It’s been an extremely busy week and I just haven’t had time to formulate a few thoughts, but I have managed to find some good stuff to forward on to you, so that much I am going to do right now. I do wish to give credit for this email’s subject title to the Bill Bonner article, There is a 100% Chance Of A Recession Next Year which I have copied just a couple of short articles below this.
Have a great week. Be prepared!
LA Times Quote of the day – priceless
Quote of the day by Dianne Feinstein…
Dianne Feinstein: “All vets are mentally ill in some way and government should prevent them from owning firearms.”
Quote of the Day from the Los Angeles Times:
“Frankly, I don’t know what it is about California, but we seem to have a strange urge to elect really obnoxious women to high office. I’m not bragging, you understand, but no other state, including Maine, even comes close. When it comes to sending left-wing dingbats to Washington, we’re Number One.
There’s no getting around the fact that the last time anyone saw the likes of Barbara Boxer, Dianne Feinstein, Maxine Waters, and Nancy Pelosi, they were stirring a cauldron when the curtain went up on ‘Macbeth’. The four of them are like jackasses who happen to possess the gift of blab. You don’t know if you should condemn them for their stupidity or simply marvel at their ability to form words.”
Columnist Burt Prelutsky
Los Angeles Times
“Riots of the Uninformed” – James Gilliland Intel Update 11-10-16
Entry Submitted by James Gilliland at 5:21 PM EST on November 10, 2016
Riots of the Brain Dead and Uninformed
I was listening to the radio this morning about the riots in Seattle and Portland. It is almost beyond belief that people were saying I am rioting for Hilary. OMG the fluoride and the chemtrails are working. The New World Order, genocidal, warmonger, criminal, corrupt puppet lost. A woman with a long history of a trail of death and destruction going back to WACO,, Iraq, Lybia, The Bengazi Coverup of illegal arms sales to ISIS, yes ISIS, the corrupt pay to play money laundering Clinton Foundation, extensive drug use and pedophile operations has lost her bid to run America. WTF? Did you know Wiki Leaks got its information from the FBI and the CIA? Loyal White Hats that could not stand the thought of the Clintons running the country. I have never seen such an ignorant, uninformed brainwashed America. Many just wanted a female president unfortunately she bears little or no resemblance to a female. Has America lost all heart, all inner sensitivity, discernment, cant you feel what these people are all about? Obviously not!
What you don’t know is Trump is already acting as president under the New Republic and he is restoring our God given rights. Our constitution; which became toilet paper with the old regime the United States Corporation Inc. a now defunct corporation. He is working arduously on releasing the World Restoration Funds, Debt relief and the new debt free treasury notes backed by gold. He is putting his and his family’s life on the line. Bringing in the new currency; which was tried by Lincoln, John Kennedy, and Regan, look what happened to them. Luckily he has the Generals behind him the highest law of the land. They are going to insure the Republic is restored. Meanwhile the brain dead, ignorant and uninformed masses are attacking their savior. Sound familiar? Are we a nation of brain dead zombies being lead by the queen zombie herself? Are we suffering from the Stockholm Effect, worshipping and serving the very captors who have enslaved us through debt, manufactured lack creating an extreme uneven dispersal of wealth? It is sure looking that way.
