Tag Archives: US Debt

SEMI-MONTHLY FISCAL/MONETARY REPORT – GOLD AND THE GOLD MINERS CONTINUE THEIR MOVE, NEW PRICE OBJECTIVES !

SEMI-MONTHLY FISCAL/MONETARY REPORT – THE STIMULUS IS MIND BOGGLING – GOLD AND THE GOLD MINERS HAVE JUST BEGUN THEIR MOVE !

The Coronavirus will pass, but the economic ramifications will be far longer lasting.  You don’t get out of a fiscal/monetary hole by continuing to dig. The current health crisis has brought forward, accelerated, and magnified the economic trends that were already in place. The monstrous buildup in debt is important because economic history has clearly shown that the higher the debt burden the bigger the drag on productive growth. This is why “the longest (and falsely promoted as “the strongest”) economic expansion in US history only provided 2.3-2.4% annual real GDP growth from ’10 through ’19. You heard it here first: there is no chance in hell that future growth (after the “dead cat bounce” from current levels) will be higher than 2% or so, likely to be materially  lower, with the new debt burden that the world will be carrying. 

We all know that the Fed balance sheet is exploding, as it finances the monstrous government spending. It is instructive to look at the pattern of growth over the last dozen years, as the supposedly apolitical Fed ignores the conservative side of the Keynes economic equation. John Maynard Keynes suggested, the in the late 1920s and early 1930s that the Fed should provide stimulus in hard times and pull it back in better times, presumably muting potential booms and busts. Unfortunately, economic conditions never seem to get good enough to remove the previous accommodation. Recapping the last dozen years: The Fed Balance sheet was under $1T in early ’08. It grew to about $2.2T by late’08, stayed around that level until mid ’09 when it started moving to about $3T by late ’11. From late ’12 to late ’14 it moved to $4.5T where it stayed until early ’18. The economy apparently never got quite good enough to pull back between ’10 and late ’17. In early ’18 the Fed announced a program of “automatic” reduction, with the implied objective to get back to perhaps $2.5-3.0T. It got back (only) to $3.7T by the end of ’19, but with the economy softening and distortions in the short term “repo” bond market, the Fed backed off and built its asset base to $4.2T, clearly on the way to a new high by mid’20. Which brings us to the current “new world”. Since March 4, 2020, the Fed has taken its balance sheet from $4.2T to $7.0T, and Chairman, Jay Powell, has indicated that he will do “whatever it takes”. We expect it to be $10T or more in a matter of months. People, this does not provide organic, productive, sustainable economic growth. This only provides an addictive high (not so high, in this case), supportive by always increasing doses of fiscal/monetary drugs.

The debt and deficits that require the Fed’s intervention are likewise exploding. The US debt, excluding unfunded entitlements like Social Security, is now over $25T, up from $22.7 at 9/30/19. The operating deficit which was supposed to be about $1.2T for the full year ending 9/30/20 is now expected to be at least $4.0T. The deficit in April alone was $738B. At this junction, after trillions of dollars have already been provided, it is clear that there is much more fiscal/monetary stimulus to come and nobody knows the ultimate magnitude or duration. Most importantly: virtually everyone, fiscal hawks and doves alike, bipartisan in nature, agree that the support must be provided, and we can all worry about the ramifications later.

THE PRICE OBJECTIVE FOR GOLD BULLION

The price of gold has shown a strong long term correlation with the federal US debt. The buildup of the Federal Reserve balance sheet over the last fifteen years has also strongly correlated with the gold price. The above discussion therefore supports a materially  higher price of gold related securities.

We believe that gold has proven itself for thousands of years as a store of value and the ultimate currency. It competes with paper currencies as the supply and demand of one currency (gold) must relate to the supply and demand of (these days) unbacked colored paper. The following chart shows the value of the gold held by the United States, since 1918 (shortly after the Fed was established in 1913), relative to the adjusted monetary base. A chart looks similar on a worldwide basis. You can see that from 1913 until just before the end of WWII, the value of the gold was about 35% of the monetary base. After the Bretton Woods agreement in 1944 whereby the US Dollar was established as the reserve currency, the percentage drifted down. The monetary base was growing steadily, and the US gold backing was declining, but the world was relatively unconcerned during a postwar recovery period. In the late 1960s, however, as US spending for the Vietnam War and President Lyndon Johnson’s Great Society accelerated, US trade and operating deficits became widely anticipated. Over 50% of the US gold was exchanged for dollars within eighteen months prior to August, 1971, when Richard Nixon “closed the gold window”. At that point, our gold amounted to only 6-7 % of the US monetary base. This level is important because we are back to that same level today.

