Phil Kennedy of Kennedy Financial invited me onto his podcast to discuss the latest FOMC comedy show, gold, silver, mining stocks, cryptocurrencies and the housing market.
Just like the Dutch Tulip Bulb bubble, internet stock bubble, and the mid-2000’s financial asset bubble, the current stock market is no longer a price-discovery mechanism. It has deteriorated into a venue in which Central Bank-manufctured liquidity – in the form of printed currency and credit creation – has flooded into the system, enabling investors to chase the few stocks rising in price at the highest velocity (click to enlarge, graph on the left sourced from Jesse’s Cafe Americain).
The drivers of this modern day Dutch Tulip phenomenon are the so-called “Five Horsemen” stocks – AAPL, AMZN, FB, GOOG,MSFT. To that grouping I toss in TSLA. Among all of those bubble stocks, TSLA has become, by far, the most disconnected from any remote intrinsic, fundamental value. AAPL alone is responsible for 25% of the YTD gain in the Dow and 13% of the YTD gain in the S&P 500. AAPL’s revenues and operating income have declined over the last three years (2014 to 2016). More often than not, even on days when the S&P/Dow are red, most if not all of the Five Horsemen + TSLA seem to close green.
Eventually, the music will stop and this “no-price-discovery-possible” market will become a “can’t find a seat” market. The abruptness and rate of decline will be breathtaking. Perhaps only matched by the outflow of capital from the cryptos by “investors” who leveraged up their cryptocurrency holdings to throw more “money” at TSLA.
The good news is that a lot of money can be made shorting stocks. Since April, stocks like IBM, GS, SHLD, BZH and GE presented in the Short Seller’s Journal as shorts have outperformed the SPX/Dow. SHLD is down 47% in 7 weeks – a home run. BZH is down 18% in three weeks. In the next issue, a “funky” financial stock will be featured that has the potential to drop at least 50% over the next 12 months if not sooner.
No one knows what event will trigger the stock bubble collapse. One possibility is the ongoing financial implosion of the State of Illinois. In stock bubble periods, all news is imbued with “the glass is half full.” As an example, Illinois’ credit rating was reduced recently to BB+/Baa3. That is a junk rating. But the media characterizes it as a “the lowest investment grade” rating – i.e. the “glass is half full.”
Both rating agencies never downgraded Enron to junk until it was weeks from Chapter 7 bankruptcy. Illinois is on the brink of financial disaster. See this article as an example: Illinois Owes Billions. This problem is absolutely dwarfed by Illinios’ public pension problem, which Illinois underfunded by a couple hundred billion (officially about $130 billion but that’s not on a true mark-to-market basis).
When the music finally stops, the perma-bubble bulls will be looking for that proverbial “seat” in all the wrong places. But the next stampede of capital will be out of stocks, bonds, cryptos and “investment” homes and into physical gold, silver and mining stocks.
Paul Craig Roberts and Dave Kranzler
In a series of articles posted on www.paulcraigroberts.org, we have proven to our satisfaction that the prices of gold and silver are manipulated by the bullion banks acting as agents for the Federal Reserve.
The bullion prices are manipulated down in order to protect the value of the US dollar from the extraordinary increase in supply resulting from the Federal Reserve’s quantitative easing (QE) and low interest rate policies.
The Federal Reserve is able to protect the dollar’s exchange value vis-a-via the other reserve currencies—yen, euro, and UK pound—by having those central banks also create money in profusion with QE policies of their own.
The impact of fiat money creation on bullion, however, must be controlled by price suppression. It is possible to suppress the prices of gold and silver, because bullion prices are established not in physical markets but in futures markets in which short-selling does not have to be covered and in which contracts are settled in cash, not in bullion.
Since gold and silver shorts can be naked, future contracts in gold and silver can be printed in profusion, just as the Federal Reserve prints fiat currency in profusion, and dumped into the futures market. In other words, as the bullion futures market is a paper market, it is possible to create enormous quantities of paper gold that can suddenly be dumped in order to drive down prices. Everytime gold starts to move up, enormous quantities of future contracts are suddenly dumped, and the gold price is driven down. The same for silver.