Trumps campaign brought all the rats out from under the woodwork in main stream corporate sponsored media as well as the agencies hiding the Clinton criminal history. He exposed a long history of corruption, black mail, and murder for the lust of power and wealth. He was the wild card the banksters could not control. I still would like to see a council of Grandmothers running the country, people chosen because of their history of service and spiritual adeptness. Right now for the house cleaning process Trump is the guy. We need to support him and hold his feet to the fire making sure he continues to give the NWO a major black eye. Hillary was the choice of the banksters and NWO. The reason she was not charged for a long list of felonies, and treason was due to bribes and black mail. Yet just because she has a uterus and played the feminine victim card, actually having a long history of victimizing Bills victims etc. People fell for it. The master manipulator and politician played women like a fiddle. I am not saying trump is a saint. I myself have used bad humor in the past to be one of the boys yet have evolved somewhat beyond that. It is societal programming and yes it has to stop. The point I am making is he never belonged to a pedophile ring, raped underage women, viciously attacked and harassed Bills victims as revealed by the victims, Wiki Leaks, her emails and the emails of her associates. In conclusion DO THE RESEARCH. Don’t fall for the lies and manipulations. Get behind the restoration of the Republic, the restoration of honor and integrity throughout all the agencies. Great things are unfolding. The days of tyranny are coming to a close. Humanity and the Earth are awakening and healing. The tyrants are being exposed; the double talk and programming are failing. This is a global event. Get behind it. If you want the woman’s voice to be heard support a woman of integrity, a strong heart and one who truly loves humanity. They have presented themselves such as Jill Stein and others yet they were virtually ignored by the media. The corporate media fully supported Hillary. So what does that tell you? Please America wake up, turn off your TVs, develop your own inner sensitivity, use some critical thinking. Don’t let yourself be swayed and manipulated by the lame stream media. I know this is going to piss off a lot of people, truth hurts especially when you realize you have been lied too and your trust has been completely betrayed. Lets get back to honesty, integrity, love and service, back in the heart and listen. You will hear that small voice saying it is time, let it go, wake up and remember.
Today, we’re taking on a big economic mystery…
Doesn’t sound exciting, does it? Well, what you’re going to learn below will be responsible for earning some investors trillions in profit over the next five years.
Investors who don’t understand these concepts are going to get wiped out. What’s the concept? It’s the answer to the following questions…
Given a more than 100% increase in federal debt and federal debt securities over the past few years, why haven’t bond prices fallen and why haven’t interest rates risen? Where is all of the inflation that should have occurred?
As you know, bond prices not only didn’t fall (causing interest rates to rise), they continued to hit new all-time highs (sending rates to new all-time lows). In many places (covering around 25% of global GDP), bond prices rose so much that interest rates went negative, something most people thought was simply impossible.
Of course, federal debt levels aren’t the only thing that has exploded…
Student debt, auto lending, U.S. corporations, and, perhaps the biggest debt bubble of all, foreign corporations.
In the U.S., corporate obligations are at all-time highs, relative to GDP (a little more than 45%). But in China, they’re even crazier: Corporate obligations have soared in the past eight years from virtually nothing to more than 120% of GDP. The corporate debt and real estate bubble in China is probably the largest the world has even seen. (Imagine working out that problem in a nation without the rule of law or a tradition of recognizing property rights.)
In total, the International Monetary Fund says that global debt is now equal to 225% of global GDP, up from about 200% just a decade ago.
Just about every economist in the world would have told you that massive increases to credit and money supply and the resulting huge expansion of consumption would have set off massive inflation, or, at the very least, much, much higher interest rates.
So… why didn’t it happen?
It’s the most important economic mystery of our lives. And the answer is finally coming into firm relief, thanks to a lot of new, fascinating economic research from major economists… all of which is teaching us something most of us would have simply called common sense: Socialism doesn’t work.
My tutor in these ideas is Dr. Lacy Hunt. He’s a Ph.D. and a practicing economist who helps direct $4 billion of investments at Hoisington Management in Austin, Texas.
Hoisington has taken a unique investment position for the last 25 years. It has put its clients into virtually nothing other than long-duration, zero-coupon U.S. Treasury bonds, which capitalize all interest payments, compounding them for 20 or 30 years.
No other investment vehicle in the world is better suited for lower inflation or, even better, deflation.
And Dr. Hunt has ridden this trend for longer than anyone else. He didn’t even blink when the Fed and every other central bank started printing stupendous amounts of money.
How did he know? What did he see in the global economy that nobody else (including yours truly) saw?
What’s the secret to his analysis?
At Jim Grant’s biannual get-together in New York this week, I found out.
Dr. Hunt explained it in great detail over the course of an hour. Don’t worry… I know you’re not interested. And I can boil it down into one simple concept that I know you’ll grasp immediately.
