Tesla, Gold, Silver And A Historical Stock Bubble

“Tesla’s headed for bankruptcy. It’s got a flawed business model; costs are way too high for the price charged for the vehicles and its riddled with accounting fraud. But the regulators will look the other way until it’s too late.”

Silver Liberties invited me on to its podcast to discuss reality. We spend 35 minutes trying to blow away the Orwellian “smoke” that is engulfing the United States’ economic, political system:

***************

You can learn more about  Investment Research Dynamics newsletters by following these links (note: a miniumum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

Modern Monetary Theory, Centralized Control And Gold

My friend and colleague, Chris Powell, Treasurer of GATA, wrote a compelling essay on Modern Monetary Theory. MMT has been in operation by the western Central Banks since Bretton Woods. The “QE” program that began in 2008 is the most recent and blatant implementation of MMT. This is a must-read if you are interesting in understanding the hidden mechanism at work that is destroying the United States.

Modern Monetary Theory, which has been getting much attention lately, is so controversial mainly because it is misunderstood. It is misunderstood first because it is not a theory at all but a truism.

That is, MMT holds essentially that a government issuing a currency without a fixed link to a commodity like gold or silver is constrained in its currency issuance only by inflation and devaluation.

This is a very old observation in economics, going back centuries, even to the classical economist Adam Smith, and perhaps first formally acknowledged by the U.S. government with a speech given in 1945 by the chairman of the board of the Federal Reserve Bank of New York, Beardsley Ruml. The speech was published in 1946.

Ruml said:

“The necessity for a government to tax in order to maintain both its independence and its solvency is true for state and local governments, but it is not true for a national government. Two changes of the greatest consequence have occurred in the last 25 years which have substantially altered the position of the national state with respect to the financing of its current requirements.

“The first of these changes is the gaining of vast new experience in the management of central banks. The second change is the elimination, for domestic purposes, of the convertibility of the currency into gold. Final freedom from the domestic money market exists for every sovereign national state where there exists an institution which functions in the manner of a modern central bank and whose currency is not convertible into gold or into some other commodity.”

Ruml noted that in a fiat currency system such as the United States had adopted by 1945, government did not need to tax to raise revenue but could create as much money as it wanted and deploy it as it thought best, using taxes instead to give value to its currency and implement social and economic policy.

MMT does not claim that the government should create and deploy infinite money. It claims that money can be created and deployed as much as is necessary to improve general living conditions and eliminate unemployment until the currency begins to lose value.

The second big misunderstanding about MMT is that it is not a mere policy proposal but is actually the policy that has been followed by the U.S. government for decades without the candor of Ruml’s 1945 acknowledgment.

The problem with MMT is that, in its unacknowledged practice, it already has produced what its misunderstanding critics fear it for: the creation and deployment of infinite money and credit by central banks as well as vast inflation.

In accordance with MMT, this creation of infinite money and credit has necessitated central banking’s “financial repression” — its suppression of interest rates and commodity prices through both open and surreptitious intervention in bond and futures markets and the issuance of financial derivatives.

That is, since money creation in the current financial system is restrained only by inflation, this restraint can be removed or lessened with certain price controls, which, to be effective, must be disguised, lest people discern that there are no markets anymore, just interventions.

The British economist Peter Warburton perceived this in his 2001 essay, “The Debasement of World Currency — It Is Inflation, But Not As We Know It“:

“What we see at present is a battle between the central banks and the collapse of the financial system fought on two fronts. On one front, the central banks preside over the creation of additional liquidity for the financial system to hold back the tide of debt defaults that would otherwise occur. On the other, they incite investment banks and other willing parties to bet against a rise in the prices of gold, oil, base metals, soft commodities, or anything else that might be deemed an indicator of inherent value.

“Their objective is to deprive the independent observer of any reliable benchmark against which to measure the eroding value not only of the U.S. dollar but of all fiat currencies. Equally, they seek to deny the investor the opportunity to hedge against the fragility of the financial system by switching into a freely traded market for non-financial assets. [EMPHASIS ADDED.]

