Tag Archives: QE

Fed Balance Sheet Expansion, Unicorns, Unintended Consequences and Gold

The Bank for International Settlements (BIS) – the Central Bank of Central Banks – released two reports on “unconventional policy tools” – e.g. QE/money printing and interest rate suppression. It concluded that the extreme Central Bank interference since 2008 has had a negative impact on the way in which financial markets function.

While Jerome Powell and his “Gang That Couldn’t Shoot Straight” at the Fed prefer to use the term “balance sheet growth” in reference to money printing, the big-thinkers at the BIS call it UMPT (Unconventional Monetary Policy Tools).”

“Last month’s spike in short-term US borrowing costs was just the latest in a series of market shocks that have fueled investors’ suspicions that this radical monetary policy is having an impact on how financial markets function.” (Financial Times)

“Moral Hazard” is defined as the “lack of incentive to guard against risk where one is protected from its consequences.” In economics (real economics, not the Keynesian psycho-babble of the current era) this would refer to the egregious misallocation of investment capital caused by the unfettered creation of fiat currency injected into the global financial system.

Additionally, unprecedented permissiveness by the regulators, who are charged with enforcing laws originally established to prevent or at least contain the escalating financial fraud that accompanies asset bubbles, further enables and accelerates the formation and inflation of investment bubbles.

The BIS report of course neglected to discuss the extreme moral hazard engendered by the trillions in money printing. The “unicorn” IPOs are the direct evidence of this. The extreme  overvaluation of the equity in the ones that have sold stock into the public markets reflects the complete disregard of historically accepted tools and guidelines used for business model appraisal and financial valuation analysis. “But it’s different this time.”

The losses racked up by these companies, the ones with public equity plus the ones yet to be IPO’d, will aggregate well into the $100’s billions, possibly trillions before this era dies. A journalist from The Atlantic, in an article titled “WeWork and The Great Unicorn Delusion,” correctly asserted that “most [of these companies] have never announced, and may never achieve, a profit.” But he lost me when he asserts that these companies are “extraordinary businesses with billions of dollars in annual revenue and hundreds of thousands, even tens of millions, of satisfied global customers.”

Quite frankly, the business model of almost every Silicon Valley unicorn is predicated on building revenues and gaining market share by selling products and services for a significant discount to the all-in cost of production and fulfillment.

Every single unicorn IPO’d over the last several years that I have evaluated is not only highly unprofitable, but also burns legendary amounts of cash. Of course there are “millions of satisfied customers” globally – the unicorn business model functions in a way that is the equivalent of selling $1 bills for 75 cents.

The more relevant proposition is that, in all probability, many of these companies would have never  spawned if the Central Banks had not inflated the global money supply well in excess of real economic growth generated by the global economy.

I find it difficult, if not impossible, to refer to these appallingly unsustainable businesses models as “extraordinary” when in fact most if not all of them are nothing more than the product of the extreme moral hazard created by the Central Banks’ printing presses running overtime.

The economic losses incurred by the Silicon Valley unicorns are funded by the “private equity” funds which have managed to harness a significant share of the cash flowing from Central Bank money-spigots and transmitted through the primary dealer banks into the financial system. Little noticed is the fact that since 2014, roughly $1.3 trillion has drained out of the banks’ excess reserve account at the Fed and disappeared into the financial system’s “black hole.”

The 2008 Great Financial Crisis – which was a de facto financial system collapse until money printing bailed out banks and reckless investors – was fueled by the easy monetary and credit policies of Alan Greenspan and Ben Bernanke. Those policies stimulated huge mortgage, housing and general stock market bubbles. The unintended consequences bankrupted a large swathe of households and banks.

But that decade’s reckless Central Bank policies pale in comparison to the current era of unfettered money printing cranked up by Ben Bernanke (recall that he was affectionately called “Helicopter Ben”). The ensuing widespread asset bubbles have fomented into a financial Frankenstein that has broken free from its chains as evidenced by the sudden implementation of the Fed’s repo program, which has yet to be accompanied by a credible explanation.

