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Positive Signals COMEX & Swiss Exports

Firstly, just a notice that our Future Proof Portfolio seminar sold out in just 4 days. Sorry if you missed out. We will try and hold another soon given the overwhelming demand.

We saw an interesting turn of events last week where gold rallied whilst the Managed Money (speculators) on COMEX sold down their long positions. The big Commercials look to have bought those long contracts and reduced their short positions (in both gold and silver), extending their recent run of doing so. This is seen as a bullish set up for the gold price by COMEX analysts.

This coincided with some physical gold demand figures (for September) released showing an increase in demand from the East but importantly too London. The monthly Swiss import/export figures showed gold exports to China spiking to their highest since January (35.5 tonne, up 64% from August) and India up to 27.6 tonne (up 20% on August).

 

Gold & Silver v Cyber Attack

We are off up to Port Douglas this week to be part of "The Great Repression" conference featuring Jim Rickards, Jim Rogers, Satyajit Das and the Daily Reckoning guys we often reference. All 650 tickets sold out in the early bird release and it should be a very interesting couple of days and we hope to write a little about it for you. If you are up there, come and say hi.

Topically, one of the key advantages Jim Rickards talks about with gold (physical not paper) is that it is completely outside the digital world. You will be hard pressed to name another asset that doesn't rely on electronics or the net to either exist or at the very least trade. Even property titles nowadays are held electronically, not in paper deeds. Why topical? Well last week we saw yet another large scale cyber attack which brought down much of the US's internet. We've previously seen still unexplained outages on Wall St demonstrating a cyber attack can bring down the world's biggest financial market. Just a couple of weeks ago the already tense relationship between the US and Russia escalated when US Vice President Biden promised a "clandestine" cyber-response in retaliation for Russia's alleged hacking interference in the US presidential election. Putin of course did not take kindly with the Kremlin responding "To the backdrop of this aggressive, unpredictable line, we must take measures to protect (our) interests, to hedge risks,". What that means is anyone's guess but highlights the degradation of relations which Russian's UN ambassador described thus "The general situation I think is pretty bad at this point, probably the worst since 1973,".

The point is, should, as some believe, the next war will be as much fought and won electronically (EMP's and the like) as with weapons that go boom, gold and silver are one of the very few assets immune to an EMP or similar. History shows too that in times of conflict and even heightened geopolitical tension, gold and silver prices surge.

Don't get us wrong, whilst many are banging the 'WW3 is upon us' drums at the moment, we are not saying that is at all the case however there is no denying the escalating geopolitical tensions at the moment right across the globe. It highlights the many advantages to a hard asset that has traded freely for thousands of years, that has no counterparty risk, and not only can survive nearly any attack, but actually thrives in that environment.

 

US Sharemarket "Extreme" Warning

US shares retreated last night and the USD rose to an 8 month high as the odds for a December rate hike increased to 70% (as a side note gold continued to hold strong, indeed it rose, in the face of the rise of the USD. We think this is an important indicator of gold price bullishness). Regular readers will know the usual good news is bad news trend here. Rates are due to go up because 'everything is awesome' but shares come off as they are supported not by 'awesome' fundamentals but largely by the cheap money game such tightening signals coming to an end. There is also the well founded fear that even that 0.25% rate rise could trigger the crash, so they are getting out of Dodge now.

Banking giant Socit Gnrale's global head of quantitative strategy, Andrew Lapthorne, is warning of this set up. We've written extensively on the fact that US corporates are buying back their own shares, often using debt financing, at a record rate for the pure aim of improving their share price. Lapthorne confirms this, showing that US corporates are spending more than their cashflow (ala debt) at an unprecedented rate. When you look at the chart below you can see when this last neared such lunacy. Just prior to the GFC

 

The "Other Side" of QE

Yesterday we wrote about the warning from Socit Gnrale's global head of quantitative strategy, Andrew Lapthorne on the fatal mix of US corporate debt and declining earnings.

Lapthorne has very recently provided another fascinating insight into the precariousness of the US sharemarket in the context of the Quantitative Easing (QE) employed by the US compared to that of Japan who arguably have gone harder than the US in such monetary expansion.

