Tag Archives: GOLD



Volatility in the Capital Markets remains a fact of life, as fluctuating interest rates reflect expectations of inflation. At the same time, it is increasingly clear that the Fed not only predicts poorly, but has basically lost its ability to successfully influence (let alone control) the situation. The situation is not as complex as Jerome Powell, assisted by 250 economic PHDs, make it out to be.

Future inflation will be largely determined by whether current interest rates are higher or lower than the expected inflation, which inform the “real” interest rate. If interest rates are higher than inflation (a positive “real” return), capital will be saved rather than spent and inflation will be subdued.  Conversely, If the “real” rate is negative, capital will be spent, fueling ongoing inflation. For 10 years now the inflation (from 2%-9%) has been a lot higher than the interest rates, which were close to zero and now are all the way up to 3-4%. Right now most commentators refer to ongoing negative “real” rates of 4%-5% (inflation of 8% over the last twelve months less the current interest rates between 3% and 4%). Confusion results, though, when certain commentators, including President Biden and some economists, say that real interest rates are now positive, indicating that inflation will abate. The latter conclusion is based on the month to month change in CPI, July being 0.1% less than June, so “there is now no inflation“.

We have consistently made the argument that there is not the political will to raise interest rates sufficiently to reduce the finally unleashed inflation that is basically the result of too much money chasing a relatively fixed amount of goods and services. The change in prices over the last year is primarily the result of almost $9 trillion in the US and close to $20 trillion worldwide being printed out of thin air by central banks since 2008. The Covid and the Russian attack on Ukraine and the supply channel disruptions and the energy shortage are representative of “the tide going out” so we could “see who’s swimming naked”. The margin for error in a worldwide leveraged economy, with lots of capital mis-allocated over a decade of minimal interest rates, was just too small to tolerate relatively short term economic distortions.

US Fed activity has so far been more talk than action. Interest rates are well above the zero bound of the last ten years but still very low historically. The Fed Balance Sheet, at $9T, has been reduced by about $190B from its peak early in 2022. This is far from reversing the $5T of Quantitative Easing in just the last few years. Though actual action has been minimal, stock and bond prices have already corrected materially and there is already a growing chorus of economists and politicians and commentators calling for a slowdown of the Fed activity. Marketplace expectations change materially almost day to day, but the upswing in the stock market and a pullback from the peak of interest rates the last few days seems to indicate a consensus that the 75 basis point Fed Funds Rate monthly adjustments will be scaled back. In essence, the worst is ever and the 2nd derivative of the change in rates is now improving, meaning the rate of change is decreasing. We don’t know exactly what rationale Jerome Powell will provide as the logic behind backing off from the current tightening policy. He might possibly suggest that the month-to-month inflation rate has become the rate to be expected (2% of thereabouts) and a 3.5-4.0% Fed Funds rate is sufficient to control inflation going forward. Keep in mind that Alan Greenspan, Ben Bernanke, Janet Yellen, and now Jerome Powell have consistently demonstrated their lack of foresight.

We expect that inflation, understated, as it is by the CPI, will likely come down, affected by the sharp decline in the housing, autos and other interest rate sensitive industries. Household savings, as a percent of discretionary income, is now running at a new recent low of 3.5% (down from over 30% at the beginning of the Covid) and credit card debt just made an all time high. On the other hand, wages only go up, energy costs are moving up again and the US Strategic Energy Reserve must be rebuilt at some point, utility and insurance expenses are higher (for example), rents are much higher than a year ago and will be firm because young families cannot afford to carry a 6-7% mortgage, and housing represents about 25% of the CPI. Accelerated inflation abroad, caused by recent rounds of easing in Britain, Japan and China will raise the price of our imports, which may or may not be offset by the relative value of the US Dollar.

Overall, we expect the year-to-year inflation rate to come down to 5-7% over the next six months, still materially higher than expected short term rates of about 4%, providing a negative return of about 2%. That is a long way (400 bp) from the necessity of a positive real rate of at least 2% to put further pressure on the inflation rate. Recall that Paul Volcker raised Fed Funds rate to 18% to squeeze out 13.5% inflation. Also keep in mind that sovereign debt around the world is too large ($31 trillion in the US) to gracefully tolerate materially higher rates. Some economists suggest that today’s economy is not similar to the 1970s and they are right. Today’s debt and deficits in the US, adjusted for the size of the economy, are 4-6x larger than in the 1970s (and no better worldwide). A serious recession from 1980 to 1983 was the result of removing the monetary punch bowl of the 1970s. Since the current addiction to easy money is an order of magnitude larger, we can assume that the discomfort of withdrawal would be proportionate.

We expect continuing volatility in the capital markets as influential commentators (such as current and former Federal Reserve officials) express their opinions, but it is (literally) day to day “noise”. The worldwide economy is clearly in the “stagflation” that we foresaw many months ago. We will be fortunate if this period is no worse than in the 1970s.

Our readers know that we have long favored gold related assets to protect purchasing power inn these turbulent financial times. Gold bullion has in fact proven to be a relatively safe haven, very long term, over the last twenty years, even in the last twelve months. Gold mining stocks have not, generally down about 75% from their highs ten years ago, today representing a true “value” play. Both were down modestly until the last few months when interest rates and the US Dollar spiked upward, putting them under even more short term pressure. Over the last ten trading days, both recovered (about 5% for bullion and 15% for the gold miners, as the US Dollar and interest rates retreated from their highs. Yesterday’s price action in gold and the gold mining stocks may have been an important turning point. Interest rates and the US Dollar were strong, and strong and gold related assets went UP. That’s the best relative trading action we have seen for gold related assets in a very long time. Along with the fact the Federal Reserve is so quickly losing credibility, which is also a major plus for the “real money”, the price performance of our favorite asset class may from this point forward justify our long term conviction.

Roger Lipton




You don’t need us to tell you that the stock market over the last six months has been the worst in the last fifty years and the bond market worse than any in over one hundred years. It could have something to do with the fact that the US Federal Reserve, joined by other central banks have presided over the largest experiment in financial history.  We’ve discussed this many times before, and symptoms such as companies selling at 50-75  times sales, “shiny objects” in the form of trillions of dollars of cryptocurrencies, hundreds of billions of dollars in the form of SPACs that could purchase a trillion dollars of companies “to be determined” are just a few chapters in The Financial Follies of the Early Twenty First Century.

After a modest rally at the end of last month, the stock and bond markets weakened again in June, especially the last few days of the month. Gold mining stocks acted more like “stocks” than gold bullion, which actually held up fairly well. While gold bullion was down only about 1.6% in June, mining stocks were down in the mid teens. However, as we discuss below, the gold mining stocks represent truly extreme value at this price, should be trading two to three times higher relative to the current price of gold bullion and a great deal higher than that once gold bullion does what it will ultimately  do.


As we discussed last month, the Federal Reserve is kidding themselves (and lots of investors), as they project the possibility of a “soft landing” for an economy that is already in “stagflation” and about to get worse under the increasing burden of higher interest rates. There is no possible way that interest rates could be raised high enough to stifle the current inflationary trends. That would require short term rates above the rate of inflation, encouraging savings rather than spending, which translates to a level of 8-9% even if inflation comes down to five or six percent from the current rate above 8%. We predict that, within just a couple of months, the Fed will find an excuse to back off from forcing rates higher, even though inflation is far from tamed. That inflation related reality should encourage ownership of (purchasing power protecting) gold related assets.

Aside from higher interest rates, the Fed has promised to reduce their balance sheet that now includes about $9 trillion of fixed income securities, in particular US Treasuries and Mortgage Backed Securities. The printing of fresh capital to finance the federal operating deficit has been an important feature of the Fed’s activity, as shown in the chart below. You can see how the Fed’s balance sheet popped from close to one trillion dollars in the heat of the ’08-’09 financial crisis, continued upward to over four trillion dollars during the great recession. It plateaued for several years, and the Fed’s plan in late 2018 to reduce its size was aborted in early ’19 after the stock market went down by 20%. It is worth noting that the quadrupling of the Fed balance sheet (by printing money out of thin air to buy US Treasuries and Mortgage Backed Securities, keeping interest rates abnormally low in the process) was followed by only about a ten percent reduction before political pressures prevailed and they backed off.

With that history, let’s go to the second chart, which shows what has happened since the Fed announced the current plan to normalize their balance sheet. In early May the Fed announced their plan to start reducing the balance sheet, $47.5B during June, increasing to $95B/month by the fall, a rate of reduction that would then prevail for an unspecified time. More specifically: beginning June 1, it will no longer reinvest proceeds of up to $30 billion in maturing Treasury securities and up to $17.5 billion in maturing agency mortgage-backed securities per month. Beginning September 1, those caps will rise to $60 billion and $35 billion, respectively, for a maximum potential monthly balance sheet roll-off of $95 billion.

The chart just below shows what has actually happened.

