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SEMI-MONTHLY FISCAL/MONETARY UPDATE – FED ACTS, CAPITAL MARKETS REACT, GOLD MINERS SHINE

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – THE FED ACTS, CAPITAL MARKETS REACT, GOLD MINERS SHINE

The general equity market was up just a little in July as the investing world waited to see how aggressive the Fed would be in terms of lowering rates. When the cut in rates yesterday afternoon was only 25 basis points, all capital markets sold off, with his remarks interpreted as if this cut would be “one and done”. This will not be the actuality, in our opinion, as extended monetary ease will be necessary to support the weakening worldwide economy. It is encouraging to us that, with gold bullion virtually flat for the month of July, based upon the prices of GDX and GDXJ, the two largest gold mining ETFs, and TGLDX, OPGSX, AND INIVX, the three precious metal mutual funds that we track,  the gold mining stocks were up about 5% for the month. This price performance is starting to reflect the inherent operating leverage within the miners vs. the price of gold bullion. For the year to date,  the gold mining stocks are up about 24.1%, nicely outperforming gold bullion which is up 9.9%.

The price action of gold bullion and the gold mining stocks is beginning to attract attention, but ownership is still almost non-existent among North American investors. Many of the reasons provided by observers have some validity, but are nothing new to all of us. The monetary stimulus, the deficit, the debts, the geo-political risks, the political dysfunction, the increasing social unrest and the wealth gap are all continuing worldwide trends that have long been in place but are suddenly become newsworthy. It’s been said, in response to how a crisis develops: “very slowly and then very suddenly”. The following are a few of the most important reasons that precious metal holdings are all of a sudden performing well.

FUNDAMENTALLY: David Rosenberg, one of the most highly regarded investment strategists, and not a perennial “gold bug” by any means, just a couple of weeks ago, wrote “WHY GOLD HAS ALLURE”.

(1) The Fed is set to cut rates (as discussed above), which will send the fed funds rate into negative territory in real terms.

(2) Geopolitical risks, including Iran’s behavior, are increasingly bothersome.

3) Trade talks with China do not seem to be making progress, and Beijing has “tools” to hit back, including the ability to weaken their currency and/or continue reducing their US Treasury holdings.

(4) The economic war between the US and France is heating up, as Emmanuel Macron imposes a tax on American large cap tech companies. At the same time, trade tensions increase between the US and Japan, as well as South Korea.

(5) The Chinese economy, as well as the entire Asian economy, is clearly in retreat, adding to the prospect of worldwide monetary ease.

TECHNICALLY: In terms of supply of demand for physical gold, and the price charts:

(1) Central Banks around the world have continued their massive accumulation, a total of 374 tons in the first half of calendar ’19. While the first half total was down around 5% from ’18, the annualized rate of 750 tons is far more than in prior years. Russian and Chinese Central Banks continue their steady accumulation.  India, between their central bank and their population, perennially the second largest accumulator of physical gold, imported 78 tons in May alone, running 49% ahead of a year earlier. Poland has now joined the other major buyers, buying a huge (for them) 100 tons in the second quarter alone. Sine the total annual worldwide production is about 3400 tons, these purchases are very meaningful.

(2) The price charts, for gold as well as gold mining shares, indicate much higher prices. Gold bullion has broken out to a five year high, though still 25% below the 2011 high. The gold mining shares are at three year highs but are still as much as 75% below their 2012 high.

The gold mining stocks are still substantially undervalued by many historical measures. Gold bullion, is down about 25% from its all time high of about 1900 in 2011, but GDX (the ETF with the larger miners) is down over 50% from its high and GDXJ (with the small to midsize miners) is down 75%. Our expectation is that gold bullion, will sell for a multiple of its current price and the mining stocks at a multiple of that. The timing, as always, is the big question, but the pieces seem to be falling into place, as outlined above.

In summary, there are never any certainties, especially in the short run, but it seems like both fundamental and technical considerations are in gear, and indicating much higher prices for precious metal securities.

