Author Archives: MK
GPO poll has it
47% leaning yes
43% leaning no
Basically within the margin of error making the referendum a toss-up.
Gold trading is erratic this morning partially on polling information on the Greek referendum, but also on the interpretation of today’s jobs report. Finance Minister Varoufakis says he will resign if Greece votes “yes”. European Union officials are generally taking a hard line. Prior to the jobs report release this morning, gold was tracking lower anticipating a stronger outlook on the employment scene. After the release, which Bloomberg headlined as a “disappointment”, gold rebounded. The metal got as low as $1158 and is trading at $1167 as this is written. It will be interesting to see what happens in the markets today as we move into the long holiday weekend. Greece votes Sunday.
Happy Fourth everyone.
Says things the CNBC crew does not want to hear.
MK note: Private equity firms are selling out of stocks “at a record clip,” according to this Bloomberg article. Leading the charge are hedge funds like Leon Black’s Apollo Global Management which started its liquidation program two years ago (!). What’s more these funds are using highly-publicized corporate buybacks as a means to that liquidation. “Private equity is selling everything that’s not bolted down. With the robust valuations in today’s market, they are accelerating monetizations of companies they own,” says Frank Maturo, Vice chairman of equity markets at UBS AG. Another analyst, Lise Buyer (Class V Group) says, “It’s clear that we are currently in an environment of frothy valuations. The insiders — those with the most knowledge — are finding this a very good time to take some money off the table.” Simultaneously, gold is traversing lows and looking like a good place to park some of those stock market gains.
Puerto Rico poses a ‘substantial threat’: Strategist/CNBC/6-30-2015
MK note: With the world’s attention on Greece, what is going on in little Puerto Rico has gone unnoticed. That is until yesterday’s announcement of Puerto Rico’s intention to declare a “moratorium” on its debt payments. Two bond insurers, Assured Guarantee and MBIA, had their stock prices hammered yesterday due to their exposure in Puerto Rico. Assured Guarantee shares were down 13% and MBIA shares down 23%.
“It’s a substantial threat,” bond expert Larry McDonald said Monday on CNBC’s Power Lunch. “The problem we’re seeing around the world is that political officials that are borrowing money in the capital markets have not been completely forthcoming about their financials.”
We recall the AIG collapse in 2008 – a centerpiece of the financial crisis. AIG was a major seller of credit-default swaps, a form of insurance against default on assets tied to corporate debt and mortgage securities. In the end, the federal government bailed out AIG to the tune of $85 billion. Yesterday’s reports had exposure at Assured Guarantee and MBIA at a mere $10.3 billion, but we are talking about their exposure in Puerto Rico only. If McDonald is right, this “quiet” and developing problem could go much deeper.
Puerto Rico’s total sovereign debt is $72 billion and, as declared by its governor, “unpayable.”
For those who take the technical approach to market problems, here’s a mathematical construct on using gold as a portfolio hedge:
“We look at [gold] purely from a risk management perspective and not just a return generating investment instrument. An analysis of the correlation between returns generated by gold and those generated by equities and bonds over various time periods brings out the lack of correlation between gold returns and those generated by both debt and equity. And even though this negative correlation increases with time, our research shows that it reaches a maximum of -0.27 over a 5 year period which is an extremely low level. Therefore, gold becomes the ideal diversification tool which based on empirical analysis reduces volatility without hampering returns. This results in a sharply higher risk adjusted return, which can only be good news for long term investors.”
– Amit Nigam of Peerless Fund Management
MK note: Funny. Using empirical analysis he comes to the same place I do via an attempted understanding of economic history. Something for all the engineers out there who read these pages. . . . . . . It still comes down to viewing gold as a long-term savings alternative detached from the currency (whatever currency you happen to use in your financial accounts).
For Robert Shiller, the prominent Yale University behavorial economist and Nobel Prize laureate, mathematics and historical example play a key role in predicting market bubbles.
“I think that compared with history,” he says, “US stocks are overvalued. One way to assess this is by looking at the CAPE (cyclically adjusted P/E) ratio that I created with John Campbell, now at Harvard, 25 years ago. The ratio is defined as the real stock price (using the S&P Composite Stock Price Index deflated by the CPI) divided by the ten-year average of real earnings per share. We have found this ratio to be a good predictor of subsequent stock market returns, especially over the long run. The CAPE ratio has recently been around 27, which is quite high by US historical standards. The only other times it has been that high or higher were in 1929, 2000, and 2007—all moments before market crashes. . . This time around, bonds and, increasingly, real estate also look overvalued. This is different from other over-valuation periods such as 1929, when the stock market was very overvalued, but the bond and housing markets for the most part weren’t. It’s an interesting phenomenon.”