We are not suggesting that the US, or anyone else, will make their paper currency convertible into gold any time soon. It wouldn’t work for long, in any event, because deficits in all major trading countries are larger than ever, and paper currencies would once again be tendered for gold. No country could back their currency with gold, unless they were “balancing their books” or, at the least, that prospect was in sight. We do, however, feel that the value of the gold “in circulation” should have a relationship to the value of alternative currencies. You might be surprised to learn that the country most able to make their currency convertible into gold would be Russia, perhaps our most prominent political adversary and a consistently large buyer of gold.

he chart above indicates that 7% could be 35%, or five times the current price. This  ballpark calculations indicate what we consider to be a rational value of 5-6x the current $1740/oz, or $8700 to $10,440/oz. This ballpark price range objective is at the current time. The monetary base is now rising at about 20% per year with all the money printing to support the economy in the current crisis. Though gold is now moving steadily higher, the monetary base is also rising so the price objective within just the next few years could be well over $10,000/oz.

THE TIMING – FOR GOLD BULLION PRICES

The following two charts provide insight into the possibility of an imminent major upward move. The first chart shows the high correlation of the gold price to the amount of worldwide sovereign negative yielding debt, which peaked at $16-17T in mid ’19 and is now in the low teens. Even in Germany, the strongest European country, the entire yield curve has been negative or close to it. We believe that the amount of negative yielding debt will continue its upward march and could even include some of the US debt, especially based on President Trumps implied blessing just in the last couple of days. The continued upward trend of this indicator could be influential in breaking the gold price out above the previous all-time high of $1911. That, in turn, could ignite the price toward the price objectives noted above.

The second chart shows a nineteen-year price chart of gold. It shows the end of an 11-12-year bull market, ending in 2012, then a 6-7 year “consolidation”. The price has now clearly broken above $1400, the previous high. Chart technicians would say that the longer the base, the bigger the move. It is conceivable that a new bull market has begun that could last for quite a few years. This would tie in to our logic that the price of gold could be 5-6 times higher over a number of years.

There are other charts we could provide that show a long term correlation of the price of gold to the level of US debt. Over the last fifteen years the same sort of correlation has taken place between gold and the buildup of the Federal Reserve balance sheet.

THE GOLD MINING STOCKS

The chart just below shows the gold mining index, XAU, relative to the price of gold bullion. Since 2008, the relative valuation of gold equities to gold bullion has fallen 75% from the prior 25-year average. The ratio of the XAU Index to spot gold averaged 0.25x for a quarter century through 2008. As of 3/31/2020, the ratio was 0.05x.

We believe that the substantial divergence in performance is due to mostly outdated opinions, the justification for which have been corrected over the last 10-12 years. Managements have been improved, balance sheets have been strengthened, operations have been streamlined. Additionally, energy costs, which are 15% or more of mine operating expenses are 60-70% lower today than they were a decade ago. Combined with sharply higher gold prices, results from established miners have been impressive recently and should become even more so.

SUMMARY

The healthcare crisis has accelerated, magnified, and brought forward in time many of the long term fiscal/monetary trends, as well as fundamental developments in our society. We believe that the worldwide economy will stagnate, at best, after the short term sequential bounce from the current situation. Some companies will survive and prosper, many will not. All will change to varying degrees. Profit margins will change, mostly for the worse. From an investment standpoint, we continue to feel that gold mining companies are the single best asset class in terms of reward versus risk. We’ve been joined lately in our conviction relative to gold by legendary investors and portfolio strategists such as David Rosenberg, Jeff Gundlach, Ray Dalio, Jim Roberts, Stanley Drukenmiller, David Einhorn, Stephanie Pomboy, Luke Gromen and others. Long term proponents of gold and gold miners such as John Hathaway Fred Hickey, Bill Fleckenstein and Peter Schiff are more convinced than ever. Though it’s nice to have some “smart money” in our camp, the investment world in general is just beginning to take small positions in this sector. Gold bullion is up about 15% this year at this moment (a safe haven, after all). The miners, which were down for the year a month ago, are now in positive territory and catching up with bullion. In the last six weeks, gold mining stocks have moved about 4x the price change of bullion.  We believe we are still in the first inning of the resumption of the long term bull market for gold related securities.

