Category Archives: U.S. Economy

JP Morgan / Jamie Dimon Decide To Burn Their Bras

JP Morgan took the bold step  to “break a stigma” and announce that it planned to borrow from the Fed’s discount window.  The discount window in the context of modern finance has evolved into  an emergency source of liquidity.  This is nothing more than an attempt at reverse psychology to cover up the fact that JPM is preparing for the eventuality that it will need to tap into emergency sources of liquidity like the Fed’s discount window.

The Fed’s “temporary” repo money printing operations are not doing the trick. The big banks are in trouble from the same type of bad lending decisions that led to the 2008 crisis, only this time it will be worse. Chris Marcus (Arcadia Economics) and I flush out exactly what this means in a short podcast:

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

Stocks And Gold: What Happened Last Week

The coronavirus crisis is perhaps the real “Black Swan” that no one saw coming.  While the virus pulled the trigger on the loaded weapon aimed at the stock market, it’s not the cause of the 2nd fastest 10% decline in the history of stock market.  Using “as adjusted” GAAP accounting applied to the current trailing 12-month SPX earnings to make them comparable to the GAAP standards applied to 1999 earnings, this was the most overvalued stock market in U.S. history.  While Fed officials and Wall Street story-tellers rejected the notion that the stock market was in a bubble, this table from Crescat Capital demonstrates the stock market’s extreme degree of overvaluation:

The SPX is at an all-time high in five of eight valuation metrics.  However,  I would argue it’s really 6 of 8. The “adjusted” P/E (CAPE) used by Robert Shiller is in the 96th percentile of high valuation.  But if the historical earnings of the SPX were adjusted using 1999 GAAP, the current “Shiller P/E” ratio would at an all-time high. This is because GAAP standards for recognizing income have become considerably more lenient over the last 21 years.

A metric more suited to comparable analysis across time is the median enterprise value (market cap + debt) to sales ratio. The revenue line is the least affected by GAAP.  For the most part (there are exceptions), sales are what they are.  Currently the median EV/sales ratio is 3.6x. This is double what it was at the peak of the dot.com/tech bubble.

It was just a matter of time before the stock market fell off its valuation cliff.  Meanwhile, the precious metals and mining stocks ripped lower last week. Several subscribers asked what was going on given the expectation that at least gold and silver should have benefited from cash seeking a safe haven.  But, as with the general stock market, the precious metals sector was set up technically for a correction.

When hedge funds face margin calls they start to dump anything in their fund that has a reasonable bid. The sheer force of the stock market sell-off took everything with hit.  Most NYSE stocks, including mining stocks, have a bid.  Most CME futures contracts, especially paper gold and silver, have liquid bids. Hedge funds have large leveraged positions in illiquid subprime high yielding garbage which have no bid in a highly turbulent market.  The Fed’s repo/QE operation since September has enabled hedge funds to maintain these morally hazardous illiquid investments rather than forcing the funds to pare back.

You’ll note, however, that most of the decline all week in the price of gold and silver occurred during Comex trading hours, when most of the rest of the world is done for the day. While the Fed/BIS/banks no doubt helped push on the metals in the paper market, hedge funds were extraordinarily long gold and silver futures going into this past week and gold and silver futures had a liquid short-cover bid conveniently provided by the banks who are clearing agents for the Comex.

Furthermore, the HGNSI (Hulbert Gold Newsletter Sentiment Index) had jumped over 70. The mining stocks and gold/silver ALWAYS correct when the HGNSI is over 60. The week before last the entire precious metals sector went straight up in a “flight to safety” move. With sentiment off the charts, the pullback is healthy because it sets up the next big move, especially as it becomes obvious that the Fed will attempt to fight a bear market in the stock market by taking the Fed Funds rate to zero and upsizing its current QE money printing agenda.

The Dow could drop to 17,000, which is where it was trading when Trump labeled the stock market “a big, fat ugly bubble” in late 2016, and still be egregiously overvalued based on fundamentals. India’s massive gold appetite was muted this past week after the big move gold had made the previous week thereby making it easier to push gold and silver lower. This is characteristic of India’s buying pattern. With the smash in gold, India will back in play next week which should at the very least insert a floor under the precious metals sector.

The Fed seems to time its reinsertion of the Fed put strategically at a time when the stock market is technically highly oversold. December 26, 2018 is a perfect example. Of course it’s no coincidence that the Fed caved in on Friday and posted a notice on its website BEFORE the stock market closed that it would use its tools and “act as appropriate to support the economy.” Translation: “we’re telling you we’ll print money to support the stock market and we wanted to get the ball rolling on Friday before the market closes with the Dow down 900 points.”  Of course, the Dow proceed to  rally over 500 points going into the close.