Stop. Look. Listen.
Puerto Rico is broke. Seeks moratorium on debt payments. Governor says “$72 billion public debt is unpayable.”
MK note: Caribbean’s Greece looking to Prexit? Issue its own currency. Repudiate debts. Maybe Varoufakis can head up the negotiating team in his spare time.
“We’re at $18 trillion now. We’re soon going to be at $20 trillion. At $24 trillion, that’s the point of no return. We will be there soon. That’s when we become Greece! That’s when we become a country that’s unsalvageable.”
MK note: Of course he’s talking about the U.S. national debt. Politicians talk about the political deficit. Businessmen talk about the reality of the uncontrollable national debt and the potential interest payments that stand in the way of raising interest rates to historic norms.
Report issued today of all days. . .
Bank for International Settlements blasts world’s central banks on “persistent exceptionally low rates reflect the central banks’ and market participants’ response to the unusually weak post-crisis recovery as they fumble in the dark in search of new certainties.”
London’s Telegraph says, “The world will be unable to fight the next global financial crash as central banks have used up their ammunition trying to tackle the last crises, the Bank of International Settlements has warned.”
MK note: On second thought, maybe their timing could not have been better. Many inquiries and purchases past few days at USAGOLD offices. Pent-up demand unleashed. . . .
DJIA – 350.33 (-1.95%)
NASDAQ -122.04 (-2.4%)
Germany DAX -409.23 (-3.56%!!)
France CAC -189.35 (-3.74%)
UK FTSE -133.22 (-1.97%)
Best analysis we see is that no one knows for certain the fallout from Greece in the rest of Europe. General perception is that others on EU’s periphery with weak sovereign finances, i.e. Italy, Spain, Portugal might see fit to follow suit if Greece opts for exit/monetary sovereignty – or to use it as a cudgel with respect to their own dismal financial picture. Such concerns send ripples through financial markets everywhere, hence the big drops per above particularly in Germany and France.
Under the new London gold fix regime, there are now eleven participants.
“Volumes have also increased significantly, with average daily volumes for the morning and afternoon gold auctions more than doubling, compared with the five months prior to IBA’s administration.”
MK note: As I have noted in the past, including China in the fix, brings a new element to the table in that China is out front about its market position as a major buyer of the physical metal. In March’s NEWS & VIEWS, I cover how China’s participation in the global gold pricing system is likely to impact the market in the months and years to come. Bank of China is already a participant and China Construction Bank is slated to join soon.
From the March newsletter:
“I expect this synergy to carry over when later this year China inaugurates its own version of a gold fix in Shanghai and three Chinese state banks join the London Bullion Market Association’s new London fix later this month. I am not among the group that foresees a hot gold war between the Shanghai and London fixes, between China and the West. More I believe we will see a balancing of interests – a cold war of sorts between the physical metal-based Shanghai business and the paper-based London business. China would not be seeking admission to the international gold club in London if it did not intend to adhere to some common ground rules – if in fact a quid pro quo of some sort had not been agreed.
That is not to say though that the new gold market mechanisms will fall short of being transformative. To the contrary, I would counsel to expect major changes in 2015. At the top of the list I would put the likelihood of Shanghai forcing London to honor its pricing by delivering real metal into the China market. The three state banks China has stationed in the new London eleven-member fix regime will act as a conduit for those deliveries – a mission for the time being likely to keep the flow through the London-Zurich-Hong Kong-Shanghai pipeline moving at a steady pace. In the process, China might force a level of honest settlement too often avoided in the previous gold fix regime. More on that further on . . .”
[Note: The original announcements listed three China banks as participants, not two.]
The doubling of volumes is a surprising development and it has come quickly under the new regime. It is difficult to know at this juncture how much of that volume is going to China in the form of physical metal, but those numbers will likely come out over time. At some point, the pressure from China is likely to accrue as a positive in the pricing mechanism, as the sellers realize over time that real, not paper, metal is China’s final objective. We will be watching these developments with a great deal of interest as we move out of the usual summer doldrums in the gold market and into the Fall rush season.
by Michael J. Kosares
Yesterday’s Fed announcement is a distinct break with the past and a watershed moment for the markets psychologically. The Fed will no longer be able to simply crack the rhetorical whip in order to keep the market tiger sitting on its stool. We will probably get a taste of what this all means in the near term, but, in my view, the Fed will find itself on the defensive with little left in the quiver, save the ultimate rate hike, to discourage speculative bubbles. Since it will be hard-pressed to actually snap the whip on Wall Street’s nose (in the form of aggressive rate hikes), the door is open to all sorts of renewed reckless behavior – a hey day for speculators of every description until the bubble ultimately bursts. The importance of a hedge in gold is now more important than ever.
