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There are about 250 persons working at the Congressional Budget Office, according to their website. Their budget, according to Wikipedia was $46.8M annually, as of 2011, probably higher now. Their projections are widely quoted, and presumably relied upon by policy makers in our administration. The CBO updates their projections on an irregular basis, sometimes several times per year, sometimes only once per year. The last update was 5/2/19, only about six weeks ago. Considering how far off their past projections have been, and the questionable assumptions within their analyses, it is a wonder that anyone takes these numbers seriously, and the latest installment provides a good example why not.

Six weeks ago, on 5/2, based on relatively firm numbers through March, and presumably pretty reliable indications through April, the CBO predicted that the US operating deficit through the current fiscal year, ending 9/30/19, would be $897 Billion. April and May results are now reported, and the table below shows the monthly numbers for the last two fiscal years.

You can see that last year’s total operating deficit was $779B, and the total debt went up by $1,271B (due to “off budget” items, the largest of which is the social security shortfall). The projection, six weeks ago, was for the current year’s deficit to be $897B, up 15.1% from fiscal ’18. The total debt is not projected, and you can see that number frozen the last few months since our administrators have already exceeded the formal debt “limit”.

The April result, with tax receipts was a surplus of $160B, which was dower than the $214B surplus a year earlier, so the cumulative deficit through April (shown at the extreme right of the table) was up 37.6%. They May results showed a $206B deficit, up from $147B, so the cumulative deficit is up 38.6% year to  year. Last  year, the monthly deficits from June through September totaled  $246B. The current CBO projection of $897B for the ’19 year would allow for only $158B the rest of the year, down 36% from the last four months of fiscal ’18 – which is  ridiculous.

We don’t have 250 professionals pushing numbers here but this year to date: December’s YTY deficit reduction was on an  immaterially low base. March’s improvement was material, but March and April combined (tax season) showed a $13B surplus this year versus $5B in fiscal ’18, which is an immaterial change. May bounced back to a 40.1% increase YTY in the deficit. You can judge for yourself the likelihood that the last four months will give us a deficit 36% lower than last year.

Our projection, with 247 professionals fewer  than the CBO is for the following: The last four months will provide a deficit about  40% higher than a year ago ($247B), which would provide for $346B  on top of the current $739B, for a total of $1.08 Trillion. This is 20% higher than the $897B projection made by the CBO with only five months left in the fiscal year. We shouldn’t have to point out that: if the CBO is 20% off the mark with five months remaining, their projections ten years out don’t have a great deal of credibility.

Furthermore: the total debt, whether or not the debt ceiling has been formally raised, will have expanded by $1.3-$1.5 Trillion, bringing it close to $23 trillion.

This reality is unlikely to be comforting to the capital markets.

Roger Lipton

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The general market was up modestly in March while gold and the gold mining stocks were down modestly. For the year to date, in the first quarter, the gold mining stocks were up about 5-6%, fairly good considering the gold bullion was only up 0.6%, also considering that the general market and the US Dollar were strong, both of which normally track inversely to gold related assets. Monetary conditions are clearly becoming more accommodative, as central banks, worldwide, back off from raising interest rates and reducing  balance sheets. The discussion below provides only a portion of the argument why there should soon be a resumption of the long term bull market for precious metal related assets.


John Maynard Keynes had some good ideas back in the 1920s: the Federal Reserve Bank had been formed in 1913, and would manage the economy, control inflation, reduce the frequency and severity of booms and busts, stimulate the economy in hard times, and pull back the accommodation in good times.

Keynes articulated this very well, in 1923: “Markets cannot work properly if the money, which they assume as a stable measuring-rod, is undependable. Unemployment, the precarious life of the worker, the disappointment of expectations, the sudden loss of savings, the excessive windfalls to individuals, the speculator, the profiteer–all proceed in large measure, from the instability of the standard of value”.

Harry Browne, the brilliant economist, and writer, who wrote “You Can Profit from the Coming Devaluation” in 1970 (which I republished in 2012), anticipating the devaluation of the US Dollar when Nixon closed in the gold window in 1971, put it another way. He said that “you can’t have a sound economy without a sound currency”.