You can see that, no matter how you look at it, the Fed’s action has substantially lagged the announced “plan”. If they cannot, for one reason or another, reduce Assets by $47.5B monthly at the beginning of the program, there cannot logically be much confidence in the longer term. Also, if interest rates have been so firm, and the economy  has been so soft, when there has been minimal implementation, we can only imagine what the capital markets would do if $95B per month of tightening were imposed.


Gold bullion has in fact provided a relatively safe haven this year, down only a few percent in US Dollars and up materially in almost all other currencies. Gold mining stocks, as we said above, have acted more like “stocks” than bullion itself, which central banks worldwide  (even as they debase paper currencies) continue to accumulate in record quantities.

Our conviction regarding the underlying value of gold mining stocks is higher than ever, considering the recent lackluster performance relative to gold bullion itself. The chart just below shows how the gold mining stock index compares to the price of bullion and you can see that the gold miners should be  trading two to three times higher, considering an “average” relationship.

Beyond this, precious metal producers are generating the highest profit margins within the commodities sector. Even more impressive: Comparing the GDM gold mining index to the S&P 500: GDM has a P/E 25% lower, a Price/Cash Flow almost 50% lower, a Price/Book Value less than half, an Enterprise Value/EBITDA of about half, a dividend yield almost double with debt/Enterprise Value of only half. In summary: the gold mining stocks provide extreme value in accordance with  the legendary 1934 Graham & Dodd tutorial, Security Analysis, that has helped to enrich Warren Buffet and so many other long term value driven investors.

Roger Lipton








The inflation, represented by the rise in prices that the worldwide economy is experiencing, is not the result of supply chain bottlenecks or the war in Ukraine or too little drilling by the oil companies. It is the result of at least twenty years of money printing by Central Banks combined with too much government spending.  The rise in prices is the predictable and obvious result, of the less bothersome dilution of value of the unbacked (therefore unlimited in quantity) supply of colored paper that is used in the exchange of goods and services. When a substantial amount of currency (something like $20 trillion over ten years) is provided by worldwide central bank without a corresponding increase in the availability of goods and services, it doesn’t take a PHD in economics to understand that the price of those goods and services will increase. For the last ten years or so that was mostly represented by an increase in asset prices (stocks, bonds, homes, art, gold bullion, etc.), within the last year finally spreading to energy, food and other consumer goods.

Another important aspect of the unprecedented fiscal/monetary accommodation provided by governments and their central banks has been the suppression of interest rates to near zero levels for more than ten years. Interest rates control economic reward and risk, and when that “regulator” of economic activity is disabled, capital is mis-allocated as investors “reach for yield” in all kinds of risky ways. That is why hundreds of stocks were selling for thirty or forty times estimated SALES, companies were able to raise billions of dollars at virtually no cost and the cryptocurrency market (Bitcoin and Tether and Ethereum and almost twenty thousand others) could amount to over $3 trilllion (that’s a lot of money) at its peak. In short, a multi-faced asset bubble has been created, which has just recently begun to deflate.

Almost every observer agrees that the fiscal/monetary trends of the last twenty years cannot go on. The deficits and the debt and the related economic distortions are too large to be tolerated. At some point the books have to balance. Booms are followed by busts and the longer the party lasts the worse will be the hangover. An overriding corollary is that “you cannot have a sound economy with a sound currency”. If the public does not believe in the medium of exchange paid for their services, they will have less incentive to apply an effort in that direction. This generalization could be playing a part in the lack of work ethic exhibited by so many young people who have become disillusioned with today’s political class.  Because politicians, since time began, are almost always (George Washington being one exception) primarily driven by their own re-election, they do what they can to enrich their constituents. That process has inevitably included creation of as much “support” as possible. This is why there has never been an unbacked (fiat) currency that has survived. It is only a question of time until the politicians of the day dilute their currency into oblivion, and today’s crop of leaders are clearly no different. A US Dollar, as it existed in 1913 when the Federal Reserve was established to control inflation, is worth about $0.02 today, and the future does not bode well.

FWIW to our new readers, this is not a new subject for us. A multitude of previous articles can be accessed by the SEARCH function on our Home Page (“fiscal/monetary”)


The Chairman of the Federal Reserve, Jerome Powell, announced yesterday the largest interest rate increase, 75 basis points, since 1994, twenty eight years ago. The objective of this first step is to reduce the unacceptably high inflation rate, up about 8% year over year, as measured by the Consumer Price Index (CPI). It should be noted that the CPI has been materially adjusted over the last several decades, each time to understate the actual change in consumer prices. We have reminded our readers repeatedly that the 8% number, calculated on the same basis as in the 1970s when it peaked at 13.5%, would be in the mid-teens.

An essential element of keeping inflation under control is to have positive “real” interest rates, defined as the nominal short term (two to five year) rate less the rate of inflation. The consumer believing that prices will rise faster than the low risk interest rate return on capital will be encouraged to spend today, in essence pulling consumption forward and driving the price of goods upward. Conversely, a rate of inflation below the interest rate will encourage savings, because the goods will be getting cheaper over time in real terms. This is why a balanced economy usually has interest rates a couple of points (200 basis points) above the inflation rate. When real interest rates are materially negative, as they have been for most of the last ten years, inflation is inevitably part of the equation, in this case showing up in asset prices, as we discussed earlier. Over the last year or so, as the (understated) CPI provided a rate in the 5-6% area, and interest rates were in the area of 1%, the negative 4-5% real rate was extremely inflationary and that has only gotten worse most recently as the CPI was reported at 8-9%.

Recall that the legendary Paul Volcker, hired by Jimmy Carter in 1979 and backed by Ronald Reagan after his November, 1980 election, moved the Federal Funds Rate to 18.5%, providing 5% real return against the 13.5% CPI inflation rate. It worked, but the US economy had to endure a serious recession from 1980-1983. Based on today’s reported CPI, Jerome Powell would have to move short term rates to at least 10%, a very long way from the just established 1.75% and the two year objective of 3.75%. One can only imagine how serious a recession would result compared to the 1980 experience. FWIW, the annual operating deficit for the US was about $100B in 1980, and the total debt was about $1 trillion, respectively versus $2 trillion (20x) and $30 trillon (30x) today. That is another order of magnitude of a problem, even in an economy that is 5x as large. In addition: social security, medicare,  medicaid and other entitlements were immaterial in 1980 versus today’s long term (and unfunded) obligations.

POWELL IS, putting it charitably, UNCONVINCING

Jerome Powell, at his press conference yesterday, suggested that the consumer, and the economy, are  strong enough to withstand higher interest rates, and there is at least a chance of a soft landing in the economy even as interest rates move up to the range of 3.75% over the next 18-24 months. He didn’t talk about consumer confidence being at an all time low, credit card debt at an all time high while household savings are back to pre-covid low levels. Higher mortgage rates (6.25% versus the low 3% level a year ago) are starting to affect housing values and auto sales are rolling over with higher finance charges.  Trillions of dollars of stock market wealth has evaporated (including $2 trillion in crypto-currencies alone), along with lower house prices so a negative wealth effect now comes into play. Retail sales are weakening while producer prices (a leading indicator) are still hitting new highs. The acceleration (the 2nd derivative) of labor cost may have peaked but are still rising (the 1st derivative) and lots of manufacturers have yet to pass cost increases on to their customers. The Atlanta Fed, usually optimistic, and prone to downward adjustments over time, just lowered their estimate of Q2 GDP growth to zero, from 0.9%, and 1.5% just a couple of weeks ago. A recession is defined as two consecutive negative GDP quarters, which looks increasingly likely and the first half of ’22 will be negative in any event.

Powell’s commentary included his belief that the 3.75% Fed Funds rate objective is essentially a “neutral” rate, based on a long term 2% inflation rate. Do we need to point out that the current inflation rate is a long way north of 2% and will remain so for years to come? There is no chance that 3.75% will put a serious dent in the current inflation rate. We accept the fact that the CPI could come down a bit, perhaps to the area of 5%, as demand destruction from higher interest rates combines with abatement of the supply chain situation and perhaps a cessation of hostilities in Ukraine, but short term rates would still have to be 7-9%, double the 3.75% current objective. To provide some context regarding the real rate of inflation, as opposed to the CPI version: year over year import prices in May were up 11.7%, and export prices were up 18.9%, without including shipping costs. Since US consumers have to buy goods that were made either here or there, the average of about 15% is much closer to the real rate of inflation than the CPI the Bureau of Labor Statistics (BLS) “cooks up”.

Powell did provide a somewhat “dovish” possibility, saying that future rate increases could be reduced if a reduction of the inflation rate persists over a matter of months. That willingness to back off the current tightening plan increases the likelihood that the Fed will back off prematurely, most likely leaving in place only a 5% inflation rate. Five percent sounds a lot better than what we’ve got right now, but destroys 40% of your purchasing power over 10 years.


Capital markets have been resilient for over ten years because investors, both in stocks and bonds, were convinced that the Federal Reserve was providing a “put” which would, as European, Japanese and Chinese central banks have periodically done, “do what it takes” so keep stock and bond markets from going down.

