Tag Archives: GOLD

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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SEMI-MONTHLY FISCAL/MONETARY UPDATE: BITCOIN REVISITED: THE FLAW IS REALLY SIMPLE!!

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BITCOIN REVISITED: THE FLAW IS REALLY SIMPLE !!

On September 5th of this year I wrote an article about Bitcoin, which you can access below: After you have read the previous article, you can return here for my new conclusion. Good luck, and HAPPY HOLIDAYS !!

SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD VS. BITCOIN – ONE WILL BE UP, THE OTHER DOWN

The price of bitcoin is several times higher now, but I stand by this article. The FLAW in the whole cryptocurrency “bubble” is as follows. While the number of bitcoins that can be created is presumably limited, which would therefore provide the long term value as a currency ( just as with gold over the last four thousand years) the number of competing cryptocurrencies is not limited. Three months ago there were something like 800 competitors to bitcoin, combining to create a total worth of about $125 billion. Now there are more like 1100 “bitcoin like” alternatives, in total worth perhaps $400 billion. In the 1920s, during the Weimar inflation in Germany and Austria,  when a loaf of bread cost 1,000,000 German marks, a mark was therefore worth one millionth of a loaf of bread. If a Bitcoin is worth $20,000., for example, that means the dollar is worth one twenty thousandth of a Bitcoin. That doesn’t sound to me like the US Dollar is worth much, especially if a computer can issue thousands of similar currencies that dilute the Dollar even further.

When the books are written five or ten or twenty years from now about the financial follies of the early twenty first century, the Bitcoin (and competing cryptocurrency) mania will be viewed as one of the “ringing bells” before the bubble burst. One man’s opinion, FWIW.

Roger Lipton

 

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – TAX “REFORM” LOOMS – CAN ECONOMY OVERCOME DEBT LOAD?

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – TAX REFORM LOOMS – CAN ECONOMY OVERCOME THE DEBT LOAD  ???

FOREWARD:

The general equity market continued strong in November, so there was no perceived need for a “safe haven” or “non-correlated” asset. Our precious metal portfolio was close to flat,  tracking the mining indexes almost exactly. GDX (the large miners) was flat, GDXJ (the smaller miners) was down 1.1%, TGLDX and OPGSX (Tocqueville and Oppenheimer) gold funds were down exactly 1.0%. So the beat goes on, and our conviction has not changed. We don’t know when the turn for precious metal holdings comes, obviously, but it is going to be dramatic. There is  no need to be “promotional” on this first fiscal/monetary post to be available  on the Restaurant Finance Monitor website. However, I am sufficiently convinced that a turn is near that we are accepting new investors into our investment partnership, with a reduced fee structure, for the first time since we began transitioning to a “gold fund” four years ago. We should interject here, to be legally compliant,  that this statement is not to be construed as an offering, which can only be made by way of an offering circular.

THE BACKGROUND

Nobody needs to tell me how painful it is to not be participating while the financial world “dances”.  Back in 1998 and 1999, our investing partnership was not benefiting while the dotcom mania roared. On January 1, 2000 I wrote that “we have seen this movie before, and know how it ends.” From March of 2000, when the dotcom bubble burst, our portfolio more than tripled over the next five years or so. The distortions within the financial markets today are must larger, and worldwide, in scope.

We could go back to the tulip mania of the 1600s, the Mississippi bubble in France and the South Sea bubble in Britain of the 1700s, but much more recently: the Japanese stock market peaked at 40,000 in 1990, descended to under 10,000 fifteen years later and still trades about 50% from that high; the dotcom mania of 1998-1999 was a “new paradigm”; and housing prices couldn’t come down, according to Ben Bernanke, Fed Chairman. The TV commentary was just as positive on 1/1/2000 and 6/30/2008 as it is today. Whatever modest strength there is in the worldwide economy has been supported by over TEN TRILLION DOLLARS of newly printed currency by the major Central Banks. It would be great if prosperity were that easy to create. The unintended consequences are still to come.

At the moment, with taxes and deficits all over the news cycle, it may be useful to reflect upon the fact that gold prices made their last major move, doubling in price from 2008 to 2011, just as it became clear that the annual deficits and cumulative debt were going nowhere but UP. The last several years, as there has been less concern about deficits, the gold price has in fact “consolidated”, but as described below: here we go again.