Starting with the longer term view, under the management of our Federal Reserve, the 1913 Dollar (when the Fed was formed) has become worth about $.03. (In contrast, an ounce of gold still has roughly the same purchasing power.) More recently, over the last ten years, our Fed (with imitation by the ECB, Japan, and China) has given us several “QE’s”, during which short term interest rates have gone to zero, there is still something like TEN TRILLION of sovereign debt with rates at ZERO or less, and the Fed balance sheet went from $900B to $4.5 TRILLION

After several Quantitative Easings over the last ten years, a little over eighteen months ago the Fed announced that they would raise interest rates to “normalized” levels (presumably upwards of 3% for short rates and above 4% for  thirty year paper) and, on an automatic programmed basis, reduce the balance sheet to a more tolerable $2.5 trillion (still almost a triple from where it started in 2008). We predicted that this program wouldn’t go far, because the economy couldn’t tolerate it, and interest rates on (now) $22 Trillion of debt would wreck the US budget. Sure enough: it is now clear that the interest rates will not rise further, and the Fed balance sheet will only shrink perhaps another $200B this year, down to about $3.7 trillion. This latest objective apparently provides comfort that the economy will not be choked off from the “steady” growth: one year, in 2018, at 3.0% (with lower tax rates, repatriation of $800B of dollars overseas, and reduced governmental regulation), projected from this point to be back to the 2.3% range of the Obama administration.

Back to John Maynard Keynes and Harry Browne:

Keynes: “Markets cannot work properly if the money, which they assume as a stable measuring-rod, is undependable. Unemployment, the precarious life of the worker, the disappointment of expectations, the sudden loss of savings, the excessive windfalls to individuals, the speculator, the profiteer–all proceed in large measure, from the instability of the standard of value”.

Browne “you can’t have a sound economy without a sound currency”.

Does any of this sound familiar? These days it’s called a “wealth gap”, and politicians are calling for rich people to “pay their fair share”. Savings haven’t been “lost”, but they are earning next to nothing unless large risk is undertaken.


We’ve written extensively that the actual debt is increasing much faster than the “operating” cash flow statement implies. Some uninformed observers have said that this is just a question of short term working capital changes which even out over a number of years. The facts are (1) this phenomenon has happened almost every year. (2) Over the last decade, the increase in debt, above and beyond the total of annual deficits has amounted to a total over THREE TRILLION DOLLARS. That’s $3,000,000,000,000. A lot of zeros. (3)  It is a result of “Intragovernmental Borrrowing”, which doesn’t run through the annual operating budget. Specifically, as of 9/30/18, there was about $6 trillion of “Non-Public Borrowing”. 51% of that is from the Social Security Trust Funds. 17% from Military Retirements and Health Care Funds, 16% from Civil Service Retirements and Disability Funds, 6% from Medicare Trust Funds, and 11% from other Trust Funds. So our legislators are hollowing out the various funds that should be safely set aside to meet their intended purposes. Before we leave this subject, it is important to know that certain observers have opined that the US is not really in debt by $22 trillion, it’s only $16 trillion, a much lower percentage of our GDP, not nearly so dangerous. After all, we owe that $6 trillion to “ourselves”, the implication being that it doesn’t have to be honored. Tell that to the social security recipients, military veterans, civil servants and medicare recipients.

We provide below a table showing the most recent monthly deficits and increase in debt. You can see that in the fiscal year ending 9/30/18 the monthly deficits totaled $779B, but the debt increased by $1.27T. We say again: this is not a one year phenomenon. Three trillion, over ten years, has been “borrowed” from various trust funds. This year, through February, the operating deficit was $234B in February, up from $215B a year ago. Cumulatively the deficit for the year through February is $544B, up 39.1%. Relative to the increase in debt, it is up $599B cumulatively, actually decreasing by 2%, but still on track to run something like $1.3T for the year versus an advertised estimated deficit of about $1 trillion.

The last point, on the specific subject of deficits and the possibility of progress: It should be clear to all of us that both political parties are already in full “positioning” mode for the 2020 election. There will be no substantive improvement in the fiscal/monetary position of our country, especially since that would require reductions in entitlements, defense, or interest rate spending, none of which will occur. By the end of fiscal 2020, at 9/30/20, the total debt will be on the order of $24 trillion and growing. The financial, social, and political implications of that reality have yet to play out.


We go to Quantitative Easing again, BUT MUCH LARGER. When an addict is hooked, each hit has to be bigger than the last, to maintain the high. The Fed balance sheet went from $900B to $4.5T, a quintuple, and will only have come down by about 18% to about $3.7T. Never before in the history of the planet has ongoing monetary accommodation (including $1 trillion current deficits) been necessary in the middle of a (relatively) strong economy.  In addition to the modest reduction in the Fed balance sheet, short term interest rates, after going slightly negative, have only risen to 2.7% before the Fed said “basta” as the economy threatens to roll over. We can only imagine how much capital will need to be injected by the Fed, and how low or negative interest rates will be taken to counter the next recession.

