Tag Archives: interest rates

SEMI-MONTHLY FISCAL/MONETARY UPDATE – THE (FINANCIAL) MUSIC PLAYS, THE DANCE CONTINUES!

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – (FINANCIAL) MUSIC PLAYS, THE DANCE CONTINUES!

The general market was firm all month, and finished up for the month in spite of substantial weakness the last two days of the month. Gold bullion and the miners were down modestly most of the month (the miners down about 3% until last Thursday) but then got hit as well. Gold bullion finished the month down a little over 6% and the miners more like 10%. There are always a lot of moving parts but it seems like the major force driving gold and the miners lower was the dramatic increase in interest rates, to be discussed just below.

As most of our readers know, while we continue to be actively engaged within the restaurant industry, the majority of our personal liquid assets are invested in gold mining shares. That takes place within our twenty seven year old Limited Partnership, in which we are both the General Partner and the largest investing Limited Partner. Our writing within this website therefore reflects our two most active financial interests, the restaurant industry and the fiscal/monetary scene.

A SEVEN MONTH CONSOLIDATION IN GOLD & THE GOLD MINERS

It seems to us that by far the most significant recent influence on the price of gold and the gold mining stocks has been the steady rise in intermediate to longer term interest rates. The charts just below show how the price of gold started trending down, almost to the day back in early August, when rates started moving up. As shown in the charts below, while the 2 yr Treasury has moved hardly at all, interest rates from 5 yrs  to 30 yrs have moved steadily higher.

It is important to note that the ownership of gold (which itself pays no dividend or interest) competes in terms of current yield with short term rates (especially up to 5 yrs, 10 at the most), which have moved hardly at all. The two year still yields next to nothing. While the five year Treasury has moved from 20 bp to 60 bp is, this is only a nominal 0.4%, still almost nothing in terms of an annual return though it is a dramatic tripling of that rate. Even the ten year Treasury only yields about 1.5%, a lot less than the inflation rate, so the ownership of gold still has a “real return” over ten years.

There are two major potential drivers of higher interest rates. The first possibility is that the economy is getting a lot stronger and we don’t believe that is the case. The 4% increase in Q4 GDP was heavily influenced by the new stimulus checks, as well as pent up demand as the pandemic begins to wind down. The second possibility is the bond market’s anticipation of higher inflation, and we believe that is more likely the case. The most recent readings indicate a rate closer to 3% than 2% and the Fed is encouraging it. The Fed balance sheet continues to expand with their bond buying, $1.9 trillion of government spending is about to begin (with more to come), a new currency called Bitcoin has created a trillion dollars out of thin air and there are others such as Etherium. Commodity prices have moved sharply higher and a new $15 national minimum wage will contribute to higher retail prices. Lastly, as shown by the last chart below, the US Dollar has been weak, another harbinger of US inflation.

We should remind you at this point that higher interest rates would be very expensive for the US Treasury, since one extra point of interest on $28 trillion is $280 billion, blowing up the annual deficit even further. Though interest “earned” by Fed T’bill holdings is rebated back to the Treasury (after expenses), there are still many trillions of debt owned by individuals and foreign countries. Volker took interest rates higher from 1979 to 1982 to control inflation but the total US Debt was about $1 trillion then versus $28 trillion today, and the annual defict was about $100 billion versus $3- 4 trillion today. Unfunded entitlements was also a non-factor forty years ago while it is a hanging “sword of Damocles” today. Today’s economy is 7.5x the size of that in 1980, but the debt and the deficits are almost thirty times the size, excluding unfunded entitlements.

We’ve had higher interest rates (both short and longer term) reflecting higher expected inflation along with a sluggish economy before. In the 1970s gold went from $35/oz to $850/oz while stagflation took the Fed funds rate to 18%. Therefore, for all but the shortest term stock traders, negative real returns on short term US Treasuries (up to at least 10 yrs) remain a fact of life and gold related securities retain their allure. Our thesis remains very much intact.