Rigging the bullion price prevents gold and silver from transmitting to the currency market the devaluation of the dollar that the Federal Reserve’s money creation is causing. It is the ability to rig the bullion price that protects the dollar’s value from being destroyed by the Federal Reserve’s printing press.
Recently, the price of a Bitcoin has skyrocketed, rising in a few weeks from $1,000 to $2,200. Two explanations suggest themselves. One is that the Federal Reserve has decided to rid itself of a competing currency and is driving up the price with purchases while accumulating a large position, which then will be suddenly dumped in order to crash the market and scare away potential users from Bitcoins. Remember, the Fed can create all the money it wishes and, thereby, doesn’t have to worry about losses.
Another explanation is that people concerned about the fiat currencies but frustrated in their attempts to take refuge in bullion have recognized that the supply of Bitcoin is fixed and Bitcoin futures must be covered. It is strictly impossible for any central bank to increase the supply of Bitcoins. Thus Bitcoin is standing in for the suppressed function of gold and silver.
The problem with cryptocurrencies is that whereas Bitcoin cannot increase in supply, other cryptocurrencies can be created. In order to be trusted, each cryptocurrency would have to have a limited supply. However, an endless number of cryptocurrencies could be created that would greatly increase the supply of cryptocurrencies. If entrepreneurs don’t bring about this result, the Federal Reserve itself could organize it.
Therefore, cryptocurrency might be only a temporary refuge from fiat money creation. This would leave gold and silver, whose supply can only gradually be increased via mining, as the only refuge from wealth-destroying fiat money creation.
For as long as the Federal Reserve can protect the dollar by bullion price suppression and money creation by other reserve currency central banks, and as long as the Federal Reserve can keep the influx of new dollars out of the general economy, the Federal Reserve’s policy adds to the wealth of those who are already rich. This is because instead of driving up consumer prices, thus threatening the US dollar’s exchange value with a rising rate of inflation, the Fed’s largess has flowed into the prices of financial assets, such as stocks and bonds. Bond prices are high, because the Fed forced up the price by purchasing bonds. Stock prices are high, because the abundance of money bid prices higher than profits justify. As the US government measures inflation in ways designed to understate it, the consumer price index and producer price index do not send alarm systems into the markets.
Thus, we have a situation in which the Fed’s policy has done nothing for the American population, but has driven up the values of the financial portfolios of the rich. This is the explanation why the rich are becoming more rich while the rest of America becomes poorer.
The Fed has rigged the system for the rich, and the whores in the financial media and among the neoliberal economists have covered it up.
Given group-think and the determination of policy makers to do ‘whatever it takes’ to prevent the next market ‘crash,’ we think that the low-volatility levitation magic act of stocks and bonds will exist until the disenchanting moment when it does not. And then all hell will break loose, a lamentable scenario that will nevertheless present opportunities that are likely to be both extraordinary and ephemeral. – Highly regarded hedge fund manager, Paul Singer, in his latest investor newsletter
Singer has apparently has unloaded $5 billion worth of stock, which is 15% of his funds management.
Anyone happen to notice that several market commentators have argued that Bitcoin is a bubble but the same stock “experts” look the other way as the U.S. stock market becomes more overvalued by the day vs. the deteriorating underlying fundamentals? Bitcoin going “parabolic” triggers alarm bells but it’s okay if the stock price of AMZN is hurtling toward parity with the price of one ounce of gold. Tesla burns a billion per year in cash. It sold 76,000 cars last year vs. 10 million worldwide for General Motors. Yet Tesla’s market cap is $51.7 billion vs. $48.8 billion for GM.
This insanity is the surest sign that the stock market bubble is getting ready to pop. If you read between the lines of the the comments from certain Wall Street analysts, the only justification for current valuations is “Central Bank liquidity” and “Fed support of asset values.” This is the most dangerous stage of a market top because it draws in retail “mom & pop” investors who can’t stop themselves from missing out on the next “sure thing.” There will be millions of people who are permanently damaged financially when the Fed loses control of this market. Or, as legendary “vulture” investor Asher Edelman stated on CNBC, “I don’t want to be in the market because I don’t know when the plug is going to be pulled.”