In conclusion: Don’t believe the economic fiction that we need not fear inflation, from accommodation of the past or from further stimulation, that deficits don’t matter, that the new Modern Monetary Theory (described in today’s Wall Street Journal) will keep things under control. All kinds of assets have already been inflated in price, and that wealth effect has clearly been enunciated as a goal of the Fed. Unfortunately, the benefit has not been spread equally among citizens, and this is a worldwide problem. The saddest part is that the politicians of today, just as in the past, show no inclination to correct the fiscal/monetary policy in a constructive way. The longer this financial party continues, the worse will be the hangover. Nobody knows exactly what the “end game” looks like, but it is probable that gold related securities will be among the very best performing assets.

Roger Lipton

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It should be no surprise that “officials”, in this case Fed Chairman, Jerome Powell, massage the facts to provide whatever agenda they are trying to promote.

Jerome Powell, in yesterday’s news conference, was asked about how far the final stage of balance sheet shrinkage would go, before being “normalized” in late 2019. Recall that the $900 billion of assets owned by the Fed back in 2008, bought with newly printed currency, expanded to a maximum of $4.5 trillion during and after the 2008-2009  financial crisis to keep the banking system from imploding and to support the economic recovery. Most economists like to think that the possible unintended consequences of this unprecedented monetary experiment are worth the ongoing risks because the financial system was saved by the intervention. Over the last decade, fed officials have come to the conclusion that the balance sheet should be shrunk, but the normalized level would be about $2.5 trillion based on an economy that has grown over the last ten years. Of course, the economy has grown nothing like the 177% increase that the balance sheet would have grown, but that’s been the working objective until just recently.

It’s important to put the Fed’s current forecast in context. Starting in late 2017, the Fed has shrunk the balance sheet steadily by selling some securities and letting others maturing in a “run off”. It was hoped that this reduction of monetary accommodation would not hurt the economy. However, with the reduction of Fed participation as a buyer of fixed income securities, and a planned series of fed fund rate increases, market interest rates immediately started to rise in late 2017, and that has contributed to economic growth slowing from the 3% rate of 2018, now expected to be in the low 2% area in 2019. Predictably, by the fourth quarter of 2018, as the stock market was collapsing, the Fed “caved”, and said they would back off from the balance sheet reduction, as well as reducing the number of interest rate increases planned in 2019.

It is now assumed that the rate increases are over for the moment, and the Fed is watching carefully, “data dependent”, yadayada. As far as the Fed balance sheet goes, it stands, as of the last report on 3/13/19, at $3.97 trillion, down 12% from the high of $4.5. Our estimate, provided just last week, was that the balance sheet reduction would go to about $3.7T, down about 18% from the high. As we said, a quintuple in the balance sheet, from $900B to $4.5T, is necessary in hard times to avoid a financial calamity, but the “good times” only allow for an 18% reduction, not exactly a balanced situation, as John Maynard Keynes economic principles would have required.

You have to read between the lines if you are interested in the facts from which to make an informed judgement as to what the future holds. Jerome Powell, Fed Chairman, is extremely articulate, perhaps the best that we can remember in this respect. However, he has his “agenda”, and we can’t resist the temptation to clarify just a couple of of his press conference comments of yesterday. Naturally, he claims that the economy is doing just fine, everything is under control, the Fed is watching carefully and has lots of flexibility to respond to any foreseeable situation. We can’t help pointing out the similarities to the Fed’s outlook in ’07.

In yesterday afternoon’s press conference:

Chairman, Jerome Powell, was asked whether the Fed balance sheet reduction was a form of “tightening”, which could be hard for the already slowing economy to absorb. He claimed that reduction of the balance sheet is not tightening, as it is not a part of “monetary policy”, just a separate planned reduction back to an appropriate level as part of a natural process. He can call expansion of the balance sheet from $900B to $4.5T whatever he wants, but it wasn’t done for no reason. $3.6T of fresh currency was created, out of thin air, inserted into the financial markets, helped keep interest rates low and finance our operating deficit, and the higher stock and bond prices created the wealth effect that Ben Bernanke predicted. If expansion was a big help, contraction can’t be of no consequence. 

