Tag Archives: GLD

SEMI-MONTHLY FISCAL/MONETARY UPDATE – THE DEFICITS AND DEBT – HERE WE GO AGAIN!

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SEMI-MONTHLY FISCAL/MONETARY UPDATE

The general capital markets were up modestly in July, gold bullion was down 2.3%. The gold mining stocks were down about 3.5%.  Most importantly, our conviction hasn’t changed regarding the long term outlook for our portfolio that is heavily invested in gold mining stocks.

While last month we outlined a group of tangible factors that support our thesis, it could be useful to go back to the biggest single reason that gold will be the surviving “currency”, protecting purchasing power best. The worldwide credit pyramid that has fueled the economic growth over the last forty years must be liquidated. Debts must be paid off, and the numbers are too large for the worldwide economy to grow out of the problem. “Default” will be the result, but refusal to pay is too obvious and makes the politicians look bad. Inflation is the only other solution since the voting public doesn’t understand who caused it. Gold has gone from $250/oz. to $1200/oz. since 2000, starting with the President GW Bush debts to finance the aftermath of 9/11 and then the two wars. Gold doubled from $900 in ’09 and the gold mining stocks quadrupled and more) as the deficit spending ramped up even further under President Obama.

Here we go again: The projected US deficit in the fiscal year ending 9/30/18 is projected to be about $800B, up from $600B last year. However, the cumulative debt in the 10 months ending today ($21.2 trillion) is already one trillion dollars higher than last September and is projected to be higher by $1.2 trillion by 9/30.

Only in governmental accounting can the annual deficits not total the cumulative increase in debt. This is not new. You have no doubt heard from politicians and economists who are concerned about the future deficit spending. Republicans are concerned when Democrats are in power, and now the situation is reversed. However, they don’t talk about the excess debt, on top of the budgeted spending, called other borrowing. Over the last ten years, the cumulative debt increase has exceeded the total of annual deficits by a cool three trillion dollars. People, this is a lot of money. While the annual deficits going forward are projected to be over a trillion dollars annually over the next decade, you can only imagine what the cumulative debt will look like after the other borrowing. We have described the situation in terms of US debts, but enormous potential credit problems also overhang the economies of China, Japan, and the Eurozone, the largest after the USA. What the endgame looks like is unknown, but it won’t be pretty.

Stay healthy. Stay financially flexible.

Roger Lipton

SEMI-MONTHLY FISCAL/MONETARY UPDATE – YOU DON’T WANT TO KNOW HOW THE SAUSAGE IS MADE !!

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – You Don’t Want to Know How the Sausage is Made !!

The general capital markets were fairly unchanged in June, gold bullion was down 3.4%. Interestingly, the gold mining stocks were down hardly at all. The gold mining ETFs, GDX and GDXJ, were almost exactly flat. The three major gold mining mutual funds were down an average of 0.8%.  Every indication is that substantial quantities of physical gold continues to move from West to East but the “paper” market, including options and futures, dominates the day to day price. The mining stocks acted noticeably better, when normally they could be down (or up) at least twice the price of gold. There was documented accumulation of GDX and GDXJ which is often a precursor of an upward move in bullion and an even larger move in the miners.

THERE IS NO SHORTAGE OF MACRO DEVELOPMENTS WITH LONG TERM IMPLICATIONS !!

In just the last few days, the following articles support our long held conclusions that a great deal of turmoil in the worldwide financial/capital markets is ahead, which we believe will cause our Fed and other Central Banks to “cave” and move back to monetary accommodation, which will spark a new run in gold related securities:

(1)    First Quarter GDP latest revision shows 2.0% real growth, down from the last estimate of 2.3% and the previous estimates in the high 2s. As for Q2’18, the latest NY Fed estimate is 2.7%, a lot lower than the highly touted 4% or more the Atlanta Fed and others have been talking about.  Even if Q2 comes in north of 4%, real GDP growth over the last year or so has been no higher that the “high 2s”, not much higher than the average of 2.3% average of the last 8-9 years and that modest increase from the “low 2s” is largely due to more government spending financed by more government debt and this is not healthy or sustainable over the longer term.

(2)  The global yield curve, the spread between 1-3 year and 7-10 year government securities, has just gone “negative”, per the JP Morgan GBI index. This yield curve “inversion” most of the time presages a recession within 6-12 months.

(3)    With the Chinese stock market down 20% from its early ’18 high, a Chinese government think tank (backed by the Chinese Academy of Social Science) has warned of a “financial panic” in the world’s second largest economy, caused by leveraged purchase of shares (as in 2015), rising US interest rates, trade tensions with the US, bond defaults and liquidity shortages in China. The Chinese government should “be willing to step in with full financial support, rather than taking piecemeal steps” the study said. Just yesterday, the Financial Times reported that the China Development Bank was tightening loan approvals for its “slum development” policy, a program which has provided (a cool) $1 trillion to homebuyers since (only) 2016. The implications of the monetary manipulations by the world’s second biggest economy are huuuge!. Our take: a much higher gold price will accompany future economic “adjustments” that will have been exacerbated by governmental interventions.