Jerome Powell yesterday (October 8th) asserted in a speech that “balance sheet expansion is not Quantitative Easing.”  But make no mistake, the repo operations function as emergency room triage until the Fed and the Treasury Department formalize another round of money printing, or QE or whatever you want to call it. At this point it is nothing more than a game of Orwellian semantics.

If you’re curious as why the price of gold has risen 37% since the end of May, look to the events unfolding at the Fed and in the banking system. Just like in late October 2008, the price-action in gold is sending a loud alarm that is no longer containable with manipulative efforts in the paper derivative gold market. Eventually the Government’s Working Group on Financial Markets will be helpless in coaxing the hedge fund trading robots to help hold up the stock market.

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The commentary above is an excerpt from the next issue of the Short Seller’s Journal (Sunday). I’ll be reviewing several unicorn short ideas over the next several issues. To learn more about this short-sell focused newsletter, click here:  Short Seller’s Journal info

Fed Delivers More QE “Light” And Gold Responds

On October 4th, as I expected would happen, the Fed announced that it was extending its overnight and term repo operations out to November 26th (the November 12th two-week term repo matures on the 26th).

The Fed added 7 more 2-week  “term repos, ” plus a 6-day “term repo,” with the next three operations upped to $45 billion. It extended the overnight repos until at least November 4th.  Well then, I guess the “end of quarter” temporary liquidity issue with corporate tax payments was not the problem.

Follow the money -The Fed’s repo operation extension further validates the analysis in my last post in which I made the case that an escalation in the non-performance of bank assets (loan delinquencies and defaults and derivatives), caused by contracting economic activity, has created a liquidity void in the banking system that is being “plugged” by the Fed. The Fed’s balance sheet has increased $186 billion since August 28th.

Not only did the Fed end “QT” (balance sheet reduction) two months earlier than originally planned in January, the Fed has effectively reversed in the last 5 weeks all of the QT that occurred since March 28th.

The evolution of Orwellian propaganda terminology for “money printing” has been quite amusing. It seems that the Fed has subtly inserted the phrase “balance sheet growth” into its lexicon. While Jerome Powell referenced “organic balance sheet growth” in his press circus after the last FOMC meeting,  expect that it will be considered politically/socially incorrect to use “QE” or “money printing” instead of “balance sheet growth” in reference to this de facto banking system bailout.

Meanwhile,  thank the Fed for providing the amount of money printing/currency devaluation needed to offset China’s absence from the physical gold market for the last week:

Given the technical set-up in gold plus the enormity of the Comex bank/commercial short position in paper gold, many gold market participants, including me, expected a much bigger price-attack on gold during Golden Week than has occurred. In fact, gold has held up well, with the December future testing and holding $1500 three times in the last week. Business activity in China, including gold and silver trading, resumes tonight.

The Fed’s QE Light program will likely transition into outright permanent money printing before the end of 2019. The November meeting is scheduled for the end of this month (Oct 29-30). But I doubt the Fed will turn its repo money printing into permanent money printing – aka “POMO” or “balance sheet growth” – until the December FOMC meeting (Dec 10-11).

With More Money Printing Coming (“QE”) Gold, Silver And Miners Will Soar

It would be difficult to find a chart with a  more bullish set-up than that of GDX unless it was a chart of the imminent move higher in the U.S. dollar money supply:

The Fed was unable to move the Fed funds rate within 50% of the long term average “normalized” level. It was also unable to unwind little more than 20% of the money it printed under Bernanke and Yellen, despite Bernanke’s insistence that the $4.5 trillion printed and injected into the banking system was “temporary.”  Not only was the first series of QE operations not temporary, the Fed is preparing to re-start its printing press.

I believe we are very close to a major shift in investor sentiment, as investors lose faith in the Central Banks’ ability to control the markets with monetary policy. As you can see from the chart above, we experienced just a “whiff” of the type action we can expect in the precious metals sector as reality ushers in true price discovery in the markets.

I can tell the sentiment is not getting frothy in the precious metals sector when several people, subscribers and others, have expressed disappointment in the rate of return for the mining stocks. From May 30th thru the start of Labor Day weekend, gold rose 15.3% and silver climbed 32.3%. Over the same period of time, GDX rose 43.7%. Call me old fashioned, but I can remember when 43.7% over a two or three year period of time was considered a great return on stocks (this was before the tech bubble).