I expect a dead-cat bounce in the stock market that may or may not last all week. If the Fed increases the amount of money spewing from its printing press it might extend the DCB longer than a week. The precious metals sector should benefit from this and it might even continue higher when the stock market inevitably takes another turn for the worse and heads toward “bear market” territory.  For precedence on this pattern, see the fall of 2008.

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

Coming Soon: More Money Printing And Higher Gold Prices

Two economic reports were released which demonstrate that the money printing is not helping the economy. In the fourth quarter of 2019, U.S. household debt pushed over $14 trillion, reaching an all-time record high. This was fueled by a surge in mortgage and credit card debt. Much of the the new mortgage debt consisted of cash out” refis, which helped exacerbate the last housing bubble/collapse.

Second, the U.S. Treasury announced that the Government spending deficit for January was $32.6 billion. This was considerably worse than the $11.5 billion deficit expected. The cumulative deficit for the first four months of the Government’s Fiscal 2020 year (which starts in October), surged to $389 billion, or an annualized rate of $1.16 trillion. The four month cumulative total was 25% higher than a year ago and was the widest since the same four month period of time in 2011.

Make no mistake, the Fed is printing money to keep the fragile financial system glued together and to monetize new Government debt issuance. The economy will continue to contract with or without the help of coronavirus. The Fed knows this, which is why several Fed officials including Jay Powell are already telegraphing more money printing.

The good news is that you can benefit from this – or at least protect your wealth – by moving a significant amount of your investible money into physical gold and silver that you safekeep yourself. I joined up with Arcadia Economics to discuss why the Fed is compelled to further crank up the printing press:

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

Gold Signaling A Financial System Disaster Will Hit

And it’s not just gold. The Fed is already hinting that more money printing is coming.  Powell suggested at his semi-annual Congressional testimony that QE would be used in the next recession.  A couple other Fed officials this week confirmed that the FOMC is preparing to crank up the printing press even more than it has been running since mid-September.

But why does the Fed feel compelled to warn us that more money printing/currency devaluation is coming if, as Powell told Congress, “the economy is in a good place?”

To begin with, money printing is not stimulating economic growth. The economy has been sliding into contraction for quite some time. Since the “repo” operations began, that pace of contraction has increased.

Make no mistake, the Fed is printing money for two reasons. First and foremost to plug the widening chasms in bank balance sheets brought on by taking on highly risky lending and derivatives risks.  This why the bank excess reserve account has drained steadily since late 2014:

Why was QE restarted? This article partially explains the reason:  Banks Stuck With Billions In Risky Leveraged Loans As Investors Flee The formal term for this is “moral hazard.”  The second reason is to monetize the flood of new Treasury issuance that began in the fall of 2019. Currently the Fed’s Treasury holdings are nearly as high as its peak during  of the first period of money printing (QE1-3).

Yes, the appearance of coronavirus is going to exacerbate the systemic problems engulfing the world. But Corona has NOTHING to do with the fact that the U.S. is overleveraged at every level of the economic system (Government, corporate, household) and China, Japan, and  EU are overleveraged at the Government and corporate level.

EU and U.S banks are  highly stressed from holding non-performing assets (subprime loans primarily) compounded by derivatives connected to those assets, which are deteriorating rapidly in value. The global economy was sliding into a nasty recession well before corona hit the scene. Corona merely will hasten the inevitable. The that fact that the global economy can’t withstand this particular exogenous shock reflects the extent to which the global economic/financial system was already headed toward the cliff.

With the stock market broken (i.e. its price discovery mechanism removed by Central Bank money printing), gold soaring despite heavy intervention attempts, the 30-yr Treasury bond yield hitting an all-time low and the Fed telegraphing even more money printing is coming, something really ugly is going to surface and cause financial system destruction similar to what occurred in 2008 – only this time it will be worse.

For now my front-runner in the race to collapse is HSBC. Deutsche Bank seems to have been somewhat stabilized from massive intervention by the ECB, Bundesbank and German Government (though that “appearance” of stabilization likely is deceptive). Judging from its stock chart, which has woefully underperformed the sector since mid-2018 and has substantially underperformed DB since mid-December, HSBC appears to be on the ropes. It may be more insolvent than DB now.  HSBC is loaded up on overvalued, illiquid Hong Kong real estate loans among many other reckless investments.

I think whatever coming at us is going to make things unpleasant for everyone. But you can help protect your financial situation by buying physical gold and silver that you safekeep yourself.  Gold broke out in a major way in mid-June. It sniffed out the systemic problems starting to surface well ahead of the reimplementation of money printing in September.