Roger Lipton

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – PRECIOUS METALS ACT WELL, AS FUNDAMENTAL AND TECHNICAL FACTORS BOTH SUPPORT MUCH HIGHER PRICES

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – PRECIOUS METALS ACT WELL, AS FUNDAMENTAL AND TECHNICAL FACTORS BOTH SUPPORT MUCH HIGHER PRICES !!

FUNDAMENTALLY:

David Rosenberg, one of the most highly regarded investment strategists, and not a perennial “gold bug” by any means, just this morning wrote “WHY GOLD HAS ALLURE”.

(1) The Fed is set to cut rates, which will send the fed funds rate into negative territory in real terms.

(2) Geopolitical risks, including Iran’s behavior, are increasingly bothersome.

(3) Trade talks with China do not seem to be making progress, and Beijing has “tools” to hit back, including the ability to weaken their currency and/or continue reducing their US Treasury holdings.

(4) The economic war between the US and France is heating up, as Emmanuel Macron imposes a tax on American large cap tech companies. At the same time, trade tensions increase between the US and Japan, as well as South Korea.

(5) The Chinese economy, as well as the entire Asian economy, as clearly in retreat, adding to the prospect of worldwide monetary ease.

TECHNICALLY

In terms of supply of demand for physical gold:

(1) Russian and Chinese Central Banks continue their steady accumulation.

(2) India,  between their central bank and their population,  perennially the second largest accumulator of physical gold,  imported 78 tons in May alone, running 49% ahead of a year earlier.

(3) The price charts, for gold as well as gold mining shares, indicate much higher prices. Gold bullion has broken out to a five year high, though still 25% below the 2011 high. The gold mining shares are at three year highs, still 60% below the 2012 high.

SUMMARY

There are never any certainties, especially in the short run, but it seems like both fundamental and technical considerations are in gear, and indicating much higher prices.

Roger Lipton

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD TAKES OFF, FOR GOOD REASON !!

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD TAKES OFF, FOR GOOD REASON !!

The general equity markets were down materially in May, the worst month in about eight years. The bond market firmed up, as it becomes clearer that the economy is slowing and Quantitative Tightening (QT) is ending. Gold bullion was higher by 1.5%. The average of the gold mining ETFs (GDX and GDXJ) were up 2.0%. The three precious metal mutual funds that we monitor (TGLDX, OPGSX, and INIVX) did a little better on average, up 3.7%. Considering how strong the US Dollar has been, and the strength in the stock market until just recently, gold bullion and the gold mining stocks have held up pretty well for the month and the year. Once again, the prospect for a major move in gold bullion and an even larger move in the gold mining stocks has only improved with time. The longer the fundamental fiscal/monetary trends that we have discussed continue, the larger the upswing  will be. Gold bullion broke above $1300 per oz. just last Friday and is up over 1% today. The gold miners are also trading higher. The “consolidation” in the price of gold, and the gold miners, has been longer than we anticipated, but the last few days could be the resumption of the long term bull market in precious metal related assets. It’s been said that “in any crisis, you have a choice or either looking like a fool before, or after, the event.  Based our long stated conviction that gold related securities represent the most underpriced  asset class, we are in the former group at the moment. We believe that there will be a great number of observers who, upon reflection, say: “How could I have not seen this coming?”

The fundamental developments over the last month that come to mind are the following:

  • The economy is weakening and tighter money is behind us. A renewed era of easier money and lower interest rates should be a tailwind for precious metal prices.
  • Gold bullion continues to be aggressively accumulated by Central Banks, China (way understated) and Russia most notably. Russia has bought over 200 tons annually for four years in a row, at the same time almost eliminating their holdings of US Treasuries.
  • The US deficit for the year ending 9/30/19 will be comfortably over $1 trillion. Be aware that the cumulative deficit is frozen” at just over $22 trillion because the US has reached its debt “ceiling”. The cumulative number will stair step to close to $23 trillion when Congress acts in the next few months. Furthermore, it is virtually guaranteed that the US is within a year of $24 trillion, and not far from $25 trillion by January 2021 when a new (or old) administration could consider adjustments. Of course, neither Donald Trump nor any of the Democratic candidates seem likely to reduce entitlements, which is the only remedy. Compounding the problem, the fiscal/monetary trends so evident in the US are also in place in Europe, China and Japan, the next three most important economies.