Secondly, he was asked how much further the balance sheet reduction would be taken by the termination as of 9/30/19. After a bit of “dancing”, he said “you are no doubt looking for a number, so that would be ‘a bit’ over $3.5T”. He no doubt wanted to provide the impression that the balance sheet reduction is continuing, automatic as presented originally, wouldn’t be a problem for the economy, and the $3.5T is an acceptable objective. Here’s our interpretation:  If we assume “a bit” over $3.5T would be $3.55T, that would require a reduction over the next 6.5 months  of $421B from the $3.971T at 3/13/19, or an average of $64.7B per month. That pace of reduction would be higher than any level during the peak pace of reduction. Q3 of ’18 averaged $37B per month. Q4’18 averaged $39B per month. So far in ’19 the average has been 35B/month.  If we assume $30-$35B/month over 6.5 months, that would be 195-228B, which would leave the balance sheet at $3.74-3.77T (still $70B or so above our target), and we don’t consider $250B “a bit”, though a quarter of a trillion dollars is admittedly not worth what it used to be.

It remains to be seen how the worldwide economy responds to the end of the largest  monetary experiment in the history of the planet. 

Roger Lipton


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The general equity market had its worst December on record, with the averages down 10% and more. Gold related securities, however, began to prove their worth as an undervalued “safe haven” and an “uncorrelated” asset class. Gold bullion was up 4.9% and the gold mining stocks were up more than double that. One month of outperformance is not enough to establish a new trend, and the gold miners were still down for the entire year, but December does demonstrate how quickly trends can change. For lots of reasons which we outline below, we believe December may have been just the beginning of the resumption in the long-term bull market for gold related securities. The charts below provide a vivid picture of the most important long-term trends, and the prospects for substantial gains in our portfolio of gold mining stocks.                                                                               

While short term fluctuations and volatility can often dominate our thinking, we think the following charts provide valuable long-term context. There is no question that gold related securities are influenced by trends in the general capital markets, viewed as a “safe haven” from a decline in other assets, and heavily influenced by the direction of the US Dollar. The recent strength in the US Dollar, and the continuous rise in the general market have clearly undermined the performance of gold related assets. We believe the charts below show that the S&P average is likely closer to a long term high than a low, that the US Dollar is closer to a high than a low, gold bullion has been “consolidating” for 4-5 years, while gold related securities (represented here by the GDX ETF), are clearly near a long-term low, and may be emerging from its base.

First, the chart below shows the performance of the S&P 500 index, virtually straight up from the bottom in 2009, an unprecedented continuous rise. Most important, of course, is the decline which began in December, the sharpest correction in the last decade, and that has continued the first day of 2019. Should this decline continue, and there are lots of reasons why it should, gold related securities may be one of the very few safe havens.

The next chart is the performance of the DXY, the ETF representing the performance of the US Dollar, since 2005, versus other major trading currencies. You can see that the US Dollar has been trading very near its high and that has no doubt undermined the price of gold bullion in US Dollars. There is a lot of discussion as to whether our Fed, led by Jerome Powell, will be able to raise interest rates further at the same time the Fed balance sheet is reduced, both of which has contributed to the strong US Dollar. Should he decide to back off these programs, which we believe will be the case, that should contribute to a weaker US Dollar, and the chart shows the downside risk over time. A materially weaker US Dollar would be a strong tailwind to the price of gold related securities.

The next chart shows the price of gold bullion, represented by the GLD ETF, since its decline in 2012. You can see that the decline was 39% from the high to low. Since 2013, GLD has been in a trading range of about 20% from a little over 130 to a low of 105.  Right now GLD is trading about 8% below its “breakout” point of just over 130.

The following chart shows the performance of gold mining stocks, represented by the GDX ETF. You can see how substantially GDX has underperformed gold bullion, down 75% from the high of 2012 to the low in late 2015. The “trading range” since 2013 has been a very wide 56%, and you can see that GDX is still a lot closer to its low within the trading range than GLD. The “catchup” in GDX to get back to the high of the trading range in 2016, when GLD was a little over 130, would imply a 48% move, versus only 8% in GLD. We believe that December may have demonstrated the beginning of a positive move in GLD, and the beginning of the inherent upside leverage in GDX. We believe that the gold miners, which declined twice as much as GLD on the downside, could demonstrate even more leverage on the upside from this historically low base. Their December performance begins to demonstrate that potential.

Lastly, we provide a chart of Homestake Mining versus the Dow Jones Average during the depression of the 1930s, so even the prohibition of private gold ownership in 1934 was not sufficient to end that bull market in gold mining companies, even as the official gold price remained at $34./oz.