A friend/colleague of mine is a point and figure chart aficionado. He sent me an email on Thursday in which he said even with the five horsemen (FANGs + AAPL) and the SPX and Dow up today (and the SPX setting a new all-time high), the bullish percent index (BPI) of the NYSE is negative which means there are more stocks generating a point and figure sell signal than a buy signal. This has been fairly consistent over the past couple of weeks. (Note: the bullish percent index is a breadth indicator based on the number of stocks on point & figure buy signals). When the BPI is negative over an extended period of time, it reflects the fact that a lot more stocks in the NYSE are trending lower than are trending higher. When a declining number of stocks are participating in the move higher of a stock index, it is a bearish signal.
As my friend says, “in reality this will continue until it doesn’t.” He goes on to say: ” what this shows me is that at this time it’s much better to be strategically short than broadly short. This will change too at some point…”
Picking out strategic shorts has been the focus of the Short Seller’s Journal. Not all of the ideas have worked and a couple back-fired – in defiance of the company’s underlying fundamentals – but many ideas are well below the price at which they were presented either the first time or presented again thereafter. One idea that has declined 39% (declined $42) since August 2016 is Ralph Lauren, which was presented on August 14, 2016 at $108.19. It closed Friday at $66.11, down 41 cents on a day when the SPX hit another all-time high. RL has closed lower on 12 of the last 13 days.
One subscriber emailed me earlier this week to let me know he had shorted 200 shares at $108 and covered 100 of it this week. He’s hanging on to the other 100 share short. I mentioned to him that my 12-18 month target was $50 and that he should hold the other 100 short at least until August because it’s only going to get worse for the consumer and retailers.
Currently there’s a a large percentage of stocks trading below their 50 and 200 day moving averages. Many stocks are close or at 52-week lows. Some stocks, like Sears Holdings (SHLD) are no-brainer shorts. Sears is going to file for bankruptcy – it’s down 32% from April 2nd, when it was presented as a short idea in the Short Seller’s Journal. Similar to the probability of a stock market crash, it’s a matter of “when,” not “if.”
I want to show two quotes from commentators in related areas of financial analysis because they illustrate the difference between truthful commentary and unmitigated idiocy.
Yesterday, James “Mc” wrote in Bill Murphy’s nightly “Midas” report:
“The sexiness of Bitcoin, Tesla, Netflix, and hundreds of other techie things will become FAR less sexy in a good old fashion economic crash. Reality will quickly set in, and real stuff, made by real people will prevail. As history has shown everything else becomes superfluous. Millennials, or even Gen-Xer’s for that matter have never experienced truly hard times. Many will be shocked to learn when TSHTF a plumber is far more marketable than an IT guy. Bartering with Bitcoin might prove problematic.”
I doubt there’s anything with that statement with which anyone could dispute. Murphy prior to that made the valid points that Central Banks and sovereign nations will never incorporate Bitcoin into their currency reserves like they do with gold. The point being that, while Bitcoin is accepted as a form of currency by its users, it is not considered a wealth storage asset.
It would be tough to classify James’ comment as propaganda or fake news. Gold is the world’s second oldest form of money (silver is the oldest). Bitcoin may or may not become a passing fad but it certainly has not stood the test of time. Its use can be eliminated by shutting down the global power grid.
Here’s an example of propaganda, fake news and unmitigated idiocy from Citicorp’s “respected” strategist, Tom Fitzpatrick:
“…markets ultimately will be driven by the economic backdrop rather than by headlines. US labor and housing markets remain robust and should continue to drive growth. European growth is picking up. China remains stable in our view despite recent volatility.” LINK
China remains “stable?” I doubt anyone would disagree that China has fomented the second biggest debt and asset bubble in the world, with the U.S. bubble the largest, and its financial system rests on the precipice of systemic collapse resting on a pyramid of debt and derivatives that requires a flood of printed money and credit creation in order to defer the inevitable financial and economic implosion. That’s the truth, in contrast to Fitzpatrick’s moronic assertion.