There are only two ways out of the worldwide debt burden. One option is outright default. The alternative is “unstated” default by paying off the debt with paper currencies depreciated by major inflation, and that is the new stated mandate of central banks worldwide. The gold price and the gold mining stocks will be major beneficiaries.

Roger Lipton

 

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – IT’S GETTING INTENSE!

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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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SEMI-MONTHLY FISCAL/MONETARY UPDATE – MAJOR RISKS SURFACE

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – RISK & REWARD IN NEWLY VOLATILE MARKETS

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 mentioned 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 reserve currency since 1944. China, Russia, and mideast 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 keytap.
  • 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 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.
  • 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 this month….if the freeze continues until yearend, 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 higher interest rates, even if at a 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 again took off).

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 the most undervalued right now. 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.

Roger Lipton

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – TRADE, IMMIGRATION, MUELLER, YADA, YADA, DEFICITS EXPLODE

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – TRADE, IMMIGRATION, MUELLER, YADA, YADA, DEFICITS EXPLODE

There is lots of economic/political/social news day to day, but we believe the underlying fiscal/monetary problems will soon dwarf the currently discussed issues. In this country alone, billions of dollars per day (in deficit spending) are being created out of thin air.   It’s been said that “money is the source of all evil”. That may be true, but a currency of some sort is necessary to exchange goods and services to make social progress. Since we are in the midst of the largest monetary experiment in the history of the planet, and we don’t believe it will end well, unfortunately, we continue to monitor developments.

While there was quite a bit of intra-month volatility in the capital markets in November, the changes were minimal over the entire month. The precious metal markets were much quieter, but there was one notable down day, November 23rd, the reason not quite clear, with mining stocks down 3-4% which was not recovered by month end.  In any event, the gold mining industry, represented by GDXJ (the small to mid-cap miners) and the three prominent funds, Tocqueville, Oppenheimer and Van Eck were down about 2.7%.

Every indication is that the long-term financial issues overhanging the worldwide economy are becoming more intense every day, any one of which could ignite the monetary embers:

(1) The US Treasury must raise over $100B every week, to finance the growing deficit and refinance the maturing debt, and the Federal Reserve is no longer a buyer but a seller of securities. The “bid to cover” ratio for two-year US Treasuries has been coming down in recent months, and last month was the lowest since December 2008, the peak of the financial crisis.

(2) Major foreign purchasers of our debt, including China, Japan & Russia have backed off or eliminated entirely their purchases of US Treasury securities, to some extent replacing that portion of their foreign reserves with gold. As a corollary, the US trade balance that President Trump is so desperate to improve, would reduce the US dollars in foreign hands, which would in turn reduce the demand for our debt, contribute to higher interest rates, slow our economy, and trigger greater stimulus.

(3) Only six to nine months ago, reporters were talking about “worldwide synchronized growth” with no sign of inflation, truly a “goldilocks” situation. Just two weeks ago, headlines in the Wall Street Journal said “GLOBAL ECONOMIC SLOWDOWN DEEPENS”, “INFLATION TICKS HIGHER…”, “INTERNATIONAL FIRMS IN US SEE AUTO TARIFFS AS A THREAT”. As a corollary, Japan and Germany reported GDP contraction in Q3, Chinese growth continues to slow. So much for Goldilocks.