First, recall that, as we described a year ago, over the nine years ending 9/16, the reported annual deficits were a total of $7.755 trillion. However, the cumulative debt increased from $9.0T to $19.4T, an increase of $10.4T. So, as disturbing $7.755T of deficits are, an extra $2.64T (a lot of money) was spent, somehow “off budget”, capitalized “investment”, or whatever. The cumulative US debt was 20.24 at 9/30/17, up $700B from a year earlier, though Congress approved $503B in February 2016.

I am not making this up.

The site: www.usgovernmentspending.com, describes it this way: “People naturally assume that the annual Deficit is the total that the Federal government borrows each year. Actually, this is not so. The Deficit is simply the difference between the Federal Outlays and Federal Receipts. Usually the Feds borrow a lot more than the annual Deficit. The difference is “Other Borrowings”. Only in D.C. I have provided here the link to the “Spending Details”. Honestly, I can’t make sense of it, but the result is clear. https://www.usgovernmentspending.com/numbers The reason that increasing debt cannot be ignored is that the higher the debt load that any organization carries, the more difficult it is to invest for the future. This applies to an individual family unit as well as a government. A classic book, “This Time is Different. Eight Centuries of Financial Folly”, written by Reinhart and Rogoff in 2011, researched hundreds of situations over eight centuries, showing that when a government’s debt exceeds about 100% of their Gross Domestic Product, it becomes a serious burden on the ability to grow. The United States debt is now about 105% of our GDP, and that could be one of the key reasons that we have been stuck in a 2% economy for the last ten years. Some observers counter that Japan, after all, has a debt load that is 260% of their GDP, and their economy hasn’t collapsed, so our debt is modest in comparison. True enough, but their stock market is still down 50% from its high 28 years ago, and their government is frantically printing money to avoid a deflationary collapse. Right now, the Japanese government is buying $60B of securities, monthly, to keep interest rates low and try to stimulate their economy. Since their economy is one third our size, that would be the equivalent of us printing $180B monthly, over $2 trillion annually, which would not be viewed favorably by capital markets if it were necessary here.

The Current Situation – Talk about “Fake News”

This is what politicians “do”: The new tax proposals and budgeting discussion revolves around limiting the tax reductions (and therefore the potential “increase in the debt”) to $1.5 trillion over ten years. The Republicans, of course, are arguing that a better economy, scored “dynamically”, will “reimburse” the theoretical deficit with offsetting tax revenues. That debate aside, this whole discussion leads one to think that the $20.5 trillion today shouldn’t be allowed to be more than $22 trillion a decade from now. WRONG. What nobody tells you is that the $1.5 trillion increase is on top of the already budgeted TEN TRILLION DOLLAR increase based on present expectations by our Congressional Budget Office. (This is the so-called “baseline”, but you haven’t heard that word uttered by either political party). The current “baseline” debt is projected to increase roughly $1 trillion dollars every year over the next ten years. The debate therefore is not whether the debt is going to go from $20.5T to $22.0T, but whether it will go from $20.5T to $30.5 or $32.0 Trillion. Keep this in mind as you watch the celebratory dance of the Republicans after the tax reform, such as it is, becomes law. The Democrats will be screaming about the new Ponzi scheme, but it’s just like the old Ponzi scheme.

BACK TO THE FACTS

Of course there are lots of assumptions built into all these projections, and they could be materially inaccurate. Unfortunately, governmental agencies are notoriously overly optimistic, and spending is usually higher than projected, as described above. In the current fiscal year, ending 9/30/18, the CBO projection is an increase of $1.03 trillion. With spending on the storms, higher defense spending, higher health care expenses, I’ll take the “over” side of the bet on the size of this year’s deficit. As a corollary to this discussion, think about the fact that it is only the very low interest rates that have allowed us to carry the $20 trillion without blowing up the deficit even further. If interest rates should be higher, along with an additional $10 trillion (or whatever) of debt, the prospect of ever reducing the total debt burden is really remote. If Reinhoff and Rogart’s “This Time is Different” is even only directionally correct, we’re “screwed”.