In the June edition of NEWS & VIEWS, I wrote the following observation on current market behavior – a piece that might be particularly relevant in view of yesterday’s Fed announcement.
On lemming-like algos and distinguishing yourself from the crowd
Back in 2012, I wrote, “It used to be ‘Don’t fight the tape.’ Now it’s ‘Don’t fight the algorithm.’ Well, algos and the madness of machines have become even more entrenched and more influential since those days.
“Real money funds investment people just aren’t playing the gold market. Central banks, the whole lot of them aren’t trading the gold market the way they used to,” says David Govett, head trader at Marex Spectron in a Financial Times article. “It’s created thin nervous markets — the algos can jump in and push it around and make a mess of it.” Of course, Govett is talking about derivative trading, not the acquisition and/or sale of physical metal itself.
Eventually circumstances change. Assumptions are overturned. Algo’s are re-written and we suddenly find ourselves in an entirely different ball game. The algo driven bear can quickly become the algo driven bull. Best way to weather the madness of machines? Own the physical metal, sit back and wait for the lemming-like machine traders to see the light.
While thinking about the algo problem for the gold market, I recalled a story told by an old friend – an engineer who worked at a major engineering firm here in Denver. Our connection was a mutual interest in gold, but that’s another story.
The team had a tight project deadline when all of a sudden a power outage took out the lights, the computers – everything electronic. My engineering friend was old school – the kind of guy that wore a bow tie and kept his pens and a slide rule in the ever-present plastic holder residing in his shirt pocket (Some of you may remember the type).
The younger engineers stood around looking at each other – panic in their eyes. But my engineering friend, like all good engineers, had a back-up plan. He pulled out his slide rule, a number 2 mechanical pencil, found his yellow legal pad, sat by a window and completed the final project calculations without a hitch.
Don’t know why I like this story with reference to algo trading, but I do.
True story, by the way . . . . . .
Bernard Baruch, the famous early 20th century stock speculator, in explaining the behavior of markets:
“Have you ever seen in some wood, on a sunny quiet day, a cloud of flying midges — thousands of them — hovering, apparently motionless, in a sunbeam? …Yes? …Well, did you ever see the whole flight — each mite apparently preserving its distance from all others — suddenly move, say three feet, to one side or the other? Well, what made them do that? A breeze? I said a quiet day. But try to recall — did you ever see them move directly back again in the same unison? Well, what made them do that? Great human mass movements are slower of inception but much more effective.”
This is the same Bernard Baruch who just before the stock market crash of 1929 liquidated his stock holdings and put his money into bonds and cash, and then later, after the crash, dumped a good portion of his fortune into gold. When asked why he would do such a thing by the secretary of the Treasury, Baruch replied that he was “commencing to have doubts about the currency.”
While others banked on the 1920’s stock mania, Baruch’s intuition was telling him that there was something amiss. There are times when it pays to distinguish yourself from the crowd – the midge that flies in the other direction.
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“One analyst aptly described the situation facing investors as being “trapped in a Twilight Zone” between the end of the Fed’s money printing policies and its first rate hike. Remaining fully committed to the Twilight Zone, though, is a matter of choice not necessity. It can be, and should be, hedged.”
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“If you don’t own gold, you know neither history nor economics.”
MK note: If you are wondering whether or not you should include gold in your investment plan, watch this video featuring one of the top money men in the world, Ray Dalio, Bridgewater Associates, speaking to the Council on Foreign Relations. Mr. Dalio is a man after my own heart. . . It is particularly interesting to hear what he has to say about acquiring physical gold in quantity – the problem he, and other hefty money managers, is/are up against. And by the way the same problem China is up against (that’s why they mine it-don’t export it). This is where the small investor has the advantage. You can acquire enough gold to meet your needs. Consider very carefully what Mr. Dalio has to say. And take special note of the audience chuckle to his earthy response when asked whether or not he owns gold. Don’t forget he’s addressing the Council on Foreign Relations . . . . . . . . . . (Scroll it back and listen to the whole presentation to get the full effect)
“The possession of gold has ruined fewer men than the lack of it.” – Thomas Bailey Aldrich
Banks not buying what the government is selling/CNBC/Jeff Cox/5-12-2015
by Michael J. Kosares
Over the years, I have written occasionally about the connection between the demand for U.S. government debt and quantitative easing. My contention is straightforward. The primary determinant for quantitative easing is not, as we are constantly told, to keep the unemployment rate down, nor is it to stimulate the economy. (I emphasize the word “primary” as opposed to the word “only”) It is to support the government debt market and keep government in business – not just in the United States but wherever it is employed.
