SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD BREAKS OUT ON UPSIDE ! FOR GOOD REASON
First, let me say that it pains me to be so pessimistic in my fiscal/monetary observations. I think that those of you who know me would agree that I am not a “perma-bear” or congenitally downbeat. I tend to look at the glass as half-full (at least) and almost always look at the bright side of a given situation. However, it is one thing to be an optimist, and it is quite another to disregard history (“fiscal/monetary”, in this case) and reality. There are sometimes empirical facts that can be disregarded only at one’s peril. Someone once said that there are two ways you can look like a fool in relation to a crisis, one is to be “early” and the other is to be “late”. I continue to opt for the “early” alternative.
Over the last two weeks, it is apparent that the economy continues to sputter. Q1 GDP real growth is now estimated in a tepid range of 1.5-1.9%. The 10% growth in profits among S&P 500 stocks is largely due to easy comparisons in the oil patch. Half the gains in the S&P 500 stock index have been due to 10 stocks, including Apple, Amazon, Alphabet (Google) and a few others. interest rates have responded by moving lower again, Janet Yellin might only do two rate increases instead of 3-4, and gold has presumably “resumed” its long term bull market after a four year “consolidation”. The Trump Rally has run out of steam, as I suggested it might, as political reality has set aside the “animal spirits” following the election. Even with control of the White House and both Congressional houses, Obamacare, Taxes, Immigration, Infrastructure, etc.etc. are “very complex”, it turns out. It’s possible that $20 trillion of existing federal debt, excluding tens of trillions of unfunded entitlements is a significant limiting factor on legislative options, as well as a continuing drag on growth. As this is written, the federal debt ceiling is days away from being exceeded, so the political wrangling relative to a potential governmental “shutdown” is about to begin.
Our friend, and world famous market strategist/economist, David Rosenberg at Gluskin Sheff in Toronto, just wrote: “..as we have said time and again, the best leading indicator from within the sales data are restaurants — not to mention that this is among the most discretionary of all the segments of the household budget. And sales on this front dropped 0.6% MoM after a 0.3% decline in February — down now in three of the past four months and four of the past six months.” Sound familiar?? We would only add that restaurant sales have been a great leading indicator, so based on our decades of experience, we do not expect a general economic pickup any time soon.
Away from discretionary consumer spending, bank credit growth has slowed while trillion dollar subprime bubbles are now becoming apparent in credit card, auto and college loans. In this context, it is interesting to note that slightly higher interest rates have already taken the steam out of auto sales (even with the ease of borrowing) and new home sales, both of which were important components of the eight year recovery from ’08-’09 (anemic though it was).
As far as gold’s role in a worldwide economy that is badly in need of growth to fuel tax receipts and pay down debt, a recent article by John Hathaway, admittedly “talking his book” as the highly successful manager of the Tocqueville Gold Fund, says it best:
“If the consensus view for robust growth proves wrong, what could it mean for gold? The Trump bull market is in our opinion mass self-delusion. While a presidential administration may be able to chart a course and set objectives, to our knowledge no administration in history has been able to repeal the business cycle. In our view, the current 97 month old business expansion is running on fumes.
“…..Gold would stand to benefit from a long-overdue loss of confidence in monetary policy. That loss of confidence could well set the stage for a Trump takeover of the Fed, with three of the seven seats on the Fed’s Board of Governors open(the most since the Woodrow Wilson administration), including Chair Yellen, by next January. Any remaining pretense that the Fed is an independent institution could vanish.
“The rationale for investing in gold is this: The practice of radical monetary policy for the past two decades has conflated systemic risk and will continue to do so. We believe that no escape is possible, including a return to normalized interest rates, in the absence of robust economic growth. Easy-money policies since the Great Recession have solved nothing and only bought time. Hope for sufficient economic growth to restore a healthy ratio between debt and productive activity seems futile..
“….It is clear to us that current public policy is not working. if the economy continues to stall, as we believe it will, answers will be sought. Trump and his advisors are pragmatists. They have no allegiance to past policies and have the opportunity to affect lasting and positive change by reincorporating gold into the monetary system. Trump himself is on record as being friendly toward gold.
“…The appeal of gold is visceral and consonant with the anti-elite sentiment of populism. So much the better for the ‘barbarous relic.’
“….the fact remains that gold is massively underpriced in all paper currencies. It would be preferable if the necessary adjustments could occur without a repeat of a 2008-like financial crisis. We give this possibility a chance, albeit slim. In any event, we expect a significant repricing of gold higher during the current administration, whether by design or because of market events.”
Couldn’t have said it better myself, so I haven’t.
Roger Lipton