(4) The US current deficit, is exploding, will clearly be over $1 trillion in FY ending 9/30/19, with the total debt going up by more like $1.5T including borrowing from the Social Security Fund. There is no chance of less government spending, especially the next two years with the two houses of Congress split. According to the Wall Street Journal, the US will spend more on interest in 2020 than it spends on Medicaid, more in 2023 than it spends on national defense, and more in 2025 than it spends on all non defense discretionary programs combined. THIS IS SERIOUS, AND IT IS IMMINENT. The relevance of the deficits and debt is that the higher the debt load, the chance of the economy breaking out with productive expansion is reduced.

(5) The long-term suppression of interest rates has serious unintended consequences. Among them is the “misallocation of resources” as investors large and small “reach for yield”.  The current news flow is starting to reflect it. The Wall Street Journal two weeks ago had the headline DEMAND FOR RISKIER DEBT LETS COMPANIES SHIFT ASSETS.  The text ….” Investors are literally giving away the store to squeeze out meager returns from picked over market for corporate debt. Demand for riskier bonds and loans has been so intense that companies…are able to move valuable assets beyond the reach of creditors. Investors continue to make it easier for them to do so by agreeing to terms …that offer fewer and fewer protections.” The financial community has a very short memory. Ten years ago, the phrase was “covenant light”, and mortgage companies were making NINJA loans to homeowners with No Income No Job, and No Assets. Who said, “history doesn’t repeat, but it rhymes”? Just this morning, this was described in the Wall Street Journal in relation to sub-prime Auto Loans.

(6) Don’t take it from me. I’m just a veteran restaurant analyst. What could I know? However, within the last few months: Richard Fisher, former Dallas Fed Chair said: “…interest expense and healthcare expenditures will soon be more than 50% of revenues. At some point you have to pay the piper…We (the Fed) have been suppressing the yield curve. it’s a ticking time bomb”.

Ludwig von Mises, the legendary Austrian economist long ago taught us: “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come soon as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

(7) Just last week Goldman Sachs came around (finally) to the view that markets offer an extremely attractive entry point for longs in goldWe see diversification value in adding gold to portfolios.” Goldman is (finally) forecasting a slowing US economy….at this stage of the business cycle, gold may be particularly appealing as a portfolio diversifier given that long-term bonds may be hurt if U.S inflation surprises to the upside … If U.S. growth slows down next year, as expected, gold would benefit from higher demand for defensive assets.”

Unfortunately, though Jay Powell, and other Central Bankers, might wish to persist in their collective attempt to contract credit, the politicians around the world can be expected to continue to kick the can down the road. Their unstated reality is “whatever happens will happen, but “not on my watch.” Politicians, economists, and capital market strategists, will soon be screaming “DO SOMETHING” and the Central Bankers will accommodate. Jay Powell gave us the first indication of that with his comments last week. Steven Mnuchin, Treasury Secretary, confirmed that just this morning, saying Powell is trying to position the Fed to stimulate when necessary.

Roger Lipton

 

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BITCOIN DOWN 75% FROM ITS HIGH – WHAT TO DO NOW?

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We don’t get them all right, but we’ve been consistently negative on the prospects for Bitcoin, ever since we started writing about it in August of 2017. Bitcoin was trading then almost exactly where it is at the moment, about $4,600. Among our articles was one written at $16,964 on 12/19.17, one day after the all time high of $18,674. We have provided, for your easy review, our writings that have included reference to Bitcoin, the most recent listed first. A summation of our opinion today, is exactly as we expressed it with our first mention back in August of 2017. “When the books are written about the financial follies of the early 21st century, the rise of bitcoin will be one of the ringing bells signaling the end”.  There was 100% risk in owning Bitcoin at $18,674 and there remains 100% risk at $4,500.