So when you see the price of gold suddenly shoot up over $20 in a single day, these days you look in the direction of the debt market and by extension interest rates to see if that is what’s driving interest in the metal.
I happened to see this article yesterday (linked above), which did not get a lot of attention, and pulled the url to my desktop for future reference. I was going to use it for a blurb in our upcoming newsletter, but with today’s events I thought a quick post might be in order.
Citigroup reports that the ‘bid for U.S. Treasuries is over.” Sounds terminal and in a certain sense, it is. The commercial banks aren’t buying Treasuries, but central banks are, according to this Asia Times article, although they can be fickle and unreliable buyers. (Think of China’s exit from the U.S. Treasuries market.)
“A shift in central bank purchases,” says AT, “or currency preference, could produce a sharp rise in Treasury yields due to diminished appetite from private investors.” It’s the part about a sharp rise that will cause some squirming around the FOMC meeting table. Such a development could upset the current plan for low and slow interest rate increases.
Attach all this to spreading worries about overall bond market liquidity and concerns, registered by some, that the Fed might be losing control of monetary policy and interest rates (once again), and you get the feeling that the psychology underpinning the current market paradigm is getting a bit wobbly. Alan Greenspan, for example, is warning this morning about the possibility of another taper tantrum. To insiders, such a change amounts to a bond market standing on shaky ground and might be what’s behind the sudden surge today in the gold price.
In the absence of demand for government debt, the most logical course of action in the Keynesian pantheon of choices is to print money – or, to use the more polite term, reintroduce quantitative easing. What we are seeing today in the gold market could be driven by insiders who understand the connections just outlined and looking to get ahead of the next big change in monetary policy.
Don’t forget too that key American corporations are taking a big balance sheet hit because of the strong dollar, Apple (the stock market’s big kahuna) being at the forefront. There has to be some pretty strong pressure coming from corporate America on dollar policy.
That said, there has been some interesting activity in the monetary base of late with it showing some signs of moving higher thus far in 2015 – at one point up nearly 6% on the year at $4.167 trillion before coming down a bit in the last report. The monetary base is a direct reflection of the Fed expanding its balance sheet (QE), so things behind the scenes might already be in motion though it is unlikely you will hear an announcement of such anytime soon. In fact, an announcement, as far as I know, is not required.
Change is in the air. . . . . . . . .
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Here is what Greece is up against:
Today the Tsipras government ordered local governments to move their funds to the central bank. As you can see, Greece has payments of almost one billion euros coming up by May 12 and €2.5 billion all-toll by June 19, so the “confiscation”, as the Globe and Mail called it, probably has to do with that. The problem here is that €2.5 billion is only a small part of what Greece owes. The total is on the order of €317 billion euros as follows:
If meeting this €2.5 billion payment requires such radical measures, what will it take to repay the other €314.5 billion?
European Central Bank governor Christian Noyer said in a Le Figaro interview published today that a default on the country’s €317-billion of obligations and a euro exit would be traumatic for the currency area and plunge Greece into a major crisis. The IMF’s Christine Lagarde warned Greece yesterday that it needed to make its loan payments to that organization without delay. She said “the fund’s board hasn’t approved a delay of payments for three decades and no advanced economy had ever officially requested such flexibility,” according to a Wall Street Journal report. Back in February just after Syriza came to power, President Obama said, “You cannot keep on squeezing countries that are in the midst of depression.” He might have just as easily used another American expression: “You can’t get blood from a turnip.”
Reading the various reactions today sent me in search of an old Barbara Tuchman observation (from her Pullitzer Prize winning study of World War I – The Guns of August) that was rattling around the back of my mind.
Here it is:
“Some are made bold by the moment, some irresolute, some carefully judicious, some paralyzed and powerless to act.”
That’s about the size of it.
Perhaps, we have become so accustomed to the constant clamor over Greece that we have lost our ability to sense when the ground might be shaking – and well it might be. Noyer’s warning needs to be viewed as important as he is not the type to be easily shaken by crisis (having seen his fair share of this sort of thing over the years). We should remember that the authorities in the United States thought that the rug could be pulled on Lehman Brothers without major repercussions. We all know how that worked out. Too many have said the same about a Grexit. It is difficult to believe that a €317 billion default would not have major repercussions in financial markets – on both sides of the Atlantic.