FURTHER SHORT-TERM REFLECTION

Following the money in and out of Washington, DC: At this point, with foreign purchasers of US debt issuance backing off, our Fed Reserve is purchasing over 60% of newly issued US Treasury securities with new money printed out of thin air. The US Treasury sells the bonds to the Fed, pays interest (at low rates) and the Fed rebates their annual “profit”, derived from interest “earned”, after expenses, to the Treasury. The net effect is virtually a zero-interest cost on unlimited new capital and the Treasury doesn’t even have to issue colored paper. We listened last Wednesday to a congressman congratulating Fed chairman, Jerome Powell, on the Fed’s rebate of $88.8 billion for the year ending 9/30/20, which reflected the Fed’s “profit” after deducting $4.5 billion of operating expenses. This is noteworthy because (1) the $88.8 billion was generated from interest earned on the now $7.5 trillion balance sheet (created out of thin air), consisting largely of US treasury securities and (2) The annual US operating deficit is reduced by this $88 billion. (3) It costs US taxpayers four and a half billion dollars to manage this scheme. And there is no graceful way out of this mess.

THE REALLOCATION OF RESOURCES

As we wrote on this website two weeks ago, suppressed interest rates are a form of price fixing, and price fixing inevitably leads to the misallocation of resources. After the “revolution”, which will likely be financial, political and social, the sun will still rise in the east and set in the west. Life will go on, but the assets will have been reallocated among owners.

We have been fundamental value investors for over four decades and it has served us well over time. There have been successful investors that invest based on chart patterns rather than the corporate fundamentals, and that can work well for short term nimble traders. We believe, however, that, while charts can sometimes alert investors early to changing fundamentals, the charts reflect the fundamentals, not the reverse. We try to follow the advice of legendary investors like John Templeton, who suggested that you should buy “when there is blood in the street” and sell into broad euphoria.

FINALLY, OUR CONCLUSION

We cannot predict when the general stock market enthusiasm for SPACs and Bitcoin and technology companies selling for 50x SALES will run its course. With that backdrop, the gold miners trade at an Enterprise Value versus EBITDA (operating cash flow) of under 8x versus the S&P 500 index of double that and the spread is the widest in at least 10 years. Gold is the “real money” and the gold miners are storing it for us within their underground vaults (called gold mines). They will bring that currency north to exchange it for the colored paper of the day over time, and that will be reflected in the dividends paid and the price the shares trade for. There are lots of ways to protect oneself from the financial turmoil we foresee. In that context, mining stocks are the most undervalued asset class we know of and should therefore be a meaningful portion of an investor’s liquid assets.

Roger Lipton

SEMI-MONTHLY/FISCAL MONETARY UPDATE–DO YOU BELIEVE IN PRICE FIXING??

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SEMI-MONTHLY FISCAL MONETARY UPDATE – DO YOU BELIEVE IN PRICE FIXING??

Most capitalists believe that the natural laws of supply and demand encourage the most efficient production of goods and services that will benefit the largest number of consumers. Certain societal needs, such as medical care for those that cannot help themselves, educational needs for the underprivileged, safety precautions for individuals and local communities and the nation as a whole, infrastructure maintenance, etc. require governmental involvement. However, the natural tendency of politicians to overreach in an effort to satisfy their constituencies is a constant danger.

Which leads us to price fixing, our particular concern being price suppression, the control of price to a lower level than the marketplace calls for. This has been done now for almost a decade, as Central Banks, worldwide, attempt to support their business community with abnormally low interest rates.  An inevitable economic distortion takes place when politicians decide that the natural laws of supply and demand have to be overridden and prices are not allowed to rise. It has been proven time and again that this approach will ultimately fail and the unintended consequences make for the cure being worse than the disease. A black market gets established in the goods and services whose prices are being controlled. The controlled price discourages production and competition among suppliers, driving prices within the controlled marketplace higher. The end result is that prices move in precisely the direction that the politicians were trying to avoid.

The best example that some of us can recall was in the 1970s. Richard Nixon, along with “closing the gold window” in August, 1971, for the first time since WWII imposed a 90 day freeze on wages and prices as well as establishing a 10% surcharge on foreign imports. Nixon suggested that these adjustments would stabilize the value of the US Dollar, protect American manufacturers from foreign opportunists and control the inflationary trend which at that point was running just under 6%. The Dow Jones Average rose 33 points the next day, its biggest gain ever at that point, and a New York Times editorial applauded Nixon’s “boldness”. The early 1970s version of today’s SPACs, Bitcoin and Gamestop was the “one decision nifty fifty”, which crashed in 1974.