(4)    Russia has cut its US Treasury holdings over 50%, from $102.2B to $48.7B in just four months from 12/17 to 4/18. While these numbers are small relative to the trillions that China and Japan hold, US Treasury securities held by all foreigners, as a percent of their reserves, has declined from 64.59% in 2014 to 62.7% in 2017, so they are steadily diversifying away from dollar related securities. Gold, as a share of foreign exchange reserves has held steady. Central Banks have continued buying hundreds of tons annually, as they have since 2009. They bought 116.5 tons in Q1’18, the most in any Q1 since 2014 and up 42% YTY.

(5)    The Wall Street Journal, several days ago, headlined “UK Central Bank Warns on Debt Risk”. The article said “it sees pockets of risk to the stability of the financial system including US corporate borrowing, risky loans in Britain, foreign-currency lending and emerging markets….as central banks step back from the easy-money policies of the past decade and trade tensions escalate.” You can google the full article, but we don’t make this stuff up.

(6)    Just under the previous article, on June 28th, the headline read: “Fed’s Ability to Fine-Tune Interest Rates is Tested”. The Fed lost “control” of the markets in ’08, salvaged the situation with trillions of financial accommodation. In some ways, the problems are larger today and the Fed, with their hundreds of PHD economists, has had a poor forecasting record.

(7)    While many observers underplay “systemic” risks in today’s financial markets, leverage in derivative securities is larger, non-financial corporate debt is at a new high (exceeding the last high in ’08), ETFs made up of cap-weighted securities will have little liquidity in a downdraft, which especially could apply to high yield fixed income ETFs. Rising default rates on student loans and subprime auto loans, sharply rising US deficits, underfunded social security and federal health care obligations are all problematic whether the market overlooks these trends for the moment or not. The momentum in capital markets can turn, literally, on a dime. If someone doesn’t think the Chinese monetary manipulation has provided at least the possibility of “systemic risk” to the worldwide economy, they are living on the wrong planet.

(8)    The equity markets are highly valued by historical standards. Interest rates are still very low which means bond prices also have substantial downside risk, especially the high yield sector where investors around the world have been “reaching for yield” for a decade.

Conclusion:

Many of the above factors have been in play over the last four or five years, building over decades, and the timing of the unwinding of the worldwide credit bubble continues to be uncertain. It’s been said that in every crisis, you can look like a fool either before the event or after. Another advisor, when asked how a crisis develops, said “very slowly and then very quickly”. Just recently, we asked a highly regarded economist and market strategist, who agrees with us, when the turn will come. His response was as good as any: “On any given Sunday”. When it happens, a great number of people will say “how could I have not seen that?”

Roger Lipton

 

SEMI-MONTHLY FISCAL/MONETARY UPDATE – CENTRAL BANKS SWAP U.S. TREASURIES FOR GOLD

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SEMI-MONTHLY FISCAL/MONETARY UPDATE

CENTRAL BANKS SWAP U.S. TREASURIES FOR GOLD

The capital markets were volatile in February, stocks down, bonds down, gold bullion down 2.1%, the gold miners were down more (the gold mining ETFs, GDX: down 10.1%, GDXJ: down 6.8%, the three prominent gold mining mutual funds, Tocqueville, Oppenheimer, and Van Eck, down an average of 8.3%). Our gold related portfolio modestly outperformed the group, down a little less. However, the fundamentals described below continue to support our positioning.

The most prominent fundamentals that come to mind are:

(1) Central Banks, notably Russia and China, continue to accumulate gold bullion. The Central Bank of Russia bought another 20 metric tons in January, increasing its holdings every month since March 2015. Their official holdings, at 1857 tons now exceeds the announced reserved at the People’s Bank of China, but China hasn’t told us in almost two years (how much gold they hold. In  mid -2015, they announced an increase of about 600 tons (over the previous 6 years) to 1,658 tons, and then announced monthly increases for about six months thereafter, reaching about 1800 tons, at that point, officially. However,  China produces the largest amount of gold in the world, at over 350 tons annually (out of 300 tons mined worldwide), and none of it leaves the country, purchased by various Chinese government agencies. Informed observers (include ourselves) therefore believe that their agencies now own double or triple (or more) than indicated.1658 tons. In total, worldwide Central Banks (without China) continue to accumulate about 400 tons per year, as they have since 2009. It is interesting to note that Central Banks have bought 4-5 times as much gold in the last five years as they have US Treasury securities. That trend seems to be continuing. At the same time, new trading arrangements are taking place between China, Russia and the Mideast, with swap arrangements based on the relative prices of Chinese Yuan, gold bullion and oil. It will obviously benefit China and Russia, in lots of ways, if gold trades at a higher level.