The problem revolves around a simple idea that economists call a “multiplier”…
They’re referring to the effect new capital has when injected into an economy. Ever since the 1920s and the days of John Maynard Keynes, economists everywhere have assumed that government borrowing and spending would produce a positive multiplier for the economy. They’ve thought of the government’s spending as “priming the pump.” For example, if the government borrows money to build new roads, then private industry would be spurred to build new houses along the roads and build new businesses to serve those houses, etc.
That’s the theory. But does it actually happen in practice? That’s where a whole slew of new research comes in.
As it turns out, there is a multiplier effect associated with government spending. But based on empirical studies, it’s actually negative. That is, rather than spurring growth, there’s a strong correlation between more government borrowing and more government spending with less economic growth.
If you want to dive deeper into this puzzle, here are a few of the most important new studies…
Blanchard, Olivier, and Roberto Perotti, “An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output,” Quarterly Journal of Economics (2008)
Ilzetzki, Ethan, Enrique G. Mendoza, and Carlos A. Vegh Gramont, “How Big (Small?) Are Fiscal Multipliers?” International Monetary Fund working paper (2011)
Dupor, William, and Rodrigo Guerrero, “Does Government Spending Create Jobs, Even During Recessions?” The Regional Economist (2016)
Perotti and Roberto, “Estimating the Effects of Fiscal Policy in OECD Countries,” IGIER working paper 276 (2004)
Assuming you don’t want to spend a week reading economic research, let me simply tell you what Dr. Hunt and these other researchers have discovered. It won’t surprise you…
Governments are generally really bad investors…
Much of the capital they borrow and invest is wasted. And as debt-to-GDP levels surpass around 80% of GDP, the real problems begin. The research above suggests that when debt-to-GDP levels stay above 90% for more than five years, the resulting damage to economic growth is particularly severe.
Worst of all, changes to the multiplier of government spending are non-linear. The multiplier doesn’t just get a little bit worse as debts and spending increase. It falls of a cliff as debts mount.
Or, in plain English, the more money governments borrow and spend, the worse the impact is on economic growth and wealth creation.
The data show that our economy is likely to experience big declines in GDP growth as our government continues to borrow more and more and spend more and more in an effort to reverse the declining economy.
That will hurt overall productivity, corporate profits, industrial production, employment, and consumer spending – all with increasing severity as the magnitude and duration of the debt is extended.
We’ve already seen these troubling data points occur over the past 24 months. Government borrowing and spending is literally digging our financial graves.
The harder they dig, the worse it’s going to get…
As for interest rates, the factors I’ve described should be more than enough to keep interest rates low, but it gets worse…
By adding the impact of quantitative easing (where the government prints money to buy bonds and manipulate interest rates lower), they’re magnifying the impact of this financial repression.
According to these studies, that’s going to have an unintended consequence: much lower consumer spending.
Think about this for a minute. The government has basically sold $10 trillion in debt over the last few years.
If that debt was trading freely in the market – and hadn’t been bought by central banks around the world – what would the interest rate be? Economic theory and more than a hundred years of data tell us that interest rates should be roughly equal to annual GDP growth plus a nominal return above the inflation rate. If growth is 2.5% and inflation is 2%, you should see short-term government bonds trading around 4.5%, with longer-dated bonds trading a little higher, say 6%.
Now, think about how much income would be generated by all of that new debt. Just looking at the new debt (6% of $10 trillion) would see an extra $600 billion a year sent into private hands.
Looking at the total federal debt ($20 trillion), that’s $1.2 trillion a year of capital sent into private hands – if the public owned these bonds and bills and if interest rates were allowed to rise.
That’s a significant amount of income for the private sector. But what happens when interest rates are manipulated to nothing and most of the debt is held by central banks or government “trust” funds?
That’s taking capital away from private hands (consumption and investment) and putting it into government programs (waste, malinvestment, and disincentives to gainful employment).
Just think about what the government spends money on.
Our government (and all the other major Western democracies) has embraced the kind of social spending programs that bankrupt every nation that adopts them.
