Category: Macro Posts

Gold Price Forecast: The Path To New All-Time Highs

Once in a while you come across an article which is purely logical especially because GOLD is bought and sold on emotions and not on reasons…

By Lynn Alden

I’m not a perma-bull on gold, and I invest in a variety of asset classes depending on where value is in the market.

For example, I sold my gold and silver coin collection at high levels in 2011 because there was so much enthusiasm in the space and started buying back in 2018 with a long-term bullish outlook when gold touched $1,200. After an initial large investment in 2018, I’ve been dollar-cost averaging into gold and golds stocks over the past year.

Although we may have pullbacks along the way, and gold may retest its previous resistance level in the high $1,300’s as support at some point, my base case is for gold to reach or at least test new all-time highs in dollar terms as the rest of this business cycle plays out into the early half of the 2020’s decade.

How I Value Gold

Gold is challenging to value because it doesn’t produce cash flows, so discounted cash flow analysis and other valuation methods are out the window. I treat it as a currency, but I cannot use most of the same metrics that I value other currencies with (such as foreign-exchange reserve levels, current account balances, purchasing power parity vs exchange rates, and so forth).

Therefore, I use a combination of two primary methods to value gold, along with a set of secondary metrics for confirmation.  

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https://news.gold-eagle.com/article/gold-price-forecast-path-new-all-time-highs/1166

Lessons in Value Investing- Farnam Street

Letter Summary: https://farnam-street.us12.list-manage.com/track/click?u=21e20539cc1dfbff0f9025100&id=afa76a73ef&e=6d0bb2ebf3

• Even if you knew the best performing stocks ahead of time, the patience required makes it difficult to execute.

• All investing involves some form of faith. Value investors place their faith in mean reversion.

• This includes both reversion for the market’s sentiment about a specific security, as well as reversion in the underlying business results.

• Capital cycle theory is a natural phenomenon which explains mean reversion.

• The glacial pace of change makes it next-to-impossible for us mortals to recognize and capitalize upon.

• It’s quite probable that value investing is not a good strategy for most people. That’s part of the reason we’re so picky about adding new clients to the Farnam Street Family.

Weekly Commentary: Resurrecting M2

Doug Noland writes

This week’s disappointing ISM reports dominated business headlines: “US Manufacturing Survey Shows Worst Reading in a Decade.” “U.S. Factory Gauge Hits 10-Year Low as World Slowdown Widens.” “U.S. Manufacturers Experience Worst Month Since 2007-2009 Great Recession.” “ISM Services Index Hits Three-Year Low, Missing All Estimates.” “Services Survey Shows Economy is Weaker Than Expected Amid Slowdown Fears.”

A Google news search for recent “money supply” articles yields slim pickings: Apparently, China’s Xinhua news agency is now the go-to source for U.S. money supply insight: “U.S. Fed’s M2 Money Stock Rises as Market Bets Another Rate Cut.” Other top results included, “Egypt’s M2 Money Supply Rises 11.78% Year-On-Year in August,” and “Serbia’s M3 Money Supply Grows 12.3% y/y in August.”

Not that many years ago economists and market analysts followed weekly money supply data with keen interest. Rapid monetary expansion was, after all, indicative of excessive Credit growth and attendant inflationary pressures. Slowing money growth would indicate a tightening of lending conditions or waning demand for Credit. The Federal Reserve and global central bankers duly monitored the monetary aggregates as an indication of the appropriateness of monetary policies. Indeed, money and Credit had been a prime focus since the establishment of central banks. Throughout its history, the Federal Reserve was expected to prudently manage the “money” supply to ensure stable prices.

Let’s focus on the extraordinary $575 billion M2 expansion over the past 22 weeks (that receives zero attention). This was the second strongest (22-week) monetary expansion in U.S. history, trailing only 2011’s “QE2” period (Fed expanded holdings by $600 billion) where M2 expanded as much as $616 billion over 22 weeks. M2 growth peaked at $530 billion (over 22 weeks) in February 2009 during the Federal Reserve’s inaugural QE operation.