(2) The US debt burden, annual and cumulative, is going up, big time, once again. We have written repeatedly that the annual stated deficits are understating the annual increase in total debt, because of “off budget” expenditures. Over the last nine years, while the reported deficits have totaled $7.5 trillion, the debt went up by $10.2 trillion, an understatement of a cool $2.7 trillion. It is now clear that the “reported” deficit in the US fiscal year ending 9/30/18 will, at the very least, approach $1 trillion, and be well above that number in fiscal ’19. It is anybody’s guess what the actual increase will look like, since DJT is not afraid of debt. When the deficit took off in 2009, the price of gold went up over 50% in the next two years and the gold mining stocks more than doubled. It is interesting that the GDX is at the same level today ($21-22/share) with gold bullion at $1310, as it was in early 2009 when gold was well under $1000, so the upside is that much greater.

(3) We wrote last month about how short term US interest rates have moved sharply higher, almost to the day when the US Fed started to unwind their bloated balance sheet. The pace was a modest $10B per month in Q4’17, going to $20B per month starting January ’18, then $30B per month in Q2, $40B per month in Q3, and $50B/mo. in Q4. Considering that the debt markets will not be supported by the Fed, as opposed to several years ago, we speculated that this will be an increasing burden over time, helping to push rates higher. So here is a day to day reading of the treasury market, courtesy of Gran’ts Interest Rate Observer. On Tuesday, two days ago: “a $60B auction of four week bills was priced to yield 1.495%, the highest since September 2008…..a $22B auction of 52-week bills fetched 2.02%, the highest since the 52-week auction was reintroduced in June 2008…the economist at Jefferies commented that: ‘the surge in bill supply has caused the market to cheapen up…there’s value in the yield. How much cash is there to absorb it?'”

By the fall of ’18 there will have been a trillion dollar swing, year to year, in terms of Central Banks supplying securities to the market rather than buying. On top of that, the US will be financing a trillion dollar annual deficit as well as rolling over a couple of trillion dollars of maturing short term securities. Personally, I don’t know whether the worldwide economy will be strong enough to provide the liqidity to absorb the anticipated supply of fixed income securities, but it sure seems like a question worth asking. Maybe this is one reason that central bankers continue to accumulate more gold than US fixed income securities.

SEMI-MONTHLY FISCAL/MONETARY UPDATE – TAX “REFORM” LOOMS – CAN ECONOMY OVERCOME DEBT LOAD?

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – TAX REFORM LOOMS – CAN ECONOMY OVERCOME THE DEBT LOAD  ???

FOREWARD:

The general equity market continued strong in November, so there was no perceived need for a “safe haven” or “non-correlated” asset. Our precious metal portfolio was close to flat,  tracking the mining indexes almost exactly. GDX (the large miners) was flat, GDXJ (the smaller miners) was down 1.1%, TGLDX and OPGSX (Tocqueville and Oppenheimer) gold funds were down exactly 1.0%. So the beat goes on, and our conviction has not changed. We don’t know when the turn for precious metal holdings comes, obviously, but it is going to be dramatic. There is  no need to be “promotional” on this first fiscal/monetary post to be available  on the Restaurant Finance Monitor website. However, I am sufficiently convinced that a turn is near that we are accepting new investors into our investment partnership, with a reduced fee structure, for the first time since we began transitioning to a “gold fund” four years ago. We should interject here, to be legally compliant,  that this statement is not to be construed as an offering, which can only be made by way of an offering circular.

THE BACKGROUND

Nobody needs to tell me how painful it is to not be participating while the financial world “dances”.  Back in 1998 and 1999, our investing partnership was not benefiting while the dotcom mania roared. On January 1, 2000 I wrote that “we have seen this movie before, and know how it ends.” From March of 2000, when the dotcom bubble burst, our portfolio more than tripled over the next five years or so. The distortions within the financial markets today are must larger, and worldwide, in scope.

We could go back to the tulip mania of the 1600s, the Mississippi bubble in France and the South Sea bubble in Britain of the 1700s, but much more recently: the Japanese stock market peaked at 40,000 in 1990, descended to under 10,000 fifteen years later and still trades about 50% from that high; the dotcom mania of 1998-1999 was a “new paradigm”; and housing prices couldn’t come down, according to Ben Bernanke, Fed Chairman. The TV commentary was just as positive on 1/1/2000 and 6/30/2008 as it is today. Whatever modest strength there is in the worldwide economy has been supported by over TEN TRILLION DOLLARS of newly printed currency by the major Central Banks. It would be great if prosperity were that easy to create. The unintended consequences are still to come.