Powell’s stated dedication to calming inflation, even tolerating a recession if that would set the stage for healthy long term growth, might have been expected to calm the stock and bond markets, both of which have been very weak lately. Most stock market pundits were in fact calling for the 75 bp rise which he delivered. Based on the apparent first step in a constructive direction, after his remarks yesterday afternoon both bond and stock markets rallied strongly. Unfortunately, the strength has evaporated today, with the Dow down 700 points on Thursday. Investors are apparently losing confidence in the logic, the timing, and/or the outcome of the Fed’s newest policy.


It’s often been said that the attractiveness of gold related assets is inversely correlated with the credibility of Central Banks. Gold, used to limit the central bankers’ ability to create unlimited amounts of currency, is essentially in conflict with the banker’s career path. Eight or nine years ago, sitting next to Paul Volcker, I asked him: “What do you think of gold?” His answer: “I’m a central banker so I don’t like gold!”

It seems to us that the credibility of Central Banks has steadily diminished over the last 109 years, from 1913 when the Federal Reserve was established,  to 1933 when FDR precluded US citizens from owning gold and 1934 when he changed the exchange rate from $20.67 to $35.00/oz. (devaluing the Dollar), to 1944 when the Breton Woods Conference established the US Dollar as the Reserve Currency (to be backed by gold), to 1971 when Richard Nixon eliminated the Dollar’s convertibility (at $35/oz.) into gold, to 1980 after gold had just peaked at $850/oz, to 2022 while gold bullion sits at $1830/oz.

In our view, gold bullion, should be more appropriately priced at somewhere between $7,000 and $10,000 per oz., and this is relative to the amount of paper currency that is circulating, as well as the amount of “equity”, assets minus debt, that important trading nations own. Gold has protected purchasing power for three thousand years, for 230 years since Alexander Hamilton’s Coin Exchange Act established gold and silver as the only legal tender in the US, since Y2K just before the dotcom bust and the two wars began, and for 13 years since the Obama administration accelerated government spending, While true that stocks and bonds and cryptocurrencies have outperformed gold as an asset class during the last decade, we believe there will shortly begin a dramatic catch-up phase. The amount of gold that sovereign nations own relative to their paper currency outstanding is at a comparable level to 1971, just before gold bullion went up over 20x in value.


The price of gold bullion should be a lot higher, currently four to five times where it is, and even higher over time. Even more compelling is the opportunity in gold mining stocks, with an upside that is a multiple  of  the move in gold bullion itself. Physical gold bullion is largely bought by the Chinese, Indian, Russian, and European public, as well as their Central Banks. The public in those countries understand how fickle paper currency can be, and the central banks can see how the US is abusing its role as a Reserve Currency by creating trillions of new Dollars. Worldwide Central Banks, with the notable exception of the US, have increased their collective holdings of gold bullion every year since 2009, absorbing about 12% of total worldwide production. Central Bankers may not “like” gold, as we pointed out above, but they collectively buy over 400 tons of it each year.

Gold mining stocks, because they are stocks, are largely purchased by North American stock investors, who have not had the personal experiences of Europeans, Chinese, Indians or Russians that demonstrated the utility of gold as a “safe haven”, a “store of value”, and a “medium of exchange”. Since North American Investors have been otherwise distracted in recent years, we anticipate that the current weakness in the stock and bond markets will bring them back to gold and gold mining stocks in particular. While gold bullion is essentially flat in ’22 and the gold mining stocks are flat to down about 5%, this asset class has in fact proved to be a relatively safe haven in a treacherous stock and bond market.

Gold mining stocks, based on their historical price relative to the price of bullion, should be something like two or three times higher than they currently trade. Gold bullion is down about 15% from the all time high, and the gold mining stocks are down over 50%. Moreover, they also represent VALUE by many measures, including a comparison to other commodity producers as shown below. Highly regarded Incrementum, whose charts we have used below, published a 390 page report in late May, making the case that commodity producers in general and precious metals in particular, are just entering a long term expansion of sales and profits.


We have already entered an extended period of Stagflation, which could, depending on fiscal/monetary developments, segway into a serious recession. Jerome Powell and his Federal Reserve have very little chance of maneuvering the US economy into a soft landing as inflation is tamed. Indeed, his approach seems to be overly optimistic, at best, disingenuous, misleading, or ignorant at worst. Viewed more charitably, he did not create this mess, and can’t be expected to control the outcome. Alan Greenspan started the process in 2001, spending the Dollar into oblivion as he tried to protect the economy from the effects of Y2k, the dotcom bust and the economic fallout from waging two wars. Ben Bernanke, Janet Yellen, and now Jerome Powell, have proceeded in turn to “play it as it lies” and “kick the can down the road”, just so….”it doesn’t hit the fan on my watch”.

The precious metals complex, and gold mining stocks in particular, should be an effective way of at least protecting one’s purchasing power in a challenging economy, while at best making 5-10x return on investment. A material (i.e.5-10% of one’s portfolio) invested in this asset class has proved to enhance long term capital returns through an investment cycle. Considering that gold mining stocks (1) have not kept pace with the general market over the last ten years nor (2) kept up with the price of bullion that has doubled over the last twelve years and (3) represent statistical value by many investment measures, they represent the opportunity for very substantial capital gains. The credibility that the Federal Reserve  is in the process of losing is supportive of far more demand for gold related assets as a means of protecting purchasing power and generating exceptional capital gains from current levels.

Roger Lipton

P.S. Roger Lipton is General Partner, Managing Partner, and the largest investor (Limited Partner) in RHL Associates, LP, an investing Limited Partnership that is 100% invested in gold mining equities.The minimum investment is $500,000, funds can be invested the first of any month, withdrawn (with no minimum holding period) at the end of any quarter (with 30 days prior written notice). The fee structure is “1 and 10” (1% annual fee and 10% of gains).  This notification should not be considered an offering, which can only be made by provision of a full Offering Circular.


ROGER’S 8/15/21 MONTHLY COLUMN IN RESTAURANT FINANCE MONITOR – Fifty years of inflation, update on Tilman Fertitta, Chuy’s 2nd qtr.results

Fifty Years Flies By: – August 15th, is the fiftieth anniversary of Richard Nixon “closing the gold window”, eliminating the convertibility of the US Dollar into gold at $35/oz. This kicked off the stagflation of the nineteen seventies, with inflation peaking at about 12% annually and the Fed Funds rate at 18%. The lack of a spending discipline by politicians has run the annual deficit from $100B in 1980 to $3-4T today and the accumulated deficit from $1T to $28T (without considering unfunded entitlements). The economy is six times larger but the deficits are still 5-6 times bigger in constant dollars. If you don’t consider that this lack of monetary discipline is important, consider that, in the last fifty years, the cost of a first-class stamp has gone from $.08 to$.55, a loaf of bread from $0.25 to $2.50, a gallon of regular gas from $0.36 to $3.05, an average car from $2,700 to $40,206, annual healthcare spending from $353 per person to over $10,000, and Harvard tuition from $2,600 to $54,000. It is equally interesting that the Harvard tuition in 1971 was 13 weeks’ worth of the median household’s annual income of $10,285.  The 2020 tuition is 36 weeks of the median household income of $78,500, demonstrating how wages have not kept up with the Dollar’s loss of purchasing power.

Gold bullion has gone from $35/oz. in 1971 to over $1800/oz. today, up 51x in value. You would have increased your purchasing power to whatever extent you had capital invested in gold bullion, even more so in the gold miners (which my readership knows I have favored for some time).

The good news for restaurant operators is that people have to eat and menu board pricing can change, carefully, as often as necessary. One piece of advice to growing restaurant chains is to make sure your rent escalation clause allows for no more than the rise in the government’s Consumer Price Index, CPI, (hopefully somewhat less). The CPI is consistently understating the real inflation (and the rise in menu prices) so your operating margin should “leverage” your sales increase by way of lower occupancy expenses, if nothing else.


We wrote here last month about “the room where it happened”, why and how Tilman Fertitta sweetened the deal for investors in his hospitality empire, soon to merge with FAST Acquisition Corp (FST).

A few days ago, it was announced that DraftKing (DKNG) is going to buy/merge with Golden Nugget Online Gaming (GNOG) (46% of which is owned by FEI).  DKNG has been one of the very successful SPACs offered over the last several years, and Fertitta sponsored GNOG has done well also. DKNG is much bigger in terms of its equity capitalization, $21.1B vs. $1.4B for GNOG, with higher sales as well, $297M in its most recent quarter, almost 13x the $23.1M of GNOG. DKNG has not been profitable yet, and is estimated to remain unprofitable through 2022. GNOG has been profitable the last two quarters but is currently expected to be unprofitable through 2022.

Both parties are predictably excited about the combination, guiding to $300M of synergies. We will likely be writing more about this situation because the FST/FEI combination, when and if completed, will create a hospitality company with revenues approaching $10B and $800B of annual EBITDA.