Breaking down the recent $575 billion M2 expansion, Currency gained $44 billion and Total Demand Deposits rose $21 billion. Meanwhile, Savings Deposits at Commercial Banks surged $332 billion (Total Savings Deposits up $346bn), with Total Small Time Deposits rising $8 billion. Over this period, Retail Money Fund deposits (included in M2) jumped $103 billion.

M2 “money” supply surged $70.2 billion last week, the strongest advance since the week of January 11, 2016. Notable to be sure, but apparently not worthy of a headline or article. Moreover, M2 was up $262 billion in 10-weeks and $575 billion over 22 weeks. The Fed’s weekly H.6 “Money Stock and Debt Measures” report presented a 13-week seasonally-adjusted M2 growth rate of 8.5%.

Let’s focus on the extraordinary $575 billion M2 expansion over the past 22 weeks (that receives zero attention). This was the second strongest (22-week) monetary expansion in U.S. history, trailing only 2011’s “QE2” period (Fed expanded holdings by $600 billion) where M2 expanded as much as $616 billion over 22 weeks. M2 growth peaked at $530 billion (over 22 weeks) in February 2009 during the Federal Reserve’s inaugural QE operation.

Breaking down the recent $575 billion M2 expansion, Currency gained $44 billion and Total Demand Deposits rose $21 billion. Meanwhile, Savings Deposits at Commercial Banks surged $332 billion (Total Savings Deposits up $346bn), with Total Small Time Deposits rising $8 billion. Over this period, Retail Money Fund deposits (included in M2) jumped $103 billion.

The Fed some years back discontinued tabulating a broader “M3” aggregate. It does, however, report Institutional Money Fund deposits, previously a key component of M3. It’s certainly worth highlighting that Institutional Money Funds expanded $256 billion over the past 22 weeks, a 32% annualized growth rate. Combining M2 and Institutional Money Funds, growth in this aggregate reached $831 billion over the past 22 weeks (to $17.666 TN), a blistering 11.9% annualized growth rate.

In last week’s analysis of the Fed’s Q2 Z.1 report, I noted the strong pickup in Bank lending (Q2 6.8% annualized) along with the notable $710 billion nine-month surge in the “repo” market (Federal Funds and Securities Repurchase Agreements). It’s no coincidence that these developments corresponded with rapid growth in both commercial bank savings deposits and institutional money fund assets, along with the collapse in Treasury and corporate bond yields (surge in prices).

September 30 – Financial Times (Joe Rennison): “Companies around the world sold a record amount of bonds last month, taking advantage of low borrowing costs fueled by investors’ frenzied search for yield. September tends to be a busy period for the bond market… That trend was amplified this year by a global rally in government bonds in August which lowered interest costs for a host of companies looking to sell debt. A total of $434bn of corporate bonds were sold globally in September, according to… Dealogic. That sum… was about $5bn higher than the previous high of March 2017. ‘It’s very attractive for issuers coming into the market right now,’ said Monica Erickson, a portfolio manager at… DoubleLine.”

October 1 – Bloomberg (Finbarr Flynn and Hannah Benjamin): “Companies globally sold a record amount of bonds in September as investors hungry for yield poured into debt, betting that major central banks can keep the global economy out of a recession… September’s new U.S. investment-grade debt supply reached $158 billion, making it the third-largest month ever for issuance. It was a month for the record books: an unprecedented 130 issuers tapped debt capital markets after a frenzied start that made the first week the busiest market participants had seen in their careers.”

September 30 – The Bond Buyer (Aaron Weitzman): “Municipal bond volume continues to accelerate, closing out the month of September 39.1% higher and the quarter 17.8% higher than a year earlier, as issuers flocked to market with taxable deals. September volume rose to $35.38 billion of municipal bonds sold in 894 transactions…”

I have posited that a bond market “melt-up” was instrumental in what has been a period of extraordinary Monetary Disorder. A weakening global economic backdrop along with escalating trade war risks and fragile markets spurred a dovish U-turn by the Fed, ECB and global central banks generally. The global yield collapse was largely fueled by a combination of speculative excess and risk market hedging. Such strategies have focused on safe haven sovereign and investment-grade corporate debt as instruments that would see inflating prices in the event of a “risk off” backdrop and resulting central bank rates cuts and QE.