Jasmine Ng, Joseph Deaux and Eddie Van Der Walt/Bloomberg Intelligence/4-20-2015
“The People’s Bank of China may have tripled holdings of bullion since it last updated them in April 2009, to 3,510 metric tons, says Bloomberg Intelligence, based on trade data, domestic output and China Gold Association figures. A stockpile that big would be second only to the 8,133.5 tons in the U.S.”
MK note: This article suggests that China may disclose its current gold reserves soon in conjunction with its bid to convince the IMF to include the yuan in its SDR (Special Drawing Rights) currency basket. China sees that as a step toward legitimizing the yuan as an international reserve currency and as a challenger to the dollar. Also this morning, Mining Weekly reports that the United States exported 83% more gold in the fourth quarter of 2014 when compared to the previous quarter. Switzerland (29 tonnes) and Hong Kong (24 tonnes), two stations along the West to East gold pipeline, were the primary recipients with Shanghai probably the ultimate destination. So the United States remains one of China’s suppliers though it is unclear where that gold is being sourced domestically. China keeps buying gold wherever, whenever it can.
From this morning’s Financial Times:
“It is quite easy for one to introduce QE policy, as it is little more than printing money. When QE is in place, there may be all sorts of players managing to stay afloat in this big ocean. Yet it is difficult to predict now what may come out of it when QE is withdrawn.” – Li Keqiang, China’s premier
Sticking with the oceanic theme, here is a similar sentiment from Warren Buffet:
“Only when the tide goes out do you discover who’s been swimming naked.”
And another sea-faring allusion from the International Monetary Fund (also recorded in today’s Financial Times):
“The Federal Reserve’s first interest rate hike risks triggering a jolt to bond markets that could surpass the turmoil the central bank inadvertently set off in 2013, the International Monetary Fund has said. José Viñals, the director of the IMF’s monetary and capital markets department, warned of a ‘super taper tantrum’ and spiking yields as the US central bank gets nearer to lifting rates from near-zero levels. ‘This is going to take place in uncharted territory,’ he told the Financial Times in an interview.”
Then we have warnings from a couple of well-known commentators on the potential for a liquidity crisis in the bond market.
Jamie Dimon (JPMorgan CEO):
“The banking system is far safer than it has been in the past, but we need to be mindful of the consequences of the myriad new regulations and current monetary policy on the money markets and liquidity in the marketplace—particularly if we enter a highly stressed environment.”
Larry Summers (former Secretary of the Treasury):
“I thought regulatory authorities made a mistake when they looked at each institution, and said, ‘You’ll be safer if you withdraw from the markets a bit,’ and then forget that if all institutions withdraw from the markets a bit, the markets would be less liquid. The markets themselves would be less safe. That would, in the end, hurt all institutions. I think there is a real issue there. Frankly, a lot of the effort that’s going into macro prudential should be into making sure we have liquidity.”
There have been a number of other prominent figures registering similar sentiments in the public venue. Stanley Fischer, though, the Fed’s vice chairman, is seen swimming against the tide:
“Markets can’t depend on the Fed staying on hold forever, says Fed Vice-Chair Stanley Fischer, speaking at an economic forum. Yes, the first quarter was a weak one for the U.S. economy, he says, but a rebound in Q2 is already underway.” [Seeking Alpha, 4/16/2015]
So, you might ask, what does all of this have to do with the demand for gold in international markets?
I will take you back to the quote at the top from Li Keqiang about printing money. The financial markets are between a rock and a hard spot. Print with abandon and eventually runaway inflation is inevitable. Stop the printing presses and the markets and the economy are pulled into a vortex of illiquidity (which translates to a downward stock and bond price spiral and all it portends for financial institutions). In either eventuality, gold is the one asset that stands apart from the potential maelstrom of counterparty risk and/or runaway inflation – an ark of sorts, a weighty portfolio anchor and an asset in which China, and anyone concerned about contemporary monetary policy, takes an abiding interest.
As for Mr. Fischer, one wonders how fifteen days into the second quarter he might be so certain of its outcome. Such boldness might raise an eyebrow or two among Wall Street’s more seasoned travelers . . . .
One last watery reference – a note in cuneiform recorded on an ancient tablet dug up somewhere in Mesopotamia:
We could have sworn you said the ark wasn’t leaving till 5.
Talk about missing the boat. . . . . . .MK
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A little USAGOLD history. . . . Pictured are News & Views hard copies from 1999 just before gold began its secular bull market. News & Views was Review & Outlook’s popular predecessor at a time when gold-based publications were few and far between. The “Big Breakout” headlined in the November, 1999 issue refers to a price jump from $260 to $330 per ounce. Your editor sees a good many similarities between that period and now.