Our interest at the moment is how this DKNG/GNOG transaction affects the still pending business combination of FST and FEI. While FEI has agreed not to sell their $700B worth of DKNG for at least a year, the premium added to GNOG shares and the enhanced liquidity is clearly a positive. Recall that the recently sweetened deal, as we described here last month, increased the current annualized EBITDA run rate to $800M, up from the previously expected $648M for 2022. This additive adjustment was no doubt provided by Fertitta to create more investor comfort with the $3B of debt and the DKNG/GNOG merger should further alleviate concerns. Tilman Fertitta rarely sits still.

Chuy’s Holdings – 2nd Quarter Report is Instructive –

Chuy’s Holdings, Inc. (CHUY) recently reported results for the quarter ending 6/30/21, at which point all stores were open again. As background, CHUY continues to be a well-run, debt free Company, though their results have flattened since 2016. Absent a tax credit in 2017, EPS has been around $1.00 per share as comps weakened and margins sagged, offsetting new store openings. At this point, setting aside YTY comparisons, we were struck by the dramatic improvement in Q2’21 vs. Q2’19 and scrutiny illustrated the ongoing uncertainty within the restaurant industry. The dramatic two-year comparisons actually started in Q3’20 with EPS coming in at $0.31/share vs. $0.21. That improving trend has continued and $0.62 in Q2’21 compared to $0.37 in Q2’19. Sales, BTW, were $108M, down from $113M so what the heck is going on? Answer: Cost of goods was down 200 bp. Labor was down 650 bp. Income before taxes was therefore up 720 bp, with after tax net income almost doubling. It’s all about the slimmed down menu and less labor necessary to serve off-premise consumption. BTW, prices are 4.8% higher YTY, which helps also. The instructive part is that management, on the conference call, expressed uncertainty as to how everything sorts out over time. They guided to a less dramatic 300-350 bp of improvement over 2019, but admitted uncertainty and were not providing formal guidance. Off Premise sales in Q2 were 27%, down from 61% in 2020, and up from 13% in 2019. The Street consensus is for $1.75/sh In ’21, up from $0.84 in ’20, then a decline in ’22 to $1.56, still well above that five year $1.00 plateau. Aside from uncertain sales, an unpredictable mix between dine-in and off-premise, a labor crisis, and possibly volatile commodity prices, it’s all very clear.



I cannot resist commenting on, and correcting the latest version of revisionist economic history.

Just yesterday Maria Bartiromo was interviewing Peter Navarro, President Donald Trump’s Director of Trade and Manufacturing and a frequent economic spokesperson. After predictably predicting a weak stock market, burdened by the poor policies of President Biden, his description of the last ten years went like this: “Under President Obama, coming out of the 08-09 crash, the GDP grew by a meager 2%, and the debt doubled. Under Donald Trump, we grew at 3% and the economy was roaring before the pandemic hit.”

Not quite:

Under President Obama, the GDP grew by an average of 1.6%, held down by a negative 2.5% in ’09, coming out of the crash. Excluding ’09, GDP grew at an average of 2.2% over seven years.

Trump’s four years went +2.3% in ’17, +3% in ’18, +2.2% in ’19 and -3.7% in pandemically driven 2020. Excluding the last year, out of Trump’s control, just as Obama’s first year, Trump’s economy grew at an average of 2.5%.

So: A reasonably fair comparison would be that Trump’s economy, buttressed by lower taxes, a trillion dollars of overseas corporate capital repatriated, less legislative burden, and a friendlier business climate, grew three tenths of one percent faster than Obama’s. If one wants to include the first year under Obama and the last under Trump, under control of neither, the average would be 0.95% under Trump and 1.6% under Obama.

As far as the debt is concerned, under Obama the debt went from $10.6 trillion at 1/20/09 to $19.9 trillion at 1/20/2017, an increase of $9.3 trillion over EIGHT YEARS. The debt under Trump increased to $27.8 trillion at 1/31/21, an increase of $7.9 trillion over FOUR YEARS.

Don’t believe anything you hear and very little of what you read!

With that off my chest, the fiscal/monetary chickens are coming home to roost. The factors that we have been discussing for years are becoming too obvious for the financial markets and policy makers to ignore.

The table just below shows the monthly deficit numbers. For the month ending April, the deficit was “only” $226B, down from the explosion of $738B in the first full month of the pandemic last year. Still, we are running 30% ahead of a year ago, which finished in a $3.1 trillion hole, and there is huge spending ahead of us this year. With the trillions that are being thrown around, it seems likely that the deficit for the current year will be over $4 trillion. Keep in mind that our Federal Reserve is buying the majority of the debt that we are issuing to fund this deficit, so we are literally “monetizing” the debt by paying for the deficit with freshly printed Dollars. It is in this context that we have suggested that there is no need to raise taxes on anyone, rich or poor. None of it will supply more than a few hundred billion dollars per year, and there is much less aggravation for everyone if one of Jerome Powell’s hundreds of PHDs pushes a computer button and produces the US version of a digital currency. Of course, inflation will be the cruelest tax, especially on the middle and lower class citizen, but they will likely never understand the cause.

Inflation in consumer goods, rather than the asset inflation we have seen in the last ten years, is finally rearing its beautiful (as far as the Federal Reserve is concerned) head. Post pandemic demand, along with looser purse strings as pandemic relief checks are distributed, is replacing the pandemic induced reduction of demand that has suppressed the economy over the last year. As we wrote last month, some very bright economists are agreeing with Jerome Powell that inflationary indications are “anchored” and “transitory”, but we believe transitory may last longer and not so well anchored as expected. The last twelve months of the CPI are now above 4%, and the CPI is widely considered to be understating the inflationary facts of life.

We consider that there has been an undeniable bubble in all kinds of assets, from Tesla to Bitcoin, to collectible homes worth a hundred million dollars to crypto-art and lots of individual stocks that trade for 50x sales instead of a more modest multiple of earnings or cash flow. Investors of all stripes are reaching desperately for a “return”, as evidenced by the historically low yield spread between high yield debt and US Treasury securities, as well as the asset classes referred to above. As we write this, a number of these upside distortions are in the process of being corrected. Tesla is down from over $900 to under $600. Bitcoin is $43k, down from $64k three weeks ago, the bloom is coming off the SPAC rose, and GameStop is down well over 50% from its ridiculous high. However, the process has just begun and will no doubt play out over a number of years.

Gold and gold mining stocks seem to have consolidated adequately since last August, when interest rates went modestly higher, and have just now established new bullish chart patterns. Negative “real interest rates”, subtracting the inflation rate from the yield on short term treasuries, has a strong correlation with the price of gold. The more negative the “real” interest rate, the more attractive is gold bullion, with no dividend or interest. Almost to the day, last August, when interest rates moved higher, reducing the degree of negativity, the gold price started drifting lower. Real treasury rates never turned positive, but the smaller degree of negativity reduced the urgency for ownership of gold. While interest rates have not gone back down to levels of nine months ago, inflation has picked up substantially, so short term treasuries yield several points less than the 4.2% trailing twelve month inflation rate and gold therefore protects purchasing power very well without paying interest or a dividend. The result is that gold bullion, as well as gold mining stocks have now broken out above their 200 day moving average price lines, so technicians will reprogram their algorithmically driven computers. While gold bullion is still down a percent or two for the year, gold mining stocks are positive for the year and have never been fundamentally cheaper.

It continues to be our conviction that gold mining stocks, in particular, are the single best place to protect one’s purchasing power over the long term, and our investment partnership is invested accordingly. Since there seems to be an increasing interest in this subject, in very quick summation:  I am personally the largest Limited Partner, by far, as well as the Managing General Partner of RHL Associates LP, as I have been for the 28 year life of the Partnership. The minimum investment is $500k and the fee structure is “1 and 10”. Funds can be added on the first of any month and withdrawn at the end of any quarter with 30 days written notice. We remain open to new investors, keep our investors apprised on a monthly basis as to our performance, and can be contacted through this site or by email at lfsi@aol.com.

Roger Lipton



The capital markets traded to the upside in April, as the Biden administration lays out their agenda and the Federal Reserve assures everyone that they continue to have everything under control. We suggest that you come to your own conclusions. Ben Bernanke had no clue that the financial crisis of ’08-’09 was coming, though there were quite a few warning bells ringing. You never know which snowflake will start the avalanche.


For those of you that like to know the latest deficit and debt numbers look like, the US deficit for the month of March was $660 billion, up from $119 billion in ’20, just before the pandemic related spending took off. The deficit for the first six months of the current fiscal year has therefore been $1.7 trillion, up from $741 billion in ’20. Since the comparisons from here will be up against the huge spending from April through September of the fiscal year ending 9/30, the comparisons will be “tougher”, depending on what stimulus programs are implemented.