“Central banks have found the battle on the second front much easier to fight than the first. Last November I estimated the size of the gross stock of global debt instruments at $90 trillion for mid-2000. How much capital would it take to control the combined gold, oil, and commodity markets? Probably no more than $200 billion, using derivatives.

“Moreover, it is not necessary for the central banks to fight the battle themselves, although central bank gold sales and gold leasing have certainly contributed to the cause. Most of the world’s large investment banks have overtraded their capital so flagrantly that if the central banks were to lose the fight on the first front, then the stock of the investment banks would be worthless. Because their fate is intertwined with that of the central banks, investment banks are willing participants in the battle against rising gold, oil, and commodity prices.”

This “financial repression” and commodity price suppression have channeled into financial and real estate assets — the assets of property owners — the vast inflation resulting from the policy of infinite money creation, thereby diverting inflation from assets whose prices are measured by government’s consumer price indexes. Meanwhile those indexes are constantly distorted and falsified to avoid giving alarm.

As a result the ownership class is enriched and the working class impoverished. Of course this is exactly the opposite of what MMT’s advocates intend.

But while the monetary science conceived by MMT people well might develop a formula for operating a perfect monetary system with full employment and prosperity for all, the monetary system always will confer nearly absolute power on its operators, and as long as the operators are human, such power will always corrupt many of them — even MMT’s advocates themselves.

That’s why market rigging is the inevitable consequence of MMT as it is now practiced and why the world is losing its free and competitive markets to monopoly and oligopoly and becoming less democratic and more totalitarian.

So what is the solution?

Maybe some libertarianism would help: Let governments use whatever they want as money, but let individuals do the same and don’t mess with them. Gold, cryptocurrencies, seashells, oxen, whatever — leave them alone.

Most of all, require government to be completely transparent in whatever it does in the markets. If government wants to rig markets, require that it be done in the open and reported contemporaneously.

After all, the world can hardly know where to go when it isn’t permitted to know where it is.

Could A Deutsche Bank Collapse Crash The Markets?

“I don’t think it’s any coincidence that gold runs from $1285 to as high as $1445 around the time that all the news about Deutsche Bank started coming out” [the failure to merge with Commerzbank followed by the “good bank / bad bank” split announcement].

It was reported by Bloomberg that Deutsche Bank clients – mostly hedge funds – are pulling $1 billion in capital per day from the collapsing bank.  Still no details have emerged on the how the “bad bank” holding company will be funded or what will go into it. What we do know is the original proposal for a bad bank was for $43 billion in bad assets. That number has bubbled up to a proposed $74 billion. In truth, no one knows for sure the degree to which DB’s derivatives holdings are radioactive.  Disgraced former CEO, Anshu Jain, admitted that near the end of his failed tenure.

Deutsche Bank is being prevented from collapsing by the German Government, the Bundesbank and the ECB.  That’s been implicitly acknowledged over the last few years that this is case.  The attempt to wash Deutsche Bank’s problems through a merger with Commerzbank failed.  In 2008/2009, Bear Stearns’  and Wash Mutual’s sins were cleansed through bankruptcy court and through JP Morgan. In the same way, Merrill Lynch’s disastrous balance sheet was cleansed through Bank of America.

The fact that a similar attempt to wash Deutsche’s bad assets using Commerzbank failed  should give us an idea of the relative scale of Deutsche Bank’s hidden financial nuclear waste compared to the derivative bombs that detonated in 2008.  I guess the money the Fed and U.S. Taxpayers gave Deutsche Bank in 2008 wasn’t enough…

Chris Marcus, of Arcadia Economics, invited me on to his podcast to discuss DB, gold, mining stocks and, of course, silver:

**********

You can learn more about  Investment Research Dynamics newsletters by following these links (note: a miniumum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

Jerome Powell Fails The Gold Standard Test

“You’ve assigned us the job of two direct, real-economy objectives: maximum employment, stable prices. If you assigned us [to] stabilize the dollar price of gold, monetary policy could do that, but the other things would fluctuate and we wouldn’t care,” Powell said from Capitol Hill. “We wouldn’t care if unemployment went up or down. That wouldn’t be our job anymore.” – Jerome Powell in response to a question about returning to the gold standard

Everything about that answer is incorrect. To begin with, the Fed apparently now has three “assigned” jobs: employment maximization, price stability and “moderate long-term interest rates” (federalreserve.gov).  How can we take anything Powell says seriously if he’s not aware of the the duties of his job?