As we Aussies know full well the US and Japanese sharemarkets have rallied far more strongly than others since the GFC. Our market is still below the pre GFC highs whereas the US has reached much higher highs. This is in very large part simply down to their respective QE programs pumping heaps of money into markets. And in that sense he says he is "worried about its consequences".

Interestingly he points out that the way in which this freshly created money inflated the US and Japanese sharemarkets was quite different and that difference could well spell out very different "consequences".

Per yesterday's article, much of the driving force behind the US sharemarket has been corporate share buybacks. Those buybacks are largely via (for now) cheap debt from the US Fed's member bank recipients of all this freshly created money. That means a lot of the US QE is sitting on public company balance sheets. 'Over to you' mum and dads

The Bank of Japan on the other hand bypasses the banks and simply buys Japanese shares directly. As we've reported previously this has been to the extent where they are top 10 holders of a large proportion of the Nikkei.

Lapthorne points out that when (not if) the market turns the outcomes will be very different.

"In a market downturn, equity market losses will lead to the BOJ having to mark to market its equity holdings at a lower price. In the US, lower equity markets will lead to balance sheet disruption with the inevitable job losses and cuts in capital spending. In a low growth world debt is dangerous; in a deflationary world, debt is toxic. Japanese companies through years of experience probably understand this and have deleveraged as a result, US corporates, perhaps foolishly, have done the exact opposite."

Enter exhibit A below. And again, like yesterday, have a look when the last time the chart got so high.GFC. But again, it's probably different this time yeah?....

 

The Great Repression

What an enthralling day we had yesterday at The Great Repression investment symposium up here at Port Douglas. 650 people packed the venue for the first of 2 days and it didn't disappoint. As you know we are big fans of the writings of The Daily Reckoning guys and it was Vern Gowdie who spoke first.

Vern started by pointing out the irony of this being held at The Mirage which was a symbol of the excesses of the last credit bubble of the 80's through the Skases. This time however that bubble is far bigger and far more global in its reach. Again Vern pointed out that since then, from 1990 to now we have increased our national debt by $5 trillion but achieved only $1.27 trillion of GDP. Like the Skases there are no new ways to go broke, it is always too much debt. Vern went on to outline all the debt accumulated throughout the world and the same lacklustre growth achieved. He then pointed out how overvalued all markets are across many metrics and the inevitability of a very large crash.

Dan Denning pointed out the many geopolitical black swans circling at present and the need to prepare for the eventuality of financial market repression. For him 3 of the bigger immediate threats are the US election, the Italian referendum, but more critically the French and German elections next year. He believes the French election is maybe the most critical as it presents the clearest outcome of a Frexit and that could be catastrophic for markets.

Satyajit Das was fascinating. He debunked the China saviour theory saying they present the biggest threat to the world economy on the back of a credit expansion (debt) that dwarfs all others and must come home to bite. Satyajit methodically and factually outlined how this house of cards must fall and how they resemble almost exactly the Japan story.

Jim Rogers begged to differ. Whilst yes they are likely to crash, and Jim's account of how bad this next crash will be almost left you feeling sick, he maintains China will rebound to be to the 21st century what the US was to the 20th. All markets crash, and the US felt the Great Depression more than most, but it rallied to now just as he expects China to from now as the US implodes. Jim repeatedly said, buy gold and silver (and have your kids learn Manadarin!).

Greg Canavan gave a very honest and insightful talk on how we should be investing, and that is by understanding we simply don't know what will happen. It was one of the clearest presentations for the need for balance and removal of emotions in investing you will see.

Kim Iskyan reinforced this by firstly outlining a large study that illustrated the simply awful track record of analysts in calling Buys and Sells in shares where, over the period, shares the subject of Buy recommendations returned almost nil, the Sells actually went up 20% and this all in the context of the market rising 3% as a whole. He stressed the need for uncorrelated assets in your portfolio and illustrated how correlated financial assets are in what many think is a 'balanced' or diversified portfolio. He said every portfolio needs gold and silver as they are one of the very few uncorrelated assets.

Port Phillip publishing are selling the dvd of the conference. Click here for info.

Unfortunately due to technical difficulties up here we won't have a Weekly Wrap podcast available this week.

 

"Trump Will Probably Win" Gold "May Rise $100" Overnight

So here we are just one week from the US election. Whilst from afar the daily antics are almost comical, the repercussions on either party winning will be anything but.