Where I really see disappointment expressed is with the junior exploration micro-cap stocks. Although some have been stuck in mud, many have doubled or tripled. One example is Discovery Metals (AYYBF, DSV.V), which ran from 17 cents to as high as 52 cents this summer. Based on today’s closing price, it’s more than doubled since May 30th. Many of the other stocks I feature in my  Mining Stock Journal newsletter provided double-digit percentage returns this summer and some have doubled or tripled.

I believe the pullback in the sector this month is a necessary and healthy technical correction, with some help from the price management squad, that will lead to higher highs sometime between now and year-end. Certainly investor sentiment, from the metrics I see daily, are far from exuberant, which is bullish.

 

Inching Toward The Cliff – Why Gold Is Soaring

The global economy is headed uncontrollably toward the proverbial cliff. Although the Central Banks will once again attempt to defer this reality with more money printing and currency devaluation, systemic collapse is fait accompli.

Gold and silver are behaving in a way I have not observed in over 18 years of active participation in the precious metals sector. It’s quite possible that the is being driven by the physical gold and silver markets, with the banks losing manipulative control over precious metals prices using derivatives.

Silver Doctors invited me to discuss a global economy headed for economic and financial disaster; we also discuss the likely reintroduction of gold into the global monetary system:

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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

When The Stock Market Reversal Happens, It Will Be A Whopper

“They may try to run this poor thing straight up and over a cliff. Recall the 2000 top was in March but they briefly ran it back in Sep 00. Ditto in Oct 07. When warning signs are ignored, the endings are abrupt. Maintain safety nets, but don’t assume stupidity has limits.” – John Hussman

Before I saw that quote from Hussman on Twitter, I was contemplating how the trading patterns this year in bond and precious metals markets remind of the way they were trading in 2008 before the financial system de facto collapsed.  Similarly,  the tech stocks right now remind me of the blow-off top that occurred in tech stocks in January/February 2000 just before the Nasdaq collapsed. Whether intentional or not, the Fed has quickly re-inflated the tech bubble that was punctured in September 2018.

Semiconductor stock bubble – The tech bubble in the late 1990’s was led by the semiconductor sector and the dot.coms. 98% of the dot.coms taken public during that time are no longer around. The semiconductor industry is “hyper”-cyclical. It has a beta of 11 vs. the economy. Right now the global economy is in melt-down mode. Just ask the IMF, BIS and World Bank. The Fed and Trump have recklessly reflated the stock bubble that led to the all-time high in the stock market. The semiconductors closed at an all-time high on Friday. It’s sheer insanity given that industry fundamentals are melting down.

The semiconductors seem to be the most responsive to trade war headlines that promote optimism. But the stock prices of these companies have completely disconnected from reality. Every possible consumer-driven end-user product market that uses semiconductors is contracting. As an example, Samsung warned on Thursday that it’s Q1 profit would be down 60% from Q1 2018, citing declines in prices for memory chips and lower demand from OEMs for screens, like the OLED display that Samsung makes for Apple’s iPhone.

Samsung’s inventory is now twice the size of two of its primary competitors. One of those competitors is Micron (MU – $41.72), which admitted that its inventory had soared to 137 days and was on its way to 150+ days in the current quarter. The slashing of capex by chip manufacturers has barely begun.

Semiconductor sales fell 7.3% in February from January and 10.6% from February. Globally semiconductor sales fell across all major categories and across all regional markets (not just China) in February. In North America, chip sales were down 12.9% from January and 22.9% from February 2018 (vs. down 7.8% in February in China sequentially from January and down 8.5% from Feb 2017).

The trade war has nothing do with the sales crash in the chip industry. And the “green shoots” seen in the “blip” in China’s PMI which ignited the stock market last Monday is not confirmed by the PMI data coming from Japan and South Korea, two of China’s largest trading partners. In short, when semiconductor stocks reverse from this insane run higher, they will literally rip in reverse. DRAM average selling prices (ASP) plunged over 20% in Q1 2019. The ASP is projected to drop another 15-20% in Q2 and a further 10% drop in Q3. So much for the 2nd half “recovery” that several chip company CEO’s saw in their crystal ball during the latest quarters’ conference calls (Micron, Lam Research, etc).