As far as the proposed tax cuts stimulating the economy through lower taxes for the middle class, it is now clear that that many of the tax cuts will affect the wealthier citizens (which is what the Democrats have been screaming). The details currently in play are in a continuous state of flux and too numerous for us to analyze, and the House and Senate proposals are about to be modified further, no doubt further muting the potential benefits of this “huge” tax reform. Overall, however, we don’t expect the final “reform” to substantially stimulate the economy through better middle class consumer spending. Maybe on the business side. In terms of public discretionary spending, it will continue to be burdened by higher health care, education and housing expenses.

The public subsidies will continue, deficit spending will be at an increasing rate for the foreseeable future, and the much higher governmental debt load will be a drag on the desired economic growth. If there is any part of the current administration’s agenda that will work, it will be the reduced administrative burden, which is being implemented by executive order rather than legislation. We fear, unfortunately, that with an incomprehensible amount of debt. It could prove impossible to grow the economy faster than the debt load and achieve, in essence, “escape velocity”.

All of this is to say that there will be no political will to reduce deficits or debt, “normalize” interest rates, or implement the necessary adjustments to “the swamp”. The capital markets, including the ridiculous cryptocurrency mania, will adjust to more realistic economic expectations. Gold, the most “unloved”, the screaming “bargain” among asset classes, will “catch up” at some point soon. Bargains are always unloved at the bottom. Our ownership of the gold miners should benefit by a multiple of whatever the gold price does. The “money” is in the ground, so it is just a question of when it gets monetized by the mining process.

Roger Lipton

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SEMI-MONTHLY FISCAL/MONETARY REPORT – GOLD BULLION FLAT IN OCTOBER – GOLD MINERS HAVE NEVER BEEN CHEAPER

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SEMI-MONTHLY FISCAL/MONETARY REPORT – GOLD BULLION FLAT IN OCTOBER – GOLD MINERS DOWN 3-5%, HAVE NEVER BEEN CHEAPER

In terms of the price action of Gold, and the Miners,  October was a continuation of the year to date. The general market continued upward, whether justified or not, and investors didn’t feel a strong need for an “uncorrelated” asset such as gold, which was down about 1% for the month.  GDX (the ETF representing the large miners) was down 2.0%. GDXJ (the small and medium miners was down 4.8%. The two most prominent mutual funds specializing in the gold miners, Tocqueville (TGLDX) and Oppenheimer (OPGSX) were down 3.7% and 4.3% respectively. The miners have virtually never been cheaper relative to the price of gold, as discussed below, so, though it hasn’t “kicked in” yet, the leverage on the upside could (we would say “should”) be amplified when gold moves higher.

As referenced above, the mining companies, with their operating leverage, normally are more volatile than the price of gold itself. While it is true that many mining companies have suffered from poor management, including acquisitions and exploration in politically unattractive countries, over the last five years there have been many management upgrades and the mining companies we hold are generally in politically stable jurisdictions. At the same time, the mining process itself has become more efficient, and the price of energy (a major expense) is a lot lower than several years ago.

The  price  performance of the miners as a group, since 2011, has been dismal, to put it gently. While gold bullion is down from $1900 to $1275m the mining stocks have done a great deal worse. The following chart shows graphically what two indexes of mining stocks have done relative to the price of gold. The “XAU” is the Philadelphia Stock Exchange Gold and Silver Index, capitalization weighted. “HUI” is the New York Stock Exchange “Gold Bugs index”, equal dollar weighted of major gold miners. The chart shows clearly that the mining stocks’ valuation have literally never been cheaper relative to the price of gold. Even with no upward movement in the price of gold, the mining equities could move 100-200% upward just to “catch up”. Add to this our conviction that gold bullion itself could be many times the current price and you can see why gold related securities, the minng stocks in particular, are an important part of our investment approach.

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – CASH IN/CASH OUT – KINDERGARTEN ECONOMICS

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SEMI-MONTHLY FISCAL MONETARY UPDATE –

CASH IN/CASH OUT – KINDERGARTEN ECONOMICS

INTRODUCTION:

