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The Yield Curve Is The Economy’s Canary In A Coal Mine

The economy has hit a wall and is now sliding down it. I don’t care what bullish propaganda may or may not be bubbling up in the headlines from the financial media and Wall Street, the hard numbers I look at everyday show accelerating economic weakness. The fact that my view is contrary to mainstream consensus and political propaganda reinforces my conviction that my view about the economy is correct.

As an example of the ongoing underlying systemic decay and collapse conveyed by this week’s title, it was announced that General Electric would be removed from the Dow Jones Industrial Average index and replaced by Walgreen’s. GE was an original member of the index starting in 1896 and was a continuous member since  1907.

GE is an original equipment manufacturer and industrial product innovator. It’s products are used in broad array of applications at all levels of the economy globally.  It is considered a “GDP company.” GE was iconic of American innovation and economic dominance. Walgreen’s is a consumer products reseller that sells pharmaceuticals and junk. Emblematic of the entire system, GE has suffocated itself with poor management which guided the company into a cess-pool of financial leverage and hidden derivatives.

As expressed in past issues (the Short Seller’s Journal), I don’t put a lot of stock in the regional Fed economic surveys, which are heavily shaded by “hope” and “expectation” metrics that are used to inflate the overall index level. These are so-called “soft” data reports. But now even the “outlook” and “expectations” measurements are falling quickly (see last week’s Philly Fed report). The Trump “hope premium” that inflated the stock market starting in November 2016 has left the building.

Something wicked this way comes:  Notwithstanding mainstream media rationalizations to the contrary, a flattening of the yield curve always always always precedes a contraction in economic activity (aka “a recession”). Always. Don’t let anyone try to convince you otherwise. An “inverted” yield curve occurs when short term yields exceed long term yields. When the yield curve inverts, it means something wicked is going to hit the financial and economic system.

Prior to the financial crisis in 2008, the yield curve was inverted for short periods of time during 2007. The most simple explanation for why inversion occurs is that performance-driven capital flows from riskier investments into the the longer end of the Treasury curve, driving the yield on the long end below the short end. The expectation is that the Fed will be forced to cut short term rates drastically – thereby driving the short-end lower, which in turn pulls the entire yield curve lower (the yield curve “shifts” down). This gives investors in the long-end a better rate-of-return performance on their capital than holding short term Treasuries for safety. The Fed’s dilemma will be complicated by the fact that it does not have much room to cut rates in order to combat a deep recession.

Studies have shown that curve inversions precede a recession anywhere from 6 months to 2 years. I would argue that, stripping away the affects of inflation and data manipulation, real economic activity has been somewhat recessionary for several years. The massive intervention in the Treasury market by the Fed, ECB and Bank of Japan has muted the true price discovery mechanism of the Treasury curve. The curve has been barely upward sloping for quite some time relative to history.  This could indeed be history’s equivalent of an inverted curve. That being the case, if an inversion occurs despite the Fed’s attempts to prevent it, it means that whatever is going to hit the U.S. and global financial and economic system is going to be worse than what occurred in 2008.

A note on gold and silver: The massive take-down in the price of gold and silver, which is occurring primarily during the trading hours of the LBMA and the Comex – both of which are paper derivative markets – is quite similar to the take-down that occurred in the metals preceding the collapse of Bear and Lehman in 2008. It is imperative that the price of gold’s function as a warning signal is de-fused in order to keep the public wallowing in ignorance – just like in 2008.  But keep an eye on the stock prices of Deutsche Bank, Goldman and Morgan Stanley – as well as the Treasury yield curve…

Paul Craig Roberts: “How Long Can The Federal Reserve Stave Off the Inevitable?”

IRD Note: The average household is bloated with debt, housing prices have peaked, many public pensions are on the verge of collapse in spite of 9-years of rising stock, bond and alternative asset values. But all of this was built on a foundation of debt, fraud and corruption. Dr. Paul Craig Roberts asks, “does the Fed have another ‘rabbit’ to pull out its hat?…

When are America’s global corporations and Wall Street going to sit down with President Trump and explain to him that his trade war is not with China but with them? The biggest chunk of America’s trade deficit with China is the offshored production of America’s global corporations. When the corporations bring the products that they produce in China to the US consumer market, the products are classified as imports from China.