Inventories of all categories of semiconductors are extremely high because the demand for the end-user products (smartphones, autos, electronics) is plummeting, which means the inventory of those products is soaring as end-user demand contracts. The best news is for shorts looking for contrarian signals is that Cramer has been on his CNBC show recently pounding the table on chip stocks. This can only mean that his Wall Street sources are trying to move big blocks of stock out of their best institutional clients.

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The commentary above is an excerpt from my latest Short Seller’s Journal.  In that issue I present a detail rationale with data to explain why the U.S. economy is tanking and I provide several stocks to short, along with put option suggestions and capital management advice.  You can learn more about this weekly newsletter here:  Short Seller’s Journal information.

“Man, this is high-value newsletter.  Especially for me.” – Subscriber “Scott” from Michigan

A Debt-Riddled System That Is Hitting The Wall

An elevated level of corporate debt, along with the high level of U.S. government debt, is likely to mean that the U.S. economy is much more interest rate sensitive than it has been historically. – Robert Kaplan, President of the Dallas Fed

Fed officials always understate risks embedded in the system. Translated, the statement above implies the Fed is worried about the amount of debt accumulated in the U.S. economic system over the last 8 years. Kaplan specifically referenced the $6.2 trillion in corporate debt outstanding as a reason for the Fed to stop raising the Fed funds rate. Non-financial corporate debt as a percentage of GDP is now at a record high:

More eye-raising for me was the warning issued by the BIS (Bank for International Settlements – the global Central Bank for central banks). The BIS warned that the surging supply of corporate debt, specifically the amount of BBB-rated debt, has left the credit market vulnerable to a crash once the economic weakness triggers ratings downgrades. A large scale ratings downgrade of triple-B issuers to junk would cause an avalanche of selling from funds which can’t hold non-investment grade debt. This has the potential to seize-up the credit markets.

The BIS would not issue a warning like this unless it was already seeing troubling developments in the numbers to which it has access. Recall that leveraged loan ETFs plunged in value the last two months of 2018. Same with high yield bond ETFs, though the drop in leveraged bank loans was more troubling given their status as senior secured and ahead of junk bonds in the legal pecking order.

As you can see from the chart below, it looks like the value of senior leveraged bank loans may be headed south again:

Just like the stock market, fixed income prices rallied sharply after the Fed and the Trump Government acted to arrest the sell-off in the stock market in late December. But this was always a short-term “fix,” as economic fundamentals continued to deteriorate, perhaps at a hastened pace because of the Government shutdown. But neither the shut-down nor the trade war are the causes of the collapsing global economy.

More evidence the consumer is tapped out – Deutsche Bank wrote a report detailing signs that the average U.S. household is running up against its willingness and ability to assume more debt and monthly interest expense. I have been suggesting this was the case for a few months in SSJ. One indicator I thought was interesting is a chart showing that the average hours worked in sectors selling “big ticket” items is now declining (home furnishings, travel arrangement and reservation services and used car dealers).

Another chart showed that, based on regional Fed surveys of senior loan officers at banks, demand for credit cards, auto loans and personal loans is declining:

One of the reasons for the drop in loans is simply that the average consumer simply can not afford the monthly cost of taking on additional debt, especially higher-cost credit card and auto debt. Just as significant is the fact that interest rates on these types of loans are rising quickly – i.e. the average credit card interest rate is now 17% vs 14% a year ago. Individuals who find themself in debt are now having to look into Credit Cards for No Credit as their credit rating is so poor due to their debts. Deutsche Bank omits to explain why the interest rate on these types of loans is rising much faster than the Fed funds.

The interest rate charged on a loan reflects the “risk free” rate (Fed funds), the time value of money and – most important – the inherent risk associated with specific types of loans. Interest rates on credit cards and auto loans are rising to reflect the increased risk attached to these forms of credit – i.e. the rising delinquency and default rates.