The surge in speculative leverage – exemplified by enormous “repo” market expansion – created a self-reinforcing surge in marketplace liquidity, of which a portion flowed into the “money” supply aggregates (notably through the expansion of commercial bank saving deposits and institutional money fund assets). Moreover, it’s my view that the abrupt September reversal of market yields and the prospect of end-of-quarter liquidity challenges spurred a reversal of some levered holdings that quickly manifested into a liquidity shortage and spike in overnight funding costs.

Federal Reserve Credit jumped $83.9 billion last week to $3.893 TN, the strongest weekly Fed balance sheet expansion since March 2009. This pushed four-week Federal Reserve liquidity operations to $170.5 billion – taking Fed Credit to the highest level since the week of April 17th.

I’ll assume at least some of this expansion will be reversed as quarter-end positioning normalizes in the marketplace (leverage reversed for reporting purposes is reestablished). Yet I view the eruption of acute repo market instability as an urgent signal of mounting financial market instability. The Fed seemingly agrees.

October 4 – Financial Times (Joe Rennison, Colby Smith and Brendan Greeley): “The Federal Reserve Bank of New York will extend its intervention in the repo market into November…, soothing concerns about a re-emergence of the cash crunch that sent short-term interest rates soaring in September. The New York Fed first stepped into the repo market… after the cost of borrowing money overnight quadrupled to 10% last month. It intensified its efforts heading into the end of September to ward off potential strain at the end of the third quarter… The markets arm of the US central bank announced that it would continue to inject $75bn in overnight loans into the repo market every day through to November 4. In addition, it would conduct a series of term-repo operations — loans ranging from six to 15 days — to maintain an additional $140bn in the market until early November. The announcement has helped ease traders’ concerns of a potential shortage of cash re-emerging when close to $140bn in existing two-week term repo loans rolls off next week.”

U.S. equities reversed higher on Friday’s “Goldilocks” jobs report. But the rally gained momentum on the New York Fed’s “repo” extension announcement. Late Friday afternoon, Cleveland Fed President Loretta Mester reiterated a comment made by her colleagues: “The Fed’s decision on reserve supplies isn’t about QE.” The problem is that Fed liquidity operations, and the resulting expansion in Fed Credit, is very much about backstopping the markets. Markets are not bothered by a “QE” or “overnight repo operation” label. Rather, the Fed’s aggressive measures further crystallize the market view the Fed (and global central bankers) has little tolerance for fledgling market instability. For good reason, markets expect central banks to respond with overwhelming force to any issue that risks unleashing latent Crisis Dynamics.

At 3.5%, the U.S. unemployment rate in September hit a 50-year low. Money supply is booming. It was the third-largest month ever for investment-grade debt issuance. The St. Louis Fed’s weekly forecast for Q3 GDP growth is up to 3.12%, which would be the strongest reading since Q3 ’18. With the tailwind of low mortgage rates, housing markets are gaining momentum. New Home Sales are running at the strongest pace since 2007. August Existing Home Sales were reported at the strongest pace since March 2018. Recent mortgage purchase applications have been running about 10% above the year ago level. And at a 17.19 million annualized pace, auto sales held up solidly in September. The consumer is working, earning, borrowing and spending.

This week’s ISMs – manufacturing and non-manufacturing – both significantly missed estimates. Manufacturing is undoubtedly weak, with attention focused on the much larger non-manufacturing sector for indications of a broadening slowdown. At 52.6, the ISM Non-Manufacturing index is still expanding.

The implied yield on January Fed funds futures declined 10.5 bps this week to 1.47%, boosting the two-week drop to 16 bps. This implies market expectations for 36 bps of additional rate cuts by January. Markets are now pricing in a 73% probability of a rate cut at the Fed’s October 30th meeting (down from Thursday’s 85%). Two-year Treasury yields sank 23 bps this week to 1.41%. European bank stocks were slammed 4.7% this week. Bank stocks were down 3.0% in the U.S. and 2.7% in Japan.