At the moment, with taxes and deficits all over the news cycle, it may be useful to reflect upon the fact that gold prices made their last major move, doubling in price from 2008 to 2011, just as it became clear that the annual deficits and cumulative debt were going nowhere but UP. The last several years, as there has been less concern about deficits, the gold price has in fact “consolidated”, but as described below: here we go again.

First, recall that, as we described a year ago, over the nine years ending 9/16, the reported annual deficits were a total of $7.755 trillion. However, the cumulative debt increased from $9.0T to $19.4T, an increase of $10.4T. So, as disturbing $7.755T of deficits are, an extra $2.64T (a lot of money) was spent, somehow “off budget”, capitalized “investment”, or whatever. The cumulative US debt was 20.24 at 9/30/17, up $700B from a year earlier, though Congress approved $503B in February 2016.

I am not making this up.

The site: www.usgovernmentspending.com, describes it this way: “People naturally assume that the annual Deficit is the total that the Federal government borrows each year. Actually, this is not so. The Deficit is simply the difference between the Federal Outlays and Federal Receipts. Usually the Feds borrow a lot more than the annual Deficit. The difference is “Other Borrowings”. Only in D.C. I have provided here the link to the “Spending Details”. Honestly, I can’t make sense of it, but the result is clear. https://www.usgovernmentspending.com/numbers The reason that increasing debt cannot be ignored is that the higher the debt load that any organization carries, the more difficult it is to invest for the future. This applies to an individual family unit as well as a government. A classic book, “This Time is Different. Eight Centuries of Financial Folly”, written by Reinhart and Rogoff in 2011, researched hundreds of situations over eight centuries, showing that when a government’s debt exceeds about 100% of their Gross Domestic Product, it becomes a serious burden on the ability to grow. The United States debt is now about 105% of our GDP, and that could be one of the key reasons that we have been stuck in a 2% economy for the last ten years. Some observers counter that Japan, after all, has a debt load that is 260% of their GDP, and their economy hasn’t collapsed, so our debt is modest in comparison. True enough, but their stock market is still down 50% from its high 28 years ago, and their government is frantically printing money to avoid a deflationary collapse. Right now, the Japanese government is buying $60B of securities, monthly, to keep interest rates low and try to stimulate their economy. Since their economy is one third our size, that would be the equivalent of us printing $180B monthly, over $2 trillion annually, which would not be viewed favorably by capital markets if it were necessary here.

The Current Situation – Talk about “Fake News”

This is what politicians “do”: The new tax proposals and budgeting discussion revolves around limiting the tax reductions (and therefore the potential “increase in the debt”) to $1.5 trillion over ten years. The Republicans, of course, are arguing that a better economy, scored “dynamically”, will “reimburse” the theoretical deficit with offsetting tax revenues. That debate aside, this whole discussion leads one to think that the $20.5 trillion today shouldn’t be allowed to be more than $22 trillion a decade from now. WRONG. What nobody tells you is that the $1.5 trillion increase is on top of the already budgeted TEN TRILLION DOLLAR increase based on present expectations by our Congressional Budget Office. (This is the so-called “baseline”, but you haven’t heard that word uttered by either political party). The current “baseline” debt is projected to increase roughly $1 trillion dollars every year over the next ten years. The debate therefore is not whether the debt is going to go from $20.5T to $22.0T, but whether it will go from $20.5T to $30.5 or $32.0 Trillion. Keep this in mind as you watch the celebratory dance of the Republicans after the tax reform, such as it is, becomes law. The Democrats will be screaming about the new Ponzi scheme, but it’s just like the old Ponzi scheme.

BACK TO THE FACTS

Of course there are lots of assumptions built into all these projections, and they could be materially inaccurate. Unfortunately, governmental agencies are notoriously overly optimistic, and spending is usually higher than projected, as described above. In the current fiscal year, ending 9/30/18, the CBO projection is an increase of $1.03 trillion. With spending on the storms, higher defense spending, higher health care expenses, I’ll take the “over” side of the bet on the size of this year’s deficit. As a corollary to this discussion, think about the fact that it is only the very low interest rates that have allowed us to carry the $20 trillion without blowing up the deficit even further. If interest rates should be higher, along with an additional $10 trillion (or whatever) of debt, the prospect of ever reducing the total debt burden is really remote. If Reinhoff and Rogart’s “This Time is Different” is even only directionally correct, we’re “screwed”.

