Tag Archives: debt

SEMI-MONTHLY FISCAL/MONETARY UPDATE – VANGUARD “RESTRUCTURING” PRECIOUS METALS FUND, SHADES OF 2001?

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – VANGUARD “RESTRUCTURES” PRECIOUS METALS FUND, SHADES OF 2001?

The general equity market was up in August, gold bullion was down about 3%. The mining stocks fared worse, with the two largest mining ETFs, GDX and GDXJ, down 12.9%.  Strange as it may seem, the apparent reason for the relatively poor performance of the miners may be a turning point. On July 31st, Vanguard announced it was “restructuring” its $2.3 billion Precious Metals and Mining Fund, and the newly named “Global Capital Cycles Fund” will start its new strategy in late September. Moves like this from a major institution are often a sign of “capitulation”, evidence of extreme negative sentiment, and marking a bottom as positions are liquidated. In particular, back in 2001, Vanguard removed the world “gold” from what was then its “Gold and Precious Metals Fund”, which coincided with a low in gold before a ten year rally. So, we’ll see.

If the facts had changed, we would have changed our strategy, but the underlying reasons are intact. The rampant creation of currency, and monstrous increase in debt, around the world, can do nothing but cause inflation in the long run, because it’s the only way out for the politicians who can’t admit to spending their constituents into financial oblivion. The amount of gold held by major central banks, relative to their circulating currencies, is approximately the same level as it was in 1970, before gold went from $35/oz. to $850/oz. There will be a “catch-up” again.

We believe, also, that the relationship between the price of gold and the US debt is valid, and the debt obligation as shown on the chart below is understated, not including monstrous unfunded entitlements. The price of gold moved in lockstep with the growing US debt, from 2000 until 2009, and for decades before that. In 2009, after a steady 9 year rise, because markets anticipate, gold ran sharply ahead when it became clear that the Obama administration was going to sharply increase the annual deficit. The price of gold diverged on the downside from late 2011 until the bottom of 2016, likely, because the annual reported deficits were lower, even though the debt steadily increased from “non-budgeted” spending. For example, this fiscal year ending September, the reported deficit will be about $800B but the increase In debt is already over $1 trillion. We think another inflection point is at hand, as the annual deficit and cumulative debt are accelerating again.

The gold mining stocks have fared even worse than bullion recently, down more than 50% since gold was at the current level four or five years ago.  That 100% catchup could be on top of the leveraged move that the mining companies, as operators, make when bullion changes price.  Financial markets can make shockingly rapid moves at certain times, as illustrated by the recent volatility in BItcoin, first up by over 20x and down by two thirds more recently. We believe this will again be the case with gold bullion, much more so with  the mining stocks, this time on the upside.

Roger Lipton

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

 

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

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.