The chart above shows “mandatory spending” (aka government transfer payments) versus discretionary spending, which is everything else. Our government is no longer building bridges and enforcing contracts. It’s simply taking money from Peter to pay Paul. And as you’d expect, that kind of economic activity (aka stealing) has a negative multiplier. Taking lots and lots of capital from productive hands and giving it to unproductive hands might meet political goals, but it’s not good for the economy.
Ready for this shocking conclusion? Socialism doesn’t work. And manipulating interest rates makes it a lot worse.
One last point…
Corporations are borrowing record amounts of money…
Despite slower economic growth and artificially low interest rates, these companies are taking on huge amounts of debt.
And they’re not spending the money on new production. They’re simply refinancing old loans and buying back stock. Over the last year, total corporate bond issuance totaled $833 billion. But net business investment was negative $64 billion. That’s not going to increase economic activity. It only increases leverage. And risk.
Think about this… Artificially low interest rates restrict growth, limit consumer spending, and encourage individuals and corporations to borrow far too much money. Imagine what’s going to happen when we go into a recession again.
We’re seeing record debt at the corporate level, the government level, the consumer level (auto loans), and an entire generation (students) encumbered by massive debt.
Do you think those conditions are going to lead to calm, cool, and rational policy decisions? Do you think those conditions are going to be good for our banking system? Do you think that’s going to make us less aggressive with our foreign policy? (It’s Mexico’s fault!) Do you think our political leaders are going to wake up and realize that it’s their policies that have put us in this mess?
They’re going to keep “doubling down” until the whole thing blows up.
I’m 100% certain we’re going to enter another recession next year…
I’ve been writing about the warning signs for a long time – falling industrial production, declining trade, falling corporate profits, and rising corporate defaults. And I told you that employment would roll over next. It has. The jobs report today showed that unemployment ticked up to 5%. The employment situation has been getting steadily weaker for the last year.
That’s the last nail in the coffin. Next year is going to be ugly for stocks. But it will be even worse for corporate bonds.
In 2017, we’ll see the first maturities on the huge amount of junk bonds that were issued in the record issuance cycle between 2010 and 2015.
Roughly $125 billion will be due. The default rate across the sector will approach 10%. It will be much more difficult, and maybe impossible, for companies to refinance these obligations. And it will continue to get worse and worse. In 2018, another $250 billion will come due. In 2019, another $350 billion. And that’s before two years of $400 billion or more in junk matures in 2020 and 2021.
If we’re in a recession next year… look out. All of these debts will be seen as unfinanceable. The bond prices of highly leveraged companies will seriously collapse as these liquidity problems spread. As for stocks, the damage to share prices will be much worse.
The fact is, most of these loans should have never been made. These companies are vastly overleveraged. And their financial condition, as a group, hasn’t improved since 2010… It has gotten worse. The huge bubble we’ve seen in junk bonds has financed massive overcapacity, where these companies simply can’t generate enough income to pay back their loans. A reckoning is coming – and it’s long overdue.
Unfortunately, small, junk-rated companies aren’t the only ones who will have a big problem…
Historically, “investment grade” meant that a corporation was extremely unlikely to ever default, regardless of the economic circumstances. The overall investment-grade default rate is usually just above zero during a recession. However, the lowest-rated “tranche” of investment-grade debt (BBB) would typically see a few defaults. In the default cycle between 1998 and 2002, a little more than 1% of these bonds defaulted. But… BBB isn’t what it used to be.
We know from our analysis of corporate credit in Stansberry’s Credit Opportunities that a lot of BBB credit is just wishful thinking.
A good example of a weak BBB credit is Devon Energy (DVN). We know the company well. Back in 2014, we essentially begged Devon to prepare for a big fall in the price of oil by selling its Canadian oil sands assets to pare down its debt and invest in higher-quality assets, like the Eagle Ford Shale.
The company never bothered to reply to our concerns. Around six months later, just about everything we warned them would happen did happen. Now, its oil sands assets are an anchor around the company’s throat. Meanwhile, it’s carrying more than $12 billion in debt, which is equal to 267% of its equity.