As far as the proposed tax cuts stimulating the economy through lower taxes for the middle class, it is now clear that that many of the tax cuts will affect the wealthier citizens (which is what the Democrats have been screaming). The details currently in play are in a continuous state of flux and too numerous for us to analyze, and the House and Senate proposals are about to be modified further, no doubt further muting the potential benefits of this “huge” tax reform. Overall, however, we don’t expect the final “reform” to substantially stimulate the economy through better middle class consumer spending. Maybe on the business side. In terms of public discretionary spending, it will continue to be burdened by higher health care, education and housing expenses.

The public subsidies will continue, deficit spending will be at an increasing rate for the foreseeable future, and the much higher governmental debt load will be a drag on the desired economic growth. If there is any part of the current administration’s agenda that will work, it will be the reduced administrative burden, which is being implemented by executive order rather than legislation. We fear, unfortunately, that with an incomprehensible amount of debt. It could prove impossible to grow the economy faster than the debt load and achieve, in essence, “escape velocity”.

All of this is to say that there will be no political will to reduce deficits or debt, “normalize” interest rates, or implement the necessary adjustments to “the swamp”. The capital markets, including the ridiculous cryptocurrency mania, will adjust to more realistic economic expectations. Gold, the most “unloved”, the screaming “bargain” among asset classes, will “catch up” at some point soon. Bargains are always unloved at the bottom. Our ownership of the gold miners should benefit by a multiple of whatever the gold price does. The “money” is in the ground, so it is just a question of when it gets monetized by the mining process.

Roger Lipton

SEMI-MONTHLY FISCAL/MONETARY UPDATE – CASH IN/CASH OUT – KINDERGARTEN ECONOMICS

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SEMI-MONTHLY FISCAL MONETARY UPDATE –

CASH IN/CASH OUT – KINDERGARTEN ECONOMICS

INTRODUCTION:

Our continuing coverage of macro-economic trends and the related performance of precious metal related investments, is based on a  conviction that a strong economy must be supported by a credible currency. If workers don’t have confidence in the exchange value (represented by the currency paid to them) they will expend less effort toward that end. Gold bullion has protected consumer purchasing power for literally thousands of years. In the history of the planet, there has been no “fiat” currency (unbacked) that has not been destroyed over time by politicians too eager to please their voters. Since 1913, when our Federal Reserve Bank was created to control inflation, a dollar has become worth less than three cents. Today’s politicians, all over the world, obviously show no “political will” to do otherwise. While we continue to invest in consumer related situations, a major portion of the investment partnership we manage is invested in gold related securities. We believe that the modestly higher price of gold, and the mining stocks, in 2016 and 2017 represents just the beginning of a new leg in the long term upward trend that started in 2000. We further believe that gold is as cheap today, relative to other currencies outstanding, as it was in 1971, at $35.00 per ounce before it ran to $850 per ounce in 1979. We provide to our subscribers, as a gift, the classic book, written by Harry Browne in 1970, which concisely and accurately rationalized and predicted the enormous rise int he price of gold. While we don’t expect to see gold more than 20x higher anytime soon, as in the 1970s, we believe the price of gold could be many times its current price sometime during the next 3-5 years. We suggest that readers interested in this subject read our previous updates on this website.. 

SEMI-MONTHLY FISCAL/MONETARY UPDATE -KINDERGARTEN ECONOMICS

The general stock market was up modestly in September, since there was no perceived day to day need for gold, as the presumed “safe haven” investment. Gold bullion was down 3.4% and the gold mining stocks were down about 7.0%, though both are still up modestly for the year. Posssibly the largest perceived negative for gold was the Fed’s inclination to begin selling off their $4 trillion bond portfolio which would also be a form of tightening. As we have previously discussed, we don’t think either effort can go very far before the already sluggish economy rolls over and the politicians scream “enough, do something”. As discussed below, the current deficit in Y/E 9/30/18 will rise sharply once again. Nor will a reduction in the cumulative deficit or the Fed balance sheet bring a graceful end to the monetary folly of the last ten years. Gold, as the best long term currency, will play its historical role.

Increasing governmental annual operating deficits & cumulative debt, as well as a slow economy accompanied by ongoing very low interest rates, are supportive of an increasing price of gold. This is not necessarily true over a month or two, or even a number of years but over a longer period of time it is predictable. Since 2000, when all of the above trends became well established, the price of gold has gone from $300/oz. to over $1300/oz., outperforming almost every other asset class.

