“In the 10 years since Lehman’s failure, policymakers eagerly have pointed to initiatives that, they believe, made the financial system safer and a repeat of 2008 unlikely. That view is Panglossian.”
USAGOLD note: With attention focused on the trade wars, shrinking credit spreads, and the potential for a new emerging country debt crisis, the elephant in the room – the highly-leveraged, multi-trillion dollar derivative market – has been pushed discreetly into the closet. A Norwegian traders $132.6 million loss trading energy futures last week, though small potatoes in the world of derivatives, issued a warning how suddenly things can go wrong. This Bloomberg opinion piece tells why current safeguards are likely to fall short in the event of a larger and more widespread meltdown.
“The bottom line is that if the trade skirmish becomes a war and damages the US economy, Trump is going to become more likely to use some form of dollar devaluation as a weapon. . .Clearly, many top bank FOREX analysts believe the trade skirmish will soon become a war involving currency devaluation. I put the odds that it happens at 50% now and trending higher!”
USAGOLD note: The public remains complacent while the pros become more nervous by day.
“Bad central bank policies were a factor in the collapse in global markets a decade ago. A coordinated tightening of monetary policy in the U.S. and Europe could have similar implications for equity and bond investors today.”
USAGOLD note: Ill-timed Fed tightening ignited the crash of 1929 and the crash of 2008, along with a few other panics in between.
“[Exante Data’s Jens] Nordvig said there’s a 50-50 chance China could let its currency fall again. ‘Everybody is too relaxed that they’ve repegged the currency again. It’s never going to move,’ said Nordvig, warning if there could be a snap higher in the dollar. ‘Why would they help out Trump on the currency front. It doesn’t make any sense to me,’ he said.”
USAGOLD note: Opinions vary about what China might do on the currency front, as this article points out. As is the case with all the emerging countries, China will be concerned about capital flight. The weaker the yuan the stronger the possibility of investors selling Chinese assets and buying assets in other countries including the U.S. and Europe – the situation to which Nordvig alludes.
“Investors may be overlooking some factors that potentially could underpin gold prices, said Mitsubishi. Gold has been held back by a strong dollar and expectations for more U.S. rate hikes, as well as a strong stock market that has reduced buying of gold as a hedge. However, two factors that could end up underpinning gold are political risks and rising inflation.”
Bloomberg/Lulu Yilun Chen/9-18-2018
“‘Short term, business communities in China, U.S., Europe will all be in trouble,’ said Ma, pacing a stage in an open white dress shirt and punctuating his remarks with forceful jabs. ‘This thing will last long, if you want short term solution, there is no solution.'”
“U.S. stock investors should brace for a market that will be paralyzed for several years in a narrow trading range, according to one team of analysts on the Street, and as reported by CNBC.”
USAGOLD note: Morgan Stanley sees stocks down as much as 17% in a bear market, it says, ‘is now upon us.’
New Zealand Herald/Ambrose Evans-Pritchard/9-17-2018
“[Former chairman of the White House Council of Economic Advisors, Martin Feldstein] warned that a decade of super-low interest rates and monetary stimulus by the US Federal Reserve has pushed Wall Street equities to nose-bleed levels that no longer bear any relation to historic fundamentals. Stock prices will inevitably come plummeting back down to earth. Prof Feldstein said the next bear market – most likely triggered by a spike in 10-year Treasury yields – risks setting off a US$10 trillion (NZ$15 trillion) crash in US household assets. The cascading ‘wealth effects’ will drain the retail economy of US$300bn to US$400bn a year, causing recessionary forces to metastasize.”
USAGOLD note: A must read from one of our top financial journalists citing sources you normally would not associate with a doomsday scenario. . . . . . . .
Financial Times/John Authers/9-15-2018
“First, how could you best have responded as a private investor on the Friday night before Lehman’s lost weekend? And second, what is the market telling us about the future course of the world?”
USAGOLD note: One more retrospective in a week of retrospectives on the 2008 financial crisis. . .This one struck a chord. For the crisis that never went away, the markets’ final verdict might still lie ahead.
“In many ways, all the talk about global central banks beginning a “great unwind” of their extraordinary monetary stimulus is positively quaint. After all, how can officials from the Federal Reserve to the Bank of Japan even pretend to know how to reverse what they’ve done over the past decade? I’m speaking specifically about propping up financial markets with easy money and allowing the world’s debt burden to balloon to almost $250 trillion.”
USAGOLD note: Chappatta outlines the residue from the crisis that never went away. . . Worth a visit to the link above.
