March 2, 2017

SEMI-MONTHLY FISCAL/MONETARY UPDATE – THE RUBBER HAS NOT YET MET THE ROAD

The fiscal/monetary world was essentially in a state of suspension, as we wait for the new administration to start the implementation phase of its stated policy objectives. The general stock market continued its optimistic expectations.  While gold bullion was up about 3.2% for the month, the mining stocks were down about 3.0%, so portfolios such as ours, with exposure to both, were essentially unchanged. (The large miner ETF, GDX, was down 4.5% and the small miner ETF, GDXJ, was down 2.2%). The US Dollar remained strong, as the financial community weighs the timing of the next 0.25% (big deal!) rise in interest rates. As we have discussed before, both dollar strength and higher interest rates are perceived as negative for the price of gold, but history has demonstrated that the gold price, to varying degrees in different currencies, can go up substantially in spite of those short term headwinds. In point of fact, that has been this case so far this year, with gold bullion up 8.8% in spite of a strong dollar and higher interest rates.

In terms of the economy and the equity market, the sentiment surveys and the equity market continue strong, including trading the first day of March, in the wake of President Trump’s Congressional address on 2/28. However, political promises and policy objectives are a long way from practical implementation. The consuming public (representing 65%-70% of GDP) may understand this better than the financial markets. While President Trump and Co. debate how to “repeal and replace” Obamacare, reduce taxes, reduce government spending (except for defense, education, infrastructure needs, and healthcare), the consuming public is still stretched. We continue to closely follow the restaurant/retail industry, and (over four decades) restaurant sales trends have invariably been a productive window and a leading indicator of general economic activity. The public does not have to buy a car, take a vacation, purchase or renovate a home on a regular basis, but they do have to feed themselves somewhere almost every day. Well over fifty percent of meals are now purchased and/or consumed outside of the home, and these trends tell us more about consumer confidence than surveys of “spending plans”. Up to this moment, there is no tangible sign that consumers are loosening their purse strings in this regard. Money spent is largely promotionally driven and comparison shopped, both in restaurants and general merchandise. Takeout and delivery is the strongest segment of retail, and that is generally at the low end of the price spectrum. Amazon is apparently going to rule the world. An economic pickup could come, but there are few tangible signs so far.

In light of the foregoing, we expect interest rates to stay relatively low (in spite of two or three possible fed fund increases this year), a pickup in the economy to be delayed (at the very least), both current and cumulative monetary deficits (in almost all major worldwide economies) to grow. This, in turn, will remain a major drag on the worldwide economy, convincingly supported by the long term historical studies of  Reinhart and Rogoff in  “This TIme is Different. Eight Centuries of Financial Folly”, published in 2011.

We expect all major currencies to continue to depreciate relative to the price of gold over time, which has been the case in the last 16 years, in the last 50 years, in the last 100 years, and for well over 2,000 years. From 1980 to 2000 and from 2012 until 2015 that has not been the case, but there were non-recurring reasons for that “consolidation”, which we have discussed before. We continue to believe that gold is the ultimate currency. Our positions in the gold miners, which have the money safely stored underground, plus our options on gold bullion, reflect that conviction.