Today, Devon is a highly levered oil and gas business that routinely operates with negative cash flows. (Last year’s tally was negative $290 million.) Incredibly, in our minds, despite the obvious risks to this individual balance sheet and the historic booms and busts of the domestic energy industry, Devon’s benchmark bonds are only paying 3.4% and the company is rated BBB.
How can a company be considered “investment grade” if a one-level credit downgrade could leave it unable to access the capital markets? After all, in periods of credit stress, junk-bond issuance disappears. And selling assets won’t repay these debts… The company is far too encumbered.
There are dozens and dozens of companies like Devon. Maybe hundreds.
How bad is the situation, really?
Historically, the BBB tranche of the investment-grade market made up a tiny portion of the total investment-grade market. But that has changed since 2009. As companies added debt in this cycle, more and more of them have been downgraded into BBB – just one step above junk-bond credits. Where 10 years ago only 14% of investment-grade bonds were BBB-rated, today more than 30% of the investment-grade market is BBB-rated. In other words, “investment grade” just doesn’t mean what it used to.
That’s why even though annual default rates on investment-grade bonds have historically been low, we suspect that the coming default cycle is going to be much, much worse. I expect we’ll see annual default rates on BBB debt of at least 3%, with cumulative defaults reaching close to 15%. Keep in mind, almost $2 trillion worth of BBB-rated “investment grade” debt is outstanding. Losses like the kind I expect during the next cycle could result in more than $500 billion in total defaults. And that’s just the defaults from the “investment grade” debt.
I’ve been warning about the coming credit cycle for about a year…
So far, I’ve been pretty much on the mark. Default rates keep creeping higher and higher. Economic conditions are getting weaker and weaker. What’s coming in 2018 and 2019 will be the biggest economic storm of our lives. It’s going to wipe out a lot of people – unemployment will go way over 10%. And more than $1 trillion worth of bonds will default. This is absolutely going to happen, because while the government can buy all the bonds it wants, it can’t make them pay.
This situation doesn’t have to be a disaster for you, though. Don’t think of it as a crisis. Think of it as a reckoning. The foolish and spendthrift are going to learn a lesson. And the wise and patient will reap their fair reward. That’s why I call what’s coming “the greatest legal transfer of wealth in history.” It’s going to be an incredible show. END.
http://kingworldnews.com/greyerz-after-historic-shocker-is-a-major-short-squeeze-about-to-unfold/ Gold investors should totally ignore these short-term moves as well as any news or events that temporarily move gold. Sadly, many investors buy gold when it goes up and sell it when it goes down. This behavior shows a total ignorance of the role of gold and why it is so important to hold physical gold.
https://www.youtube.com/watch?v=uwu6dusUd-o This is a very interesting interview of Rob Kirby of Kirby Analytics by Greg Hunter.
http://www.zerohedge.com/news/2016-11-10/trump-reveals-policy-goals-building-wall-end-war-coal-repeal-obamacare-dismantle-dod The Trump team has laid out the framework of his initial policies with policies focused i) on American Security including as Defense and National security, Immigration Reform and Building That Wall, and Energy Independence; ii) Getting America Back to Work Again including Tax Reform; Regulatory Reform; Trade Reform; Education; Transportation & Infrastructure and Financial Services Reform; and iii) Government for the people including Healthcare Reform (Obamacare), Veterans Administration Reform and Protecting Americans’ Constitutional Rights.
http://kingworldnews.com/alert-former-soros-associate-just-warned-the-pros-have-it-wrong/ We are going to have a lot of inflation going forward and that will be extremely bullish for both gold and silver, which will soon catch up to the rest of the industrial metals. People just need to look at the 1970s in order to understand the roadmap for higher gold and silver prices.
http://365reality.net/ray-dalio-this-is-what-donald-trumps-presidency-will-look-like/ Our very preliminary assessment is that on the economic front, the developments are broadly positive
.http://kingworldnews.com/dr-stephen-leeb-11-19-16/ Very interesting 12 min. interview of Dr. Stephen Leeb (Chairman and Chief Investment Officer of Leeb Capital Management) who is a recognized authority on the stock market, macroeconomic trends and commodities, especially oil and precious metals.