August 16, 2018

SEMI-MONTHLY FISCAL/MONETARY UPDATE – BITCOIN DOWN, GOLD ALSO – BUY ONE, AVOID OTHER BITCOIN – FLIRTING WITH A NEW LOW, A CORRECTION IN A LONG TERM BULL MARKET, OR AN END TO ITS RUN?

https://www.liptonfinancialservices.com/2018/08/semi-monthly-fiscal-monetary-update-bitcoin-down-gold-also-buy-one-avoid-the-other/

February 1, 2018

FISCAL-MONTHLY FISCAL/MONETARY UPDATE – GOLD FIRMS, US DOLLAR WILL REMAIN WEAK, BYE BYE BITCOIN (BLOCKCHAIN ADVOCATES WILL GO WITH THE GOLD) 

https://www.liptonfinancialservices.com/2018/02/semi-monthly-fiscal-monetary-update-gold-firms-us-dollar-will-remain-weak-bye-bye-bitcoin/

January 17, 2018

SEMI-MONTHLY FISCAL/MONETARY UPDATE – SOMETIMES A SIMPLE VIEW WORKS BEST, + BITCOIN UPDATE

https://www.liptonfinancialservices.com/2018/01/semi-monthly-fiscal-monetary-update-sometimes-simple-view-works-best-bitcoin-update/

December 19, 2017

BITCOIN REVISITED: THE FLAW IS REALLY SIMPLE !!

https://www.liptonfinancialservices.com/2017/12/semi-monthly-fiscal-monetary-update-bitcoin-revisited-flaw-really-simple/

September 5, 2017

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

https://www.liptonfinancialservices.com/2017/09/semi-monthly-fiscalmonetary-update-gold-vs-bitcoin-one-will/

August 15, 2017

BITCOIN MUST BE THE “NEXT BIG THING”, RIGHT?

https://www.liptonfinancialservices.com/2017/08/bitcoin-must-next-big-thing-right/

August 1, 2017

SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD SLOWLY RISES – BITCOIN “ADJUSTMENTS” – BE CAREFUL OUT THERE!

https://www.liptonfinancialservices.com/2017/08/semi-monthly-fiscalmonetary-update-gold-slowly-rises-central-banks-buying-equities-sell/

 

 

 

 

 

 

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SEMI-MONTHLY FISCAL/MONETARY REPORT – CAPITAL MARKETS GYRATE – THE RUBBER MEETS THE ROAD!!

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SEMI-MONTHLY FISCAL/MONETARY REPORT – CAPITAL MARKETS GYRATE – THE RUBBER MEETS THE ROAD!!

Most of the trends we describe in this semi-monthly (or bi-weekly) column are very long term in nature. Day to day capital market trends are driven by short term trading techniques, often driven these days by computers that are making decisions based on price patterns, with no regard for the underlying fundamentals. I believe that the fundamentals drive the price patterns over the long term, not the reverse, and make my financial bets accordingly, in restaurant industry investments as well as broader decisions with my total capital. Lots of market commentators, including the infamous Jim Cramer who is a brilliant short term trader, fit their daily commentary to the daily price action, because there must be a reason that the market was strong or weak today. Trying to “game” the markets day to day is not the way to make money and keep it over the long term, and keeping it can be even tougher than making it, because there are lots of ways to lose.

We believe that a lot of the long term problems that have been overhanging the capital markets for decades are becoming very intense, and are likely to explode in the fairly short term, like a simmering ember prepare to ignite. The deficits, the debit, the spending, the money creation by Central Banks, the suppression of interest rates, the challenging worldwide economy, the wealth gap, the political dysfunction, the social unrest, and I could go on.

The current day to day news flow demonstrates the increasing intensity of the problems.

(1) The US Treasury must raise over $100B every week, to finance the annual deficit and refinance the maturing debt, and the Federal Reserve is no longer a buyer but a seller of securities. Last month’s “bid to cover” ratio for two year US Treasuries has been coming down in recent months, last month was the lowest since December 2008. You might remember that this was the peak of the financial crisis of ’08-’09.

(2) Major foreign purchasers of our debt, including China, Japan & Russia have backed off or eliminated entirely their purchases of US Treasury securities, to some extent replacing that portion of their foreign reserves with gold. As a corollary, the US trade balance that President Trump is so desperate to improve, would reduce the US dollars in foreign hands, in turn reducing the demand for our securities, contributing to higher interest rates here which slows our economy.