But let’s set that issue aside.  In fact, if the dollar was backed by gold, the Fed would be irrelevant – the gold standard would take away completely any need for a Central Bank. Powell and his cohorts would not have any job at the Fed.

The function of a gold standard is not to “stablize” the price of the currency which is backed by gold.  Interest rates can be used to “stabilize” the value of currency.  Free markets, if ever allowed, would set the price of money.  The function of the gold standard, fist and foremost, is to stabilize the supply of currency in relation to the wealth output of an economic system.

A Central Bank is not necessary to any economic system which has its currency backed by gold.  If the U.S. had its monetary system tied to the value of the gold it holds in reserve,  it would automatically serve the function of price stability. Remove gold from the equation and the macro variables fall apart rather quickly.

But let’s use reality to test this.  Prior to the closure of the “gold window,” the U.S. largely was a creditor nation and never incurred unmanageable Government spending deficits except during wars.  In fact, the amount of Treasury debt issued to fund the Viet Nam war ultimately led to the removal of the last remnants of the gold standard.  This is because the U.S. Treasury did not have enough gold left to redeem debt issued to foreigners with that gold per the Bretton Woods Agreement.  In short, the U.S. ran out gold so Nixon closed the gold window.

Take a look at the economic and fiscal condition of the United States from inception to 1971 and post-1971.  Any “economist” or Central Banker (Powell is not an economist and probably never thought about gold until he was prepped to answer the possibility of a gold standard question) who opposes the gold standard is ignorant of historical facts or has ulterior motives.

Aside from his inability to respond intelligently to the gold standard question (he should have taken notes from Greenspan), Powell knows that  a zero interest rate policy and money printing are the only ways that he and his elitist cronies can keep the system from collapsing until they finish extracting the last remnants of wealth from the public.  A gold standard would stand in the way of this effort.

Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government’s promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. – Alan Greenspan, “Gold And Economic Freedom,” 1966

The U.S. (and Global) Economy Is In Trouble

Jerome Powell will deliver the Fed’s semi-annual testimony on monetary policy (formerly known as the Humphrey-Hawkins testimony)  to Congress this week.  He’ll likely bore us to tears bloviating about “low inflation” and a “tight labor market” and a “healthy economy with some downside risks.”  Of course everyone watching will strain their ears to hear some indication of when the Fed will cut rates and by how much.

But the Fed is backed into a corner.  First, if it were to start cutting rates, it would contradict the message about a “healthy economy.”  Hard to believe someone in control of policy would lie to the public, right?  Furthermore, the Fed is well aware that it has created a dangerous financial asset bubble and that price inflation is running several multiples higher than the number reported by the Government using its heavily massaged CPI index.

Finally, the Fed needs to keep support beneath the dollar because, once the debt ceiling is lifted again, the Treasury will be highly dependent on foreign capital to fund the enormous new Treasury bond issuance that will accompany the raising, or possible removal, of the debt ceiling.  If the Fed starts slashing rates toward zero, the dollar will begin to head south and foreigners will be loathe buy dollar-based assets.

However, if the Fed does cut rates at the July FOMC meeting, it’s because Powell and his cohorts are well aware of the deteriorating economic conditions which are driving the data embedded in these charts which show that US corporate “sentiment” toward the economy and business conditions is in a free-fall:

The chart on the left is Morgan Stanley’s Business Conditions index. The index is designed to capture turning points in the economy. It fell to 13 in June from 45 in May. It was the largest one-month decline in the history of the index. It’s also the lowest reading on the index since December 2008.