In terms of current news that supports our long term conviction, both bond and stock markets have had to digest lots of news in recent weeks, and it hasn’t always been pretty. Capital markets don’t like uncertainty, which exist relative to trade tariffs, the clearly slowing economies worldwide (US, Europe, Japan, China), the uncertainty regarding our Fed’s plan relative to interest rates, the exploding US deficits, Mario Draghi’s announcement of an end to QE in Europe, the ongoing political turmoil in and out of the White House, the collapse of Bitcoin and the crypto-currency market. The result has been more volatility, especially in the stock market, than we have seen in years. Intra-day moves of 3-4% have become common place, which in and of itself creates a level of discomfort among investors.

There are major macro developments, within the broad brush concerns above:

  • The new US fiscal year started in October, and the stated (now called “on-budget” by some) deficit was $100.5B in October, versus $63.2B last year. November came in at $205B vs. $139B last year. For two months, the deficit is $305B. vs. $202B, up 51%. The actual debt is up $334B, reflecting “off-budget” items, the largest of which is Social Security obligations. We continue to suggest that the “on-budget” deficit will be closer to $1.5 trillion in the current fiscal year, and the total debt will be well over $1.5 trillion, due to government spending (up 18% so far YTY),  higher interest costs, higher defense spending, higher VA support, health care support, THE WALL, etc. There seems to be rare bipartisan agreement right now regarding an unwillingness to talk about the explosion of the deficit and the debt. It is just too disturbing. All the deficit hawks have put their heads in the ground. THERE IS NO POLITICAL WILL in this area.
  • There is an ongoing move away from the US Dollar, the world’s dominant reserve currency since 1944. China, Russia, and mid-east countries are increasingly using the Yuan and gold for oil trades. There is also a consistent reduction within foreign exchange reserves, of US denominated securities. This has been accompanied by accumulation of physical gold, which can’t be diluted by a computer key-tap.
  • There are many indications that China is accumulating far more gold than they have announced. Recall that three years ago China announced that their Peoples Bank of China (PBOC) had increased ownership to 1600 tons from 1000 tons over the previous five years. Considering that China is the largest miner of gold on the planet, 400 tons per year, and nothing leaves the country, an increase of 600 tons over five years is obviously an understatement. It may be Chinese government agencies other than the PBOC that is holding it, but they are government “affiliates”. Various sources have reported that thousands of incremental tons have moved into the hands of various government agencies in recent years, and we would not be shocked if China announces at some point soon that they own 10,000 tons or more.  This would be substantially more than the 8,400 tons owned by the US, currently assumed to be the largest holder.  This would allow the Chinese to create a trading currency backed in some way by their gold ownership, joining, or even replacing the US Dollar as the primary trading currency worldwide. Surprisingly, based on reported gold holdings, Russia (which continues its aggressive gold purchase program) is in the best position to make their currency convertible into gold. Both China and Russia could have multiple political reasons to link the Ruble or Yuan to gold, provide more credibility to their currency than the US can provide.
  • Jay Powell’s newfound uncertainty over the pace of further rate increase provides the possibility that Quantitative Tightening is slowing down, if not stopping altogether should our economy weaken further. It is now clear that fourth quarter GDP will be more like 2% or so than the 4.5% in Q3. Especially in light of slowing economies elsewhere in the world, which will slow further if interest rates are moved higher, Powell may find that the next important course of action is “QE4” or whatever they choose to call the new monetary accommodation.
  • Since September, foreign purchases of US Treasury securities can no longer be made, financed by low interest (or negative interest) borrowing abroad, with currency hedging providing an overall positive carry. Borrowing costs abroad have gone up modestly, hedging costs as well, so the guaranteed positive return has gone away, removing some material portion of the $5-6 trillion of annual demand for US Treasury securities. Since $5-6T of US Treasury Securities have to be “rolled” over the next twelve months, the $1.5T of incremental government debt has to be financed, and the absence of perhaps $2-3T that was previously invested (and hedged) by foreigners, provide a total of something like an incremental TEN TRILLION of US securities that has to be bought in the next twelve months. People… ($10,000,000,000,000) this is a lot of money and could be a strain on the financial system, to put it really mildly.
  • The market for “leveraged loans” and high yield loans has shown serious signs of strain in just the last sixty days. Wells Fargo and Barclays Bank failed to sell $415 million of debt on Ulterra Drilling Technologies, a manufacturer of drilling bits. Blackstone received their funds to help in their buyout of Ulterra, but WF and BB are hoping to market the debt in a better environment in ’19. There were a number of other deals actually pulled from the market in Europe over the last several weeks. The Financial Times said today that the “’junk bond’ market, whether in loans or bonds – has frozen up, and the US credit markets have ground to a halt….not a single company has borrowed money through the $1.2T US high-yield corporate bond market through mid-December…..we haven’t seen the results at yearend, but if the freeze remained in place, it would be first month since November 2008 that not a single high-yield bond priced in the market..”