(3) Readers of this column know that we have been skeptical of the apparent strength in our economy, though only six to nine months ago, reporters were talking about “worldwide synchronized growth” with no sign of inflation, truly a “goldilocks” situation. Headlines in today’s Wall Street Journal say “GLOBAL ECONOMIC SLOWDOWN DEEPENS”, “INFLATION TICKS HIGHER…”, “INTERNATIONAL FIRMS IN US SEE AUTO TARIFFS AS A THREAT”. Japan and Germany reported GDP contraction in Q3, Chinese growth continues to slow. So much for Goldilocks.

(4) Jay Powell, our Fed Chairman, has a serious problem. He is committed to raise rates further, and continue to sell off assets (which are only down about 7% from the peak 14 months ago), but higher rates will further stall our economy. His other choice is to back off, even do QE4 in some form, ignite inflation (and a run on gold), but that has its own risk of economic disruption. We may already be in an  unrecognized “stagflation”.

(4) The US current deficit will clearly be over $1 trillion in FY ending 9/30/19, with the total debt going up by more like $1.5T including borrowing from the Social Security Fund. There is no chance of less government spending, especially the next two years with  the two houses of Congress split. According to the Wall Street Journal last week, the US will spend more on interest in 2020 than it spends on Medicaid, more in 2023 than  it spends on national defense, and more in 2025 than it spends on all nondefense discretionary programs combined. THIS IS SERIOUS, AND IT IS IMMINENT. The relevance of the deficits and debt is that the higher the debt load, the chance of the economy breaking out with productive expansion is reduced.

(5) The long term suppression of interest rates has serious unintended consequences. Among them is the “misallocation of resources” as investors large and small “reach for yield”.  The current news flow is starting to reflect it. Today’s Wall Street Journal has the headline DEMAND FOR RISKIER DEBT LETS COMPANIES SHIFT ASSETS.  The text starts….”Investors are literally giving away the store to squeeze out meager returns from picked over market for corporate debt. Demand for riskier bonds and loans has been so intense that companies…are able to move valuable assets beyond the reach of creditors. Investors continue to make it easier for them to do so by agreeing to terms …that offer fewer and fewer protections.” The financial community has a very short memory. Ten years ago, the phrase was “covenant light”, and mortgage companies were making NINJA loans to homeowners with No Income No Job, and No Assets. Who said, “history doesn’t repeat, but it rhymes”?

(5) Don’t take it from me. I’m  just a veteran restaurant analyst. What could I know? However, within the last few months: Richard Fisher, former Dallas Fed Chair said: “…interest expense and healthcare expenditures will soon be more than 50% of revenues. At some point you have to pay the piper…We (the Fed) have been suppressing the yield curve..if rates rise, it’s a ticking time bomb”.

Ludwig von Mises, the legendary Austrian economist long ago provided a succinct summary: “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come soon as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

Unfortunately, though Jay Powell, and other Central Bankers,  might wish to persist in (just the beginning) of their collective attempt to contract credit, the politicians around the world can be expected to continue to kick the can down the road. Their unstated reality is “whatever happens will happen, but “not on my watch.” Politicians, economists, and capital market strategists, will soon be screaming “DO SOMETHING” and the Central Bankers will accomodate. The best we can do is to stay physically fit and financially flexible.