Besides the rising cost of necessities, the average household is getting squeezed from higher interest payments on the record amount of household debt that has accumulated over the last 10 years. The chart below shows the year-over-year growth in household interest payments going back the 1960’s:

The aggregate household interest payment has soared at a 15% Y/Y rate. Interest payments as a share of total household spending have jumped to the highest level since the financial crisis. Virtually every prior time when interest payments spiked this much, a recession promptly followed.

Last but not least, as Treasury debt hits a new record every day, it was reported by the Treasury that the U.S. budget surplus in January, traditionally one of the only months of the year with a spending surplus because of tax receipt timing, was only $9 billion. This missed the consensus estimate of $25 billion and was far below the January 2018 surplus of $49 million. For the first 4 months of the Government’s fiscal year, the budget deficit was $310 billion, 77% higher than the $175.7 billion deficit for the same period last year.

The budget deficit will surely be much higher than the $1.2 trillion annualized rate recorded in the first four months of this FY. Federal interest expense hit a record high for the four-month period. Annualized, the projected $575 billion interest expense alone for FY 2019 would be more than the entire budget deficit in FY 2014.

Finally, the Deutsche Bank report showed two graphics showing the “current conditions” index for buying cars and homes for the top 33% of households by income. The index measures the intent to make a purchase. The current conditions index for car purchases was at its lowest since 2012. For home buying, the intent to purchase index was at its lowest since 2008.

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The commentary above is partially excerpted from the latest Short Seller’s Journal. This is a weekly subscription service which analyzes economic data and trends in support of ideas for shorting market sectors and individual stocks, including ideas for using options. You can learn more about this here: Short Seller’s Journal information

MMT (Modern Monetary Theory) Thoroughly Disemboweled

The best I can figure is that some very liberal, trust-fund Phd Sociologist professors at Bennington hooked with a group of radical Public Policy students from Harvard somewhere in a cabin in Vermont and did a group analysis of John Maynard Keynes’ “The General Theory of Employment, Interest and Money” after ingesting copious quantities of LSD. From out of that drug-addled assemblage, MMT sprung to life in “socially correct” political circles in NYC and DC.

Short of that explanation for the current obsession with MMT – also known as “Magical Money Tree” –  among the elitist intellectual trust-fund liberal political class, I have a hard time explaining the enthusiasm for this comic book version of economics.

A good friend of mine, who happens to be highly intelligent and obsessive about research, is thoroughly confounded by the idea anyone in their right mind would consider MMT as a serious policy tool other than as a mechanism to accelerate the confiscation of wealth and liberties from the public.

The best I could offer is that legitimizing MMT with academic endorsements is a precursor to the next round of QE, which will have to be Weimar in scale.  Occam’s Razor applies here. It’s that simple.  A Government unable  slow down its spending deficit has no other means of paying its bills other than to raise taxes to a level that will trigger mass revolt or use its printing press.  You see where this is going…

Interestingly, a writer/analyst who springs from the left, and who otherwise I would have thought to have been a proponent of MMT, thoroughly explores and disembowels the concept.  You can literally sense the author’s struggle to find a use for MMT:

We have a private economy driven by exploitation, overwork, asset stripping, and ecological destruction. MMT has little or nothing on offer to fight any of this. The job guarantee is a contribution, though a flawed one, and it’s not at the core of the theory, which proceeds from the keystroke fantasy. That fantasy looks like a weak response to decades of anti-tax mania coming from the Right, which has left many liberals looking for an easy way out. It would be sad to see the socialist left, which looks stronger than it has in decades, fall for this snake oil. It’s a phantasm, a late-imperial fever dream, not a serious economic policy.

Ordinarily I would have briefly skimmed through this essay. But if you are making an effort to be open-minded and understand the genesis, history and follies of MMT, it’s worth spending the time to read this piece in its entirety – then you can have a good laugh:  Modern Monetary Theory Isn’t Helping by Doug Henwood

Modern Monetary Theory isn’t just an insult to one’s intelligence, it’s a complete affront to common sense.