While the Nixon approach may have been a short term political success, it brought on the stagflation of 1970s, led to the instability of floating currencies with the US Dollar plunging by a third, and inflation peaked in the late 1970s at 12%, accompanied by a Fed Funds Rate of 18%.

TODAY’S INTEREST RATES ARE AN UNPRECEDENTED EXAMPLE OF PRICE FIXING/SUPPRESSION

Interest rates are the economic equivalent of our body’s pituitary gland. As described in Wikipedia, the pituitary gland secretes hormones that help to control growth, blood pressure, metabolic processes, temperature regulation, pain relief, and many other functions.

In a similar fashion, interest rates control deployment of capital. In a normal marketplace, capital investment, consumer savings, stock market and bond market capital allocation, and all manner of investment are applied to opportunity based on reward and risk. The higher the perceived risk, the greater will be the required rate of return in a natural marketplace. Short circuiting the monetary metabolism allows for misallocation of capital. If money can be raised at minimal cost, why not “take a shot”.

In recorded history, there has never been anything remotely approaching the $17 trillion of sovereign debt that is trading with negative interest rates. Central banks, worldwide, in an effort to support their local economies and keep interest rates at affordable levels relative to their respective debt loads, are holding down interest rates. Governments around the world, along with their Central Bankers, are kicking the can down the road, as savers get screwed with the non-existent returns on safe deployment of their capital.

SIGNS OF THE TIMES

In short, we are experiencing “misallocation of capital” to a degree never seen before. Savers are forced to “reach for yield”, desperately try to get some sort of return in stocks, in bonds, in alternative investments, in Bitcoin, anything to replace the much safer 4%, 5% or 6% they used to get in their five to ten year US Treasury securities. Unfortunately, investors, including institutional portfolio managers that should know better, are pursuing strategies based on FOMO (Fear Of Missing Out of a market that only goes up), TINA (There is No Alternative to the apparently fully valued stock market) and MMT (Modern Monetary Theory, which says the amount of debt doesn’t matter because interest rates are minimal).

Yesterday’s front page Wall Street Journal article is headlined: “Riskiest Firms Binge on Low Cost Borrowing, Struggling Companies obtain funding at rates once reserved for the safest businesses”. The High Yield Index, including embattled retailers and fracking companies, shows a current yield of just 3.97%. Compared to the 1.2% in 10 year US Treasury Bonds, this spread of just 2.77% is at a historic low.

Corporations with questionable prospects are therefore allowed to hang on far longer than they should. Some of the biggest short term gains in the stock and bond markets are among the companies that get one last “misallocated” bite of investment capital. The end will come at some point because, while the interest rate can be managed, the debt has to be finally repaid, and the company was never well positioned. Of course, some companies, such as the $100 BILLION worth of SPACs that have been financed in the last year, can sputter along for years because they have raised so much “free” capital.

THE FINAL RESULT

This interest rate price control scheme will predictably end badly at some point, the operative phrase obviously being at some point. The natural laws of supply and demand will take over, interest rates will start going up because capital providers will finally say “basta”. The risks will be just too obvious for capital to be provided with the same minimal rate of return. Inflation will follow bond yields higher. The Central Bankers have indicated that 2% plus, as an inflation rate, is acceptable, so 2.5-3.0% won’t be too bothersome. Inflation, however, will keep moving up and the Central Bankers will have no remaining tools to maintain the interest rate suppression scheme.

At some point, someone like Paul Volker will come along to implement corrective policy, but the resultant pain will be substantial. There was a recession from 1979 (when Volker arrived) until 1982 when Volker’s adjustments took effect. Though today’s US GDP is six times that of 1980, the debt now is $28 trillion instead of $1 trillion, and the annual deficit is $3-4 trillion versus $100 billion. The resultant detoxification of the financially addicted worldwide society will be painful. The good news is that, after the ”revolution”, the sun will continue to rise in the east and set in the west. The financial assets will, however, be largely reallocated.