Roger Lipton

 

 

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SEMI-MONTHLY FISCAL/MONETARY REPORT – GENERAL EQUITY MARKET VOLATILE – RE: GOLD, THE SPRING IS COILED, THE GUN IS LOADED

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SEMI-MONTHLY FISCAL/MONETARY REPORT – GENERAL EQUITY MARKET VOLATILE – RE: GOLD, THE SPRING IS COILED, THE GUN IS LOADED

November 1, 2018

The general equity market was volatile and weaker during October. Gold bullion, and the mining stocks were relatively quiet, all changes rather immaterial.  Gold bullion was up 2.2%; the mining stocks as represented by an average of the three mutual funds we track (Tocqueville, Oppenheimer and Van Eck) down an average of 1.8%, possibly weaker from the tail end of the Vanguard liquidation we have discussed. The two ETFs, GDX and GDXJ were up an average of 1%, so obviously their holdings did better than the broader mutual fund portfolios.  Though it’s our job to focus, and report, on small changes such as these, the longer term is obviously our major concern. The downside damage in the gold sector over the last several years obviously dwarfs a few points one way or another, and the upside when it comes will make our monthly reports seem immaterial.

The following bullet points summarize our current thoughts:

  • Gold, as a “safe haven” is not yet in great demand in “the West”, though major accumulation continues in China & India and all major Central Banks. North American investors will see the light sometime soon, especially if the equity market’s recent downside volatility persists.
  • The mining stocks continued to act a bit weaker than bullion in October, possibly representing the tail end of the Vanguard liquidation.
  • It is just a question of time until Jay Powell, Fed Chairman, backs off of his intention to keep raising rates, and reinstitutes an accommodative monetary policy (QE4, or whatever). This will happen when the stock market takes a more sustained tumble and the slowing worldwide economy becomes more apparent. Calendar ’19 will not have the tailwind of much lower tax rates, and the resumption of monetary stimulus should generate much more interest in gold related securities. The gun is loaded, the spring is coiled.
  • Central Banks, including Russia, Poland, Turkey, India, China, and others, are steadily increasing the gold bullion reserves within their foreign exchange holdings. Through September, the amount bought was the largest in six years, over 200 tons, and that doesn’t include China, who alone may be purchasing that much, or more.
  • Central Banks, on the other hand, are reducing their holdings of US Treasury securities, expressing dissatisfaction with our accelerating deficits.
  • China, allowing their currency to cheapen, has virtually offset the effect of the new tariffs. This demonstrates how major trading competitors can use their currency as an economic, and even political, weapon of sorts.
  • China, Russia, and Europe have set up alternate payment systems that do not require the use of US Dollars, undermining the credibility of the US Dollar as a reserve currency. The last time there was a major movement away from the US Dollar was 1971, when Richard Nixon ended the dollars convertibility into gold, inflation took off and gold went from $35 to $850/oz.
  • The recently announced merger of Barrick Gold and Randgold, both within our portfolio, is no doubt a reflection of what they perceive as a bargain price level, and their desire to be the very strongest participant in a dynamically evolving gold market. These kinds of transactions often occur at the bottom of a cycle.
  • Goldcorp, one of the premier gold mining companies, also in our portfolio, just announced a buyback of approximately $350M of their public shares, an obvious statement that their stock is considered substantially undervalued, and another possible indicator of an inflection point.
  • There have been hardly any major gold discoveries in recent years, as opposed to a decade ago. Since major new mines can take a decade or more before production commences, increased demand will not bring out more supply for many years, even at higher prices, and the upside price volatility will be that much greater.
  • Considering that the price of gold bullion, though down this year, has been fairly steady the last several months, even in the face of higher interest rates and a strong US Dollar, we believe the stage is set for a major rally in gold bullion and the mining stocks once the dollar weakens a bit (or more) and/or the stock market has its long overdue correction (or worse).

For the above reasons, and many others, we believe the stage is set for a major upward move in the most unloved asset class on earth.  Legendary investors like John Templeton are famous for saying that the time to buy is when there is “blood in the street”. It seemed that way to us a few years ago, but nobody can tell when the bottom will be put in. None of the concerns that we have been enumerating regularly have gone away. It’s not a question of “if”, just a question of “when?”.

Roger Lipton

P.S. As I finish this letter, at 10:18am on November 1, the dollar is weak, gold bullion is up 1.2% and the mining stocks are up about 3%. Every long trip has to start with a single step?

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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

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