Roger Lipton

SEMI-MONTHLY FISCAL/MONETARY REPORT – FED FINANCES MOST OF US DEFICIT – WALL STREET JOURNAL SAYS US HAS CHINA WHERE WE WANT THEM, NOT ON YOUR LIFE!!

SEMI-MONTHLY FISCAL/MONETARY REPORT – FED FINANCES MOST OF US DEFICIT – WALL STREET JOURNAL SAYS US HAS CHINA WHERE WE WANT THEM, NOT ON YOUR LIFE!!

THE DEFICITS AND THE FED

The new fiscal year for the US government started October 1st. In the two months ending 11/30, the current deficit has been $337B, up 10.4% from a year earlier, headed comfortably over $1T for the current year, up from $984B.  As always, the increase in debt is higher, up $360B, the difference being the “off-budget” spending, mostly to finance the deficit in the social security entitlement account. Most years, this off budget spending totals a couple of hundred billions, still a serious amount of money.

It’s no coincidence that the Fed Balance Sheet has increased, from 9/25 until 11/27 by $194B so the Fed has financed about 57% of the two month operating deficit. It’s clear therefore that the Fed has no choice but to continue expansion of its balance sheet. Now at $4.095T, it is clear that a new high above $4.5T is in the cards by the end of the current fiscal year ending 9/30/20.  Of course, the old high was put in place to stimulate growth in the wake of the 2008-2009 financial crisis. The new high will take place in the middle of “the greatest economy the country has ever experienced.”

THE QUESTION: What’s the matter with this picture?

THE ANSWER: In the 2008-2009 crisis the Fed balance sheet went up by $3.5T. Might the Fed need to take its balance sheet to at least $7-8T to forestall the next downturn. With any addiction it always takes a bigger hit to maintain the high. Economic policy would be simple if recessions (and worse) could be easily avoided by the printing of new money. Do you not suppose that a price must be paid at some point ? It’s trite but true: if something can’t go on forever, it won’t.

OUR LEVERAGE, OR LACK THEREOF, NEGOTIATING WITH CHINA

Today’s Wall Street Journal describes how the US is in a relatively strong bargaining position relative to trade negotiations. We respectfully disagree. (1) Both economies are increasingly burdened  by debt and supported by government spending.  China, though growth is apparently slowing to a mid single digit pace, with financial strains to be sure, still owns the fastest growing major economy in the world. The US, with its own set of economic distortions, is growing at a tepid 2% rate. (2) China, though diversifying away from dollar denominated securities, still owns over $1T of our debt, and could create havoc by forcing worldwide interest rates higher with their sales. While the markdown on their remaining position might create some discomfort at home, this remains a possibility (3) China can offset new tariffs by weakening the Yuan, requiring retaliation by the US and other trading partners (4) China is dedicated over the long term to joining, or replacing, the US Dollar with the Yuan as a reserve currency. Most students of the situation believe that China is very substantially understating gold reserves. We believe that many other Chinese agencies besides the People’s Bank of China have been buying physical gold, and far more than the PBOC has reported. Add the fact that adversarial Russia continues to purchase physical gold. Nothing would please China, or Russia, more than to replace the US Dollar with a new reserve currency that is backed by gold, and we believe that is where the worldwide monetary system is headed. It so happens that China and Russia are in the best position to do so. The key question remains: when ???

Roger Lipton

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

SEMI-MONTHLY FISCAL/MONETARY UPDATE

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

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

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

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

Stay healthy. Stay financially flexible.

Roger Lipton

SEMI-MONTHLY FISCAL/MONETARY UPDATE – BUDGETS & DEFICITS – TALK ABOUT “FAKE NEWS”!!

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

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.