Why Housing Won’t Bounce With Lower Rates

“Our advice is to own as little exposure U.S. equity exposure as your career risk allows.” – Martin Tarlie, member of portfolio allocation at Grantham, Mayo, Van Otterloo investment management

The following is an excerpt from the latest Short Seller’s Journal:

Economy is worse than policy makers admit publicly – Less than four months ago, the FOMC issued a policy statement that anticipated four rate hikes in 2019 with no mention of altering the balance sheet reduction program that was laid out at the beginning of the QT initiative. It seems incredible then that, after this past week’s FOMC meeting, that the Fed held interest rates unchanged, removed any expectation for any rate hikes in 2019, and stated that it might reduce its QT program if needed. After reducing its balance sheet less than 10%, the Fed left open the possibility of reversing course and increasing the size of the balance sheet – i.e. re-implementing “QE” money printing.

Contrary to the official propaganda the economy must be in far worse shape than can be gleaned from the publicly available data if the Fed is willing to stop nudging rates higher a quarter of a point at a time and hint at the possibility of more money printing “if needed.” Remember, the Fed has access to much more detailed and accurate data than is made available to the public, including Wall Street. The Fed sees something in the numbers that sent them retreating abruptly and quickly from any attempt to tighten monetary policy.

Housing market – As I suggested might happen after a bounce in the first three weeks of January, the weekly purchase mortgage index declined three weeks in a row, including a 5% gap-down in the latest week (data is lagged by 1 week).  This is despite a decline in the 10-yr Treasury rate to the lowest rate for the mortgage benchmark Treasury rate since January 2018.

Not surprisingly, the NAR’s pending home sales index – released last Wednesday mid-morning for December – was down 2.2% vs November and tanked nearly 10% vs. December 2017. Pending sales are for existing home sales are based on contracts signed. This was the 12th straight month of year-over-year declines. Remarkably, the NAR chief “economist” would not attribute the decline to either China or the Government shutdown. He didn’t mention inventory either, which has soared in most major metro areas over the past couple of months.

For me, the explanation is pretty simple: The average household’s cost to service debt has reached a point at which it will become more difficult to find buyers who can qualify for a conventional mortgage (FNM, FRE, FHA):

The chart above shows personal interest payments excluding mortgage debt. As you can see, the current non-mortgage personal interest burden is nearly 20% higher than it was just before the 2008 financial crisis. It’s roughly 75% higher than it was at the turn of the century.  Fannie Mae raised the maximum DTI (debt-to-income ratio – percentage of monthly gross income that can be used for interest payments) to 50% in mid-2017 to qualify for a mortgage. This temporarily boosted home sales. That stimulus has now faded. And despite falling interest rates, the housing market continues to contract.

That said, the Census Bureau finally released new home sales for November. It purports that new homes on a seasonally adjusted, annualized rate basis rose a whopping 16.9% from October. I just laughed when I saw the number. The calculus does not correlate either with home sales data reported by new homebuilders or with mortgage purchase applications during that time period (new home sales are based on contract signings). 90% of all new home buyers use a mortgage.

The November number was a 7.7% decline from the November 2017 SAAR. According to the Census Bureau, the months’ supply of new homes is at 6, down from October’s 7 but up from November 2017’s 4.9. A perusal of homebuilder balance sheets would show inventories near all-time highs (homebuilders do not always list finished homes on MLS right away if a community already has plenty of inventory). The average sales price of a new home dropped to 8.4% from $395,000 in October to $362,000 in November. Anyone who purchased a new home with a less than 9% down payment mortgage during or prior to October is now underwater on the mortgage.

Absent more direct Government subsidy and Fed stimulus, the housing market is going to continue contracting, with prices falling. Anyone who bought a home with less than a 10% down payment mortgage over the last 3-5 years will find themselves underwater on their mortgage.  I expect home equity mortgage delinquencies and default to begin rising rapidly in the 2nd half of 2019.