http://www.thedailyeconomist.com/2016/11/price-of-gold-in-dollars-well-over-3600.html According to many sources, the price of gold in dollars has now reached over $3600 per ounce as the people move to get rid of their rupees and into the one tangible asset that weathers all crises.
http://www.onenewspage.com/n/Markets/759x600mv/Chicago-And-Boston-Join-Cali-In-Refusing-Assistance.htm In all, according to the Center for Immigration Studies, there are roughly 300 “sanctuary” jurisdictions around the country. *We suspect many of them need their federal funding more than they need to their criminal illegal aliens but time will tell…*
What Is Happening To Markets All Over The World?
What the heck is happening to markets all over the world?
The answer to this is … there are no markets. There are no legitimate markets from bonds to Gold.
Computers are trading with computers and that is all there is. These computer run markets are virtual markets and that is all there is. The computer run markets create prices which are so virtual that there its no depth to any market anywhere on anything. Volatility goes wild as computers overtake markets. Central banks, lacking no practical tools, are pushing the panic button.
Today, the Japanese bond market clearly over ran their control protocols and breached established parameters. A strong close at 3% or higher on United States ten year bonds could cause a leap in rates due to the fact that there are few real position takers. This is the result of central banks creating artificial market rates which are so low they are an insult to an investor’s understanding of market fundamentals.
All of the central banks of the industrialized world have stepped out onto thin ice and unknown territory where there is no place to safely move and no room to breathe. This is the bomb that could detonate in any or all markets at any time.
Gold is trading in India just below $3,000 USD. This could have been caused by a mistake between the central banks of India and the US Federal Reserve. This mistake is devastating for India economy while the best advertisement gold has ever had.
Bonds markets are doing strange things in the EU because of illiquidity and factors in the Euro/dollar market which are independent of all other considerations.
Stock markets have made record highs on no volume so once again illiquidity is raising its very dangerous head.
We will go into more detail on all of these points but for now, I urge you to do the following to the degree possible:
Hold your precious metals positions and remain calm.
Eliminate all or as much margin (credit) in anything, anywhere.
Have a least a month worth of cash at home.
Put all your securities into direct registration (DRS).
Do the basics of my recent articles on being prepared.
Situations may become more difficult but we can Be Prepared.
< ![if !vml]>< ![endif]>Something Financially (And Politically) Wicked This Way Comes
The catalyst for today’s article – as so often is the case, gleaned at the gym this morning. In this case, watching Steven King’s awesome Storm of the Century mini-series, whilst CNBC blared an interview with “Mr. Atlas Shrugged” himself, Larry Summers. Regarding the former, the main character, Andre Linoge, is actually the devil in disguise. So when I saw Summers talking of how Trump “caused” the market carnage that is destroying the economy; and the social unrest he proclaims is tearing the nation apart; it occurred to me that career “elites” like Summers – and the granddaddy of evil himself, George Soros – are in fact behind efforts to undermine the nation.
Yes, “they” lost the election, despite an historic level of rigging. However, “they” are clearly not giving up, as depicted by the – incredibly, publicly advertised – three-day “closed-door” meeting between those seeking to undermine Trump, chaired by none other than George Soros himself. And trust me, when you consider who’s invited – including Democratic rabble-rousers like Nancy Pelosi and Elizabeth Warren – it couldn’t be clearer that their intentions are malicious, destructive, and self-serving. Fortunately, “they” cannot win in the long-term; however, in the short-term, the damage they can cause will be devastating.
In other words, just as the “evil Troika” of Washington, Wall Street, and the Mainstream Media used increasingly impoverished, historically desperate Americans’ fear of the future to try to steal the election, and hand it to the very belly of the beast, they are now attempting to foment the very divisiveness I wrote of earlier this week. Which in my view, is the greatest crime against America – and humanity – of all, as it will unquestionably yield further political instability, social unrest, economic volatility, and currency devaluation.