Image: Lehman Brothers sign offered in auction at Christies-London, October, 2010
“The stock market may be on the cusp of a major setback, according to David Tice. Tice, who made a name for himself in running the Prudent Bear Fund before selling it to Federated Investors in 2008, believes the market is dangerous. ‘I’m nervous,’ he said Wednesday on CNBC’s ‘Trading Nation.’ ‘We’re getting closer to a meltdown scenario.'”
Zero Hedge/Tyler Durden/9-13-2018
“I was amused to read the NY Times op-ed, co-authored by the three leading US policy makers at the time of the crisis (Ben Bernanke, Tim Geithner and Henry Paulson). In a piece entitled ‘What We Need to Fight the Next Financial Crisis’ they lament the fact that ‘Congress has taken away some of the tools that were crucial to us during the 2008 panic. It’s time to bring them back (link).’
Tools! Apparently, they always need more tools. Rubbish, they had all the tools necessary. They just never recognised beforehand that the economy was a massive credit bubble – just like it is now. It was worse than that. In 2005 Bernanke had even derided an interviewer who asked him about the possibility that the housing bubble could burst. And I also remember Shelia Bair, who headed up the FDIC (the Federal bank liquidator) at the time, and had successfully seized and closed many banks during that period, including the massive Washington Mutual, lamenting that she had not even been consulted about Lehman’s.”
USAGOLD note: Worth the four minutes it takes to watch it. Henry Blogett interviews one of the most colorful and outspoken analysts in the investment business. . . . . .
Financial Times/Robin Harding/9-12-2018
“The opportunity exists because the most important former manipulators, China and Japan, no longer undervalue their currencies. What is more, and whether they realise it or not, the fundamental interests of these East Asian giants have changed: they now have more to lose from the currency manipulation of others than they can gain by intervention of their own. The time is ripe for change.”
USAGOLD note: Two obstacles stand in the way of China manipulating the yuan lower: capital flight and its ambition to make the yuan a dependable reserve currency. Whether or not those obstacles will prove sufficient in the high-stress global economic environment remains to be seen.
Clive P. Maund/9-8-2018
“The latest gold and silver COTs and Hedgers charts are quite simply astounding – we have not see anything like it since the site started 15 years ago. In addition, short selling of gold and silver by futures traders is at record levels by a huge margin at a time when bullishness towards the dollar is also at extreme levels. All of this points not just to a reversal soon, but to a meltup in gold and silver triggered by a scramble to exit massive short positions once the tide turns.”
USAGOLD note: For the details, including chart annotations, we recommend visiting Clive Maund’s site linked above. Interest among physical silver buyers is picking up at current prices. Last week the U.S. Mint reported that demand had depleted its silver Eagle inventory.
“The low level of corporate failures might appear a boon. But in the past decade, U.S. productivity growth collapsed to below half its postwar average. New business formation, although recovering, has created fewer new jobs than in past upswings, according to the Bureau of Labor Statistics. The U.S. economy operated for years with excess capacity, yet fewer firms than in similar periods in the past went bust. Even though corporate interest costs had never been lower, a rising number of American companies had trouble servicing their debts. These are the corporate zombies.”
USAGOLD note: Chancellor makes the point that these “corporate zombies” frustrate real growth. They stand in the way of innovative, modern businesses that could lead a true recovery. Anna Schwartz gained renown by authoring A Monetary History of the United States with Milton Friedman. At the time of the 2008 meltdown she went public with the notion that the poorly-run, upside-down banks should be allowed to fail. Their failure, she said, would lay the foundation for a true recovery. Needless to say, she was ignored.
“Nouriel Roubini became a household name in the finance and economics arena over a decade ago for his warnings about the coming global financial crisis. . . In a Sep. 11, 2018 op-ed in the Financial Times, Roubini and research partner Brunello Rosa, an LSE economist with whom Roubini operates a research firm, outlined those factors. They include: Slowing economic growth, ill-timed fiscal stimulus, trade frictions that could turn into all-out trade wars, domestic politics and frothy asset prices.”
USAGOLD note: Brunello Rosa recently wrote that “gold will remain a crucial component of diversified portfolios, as a hedge against potential corrections across asset classes,” according to a recent Kitco News article.
Hussman Funds/John P. Hussman/September, 2018
“I am aware of no plausible conditions under which current extremes are likely to work out well for investors. There are a few possibilities that could involve a smaller loss than the two-thirds of market capitalization that I expect to vanish, as the run-of-the-mill, baseline expectation for the S&P 500 over the completion of this cycle. Yet it’s worth recognizing that the completion of every market cycle in history has taken the most reliable valuation measures we identify (those best correlated with actual subsequent S&P 500 market returns) to less than half of current levels.”
