Tag Archives: GOLD

SEMI-MONTHLY FISCAL/MONETARY UPDATE – YOU DON’T WANT TO KNOW HOW THE SAUSAGE IS MADE !!

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – You Don’t Want to Know How the Sausage is Made !!

The general capital markets were fairly unchanged in June, gold bullion was down 3.4%. Interestingly, the gold mining stocks were down hardly at all. The gold mining ETFs, GDX and GDXJ, were almost exactly flat. The three major gold mining mutual funds were down an average of 0.8%.  Every indication is that substantial quantities of physical gold continues to move from West to East but the “paper” market, including options and futures, dominates the day to day price. The mining stocks acted noticeably better, when normally they could be down (or up) at least twice the price of gold. There was documented accumulation of GDX and GDXJ which is often a precursor of an upward move in bullion and an even larger move in the miners.

THERE IS NO SHORTAGE OF MACRO DEVELOPMENTS WITH LONG TERM IMPLICATIONS !!

In just the last few days, the following articles support our long held conclusions that a great deal of turmoil in the worldwide financial/capital markets is ahead, which we believe will cause our Fed and other Central Banks to “cave” and move back to monetary accommodation, which will spark a new run in gold related securities:

(1)    First Quarter GDP latest revision shows 2.0% real growth, down from the last estimate of 2.3% and the previous estimates in the high 2s. As for Q2’18, the latest NY Fed estimate is 2.7%, a lot lower than the highly touted 4% or more the Atlanta Fed and others have been talking about.  Even if Q2 comes in north of 4%, real GDP growth over the last year or so has been no higher that the “high 2s”, not much higher than the average of 2.3% average of the last 8-9 years and that modest increase from the “low 2s” is largely due to more government spending financed by more government debt and this is not healthy or sustainable over the longer term.

(2)  The global yield curve, the spread between 1-3 year and 7-10 year government securities, has just gone “negative”, per the JP Morgan GBI index. This yield curve “inversion” most of the time presages a recession within 6-12 months.

(3)    With the Chinese stock market down 20% from its early ’18 high, a Chinese government think tank (backed by the Chinese Academy of Social Science) has warned of a “financial panic” in the world’s second largest economy, caused by leveraged purchase of shares (as in 2015), rising US interest rates, trade tensions with the US, bond defaults and liquidity shortages in China. The Chinese government should “be willing to step in with full financial support, rather than taking piecemeal steps” the study said. Just yesterday, the Financial Times reported that the China Development Bank was tightening loan approvals for its “slum development” policy, a program which has provided (a cool) $1 trillion to homebuyers since (only) 2016. The implications of the monetary manipulations by the world’s second biggest economy are huuuge!. Our take: a much higher gold price will accompany future economic “adjustments” that will have been exacerbated by governmental interventions.

(4)    Russia has cut its US Treasury holdings over 50%, from $102.2B to $48.7B in just four months from 12/17 to 4/18. While these numbers are small relative to the trillions that China and Japan hold, US Treasury securities held by all foreigners, as a percent of their reserves, has declined from 64.59% in 2014 to 62.7% in 2017, so they are steadily diversifying away from dollar related securities. Gold, as a share of foreign exchange reserves has held steady. Central Banks have continued buying hundreds of tons annually, as they have since 2009. They bought 116.5 tons in Q1’18, the most in any Q1 since 2014 and up 42% YTY.

(5)    The Wall Street Journal, several days ago, headlined “UK Central Bank Warns on Debt Risk”. The article said “it sees pockets of risk to the stability of the financial system including US corporate borrowing, risky loans in Britain, foreign-currency lending and emerging markets….as central banks step back from the easy-money policies of the past decade and trade tensions escalate.” You can google the full article, but we don’t make this stuff up.

(6)    Just under the previous article, on June 28th, the headline read: “Fed’s Ability to Fine-Tune Interest Rates is Tested”. The Fed lost “control” of the markets in ’08, salvaged the situation with trillions of financial accommodation. In some ways, the problems are larger today and the Fed, with their hundreds of PHD economists, has had a poor forecasting record.