Gold raced to a 6-year, 11-month high last week. It’s only a matter of time before it assaults the previous all-time high of $1900. Though inexplicably underperforming gold, silver is percolating to make a move like the current move in palladium. And last but not least, the junior mining stocks are setting up for a move that will make the current tech-mania bubble seem tame.

Gold Chases The Money Supply Higher

Q: “Why is the Fed reluctant to let the boom-bust nature of markets play out?”
A: “Because it what’s they’ve always done [since the Fed was founded in 1913]…Once you’re in power, you’re going to do what you can to defend the system as it is”

The best official measure of the money supply created by the Fed was M3.  “Was” because the Fed under Helicopter Ben removed M3 from public view.  But the “effective” money supply is the currency printed plus the “spendable” currency created by debt issuance. Currency from a loan behaves like printed money until the loan is repaid.  But for the last 10 years the amount of the loans outstanding, and therefore the supply of “spendable” currency,  has risen at an increasing rate.

Gold can “smell” these reams of fiat paper currency being printed and then fractionalized and leveraged by the Central Bank. The “fractionalization,” of course, is the process by which loans (including repos) creates spendable currency.

SilverBullion invited me back onto its SBTV podcast to discuss the markets in the context of the QE4 and what it means for the gold, silver and mining stocks:

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

Greed Unbounded: “A Slow-Motion Looting”

I made the observation back in 2004 that the elitists would keep the financial and economic system from collapsing using printing money and debt for as long as it took for them to sweep every last crumb of middle class wealth off the table and into their own pockets.  “Middle class” in this context is defined as anyone without enough cash lying around to purchase their own Federal politician, judge and regulator.  If you were not invited to Davos or the annual Bilderberg meeting, you are middle class.

The Huffpost has written a must-read essay describing the vision I had back in 2004 as it is unfolding in real-time:

Country-club nepotism and Gilded Age avarice are nothing new in America, of course. But the rich are enjoying a golden age of impunity unprecedented in modern history…Elite deviance has become the dark matter of American life, the invisible force around which the country’s most powerful legal and political systems have set their orbit.

“OVER THE LAST TWO YEARS, nearly every institution of American life has taken on the unmistakable stench of moral rot. Corporate behemoths like Boeing and Wells Fargo have traded blue-chip credibility for white-collar callousness. Elite universities are selling admission spots to the highest Hollywood bidder. Silicon Valley unicorns have revealed themselves as long cons (Theranos), venture-capital cremation devices (Uber, WeWork) or straightforward comic book supervillains (Facebook). Every week unearths a cabinet-level political scandal that would have defined any other presidency. From the blackouts in California to the bloated bonuses on Wall Street to the entire biography of Jeffrey Epstein, it is impossible to look around the country and not get the feeling that elites are slowly looting it.”

Read the rest of this here: A Slow-Motion Looting

The Fake News Economy

The stock market is becoming increasingly disconnected from underlying main street reality. Corporate profits have been declining since the third quarter of 2018. However, pre-tax corporate profits have been declining since the Q3 2014 (this data is available on the St. Louis Fed FRED website). Real corporate profits (adjusted for CPI and including inventory write-downs and capex) are the lowest since the financial crisis. Remarkably, rather than the usual “hockey stick” forecasts, Wall St analysts have revised lower their consensus earnings estimates for the Dow Jones Industrials. In fact, per the chart above, I think you can say that Wall Street’s forward EPS estimates have gone off a cliff.

The “narrative” architects and fairytale spinners are desperately looking for evidence to fit their “consumer is still healthy/economy still fine” propaganda. But a look under “the hood,” starting with the employment report, reveals a reality that is in stark contrast to the manipulated headline numbers.

There’s no b.s. like the BLS (Bureau of Labor Statistics). The BLS publishes the monthly non-farm payroll report.  Predictably, the headline number reporting that 225k “jobs” created was well above the consensus forecast of 160k. But the benchmark revision removed 514,000 jobs reported to have been created between April 2018 and March 2019. This is visually what it looks like when 20% of the prior year’s job “growth” is erased:

The black line shows the number of jobs originally reported between April 2018 and March 2019. The light blue line shows the revised data. The two lines are lined up prior to April 2018 reflecting prior benchmark revisions, which is why they’re in sync. A large portion of the revision came from the BLS’ seasonal “adjustments” model over-estimating job creation related to consumer spending, primarily the retail sector and leisure/hospitality.

The benchmark revision does not apply to the current report, which is largely not credible. As an example, the BLS attributed 44,000 new jobs to construction. But the December construction spending report showed 0.2% decline from November. Private construction spending was 0.1% below November.

