SEMI-MONTHLY FISCAL/MONETARY UPDATE  – U.S. ECONOMY SOFTENS –  CENTRAL BANKS BUY GOLD!! – WILL THE UNITED STATES FOLLOW JAPAN?

THE US ECONOMY –  the best house in the worldwide bad neighborhood.

Though the yield curve is no longer inverted, aided by the fact that the FED has pumped almost $300B into short term paper in the last ninety days, there are tangible signs that the US economy is slowing, and is not far from rolling over into recession. The standard punditry, led by Mad Money’s Jim Cramer, whose fundamental “rigorous” analysis seems to depend mostly on the stock market’s action over the last 24 hours, continues to report that the consumer remains “resilient”. Setting aside our anecdotal observations of restaurant traffic and sales trends, which are largely driven these days by $5.00 price points at lunch and three course meals for $10.00 at dinner, overall reported retail sales were up only 0.26% in October, failing to recoup the 0.32% loss in September. Adjusted for inflation, sales volume dipped 0.1% in October after a 0.4% decline in September, flat in the last three months, slowing steadily through 2019 from 2.2% and 1.0% gains in the respective March and June quarters.

Going forward, the New York Fed is now predicting Q4 GDP growth at just 0.4%, and the normally bullish Atlanta Fed is now down to 0.3%. Both estimates have been coming down week by week. In the public marketplace, just this morning Kohl’s (KSS) and Home Depot (HD) reported disappointing results, lowered guidance for the current quarter, and their stocks are trading down 18% and 5% respectively. It is noteworthy that Kohl’s is a discount retailer and Home Depot is dependent on new housing and renovation, both important portions of the consumer related economy.

CENTRAL BANKS BUY GOLD IN RECORD AMOUNTS

We’ve written many times, relative to Central Banks’ attitude toward Gold, investors should do as they do, not as they say. They don’t like to confirm that gold is the ultimate store of value, as opposed to the fiat/cyber currencies that they produce with the stroke of a computer key, backed only “by the full faith and credit,  yada, yada”. However, the chart below shows vividly that they switched from seller to buyer in 2010 and that continues to this day. They bought 374 tons in the first half of ’19, which would annualize to over 750 tons, a record. This represents about 20% of worldwide annual production of 3500 tons. The likelihood, also, is that China’s accumulation is substantially understated.

JAPAN – three “lost decades” later – with Central Bank intervention

Japan’s experience since the peak of their GDP growth and stock market in 1989-1990 provides an insight into the power, or lack thereof, of a central bank to stimulate growth. The easy money strategy in Japan has been especially prevalent since prime Minister Shinzo Abe took office seven years ago. Interest rates in Japan have been below zero since 2015, and the Bank of Japan has printed money to buy bonds and equity ETFs to the point where the BoJ balance sheet is now 104% of 2018 GDP, up from 40% at the end of 2012. This compares to 20% and 39% of GDP in the US and Europe respectively. Japan has demonstrated that, while Central Banks may be able to paper over a pending financial collapse, stimulating economic growth is another story. GDP growth in Japan has averaged all of 0.49% from 1980 until 2019, with an all time high of 3.2% in 1990 and a low of -4.8% in Q1’19. Part and parcel of the Japanese situation is that their government debt is about 250% of GDP, much higher than the US situation, which is just above 100%. An optimist could conclude that the US has a long way to go before our Fed balance sheet or government debt becomes a problem. That might be true, and we might also be looking at GDP growth no higher, and perhaps a lot lower, than 1% for the next 20-30 years.

Roger Lipton