Safe to say that the deficit for the current year ending 9/30/21 will be substantially more than the $3.1 trillion of last year. No doubt the total debt, not including unfunded entitlements, will be in the area of $30 trillion somewhere in the fourth calendar quarter of 2021. This continues to be of prime importance because heavy debt burdens the recovering economy and enormous spending, mostly financed by our Federal Reserve’s currency creation, will be necessary to keep the economy from collapsing. With the 2022 very important congressional election season beginning in just a matter of months, you can bet that the Biden administration will spare no expense to make the economy look good.


There is an increasingly active debate developing as to whether inflation, or possibly some form of deflation, is in our future, and when. Keep in mind that both can happen, just as we have already seen higher prices in assets such as stocks, bonds, real estate and others. On the other hand, general income levels have not moved by much and “core inflation”, excluding food and energy, is still subdued.

Both inflation and deflation can be good for gold. The miners did very well during the deflationary 1930s, in spite of a fixed gold price, because their costs were coming down as the worldwide economy collapsed. Gold did even better in the inflationary 1970s, moving from $35 when Nixon eliminated convertibility in 1971 to $850 early in 1980. On balance, we prefer inflationary trends and that is what central banks around the world are desperately trying to provide.

There are some very obvious short term trends that point to inflation. There is major upward pressure on the minimum wage, with an apparent shortage of workers. There have been shortfalls in supply, and higher prices for semiconductors, lumber, copper, agriculture, gasoline, used cars, and housing. Interest rates, while still low, have moved upward, which could signal the bond market’s expectation of higher inflation. The M-2 money supply has moved up by 24% in just the last year, the most rapid rate in 150 years, and economics 101 dictates that more money chasing the same amount of goods should be inflationary at some point. Most importantly, consumers increasingly expect inflation to accelerate, and that expectation alone can be a critical ingredient. Lastly, the weakness in the US Dollar points to higher domestic inflation.

On the other hand, some of the most intelligent observers, including Lacy Hunt, Gary Shilling, and David Rosenberg, believe that the likely inflation coming out of the pandemic, over the next six months, will be modest. Fed Chairman, Jerome Powell, calls it “anchored” and “transitory”. Hunt and Schilling have had three decades of accurately calling for low interest rates, a sluggish economy, and subdued inflation, largely as a result of the debt burden. David Rosenberg, perhaps the economic commentator with the most well documented view, is looking for a short term economic bounce, accompanied by a modest uptick in inflation, but a return to economic malaise within six months.

Powell believes the Fed can control inflation by reversing the accommodation, allowing interest rates to rise, just as Paul Volker did in from 1979 to 1982. Hunt and Shilling and Rosenberg believe that the economy will go nowhere because of the debt and the aging demographics. The debt, in their mind, is a huge problem over the long term, but the Fed activities preclude a full scale  economic collapase. It seems to us that one of the most important ingredients in the reasoning of Powell, Hunt, Shilling and Rosenberg is that inflation is been “anchored” for the last ten years, even though the deficits and debt have gone through the roof. Therefore: the same beat can go on for the foreseeable future.

Though these are very smart people that we are trying to interpret and “second guess” to a degree, we are inclined to think that inflation will be higher, and longer, than is suggested above. Historical precedents may not apply because this monetary experiment is of a different magnitude than has ever been seen before.

Firstly, the Fed can’t “pull a Volker”, if inflation takes off, because the $28 trillion of debt now compares to $1 trillion in 1980, and today’s many trillions of unfunded entitlements were of little concern forty years ago. The annual operating deficit was only about $100 billion in 1980 compared to perhaps $4 trillion today. Even with an economy that is 6-7 times larger today, the problems are of a different order of magnitude. Raising interest rates, as Volker did, would trigger a massive decline in asset prices and a terrible depression.

The assumption by Powell and the others is that, based on the lack of inflation the last ten years, as deficits and debt built up, there is reason to believe that further monetary accommodation will, similarly, not create an inflation problem. We have seen that, though the Fed took its balance sheet from $1 trillion to $8 trillion in the last ten years, financing most of the annual deficit with newly printed dollars, the “velocity” of the monetary aggregates collapsed at the same time so the new currency did not pressure the CPI upward.

The Fed wants 2%+ inflation, and $7 trillion of new currency did not get the job done. In an extreme example, do you believe that $100 trillion of new currency, chasing the same amount of goods and services, would drive prices higher? We would say: highly likely. Seven trillion dollars didn’t get the job done. One hundred trillion dollars probably would.

The only remaining question becomes: What amount of new currency, between $7 trillion and $100 trillion, would kick off inflation? We think we are going to find out. Nobody knows how the above discussed elements will interact, but we expect a stagflationary period during the foreseeable future, likely with an even weaker economy and higher inflation than in the 1970s.  We also expect gold and the gold miners to be among the very best asset classes to own in the turbulent period ahead.

Roger Lipton.



The capital markets in January were dominated by the action in Gamestop and other heavily shorted stocks, so the Russel 2000 and Nasdaq indexes were up. The larger indexes, the Dow and S&P were down. Gold bullion was down about 3.2%.  Gold mining stocks, to be expected, were down about double that. However, the year has just begun, the dollar printing presses are preparing to print trillions of stimulus dollars, and the broad background, as discussed below, is moving in favor of the “real money” (i.e. gold, and it’s “little brother”, silver) on almost a daily basis. Additionally, the populist revolution of Robinhood traders, the last few days spilling over to silver, demonstrates how quickly and dramatically mass psychology can turn. It will take more than a group of young traders to move the gold and silver markets sharply higher but the institutions and computer driven trading programs are odd lotters at heart, chasing momentum rather than fundamentals. Gold related securities have had positive fundamentals for a long time now, so it’s just a question of time until the psychology turns. We discuss just below the analogies between Gamestock and the precious metals  before providing an update on the broader fiscal and monetary developments.


Recent short term trading developments seem far removed from precious metals but there are similarities that could come into play.

First, the buyers of Gamestop, from the trading platforms such as Robinhood, were out to punish the fat cat hedge funds that, as they see it, have gotten rich by shorting low priced stocks into oblivion. The new buying from the “little guys” forced the hedge funds that were short to limit losses by covering at increasingly high prices. A critical technical aspect of this situation is that the total short positions had been allowed (by hedge fund custodians such as Goldman Sachs) to be well over 100% of the shares outstanding, called “naked” shorting, and there was no way, until Robinhood suspended trading, that all the shares that had been shorted could be bought back. It should be noted that, while many commentators expressed concern about the price volatility, almost everyone is sympathetic with the little guy, nobody feeling sorry for the hedge funds that took huge losses. At least a couple of multi-billion dollar hedge funds closed their doors in the wake of the unprecedented upsurge.

Here is the application to the gold and silver markets.

First, the prices of gold related securities are thought by many (including ourselves) to be suppressed similarily as Gamestop. In the case of gold, the suppression is by worldwide politicians and their affiliated bankers, who don’t want a rising gold price to bring attention to the huge dilution of the unbacked paper currencies. Gold related securities, especially the gold mining stocks, for no apparent fundamental reason, have therefore participated very little in the asset inflation of the last seven or eight years. The fact is that several large market makers in gold and silver related securities, including futures and options, have paid fines amounting to hundreds of millions of dollars for manipulation of precious metal markets. There has, therefore, been a distortion in the “price discovery” of precious metals, just as we have described for years.

The other important similarity between Gamestop and Gold is the use by the Gamestop short sellers of “naked shorts” as described above. This “paper” that was over 100% of the total “underlying” created a potential demand, once the stock started going up, that was impossible to satisfy except at much higher prices. The term you will hear is “short squeeze”. The number discussed, relative to Gamestop, is that the total short positions amounted to 140% of the shares outstanding, a ratio of 1.4 to 1. NOW GET THIS !  In the gold market, the “paper”, that is composed of derivatives such as options, futures, ETFs, etc., that reside on top of the physical trading of the “underlying” gold is thought to be something like 100 to 1, that’s ONE HUNDRED TO ONE. We don’t mean to suggest that all of that “exposure” is on the short side, but a great number of positions are built on borrowed money, and no doubt a substantial amount is “short”. In addition, buyers (like the “little guys” at Robinhood) in the gold or silver futures market could require “delivery”, rather than a cash settlement, and the short seller would obviously have a bigger problem than just buying back the paper short and taking the loss. They would have to find a seller of physical metal.  It has been reported by dealers of physical gold and silver that there has been a huge increase in demand by retail buyers who expect delivery, not settlement in cash.  This spills over into the derivatives market as physical dealers buy options and futures contract to protect their profit between the time they give a customer their “report” and when the dealer receives, then delivers against payment the physical product.  A final simplistic point is that it takes ten years to bring on stream a newly discovered gold mine. In the stock market, Gamestop could issue more shares at some point and satisfy some of the demand. As it applies to gold, nobody can “issue” new gold bullion overnight. In fact, there are no new large gold mines scheduled to come on stream for years. If potential physical demand is to be satisfied, it has to come from an existing physical holder, and they will likely require a very much higher price.