(7)    While many observers underplay “systemic” risks in today’s financial markets, leverage in derivative securities is larger, non-financial corporate debt is at a new high (exceeding the last high in ’08), ETFs made up of cap-weighted securities will have little liquidity in a downdraft, which especially could apply to high yield fixed income ETFs. Rising default rates on student loans and subprime auto loans, sharply rising US deficits, underfunded social security and federal health care obligations are all problematic whether the market overlooks these trends for the moment or not. The momentum in capital markets can turn, literally, on a dime. If someone doesn’t think the Chinese monetary manipulation has provided at least the possibility of “systemic risk” to the worldwide economy, they are living on the wrong planet.

(8)    The equity markets are highly valued by historical standards. Interest rates are still very low which means bond prices also have substantial downside risk, especially the high yield sector where investors around the world have been “reaching for yield” for a decade.

Conclusion:

Many of the above factors have been in play over the last four or five years, building over decades, and the timing of the unwinding of the worldwide credit bubble continues to be uncertain. It’s been said that in every crisis, you can look like a fool either before the event or after. Another advisor, when asked how a crisis develops, said “very slowly and then very quickly”. Just recently, we asked a highly regarded economist and market strategist, who agrees with us, when the turn will come. His response was as good as any: “On any given Sunday”. When it happens, a great number of people will say “how could I have not seen that?”

Roger Lipton

 

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SEMI-MONTHLY FISCAL/MONETARY REPORT – GOLD LOWER LAST FRIDAY – “MANIPULATION”???

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SEMI-MONTHLY FISCAL/MONETARY REPORT – GOLD LOWER LAST FRIDAY, “MANIPULATION” ???

Not much has changed fundamentally in the last couple of weeks. The economy is doing somewhat better, aided materially by increased government spending. Capex investment by corporations is still lagging, housing and auto activity are slowing as interest rates rise, the deficit moves predictably higher as health care costs, higher interest rates on the US debt, and much higher defense spending are long term facts of life. Though consumer sentiment and business optimism is much improved over the last year or so, consumers are still stretched financially and the possibility of a tariff “war” continues to unsettle capital markets and the business community.

Gold and gold miners have been quietly consolidating over the last few months, but had an uncharacteristically volatile day, on the downside last Friday.  That just happened to be an option expiration day, which often can generate unusually large price changes.  This type of volatility, heavy trading volume, especially at illiquid times of the day (“middle of the night”), and at inflection points for the technical chartists, used to be fairly frequent occurrences, in the gold markets in particular. It seemed like every time there was especially bullish news for gold, the price would get hit, with heavy volume in futures and options at times of the day when nobody “in their right mind” would be trying to liquidate a “real” physical position unless they were consciously trying to manipulate the short term price of “paper” gold. In any market where there are futures and options trading, aggressive traders of the “paper” who don’t have to immediately deliver the physical “underlying”, can trigger “stop loss” orders at certain predictable prices. Over time, these distortions get corrected, but the short term volatility can be unsettling. Longer term physical buyers use these distortions as buying opportunities, and it is no coincidence that China, India, Russia, and others have continued to be major buyers of physical gold, demonstrating their diversification of assets away from US Treasury issued securities. China and Russia, in particular, have clear reasons to undermine confidence in the US Dollar, improving trade and investment in the Yuan and Ruble, and a higher gold price would do just that. They understand the nature of the worldwide currency debasement and are doing what they can to cope, though our politicians lack the political will to do the same.

Friday, the fifteenth of June, was an option expiration day which, in and of itself, can increase price volatility. It cannot be coincidental that, after India and China had closed their physical trading markets, large quantities of gold futures contracts were dumped into the CME’s Globex computer trading system just before the Comex gold pit opened for the day (at 8:20 a.m. EST).  The chart below shows the price action, and note especially how the trading volume exploded higher from the typically much lower levels. IN ONE HOUR, from 8-9am EST, futures contracts representing 9.03 million oz. of gold traded, which is slightly more than the 9.01 million oz. of TOTAL GOLD STOCK in the Comex vaults, and 17.7x the number of gold oz. “available to deliver”. For the entire day, 49.5 million oz. worth of “paper” traded, the equivalent of about six months of entire worldwide production.