Listening to Jim Rickards, Jim Rogers and Dan Denning talk about this at last week's Great Repression investment conference left you in no doubt. Rickards, whilst saying no one could really tell at this stage, firmly believes himself that Trump will probably get in. He goes on to say that in that event you would see sharemarkets drop 10% overnight and gold jump $100 at the same time. He said the market has fully priced in a Clinton victory (though this was before the latest FBI/email news and polls now having them just 1 point apart and you could see a continuation of the adjustment Friday night that saw gold up and shares down). That said, he believes you could see shares soon recover as the market realises that this guy is going to lower taxes and spend a bomb on infrastructure and a certain wall After that however, that same deficit funded infrastructure spend will add considerably to their already near $20 trillion in debt... With a Clinton victory we just get more of the same, which the market is getting wary of already with gold still up 21% this year despite the recent correction. He also said Hillary loves a war..

Jim Rogers wasn't speculating on who would win but was more concerned about the period between the election and inauguration, nearly 80 days of "Leader of the Free World" political no-mans-land at a critical time in geopolitical tensions. Jim was unequivocal, you must own gold and silver.

As we wrote Friday, Dan Denning was actually more concerned about the April French elections. Hollande has a popularity rating of just 4%. His main opponent will take France to a referendum on leaving the EU. You then have German elections in September, again with Merkel's approval in the gutter and a lot of Germans sick of her EU policies. Both of these are of course after the Italian referendum we wrote of recently here, which could well trigger the same. He believes this could well be the trigger for the next global crisis.

The takeaway from all of this is not that any one of these is going to happen, we simply don't know that. The takeaway, as was the premise of the whole conference, is that the number of these 'black swans' circling at the moment are at numbers not seen in a very long time. It may well happen at any time and you therefore need to balance your portfolio accordingly before it's too late.

 

Picking The "Sure Bet"

Millions of Australians will be having a punt today on the Melbourne Cup. Rarely does the favourite win. The "smart money" seems to get it wrong every year and that "sure tip" you get rarely seems to pay. The same can be said for investing. One of the speakers at last week's The Great Repression conference spoke of a study involving all major investment houses in Australia where they tracked the performance of shares with a BUY recommendation and likewise SELL recommendation. Year to date those shares the analysts recommended you buy have returned nearly 0%. Those they said you should sell have returned on average 20%! (yes, you read that right). This, in the context of an All Ords up 3%. How's them for odds

One predictor that has given much better results for gold's performance is the Gold:Silver Ratio (GSR). We have written many times about how this is flashing bullish for silver right now. As a very quick recap for newcomers, the 100 year average is around 45, that is, it takes 45 oz of silver to buy 1 oz of gold. It's over 71 now and that is screaming silver is undervalued compared to gold on simple 'reversion to the mean' maths.

When this ratio peaks, as it did in February this year at 84, history has shown gold also turns to a rally (and silver even more so as that ratio drops). We saw this play out this year as gold rallied and silver more so until the 'correction it had to have' happened over the last couple of months. You can see how the ratio below has ticked up from 66 back up to 72. That is normal and historically it looks like it is due to drop again. The last 2 times this century saw around 290% gains for gold and much higher for silver after each turn. That is much better odds than those Buy and Sell recommendations. Now as any disclaimer says, history is not necessarily a predictor of future events but Mark Twain probably put it best:

"History doesn't repeat itself but it often rhymes,"

 

Trump Victory Implications

In case you missed it Trump now leads the polls in the US. As we discussed Monday, this market had a Clinton victory fully priced in. This miraculous turnaround in the polls predictably saw the market react immediately. The Dow fell below 18000 before settling just above, likewise S&P500 fell below 2100 before a late small rebound. Gold was up $13 and silver 50c seeing the GSR fall to 70 (topically after yesterday).

Simon Johnson is a professor at MIT's Sloan School of Management and a former chief economist at the International Monetary Fund (IMF). In an opinion piece in today's AFR it would be fair to say he did not hold great hopes for the global economy should Trump win. This is his conclusion:

"Trump promises to boost US growth immediately to 4-5 per cent, but this is pure fantasy. It is far more likely that his anti-trade policies would cause a sharp slowdown, much like the British are experiencing.