The economy continues to be sluggish, even though a phalanx of optimistic economists predict that GDP growth is just about to improve. We doubt it, and the revisions for the current September quarter are coming through lower rather than higher. GDP growth in the fiscal year ending 9/30/17 will no doubt be much closer to 2% than 3%. This has been the case for almost a decade, it continues to be the case, and we believe will be reality in the foreseeable future, with an economy burdened by an oppressive debt load.  The recent Fed announcement of the initial steps to unwind the $4 trillion balance sheet (which backstopped the financial crisis ten years ago, but has not jump started the economy) amounts to a form of tightening, and is modest in any case. If the Fed sticks to the program outlined, it will only reduce the Fed balance sheet by about 10% by the end of calendar ’18.

Meanwhile, the cumulative U.S. debt is now comfortably over $20 trillion, with the 9/30/17 yearly deficit about to exceed by a still undetermined amount over $700 billion. There is no question that the deficit in Y/E 9/30/18 will be higher, at least close to $1 trillion, possibly materially higher, especially with higher defense spending, health insurance subsidies, and the start of infrastructure spending. (Can’t forget “The Wall”) There have unfortunately been a large number of “shovel ready” projects created by the recent storms, likely to cost over $100B.

Some observers suggest that higher GDP growth, propelled by lower tax rates, will quickly solve the debt problem. The U.S. federal budget for Y/E 9/30/18, still in the formative stage, will no doubt involve a higher short term deficit, but would hopefully ignite the growth, reduce or eliminate the annual deficits, even pay down the cumulative debt. This “dynamic scoring” is a complex subject, but Steve Mnuchin, Treasury Secretary, recently provided guidance. He said that 3% growth, up from the current 2%, would generate $2 trillion of extra federal tax revenues over 10 years. Unfortunately, that is only an average of $200B annually, only a modest down payment on the apparent current $1T run rate. Conclusion: The debt and deficit Beat Goes On, which in turn burdens the economy’s opportunity for a higher growth rate.

As a sign of the ongoing absurdity, and danger, taking place in the monetary world: a Wall Street Journal article last week talked about China based Alibaba Group Holding, Ltd having created the world’s largest money market fund, now at $218B, up from $124B only six months earlier. The rapid growth is no doubt a function of the very attractive seven day yield of 4.02%, up from 2.3% a year earlier. The disconnect is that one-year Chinese bank deposits only yield 1.5% and even 10 year Chinese bonds earn only 3.6%. The extraordinary 4.02% yield has been generated by investing in “financial instruments with longer maturities”, no doubt of lesser quality and less liquid than a “money market” model would suggest.  It was a big deal ten years ago when a US money market fund couldn’t redeem deposits at $1.00 per share, which has always been the model. In China today, and around the world, investors continue to “reach for yield”, which inevitably ends badly.

Roger Lipton

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

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

The general equity market was lackluster in August. The price of gold bullion firmed steadily through the month, endng up 4.2%. Our gold related portfolio, largely driven by the performance of the mining stocks, outperformed on the upside. As we have pointed out before, the gold mining stocks have the potential to multiply  by many times, since they are so cheap, historically, versus the price of gold bullion, which is still down substantially from its high of $1900/oz. in 2011. The weakening of the US Dollar which began in June continued through August.  A weak dollar is not a necessity for gold (and the mining stocks) to go up in price but, all other factors being equal, should prove to be a positive for us.

The rise of crypto-currencies, the most prominent of which is Bitcoin, has no doubt attracted your attention as journalists breathlessly describe the fortunes being made by “investors” in this new “asset class”.  I believe there is a relevance of this development to our investment in assets related to gold, the only “real” money. Please bear with our, longer than normal, discussion which provides a background on Bitcoin, then finally its relevance to gold related investments.

BITCOIN, AND CRYPTO-CURRENCIES

Currency is most often defined as a form of money, circulated through the economy and used as a medium of exchange for goods and services. Most broadly used currencies have been  issued by governments, which these days, unbacked by anything tangible except taxing power, are themselves a crypto-currency.The universal acceptance of gold, for literally thousands of years, provided credibility for the currencies that were backed by gold. Over thousands of years, the longest lasting currencies were those convertible into a proven store of value, most often gold and/or silver, therefore controlling the amount issued, and providing predictable purchasing power of those units of value. Several years ago I created a three minute youtube video, on this subject, that discusses why “Warren Buffet (who dislikes Gold) is Wrong” which you can watch at    https://www.youtube.com/watch?v=ah7Y2rHuhCs  .There has never been an unbacked “fiat” currency that has lasted. It is just a question of time until the politicians of the day dilute the currency into oblivion as they try to satisfy their constituents.

The best known cryptocurrencies currently are Bitcoin and Ethereum. You should know, though, that (per James Grant’s Interest Rate Observer) “there are now 840 cryptocurrencies, worth $123.4 billion. Two weeks ago, there were 828 cryptobrands, worth less than $90 billion”.

