Tag Archives: interest rates

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.

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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

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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

 

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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.

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

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INCLUDED IN YOUR ANNUAL SUBSCRIPTION:

  • Broad economic insight. As described in “Restaurants/Retail – Why Bother?” the restaurant and retail industries provide a leading indicator of far broader economic trends. You no longer have to be the last to know.
  • Two to three analytical pieces per week (“Roger’s Rap”) personally written by Roger Lipton describing corporate developments within his industry specialization, including their relevance to the broader economy.
  • Periodic “macro” discussions personally written by Roger Lipton, analyzing fiscal and monetary matters that will likely affect your investments and your business.
  • Opportunity to “Ask Rog” about your personal concerns, regarding individual companies or broader economic trends. Roger will use his best efforts to answer questions submitted, obviously limited by the number of requests . He may answer your question by email directly and/or include your question with his “Roger’s Rap” releases.
  • You are provided access to “Friends of Rog”, depending on your financial and operational needs. The outstanding individuals suggested here, have been personally “vetted” by Roger over decades. Roger receives no compensation based on whether or not use their services.
  • A free copy of the legendary best selling book, How you can Profit from the coming devaluation, as shown at right, written in 1970 by Harry Browne, which predicted the 2000% rise in the price of gold. This profound piece is more relevant today than ever, so Roger re-published it in 2012. This book will help you preserve the fortune you are in the process of accumulating.

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.

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

To access this content, you must purchase Website Subscription.

INCLUDED IN YOUR ANNUAL SUBSCRIPTION:

  • Broad economic insight. As described in “Restaurants/Retail – Why Bother?” the restaurant and retail industries provide a leading indicator of far broader economic trends. You no longer have to be the last to know.
  • Two to three analytical pieces per week (“Roger’s Rap”) personally written by Roger Lipton describing corporate developments within his industry specialization, including their relevance to the broader economy.
  • Periodic “macro” discussions personally written by Roger Lipton, analyzing fiscal and monetary matters that will likely affect your investments and your business.
  • Opportunity to “Ask Rog” about your personal concerns, regarding individual companies or broader economic trends. Roger will use his best efforts to answer questions submitted, obviously limited by the number of requests . He may answer your question by email directly and/or include your question with his “Roger’s Rap” releases.
  • You are provided access to “Friends of Rog”, depending on your financial and operational needs. The outstanding individuals suggested here, have been personally “vetted” by Roger over decades. Roger receives no compensation based on whether or not use their services.
  • A free copy of the legendary best selling book, How you can Profit from the coming devaluation, as shown at right, written in 1970 by Harry Browne, which predicted the 2000% rise in the price of gold. This profound piece is more relevant today than ever, so Roger re-published it in 2012. This book will help you preserve the fortune you are in the process of accumulating.