In fact, the impact of a Trump victory on the US could well be worse. Whereas British Prime Minister Theresa May's government wants to close Britain's borders to immigrants from the EU, it does want trade with the world. Trump, on the other hand, is determined to curtail imports through a variety of policies, all of which are well within the power of a president. He would not need congressional approval to slam the brakes on the US economy.

Even in the best of times, US policymakers often do not think enough about the impact of their actions on the rest of the world. Trump's trade-led recession would tip Europe back into full-blown recession, which would likely precipitate a serious banking crisis. If this risk were not contained and the probability of a European banking debacle is already disconcertingly high there would be a further negative spiral. Either way, the effects on emerging markets and all lower-income countries would be dramatic.

Investors in the sharemarket currently regard a Trump presidency as a relatively low-probability development. But, while the precise consequences of bad policies are always hard to predict, if investors are wrong and Trump wins, we should expect a big markdown in expected future earnings for a wide range of stocks and a likely crash in the broader market."

As Simon says, the market, whilst off relatively modestly last night, is still not believing a Trump victory is likely. A Clinton victory is still largely priced in. As Brexit taught us, that can be a dangerous position to assume, especially as the Trumpanaut has defied every disbeliever in its path so far. Brexit also taught us not to underestimate the level of anti establishment and anti globalisation sentiment amongst the 90% left behind since the GFC. Clinton is the very embodiment of all that people detest in our political system.

Now please don't get us wrong We are most certainly not Trump supporters. But as Greg Canavan pointed out last week at The Great Repression conference you cannot invest based on emotion or bias. Wishing for Clinton to win, or 'surely Trump won't win' is not an investment strategy. Being prepared for either eventuality is.

 

Massive New Gold Customer Base

At the moment most of the world's Muslim population don't, or cannot, invest in gold. Sharia law considers gold a "Ribawi item" meaning Muslims can't trade it for future value or for speculation. It can, however, be used as currency or owned as jewellery etc.

The World Gold Council is finalising negotiations with the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI - who set the standards for Islamic financial law) to allow Muslims to trade gold.

According to Casey Research that means, for the first time in 42 years, 1.6 billion people, 32 central banks and 112 billionaires would be free to buy gold from 31 December this year!

The pent up demand for such a huge number of people with a cultural affinity for gold could well be staggering.

Yusuf DeLorenzo, an AAOIFI member, has said that "The hesitation about investing in gold when credible Shariah standards are unavailable is nearly universal in the Islamic world. On the reverse side of the equation, however, gold has historically been the choice of individual Muslims desirous of preserving wealth and value."

Speaking of cultural affinity, keep in mind this 1.6 billion gets added to the 2.7 billion Chinese and Indians who already culturally love, value and trust gold beyond all else.

Of course 31 December is hot off the heels of the supposed US Fed rate hike too, the odds of which last night surged to 80% We all know what happened in January this year after the last Fed rate hike in December 2015.

 

Massive New Gold Customer Base

At the moment most of the world's Muslim population don't, or cannot, invest in gold. Sharia law considers gold a "Ribawi item" meaning Muslims can't trade it for future value or for speculation. It can, however, be used as currency or owned as jewellery etc.

The World Gold Council is finalising negotiations with the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI - who set the standards for Islamic financial law) to allow Muslims to trade gold.

According to Casey Research that means, for the first time in 42 years, 1.6 billion people, 32 central banks and 112 billionaires would be free to buy gold from 31 December this year!

The pent up demand for such a huge number of people with a cultural affinity for gold could well be staggering.

Yusuf DeLorenzo, an AAOIFI member, has said that "The hesitation about investing in gold when credible Shariah standards are unavailable is nearly universal in the Islamic world. On the reverse side of the equation, however, gold has historically been the choice of individual Muslims desirous of preserving wealth and value."

Speaking of cultural affinity, keep in mind this 1.6 billion gets added to the 2.7 billion Chinese and Indians who already culturally love, value and trust gold beyond all else.

Of course 31 December is hot off the heels of the supposed US Fed rate hike too, the odds of which last night surged to 80% We all know what happened in January this year after the last Fed rate hike in December 2015.

 

Halal gold? What a crock.

 

Anyone vaguely familiar with the Arab World will be ROFL. 'Casey' is a nice enough name. But 'Research'? Meh!