In the last issue of the Short Seller’s Journal, I presented my favorite homebuilder shorts along with put option and short selling call option ideas. You can learn more about this newsletter here:   Short Seller’s Journal information

 

The Fed Blinked – Gold And Silver Are Going Higher

Price inflation has been badly misrepresented by CPI figures and have been averaging closer to about 8% annually since gold topped in Sept 2011. Since then the purchasing power of the dollar has declined by about 43%, so that in 2011 dollars the gold price is $740. No one seems to have noticed, leaving gold extremely cheap. – Alasdair Macleod, “Ten Factors To Look For In Gold In 2019

The following is an excerpt from the latest issue of the Mining Stock Journal, which included an analysis of a  highly undervalued, relatively new and unknown junior mining company advancing a gold-silver project in Mexico.

As I have suggested in the past (in more detail in the Short Seller’s Journal), the Fed is retreating quickly from rate hikes and balance sheet reduction (QT). The Fed deferred on raising rates at its FOMC meeting this week. What I found somewhat shocking, however, was the removal of reference to “further gradual rate increases.”

Perhaps more shocking was the reference to the possibility of re-starting the money printing press:  “…the Committee would be prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy…” That statement translated means, “we’ll have to print more money eventually.”

This should be extremely bullish for the precious metals sector. The only issue is the timing of the next big move higher. That depends on the degree to which the banks can continue controlling the price with gold and silver derivatives.  No one knows that answer, not even the banks. At some point, as occurred from 2008-2011, the western banks will be unable to suppress the natural price rise of gold/silver. That said, the Chinese and the Russians could pull the rug out from under the western manipulation if and when they want. That will happen eventually as well.

Alasdair Macleod wrote a brief and insightful essay from which I quoted and linked above describing key factors in 2019 that could push the price of gold significantly higher. Most of the factors are familiar, especially for subscribers to my Short Seller’s Journal. First and foremost will be the Fed, along with Central Banks globally,  reverting to easy monetary policy.

Notwithstanding official propaganda to the contrary, the U.S./global economy is rapidly slowing down. Many areas are contracting. Government spending deficits will soar as tax revenues fall behind the rate at which Government spending is increasing.

At some point, the Government will plead with the Fed to help finance Treasury issuance (this will occur in the EU, Japan and China as well), creating another acceleration in monetary inflation/currency devaluation. This will act as a transmission mechanism to inflate the dollar price of gold. Smart investors understanding this dynamic, and who have the financial resources, will move dollars out of financial assets and into gold. See 2008-2011 for an example of this process.

Gold has outperformed almost every major asset class since 2000:

Gold has outperformed most other assets since 2000 because Central Banks globally began to implement extreme monetary policies in response to the global stock market crash in 2000 led by tech stocks. As John Hathaway, manager of the Tocqueville gold fund, describes it, “gold has been a winning strategy since monetary policy became unhinged nearly two decades ago.”

In addition to the fiscal and monetary policies implemented globally in response to deteriorating economic and financial conditions, Alasdair identifies four factors directly affecting the price of gold this year.

One factor not widely perceived or understood by the markets is the gradual and methodical shift away from using the U.S. dollar for trade and as a reserve asset by Russia and China. It’s clear that both countries are swapping dollar reserves for gold and conducting an increasing percentage of bi-lateral trade with their trading partners in each country’s sovereign currency.

As an aside, gold has been soaring in most currencies besides the dollar. At some point, this shift away from using the dollar as a reserve currency will remove the “safe haven asset” status of the dollar, causing a considerable decline in the dollar vs global currencies. Concomitantly, the dollar price of gold will soar.

Another factor identified by Macleod is price inflation: “price inflation has been badly misrepresented by CPI figures and has been averaging closer to about 8% annually since gold topped in Sept 2011. Since then the purchasing power of the dollar has declined by about 43%, so that in 2011 dollars the gold price is $740. No one seems to have noticed, leaving gold extremely cheap.”

In my view, the price inflation factor as it affects investor attitudes toward gold will be a “slowly then suddenly” process. Investors and the population in general tend to move in herds. Currently the headline Government CPI is accepted and discussed as reported. At some point,  a large contingent of mainstream institutional investors will decide the Government’s measurement of inflation is wrong and will begin to buy gold and silver. The masses will soon follow. We saw this dynamic leading up to the parabolic move by gold in 1979-1980.