As for the remark that the U.S. labor market is “robust.” My guess is that a majority of the 95 million working age people (37% of the working age population) in the U.S. who are no longer considered part of the “labor force” would have a different set of adjectives to describe the labor market here (they would also have a set of adjectives to describe Fitzpatrick that would make some blush).
A “robust” housing market? Total home sales are running two-thirds of the long run average and about 50% the last peak in sales. This is despite a steady long term growth in the population. Furthermore, in order to for a home to sell, in general buyers have to resort to using a 0-3% down payment mortgage and use at least 50% of their monthly income to service the mortgage. An oversupply of housing in New York City and Miami is beginning to crush those two housing markets, a dynamic that will soon spread to most major metro areas across the country. Flippers and “investors” were about 35% of all home sales in 2016.
These are unequivocally NOT the attributes of a “robust” housing market, not to mention the fact that the even the monthly manipulated home sales data series published by the Government and the National Association of Realtors have been trending lower this year. Tom Fitzpatrick’s remarks embody the attributes of Wall Street propaganda, outright fake news and total unmitigated idiocy. I hope you get rich selling lies and feel good about it, Tom.
There’s been a lot of debate over the meaning and significance of the parabolic move in Bitcoin. Allhambra Investments’ Jeffrey Snider has come the closest to the truth by equating the Bitcoin move as the manifestation of Gresham’s law.
While this encapsulates the Bitcoin frenzy, beneath the surface represented by Bitcoin is an even bigger movement of bad money (fiat currencies) piling into physical gold that is occurring in the eastern hemisphere, specifically in India and China. The evidence of this movement in the form of a higher price expressed in dollars is being hidden by the continuous intervention in the western gold market implemented by the western Central Banks using paper gold derivatives.
The point of this is that the price of Bitcoin is behaving the way price of gold would be behaving in the absence of manipulation. The rush into both is a rejection by the market of the continuous devaluation of fiat currencies that is occurring from the trillions of paper currencies that have been created since 2008.
At some point, and there’s not anyone who can predict when, Tom Fitzpatrick’s fake news and unmitigated idiocy will be exposed for what it is as global financial markets and economies crash and money that is pulled out of bubble assets floods into the safety of physical gold and silver. At that point the Central Bank effort to suppress the price of gold and silver will fail.
It’s been occurring slowly since 1971 (and really since 1913) and will at some point happen all at once. Have a great Memorial Day weekend and try to enjoy what you can, as much you can, while you still can.
“How did you go bankrupt?” “Two ways. Gradually, then suddenly.”
– Ernest Hemingway, “The Sun Also Rises”
I was chatting with a friend two days ago who was agitated by the insanity of the markets. Look at TSLA, for instance. This thing loses $13,000 for every car sold. Soon the tax credits – i.e. the taxpayer subsidies – will expire and TSLA will lose even more per car because it will have to lower the price to entice buyers. Its balance sheet is a ticking time bomb in the form of residual value guarantees issued by TSLA used to induce buyers into paying up for a car that has depreciated in value considerably more than the value of the guarantee. Those poor saps don’t realize it yet, but they will be unsecured creditors to a bankrupt corpse of a company. And yet, the market has pushed the market cap above the market caps of GM and Ford.
To say this is absurd is an insult to the word “absurd.” I’m still trying to decide whether TSLA or AMZN is the biggest Ponzi scheme in U.S. history. I have not had a chance to dissect TSLA’s financials and operations to the extent that I have done so with AMZN. With AMZN the market doesn’t seem to care that, on a net income basis, in its latest quarter AMZN’s product sales business (it’s non-cloud, or AWS, business) lost money (that’s right, if you subract the operating income of AWS from total net income, AMZN lost money – AMZN manufactures net income for its non-AWS business via GAAP gimmicks) . But why focus on the facts? The operating income of its AWS cloud business dropped 29%. Once GOOG, MSFT and ORCL have fully implemented their attack on AMZN’s cloud market share, AWS will become irrelevant. I would bet every single entity that bought AMZN stock since it released its Q1 earnings does not know these facts. AMZN, pure and simple, is a Ponzi scheme.