The chart on the right  shows business/manufacturing executives’ business expectations (blue line) vs consumer expectations. Businesses have become quite negative in their outlook for economic conditions. You’ll note the spread between business and consumer expectations (business minus consumer) is the widest and most negative since the tech stock bubble popped in 2000.

Regardless of the nonsense you might read in the mainstream media or hear on the bubblevision cable channels, the U.S. and global economies are spiraling into a deep recession.  Aside from the progression of the business cycle, which has been hindered from its natural completion since 2008 by money printing and ZIRP from Central Banks, the world is awash in too much debt,  especially at the household level. The Central Banks can stimulate consumption if they want to subsidize negative interest rates for credit card companies.  But short of that, the economy is in big trouble.

I publish the Short Seller’s Journal, which features economic analysis similar to the commentary above plus short selling opportunities to take advantage of stocks that are mis-priced based on fundamentals.  You can learn more about this weekly newsletter here: Short Seller’s Journal information.

It Looks, Sounds And Smells Like A Gold Bull Market

Gold tends to perform the best when the real rate of interest (interest rates minus the real inflation rate) is negative. For now, the Central Banks have been able to contain the movement of gold in order to prevent the price from doing what it should be doing when interest rates are negative.

With that enormous amount of negative yielding debt globally, and Treasury yields in the U.S. heading south quickly, from a fundamental standpoint there’s a high probability we have started the next big move higher in gold. Silver will eventually “catch up” and begin to outperform gold. That said, get used to a higher level of price volatility in the precious metals sector. Keep a core position but sell rallies and buy sell-offs if you want to trade the volatility. Otherwise, sit tight and be right.

The Prepared Mind invited to its podcast to discuss a wide range of issues from precious metals to geopolitical problems. Here’s Part 2 (click to view Part 1):

**********

You can learn more about  Investment Research Dynamics newsletters by following these links (note: a miniumum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

A Predictable Gold Price Attack – Now What?

Today’s attack on gold and silver was one of the most predictable in my 18 years of involvement in the precious metals sector. On Wednesday just before the close of the NYSE, I loaded up at-the-money puts on NUGT that expire today. I sold them right after the open for home run trade. The sector has been grinding higher since the first hour of trading, which is bullish.

Trevor Hall and I discuss the recent move up in gold (and the new move below $1400), silver expectations, and the increasingly positive investor sentiment toward the junior mining sector. We also share a few stocks which we have likened over the first half of 2019 along with a few disappointments. You can listen to the discussion by clicking here: MINING STOCK DAILY  or on the graphic below:

The Mining Stock Journal  covers several mining stocks that I believe are extraordinarily undervalued relative to their upside potential. I also present opportunistic recommendations on select mid-tier and large-cap miners that should outperform their peers.  In response to subscriber requests, in the latest issue released Wednesday  I presented an initial opinion on Great Bear Resources. You can learn more about this newsletter here:   Mining Stock Journal information.

The Flight To Safety In Gold – A Conversation With The Prepared Mind – Part 1

The Chinese have been slowly trading out of their U.S. dollar exposure and converting it to gold. Something a lot of analysts don’t pay attention to because they don’t even know what the facts are [with regard to the actual amount of physical gold held by China] when they look at China and proclaim that China has a debt problem.  Sure, China has a fiat currency-derived debt problem but it’s nowhere near as bad as the U.S. fiat currency-derived debt problem. And guess what? On the other side of the paper debt China has 25,000-35,000 tonnes of physical gold they’ve hoarded over decades.

The Prepared Mind invited to its podcast to discuss a wide range of issues from precious metals to geopolitical problems. Here’s Part 1:

**********

You can learn more about  Investment Research Dynamics newsletters by following these links (note: a miniumum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

“Dave mate. You’re making me rich. I don’t know what’s going on with Gold Fields but they’ve spiked up 33% and my calls are going ballistic.” – Mining Stock Journal subscriber in Australia

Gold: BOOM Goes The Dynamite

After dancing around the $1350 level (August futures basis) the price of gold launched in three stages after the FOMC circus was over on June 19th. The first move enabled gold to break above and hold the $1360 area of resistance that has been referenced ad nauseum for the last three years. Then, two “reverse flash crashes” later on Thursday and Friday that week, gold powered well above $1400 before a “flash crash” at the end of Friday’s trading pushed gold back below $1400 for the weekend. On Monday afternoon (June 24th) gold broke free from  the shackles of official price containment and sustained a move over $1400 and ran up to $1440.