I would tend to somewhat downplay current U.S. economic weakness. These are clearly abnormal times, but it would be atypical for such loose financial conditions not to support economic activity (for now). Global markets are a different story. Myriad co-dependent Bubbles appear more vulnerable by the week – while monetary stimulus and prospects for additional QE only exacerbate excesses along with fragilities. Trade negotiations remain a major wildcard. Increasingly, impeachment proceedings and rancid Washington pandemonium add a layer of complexity upon a highly complex backdrop. Taking it one week at a time, there’s palpable pressure on the administration to make some headway with the Chinese.


http://creditbubblebulletin.blogspot.com/2019/10/weekly-commentary-resurrecting-m2.html

Globalisation is over and there will be no US China Deal

President Trump to an auditorium of world leaders recently at the UN.

“In 2001, China was admitted to the WTO. Our leaders then argued that this decision would compel China to liberalize its economy and strengthen protections to provide things that were unacceptable to us, and for private property and for the rule of law. Two decades later, this theory has been tested and proven completely wrong. Not only has China declined to adopt promised reforms, it has embraced an economic model dependent on massive market barriers, heavy state subsidies, currency manipulation, product dumping, forced technology transfers, and the theft of intellectual property and also trade secrets on a grand scale. As just one example, I recently met the CEO of a terrific American company, Micron Technology, at the White House. Micron produces memory chips used in countless electronics. To advance the Chinese government’s five-year economic plan, a company owned by the Chinese state allegedly stole Micron’s designs, valued at up to $8.7 billion. Soon, the Chinese company obtains patents for nearly an identical product, and Micron was banned from selling its own goods in China. But we are seeking justice. The United States lost 60,000 factories after China entered the WTO. This is happening to other countries all over the globe. The World Trade Organization needs drastic change. The second-largest economy in the world should not be permitted to declare itself a “developing country” in order to game the system at others’ expense. For years, these abuses were tolerated, ignored, or even encouraged. Globalism exerted a religious pull over past leaders, causing them to ignore their own national interests. But as far as America is concerned, those days are over. To confront these unfair practices, I placed massive tariffs on more than $500 billion worth of Chinese-made goods. Already, as a result of these tariffs, supply chains are relocating back to America and to other nations, and billions of dollars are being paid to our Treasury. The American people are absolutely committed to restoring balance to our relationship with China. Hopefully, we can reach an agreement that would be beneficial for both countries. But as I have made very clear, I will not accept a bad deal for the American people.”

Thucydides Trap & War between US and China

Martin Armstrong writes…

I have never seen the press so anti-president in the history of this nation. Every possible thing they claim will destroy the US economy. The US trade with China will by no means send the US economy into a deep recession. However, blocking US investment into China would send the Chinese economy down even harder.

This style of analysis always reduces the future trend to one simple event. The markets and the world economy are far more complex than a single event. This is the entire problem with Western Analysis – it is always linear and never cyclical. This is the same problem as Global Warming. They see a 1-degree rise, project that out for 50 years, and then assume the trend will remain the same – linear analysis. They always project the future in this manner and NEVER look at the trends in history to learn what are the “real” possibilities from similar events.

What you must understand is they often call this type of struggle between the current superpower (Financial Capital of the World) and the rising power to take that title, the Thucydides Trap. This is named after the ancient Greek historian Thucydides who wrote about a war that devastated the two leading city-states of classical Greece – Sparta & Athens.

Thucydides explained: “It was the rise of Athens and the fear that this instilled in Sparta that made war inevitable.”

He concludes

The Thucydides Trap is considered the violent aspect of the shift in the Financial Capital of the World. In most cases, the rivalry between the major power and the new contender has led to war. Only a few times the passing of the crown of the Financial Capital of the World changed hands without war such as the loss of that title from Britain to the United States. However, there was still war involved whereas Britain lost its economic status due to war in Europe primarily and then the rise of the Labour Party. It did not involve war with the United States.

Nonetheless, we are looking at the risk of a conflict between China and the United States as this struggle for power continues. The USA will lose the title to China. Our computer model will be correct on that. But it does not necessarily mean war will unfold. The West will fall because of the economic conflicts internally between the left and right as socialism is dying and all the promises cannot be funded. So we see this more as the case with Britain that it lost the title to the United States without a direct war between the two powers.