Amusingly, there’s a contest on CNBC over whether AMZN or GOOG hits $1000 first. This is the surest signal that the end of this fiat currency-driven credit and stock bubble globally is about to collapse.
Given the inability to manipulate its market via paper derivative instruments and short selling, this is the message that Bitcoin is signaling:
In the absence of the ability to manipulate the market, this is the same message that gold and silver would be sending to the world, only the scramble for gold and silver bullion in any form would be more frenzied and it would be widespread. There actually is a somewhat frenzied scramble for gold and silver in eastern hemisphere markets based on the premiums to melt being paid for refined products in places like India, China, Turkey and Viet Nam.
At some point the western Central Banks will lose the ability to manipulate the gold and silver price and the Comex will default. That’s when chaos will break out in the physical gold and silver markets. That may be what it will take to trigger the collapse of the U.S. Ponzi scheme. Apparently JP Morgan understands this inevitability. Prior to 2011, JPM did not operate a Comex vault. It had zero Comex silver. Currently JPM is holding nearly 108 million ozs of silver, or 54% of the total silver reportedly held in Comex silver vaults. This tells us, or at least me, that smart insider money is loading up on precious metals – not Bitcoin – and that silver is a better bet than gold.
Hemingway’s “slowly” method of going bankrupt has nearly run its course. There’s no way to tell the timing on the “all at once” side of this trade but the price action in Bitcoin is signaling to the world that the obviously inevitable draws near.
Gold and silver have been sold down pretty hard since April 18th. But the structure of the weekly Commitment of Traders report, which shows the long and short positions of the various trader classifications (banks, hedgers, hedge funds, other large investment funds, retail) had been flashing a short term sell signal for the last few weeks. The net short position of the Comex banks and the net long position of the hedge funds had reached relatively high levels. Except Thursday (May 4th), almost all of the price decline action was occurring after the London p.m. gold fix and during the Comex floor trading hours, exclusively. This tells us all we need to know about the nature of the selling, especially given the enormous amount of physical gold currently being accumulated by the usual eastern hemisphere countries. The table to the right calculates the Comex banks’ paper gold positioning going back to 2005. As you can see, currently the net short position and the net short position as a percent of total open interest has reached a relatively high level. This typically happens when the banks engage in raiding the Comex by unloading massive quantities of paper gold in bursts in order to trigger hedge fund stop-loss selling. It serves the dual purpose of pushing down the price of gold and providing a relatively riskless source of profits for the banks.
This is the cycle that has repeated numerous times per year since 2001. This time, however, more than any other time since 2001, the sell-off in the price of gold is counter-intuitive to the collapsing financial and economic condition of the United States, specifically, and the entire world in general. The likely reason for the current price take-down of gold is an attempt by the elitists to remove the batteries from the “fire alarm” mechanism embedded in a rising price of gold. An alarm that lets the populace know that there’s a big problem that will hit the system sooner or later; an alarm that lets the public know systemic failure is beyond Government and Central Bank Control.
A similar manipulated take-down of the price of gold and silver occurred in the spring of 2008, ahead of the great financial crisis. Gold was pushed down to $750 from $1050 and silver was taken down from $20 to $10. This price decline was counter-intuitive to the collapsing financial condition of the U.S. financial system, which had become obvious to anyone not blinded by the official propaganda at the time. Of course, after the financial collapse occurred and was addressed with money printing, the price of gold ran up to an all-time high.
It’s likely that a similar situation is taking place now. Only this time around all “assets” are in price-bubbles fomented by record levels of fiat money creation and the interminable expansion of credit. The debt portion of this equation is getting ready to hit the wall, the only question is timing. This explains the parabolic move in the price of Bitcoin. Bitcoin is nearly impossible to manipulate. Once the western Central Banks lose the ability to manipulate the price of gold in the derivatives markets, the price of gold and silver will go on their own parabolic price journey – one that will leave the price of Bitcoin in the rear view mirror.