Six years ago when I was writing The Failure of Laissez Faire Capitalism, I concluded on the evidence that half of US imports from China consist of the offshored production of US corporations. Offshoring is a substantial benefit to US corporations because of much lower labor and compliance costs. Profits, executive bonuses, and shareholders’ capital gains receive a large boost from offshoring. The costs of these benefits for a few fall on the many—the former American employees who formerly had a middle class income and expectations for their children.

In my book, I cited evidence that during the first decade of the 21st century “the US lost 54,621 factories, and manufacturing employment fell by 5 million employees. Over the decade, the number of larger factories (those employing 1,000 or more employees) declined by 40 percent. US factories employing 500-1,000 workers declined by 44 percent; those employing between 250-500 workers declined by 37 percent, and those employing between 100-250 workers shrunk by 30 percent. These losses are net of new start-ups. Not all the losses are due to offshoring. Some are the result of business failures” (p. 100).

In other words, to put it in the most simple and clear terms, millions of Americans lost their middle class jobs not because China played unfairly, but because American corporations betrayed the American people and exported their jobs. “Making America great again” means dealing with these corporations, not with China. When Trump learns this, assuming anyone will tell him, will he back off China and take on the American global corporations?

The loss of middle class jobs has had a dire effect on the hopes and expectations of Americans, on the American economy, on the finances of cities and states and, thereby, on their ability to meet pension obligations and provide public services, and on the tax base for Social Security and Medicare, thus threatening these important elements of the American consensus. In short, the greedy corporate elite have benefitted themselves at enormous cost to the American people and to the economic and social stability of the United States.

The job loss from offshoring also has had a huge and dire impact on Federal Reserve policy. With the decline in income growth, the US economy stalled. The Federal Reserve under Alan Greenspan substituted an expansion in consumer credit for the missing growth in consumer income in order to maintain aggregate consumer demand. Instead of wage increases, Greenspan relied on an increase in consumer debt to fuel the economy.

The credit expansion and consequent rise in real estate prices, together with the deregulation of the banking system, especially the repeal of the Glass-Steagall Act, produced the real estate bubble and the fraud and mortgage-backed derivatives that gave us the 2007-08 financial crash.

The Federal Reserve responded to the crash not by bailing out consumer debt but by bailing out the debt of its only constituency—the big banks.

Click here to read the rest: Paul Craig Roberts/Fed

With Sentiment In The Gutter, Will Gold Stage A Rally?

A week ago Friday, the metals got clocked hard. It was a drive-by “paper gold” shooting on the Comex which took place after most of the rest of the world had gone home for the weekend. On Monday, the Hulbert Gold Stock Newsletter Index fell to zero. On Tuesday it dropped to negative 2.7. The HGNSI is an index that measures newsletters which make trading recommendations on mining stocks. A negative reading means, overall, the newsletters are net short in terms of position recommendations. Zero and negative readings are typically highly correlated with bottoms.

Since I’ve been following the HGNSI (since 2005), it has been a remarkably accurate contrarian signal. However, it does not offer any information on the timing of a move higher. That, of course, is always the money question. What I can say, however, is that if you have cash to put to work in the sector now is a good time start slowly buying into your favorite ideas.

There’s a growing feeling among long-time gold investors like myself that precious metals will potentially stage a surprise move higher in the near future. Note how I do not define “near future.” This is because Central Bank intervention makes it next to impossible to forecast over the “near future.” It’s this way now with all markets, not just gold and silver.

My friend and colleague, Chris Marcus of Arcadia Economics, invited me onto his podcast to discuss the precious metals market, stock market, Deutsche Bank and the general economy:

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Visit these links to learn more about the Investment Research Dynamic’s  Mining Stock Journal and  Short Seller’s JournalThe mining stocks are historically cheap and percolating for a big move higher.  My subscribers and I are making a lot of money shorting and buying puts on homebuilders and I’ve updated my recommendations ahead of this week’s earnings reports from Lennar and KB Home.

Something Wicked Comes This Way…

Craig “Turd Ferguson” Hemke (TF Metals Report) invited me to discuss the possibility that global financial system, including and especially the U.S. financial system is heading into another black hole like 2008.   In this conversation we discuss the signs that are pointing in this direction.  (To download, right click and “save as”)

To learn more about the Short Seller’s/Mining Stock Journals, click on either link (note, subscribers to both Journals receive 50% off on the second Journal):

  SHORT SELLER’S JOURNAL    /    MINING STOCK JOURNAL

Greatest Stock Bubble In History

Anyone who can’t see a dangerous bubble should not be managing, analyzing or trading stocks. Even Hellen Keller could figure out what is going here:

It’s not easy shorting the market right now – for now – but there have been plenty of short-term opportunities to “scalp” stocks using short term puts. I cover both short term trading ideas and long term positioning ideas.  You can learn more  about this newsletter here:      Short Seller’s Journal information.