As I expected, a combination of profit-taking by the hedge funds chasing momentum higher with paper gold and official efforts to push the price of gold lower triggered a sell-off that tested $1400 successfully. Gold closed out the week (August futures basis) at $1412.

While I was expecting a move like this at some point in response to the Fed reimplementing loose monetary policy, I thought that it wouldn’t happen until the Fed signaled that it would begin printing money again. It’s not clear to me if this move is being fueled by fundamentals and a flight to safety or if it’s hedge fund algos chasing price momentum. It’s likely a combination of both.

Independent of any economic disruption that may or may not be caused by the trade war, economic activity globally is deteriorating rapidly. Every country around the world recklessly printed money and piled up debt which artificially revived economic activity after the 2008 de facto systemic collapse. Mathematically the world can’t print money and issue debt ad infinitum. We may have hit the wall in that regard over the last 12 months. The trade war is being used as a convenient scapegoat. It’s like blaming the start of World War I on the assassination of Archduke Franz Ferdinand…

I believe there’s no question that highly negative events are unfolding “behind the scenes” which are sucking liquidity out of the system. I believe these events will emerge in plain sight well before year-end. The yield curve inversions (Treasury, Eurodollar futures) are telling us there’s hidden explosives detonating that have been contained for now. I have no doubt that the troubles are connected to primarily to Deutsche Bank but also stem from the early stages of a subprime debt problem. The “secret” meeting held a couple weeks ago by Mnuchin and the Financial Stability Oversight Council concerning “alarms” in the junk bond market was a tell-tale as was the “bad bank” plan announced by Deutsche Bank, which was curiously devoid of any details on how it would be funded or what would go into it.

The systemic problems and geopolitical animosities percolating behind “the curtain” are not lost on those with an inside view of the action. I expect an aggressive attack on the gold price next week. The Fourth of July observance falls on Thursday, which means most Wall Street trading desks will be lightly staffed most of the week. Low-volume holiday periods are the favorite time for the bullion banks to stage a raid on gold. The success of this raid is crucial to maintaining the illusion that obvious systemic problems are manageable.

Any attempt to push the price of gold lower will be helped by the fact that official gold imports into India have stopped while the Indian public digests the recent surge in the price of gold. This is typical behavior by India after a sharp move higher in gold. Smuggling to avoid the import duty likely continues unabated. But the removal of India’s official bid from the physical gold market is a window of opportunity for the western gold price managers to make an effort to push bold back below $1400 using paper.

If any attempt to  manipulate gold back below $1400 fails in the next week or two, it means that unhealthy quantities of brown fecal matter are connecting with the fan blades – out of sight for now except for the signal coming from the gold.

Any sustained move higher in gold and silver will ignite a fire below the mining stocks, especially the historically undervalued juniors. My Mining Stock Journal covers several mining stocks that I believe are extraordinarily undervalued relative to their upside potential. I also present opportunistic recommendations on select mid-tier and large-cap miners that should outperform their peers. In response to subscriber requests, in the next issue released this upcoming week I’ll present an initial opinion on Great Bear Resources. You can learn more about this newsletter here:   Mining Stock Journal information.

New Home Sales Tank – KBH Claims Its Numbers “Improved”

“We are confident we can produce further improvement in our results in the second half of this year” – KB Homes CEO in reference to its “returns-focused” growth model

“Returns-Focused Growth Model.” Has a nice ring to it, doesn’t it? KBH’s revenues dropped 7.3% YoY for Q2. It’s operating income plunged a healthy 28%. How’s that growth strategy working out for you, Jay?