Donald Trump surprisingly won the US election, yet gold has fallen in a move opposite to what analysts expect.
Stanley Druckenmiller sold all his gold during election night as he believe massive infrastructure spending and tax cuts will benefit stocks.
If it were not for current global debt levels we would agree with Druckenmiller, but nobody has an answer for how debt markets will deal with these initiatives.
Bond yields are rising chaotically and we believe it’s the beginning of the end for the 30+-year rally in bonds.
Chaos in bond markets are not good for stocks but good for gold, thus we believe that the recent plunge in gold is a buying opportunity for investors.
As everyone knows by now, Donald Trump will be the 45th president of the United States, and what supposedly would rocket gold beyond $1400 has actually resulted in gold DROPPING after the election. With gold experts and analysts scratching their heads, we will offer our opinion on what is going on with gold and how gold investors should position themselves moving forward.
What is Going on With Gold?
On election night, investors could have ignored CNN and simply watched the gold price to see who was winning the election. In fact, we saw one of the craziest 12 hours in gold in history as it jumped to rise more than $60 in a few hours to rise above $1340, and then it started to fall below its election day start.
That’s a pretty volatile move and depressing for gold investors that expected Trump would lead to $1400 gold.
What happened here is that investors (or more appropriately “traders”) were originally shocked at the impending Trump victory and bought gold, sold stocks, and sold the US Dollar in their emotional reaction to the election results.
In fact, if we compare the gold price with the US Dollar we find an almost tick-to-tick move.
As the night went on many investors include Jim Rickards and Stanley Druckenmiller, who publicly announced he sold all of his gold the night of the elections, took the opportunity to book profits. Other investors like Carl Icahn bought large amounts of stocks during the overnight bloodbath, figuring the initial overreaction was a good opportunity to buy – and they were right as stocks rose the very next morning.
The reason for the opposite moves to what was originally predicted in stocks, gold, and the US Dollar, was that much of the initial reaction was completely emotional due to the surprise uncertainty. But then when investors took a step back they realized that Trump’s plan to spend massive amounts on infrastructure was good for stocks and commodities. Additionally, the Republican sweep of both sides of Congress meant that there was a good chance all of these policies would be implemented – after all this is the first time in quite a while that the White House and Congress were held by one party.
That Explains Why Stocks and the US Dollar Rose, But Why Did Gold Drop?
The answer is best summed up by Stanley Druckenmiller on an interview aired via CNBC, where he stated that “I sold all my gold on the night of the election… because I’m very optimistic” and he’s betting on growth inspired by Trump’s massive infrastructure plan and deregulation push. In a growth environment, it is better to own risk-on assets and stocks rather than gold – and we agree after all rising revenues mean increasing asset values while with gold you’ll only end up owning exactly the chunk of gold that you bought.
This is actually evidenced in history. In Roy Jastram’s excellent book The Golden Constant, he analyzes hundreds of years of the gold price versus commodity pricing (remember for most of economic history gold was money and thus had no “price” other than commodity ratios) and found that gold did well during economic recessions and depressions, while it underperformed commodities during economic booms. Essentially, you wanted to own gold (i.e. cash) during rough times and commodities during booms – pretty logical.
If That is the Case Then Is it Time to Sell Gold for Commodities and Stocks?
Based on just those facts it would make sense to sell gold – but there is one issue that makes Jastram’s analysis not quite accurate for today’s world and it’s a big hole in Mr. Druckenmiller’s argument in selling his own gold and buying stocks… The Bond Market.
Unlike the centuries of data that Mr. Jastram studied, our bond market is an artifice in central bank suppression of the natural interest rate. It is the only world where European 10-year bonds can offer negative yields and Japan can raise money over 30 years at 0.5%. We pointed out a few weeks ago that this is starting to change, and after Trump’s election, bonds have been going vertical – look at the chart for US 30-year treasuries.