 

"Buy Gold No Matter Who Wins The Election"

That's the words of banking giant HSBC who think there will be only one certain winner in next week's US election gold.

They are predicting at least an 8% jump regardless of who wins. The key word there is 'least' as they are calling much higher, of course, if it's Trump. At the time of the report from Bloomberg 2 days ago gold was at USD1289 and has already risen to USD1303 at the time of writing on renewed fears of a Trump victory.

HSBC are predicting $1500 if Trump wins (that's up 15%!) and $1400 on Clinton. It's not just a flash in the pan rise either as both have policies that are supportive of gold in the longer term too. Both are looking to employ fiscal spending to stimulate growth. Trump at one point in his ever changing 'policy' positions said he would put at least half a trillion dollars to work. Can we remind you that the US is over $19.5 trillion in government debt already! That is over 105% of GDP and rising and the highest level since World War II. So yes you could see an initial flurry of growth but that debt burden is getting mighty overwhelming. It's incredibly ironic too that Trump is looking to increase deficit spending when he had this to say about raising the US debt limit:

"Let's say you come home from work and find there has been a sewer backup in your neighbourhood. Your home has sewage all the way up to your ceiling.

'What do you think you should do? Raise the ceiling, or pump out the s**t?"

It's not just fiscal policy with Trump of course, as HSBC says:

"Gold is seen as a hedge against political uncertainty, and President Trump would bring more political unpredictability than any president for generations, particularly over the U.S. Federal Reserve's leadership and monetary policy strategy,"

We've written before about Jim Rickards views. Via the Daily Reckoning guys, this is what he just said in an interview:

"There are a lot of reasons to think this is going to be extremely close and he could win. Now, here is the point, markets are fully priced for Hillary; gold, stocks, everything is priced for a Hillary victory. If she wins, nothing happens because it's already priced. But, if he wins, the markets are going to go like this [points higher] gold will go up $US100 an ounce.[pretty much identical to HSBC]

'So, I would buy gold now, or shortly before the election. If Hillary wins nothing is going to happen, you won't lose much. But, if Trump wins, you'll make a fortune. So, it's an asymmetric trade."

Rarely in life so you get an asymmetric trade.

 

Making America Great Again

That's the slogan Trump has used from day one to tap into the discontent within that nation. That 'policy' has been scant and inconsistent at best hasn't mattered; the people are not happy. As we mentioned in last week's Weekly Wrap, all eyes were on the US non farm payrolls employment data on Friday night for cues as to whether there was enough in it to support a rate hike in December.

The data again disappointed with 161,000 new jobs created in October against expectations of 173,000 and taking the 2016 average to 181,000 per month compared with 229,000 in 2015. The household survey actually saw a drop, its first since April, of 43,000 for the month. The unemployment rate fell to 4.9% because the participation rate dropped, i.e. more people gave up or dropped out of the workforce altogether. 425,000 people left, taking non participants to 94.6m. The headlines were neither bad enough to rule out a rate hike nor good enough to bake the cake. But it was what was behind the headlines that brings us back to The Donald's slogan.

The all important 'average hourly earnings' rose 0.4%, a little above expectations of 0.3%. That was received well by markets as it supports the Fed's aim of higher wages translating into more consumption and hence demand lead inflation. Inflation is their number one aim as that is the only tool left to address all the debt that's been racked up. However drill down on that number and you find that 82% of the workforce, in the subsets of production and non-supervisory private workers (the do-ers) were about half that rate at 0.2%. Annualising that and you find that it is almost the same as core inflation. i.e. they are going nowhere. One of Trump's core 'policies' is to tear up all the trade agreements and clamp down on imports to support domestic manufacturing. Why? Well again the data behind the headline shows a continuation of a loss of manufacturing jobs, once the backbone of the nation. According to ZeroHedge "In October, according to the BLS, while the number of people employed by "food services and drinking places" rose by another 10,000, the US workforce lost another 9,000 manufacturing workers.. since 2014, the US had added 547,000 waiters and bartenders, and has lost 36,000 manufacturing workers."