It does not seem farfetched to conclude that nobody in their right mind would choose this particular time of day and month to “dump” such a large quantity of “real” gold, unless the seller wanted the price lower. This has happened before, and an artificially low short term price gave way to much higher prices in the near future. No individual seller is larger than the worldwide market, over a reasonable period of time. A buyer at an artificially high price had better be prepared to buy “it all”, because they will own it. A seller, at a price lower than the true market would allow, had better have an enormous inventory because the buyers will keep coming. It will be interesting to see how this latest incident of seemingly irrational volatility gets resolved.

Roger Lipton

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – ECONOMIC STRENGTH “OVERSTATED”, CAPITAL MARKETS QUIET, PRECIOUS METALS “CONSOLIDATE”

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SEMI-MONTHLY FISCAL/MONETARYUPDATE – ECONOMY “OVERSTATED”, CAPITAL MARKETS FIRM FURTHER, PRECIOUS METALS “CONSOLIDATE”

June  4, 2018

The equity market firmed in May and the fixed income market strengthened late in the month, after sinking mid-month, ending modestly higher (yields lower) than at May 1. Precious metals related holdings were quiet overall. The gold miners did slightly better than gold bullion which was down 1.2%.  We can’t help but repeat last month’s statement, that we continue to feel that the gold mining stocks, which represent almost all of our portfolio, represent the best value (and most unloved) asset class of all. The “money” is being safely stored, in the ground.  It is just a question of when it will be brought north and exchanged for the “colored paper” of its time, and the quantity of green paper (in the US) will be a multiple of the current $1300 per oz. The dramatic increase in profits for the gold miners will put their stocks an order of magnitude higher than they are currently.

The thoughts that currently come to mind are as follows:

  • The economy, while firming, is not at the 3-4% GDP growth that the administration advertises. After several quarters last year that averaged about 3.0% of real GDP growth, Q1’18 finally came in at a modest 2.2%. It will obviously take GDP growth of well over 3% (far from certain) for the rest of the year to reach the 3% annual objective. The higher interest rates will hinder consumer spending as well as limit the government’s ability to stimulate. Also, an inhibition, the tariff/ trade negotiations continue to keep the business community and capital markets on edge.
  • The Fed is barely keeping up with the plan to shrink their $4.2 trillion balance sheet. While they are stretching to reduce by the current rate of 2.8% (big deal!) annually, interest rates are steadily moving higher which drags on the economy and insures that the current selling program won’t make much of a dent before the program gets abandoned, and it won’t be long.
  • Inflation (which is a good reason for owning gold) is not as dormant as commentators indicate. “Core Inflation”, the most commonly quoted indicator, excludes food and energy. You know what grocery and restaurant prices (heavily influenced by higher labor costs) are doing, and the recent gasoline price rise is absorbing a lot of the recent tax cut.
  • The US deficit in the year ending 9/30/18 is officially estimated at $825B, but I’ll take “the over”. Certainly at least $1 Trillion is in the cards for 9/30/19 with higher defense spending, higher interest costs, and lower taxes on an economy that remains sluggish.

We believe that, due to any number of possible catalysts, the Fed will back off. The inevitable new round of stimulus should finally spark gold related securities much higher. It’s just a question of time.

Roger Lipton

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SEMI-MONTHLY FISCAL/MONETARY REPORT – THE ECONOMY, FED’S BALANCE SHEET, INTEREST RATES, GOLD

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SEMI-MONTHLY FISCAL/MONETARY REPORT – THE ECONOMY, FED BALANCE SHEET, INTEREST RATES, GOLD