Roger Lipton

SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD BREAKS OUT OVER $1600/OZ & THE US DOLLAR APPROACHES 6 YR HIGH – SCRATCH ONE MORE MYTH !!

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD BREAKS OUT OVER $1600/OZ & THE US DOLLAR APPROACHES 6 YR HIGH – SCRATCH ONE MORE MYTH !!

It’s an accepted fact that gold and the US Dollar move in opposite directions. Any number of economists, market strategists, and stock pickers have presented this as gospel. One true giant of the gold mining industry, no less than Pierre Lassonde, has stated that 90% of the price action in gold is dictated by the price performance of the US Dollar.

Not exactly !

If that were true, it would be impossible for gold bullion to be breaking out above $1600/oz., a multi-year high, at the same that DXY, the ETF representing the performance of the US Dollar relative to a basket of other currencies is hitting a multi-year high. WHICH IS WHAT WE HAVE TODAY !

There are a large number of other myths relative to the attractiveness of gold as a store of value and/or a speculative investment. We have dealt with many of the following over the years, will again in the future, and there are other myths as well:

Gold is mostly attractive as a “safe haven”, in times of economic, social, or political chaos.

Gold is useful primarily as an inflation hedge.

Gold can only go up when interest rates, especially adjusted for inflation, are very low.

Gold can’t do well when the stock market is doing well.

Gold is not as liquid as other currencies.

Gold’s absence of dividends is a killer in terms of a store of value.

Gold, going forward, is far less attractive than bitcoin or other crypto-currencies.

I could go on, but for the moment: THE STOCK MARKET AND THE US DOLLAR ARE HITTING NEW MULTI-YEAR HIGHS AND and (somehow) SO IS GOLD !!

Roger Lipton

P.S. But the gold miners are still down 50-70% from their highs & that’s another story for another day !!

SEMI-MONTHLY FISCAL/MONETARY REPORT – THE ECONOMY, FED’S BALANCE SHEET, INTEREST RATES, GOLD

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SEMI-MONTHLY FISCAL/MONETARY REPORT – THE ECONOMY, FED BALANCE SHEET, INTEREST RATES, GOLD

A PROGRESS REPORT: IN SUMMARY

THE ECONOMY

Meet the new economy, very similar to the old economy. While the Trump administration touts the 3% (and moving higher) economy and history making low unemployment rate, real GDP growth came in at 2.3% in Q1, down from the 3.2% peak of Q3’17 and 2.9% in Q4’17. Both of the H2’17 reports were inflated by storm remediation expenses. Keep in mind that government spending, now at a record level, contributes to GDP, so the “organic” economic growth is very similar (within a couple of tenths) to the 2.3% average under the Obama administration, even in spite of deficit spending that is ramping higher. The 3.9% low unemployment rate is a function of a participation rate moving lower, not materially more employment. There is no question that things are a lot better than nine years ago when 600,000 workers were let go each month and there are more companies looking for workers as the necessary skills are often not present. Balancing the picture: while the tax cut has now kicked in, so have higher gasoline prices, and the consumer savings rate is moving higher once again after coming down late last year. Our readers know that we look at restaurant sales as a predictable leading indicator of the general economy. Today’s Miller Pulse headline tells us that April sales were “the highest since 2016”.  Unfortunately, the 1.6% sales gain in April was overcome by negative traffic of 0.7%, the 26th straight month of traffic decline. Two year same store sales rose 1.2% in April, vs. 1.1% in March and a 1.8% decline (the storms no doubt) in February.  If we consider that prices are rising by a couple of percent per year, traffic is running down 3 or 4% over two years. “Down so far, down looks like up to me” is the country western song writer’s way to put it.