Our conclusion from all of the above is that our economy and, indeed, the worldwide economy will have very modest growth, at best. The debt load is too heavy, and the unintended consequences of ten years of monetary promiscuity have yet to play out. Equity investors right now assume that Jay Powell will more or less stick to his plan of generally higher interest rates, even if at a much slower pace. If he “cries wolf”, however, the equity markets would rally, but we don’t think for long. The last recession of ’08-’09 required “monetary heroin” to the tune of $4T in the US alone, but each hit has to be bigger to keep the addict functioning. Once capital markets realize that, a more major downdraft is likely. 

In the long run: we believe there will be a new monetary paradigm, and gold related securities will be an important part of a more disciplined fiscal/monetary approach. The ownership of gold has protected one’s purchasing power for the last five thousand years, the last two hundred years, the last 105 years (since the Fed allowed the US Dollar to be diluted by 98%), the last 47 years (since 1971, when the gold window was closed), the last 18 years (since 2000, when deficit spending accelerated once again).

It is of course true that since 2012 gold and gold related securities have been poor investments, but, in the sweep of history, that is a mere blip. With a new level of financial uncertainty compounded by geopolitical concerns and fiat currency dilution rampant around the world, it is only a matter of time before gold establishes itself again as “the real money”. Gold is not the only hedge against inflation, but, among the possibilities, it is currently the most undervalued.  As James Grant, the preeminent monetary historian has said: “A gold backed monetary system is not perfect, but it is the least imperfect system”. We don’t expect a new gold backed monetary system to be in place any time soon, but any small progress in that direction will allow for substantial appreciation in gold related assets.

Best wishes for a healthy, happy, and prosperous New Year!

Roger Lipton


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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.


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.


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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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! – 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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There is not too much new, during just the last two weeks, in the way of fiscal/monetary developments. Governments, and their Central Bank (supposedly independent) agents have to adjust fiscal and monetary policy but between the US governmental dysfunction, the ongoing concerns over Brexit, and the French election there hasn’t been much time to get much actually accomplished.

In terms of fiscal and monetary affairs here at home, the political debate goes on as to whether the proposed tax cuts, which are now emerging as the centerpiece of the Trump agenda,  will help or hurt our economy.  Our conclusion on this front is that when the tax cuts finally take place they will be far less than has been discussed in the campaign and the early days of the Trump administration. The resulting impact on the economy will therefore be materially less than is  hoped for.

A well established “Third Rail” of political discourse is the absolute necessity of adjusting non-discretionary spending, especially entitlements, if the budget is ever going to come close to balancing. Entitlements, interest on the debt, defense, and benefits including social security and disability payments, food stamps, medicare and medicaid make up 75% of the $4 trillion annual government budget. If only $1 trillion (25% roughly), is discretionary, it would obviously take an enormous cut in those services to seriously reduce the current “apparent” $587B annual deficit. We say “apparent” because what you see is not what you get, and we will discuss this later.

A new Third Rail, in addition to entitlement reform, has now emerged, and that is discussion of the Deficit itself, and the impotence of either party to seriously reduce it. When the Democrats were in charge, only the Republicans cared. Now the Republicans are in charge, and only the Democrats care.  A point we must make in this regard, is that the Deficit that you see is not the Deficit you get. The Obama administration managed to bring the annual deficit down, to be sure, from over 9% of GDP, but the “under 3%” figure they trumpeted was seriously misleading.  In the fiscal year ending 9/30/16, while the stated annual deficit was $587 Billion (up from the low of $470B the prior year), the actual cumulative debt went up by $1.25 Trillion, a difference of a cool $663 Billion.  This is NOT a one year phenomenon, such as a result of “working capital” changes from one year to the next. We published back in October, 2016, year by year numbers over 9 years. In summary: For the nine years ending 9/30/16, the total of reported annual deficits was $7.755 Trillion, but the cumulative debt went up by $10.392 Trillion, higher by $ 2,637 Trillion.  This difference is the result of “special” expenditures (“non-recurring”?) that do not run through the normal budgeting process. Be that as it may, the debt must be repaid at some point and, at the very least, interest on the debt must be paid. The interest  rate is abnormally low at this point, but this is unlikely to be the case forever. There is relatively little discussion, by either party, of the deficit in the current year, and the potential increase in the total debt. When there is no discussion, you can count on the fact that there is a reason. Neither political party is willing to undergo the pain that reducing the deficit would entail. The Democrats will take the opportunity, at a time of their choosing, to cast blame for potential cuts (EPA, Planned Parenthood, The Wall, Entitlements, etc.etc.etc.) on the Republicans, but neither party is prepared to deal with the reality of the spending situation.