That is a scary thing for investors holding multi-billion-dollar treasury portfolios (think central banks and large mutual funds), and those are big paper losses that will be realized when bonds are sold – and will only increase as yields rise. In one week, bond investors have already seen $1 trillion in losses – we highly doubt those investors will be buying more treasuries in a rising-yield, inflationary environment.
Which brings us back to Mr. Druckenmiller’s economically optimistic view of markets based on the massive infrastructure plan Mr. Trump proposes to implement – how are bond markets going to react and fund that plan?
While details are still very few and far between on Mr. Trump’s spending plans, what we do know is that he plans on significantly increasing the budget deficit through spending and tax cuts. Even when CNBC’s Joe Kernen questioned Mr. Druckenmiller in the interview cited earlier about how the plan will be beneficial for stocks when it is projected to blow out deficits by so much that many Republicans are hesitant to back them. After a long-winded discussion of Reagan, the only response was that “I don’t worry about the other stuff…” Not very comforting.
That is exactly what we think is happening in stock markets which are trading to the upside on expecting big infrastructure spending and lower taxes and following Mr. Druckenmiller’s “I don’t worry about the other stuff” attitude.
This line of thinking has worked for the first few days after the election based on the initial emotional charge of the election results, but we don’t see how a collapsing bond market with rising yields will be good for stocks and the US Dollar…
We Do See Why It Would Be Good for Gold
Summing it all up we see a number of reasons why this environment is very negative for markets:
- Rising bond yields will cause chaos in a bond market that even Goldman Sachs warns are extremely fragile to rising rates.
- Trump’s plans call for massive fiscal spending, deregulation, and cuts to taxes that all will increase the US budget deficit and long-term debt and put more upward pressure on bond yields.
- Rising yields also mean the required rate of return for stocks (used in DCF analysis) will rise, which are negative for stocks.
- Rising rates also put a damper on real estate markets around the world as the cost of mortgage payments rise and lower prices buyers are willing to pay for real estate.
- Individuals, companies, and governments used to extremely low interest rates will now have a hard time raising money or will be forced to pay higher rates thus lowering investment.
All of these things start with central banks losing control of bond yields and those yields starting to rise to more natural levels – and that’s what we think is happening.
To strengthen our argument further we remind investors about this chart from the McKinsey Global institute showing where bond markets stand in terms of debt outstanding.
Source: McKinsey Global Institute
While the chart is dated and we know of no more current chart from the institute, its plain to see that global debt levels have been growing very fast – probably due to the extremely low interest rate environment we have been in since 2007. What happens when yields rise on more than $200 trillion worth of global debt?
So in summary:
- Inflation: Check
- Rising Government Deficits: Check
- Rising Bond Yields: Check
- Rising Debt Loads Around the World: Check
- Panic in Bond Markets: Check
- Calls for Protectionism: Check
We wouldn’t be particularly comfortable with owning stocks in this environment, but we certainly like gold in this environment.
Conclusion for Investors
It all comes down to an investors’ view on whether or not increasing US budgets will be feasible in the currently over-leveraged and overly-indebted that we live in today. If you believe that bond markets will accept trillions of dollars of additional debt and higher inflation without spiking, then you want to be a buyer of stocks and commodities.
But if you are of the view that the next crisis in going to be in the bond markets, then there will be probably be significant road-blocks to any major government spending program and that will provide headwinds for US stocks and the US Dollar. As an alternative reserve currency without the ability of governments to dilute it via massive spending, gold provides investors with an excellent hedge in this environment – and that is the environment we believe we are heading for.
Thus, we think this is an excellent opportunity for investors that heeded our advice and lightened up positions prior to the elections to beat the mainstream investment herd by accumulating physical gold and the gold ETFs (SPDR Gold Shares (NYSEARCA:GLD), PHYS, and CEF). In fact, we have begun accumulating precious metals miners again after being uninterested for many months, as the valuations have come down significantly from a few months ago and there is now value in owning them again.
It is time for investors to a step ahead of the crowd and understand that if massive government spending is undertaken we will see even more chaos in bond markets – and that is very gold positive.
Disclosure: I am/we are long SGOL, SIVR.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.