Of course it produced a headline EPS “beat.” But this is because it implemented a full-blown deep-tissue body massage to GAAP accounting, including capitalizing costs that should have been expensed (interest expense and homebuilding expenses), it recognized a non-cash “income” in off-balance sheet JV’s (a suspiciously round $2.5 million) and slashed its arbitrarily determined book tax rate to 17% from 28%.

Except in certain areas where markets remain hot due to migration patterns (hundreds moving to Denver weekly – please stop), the housing market is contracting despite the lowest mortgage rates since late 2017. The Government has all but made it possible for a barely breathing corpse to take down a tax-payer guaranteed mortgage (there’s even several no-down-payment programs).

The homebuilder sentiment index (formally called the “Housing Market Index”) was released on Monday morning. It fell to an index level of 64 in June from 66 in May. Wall St’s finest were looking for a consensus 67. All three sub-indices declined: current sales conditions, buyer traffic and expectations for the next six months. Buyer traffic has been below 50 for two months in a row. This is despite more than a 1% decline in the average rate on a 30-year fixed rate mortgage during the last 7 months.

At the end of the day, it doesn’t really matter how homebuilders “feel” about the sales  environment now or in six months, declining foot traffic translates into falling sales volume. The quote above reinforces my theory that the “pool” of potential homebuyers, especially first time buyers, who can qualify for a mortgage and afford the monthly cost of home ownership is drying up. Lower interest expense from lower mortgage rates somewhat offsets high prices relative to income. However, the general cost of home ownership other than debt service is rising beyond the spending budgets of many potential home owners.

A long-time subscriber contacted me and was curious about the divergence between my view of the housing market and Josh Steiner’s at Hedge Eye. Here’s my response: “I tried to follow Hedge Eye several years ago. It didn’t take me long to discard them into the rosecolored glasses/perma-bull bucket. Hope and optimism is easier to sell than doom, gloom and reality.  Housing market perma-bulls don’t understand the extent to which easy credit has fueled the housing market since 2010. You can’t necessarily call it a “housing bull market” because the until sales level is not even remotely close to the previous peak in 2005. New single family home sales peaked at a seasonally adjusted annualized rate of 1.39 million in July 2005. The current SAAR is 626,000.

Furthermore, the Government “pulled forward” future demand when it began to lower the bar to qualify for a FNM/FRE mortgage. The demand pool Steiner probably thinks is out there for starter homes has mostly already bought OR can’t qualify. This is why that huge drop in the 10yr has not stimulated housing sales. The rate on a 30yr fixed mortgage has dropped over 100 basis points since November, yet housing sales have been declining. It would be interesting to know to what extent home sales would have have declined over the last few months if rates had not fallen over 1% since November.

Mortgage purchase applications dropped 1% this past week after a reported 4% decline the week before. Mortgage purchase applications have declined 8 of the last 10 weeks. This is despite the stunning drop in the 10yr Treasury yield and the related decline in mortgage rates. Furthermore, June is seasonally a peak month for home sales and thus mortgage purchase applications should be soaring.

KBH’s unit sales were flat but the average selling price plunged 8.5%. The Company had to resort to heavy discounting to move homes while it’s inventory continues to soar. The DJUSHB has been rising despite the fact that falling interest rates are not stimulating housing market activity. I’m certain that hedge fund algos have been programmed to buy homebuilders when the 10yr yield falls.However, at some point the fundamentals will take over and hedge fund algos will be reprogrammed to start selling.

The DJUSHB knifed through it’s 50 dma earlier this week. Despite the overall strength in the index this spring, I recommended two shorts in my Short Seller’s Journal that have been home runs. In mid-April, I recommended shorting Realogy (RLGY) at $12. It’s trading at $7 as I write this. I also recommended shorting HOV at $15. It’s trading at $6.94 today. Realogy is the best bellweather stock indicator for the housing sector because its the largest realtor services company. HOV is just a zombie company with far too much debt and will hit the wall eventually. That’s why indsiders dump their shares continuously.

There’s a lot downside profit opportunities in the housing sector. I review many of them in my Short Seller’s Journal. This includes ideas for using options and trading strategies. To learn more about this follow this link:  Short Seller’s Journal information.