This debt buildup is important, especially since it continues to grow materially faster than the economy which it supports and supposedly stimulates. We harken back to the findings described in the highly respected (by most) 2010 economic treatise “This TIme is Different” by Reinhart and Rogoff.  They studied the link between different levels of debt  and countries’ economic growth over the last two hundred years. In summary, countries with a gross public debt exceeding 90% of annual economic output (GDP) tended to grow more slowly. Above the 90% threshhold (the US, at 85% in 2009,  is now close to 110%), average annual growth was about two percentage points lower than countries with public debt less than 30% of GDP.  There, of course, can be no absolute certainty that the Reinhart/Rogoff studies are currently relevant. However, the US economy has in fact struggled for almost ten years now, recovering from the financial crisis of 2008-2009 far slower than our federal administration and their economic advisors would have liked, or predicted. There is, at the very least, the possibility that Reinhoff and Rogart are directionally correct, and it will be increasingly difficult for our economy (or the worldwide economy by extension) to accelerate GDP growth, considering that the debt burden continues to grow on a relative basis.

Our conclusion: President Donald Trump has made it clear that he is not afraid of debt. He is less concerned about deficits than about defense, infrastructure spending, and protecting entitlements. The cumulative debt, and the Reinhoff/Rogart drag on the economy, will continue to grow, faster than GDP in the short term. Whether expenditures run through the normal “budget” or not, it remains to be seen whether it is well spent and will truly stimulate GDP growth. We’ve seen enough of the new administration to conclude that directional changes could be “business friendly” but not material enough to be game changing in the short run. The recently positive consumer and business sentiment readings will become more of a “show me” situation, since public economic stress will not be relieved in the short run. The 65-70% of the economy that is dependent on the US consumer will not kick into high gear quite yet. Amazon, Netflix, Google, and Apple can’t carry the economy by themselves. The rate of GDP growth will continue to be disappointing.

In terms of our interest in gold related securities: interest rates will remain relatively low, Central Banks worldwide will remain dovish to support still fragile economies. Assets such as stocks, bonds, real estate and art will remain at their elevated levels, perhaps move even higher as investors search for appreciating assets. Gold related securities, perhaps  the most currently undervalued asset class , will narrow the valuation gap that has developed over the last several years.

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The capital markets, including the gold market, were little changed during September. Our portfolio was up slightly better than gold bullion which was up 0.7%. For the year, we are outperforming gold bullion which is up 23.8%. As we have said before, we have participation with both gold bullion and the miners, and our portfolio should move more than bullion itself, especially on the upside. We expect the capital markets, as well as the gold market to be more definitive once the US presidential election is concluded. Neither candidate has indicated any policies that would be negative for gold.

It might be a good time to go back to economic basics, of paramount consideration within the political landscape. We continue to believe that the US debt will eventually strangle (completely) our economy, which has grown steadily but very slowly for a decade, not coincidentally since the debt burden accelerated. Zero interest rates, have helped our government to keep the annual deficit to “only” $600 billion in the latest 12 months, still growing faster than the lackluster economy, but has also penalized the saving public in the process. That is why so many “mature” individuals, normally of retirement age, continue to work. Many investors put their “heads in the ground”, assume their IRAs and 401ks will be OK over the long term, especially since they have done well since the ’08-’09 decline. The more conservative (I would say “realistic”) investor, understands that the stock and bond market performance has been (the Fed admits) largely supported by Central Bank easy money policies. The investor like myself, more aware of monetary history, has been less willing to “reach for yield” in an increasingly risky environment.  For every million dollars a family has in the bank, if they want to keep the funds “safe” in US Treasury securities (which will not “default”, just be inflated away), they earn: maybe $6000 annually with a 1 year maturity, less than $10,000 per year for 5 years, about $16,000 annually for 10 years, all of it taxable. Not too many families currently have many millions in liquid savings, so it is understandable that the savings rate is (out of desperation, perhaps) going up as interest rates come down, and workers don’t retire. The Central Bank P.H.D. model, which calls for better consumer spending with lower interest rates, and higher inflation at some point (to inflate away the government debt) is not working. This is true not only in the US, but in Europe, Japan, and China, the world’s largest economies. I say again, the model is not working. When you are in a hole, the remedy is not to “keep digging”.