Our continuing coverage of macro-economic trends and the related performance of precious metal related investments, is based on a  conviction that a strong economy must be supported by a credible currency. If workers don’t have confidence in the exchange value (represented by the currency paid to them) they will expend less effort toward that end. Gold bullion has protected consumer purchasing power for literally thousands of years. In the history of the planet, there has been no “fiat” currency (unbacked) that has not been destroyed over time by politicians too eager to please their voters. Since 1913, when our Federal Reserve Bank was created to control inflation, a dollar has become worth less than three cents. Today’s politicians, all over the world, obviously show no “political will” to do otherwise. While we continue to invest in consumer related situations, a major portion of the investment partnership we manage is invested in gold related securities. We believe that the modestly higher price of gold, and the mining stocks, in 2016 and 2017 represents just the beginning of a new leg in the long term upward trend that started in 2000. We further believe that gold is as cheap today, relative to other currencies outstanding, as it was in 1971, at $35.00 per ounce before it ran to $850 per ounce in 1979. We provide to our subscribers, as a gift, the classic book, written by Harry Browne in 1970, which concisely and accurately rationalized and predicted the enormous rise int he price of gold. While we don’t expect to see gold more than 20x higher anytime soon, as in the 1970s, we believe the price of gold could be many times its current price sometime during the next 3-5 years. We suggest that readers interested in this subject read our previous updates on this website.. 

SEMI-MONTHLY FISCAL/MONETARY UPDATE -KINDERGARTEN ECONOMICS

The general stock market was up modestly in September, since there was no perceived day to day need for gold, as the presumed “safe haven” investment. Gold bullion was down 3.4% and the gold mining stocks were down about 7.0%, though both are still up modestly for the year. Posssibly the largest perceived negative for gold was the Fed’s inclination to begin selling off their $4 trillion bond portfolio which would also be a form of tightening. As we have previously discussed, we don’t think either effort can go very far before the already sluggish economy rolls over and the politicians scream “enough, do something”. As discussed below, the current deficit in Y/E 9/30/18 will rise sharply once again. Nor will a reduction in the cumulative deficit or the Fed balance sheet bring a graceful end to the monetary folly of the last ten years. Gold, as the best long term currency, will play its historical role.

Increasing governmental annual operating deficits & cumulative debt, as well as a slow economy accompanied by ongoing very low interest rates, are supportive of an increasing price of gold. This is not necessarily true over a month or two, or even a number of years but over a longer period of time it is predictable. Since 2000, when all of the above trends became well established, the price of gold has gone from $300/oz. to over $1300/oz., outperforming almost every other asset class.

The economy continues to be sluggish, even though a phalanx of optimistic economists predict that GDP growth is just about to improve. We doubt it, and the revisions for the current September quarter are coming through lower rather than higher. GDP growth in the fiscal year ending 9/30/17 will no doubt be much closer to 2% than 3%. This has been the case for almost a decade, it continues to be the case, and we believe will be reality in the foreseeable future, with an economy burdened by an oppressive debt load.  The recent Fed announcement of the initial steps to unwind the $4 trillion balance sheet (which backstopped the financial crisis ten years ago, but has not jump started the economy) amounts to a form of tightening, and is modest in any case. If the Fed sticks to the program outlined, it will only reduce the Fed balance sheet by about 10% by the end of calendar ’18.

Meanwhile, the cumulative U.S. debt is now comfortably over $20 trillion, with the 9/30/17 yearly deficit about to exceed by a still undetermined amount over $700 billion. There is no question that the deficit in Y/E 9/30/18 will be higher, at least close to $1 trillion, possibly materially higher, especially with higher defense spending, health insurance subsidies, and the start of infrastructure spending. (Can’t forget “The Wall”) There have unfortunately been a large number of “shovel ready” projects created by the recent storms, likely to cost over $100B.

Some observers suggest that higher GDP growth, propelled by lower tax rates, will quickly solve the debt problem. The U.S. federal budget for Y/E 9/30/18, still in the formative stage, will no doubt involve a higher short term deficit, but would hopefully ignite the growth, reduce or eliminate the annual deficits, even pay down the cumulative debt. This “dynamic scoring” is a complex subject, but Steve Mnuchin, Treasury Secretary, recently provided guidance. He said that 3% growth, up from the current 2%, would generate $2 trillion of extra federal tax revenues over 10 years. Unfortunately, that is only an average of $200B annually, only a modest down payment on the apparent current $1T run rate. Conclusion: The debt and deficit Beat Goes On, which in turn burdens the economy’s opportunity for a higher growth rate.