The third factor is “monetary inflation.” Most people think of price when they see the term “inflation.” But the true economic definition of “inflation” is the rate of growth in the money supply in excess of the rate of growth in economic (wealth) output. This in essence reduces the value of each dollar. Think about it terms of an increasing amount of dollars made available to chase a fixed supply of goods and services. That’s the monetary inflation that causes “price” inflation. Rising prices are the manifestation of monetary inflation.

As discussed at the beginning, at some point the Fed will be forced to re-start the printing press or face the consequences of a rapid economic and financial collapse.  Macleod points out that “these are exactly the conditions faced by the German government between 1918 and 1923, and the likely response by the Fed will be the same. Print money to fund government deficits.”  Recall that the policies used by the Weimar Government eventually led to hyper price inflation. The hyperinflation did not occur until the early 1920’s. But the policies leading to this condition began in 1914, when Germany World War 1 started and Germany’s huge war debt began to pile up. This is strikingly similar to the huge U.S. Government debt outstanding currently.

The final factor mentioned by Macleod is simply, “Gold is massively under-owned in the West.” By 1980, institutional investors on average held 5% of their assets in gold. Currently the percentage allocation to gold (or fake gold like GLD) is well under 1%. All it would take for a massive price reset  in gold and silver is for institutions to allocate 1-2% of their assets to gold. I believe eventually that allocation percentage will move back to 3-5%, which will drive the price of gold well over $2000/oz.

The Stock Market Would Crash Without Central Bank Support

The mis-pricing of money and credit has also driven a terrible misallocation of capital and kept unproductive zombie debtors alive for too long. Saxo Bank, “Beware The Global Policy Panic”

“Mis-pricing of money and credit” refers to the ability of the Fed to control interest rates and money supply.  Humans with character flaws and conflicting motivations performing a role that is best left to a free market.   After the market’s attempt in December to re-introduce two-way price discovery to the stock stock market, the Fed appears ready to fold on its “interest rate and balance sheet normalization” policy, whatever “normalization is supposed to mean.

Tesla is the perfect example of terribly misallocated capital enabling the transitory survival of a defective business model. Access to cheap, easy capital has enabled Elon Musk to defer the eventual fate of the Company for several years. But as the equity and credit markets become considerably less tolerant, companies with extreme financial and operational flaws are exposed, followed by a stock price price that plummets.

The Stock Market Would Crash Without Central Bank Support – A few weeks after Fed head, Jerome Powell, hinted that the Fed may hold off on more rate hikes, an article in the Wall St. Journal suggested that the Fed was considering halting its “Quantitative Tightening” program far sooner than expected, leaving the Fed’s balance sheet significantly a significantly higher level it’s original “normalization” plan.

But “normalization” in the context of leaving the Fed’s balance sheet significantly larger than its size when the financial crisis hit – $800 billion – simply means leaving a substantial amount of the money printed from “QE” in the financial system. This is a subtle acknowledgment by the Einsteins at the Fed that the U.S. economic and financial system would seize up without massive support by the Fed in the form of money printing.

I suggested in the January 13th issue of my Short Seller’s Journal that the Fed would likely halt QT: “The economy is headed toward a severe recession and I’m certain the key officials at the Fed and White House are aware of this (perhaps not Trump but some of his advisors). I suspect that the Fed’s monetary policy will be reversed in 2019. They’ll first announce halting QT. That should be bad news because of the implications about the true condition of the economy. But the hedge fund algos and retail day-trader zombies will buy that announcement. We will sell into that spike. Ultimately the market will sell-off when comes to understand that the last remaining prop in the stock market is the Fed.”

Little did I realize when I wrote that two weeks ago that the Fed would hint at halting QT less than two weeks later.

When this fails to re-stimulate economic activity, the Fed will eventually resume printing money. Assuming the report in the Wall Street Journal on Friday is true, this is a continuation of the “mis-pricing” of money credit alluded to above by Saxo Bank. Moreover, it reflects a Central Bank in panic mode in response to the recent attempt by the stock market to re-price significantly lower to a level that reflected economic reality.