“SSJ  provides outstanding practical advice for translating a company’s bottom line fundamentals into $$’s. Whether you’re a buy and hold long term investor or short term trader (or both), you’ll find all kinds of helpful advice on portfolio management, asset allocation and short term/long term options strategies. Really can’t recommend SSJ enough! Thanks Dave for your great service!” – subscriber “John”

WTF Just Happened: Gold & Silver Drive-By Shooting Friday

After moving significantly higher on Wednesday and Thursday following the dovish monetary policy issued by both the Federal Reserve and the ECB, the precious metals were ambushed Friday morning by the Comex bank cartel.  Right before the Comex gold pit opened on Friday, thousands of gold and silver contract were dumped wholesale into the Comex Globex computer trading system.   The deluge continued for over an hour (click on image to enlarge):

The chart above is the July Comex paper silver. From 8-9 a.m. EST, 21,922 silver contract were dumped on the Comex. This represents 109.6 million ozs of silver – roughly 13% of the total amount of silver produced my silver mining annually. It also represents 40% of amount of physical silver allegedly held in Comex silver vaults as reported by the vault operators (primarily JP Morgan, HSBC and Brink’s). Friday was by far the largest volume day for the July contract going back to late April, when July became the “front-month” contract for silver.   The same dynamic occurred in gold on Friday.

In the latest episode of “WTF Just Happened?” we discuss how and why the precious metals were smashed on Friday, as the Comex banks printed $10’s of millions in profits covering their enormous short positions in paper gold and silver ((WTF Just Happened is a produced in association with Wall St. For Main Street – Eric Dubin may be reached at  Facebook.com/EricDubin):

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 I recommended Arizona Mining in May 2016 at  $1.26 to my Mining Stock Journal subscribers.  It was acquired today for $1.3 billion, or $4.65/share.  Visit these links to learn more about the Investment Research Dynamic’s Mining Stock Journal and Short Seller’s Journal.   

Was Gold Actually “Dumped” Friday?

Sifting through Twitter, I came across a curious assertion posited as a reply to a post on “unemployment” on Steph Pomboy’s twitter feed (@spomboy).  The tweeter asked, “have you noticed that gold is being dumped?”  But was gold “dumped?”  Perhaps the tweeter should have qualified the question with the adjective, “paper,” in front of the word “gold.”

I replied rhetorically with, “is actual physical gold being dumped or is it Comex is it paper gold?” Let’s have a look. (click image to enlarge)

The Comex is a futures contract trading venue. While the Comex vault operators issue daily vault reports which allege the presence of 100 oz gold bars in custody, we have no idea if all of the bars are sitting physically in the vaults or whether or not there are any sort of encumbrances attached to any of them. Very few holders of gold contracts ever take delivery and very little actual physical gold moves in or out of the Comex vaults on a weekly/monthly/quarterly basis.  In short, the Comex is a paper gold trading exchange.

On Friday, after the primary physical bar trading markets – India and China – were closed for the weekend, large quantities of paper gold futures were suddenly being dumped into the CME’s Globex computer trading system, about 5 minutes before the Comex gold pit opened for the day (8:20 a.m. EST).  You can see the action narrated in the chart above.  It’s not uncommon for the price of gold to be smashed using paper gold on the Friday after an FOMC meeting, especially in the summer months when trading operations are likely only at half-staff and the rest of the world is gone for the weekend.

Over a 60 minute period from 8 a.m. – 9 a.m. EST, approximately 90,300 contracts were sold, largely indiscriminately hitting every bid in sight.   This is the equivalent of 9.03 million ozs of gold.  There’s only one problem with this:   as of Friday’s warehouse report, Comex vaults were reporting total gold stock of 9.01 million ozs – only 507,453 of which were listed as “available to be delivered.”  In other words, in just one hour, the total amount of gold allegedly held in Comex vaults was “dumped” in the form a paper derivatives.  Worse, the amount “dumped” was 17.7x the number of gold ozs currently available to deliver.