THE FED’S BALANCE SHEET AND INTEREST RATES

We all know that the Fed is normalizing it’s balance sheet, by $10B/month in Q4’17, then $20B/month in Q1’18, now at $30B/month in Q2, going to be $40B/month in Q3 and $50B/month in Q4. These reductions are supposed to be “automatic” as treasury securities and other holdings mature and the balance of the planned decrease is liquidated. We have discussed before how interest rates have steadily moved upward, beginning exactly last October when the normalization started. The planned reduction got behind almost immediately in Q4’17, kept pace through in Q1’18 and April’18, though not making up the shortfall of Q4 and has gotten further behind in early May. Our analysis shows that the cumulative shortfall is about $30B at this point, and of course that can change week to week. It may be no coincidence that interest rates are back to their high this morning, with the ten year at $3.05%, as the Fed tries to reduce by $15B or more this week to catch up. The bottom line is that the Fed’s balance sheet normalization is more than likely to drive interest rates still higher, at least that’s the way it looks so far. This interest rate rise in turn affects housing (see Home Depot stock this morning), auto sales, consumer interest expense, and contributes to a stronger dollar which undermines the general economy further.

GOLD and GOLD MINING STOCKS

The stock market has been up eight days in a row (until today), interest rates (and the dollar) have been firming slowly (more than “firm” this morning) so there continues to be no urgency to look to gold as a “safe haven”. We have pointed out in the past that neither higher interest rates nor a strong dollar are a death knell over time for gold related securities but in the short run a weak dollar and lower interest rates are better. Considering the recent strength in the dollar and the steady march of interest rates higher this year, the fact that gold bullion is virtually unchanged for the year and the mining stocks are down only modestly is not terrible performance. The gold mining companies, which is our primary way to participate in this out of favor asset class, are holding the “real money” in the ground for safekeeping. It’s just a question of time until they bring it north and exchange it for the “colored paper of the day”, at much higher dollars per ounce than today.

SEMI-MONTHLY FISCAL/MONETARY UPDATE – MODEST APPARENT CHANGES IN APRIL, HUUUGE DEVELOPMENTS UNDER THE SURFACE

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – Modest apparent changes in April, huge developments under the surface!

 

The results for all the capital markets changed only modestly in the month April, in spite of intra-month volatility. Gold bullion was down almost exactly 1%, Gold mining stocks were up about 1.2%. We continue to feel that the gold mining stocks, represent the best value (and most unloved) asset class of all. The “money” is being safely stored, in the ground.  It is just a question of when it will be brought north and exchanged for the “colored paper” of its time, and the quantity of green paper (in the US) will be a multiple of the current $1300 per oz. The increase in profits for the gold miners will be huuuge and the stocks should sell for multiples of the current price.

We believe that the lackluster price action in gold and the miners has been due to the expectation of much higher interest rates, an apparently stronger economy, the perceived lack of a need for gold as a “safe haven”, and the renewed strength in the US Dollar. We don’t believe any of these factors will last much longer, and none of which will preclude higher prices in the long run.

The US economy is not as strong as advertised. After several quarters last year that averaged about 3.0% of real GDP growth, Q1’18 came in at a modest 2.3%. It is important to note that government spending of $4.5 trillion is part of our $20 trillion GDP economy. When government spending of $150 – $200 billion (over perhaps H2’17) to repair storm damage, that adds 1.5 to 2.5 points to GDP growth. That means that something like half (or more) of the “growth” in the last six months (as a % of $10T of six months’ GDP) was due to storm remediation. (That’s correct, I checked the math three times.) As another example, an increase of $100 billion in defense spending, over a year, will add 0.5% to our annual GDP. So, the bigger the deficit (in turn increasing interest expense), the better the GDP appears. The apparently stronger GDP growth in H2’17 was also positively affected by the weaker dollar and this, too, has changed lately, probably contributing to the tepid 2.3% Q1’18 GDP real growth.

Interest rates have moved up steadily, as the Fed has simultaneously raised the short term Fed Funds rate and sold increasing amounts of its bloated $4.3 trillion balance sheet. The much higher interest expense, combined with government spending will explode the deficit, which in turn will burden the economy even further. The Fed will back off. We will have new round of stimulus, much bigger than the “financial heroin” hit of ’08-’09. That should finally spark gold related securities much higher. It’s just a question of time.