A PROGRESS REPORT: IN SUMMARY

THE ECONOMY

Meet the new economy, very similar to the old economy. While the Trump administration touts the 3% (and moving higher) economy and history making low unemployment rate, real GDP growth came in at 2.3% in Q1, down from the 3.2% peak of Q3’17 and 2.9% in Q4’17. Both of the H2’17 reports were inflated by storm remediation expenses. Keep in mind that government spending, now at a record level, contributes to GDP, so the “organic” economic growth is very similar (within a couple of tenths) to the 2.3% average under the Obama administration, even in spite of deficit spending that is ramping higher. The 3.9% low unemployment rate is a function of a participation rate moving lower, not materially more employment. There is no question that things are a lot better than nine years ago when 600,000 workers were let go each month and there are more companies looking for workers as the necessary skills are often not present. Balancing the picture: while the tax cut has now kicked in, so have higher gasoline prices, and the consumer savings rate is moving higher once again after coming down late last year. Our readers know that we look at restaurant sales as a predictable leading indicator of the general economy. Today’s Miller Pulse headline tells us that April sales were “the highest since 2016”.  Unfortunately, the 1.6% sales gain in April was overcome by negative traffic of 0.7%, the 26th straight month of traffic decline. Two year same store sales rose 1.2% in April, vs. 1.1% in March and a 1.8% decline (the storms no doubt) in February.  If we consider that prices are rising by a couple of percent per year, traffic is running down 3 or 4% over two years. “Down so far, down looks like up to me” is the country western song writer’s way to put it.

THE FED’S BALANCE SHEET AND INTEREST RATES

We all know that the Fed is normalizing it’s balance sheet, by $10B/month in Q4’17, then $20B/month in Q1’18, now at $30B/month in Q2, going to be $40B/month in Q3 and $50B/month in Q4. These reductions are supposed to be “automatic” as treasury securities and other holdings mature and the balance of the planned decrease is liquidated. We have discussed before how interest rates have steadily moved upward, beginning exactly last October when the normalization started. The planned reduction got behind almost immediately in Q4’17, kept pace through in Q1’18 and April’18, though not making up the shortfall of Q4 and has gotten further behind in early May. Our analysis shows that the cumulative shortfall is about $30B at this point, and of course that can change week to week. It may be no coincidence that interest rates are back to their high this morning, with the ten year at $3.05%, as the Fed tries to reduce by $15B or more this week to catch up. The bottom line is that the Fed’s balance sheet normalization is more than likely to drive interest rates still higher, at least that’s the way it looks so far. This interest rate rise in turn affects housing (see Home Depot stock this morning), auto sales, consumer interest expense, and contributes to a stronger dollar which undermines the general economy further.

GOLD and GOLD MINING STOCKS

The stock market has been up eight days in a row (until today), interest rates (and the dollar) have been firming slowly (more than “firm” this morning) so there continues to be no urgency to look to gold as a “safe haven”. We have pointed out in the past that neither higher interest rates nor a strong dollar are a death knell over time for gold related securities but in the short run a weak dollar and lower interest rates are better. Considering the recent strength in the dollar and the steady march of interest rates higher this year, the fact that gold bullion is virtually unchanged for the year and the mining stocks are down only modestly is not terrible performance. The gold mining companies, which is our primary way to participate in this out of favor asset class, are holding the “real money” in the ground for safekeeping. It’s just a question of time until they bring it north and exchange it for the “colored paper of the day”, at much higher dollars per ounce than today.

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – MODEST APPARENT CHANGES IN APRIL, HUUUGE DEVELOPMENTS UNDER THE SURFACE

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – Modest apparent changes in April, huge developments under the surface!

 

The results for all the capital markets changed only modestly in the month April, in spite of intra-month volatility. Gold bullion was down almost exactly 1%, Gold mining stocks were up about 1.2%. We continue to feel that the gold mining stocks, represent the best value (and most unloved) asset class of all. The “money” is being safely stored, in the ground.  It is just a question of when it will be brought north and exchanged for the “colored paper” of its time, and the quantity of green paper (in the US) will be a multiple of the current $1300 per oz. The increase in profits for the gold miners will be huuuge and the stocks should sell for multiples of the current price.

We believe that the lackluster price action in gold and the miners has been due to the expectation of much higher interest rates, an apparently stronger economy, the perceived lack of a need for gold as a “safe haven”, and the renewed strength in the US Dollar. We don’t believe any of these factors will last much longer, and none of which will preclude higher prices in the long run.