As we listen to the economic portion of the debate by the two presidential candidates, and their plans, or non-plans, to adjust government spending and get the projected rise in the yearly deficit under control, keep in mind the following inconvenient facts. The U.S. government has spent about $4 trillion in the fiscal year just ended. Pensions (Social Security, etc.) amounted to $1,105B (26.9%), Health Care (Medicare,Medicaid,etc.) was $1,124B (27.4%), Defense was $817M (19.9%), Welfare (Families, Unemployment, Housing, etc.) was 9.8%, Interest on the Debt, even with very low interest rates,  was $318M (7.7%). There is not the political will, in either party, to materially reduce spending within the above categories, and this represents the bulk of the budget.  In our view, it won’t happen until after the next financial crisis, which we believe will be much larger than the last. Most asset classes will be much lower and gold related securities will be much higher at that point.

It should be clear to all that our convictions have not changed. We are always available for your questions/concerns.

Special Note : If you are interested in this subject matter, you can view, FOR FREE, the three youtube videos I produced, only 3 minutes each, with links on our Home Page. Even more illumination you will get from Harry Browne’s books, the most profound of which we provide for free with a paid subscription to this website.

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The capital markets, and gold related securities are fluctuating again, just as they did several months ago, with a pending interest rate hike (25 bp, big deal!). It is not the order of magnitude of the increase that investors fear, but the symbolic “direction”, possibly leading to more interest rate hikes in the future. This traditionally means lower prices for most asset classes, as investors require higher dividend and interest yields to compete with higher interest rates on the lowest risk government backed securities.

We continue to feel that interest rates will not rise materially. The debt, around the world, is too large and higher interest rates on newly issued paper would choke respective national budgets. Also, as far as the US rates, the export portion of our economy cannot afford the higher dollar which would result from higher rates. Our economy is barely running at a positive rate, in spite of near zero rates and trillions of monetary stimulus. This is supported just this morning with weak retail sales numbers from August, and the recently reported turndown in auto sales, in spite of heavy discounting. A higher Fed Funds Rate would accomplish only one thing. It would give the Fed room to come back down when the economy weakens further, which would be impossible from today’s rates already near zero. Rates will go up one day, but it will not be at the Fed’s choosing. They will have lost total control at that point, and the long term de-leveraging process will be entering its inevitable crisis stage.

As far as Gold is concerned, investors should understand that most investors consider higher interest rates negative for Gold, since gold ownership brings no dividend or interest. Minimal interest rates therefore allow Gold to be competitive in this regard, and right now the $13 trillion of negative yielding worldwide sovereign debt, and trillions more at negligible rates, allows Gold to be relatively attractive. Gold ownership allows investors to get all their money back in the future, rather than be guaranteed to get less than invested with a negative yield. This reality however, doesn’t get fully considered, as investors automatically sell almost all asset classes when an interest rate rise is expected.

Also relative to Gold’s presumed risk if rates go up, this is an inaccurate “myth” in any case. Gold’s performance depends on lots of other monetary and fiscal factors, such as prevailed from June, 2004 to June of 2006 when Gold increased in price from $390 to $630, up 62%. It so happens that Alan Greenspan raised interest rates by 25 basis points seventeen times. It also happens that the US deficit was “consolidating” after coping with Y2K, the dotcom crash and 9/11, before rising sharply to finance two wars later in the decade. More recently, the last time we had an actual rate rise, 25 basis points in December, 2015, precious metal securities bottomed almost precisely with the rate rise, and had a strong five months immediately thereafter. In the second half of May’16, gold investors feared a rate rise and in this case, when it did not materialize, Gold went straight up in June. Equity markets, in general, reacted similarly, both in January, and June, in the first case after an actual increase in rates, and in June after it was a false alarm.

So, “Play It Again, Sam”. Earlier this week, the US operating deficit for August was announced, a cool $107 billion, on the way to about $600 billion for the fiscal year ending September ‘16, and expected to continue rising.  We don’t know whether rates will be increased in September or not, but the market is reacting as it did in December and May. We suspect (can never be sure, of course) that the price of Gold will act just fine in very late September and/or October, whether a rate increase in announced or not.

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