As always, the timing of a large move in gold related securities continues to be uncertain, but some of the critical catalysts are similar in nature to those that drove Gamestop so dramatically higher. Everyone agrees that there are no possible fundamentals that could justify the recent price of Gamestop, even at $90, up from $20, let alone at a high of $500.  In the case of Gold, we are not suggesting that it should be trading  20-30 times higher, but somewhere between $6,000 and $10,000 an ounce  can be rationally jusified. That could take gold mining stocks up by least 10x and would be adequately satisfying.

With that review of the most current events in the capital markets, below is a continuation of our longer term broad fundamental perspective.


It’s becoming a common refrain: “don’t fight the Fed”, originally coined by the late and great market strategist, Martin Zweig back in the 1980s.

Jerome Powell, Fed Chairman, has made it clear that he will do “whatever it takes” to get back to relatively full employment and balanced economic growth, “balanced” referring to a narrowing of the wealth gap. He has reiterated that he is “not even thinking about thinking about raising interest rates”, signaling that the Fed will continue to expand its balance sheet, keeping interest rates very low, bond markets and the stock markets still supported by the “Fed put”. The Fed’s largesse has no doubt been an important contributing cause of the weakness in the US Dollar, which supports exporting US industries.

A historical footnote: This disillusionment with the US Dollar is similar to 1969 and 1970 when the Europeans, led by France’s Charles DeGaulle, exchanged their predictably diluted Dollars for the US Gold. In the course of just a couple of years, the US Gold holdings were reduced from over 20,000 tons to the 8,400 tons that we still own today.  Richard Nixon famously “closed the gold window” in August, 1971, inflation took off, taking Fed Fund Rates to 18%, and the price of gold went from $35. to $850/oz. by January, 1980. An important corollary is that the amount of gold that  the US, as well as collective worldwide central banks, own, relative to the paper currency outstanding, is today at roughly the same (7-8%) level it was in 1971.

Back to the current situation:

Enter Powell’s predecessor, Janet Yellen, likely to be confirmed by the Senate as new Treasury Secretary. While the Fed and the administration’s Treasury Secretary are theoretically independent of one another, it has long been the case that the Fed is responsive to political concerns. Interest rates have firmed up a bit in the last two weeks, and the dollar has also bounced off its lows since early January.  Some headlines have said that “Yellen does not seek a weaker dollar for competitive purposes”, implying that she will favor a stronger dollar, likely accompanied by higher interest rates. Not exactly. She also said she is in a favor of a “market driven dollar”. All of her remarks indicate that she is agnostic as to where the Dollar trades.

Now let’s see what is going on in the economy and how Fed/Treasury policy will play out.


Retail Sales Are Weak – December sales came in weaker than expected, down 0.7% YTY and November was revised to down 1.4% vs. originally estimated negative 1.1%. Further breakdowns of the overall numbers look even worse. Restaurant sales were down 4.5%, electronics -4.9%, appliances and furniture -0.6%, online sales -5.8% after -1.7% in November.  In essence, aside from restaurant sales, “stuff” in demand due to the Covid seems to have run its course. While we don’t doubt that a certain amount of demand will be released when the Covid-related cabin fever breaks, a case can be made that a traumatized consumer, who have saved or paid down credit balances with stimulus checks may well spend less and save more than was the case before the pandemic. From March through November, 2020, American households saved $1.6 trillion more than a year earlier, while credit balances collapsed at a record 14% annual rate.


Jobless claims in December were 965k, versus an estimate of $790k, in spite of Christmas retail hiring, much higher than November which was revised lower by 3k to $784k.


US real GDP is improving relative to the disastrous 2nd and 3rd quarters, but still down very sharply from a year ago. While it is well accepted that 2020 will be a lost year, economists and commentators are quoting “growth of something like 6% in 2021. Goldman Sachs just raised their forecast from 6.4% to 6.6%, fueled by $1.9 trillion (or something close) stimulus’ effect on disposable incomes and government spending. The reality is, however, that the US economy has been growing at a tepid low to mid 2%+ range for twelve years now. It grew at an average of about 2.3% for eight years under President Obama. In the four years of the Trump administration, with the tailwind of lower taxes, major government deficit spending, less governmental regulation, a trillion dollars of repatriated overseas capital and interest rates very close to zero, GDP grew at an average of about 2.5%. This can fairly be called “the law of diminishing returns”, a lower “marginal return on invested capital” or, less charitably a “misallocation of capital”.

At the same time that economic signals are weakening, inflationary signals are more apparent.

The deficit so far this fiscal year, the three months through December, show a deficit 58% higher than a year ago. Unfortunately the new fiscal stimulus package, proposed at $1.9 trillion, will inflate the government spending again this year. Though the amount is negotiable, President Biden has stated that it is only a “downpayment” on future plans. It seems reasonable to expect this fiscal year’s deficit to at least approach the $3.1 trillion of last year, perhaps even exceed it.

We point out again that the debt increases almost every year at much more than the annual deficit would suggest. This is due to “off budget” spending, and those dollars are in large part borrowed from the social security fund.  The deficit shown above in ’19 was $984 billion but the debt went up by $219 billion more, $1.2  trillion higher in total. The deficit in the Y/E 9/30/20 was $3.1 trillion but the increase in debt was $4.2 trillion. People….these are not  trivial differences, and this huge accelerating debt load will further drag on our economy.

INFLATIONARY SIGNALS ARE APPEARING, though it still may be a way off

First, the parabolic increase in the M2 money supply has to be some cause for concern.

Secondly, reported import and export prices for December are cause for inflationary concern, and this could be one contributing factor to the rise in interest rates and the US Dollar. December import prices were up 0.9% instead of the expected 0.6%. November was revised slightly upward, from 0.1% to 0.2%. Export prices were also up much more than the expected 0.6% in December to 0.9%. November was also revised upward by 0.1% to 0.2%.

Lastly, the seemingly inevitable move to a nationwide $15 minimum wage could also contribute. While it is true that perhaps only 3 or 4 percent of the workforce earn the $7.25 minimum wage, with the lowest paid sector (leisure/hospitality) earning $17/hr, a higher minimum could well provide upward pressure. That $17/hr worker might not be happy earning just over the acknowledged subsistence level, and expect a bit more.  Its also true that employers will attempt to hold the pricing line by absorbing labor increases by way curbing expenses elsewhere, but a great deal of that may already be in place. In any event, we haven’t seen any arguments that a higher national minimum wage will be deflationary.

In spite of the factors provided above, the month to month CPI report doesn’t show much yet, up 0.4% in December but up just 1.4% for the twelve months ending December. The so called core-CPI, less food and energy, was up just 0.1% in December, up 1.6% for twelve months. The Fed, of course, has clearly stated a policy to allow inflation to run higher than 2% annually for a while because it has been under 2% for so long. Keep in mind that, while prices of goods and services (except for major expenses like education and health care) have been stable, asset price inflation has been huge. There is a reason why very rich people are paying over $100M for a residence or a rare painting. They want to own anything but cash. They don’t know what that Van Gogh or oceanfront property will sell for, but they know their cash will lose a lot of purchasing power. As always, inflation is the cruelest tax, affecting the rich the least. They have their land, homes, art, stock and stock options, gold, etc. It’s the lower and middle class that gets hurt, left to wonder why they are making more in nominal terms but have to work harder to make ends meet.

Inflation is in our future, guaranteed, with governments around the world printing currency at an unprecedented rate, with a stated goal of creating of something over 2% for a long time. Short term, however, there is a lot of under-utilized manufacturing capacity, consumer spending is still restrained, and rents (“rent equivalent” is over 25% of the CPI index) are stagnant as city dwellers move out. Education and Healthcare, two of the largest family expenditures, are not in the CPI that is most often quoted by officials. The CPI, also, does not reflect the inflation in asset prices, including speculations such as Bitcoin and Gamestop. For these reasons, the reported CPI may not take off for a while but inflation in the real world is inescapable.


The Federal Reserve and the supposedly independent US Treasury, as a result of at least forty years of fiscal/monetary promiscuity have incompatible masters to serve.

On one hand they are supposed to keep inflation at a tolerable level, these days no higher than a “symmetrical” 2%, At some point that will call for higher interest rates, and normalization to 150-200 bp above the rate of inflation, a range of 3.5-4.0%, providing a “real” return to savers. Unfortunately that would add an unacceptable $800-900 billion of annual interest to government expenses, blowing the deficit even higher, exacerbated further yet because tax receipts would contract as businesses cope with higher interest rates. So….interest rates might edge up, but not by much.

On the other hand the Fed’s second mandate is to foster full employment. This requires relatively low interest rates and continued government fiscal stimulus, which along with a weaker dollar will support US business activities. These policies problematically foster the inflation that they don’t want to get out of control.

The objectives are inconsistent.