The US economy is not as strong as advertised. After several quarters last year that averaged about 3.0% of real GDP growth, Q1’18 came in at a modest 2.3%. It is important to note that government spending of $4.5 trillion is part of our $20 trillion GDP economy. When government spending of $150 – $200 billion (over perhaps H2’17) to repair storm damage, that adds 1.5 to 2.5 points to GDP growth. That means that something like half (or more) of the “growth” in the last six months (as a % of $10T of six months’ GDP) was due to storm remediation. (That’s correct, I checked the math three times.) As another example, an increase of $100 billion in defense spending, over a year, will add 0.5% to our annual GDP. So, the bigger the deficit (in turn increasing interest expense), the better the GDP appears. The apparently stronger GDP growth in H2’17 was also positively affected by the weaker dollar and this, too, has changed lately, probably contributing to the tepid 2.3% Q1’18 GDP real growth.

Interest rates have moved up steadily, as the Fed has simultaneously raised the short term Fed Funds rate and sold increasing amounts of its bloated $4.3 trillion balance sheet. The much higher interest expense, combined with government spending will explode the deficit, which in turn will burden the economy even further. The Fed will back off. We will have new round of stimulus, much bigger than the “financial heroin” hit of ’08-’09. That should finally spark gold related securities much higher. It’s just a question of time.

Roger Lipton

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – SLUGGISH GDP, FED NORMALIZATION BEHIND SCHEDULE, GOLD THREATENS AN UPSIDE BREAKOUT

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – GDP GROWTH SLUGGISH, FED BALANCE SHEET COMES DOWN-BUT BEHIND SCHEDULE, GOLD PRICE READY FOR UPSIDE BREAKOUT?

THE ECONOMY

It now seems clear that Q1’18 will not demonstrate a pickup in the economy. After 2.9% real GDP growth in Q4’17, lagging the much heralded 3% plus in Q2 and Q3’17 (Q3 aided by reconstruction activities after the storms), it now seems clear that Q1’18 will be closer to 2% than 3%. Recall that Q4 consumer spending, which included the best Christmas season in at least five years, included record high consumer credit card debt (with an increasing incidence of default) and a reduction of the consumer savings rate down to about 3% of household income, not the healthiest combination for longer term spending expectations. Sure enough, the first quarter of ’18 seems to be characterized by slightly higher consumer savings, as the public is still burdened with high health care, rent, and education costs. We saw a chart recently that indicates that about 33% of 25-29 year olds are living with parents or grandparents, up from about 26% in 2010. No doubt many of these Millennials are coping with the burden of student loans. Surveys indicate that many consumers are going to apply savings from the new tax bill against debts, rather than increase spending. Economic spokespersons (i.e.Kudlow, Mnuchin, etc.etc.) continue to predict that the tax bill will stimulate faster GDP growth and much higher tax revenues, in time reducing the federal debt burden. Time will tell, obviously, but the jury is still out, and the signs are not convincing so far.

FEDERAL RESERVE NORMALIZATION PROGRAM

The US Federal Reserve continues to “normalize” the bloated balance sheet, but is running behind schedule. Recall that the plan called for $10B/month reduction in Q4, $20B/month in Q1, $30B/month in Q2, $40B in Q3, $50B in Q4’18, and that’s as far as described. The plan fell behind schedule by $23B in Q4, fell another $4-10B behind plan in Q1 (depending on whether you use 3/28 or 4/4), so was $27-33B behind schedule as of 3/31, a significant percentage against the $90B that was scheduled. In the first week of Q2, ending 4/11, the Fed’s balance sheet was essentially unchanged. The rubber meets the road now with a reduction of  $30B monthly. Since the Fed’s activities affect short term interest rates rather than longer term, it could be instructive to look at what the bellwether ten year treasury note has done over the last six months. During Q4, as the Fed got $23B behind their $30B objective, the ten year traded between at 2.35% to 2.45%. The Fed stepped up their selling in Q1, meeting their quarterly objective (though not catching  up) and the ten year moved dramatically, from just above 2.40% to as high as 2.95% and closed Q1 at about 2.75%. So far in Q2, the ten year has traded back up to 2.85% as this is written.  The more volatile two year treasury, which bottomed around 1.3% in midSeptember, has moved in a straight line to 1.9% at 12/31, 2.27% at 3/31, and 2.38% today. These are very dramatic moves, and the pace of “normalization” continues to quicken. Time will tell what affect $30B/month of Fed “runoff” has on interest rates, but the possibility exists that rates could spike higher, especially if the Fed tries to catch up with the shortfall to date of about $30B. If interest rates spike upward in Q2, as they did in Q1, it could  be unsettling to capital markets that are already showing volatility that we have not seen in years