The total value of construction spending in 2019 was 0.3% below 2018. Private construction spending for the entire year in 2019 was 2.5% below 2018, with residential construction 4.7% below 2018. Removing construction inflation from the numbers, private residential construction spending in 2019 fell 8.8% from 2018 (per John Williams’ Shadowstats.com).

I glean three conclusions from the construction spending data. First, the BLS attribution for 44k new construction jobs in January is egregiously incorrect. No way construction firms are hiring with construction spending in decline. Recall I mentioned in the last issue (the Short Seller’s Journal) that Caterpillar’s CEO had forecast a further decline in residential construction spending in 2020.

Second, without the increase in Government spending, the decline in construction spending would have been worse. Third, per the CAT CEO’s outlook for lower residential spending in 2020 (and I’m certain his view is derived from residential construction equipment orders) it would seem that homebuilders are not backing their optimism per the homebuilder sentiment report with real money if they are planning to spend less in 2020 than they did in 2019.

Notwithstanding the BLS fantasy employment report this past Friday, here’s a good leading indicator of labor market weakness:

When businesses start reducing payroll to cut expenses in response to expected business weakness, the temp labor goes first. You’ll note that this data series went negative briefly in 2015,  but recovered somewhat. In all probability businesses responded to the Trump election hopium and the stimulative effect from Trump’s massive corporate tax cut. But businesses prematurely implemented expansion and capex spending and now they’re back to using cash for stock buybacks into which insiders are selling.

While December retail sales, released in mid-January, showed a 0.3% increase over November, ex-autos retail holiday spending was slightly better than expected. December retail sales not including autos increased 0.7%. However, if you exclude gasoline and auto sales, retail spending increased 0.5%. Auto sales took a hit in December (predictably) and gasoline price inflation boosted the headline number. Surprisingly, considering all of the hoopla in the mainstream financial media about “strong” online sales for the holidays, online sales only increased 0.2%.

Underlying the “good” holiday retail sales number, is a troubling reality. The Fed reported this past Friday (Feb 7th) that consumer credit soared by $22.1 billion in December ($15 billion was the consensus forecast). Most of that increase is attributable to credit card spending, which accounted for $12.6 billion of the $22 billion. This was the biggest one-month jump in credit card debt since 1998. Total consumer credit outstanding hit a record $4.2 trillion in December.

What makes this statistic even more troubling is the fact that credit card delinquency and default rates are starting to accelerate per the Discover Financial (DFS) data I presented in January 26th SSJ issue. PNC Bank (PNC) also reported rising credit delinquencies and charge-offs when it reported its Q4. Its stock tanked 7% over the next eight trading days. Credit Acceptance Corporation (CACC – subprime auto loans) reported rising delinquencies, defaults and charge-offs on January 30th. It’s stock fell 8.1% the next day though it’s recouped about half of that loss through Friday (Feb 7th).

The chart above shows CPI-adjusted retail sales (blue line) vs consumer credit outstanding (red line) for the last 5 years. CPI-adjusted retail sales declined slightly in 2019, which means “unit volume” declined slightly, while consumer credit continued to rise. Now imagine if a real inflation adjustment was applied to retail sales instead of the phony CPI. Real retail sales would show a decline in 2019. The chart above is not a “friend” of perma-bulls and economic fantasy promoters, which is probably why you will never see a chart like that in the mainstream financial media.

Target (TGT, $115) said its same-store-sales were up just 1.4% during the holidays vs 5.7% a year ago. Toy sales were flat, electronics sales were down 6% and home items sales were down 1% (apparel was up 5%, food/beverage up 3% and beauty items up 7%). Macy’s, Kohl’s and JC Penney all reported same-store-sales declines for the holiday period. Macy’s announced earlier this past week that it was going to cut 2,000 jobs and shutter 125 stores.

While it’s clear e-commerce is slowly taking market share from brick/mortar, the latter’s troubles are derived primarily from the deteriorating financial condition of the average household. A study released this past week from a survey taken in late November showed that nearly 70% of all respondents said they had less than $1,000 in savings.

The economy is contracting in most sectors. Any area of the economy that still has pulse is being driven by debt issuance.  Any media reports or official proclamations that the economy is “doing  well” are nothing more than fake news and propaganda.