When in doubt, the policymakers will pursue the inflation every time. The public, especially the lower and middle class, doesn’t quite understand why they have to work harder and longer to make ends meet.  It is very apparent, on the other hand, when interest rates and/or taxes are going up and unemployment is rising. Far better for the incumbent politicians to stimulate the economy by way of government spending, low interest rates, and a lower dollar. Somebody else can deal with the inflation later on. Paul Volker came along in 1979 and Ronald Reagan stuck with him, enduring the higher interest rates of the early 1980s to squeeze out inflation, but there is no Paul Volker or Ronald Reagan these days and the problems (the deficits, the debt, the tepid economy, the already very low interest rates) are an order of magnitude larger.

The recent runup in speculative securities such as Gamestop could be a forerunner of a similar explosion in gold and gold mining stocks. As discussed above, the disdain for “the fat cats” is driving a populist revolt (with sympathy from both sides of the political aisle) that has driven heavily shorted stocks up by ten times and more in a matter of weeks. The stage could well be set, for a lot of the same reasons as discussed above for precious metal related assets. The Gamestop crowd, at the end of their recent run, broadened their focus to silver and silver miners, and gold rose in sympathy a couple of days ago. As attention is drawn to fiat currency alternatives, the price action of gold, silver, and the miners could start to reflect the compelling fundamentals.

Roger Lipton



The US debt at 9/30/00, excluding unfunded entitlements,  just before President Bush took office was $5.7 trillion. Eight years later, at 9/30/08, just before President Obama, the debt was $10.0 trillion. Eight years later, at 9/30/16, just before President Trump, the debt was $19.6 trillion. Four years later, at 9/30/20, just before President Biden, the debt was $26.9 trillion.


Quoting the most recent Congressional Budget Office (CBO) update :

“At 14.9 percent of gross domestic product (GDP), the deficit in 2020 was the largest it has been since the end of World War II. Much of that deficit stemmed from the 2020 coronavirus pandemic and the government’s actions in response—but the projected deficit was large by historical standards ($1.1 trillion, or 4.9 percent of GDP) even before the disruption caused by the pandemic. In the CBO projections, deficits as a percent of GDP fall between 2021 and 2027 (from 8.6 percent of GDP to 4.0 percent), and then increase to 5.3 percent of GDP by 2030—more than one-and-a-half times the average over the past 50 years.”

It is worth noting that the CBO has consistently overestimated the projected growth (and tax receipts), underestimated the spending and therefore substantially underestimated the deficit. With that in mind, the CBO projected 8.6% deficit in the current year,  as a percent of GDP would amount to about $2 trillion so the US will pass the $30 trillion round number in calendar 2022. No matter what Modern Monetary Theory tells you, the debt matters because it is a proven drag on growth. Even if interest rates continue to be suppressed, only 1% on $30 trillion is $300 billion so that’s a guarantee that the deficit will continue to be a problem. It’s also a guarantee that interest rates will not go up much if the Fed can control it. If and (as we believe) when that is no longer the case, it will indicate that the Fed has lost control, inflation is about to take off, and all bets are off in terms of the economy and capital markets.


New records are being set as $18.4 trillion of global debt is now priced to yield less than zero, up from less than $8 trillion in March and a five year average of $10.3 trillion. As noted monetary historian, Jim Grant, points out: “nominal negatIve yielding debt had never been seen in material size  in 4,000 years of interest rate history prior to the current cycle, and recent happenings suggest that upside-down debt may grow larger still”.

Negative “real” yields, which subtract the inflation rate from the stated “nominal” interest rate creates a strong incentive for investors to reach for yield in the capital markets, no matter what form that risk might take. This TINA (There Is No Alternative) approach to investing is why Tesla, Doordash and $60 or $70 billion worth of SPACs are trading where they are as stock market averages his new record highs. It also means that savers not willing to play the TINA game are being screwed (no better way to put it ), to the benefit of central bankers and politicians who are kicking the fiscal/monetary can down the road. Negative interest rates also improve gold as an investment because the absence of interest or dividends is better than the negative yield on government debt.

We have pointed out before that negative “real yields”, along with lots of other current indicators, have strongly supported higher gold prices. We are admittedly surprised that the gold price and gold mining stocks have given back over half of the mid-2020 gains, and we attribute this “consolidation” to (1) The group had become a little too popular in the middle of the year and technically needed a correction to  shake out the weak holders and set the stage for the next leg up (2) The stock market strength precluded a perceived need for a safe haven (3) The next trillion dollars of government fiscal stimulus was put on hold until after the election (4) The Federal Reserve balance sheet, above $7 trillion, is “only” growing by $150B/month, no longer a shock to the capital markets.

We do not believe that the current strength in cryptocurrencies such as Bitcoin is as much of a culprit as the factors above, since gold and gold mining stocks are far more of a long term “store of value” rather than the crypto currencies that are primarily trading vehicles.

We believe fiscal stimulus is coming shortly, to be followed by more fiscal/monetary support in just a few months and more after that, ad infinitum.

This point in time happens to coincide with gold bullion and the gold mining stocks trading just at the technical support price at the 200 day moving average. We are determined not to play it too cute with our holdings of gold mining stocks, trading out at a short term peak, and trying to time a re-entry. The long term potential is too compelling. The gold mining industry is the least expensive asset class we know of, not only protecting purchasing power over the long term, but a potentially very lucrative investment in nominal terms. We reiterate our belief that the gold price will increase by several times in value over the next three to five years and the gold mining stocks by a multiple of that. (Our investment partnership remains open to qualified investors.)

Roger Lipton




The general market has been very strong since the election, so there has been less perceived need for a “safe haven” such as gold. Gold bullion was therefore down about 5.7% in November and the mining stocks were down 8-9%. However, it has become increasingly clear over the last week or so that Janet Yellen, the apparently incoming Treasury chief,  will be a predictably doveish monetary policy participant. That is one reason that gold and the gold miners have “caught a bid” in the last few days. Perhaps it is dawning on investors that the deficits and spending and debasement of fiat (unbacked) paper currencies around the world will definitely continue. The new administration has been dubbed by some as “Obama 2.0”. Recall that in the first two years of President Obama’s administration gold bullion went up 100% and the gold miners went up over 200%.

We discuss below the recent short term performance, perhaps why gold has been in a consolidation mode over the last four months, and then a longer term discussion. While I understand that many of you don’t want to deal with these details, we like our readers to be as well informed as possible.


The chart just below is over the last several years, and shows how the price of gold has correlated with “real yields”, that is the actual short term interest rate (inverted on the chart) adjusted for inflation. With short term rates less than 0.5% and inflation of 1.5-2.0% the “real yield” is now close to a negative 1.5%. That means that savers, in high quality fixed income securities, are losing purchasing power of 1.5% annually. It also means that, from the standpoint of current real return, investors are 1.5% better off in gold, yielding zero. The chart shows how gold has moved up in price as the real yield became increasingly negative. Over the last four months, however, you can see that the negative real yield (in red) stabilized and actually became a little less negative, so bears on gold speculated that interest rates were moving up, real yields might be rising and gold would be less attractive, so the gold price corrected over 10% from its high in early August.. Lately, however, you can see real interest rates (in red) breaking out on the upside, so the real yield (inverted on the chart) is becoming more negative. Contributing to this situation is over $17 trillion (a new high) of sovereign debt worldwide yielding less than zero. This type of action presaged earlier upward moves in gold bullion, and the miners, so that might well be the case again


The USA is the most powerful nation on earth. The holding pattern we are in before the new administration takes control, as well as the Covid-19 vaccines become widely distributed, has affected the world we live in, on many levels.

At the moment In the capital markets: The stock market chooses to look across the valley, flirting with an all time high as this is written. Traders have lightened up on their gold bullion positions, since a “safe haven” is not considered as necessary. Gold mining stocks have retraced virtually their entire gains since the first of the year. The reasoning in a nutshelll: (1) A new, more comforting, US administration is about to take office (2) Vaccines are on the way (3) There is no alternative to investing in the equity markets (TINA) since interest rates are so low.

Meanwhile: The facts of life include the following discussion points. Take them under consideration, with the cautionary overview that it is very difficult not to be seduced by the madness of crowds. 

With that preface:

The central banks around the world continue to stand by, prepared to accommodate further when necessary, which will no doubt be the case, though the form it takes is a bit more uncertain. Overall,  the basic situation has not changed, in terms of (1) Negative interest rate debt, which is at an all time high (2) The current deficits and cumulative debt are at record levels (3) Most asset classes have been bid to record levels (4) Governments around the world are searching for sources of funds, and the public will pay (5) Gold is underpriced, the gold mining stocks even more so.


The total worldwide sovereign debt now selling at negative interest rates has just hit a record of $17 trillion. China, for the first time, recently sold negative yielding debt. Major trading nations compete with each other to raise capital so the fact that German five year bonds sell with a negative .74% yield allowed the Chinese to provide an attractively higher yield at a negative 0.15% on their five year paper. The Chinese issuance was part of a package that yielded a barely positive 0.318% for ten years and 0.665% for fifteen years.