GOLD UPDATE

Gold has been “consolidating”, around $1350/oz., up 3-4% for the year, fairly firm day to day, seemingly threatening to break out on the upside. No doubt the increasing visibility of federal debt accelerating to over $1 trillion annually as far as the eye can see, is contributing to the interest, as well as the possibility of increased inflation. Since Central Banks, worldwide, are trying to stimulate inflation, it stands to reason that they would be continuing to purchase gold bullion, which they are. Market technicians, chartists, point to $1,375 and $1,400 per ounce as “breakout” levels on the upside. After a 4-5 year consolidation, some observers think gold bullion could make a move to new all time highs, above $2,000/oz. From our standpoint, the gold miners seem to be the most advantageous way to participate, since the gold mining stocks are even more depressed in price than the metal itself. The last time gold bullion was around $1,350/oz., in mid 2016, the gold mining stocks were about 35% higher. If the price of gold breaks out on the upside, the gold mining stocks should do even better.

Roger Lipton

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD & MINERS SURVIVE VOLATILE MARCH MARKETS

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD FIRMS, US DOLLAR WILL REMAIN WEAK, BYE BYE BITCOIN

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FISCAL-MONTHLY FISCAL/MONETARY UPDATE – GOLD FIRMS, US DOLLAR WILL REMAIN WEAK, BYE BYE BITCOIN (BLOCKCHAIN ADVOCATES WILL GO WITH THE GOLD)

The broad equity market continued upward in January. Gold bullion was up a little over 3%, the gold miners were up less (GDX up 2.2%, GDXJ down 1.3%). Our gold miner related portfolio was up inline with that group. We believe that the gold miners will start to outperform gold on the upside as they report Q4’17 earnings, the first quarter in over a year that the price of gold was materially higher than a year earlier. That will continue to be the case as Q1’18 is reported, and all through this year if gold holds its current price above $1300. We describe below two particularly positive recent developments.

The US dollar has recently been dramatically lower, in particular against the Euro, which represents the second largest collective economy in the world. We have written in the past that gold does not necessarily move inversely to the dollar, as many observers believe, since it depends on the time period one uses. However, all other things being equal, a weak dollar helps rather than harms the price of gold. The question then becomes: what is really the US policy? Over the last year, both President Trump and Sec’y of the Treasury, Steve Mnuchin have made statements that they consider a weak dollar a “blessing” in terms of US exports, our economy and our trade balance. They backed off that stance recently as they were attacked by certain pundits. However, DJT has continuously said “it’s all about jobs” and he is certainly not afraid of debt and deficits, which would pressure the US Dollar to the downside. The latest indication in this regard comes just last week in Davos, when Commerce Sec’y, Wilbur Ross, reflected back to 1945, just after Bretton Woods had established the US Dollar as the world Reserve Currency, and the US (with a strong dollar) was willing to be supportive of other countries rebuilding themselves after WWII. Ross said, though, that “it is a different world today”. (Check it out on Youtube, minute 19-20 in the presentation). Obviously, he is pretty directly saying that the US can no longer afford to support the worldwide economy at our own expense, implicitly blessing a lower dollar.

The second potentially powerful positive development is that a number of prominent institutions are planning to introduce cryptocurrencies BACKED BY PHYSICAL GOLD. Just this week, the UK’s Royal Mint, responsible for producing all the physical money in the UK, has announced the launch of its own gold-backed cryptocurrency. Also announcing similar plans are the Perth Mint in Australia, and the Sprott organization of Canada.

We have written (skeptically) about Bitcoin over the last few months, which readers can access through our Search function on the home page. We don’t think it is a coincidence that, virtually to the day that Bitcoin topped at $20,000 and started to fall by 50%, gold has been edging upward. It seems more than reasonable to think that speculators and investors would rather own a cryptocurrency backed by gold than backed by NOTHING. Since the total market value currently invested in Bitcoin and others is still something on the order of $300-400 Billion, there could be substantial additional demand for physical gold, whose total worldwide annual production is $140-150 Billion.