For the entire day, Globex + floor volume, 495,364 contracts were “dumped.”  This is 49,536,640 ozs of Comex paper gold.  Again, I ask the tweeter who posited that comment on twitter, was gold really “dumped” on Friday?

For those who monitor the daily gold flow into India and China, I will bet any amount of money that both of those markets will be aggressively buying more than their usual daily amount of physical gold in order to take advantage of the lower price.   Funny that Trump would enable the Chinese to buy cheap physical gold when he’s engaged in a rapidly escalating trade war with China…

Retail Sales: Inflation Plus Extrapolation

The footnotes are the most interesting section of every financial and economic reports.  They also happens to be least studied section of these reports.  Those who prepare these reports rely on this fact.

The monthly headline retail sales is based to a large extent on estimates, guesswork, invalid assumptions and statistical magic.  Examine the line-item details in this retail sales report link. Note the numerous lines for the May “estimate” that contain “(*).” Then scroll down to the footnotes.

“(*)” indicates, per the footnotes, that “advance estimates are not available for this kind of business.” Footnote 3 further explains that “Advance estimates are based on early reports obtained from a small number of firms…”.   In other words, a significant percentage of the retail sales are based on guesswork and inference.

Scroll further down the retail sales report and Table 2 shows the summary table (Table 2) which presents the month to month percentage change comparison for the latest month’s report.  The data in first four lines in this table is the data used for the headline reports.

Everyone uses these numbers, most without any knowledge whatsoever about the degree to which the data “behind” the numbers is comprised of highly questionable guesswork and unsubstantiated, if not entirely problematic, statistical inference and  adjustment calculus.

Additionally,  there’s a section in the report that explains methodology for the guesswork.  “Advance estimates are computed using a link relative estimator.”  A “link relative estimator” is a polite descriptor that basically means, “we assume that the historical growth rates implied by our historical reports can be applied to growth rate we assume in  this month from the previous month.”  On top of all of that, the Census Bureau then applies its nefarious “seasonal adjustment” factors to the data.  Keep in mind that a significant portion of the data is pulled out their ass.

All of this methodology is explained in further detail in the tabs on the main Monthly Retail Trade page of the Census Bureau. The information spread out in this section substantiates every assertion I have put forth above. It requires sifting through the “how data are collected,” “definitions” and “FAQs.”  I’m probably one of the few analysts curious enough to subject myself to this brain damage.

By the Census Bureau’s own trumped up numbers, most of the “gain” in retail sales from April to May, if indeed a bona fide gain occurred, was from gasoline and clothing inflation.   The numbers in the report are expressed in nominal terms.  They are not adjusted for the effects of price inflation.  Removing the effect of price inflation would yield the change in “unit” volume of retail sales.  This would be the number of true interest.

Finally, the estimated change in retail sales is not consistent with the patterns in consumer credit.  Based on the Fed’s consumer credit report, the use of revolving credit (credit cards, checking overdraft accounts, etc) has been contracting.  With the savings rate at an all-time low, the only way that retail sales unit volume could possibly increase is through the use of credit.  Thus, while guesswork and inflation is driving today’s headline report, in all likelihood unit volume of sales declined.  This latter assertion is indeed supported by recent manufacturing, factor order, durable goods and wage growth data.

A Massive Bubble In Retail Stocks

Retail, especially the “concept” retailers, are going parabolic. It makes no sense given the declining rate of personal consumption, retail sales, etc. The kinkiest names like RH, RL and W are going up like the dot.com stocks went up in late 1999/early 2000. The move in these stocks reflects either mindless optimism or momentum-rampaging by hedge fund bots – or both. The hedge fund trading flow can turn on a dime and go the other way. I suspect this will happen and, as it does, squeeze even more mindless optimism out of the market.

The cost of gasoline has to be hammering disposable income for most households. On top of this is the rising cost of monthly debt service for the average household.  Non-essential consumerism is dying on a vine.

Fundamentally the retail sector is not recovering. If anything, the economic variables which support retail sales are deteriorating. I think some of the shares caught a bid on better than expected earnings derived from the one-time bump in GAAP non-cash income from the tax law changes reported by numerous companies in Q1. I just don’t see how it’s possible, given the negative wage, consumption, credit and retail sales reports that the sector has “recovered.”

In just the last eight trading days, XRT has outperformed both the Dow and S&P 500 by a significant margin. It has all indications of a blow-off top in process. You can see that, with industry fundamentals deteriorating, XRT’s current level now exceeds the top it hit at the end of January, which is when the stock market drop began. The RSI has run back into “overbought” status.

