long overdue correction.

2020 should resolve the matter.

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Sources:

The Wall Street JournalStocks on Track for Best Year Since 2013

Seeking AlphaJosh Galper On The Current State Of Repo Markets, Key Bottlenecks, And A Balanced Proposal To Restore Stability

National ReviewWhat Gloom? 80 Percent of Americans Think Their Lives Will Get Better Next Year

USA TodayWill it be a happy new year? Sure, in our own lives. For the country? Poll says that’s tougher.

The Wall Street JournalA Year to Remember

MarketWatchGold closes near 3-month high, clinches longest win streak in about 6 months

KitcoBold call: gold prices to hit $2,000 in 2020

KitcoRising inflation risks could push gold prices 10% higher in 2020 – Invesco

Investing NewsGold Outlook 2020: Gold Building Base for New Price Highs

Gold chart for 2019

CNBCPeter Navarro sees ‘at least’ Dow 32,000 in 2020 and US economic growth closer to 3% next year

The Wall Street JournalThe Bull Market Is Charging Into 2020

Background on Repos

One year chart of DJIA

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