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The commentary above is  excerpted from the February 9th is of the Short Seller’s Journal. Each weekly issue contains macro economic analysis, market analysis, and short ideas.  I  To learn more about this short-sell focused newsletter, click here:  Short Seller’s Journal info

The Stock Market, Gold, Silver, Mining Stocks And Tesla

The stock market has become a powerful political and economic propaganda tool. It’s hard to dispute the idea that economy is not “in a good place” or “booming” when the Dow goes up 100 points or more everyday. Trump understands this and has been coercive in the Fed’s decision to loosen monetary policy and re-start the money printing press. Ironically, Trump tweeted this in 2012 (as sourced by northmantrader.com):

Make no mistake, the economy nearly every sector of the economy is contracting  except consumer spending and defense spending, both of which are being driven by record levels of consumer and Government debt.

Meanwhile, the precious metals sector is getting ready for another move higher and, according to Factset, currently 45% of all research analysts either have a sell or underweight (which is diplomatic “sell”). Silver Liberties invited me onto this podcast to have some fun and discuss these topics:

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

Will Tesla Ever Generate A Real Profit?

The only part of Tesla’s business model that generates profitability – gross, operating and net – is the sale of greenhouse gas credits to other OEM manufactures and tax subsidies.  Neither of those sources of profitability is sustainable.

The GAAP net income of $105mm in Q4 was 17% below the consensus of $126mm. Regarding net income, Tesla generated $133mm of income from selling Zero Emission/Greenhouse Gas credits to the big OEMs who need them – for now – to remain in compliance with environmental regulations. Net of these credits, Tesla lost $28 million in the quarter (before the fraudulent accounting manipulation). Subtracting these credits from the full-year loss, Tesla’s 2019 net loss attributable to shareholders is $1.5 billion.

The problem with this reliance on the sale of these credits to generate income is that, starting this year, the buyers of these credits (GM, Audi, Chrysler, etc) will soon be selling more than enough EVs and hybrids to remain in compliance. This source of income for Tesla will thus eventually be non-recurring.

With subsidies disappearing and an onslaught of competition,  2020 could be a bloodbath for Tesla in terms of deliveries. Not only is the global auto market contracting, but the much larger, better funded and operationally credible OEMs will be flooding the market with competitive EVs that will significantly cannibalize Tesla’s market share.

There’s just no telling when this Electric Tulip will inevitably crash. But, like with any investment bubble,  the popping will happen suddenly and unexpectedly, when the bulls are convinced that the upside is limitless and the bears are in a state of terror

Mining Stocks Are Setting Up For Another Run

The Fed is trapped.  If it stops adding money to the money supply, the stock market will crash.  It’s already extended the repo money printing program twice. The first extension was to February and now it has extended it again to April.

What was billed as a temporary “liquidity problem” in the overnight repo market is instead significant problems developing in the credit and derivative markets to an extent that it appears to be putting Too Big To Fail bank balance sheets in harm’s way.  That’s my analysis – the official narrative is that “there’s nothing to see there”.

The delinquency and default rates for below investment grade corporate debt  (junk bonds) and for subprime consumer debt are soaring.   Privately funded credit,  leveraged bank loans,  CLO’s and subprime asset-backed trusts (credit cards, ABS, CMBS)  are starting to melt down. The repo money printing operations is a direct bail out of leveraged funds, mezzanine funds and banks, which are loaded up  on those subprime credit structures.    Not only that,  but  a not insignificant amount of OTC credit default derivatives is “wrapped around” those finance vehicles, which further accelerates the inevitable credit meltdown “Minsky Moment.”

The point here is that I am almost certain, and a growing number of truth-seeking analysts are coming to the same conclusion, that by April the Fed will once again extend and expand the repo operations. As Milton Friedman said, “nothing is so permanent as a temporary government program.”

Gold will sniff this out, just like it sniffed out the September repo implementation at the beginning of June 2019.  I think there’s a good chance that gold will be trading above $1600 by this June, if not sooner.

Eventually the market will discover the junior exploration stocks and the share prices will be off to the races. This is part of the reason Eric Sprott continues to invest aggressively in the companies he considers to have the highest probability of getting enough “wood on the ball to knock the ball out of the park” (sorry, baseball is right around the corner).

Precious metals mining stocks are exceptionally cheap  relative to the price of gold (and silver).   Many of the junior exploration stocks  have sold down to historically cheap levels  in the latest pullback in the sector.   As such, this is a good opportunity to add to existing positions in these names or to start a new position.

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In my latest issue of the Mining Stock Journal, I present a penny stock idea that I believe could be a 5-10 bagger.  I’m not alone in this view because a royalty company I know and respect recently took a 9.5% position in the company’s stocks and purchased a royalty stream on several of the company’s mining claims.  You can learn more about this mining stock newsletter here:   Mining Stock Journal information.

NOTE: I do not receive compensation from any mining stock companies and I do not accept any precious metals industry sponsors. My research and my views are my own and I invest my own money in many of the stocks I present.