Some of the “kinkiest” retail concept stocks, like Lululemon (LULU), Five Below (FIVE) and Restoration Hardware (RH), soared after reporting the customary, well-orchestrated GAAP/non-GAAP earnings “beat.”  Of course, RH’s revenues declined year over year for the quarter it just reported.  But it used debt plus cash generated from reducing inventories to buyback $1 billion worth of shares in the last 12 months.  Yes, of course, insiders greedily sold shares into the buybacks. (Note: If insiders were working for shareholders other than themselves, companies would pay large, one-time special dividends to ALL shareholders rather than buyback shares to goose the stock price)

The retail stocks are setting up a great opportunity for bears like me to make a lot of money shorting the most egregiously overvalued shares in the sector.  Timing is always an issue.  But complacency has enveloped the stock market once again, as hedge funds have settled back to aggressively shorting volatility.

It won’t take much to tip the market over again.  Only this time around I expect the low-close of February 8th (2,581 on the SPX) to be exceeded to the downside by a considerable margin.

The above commentary was partially excerpted from the the latest issue of the Short Seller’s Journal.  It’s not easy shorting the market right now – for now – but there have been plenty of short-term opportunities to “scalp” stocks using short term puts. I cover both short term trading ideas and long term positioning ideas.  You can learn more  about this newsletter here:  Short Seller’s Journal information.

 

Gold May Surprise To The Upside Soon

The market sentiment toward the precious metals is quite negative.  Additionally, gold and silver are fighting both the ongoing official price-management, which seems to have intensified over the last 12 months, and the rising dollar. The rise in the dollar is technical in nature – certainly it’s not based on U.S. systemic fundamentals. The current financial and economic environment, both here and globally, is very similar to the late 2007-mid-2008 environment. Remarkably, the financial roadside bombs planted and getting ready explode are more numerous and contain more powerful explosives than the ones that detonated in 2008.

Given the  “headwind” variables (manipulation, dollar rise, sentiment) at work, gold has held up remarkably well, especially in the context of the price-drop experienced by gold between mid-March 2008 and late October 2008, when it was taken down from $1020 to $720 (October 27, 2008 London a.m. fix), or 29.5%. A drop like that now would put gold below $1000. Furthermore, in my opinion, the miners have been quite resilient to hard sell-offs, even on days when gold gets hit pretty hard.

This chart shows the degree to which the miners are undervalued vs. the SPX:

Going back to 2005, the miners have mostly outperformed the SPX. I’m guessing that might surprise a lot of subscribers. After an extended period of outperforming gold from late 2008 to late 2011, the miners have been underperforming the SPX by a substantial margin since early 2013 through today. Based on the laws of probability and mean-reversion, the likelihood of that period of time when the miners once again outperform the SPX grows closer by the day.

Gold is holding up well vs. the dollar. The dollar is at its highest since mid-November and the price of gold is trading 2% higher than it was at in November. Also, don’t overlook that the Fed began its snail-paced interest rate hike cycle at the end of 2015. Gold hit $1030 when the Fed began to tighten monetary policy. I thought gold was supposed to trade inversely with interest rates (note sarcasm). Gold is up nearly 30% since the Fed began nudging rates higher. The chart on the next page shows the ratio of the price of gold to the US Dollar index:

When that ratio rises, gold is outperforming the dollar. When the it falls, the dollar is appreciating vs. the price of gold. While the ratio has dropped since early April, you can see that it’s been in a bullish trading channel since the beginning of 2017. The ratio is considerably higher than it was when gold bottomed in 2015.

Certainly this factual analysis would never show up in the mainstream financial media. That said, you can see that, despite that it might currently “feel” like the price of gold is going nowhere, beneath the surface gold (and silver) have been staging a  powerful bull market set-up. Finally, you’ll note that both the RSI and MACD are positioned in a way that suggests the potential for gold to stage an energetic move higher. I don’t want to predict the timing for this to start other than that I expect it to begin well before the end of the year.

The above analysis is an excerpt from the last issue of the Mining Stock Journal.  Several of my stock picks have outperformed the mining stock indices and the S&P 500. I truly believe that investing in certain stocks right now is the equivalent of buying into the internet stocks that survived the Dot.Com bubble. You can learn more about the Mining Stock Journal by following this link – Mining Stock Journal information.