As a sign of the ongoing absurdity, and danger, taking place in the monetary world: a Wall Street Journal article last week talked about China based Alibaba Group Holding, Ltd having created the world’s largest money market fund, now at $218B, up from $124B only six months earlier. The rapid growth is no doubt a function of the very attractive seven day yield of 4.02%, up from 2.3% a year earlier. The disconnect is that one-year Chinese bank deposits only yield 1.5% and even 10 year Chinese bonds earn only 3.6%. The extraordinary 4.02% yield has been generated by investing in “financial instruments with longer maturities”, no doubt of lesser quality and less liquid than a “money market” model would suggest.  It was a big deal ten years ago when a US money market fund couldn’t redeem deposits at $1.00 per share, which has always been the model. In China today, and around the world, investors continue to “reach for yield”, which inevitably ends badly.

Roger Lipton

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – THE BEAT GOES ON – IGNORE RISK AT YOUR PERIL

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SEMI-Monthly Fiscal/Monetary Update – The Beat Goes On – Ignore the Risks at Your Peril

Increasing governmental annual operating deficits & cumulative debt, a slow economy accompanied by ongoing very low interest rates, are all supportive of an increasing price of gold. This is not necessarily true over a month or two, or even a number of years but over a longer period of time it is predictable. Since 2000, when all of the above trends became well established, the price of gold has gone from $300/oz. to over $1300/oz., outperforming almost every other asset class.

The economy continues to be sluggish, even though a phalanx of optimistic economists predict that GDP growth is just about to improve. We doubt it, and the revisions for the current September quarter are coming through lower rather than higher. GDP growth in the fiscal year ending 9/30/17 will no doubt be much closer to 2% than 3%. This has been the case for almost a decade, and it continues to be “on the come”.

Meanwhile, the cumulative U.S. debt is now comfortably over $20 trillion, with the 9/30/17 yearly deficit about to exceed $700 billion (we don’t know by how much). There is no question that the deficit in Y/E 9/30/18 will be higher, probably close to $1 trillion, especially with higher defense spending, health insurance subsidies, and the start of infrastructure spending. There have unfortunately been a large number of “shovel ready” projects created by the recent storms, likely to cost over $100B.

Some observers suggest that higher GDP growth will quickly solve the debt problem. The newly proposed budget U.S. federal will no doubt involve a higher short term deficit, but would hopefully ignite the growth, reduce or eliminate the annual deficits, even pay down the cumulative debt. This “dynamic scoring” is a complex subject, but Steve Mnuchin, Treasury Secretary, recently provided guidance. He said that 3% growth, up from the current 2%, would generate $2 trillion of extra federal tax revenues over 10 years. Unfortunately, that is only an average of $200B annually, only a modest down payment on the current $1T run rate. Conclusion: The debt and deficit Beat Goes On (increasing the burden on future growth).

As a sign of the ongoing absurdity, and danger, taking place in the monetary world: a Wall Street Journal article last week talked about Alibaba Group Holding, Ltd having created the world’s largest money  market fund, now at $218B, up from $124B only six months earlier. The rapid growth is no doubt a function of the very attractive seven day yield of 4.02%, up from 2.3% a year earlier. The disconnect is that one-year Chinese bank deposits only yield 1.5% and even 10 year Chinese bonds earn only 3.6%. The extraordinary 4.02% yield has been generated by investing in “financial instruments with longer maturities”, no doubt of lesser quality and less liquid than a “money market” model would suggest.  It was a big deal ten years ago when a US money market fund couldn’t redeem deposits at the “buck” model due to illiquidity. In China today, and around the world, investors continue to “reach for yield”, which predictably will end badly.

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SEMI-MONTHLY FISCAL/MONETARY REPORT – CENTRAL BANKS BUYING BIG! – SELL TO WHOM?

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – CENTRAL BANKS ARE BUYING BIG – SELL TO WHOM?

It is becoming increasingly clear that currency creation by Central Banks of major industrialized countries is reaching dangerous proportions.

We all know by now that Central Banks have artificially suppressed interest rates, in the (so far) vain hope of encouraging capital investment and stimulating economic growth. We shouldn’t forget that the flip side of that process involves “mis-allocation” of financial resources, as (1) companies “reach” for return in deals that make little economic sense with investment capital with so little interest rate cost and (2) individuals that similarly “misallocate” their savings, reaching for yield they need without understanding the risk involved. This process will inevitably run its course and there will be a lot of damage, perhaps far exceeding the 2007-2008 financial crisis, but the timing is of course uncertain.

