Author Archives: Opinion
“I’m not often glad I am no longer the young person in the room, but this month I am. If you have only been knocking around in markets for, say, 15 years, you are seeing the collapse of everything that you have been told is true and have observed to be true about markets.”
USAGOLD note: As the new verities fall one after the other and Somerset Webb returns to an old verity saying that what is new to most market participants is actually old and a return to the 1970s. “With that in mind, ” she says, “hold gold.” But that is the bottom line in a very interesting longer analysis of the economic times at the link. The Misery Index – the combination of inflation and unemployment – became the poster child of the stagflationary 1970s. As it rose, so did the price of gold, as shown in the chart below.
The Misery Index and the price of gold
(% change from year ago,1970s)
Sources: St. Louis Federal Reserve [FRED], ICE Benchmark Administration, Bureau of Labor Statistics
“It’s very unlikely that the Fed will blink this time.… It needs share prices to fall enough to influence behavior, which means that policymakers need this to turn into a true bear market, and not like one of the 20%-ish declines that were followed by rescues and resumed exuberance. It needs to avoid disorderly conditions that could create systemic problems, and a serious crash that would drive a recession.”
USAGOLD note: The difficulty comes in controlling a panic once it begins, particularly if the Fed’s stated intention is to stand aside. Authers cites the comment from Kansas City Fed President Esther George: “I think what we are looking for is the transmission of our policy through markets understanding, and that tightening should be expected. It is one of the avenues through which tighter financial conditions will emerge.” If that is the consensus view at the Fed, it might end up with more than it bargained for. Wall Street’s memory is notoriously short, but some will remember that the Fed’s tightening into a slowdown in the late 1920s instigated the crash of 1929 and the subsequent full-scale depression.
Goldman Sachs’ former CEO says there’s a ‘very, very high risk’ of recession for the US economy and companies and consumers should prepare
“If I were running a big company, I’d be very prepared for it. If I was a consumer I’d be prepared for it.” – Lloyd Blankfein, Goldman Sachs
“Big shocks to the global economy, such as Russia’s invasion of Ukraine, understandably capture the most attention. But a new worldwide pattern of little fires everywhere may be equally consequential for longer-term economic well-being. Over time, these small fires can coalesce into one that is just as threatening as the initial large fire that acted as the catalyst.
USAGOLD note: Remember nuclear proliferation? Now, according to El Erian, we have nothing less than systemic risk proliferation coming at us from multiple directions. “If that nightmare scenario materialises,” he warns referencing the risks listed in the headline, “the effects will be felt far beyond individual developing countries – and will extend well beyond economics and finance.” As we pointed out in the May issue of News & Views, today’s headlines serve as a constant reminder of why we own gold.
“Today’s COT report for gold (as of Tuesday) is extremely bullish. Managed Money (mostly hedge funds) net long futures contracts plunged 30% on the week to a net 43,360 contracts, the lowest level of the year and below late January’s level, just before gold soared $260/oz to a near-record high. Managed Money almost always has its lowest net long futures contracts at gold bottoms and largest net long positions at tops. The 43.4K net long contracts this week is just slightly higher than the lows seen around early August and late-September of last year when gold was trading sub-$1750.”
USAGOLD note: In the chart below, you can see managed money position bottoms signaling gold price uptrends, as Hickey indicates.
Gold future and options fund net positions vs price
Chart courtesy of MacroMicro.com
“‘When you break below 30,000 [dollars] consistently, 8,000 [dollars] is the ultimate bottom, so I think we have a lot more room to the downside, especially with the Fed being restrictive,’ Minerd told CNBC’s Andrew Ross Sorkin in a ‘Squawk Box’ interview at the World Economic Forum in Davos, Switzerland on Monday.”
USAGOLD note: Bitcoin finds itself more closely allied with tech stocks than gold in the trading realm. If Minerd is correct, bitcoin’s collapse could be part of a much wider meltdown.
“For most of the past year, gold has been ignoring the red-hot inflation that we have been living in. Our internal forecasts model indicates that gold, when factoring in a US inflation rate of 7.9% in February 2022, should be trading at closer to US$2150/oz rather than US$1920/ oz where it is currently trading (7 April 2022). It’s as if gold has been living in an alternate universe. However, gold has been picking up recently, catalysed by safe-haven demand driven by the war in Ukraine. We have periodically observed such instances of geopolitical shocks bringing gold back to life. If sustained, gold could be on an upward trajectory, despite bond yields rising and the US Dollar remaining quite firm.”
USAGOLD note: Wisdom Tree’s consensus forecast has gold at $2315 by the first quarter of 2023. Its bullish scenario, based on sticky near double-digit inflation and a sharp correction in the dollar index, puts it at $2680. Its bearish forecast, which would result from the Fed successfully taming inflation, puts it at $1790 by the first quarter of 2023. “We believe that gold has reached a turning point,” concludes the Ireland-based investment firm, “after being relatively subdued in the second half of 2021. The metal has been catalysed by rising geopolitical risks and it will become increasingly difficult for the metal to keep ignoring the elevated inflation environment we live in.” For the full report, please go to the link at the top of this post.
“Most of the market stabilization liquidity injected by central banks flowed into financial assets, where price inflation was mistaken for investment genius.”
USAGOLD note: That quote from Bill Blain is one for the ages. Now your favorite central banker, no matter where you call home, is walking a tightrope stretched over a financial abyss. The real question with respect to how you invest your money is whether or not you think he or she will make it.