We  obviously believe that our gold related investment strategy is more valid than ever.

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – SOMETIMES A SIMPLE VIEW WORKS BEST, + BITCOIN UPDATE

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – SOMETIMES A SIMPLE VIEW WORKS BEST, + BITCOIN UPDATE

Economics seems like such a complex subject, as represented by PHDs and pundits. Some of you may remember Martin Zweig, a very successful money manager who made his name by predicting the 1987 crash. More than that, his investment mantra, “Don’t Fight the Fed” has proven to be one of the simplest, but most durable, tools in capital management. While everyone seems to be celebrating two quarters of 3% GDP growth (not “great”, but better than 2%), and debating whether the economy will continue to strengthen or weaken once again, everyone seems to be forgetting that Central Banks around the world have enlarged their collective balance sheet by something like TEN TRILLION DOLLARS since the financial crisis of ’07–08. In an effort to stave off a deflationary collapse, the Fed, the European Central Bank, the Bank of Japan, the Swiss National Bank, and the Peoples Bank of China have created new currency (something like “cryptocurrency”), and bought all kinds of fixed income securities as well as equities. This has, as designed, inflated the bond and stock markets, keeping interest rates very low (still negative on trillions of fixed income securities) and elevated the stock markets to record highs. Janet Yellen and other economists are mystified as to why all this newly created capital has not stimulated inflation in wages and groceries, ignoring the fact that inflation has been huge in the capital markets, real estate, art and other asset classes with the notable exception of gold (so far). The “wealth effect” for the upper class at least, has allowed the for the purchase of a Van Gogh painting for a cool $450M and apartments in the Big Apple for $60-100M. Grocery and apparel prices have not inflated, but the creation of $10 trillion of fresh capital has had its intended inflationary consequences in the form of asset prices.

Now comes the test, as the Central Banks begin to “normalize”, reduce their balance sheets, and pull back the Keynesian accommodation that helped to avoid an even larger financial crisis back in ’08. Our SIMPLE point here: If Central Banks provided $10 trillion dollars of freshly printed currency, which no doubt was a major contributor to the steady (though anemic) economic growth of the last seven years and the straight line upward in the stock and bond markets, it seems reasonably predictable that the removal of that “accommodation” will reverse a lot of that economic progress and asset inflation.

Do not despair, however. In our view, the stock and bond markets will not collapse, and THE REASON IS SIMPLE. THE CENTRAL BANKS WILL CAPITULATE, and back off their intended “normalization”. Within a matter of months, the sale of securities by our Fed, and the reduction of purchases in Europe, Japan, China, and Switzerland, will create a year to year reversal of something like a trillion dollars, annualized, of buying power, and that will weaken the worldwide economy. At that point, the politicians will scream “do something”, and the Central Banks will back off their QT (Quantitative Tightening). The result will be the “can kicked down the road” once again. Unfortunately, though, each financial “heroin hit” has to be bigger than the last to maintain the economic “high” (anemic though it may be), so the accommodation will need to be even bigger. Of course the long term downside consequences will be even more dramatic but that is a story for another day. The bond market, with the ten year note still at a historically low 2.6%, (“disbelieving” the strengthening economy), and the gold market which has been firming over the last month or so (anticipating the next round of accommodation), may well be signaling exactly this scenario.

Regarding Bitcoin: Now down about 50% from its peak (about the time we last wrote about it, on 12/19 at the high), we stand by our analysis (from 8/1 and 9/5 at much lower prices, and again on 12/19) The search function on our Home Page will bring up those articles for you). The youtube link below humorously summarizes the situation.  Blockchain technology no doubt will have its applications, but Bitcoin and its 1300 brothers and sisters, amounting to hundreds of billions of dollars of newly “mined” currency, is not going to have material staying power. Watch this video, more truth than fiction.

 

 

 

 

 

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2017 YEAR END FISCAL/MONETARY UPDATE – BE CAREFUL OUT THERE!

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