People vote with their wallet and that Trump's policies could cause a global financial crisis appears to be lost on many of those 82% who likely see a sharemarket crash only affecting the rich and Clinton as the embodiment of them. Should she win then the ensuing social unrest could manifest in a completely different but equally destructive way. 322 million people and we have these two. Incredible.

 

Deadly Potion of Emotion

What a night on markets last night! It was 'risk on' as the market re-fully priced in a Clinton victory. The S&P500 surged 46 points, up 2.2% in one night and ending its longest losing streak since December 1980. Gold and silver were down 1.7% and 1.2% respectively but the USD fell too which put the AUD up and gold and silver were down 2.3% and 1.8% respectively in AUD. An emotions driven night.

Listen to or read any news this morning and a Clinton victory is 'in the bag' with a 3 point lead in the last polls. It's what the world's emotions want to here. You might, however, remember another vote in the middle of this year where the result differed to the polls. Should the polls again prove to be wrong this will be "Brexit x 10", as Jim Rickards puts it. But let's assume the cake is baked and Clinton gets in what next for markets?

The US election circus has been one of the few distractions big enough to divert the markets' attention away from its US rate hike preoccupation. That said, part of what contributed to the S&P500's historic losing streak these past weeks has been the now 80% market odds of a rate US rate hike in December. Should Clinton get in we may well see a combination of 'buy the story, sell the fact' AND the inevitable sell down on rate hike expectations given a Trump win was about the only credible excuse not to hike in December. Don't dismiss either a Supreme Court challenge on the result, ala the 2000 election when Bush won 5-4 in court. This time however we have the temporary situation of an even number of Supreme Court judges and the prospect of a split decision even there. This could be a drawn out affair to test the emotions further

Clinton represents 'business as usual' for the US. As regular listeners to our Weekly Wrap know, 'business as usual' in the US is lacklustre at best and recessionary in reality for many sectors. A rate hike makes no sense other than they need to do it to curtail the financial asset bubbles it produced. So should the Fed actually go through with it this time (they've been saying "probably next time" for the last 10 months) you could very well see the same result as last December with a January crash. January was a relatively little one as crashes go. The system is even more 'inflated' now and so too the precariousness.

It is easy to be emotionally drawn in by the latest 'events'. Last night shows how one 'story' to the next can swing a market in the short term. A truly balanced portfolio, a mix of uncorrelated assets, takes the emotion out of investment. Emotion is an awful investment input, and hence the famous quote:

"Those who beat the market beat their emotions first"

 

There is a famous quote that "there is no new way to go broke, it's always too much debt".

Whoever wins the US election today will inherit a fiscal mess of a scale that makes you wonder why they even want the job. A Bloomberg article titled "Obama's Successor Inherits Bond Market at Epic Turning Point" spells it all out. Here's a summary:

Obama has sold more US Treasury bonds and at a lower rate than any president in history. (For newcomers, bonds sold by the government are debt that must be repaid together with interest along the way. That debt pays for continual deficits and the interest paid adds to those deficits. At some point the interest burden becomes too great).

Those low rates were, in part, courtesy of the 'independent' US Fed buying an unprecedented amount of US Treasuries. So prolific was this QE bond buying 'money printing' program, it soaked up a quarter of the total debt issued between 2009 and 2014, some $1.7 trillion worth, and became the biggest single holder in the world. The US Fed's balance sheet has ballooned to an incredible $4.45 trillion.
International demand was very strong, especially China with all its reserves, collectively buying $3 trillion over that period. However foreign central banks have now reduced their stake in Treasuries for an unprecedented three consecutive quarters with foreign holdings shrinking at the fastest pace since 2013.

The government's marketable debt has more than doubled under Obama to a record $14 trillion (and nearly $20t in total) and that debt burden is about to bite. Despite record low rates, the interest costs are now the highest in 5 years and rates look about to rise as the Fed appears more serious about a rate hike in December, the first in a year.

Obama enjoyed a "Free lunch" as one analyst put it, but all of a sudden the world's biggest bond market looks decidedly shaky and the next President will have to deal with that, ironically as both candidates talk up fiscal spending on infrastructure.
An analyst interviewed put it well: "All these years we've been kicking the can down the road, and suddenly we're seeing a brick wall. There's been so much borrowing going on that's been enabled by extremely low interest rates, one shudders to think what would happen if rates actually ever did go back to normalThe impact on the interest expense would be significant, and could really bring deficit concerns back to the fore."
These 3 graphs from the government's very own Congressional Budget Office tell a scary tale for the next President and the market as a whole.