USAGOLD note: Hussman recommends “humble cash” as the best option “because it offers opportunity to respond to deep market losses.” We would refine that a bit. Green cash is a good option under the circumstances Hussman describes. Gold cash is even better. Inflation could becomes an issue. If it does, gold can do things for you that green cannot – like appreciate, rather than depreciate, in value. The inflation does not have to rise to the level summarized in our accompanying photograph either. Historically gold has proven to be a solid hedge against even comparatively minor doses of currency depreciation.
Credit Bubble Bulletin/Doug Noland/9-8-2018
“I’ve never viewed the 2008 fiasco as a ‘failure of the free markets.’ It was instead an abject failure of policymaking – of government policy and central bank doctrine and methods. At its roots, the crisis was the inevitable consequence of unsound money and Credit – finance that over time became increasingly unstable specifically because of government intervention and manipulation. ‘Activist’ central banks were manipulating the price of finance and the quantity and allocation of Credit, along with increasingly heavy-handed interventions to backstop dysfunctional markets. The crisis was a predictable failure of inflationism. Sure, it’s reasonable to blame the reckless behavior of Wall Street. But risk-taking, leveraging, speculation and chicanery were all incentivized by policy measures employed to inflate both asset prices and the general price level.”
USAGOLD note: Doesn’t like much has changed. . . . The above is Noland’s reaction to Financial Times columnist Martin Wolfe’s claim that the 2008 breakdown was a ‘failure of the free markets’. Free markets do not fail, nor do they succeed. They simply proceed. And sometimes despite the intentions, protestations and guidance of the various monetary authorities.
Financial Times/Gideon Rachman/9-10-2018
“To date, markets have been oddly relaxed about all this. Perhaps they have assumed that a last-minute deal would be reached between the US and China? But that is far too complacent. Instead, there are political, economic and strategic reasons that are pushing the two sides towards prolonged confrontation.”
USAGOLD note: The author likens the present day apathy to the early stages of World War I. In August, 1914, Britain believed that the troops would be home by Christmas. Of course, that was far from the reality. As it is, the markets seem to believe that nothing of consequence will come of the U.S./China trade war. Inflation is likely to come with it though. If and when it does, or possibly sooner if a “prolonged confrontation” goes from possibility to probability, complacency will make its exit.
Seeking Alpha/Adam Hamilton/9-8-2018
“Thus short-covering gold-futures buying quickly snowballs, catapulting gold sharply higher. Gold uplegs actually have three major stages, and futures short covering is the first one. This involuntary mandatory buying pushes gold high enough for long enough to encourage other futures speculators to return on the long side in stage two. Eventually gold’s gains grow large enough to entice back investors in stage three. The scale of this summer’s extreme gold-futures shorting was off the charts, which means the inevitable coming short-covering will be proportionally huge.”
USAGOLD note: This article is a good supplement to our Gold – A reverse bubble in search of a pin: The victim could quickly find itself the beneficiary [LINK] published in last week. It offers a detailed look at how the COMEX paper gold market works and why “proportional buying” is “super bullish” for gold and silver.
Financial Times/John Paul Rathbone and Benedict Mander/9-9-2018
“’The seeds have been sown and the harvest will come,’ says Kit Juckes, head of currency strategy at Société Générale. ‘This is a symptom of how hard it will be to normalise policy after the greatest monetary experiment in history.’”
USAGOLD note: We choose to feature this quote because it goes to the essence of the problem besieging many emerging countries, not just Argentina. That country, though, along with Turkey, finds itself a poster child for the problem. The authors do a good job getting to the heart of the matter: Though “idiosyncratic,” the latest financial media buzzword, at the moment, the potential for a contagion effect is a clear and present danger elsewhere, even “richly-valued U.S. equities.” The potential impact to the gold market comes in two forms – first, as demand among the local citizenry (already in progress), and second, as demand generated in advanced economies to hedge knock-on systemic and market risks (yet to surface).
“There are over 3,800 historical examples of paper currencies that no longer exist. Although some of these currencies, like the French franc or the Greek drachma disappeared as a result of being replaced by an alternative (euro), many disappeared as a result of government imprudence, debauching the currency and hyperinflation. In all of those cases, persistent budget deficits and printed money were common factors. This should sound worryingly familiar.”
USAGOLD note: A solid refresher on why gold ownership is important to the average citizen using the Turkish lira as a reference point. . . .
“Sudden, severe stock sell-offs sparked by lightning-fast machines. Unprecedented actions by central banks to shore up asset prices. Social unrest not seen in the U.S. in half a century. That’s how J.P. Morgan Chase’s head quant, Marko Kolanovic, envisions the next financial crisis. The forces that have transformed markets in the last decade, namely the rise of computerized trading and passive investing, are setting up conditions for potentially violent moves once the current bull market ends, according to a report from Kolanovic sent to the bank’s clients on Tuesday.”