One of the requirements of a desirable currency is the knowledge an owner has as to what quantity of goods of services that “unit of exchange” will be worth. Look at it simplistically. Let’s say we have a closed “society”, call it a “residential community” with 100 homes for sale, and the total amount of currency that is circulating within that society is $100M. Depending upon how many residents want a new home, there will be transactions at an average price, perhaps at an average of $1M per home. Let’s say then, that the government, or some other issuing agency, puts $1 billion more value (in cryptocurrencies or oil or bananas or whatever) into that community and distributes it among the residents. It’s obvious that those homes are going to be worth a lot more “money”, therefore the previously existing currency (U.S.Dollars, in the US, these days) will have been severely depreciated. It is ridiculous to assume that new currencies, issued by governmental agencies or the “quant” creators of Bitcoin and the others will not inflate the assets of existing goods and services over time, in essence diluting the previously issued currency as far as its previous purchasing power. It is just a question of degree, and time before the newly issued currency circulates within the society.

The proliferation of individual competing cryptocurrencies, as well as the enormous volatility in price of such currencies, by their very nature, invalidate these cryptocurrencies as predictable stores of value or units of exchange. Nobody can know from one day to the next, let alone over months or years, what the purchasing power of Bitcoins or the others will be. Speculators might want to “roll the dice” in terms of what Bitcoin might sell for tomorrow, or next week, but I suggest that nobody in their right financial mind would put a “serious” amount of money into Bitcoin as more than a speculation for a short timeframe. Of course, a “serious” amount of money or time will vary among investors. Some vendors such as Spirit Airlines have accepted Bitcoin as payment, but you can bet that they have converted that Bitcoin into a more “stable” currency ASAP.

The proliferation in recent years of cryptocurrencies is a commentary on (1) an unfortunate human inclination to try to make “a quick buck” through speculation (2) a search for an alternative to governmentally issued cryptocurrencies which have had no backing since Richard Nixon closed “the gold window” in 1971 (3) a “reach” for a return by investors frustrated by federally suppressed interest rates on their savings accounts.

The essence of my conviction is that Bitcoin (and the others) will fade from existence over time, and speculators will lose their “investment” in these “tulips” of the 21st century, since there is no limit to the number of these types of currencies that can be issued. While the amount of governmental Central Bank digitally created currencies also have no limitation, at least the taxing capability allows the government to provide some sort of value to the currency after the ……… hits the fan.

BITCOIN VS. GOLD

This discussion very much also relates to my conviction regarding the long term ownership of gold related assets as a store of wealth and potential medium of exchange. It is likely that the cryptocurrencies have siphoned off a certain amount of capital that is looking for a safe haven away from government’s prying eyes. It is possible that the gold price will “go parabolic” just about the time that the Bitcoin frenzy winds down.

I remember a CNBC TV segment a few years ago, when Larry Kudlow, the well regarded financial commentator, had his nightly show, he invariably talked about his intense disapproval of the ownership of gold, which had started to slip from its all time high at $1900/oz. Gold, he said, had no “utility”, it was a psychological game and therefore very dangerous. See my youtube video, referred to above, @  https://www.youtube.com/watch?v=ah7Y2rHuhCs. So one night in 2012 or 2013, he was doing a segment on Bitcoin, which had just started to emerge, and he said: “Bitcoin is ridiculous, it has no backing, now if you backed it with Gold, you would really have something”. I sent him an email, saying “Larry, I’m confused, help me out”. He never responded.

I believe that when the books are written (possibly after my lifetime) and the fiscal/monetary follies of the early 21st century are described, Bitcoin and the other cryptocurrencies, including those currently being issued by worldwide Central Banks, will be described as “ringing the alarm bell” at the beginning of the financial revolution to follow. My advice to readers, which you have no doubt already concluded, is to avoid the cryptocurrency “asset class”, except perhaps as the rankest of speculation. It’s hard to know whether your capital will last longer in Bitcoin or in a Las Vegas casino, but the result will be the same. Those casinos weren’t built by customers walking away with much in the way of winnings.

CONCLUSION

Just in the last few days it is becoming apparent, that, as crypto-currencies trade at new highs, governments, including China, are cracking down on their usage. Many “investors” in Bitcoin and others are using this currency as a tax avoidance mechanism, which provides predictable unhappiness for governments around the world. On the other hand, gold is being continuously accumulated by Central Banks including China, Russia, and many others, to the tune of hundreds of tons annually. It is my opinion that, when Bitcoin and its imitators get disillusioned, a significant portion of that capital will flow to the ultimate “safe haven” investment, namely gold and its related investments.

SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD SLOWLY RISES – BITCOIN “ADJUSTMENTS”

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD SLOWLY RISES –  BITCOIN “ADJUSTMENTS”

The price of gold bullion firmed a bit through the month of July, with gold bullion up about 2.3% for the month. The chartists could say that a base has been formed to support a major move upward. The gold mining stocks were up somewhat more, reflecting the operating leverage from the change in price of their end product. Our major position in the miners continues to be our  emphasis and, as we have pointed out before, has the potential to multiply our portfolio value by many times. The weakening of the US Dollar which began in June continued through July. A weak dollar is not a necessity for gold (and the mining stocks) to go up in price but, all other factors being equal, should prove to be a positive for us.

We talked last month about the steady increase in the monetary base that has been created by Central Banks worldwide, and that this financial experiment will undoubtedly end badly. An increasingly dangerous corollary of Central Bank currency creation is the purpose to which those funds are put to work. What is not 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 are adding equities to the 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 recently announced a continuation (A hesitancy to back off?) 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 securities, 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 with an already soft economy.

These are serious amounts of capital being put 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 learned a long time ago (the hard way) that when you become “responsible” for supporting a particular market, the best possible strategy is “get out of the way” and take the current loss before it inevitably becomes much larger. The key question, at this point for Central Banks, now becomes “Sell to Whom?”.

Lastly,  a Wall Street Journal  Headline this morning reads: Bitcoin RIval Arises From Sector Spat. I will write more about Bitcoin, and the other “Cryptocurrencies” in the near future. As a preview: I believe that years from now, books will be written about the current fiscal/monetary world we are living within, and the cryptocurrrencies will be appropriately viewed as symptomatic of the tail end of the financial folly. Stay tuned on this subject and, in the meantime, be careful out there.

SEMI-MONTHLY FISCAL/MONETARY REPORT – CENTRAL BANKS BUYING BIG! – SELL TO WHOM?

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – CENTRAL BANKS ARE BUYING BIG – SELL TO WHOM?

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?”.

SEMI-MONTHLY FISCAL/MONETARY UPDATE- EVERYTHING’S UNDER CONTROL……SURE!

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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.

 

SEMI-MONTHLY FISCAL/MONETARY REVIEW – QUIET MONTH OF MAY – THE BEAT GOES ON

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SEMI-MONTHLY FISCAL/MONETARY REVIEW – QUIET MONTH OF MAY – THE BEAT GOES ON

The capital markets were once again relatively quiet, as was the price of gold bullion (down 0.1%) for the month). The gold mining stocks were mixed on the month, with the larger miners (represented by GDX, up 1.8% and the smaller miners, represented by GDXJ down 2.5%. It appears that the re-balancing of GDXJ, which we described last month, and has affected the pricing of some of the small to medium sized miners has largely run its course, so the miners should begin to act a bit more rationally.  Our gold related holdings have not changed, but we have found some restaurant/retail companies that we believe offer opportunity to “augment” our returns.

The most significant fiscal/monetary developments over the last month are as follows:

The federal budget debate continues, and is heating up in terms of resistance to the suggested spending cuts. Also, the debt ceiling has to be raised quickly because tax receipts are coming in more slowly than anticipated, and the government is already running on “temporary” spending measures.

While there is evidence of improvement in the economy, in particular the employment numbers (all of which are estimates, normally revised several times) there continues to be many signals that the recovery is anemic. Even the Fed said “the growth is modest………Consumer spending softened, with many districts reporting little or no change in non-auto retail sales”.

Related to the Fed’s observations, the most recent consumer surveys show a clearly weakening trend, which we postulate reflects frustration over POTUS’ difficulty in delivering on campaign promises.

Clearly, the unproductive “noise”, largely provided by our inexperienced and “unorthodox” Commander in Chief is undermining  policy initiatives. Policy paralysis, in large measure,  becomes the result, with executive orders implementing a more limited agenda. Unfortunately, time wasted is exacerbating, not helping, the fiscal/monetary distortions that are negatively affecting the worldwide economy.

Consumer debt is at new highs. The housing “bubble” of 2007 has been replaced by new highs in sub-prime auto debt, student loans, and “shadow bank” (internet) lending. We don’t believe interest rates will rise by much. Higher rates would choke off the already tepid consumer spending and wreck government budget balancing attempts.

We continue to feel that the 1.5-2.0% GDP growth (the weakest “recovery” after recession in at least 50 years) that has been a feature of our economy for almost ten years now is more likely to slow than accelerate. The sluggish growth has been in spite of close to zero percent interest rates and trillions of newly created dollars. It stands to reason that even modestly higher interest rates and an attempt to reduce the size of the Fed’s balance sheet will be a deterrent, not a stimulant, to faster growth. Further, we believe that the modest “tightening” direction will prove to be just a setup to the next phase of stimulation, as the economy stalls and politicians scream “do something”. At some point as that process plays out, we expect gold related investments to be the “cream rising to the top” of asset allocation.