 

President Trump What Next?

The people have spoken again and it should come as a very clear and very loud signal to European leaders. The people are tired of the establishment, tired of being left behind as the rich get richer on monetary stimulus, and tired of the effects of globalisation. As the diagram below shows there are a string of elections still to come where this theme will likely dominate. Of main concern are the Italian referendum next month, the French elections in April, and the same for Germany in September. Those are the 3 biggest economies in the EU and each represents the same threat but arguably on a larger scale as each could trigger a breakup of the 2nd biggest monetary union in the world. Unlike the 'unknown' effects of Trump, the effects of a collapse of the EU is a known known. That is not a flash in the pan.

 

Tick Tock The Leverage Clock

Sharemarkets surged higher again last night. Optimism rules on Trump promises of fiscal stimulus. The world has lived under central bank created monetary stimulus since the GFC with terrible results so let's rejoice this new approach!. Fiscal stimulus is fancy speak for spending lots of government money on things like infrastructure and, say, big walls etc. The problem is the US already has massive deficits and this new big spend is going to coincide with lower tax income on promised broad based tax cuts. As we discussed in today's Weekly Wrap this ordinarily sees inflation and rates rise and Ray Dalio, the head of the world's largest hedge fund and twice Forbes' 100 most influential people, says it will be this mix of even higher debt and higher rates that will cause the financial crash.

That monetary stimulus to date has already set up a scary situation. CitiBank just released a report showing the effects.

To date companies have propped up their shares through share buy backs or paying dividends to improve yields (when the bank and gold gives you nothing) by borrowing at these record low interest rates to do so. The 2 charts below paint a very clear picture when you consider the timing of the last financial crashes. i.e. they are borrowing more to avoid a crash that would have, and previously has, happened on fundamentals:

 

Couldn't help myself in highlighting such a crappy call.
Fully aware that this is nothing more than a pumping billboard in the interests of flogging bullion, I wouldn't even remotely pretend the posts here would be dignified with a reply.
But here goes anyway:

 

Bonds More Dangerous Than 007

It was another hard night Friday night for gold and silver, both down sharply as shares continued their Trump rally. This of course has many scratching their heads. This is clearly a market rallying on hope and emotion not fundamentals. Even Stanley Druckenmiller, who said he sold his gold on the night of the election (at its peak), when queried on why he is so optimistic on shares when it is projected to blow out deficits by so much that many Republicans are hesitant to back them, responded "I don't worry about the other stuff".

We discussed Friday the massive debt issue that exists already and potentially the key element in all of this is the bond market. For Trump to spend all that money on infrastructure whilst cutting income through tax cuts, he needs to issue more bonds to the market to fund it. The program will also be highly inflationary and put pressure on the Fed to raise rates more quickly as well. This all comes at a time when bond prices are already falling (yields rising) and the world is as leveraged as it's ever been.

The types and holders of bonds are wide and varied. Apart from the aforementioned sovereign debt like US Treasuries, we have seen a proliferation of corporate bonds and just plain junk bonds (over $1.4 trillion more just since 2012). US corporate debt now stands at 45% of GDP, the same level as the top of the last 2 credit cycles in 2002 and 2008. Banks are tightening lending and defaults and credit downgrades are on the rise. But critically, this is all before the now certain rising yields and rates.

This "other stuff" is very real and of a scale that is in many ways incomprehensible. Goldman Sachs warned nearly a month ago of the repercussions of rising yields, stating a 1% rise would translate to over $1.1 trillion in losses to holders. That happened last week. Those rising yields also mean higher rates for mortgage holders (weighing down on property), and higher required rates of return for shareprice analysts (weighing down on shares fundamentals).

The elephant in the room is the appetite for the big bond holders/buyers to purchase more bonds to fund Mr Trump's plans in such an environment and moreover any panicked sell off. Druckenmiller's stated response was to go short the bond market. That's not something everyday investors can easily do. Gold on the other hand is very easy and is essentially the same play.

This new era of high inflation and precarious bond markets is potentially very supportive of higher gold prices. We just need to get past the current hope and emotions stage.