USAGOLD note: The madness of machines. . . .In case you missed it:
Gold – A reverse bubble in search of a pin
The victim could quickly find itself the beneficiary
“2008 has special significance for gold bugs, both because of the money they lost in August of the year and the money they made in the half-decade that followed. Today’s world is beginning to feel eerily similar.”
USAGOLD note: The gold chart in 2008 just before the big move to all-time highs. . . . . .
Credit Bubble Bulletin/Doug Noland/9-1-2018
“I’ve been here before and, candidly, it’s not much fun. Lodged in my mind this week was the brilliant quote from the 19th century German philosopher Arthur Schopenhauer: ‘All truth passes through three stages: First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as self-evident.’ It’s fascinating how it all works. Looking back, there was definitely a Bubble in 1999. Clearly, 2007 was one huge Bubble. Everything is obvious in hindsight, and most look back now and contend it was pretty conspicuous even at the time. Having toiled through both prolonged Bubble periods – arguing against deeply embedded bullish conventional wisdom – I can attest to the fact that the Bubble viewpoint was violently opposed at the late stages of both cycles.”
USAGOLD note: Noland argues through the prism of recent history that the “EM contagion at the ‘periphery will make its way to the ‘core.'”
“This looks like contagion. One emerging country’s problems have become other emerging countries’ problems, and it’s hard to see how to break the cycle. What’s really worrying is that this week’s gyrations don’t look to have been driven by dollar strength — on a trade-weighted basis, the greenback is lower on the week. Were a rising U.S. currency to be responsible, perhaps Federal Reserve Chairman Jerome Powell could be prevailed upon to slow the pace of interest-rate increases.”
USAGOLD note: This article speaks to concerns we raised in this morning’s Chart of the Day about a possible emerging markets contagion.
“I have been relatively silent on gold’s chart since we called the top back in January and February as the Elliott Wave pattern has a few options at hand. If you recall from our article on January 25 ‘Gold prices hit 17 month high’ (the day of the 2018 high) we forecasted a bearish reversal such that ‘in the coming months would be a correction down towards $1200’ . . . Now that the bearish targets are satisfied, we have seen enough evidence that a large rally may mount for the yellow metal.”
USAGOLD note: It is not often that an analyst calls the high on the day it happens. As for the future, Wagner’s suggests a “likely rally to above $1380.” His analysis includes a couple supporting charts.
Gold Eagle/Michael Ballanger/8-28-2018
“These are across-the-board synchronized correlations and as I wrote about last week, the computer-driven ‘algobots’ exacerbate and exaggerate every short-term trend in virtually all markets around the globe and since they never sleep, when Chicago shuts down, London picks up the reins and when London retires for the day, Tokyo carries the mantle such that over and over and over again, the pattern-recognition-driven algorithms implanted into the brains of the algobots feed upon themselves and overshoot their marks every single time, as happened on August 15 and 16 in (again) ALL markets. Now these pulse-less, robotic vermin are trapped and quite possibly, in deep trouble.”
Related: Historical Repetition in the Gold And Silver Arenas/Michael Ballanger/Gold Eagle
USAGOLD note: Ballanger writes convincingly and definitively about computer-driven money management systems that dominant the markets these days including gold. The two articles linked above are solid and fascinating representations of his thinking. In conjunction with his advice to back-up the truck on precious metals, he says the bottom for gold is in at $1167 per ounce on August 16, 2018.
Gold price reversal gaining legitimacy/Christopher Vechio/DailyFX
“The daily 13-EMA, which had been resistance since mid-June, has survived tests as support yesterday and today, suggesting Gold may have indeed turned the corner.”
Has gold finally bottomed?/Phoenix Capital Research
“That’s a heck of a ‘tell/ from the markets. And it’s ‘telling’ us that we’re about to see a major inflationary move as the USD drops hard. This will be sending gold and other ‘weak-USD’ plays on a major bull run.
Gold rebounds after yesterday’s slide,/Matias Salord/FXStreet
“Gold moved all in a small range with a bullish bias.”
Gold: The rally accelerates/Stewart Thompson/Gold Eagle
“Gold’s impressive rally continues to accelerate. Key fundamental and technical price drivers are playing a bullish song with almost perfect harmony.”
Gold rebounds – What’s next?/FX Trading Revolution Team/FXStreet
“Technically, Gold made an important rebound which could be the end of the bearish trend that started in April.”
Short term chart . . . . .