People…this kind of situation has not happened in recorded history, and is not good.


As we have written before, the addict needs an increasingly large “hit” to maintain the “high”, though hardly anyone would say that the worldwide economic situation is rocking and rolling (i.e.”high”) While common wisdom these days is that the economy was strong before Covid-19 hit, US GDP  (up about 2.5% in calendar ’19) was forecast, before the Covid-19,  to grow only about 1.5% in Q1, clearly rolling over. The chart below shows vividly how large the stimulus, worldwide, has been, to get us through the pandemic, compared to the last crisis.

People….there has to be a hangover after this fiscal/monetary party.


Ben Bernanke, Fed Chairman ten years ago, made it clear that his Fed’s objective was to support asset prices, which in turn would hopefully create a trickle down wealth effect for the broad economy. Janet Yellen, and now Jerome Powell have continued in the same vein. Moreover the mandate has evolved, as described by Powell, to achieve a “symmetrical” two percent inflation rate (tolerating above 2% for a while) and, most recently, economic growth that will benefit all segments of the economy, clearly targeting the wealth gap. This policy, echoed by central banks worldwide, has produced negligible interest rates of fixed income securities (all the way out to thirty years),  supporting the stock market because TINA (there is no alternative). The chart just below shows vividly how US equities (the S&P 500, ex financials) are selling at 49x free cash flow, almost 50% higher than at the top of the dotcom bubble.

People…..safe to say we are closer to a top than a bottom.


First, we should understand that the minimal, or even negative, interest rates, are a form of wealth transfer. Fixed income security holders earn nothing, losing ground to even minimal inflation, and the government benefits from negligible interest cost on Treasury securities.

Additionally, though President-elect Biden publicly dances around the subject, it is clear that tax rates in the US will go up under his administration. It won’t be close to filling the cash flow gap but will be designed as acceptable to the public while the can (cash flow gap) gets kicked down the road. There has been a lot of discussion in the United Kingdom on this subject and our policies tend to mirror theirs.  Rather than a Value Added Tax (VAT) which would raise the most money but tax everyone, taxes targeting the rich alone are more politically preferable. This could include a tax on homes with a value above a certain level, much higher capital gains taxes, higher estate taxes, and higher rates on large incomes. The charts below show the long term trends in tax rates both in the UK and the US. Tax rates in the future may not match the 90%+ as shown in the charts, but higher than today they will be.

People…..it won’t be enough to materially reduce deficits, but everyone will be paying a more “fair share”.


The price of gold has historically correlated strongly with the U.S. debt buildup, the growth in money supply, the buildup in negative yield debt, and Central Bank asset buildup. It has also protected purchasing power both during inflation (as in the 1970s) and deflation (as in the 1930s). By every measure, the price of gold should be a multiple of its current price. Central Banks around the world, who are most attuned to long term monetary trends, have been collectively buying over 400 tons of gold every year in the last ten. Though central bankers never admit to liking gold as an asset class, since a gold standard limits the ability of central banks to create more currency, this is a classic case of “do as I do, not as I say”. Gold mining stocks, whose earnings are leveraged to the price of gold, are even more underpriced than gold bullion itself. With the gold price almost the same as the $1900 high of 2011, the gold mining stocks are 50-60% below those levels. This undervaluation is underlined because, as the chart below shows, they have flipped from a negative cash flow position to free cash flow generators. One can only imagine how much cash they will generate as the price of gold (their end product) catches up with other asset classes.  Dividends are already being steadily raised by many of the major miners, just as they were in the 1930s, when Homestake Mining, between 1929 and 1936, paid out dividends worth three times the 1929 stock price.

People….it’s not a question of IF, more a question of WHEN.


We see no constructive movement, in terms of dealing with economic imbalances and fiscal/monetary distortions. The problems are an order of magnitude impossible to comprehend, let alone deal with, and have been created over decades, The current crop of politicians, worldwide, give no indication of a willingness to directly confront the situation.

We continually search for the flaws in our long term investment argument. If the facts, and important trends have changed, we would gladly adjust our approach. This is not the case, however. The fiscal/monetary influences on the worldwide economy have been on a parabolic ascent in recent decades. Stagflation, as in the seventies but worse, is the best outcome we can hope for in the foreseeable future. Events will at some point force the necessary financial, political and social changes necessary to encourage long term productive economic growth. The operative phrase is AT SOME POINT…..

Roger Lipton



It is difficult to step back from the 24 hour news cycle and focus on the forest, rather than the trees.  As of 9/30/2000, a mere twenty years ago when GW Bush was elected,  the total US Debt amounted to $5.7 trillion. In 2008  Barack Obama bemoaned the “irresponsibly built” debt of  $10.0 trillion, then took it to $19.6 trillion by 9/30/2016. Donald Trump campaigned suggesting he could balance the budget and begin to reduce the debt and the current total is now over $27 trillion. Even without the “extra” couple of trillion to cope with Covid-19, he was on pace to substantially exceed the pace of his predecessors. The deficit the next twelve months is likely to be in the $2-3 trillion range in the current fiscal year ending 9/30/2021, so the beat goes on.

Anyone who thinks our economy will resume long term real GDP growth in excess of 3% is ignoring the crushing burden of the ongoing debt buildup. The best we can hope for is “stagflation” as our dollar loses its purchasing power over the long term and the worldwide economy moves toward the “European Model”. This conclusion applies no matter which candidates, for the presidency and congress, prevail. The public (on both the political right and the left) wants health care insurance with no regard for pre-existing conditions, continuation of social security and other entitlements, increasing support for education at all levels, continued high defense spending, as well as other forms of government support. The Federal Reserve Bank has taken up the task of narrowing the wealth gap. All of this means continued major government spending, far in excess of government receipts. Larger government may be more predictable under Democratic leadership but will also be a necessary reality under the Republicans. Neither Trump, Pence, Biden or Harris created this situation. It has been created over decades, and the current players can only kick the can down the road, at best.

The worst outcome that we can envision is a deflationary depression, possibly one that could match or even exceed that of the 1930’s.

Our opinion is that the can gets kicked down the road, at least once more. These cycles take years to play out, so the timing of the ultimate “reset” is impossible to accurately  predict.


There is lots of additional news, all of which only serves to intensify the financial distortions that we have been describing for years. With the US election upon us,  there seems to be nobody that expects government (fiscal) or federal reserve bank (monetary) support to be reduced after the election. It is virtually certain to be quite the contrary. Below we will hit a few “high” or perhaps “low” points, while quoting several more well known authorities than ourselves.

We have described many times how debt issuance brings forward demand, at the expense of future consumption. We have also pointed out, as Reinhart and Rogoff described over ten years ago in “This Time is Different” (chronicling 800 years of business history) that once government debt reaches approximately 100% of GDP it is a noticeable drag on productive growth.

Lacy Hunt and Van Hoisington of Hoisington Research said recently: “Countries in a debt trap (our italics) like the US, Japan, the UK and the Euro Area have experienced a fall in short term interest rates to the zero bound, in some cases into negative rates, thus eliminating monetary policy to play a role in supporting the economy.” In other words, once at zero, below zero can’t help much.

Hunt and Hoisington described the increasing burden of the debt buildup this way: “As proof of the connection (between debt and GDP slowdown), each additional dollar of debt in 1980 generated a rise in GDP of 60 cents, up from 54 cents in 1940. The 1980s was the last decade for the productivity of debt to rise. Since then this ratio has dropped sharply, from 42 cents in 1989 to 27 cents in 2019.”

Hunt and Hoisington also said “Debt financed fiscal policy can provide a short term lift to the economy that lasts one to two quarters. This was the case with….2009, 2018 and 2019. However, the benefit of these actions…even when the amount of funds borrowed and spent were substantial, proved to be very fleeting and the deleterious effects remain. The multi-trillion dollars borrowed for pandemic relief in Q2 encouraged the beginnings of a “V” shaped recovery, but this additional debt will serve as a persistent restraint on growth going forward. When government debt as a percent of GDP rises above 65% economic growth is severely impacted and becomes very acute (our italics) at 90%.”

Keeping the above in mind, we present the following chart, provided to us within our subscription to Grant Williams’ “Things that make you go hmmm”. Shown are examples of what was going on, describing profound societal adjustments that have accompanied the debt levels of today. Fifty one out of fifty two times in the past, when debt gets to 130% of GDP, the country eventually defaulted  on its financial obligations, one way or another, which is exactly where the USA is right now.


As the final footnote to this discussion, to demonstrate how dramatic the government intervention has recently been: the legendary investor, Howard Marks, pointed out recently that: “in the four months from mid-March to mid-July of this year, the Fed bought bonds and notes and other securities to the tune of more than $2.3 trillion. That was roughly 20 times what it bought in 18 months during the Global Financial Crisis (of ’08-’09).”  We have it it this way: the “drug addict needs an increasingly powerful ‘hit’ to maintain the ‘high’”.

Take all of this under consideration as you position yourself financially.

Roger Lipton