Another increasingly dangerous corollary of Central Bank currency creation is the purpose to which those funds are put to work. It is well known by now that the US Fed, the European Central Bank and others have been active to the tune of hundreds of billions of dollars in the fixed income markets, which have been instrumental in keeping rates low. This has artificially inflated bond prices, in turn driving investors into the equity markets for alternative returns. What is not so well known is that Central Banks have been buying hundreds of billions of dollars of equities. Since major Central Banks cumulatively hold over $11 trillion of foreign currency reserves, it is natural that they should want to diversify those reserves away from the currencies which are being continuously diluted. Along with steady buying of Gold (which we suggest is the “real money”), the Central Banks have increasingly added equities to the portfolio mix.

The Bank of Japan has been buying Japanese ETFs at the rate of $53 billion per year, and now holds over 71% of those ETFs. The bank is now one of the top 5 owner of 81 companies within Japan’s Nikkei 225 index. As reported by Grant’s Interest Rate Observer, the Japanese Financial Services Agency (Japan’s SEC) is now “paying close attention” to this phenomenon.

The European Central Bank has been buying 60 billion euros worth of bonds monthly, and Mario Draghi is going to update their plans tomorrow. In the meantime, Deutsche Bank CEO, John Cryan, has said: “There has been absolutely no price discovery now in corporate bonds….which is a very dangerous situation”.

The Swiss National Bank has been steadily buying equity securities, including US based companies. Equity securitie, as of Q3’16, comprised 20% ($128 billion) of their of their $643 billion in foreign exchange reserves, up from 7% in 2009, including investments of $1.7 billion in Apple, 1.08 billion in Exxon, and $1.2 billion in Microsoft.

Here in the US, our Fed has talked about beginning to unwind our $4.2 trillion balance sheet by no longer reinvesting the funds from securities that are maturing. The result of this form of money “tightening” can only be a guess, especially relative to already soft economic trends.

These are serious amounts of capital being to work in an increasingly dangerous way. To some extent, Central Banks are biased toward continued equity (and bond) buying, because their absence from the marketplace would cause a price decline and trillions of dollars of “paper losses” on their respective balance sheets.

I’ve been in the financial world for many decades, and learned (the hard way) that when you get the feeling you are “responsible” for supporting a particular market, the best possible strategy is “get out of the way”, take the current loss before it inevitably becomes much larger. The key question, at this point for Central Banks, now becomes “Sell to Whom?”.

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SEMI-MONTHLY FISCAL/MONETARY UPDATE- EVERYTHING’S UNDER CONTROL……SURE!

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – EVERYTHING’S UNDER CONTROL…SURE! – Believe that and I’ve got a bridge to sell you 🙂

Some economists, stock market strategists, and investment advisors have referred to the current economic situation is “goldilocks”, GDP growing modestly (sub 2%) but about to firm up, inflation under control (also sub 2%), the Fed continuing to “normalize” rates with the latest 25 basis point increase and another scheduled for December. Everything is even promising enough that the Fed is talking about beginning to pare down their $4 trillion balance sheet at the end of this year. (I can’t resist interjecting here that balance sheet reduction remains to be seen and the end of ’17 is a long way off.)

However…..while the financial world is relatively quiet, for the moment, the underlying problems have not gone away. The following chart provides us a simple picture of what Central Banks have “wrought” over the last 8-9 years.

While the US Fed has taken a break from money printing, their slack has been taken up by the ECB, BOJ, BofE, and SNB. Lots of economists have reflected that the appropriate money printing in ’08 saved the world from a financial collapse, and we can’t disprove that, but you can see that  $7-8 trillion has been printed subsequent to early ’09, and the curve now is steep as ever. Wouldn’t it be nice if all we had to do to create prosperity was rely on the Central Banks to provide the cash. We could all stop working, collect, and spend the cash. Unfortunately, goods and services have to be produced at competitive prices if an economy is to flourish. You would think that Central Bankers would understand this, but surgeons “cut” and Central Bankers “print”.  You would think that $11 trillion of new money since 2006 would have stimulated the US (and worldwide) economy rather substantially. That’s an incomprehensible amount of money. (Lebron James makes $40,000,000 per year. It would take him TWO HUNDRED SEVENTY FIVE THOUSAND YEARS to earn $11 trillion.) That’s true, but bringing the discussion back to earth, the result in this case is that US GDP growth has averaged 1.3% from 2007 until 2016, still sub 2% since ’10. It happens that the US economy grew at 1.3% during the US depression of 1930-1939, so I propose that what we have experienced, and are about to experience,  is not “goldilocks”. The Central Banks around the world have been essentially “pushing on a string”.