Roger Lipton

SEMI-MONTHLY FISCAL/MONETARY UPDATE – FED BALANCE SHEET, REALLY GETS INTERESTING FROM HERE

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – US FED BALANCE SHEET, REALLY GETS INTERESTING STARING IN APRIL

Recall that our Federal Reserve is trying to normalize their balance sheet, at the same time as moving interest rates up from the artificially suppressed levels of the last decade. Both the creation of new money, here as well as around the world, as well as the unprecedented low borrowing rates have supported the economic recovery, tepid though it has been, since the great recession of ’08-’09.

Part of this Fed process is the sale (or lack of re-investment) by the  Fed, presumably on a programmed basis, of the accumulated treasury securities and other fixed income assets that were purchased as the Fed balance sheet increased by about $4 Trillion over the last decade. The reduction plan, announced in September ’17 called for $10B per month in Q4’17, $20B per month in Q1’18, $30B per month in Q2’18, $40B per month in Q3’18, $50B per month in Q4’18. That’s as far as the projected program went, for the time being. The problem is: virtually at the same time that the program started, interest rates started upward, as shown by the chart of the two year treasury note below.

The following chart shows the combined balance sheets of the six major central banks. Notice that the Fed balance sheet has been constant over the last several years, but every other major bank has inflated their assets, contributing to the worldwide monetary stimulus that has supported the worldwide economic recovery, such as it is.  It is important to know that, though most of the others continue to build assets, the European Common Bank, in particular, representing collectively the second largest worldwide economy,  has  discussed following our lead in terms of reduction, hopefully on a six month to a year lagging basis. The Bank of Japan is reducing purchases, China is trying to gracefully reduce their stimulative policies (including credit creation), and the Swiss National Bank is too small to matter. Overall, no major Central Bank is talking about expansion of balance sheet, all hoping for the opportunity to reduce, but, as the saying goes: “Hope is not a strategy.”> The question posed at the moment is whether the worldwide economy can tolerate our Fed’s reduction, let alone the others, at whatever point they come into play.

The following table shows the comparison between the presumably programmed reduction in the US Fed’s balance sheet, compared to the actual monthly performance. You can see that at know point has the reduction been “ahead” of schedule. The Fed has gotten behind, almost caught up, then most recently fallen behind by $31 B, when the cumulative reduction should have been almost $90B by now.  The next couple of weeks will be interesting, in and of itself, to see if the Fed tries to catch up with the monthly purchase plan. It doesn’t get any easier on April 1.

A short two weeks from now,  the rubber meets the road when the reduction is supposed to be $30B per month. Keep in mind that while the Fed will be trying to reduce by $30B per month (some of it by allowing maturing securities to roll off, without re-investing), our current deficit, which must be borrowed, is running at about $1T, annualized, and the treasury is re-issuing well over $1T, annualized, of existing short term debt that is maturing (without the Fed, who has been the biggest buyer in the past). All of this provides a daunting amount of supply to the fixed income capital markets, and the real possibility that interest rates will continue to rise substantially as a result. Should that happen, the US economy would be weakened, even to the extent of a recession.

It seems to us that the normalization process could come to a premature end, as the Fed aborts the asset sales and potentially adjusts the plan to raise interest rates further. Since each stimulus “hit” must be bigger than the last, to keep the economy moving ahead, in essence to maintain the “financial heroin high”, it will be interesting to see what’s required the next time around, and what form it will take.

Roger Lipton

 

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.

SEMI-MONTHLY FISCAL/MONETARY UPDATE – STOCKS UP BIG – BONDS AND GOLD DOWN – SUSTAINABLE?

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SEMI-MONTHLY FISCAL/MONETARY REPORT – GOLD “CONSOLIDATES” AS INVESTORS FEAR RATE HIKE – “PLAY IT AGAIN, SAM”

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SEMI-MONTHLY MONETARY UPDATE – GOLD “CONSOLIDATES” AS INVESTORS FEAR INTEREST RATE HIKE – “PLAY IT AGAIN, SAM!” (Woody Allen reference to Ingrid Bergman in 1942 film, “Casablanca”)

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

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

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

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

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

HELLO 2016 – THE ECONOMY, INFLATION VS. DEFLATION, INTEREST RATES & GOLD

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