If you are interested in getting unique, insightful gold/silver market analysis and mining stock investment ideas ahead of the market, subscribe to the Mining Stock Journal. You can get more information about this here: MSJ subscription info.
On April 11th, the CME and England’s Royal Mint announced that they were testing a blockchain-based platform for trading gold. The product to be traded is a new crypto-coin called, Royal Mint Gold (“RMG”). The token will be issued by the Royal Mint and will represent the digitized version of 1 gram of gold. The gold will be stored in the Royal Mint’s vaults.
This news announcement was surprisingly overlooked by the alternative media, except for Rory Hall at his Daily Coin website: CryptoGold and Thieving Bankers. However, the fact that the CME is involved should have set off the smoke alarms throughout at least the segment of the alternative that seeks to shine the light of truth on precious metals trading and ownership. This is because the concept of a “new alternative way to trade gold” is an extension of the “fractional gold and silver bullion market” that is driven by the paper derivative precious metals products traded on the Comex and the LBMA.
The truth is that this new “blockchain-based” technology is nothing more than a mechanism to divert investor money away from taking delivery of actual physical gold and silver in the form of Royal Mint bullion coins and LBMA bars, thereby removing the availability of physical gold and silver that can be used for hypothecation. Furthermore, the new product is an extension of the institutional-level fractional bullion system that utilizes Comex/LBMA paper gold and silver contracts in order to fabricate the illusion that the buyers of those contracts have purchased legal ownership the underlying bullion bars. Below is an excerpt from the Royal Mint’s website which promotes the new concept:
RMG®, an innovative new product launching in 2017, will provide the investment performance of the London Gold Market with the transparency of an exchange-traded security. RMG holders will negate counterparty risk, by having direct ownership of physical gold bullion where each RMG represents ownership and full title to 1g of physical gold bullion held in the form of fully allocated, LBMA Good Delivery Bars within The Royal Mint’s vault.
We believe these features, coupled with the guarantee of zero ongoing annual management fees and free storage, represents one of the best and cost-effective ways to invest in physical gold today. At any time RMG can be redeemed for physical gold bars and coins produced by The Royal Mint, with physical delivery.
The basic tenet of the RMG is that “counter-party” risk is eliminated because the buyers are purchasing direct ownership of gold that is stored in the Royal Mint’s vault. However, the idea of custodial possession – where the owner trusts the safe-keeping of an asset with a third party – is in and of itself a primary source of counter-party risk. The first law of ownership of gold is that you do not fully “own” it until it is in your personal possession. Just ask the German Government.
The second myth in that statement above by the Royal Mint is the gold is held in the form of fully allocated LBMA Good Delivery Bars (in the Mint’s vault). This is GLD’s holy grail claim as well. The problem, again, is accountability. Until gold custodian’s are willing undergo a fully independent 3rd party audit at any time and without advance notice, it’s silly to assume that these custodians possess full, legal title to the gold they are reporting to be in their vaults. The poster-child example is the U.S. Federal Reserve, which has spent millions to avoid the prospect of a legally enforced audit of its gold vaults by a third party, fully independent auditor.
The Shadow of Truth discusses this new mechanism of deceit in today’s podcast and we explain why it’s riddled with counter-party risk and the potential for fraud on the same scale as Comex and LBMA gold and silver derivative products.
– JP Morgan on December 18, 1912 in testimony to Congress
Crush The Street’s Kenneth Ameduri invited to discuss why I believe the current stock market is the most overvalued in history. We also chatted about the movement by western Governments to a digital currency system and, of course, the precious metals market. It’s my view that the pullback in the precious metals sector that began in late July was over by the end of December. I also believe that there’s good probability that the next move in the sector will be more powerful than the 2016 move.
You can listen to our conversation here:
If you want to have access to my proprietary precious metals market analysis and junior mining stock ideas you can subscribe to the Mining Journal with this link: MSJ Subscription Link. The subscription is email-based and new subscribers get all of the back-issues. The next issue will be published Thursday this week and I have an extraordinarily intriguing high risk / high return, 10-bagger potential stock idea.