The same problems exist today that were in place ten years ago, but the numbers are a lot larger. We continue to believe that there is no graceful way to “normalize” the situation. We don’t blame Janet Yellen. She didn’t create this mess. It was the politicians, of both parties, over the last thirty to forty years. We believe that there will be no more than one more rate hike this year (right now an apparent 38% probability for December) but interest rates will still be very low historically, and “real” interest rates will still be negligible, if not negative. As far as reducing the Fed balance sheet, Janet Yellen discussed a modest pace of reduction. If this reduction starts at all, it will be a form of “tightening” that, along with the modest rate increases,  our still fragile economy will not easily withstand. We believe that the current series of interest rate increases, as well as the initiation of the Fed balance sheet reduction, will just be precursors to the next round of stimulus.

We believe that the price of gold, marking time lately, will resume its long term rise, as the next round of stimulus comes into view. This is, after all, what Central Bankers do.

 

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SEMI-MONTHLY FISCAL/MONETARY REVIEW – QUIET MONTH OF MAY – THE BEAT GOES ON

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SEMI-MONTHLY FISCAL/MONETARY REVIEW – QUIET MONTH OF MAY – THE BEAT GOES ON

The capital markets were once again relatively quiet, as was the price of gold bullion (down 0.1%) for the month). The gold mining stocks were mixed on the month, with the larger miners (represented by GDX, up 1.8% and the smaller miners, represented by GDXJ down 2.5%. It appears that the re-balancing of GDXJ, which we described last month, and has affected the pricing of some of the small to medium sized miners has largely run its course, so the miners should begin to act a bit more rationally.  Our gold related holdings have not changed, but we have found some restaurant/retail companies that we believe offer opportunity to “augment” our returns.

The most significant fiscal/monetary developments over the last month are as follows:

The federal budget debate continues, and is heating up in terms of resistance to the suggested spending cuts. Also, the debt ceiling has to be raised quickly because tax receipts are coming in more slowly than anticipated, and the government is already running on “temporary” spending measures.

While there is evidence of improvement in the economy, in particular the employment numbers (all of which are estimates, normally revised several times) there continues to be many signals that the recovery is anemic. Even the Fed said “the growth is modest………Consumer spending softened, with many districts reporting little or no change in non-auto retail sales”.

Related to the Fed’s observations, the most recent consumer surveys show a clearly weakening trend, which we postulate reflects frustration over POTUS’ difficulty in delivering on campaign promises.

Clearly, the unproductive “noise”, largely provided by our inexperienced and “unorthodox” Commander in Chief is undermining  policy initiatives. Policy paralysis, in large measure,  becomes the result, with executive orders implementing a more limited agenda. Unfortunately, time wasted is exacerbating, not helping, the fiscal/monetary distortions that are negatively affecting the worldwide economy.

Consumer debt is at new highs. The housing “bubble” of 2007 has been replaced by new highs in sub-prime auto debt, student loans, and “shadow bank” (internet) lending. We don’t believe interest rates will rise by much. Higher rates would choke off the already tepid consumer spending and wreck government budget balancing attempts.

We continue to feel that the 1.5-2.0% GDP growth (the weakest “recovery” after recession in at least 50 years) that has been a feature of our economy for almost ten years now is more likely to slow than accelerate. The sluggish growth has been in spite of close to zero percent interest rates and trillions of newly created dollars. It stands to reason that even modestly higher interest rates and an attempt to reduce the size of the Fed’s balance sheet will be a deterrent, not a stimulant, to faster growth. Further, we believe that the modest “tightening” direction will prove to be just a setup to the next phase of stimulation, as the economy stalls and politicians scream “do something”. At some point as that process plays out, we expect gold related investments to be the “cream rising to the top” of asset allocation.

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