Zulauf’s Bottom Line, What’s Ahead

In early June 2019, Steve from cmgwealth.com shared notes from Felix’s keynote presentation at Mauldin’s Strategic Investment Conference in Dallas.  You can find it here.

At that time, Felix said the global slowdown should eventually impact markets. He said, “The rally from the December low is over.” On December 27, he sent out a report to his clients saying this is the low. Then on May 2, he sent out a note saying there’s a “new sell signal.” I think we have started the second decline in this bear market that was interrupted by a nice rally.  The S&P 500 peaked at 2,945, sold off and rallied to 3,000 in July. It sits at 2,976 today. His sell signal remains in place. On what to watch: He said, “The key is the Fed. If the Fed changes policy quickly and this weakens the dollar, we could have an extension of the business cycle. And that will be an investment decision we will have to make in the second half of this year. It depends on what they do…”

September 12, 2019 Webinar Notes and Link to Recording

Bottom line: In terms of big macro moves, Felix says the cocktail presented to investors is highly toxic.https://www.cmgwealth.com/ri/on-my-radar-zulaufs-bottom-line-whats-ahead/

  • Felix believes a September 2019 stock market peak will be followed by a 20% correction with the low coming in late December or early January. That will send the S&P 500 back towards the December 24, 2018 low near 2,300.  He believes interest rates are still headed lower and will bottom around the same time, perhaps making a long-term bottom.
  • On top of a slowing world economy and already very low real and nominal growth, the world is facing a sharply deteriorating liquidity condition because the U.S. Treasury must replenish its account at the Fed from levels as low as $111 billion in mid-August, $156 billion in early September and $196 billion in mid-September to near $400 billion. Draining $250 billion of liquidity within two to three months could shock the financial markets, even if the Fed cuts rates.  (Steve here: In 2015, Congress mandated that the Fed keep $400 billion of cash in their piggy bank in case of a Government shutdown or a crisis-like event.  Last December the Fed’s balance went from $400 billion to $111 billion. That’s money that is injected into the system.  A QE-like effect on markets.  When they have to replenish the piggy bank, they sell more Treasury debt and put the cash proceeds back in the piggy bank.  That’s like a quantitative tightening that pulls money out of the financial system. I believe the recent hit to the money market system is partially a result of the Treasury’s recent actions.)
  • As they did in late 2018 and early 2019, the Fed and global central bankers will respond aggressively and that will put a floor on the downside. He believes this is a pattern we will be in for some time.  Market support will be very much dependent on the Fed’s, central bankers’ and policymakers’ responses.
  • Like Dalio, he believes we sit late in a long-term debt cycle and such cycles present significant challenges.
  • China, the engine of growth to the world, is the major driver of the global economic slowdown. Their private market debt has peaked and they are stuck in terms of their ability to stimulate more growth.  Trade wars are a concern.
  • He believes gold is in a secular long-term bull market, but expects a short-term sell-off from recent highs. He likes gold on dips.
  • He doesn’t see a 2008-like crash.  More of a range-bound equity market with big swings up and then down and then up again.  An environment that favors active management over passive.  He thinks value is a better place to be over growth and shows you how you might time your entry.

Miami Real Estate Is About To Collapse…

This is an interesting article and it should be read not for the headline but the concept of real estate in todays time

The problem in todays real estate is Carrying cost

Why are prices dropping? It’s more than simple supply and demand—though the glut of new supply is clearly part of it. Rather, your typical condo has a carrying cost of 4-7% of fair value before financing costs (property tax/condo fees/insurance/maintenance/special assessments/etc). This adds up fast when a property is worth hundreds of thousands or even millions. It is pretty much mathematically impossible to have a positive yield from buying and renting out a Miami condo (trust me, I’ve done the math many times). The only way owning is viable, is if prices go up and allow you to extract capital to fund the carrying costs—though debt service then makes the monthly cash flow even worse. The basic law of Miami condo pricing is that if prices stop going up, they collapse due to the carrying cost. Suddenly, it seems as though a lot of owners are becoming financially distressed—forcing them to hit bids at a time when demand is somewhat lacking.

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Miami Real Estate Is About To Collapse…