“Investors looking for value in the stock market during the ongoing downturn may be ‘deluding themselves,’ according to Sean Corrigan, director at Cantillon Consulting.”
USAGOLD note: More and more, analysts are pointing to something we have considered the real problem all along – LEVERAGE. The Fed will find it everywhere in financial markets, if it cares to look, and it will not be long, in our view, until confronting it will be unavoidable. “People always say the market comes down on profit-taking,” says Corrigan. “it comes down on loss realization. The guy who sells at the top sells to the next two guys, who realize it’s not going to hold, who sell to the next guys and if any of those are leveraged, we’re in trouble.”
“In the same way, a belated tightening of monetary policy by the world’s most important central bank, the Federal Reserve, inflicts a sort of regime change not only on US households and businesses, but on the rest of the world, too. All the consequences of these two shocks — one geopolitical, the other economic — are very hard indeed to predict, but I am confident that we have seen only a small proportion of them so far.”
USAGOLD note 1: Ferguson goes on to say that “owning gold has preserved capital, but owning dollars has been a superior strategy.” That logic applies to investors in countries outside the United States but not to Americans who already own dollars by default.
USAGOLD note 2: Gold has held up well in response to the financial shocks of 2022 while other assets covered in the Ferguson analysis – most notably stocks, bonds, and bitcoin – have declined sharply, as shown in the chart below. Historically, Ferguson identifies the 1970s as the closest comparison to the present period but says “the analogy is far from perfect.” Like the 1970s, he says, we should not “expect a rapid return to stability, whether in macroeconomic or geopolitical terms.” The full analysis is highly recommended at the link.
Investment performances 2022
(%, year to date)
(SPGSCI = Standard & Poors Goldman Sachs Commodity Index; TLT = Bond ETF; SPX = S&P 500; BTCUSD = Bitcoin)
Chart courtesy of TradingView.com
Jeremy Grantham and Ray Dalio discuss the stock-market plunge, ring the inflation alarm, and share investing tips.
“Grantham, the cofounder and chief investment strategist of GMO, predicted a sweeping crash in asset prices, blasted the, and touted natural resources and clean energy as shrewd bets. Dalio, Bridgewater’s cofounder and co-chief investor, warned against holding cash or bonds, trumpeted gold and emerging markets, and touched on Tesla CEO Elon Musk’s deal to buy Twitter.”
USAGOLD notes: This article shares 15 quotes from two of the financial world’s most highly respected money managers. Dalio’s pro-gold stance is well-known, but Grantham’s thinking on the subject is not. This past January, he recommended both gold and silver as “good safe harbors to counter inflation,” in remarks posted at the Chief Investment Officer website.
USAGOLD note: In this editorial, Judy Shelton explores two interrelated questions. First, who is responsible for a sound dollar, Congress or the Fed? And second, who is to blame if the currency crumbles? She then attacks the political process in Washington for essentially defending inflation rather than producing a sound currency. She ends by calling for a commission “to carefully consider how best to secure the integrity of the American currency.” Much could be said about Shelton’s proposal to make the dollar a sound currency via the political process. While we are waiting for that to happen, though, the best alternative for those who share her concerns is to confront the issue by owning sound money outright in the form of gold and silver coins and bullion.
“The correlation between rate hikes and S&P 500 returns indicates that it is not the number of hikes that impacts the market as it is the level of interest rates that suddenly trigger outflows from the market to other securities like bonds. With five proposed rate hikes in the remaining 9 months of the year a similar adverse market reaction could be triggered by the end of the year. However, I submit the larger concern will be the liquidity drain from the Federal Reserve’s aggressive quantitative tightening schedule.”
USAGOLD note: Henning offers an in-depth look at quantitative tightening, i.e., how it will unfold and its potential impact, particularly on stock market volatility. He points out that the Fed now holds 25% of the overall Treasury market. The Fed has purchased 52% of the Treasury Department’s debt issuance in each of the last two years, as shown in the interactive chart below. There are two critical aspects to quantitative tightening the bond market will now be forced to digest. First, the Treasury Department will no longer be depending on the Fed to buy what it cannot place elsewhere forcing it into the open market. Second, the Fed will suddenly turn from net buyer of Treasury debt to net seller. Gapping rates, a tantrum, and in the worst case, a financial panic are all possibilities.
“And the truth is that there are signs everywhere that a pretty profound market regime change is upon us, and that people are only starting to grapple with the implications. The Nasdaq has now given up all of its 2021 gains, and many — like [Third Point’s Dan] Loeb — believe that this is just the beginning of an epic shakeout, rather than the end.”
USAGOLD note: Fascinating look at the degenerating “modern cycle” stock regime. He credits Goldman Sachs’ Peter Oppenheimer with coining the phrase “the post-modern cycle” – an era he says will be characterized by higher inflation, bond yields, labor costs, and commodity prices; regionalization over globalization, and more activist governments. “They don’t ring a bell,” Oppenheimer says, “when the rules of the game are changing.” A must-read at the link……
“The world’s most powerful central bank is about to find out how far it can squeeze financial markets before something breaks. Struggling to tamp down the most pervasive inflation in decades, the Federal Reserve delivered its biggest interest-rate increase since 2000 last week while outlining a plan to begin unwinding trillions of dollars in asset purchases that have kept world markets brimming with cash since the 2020 crash. Its peers will soon follow suit.”
USAGOLD note: Bloomberg polls traders, analysts, and money managers to come up with four sources of potential problems “keeping Wall Street worry warts on edge.” It warns that investors are in for a bumpy ride. We would add that any of the four problem areas covered could suddenly spin out of control inviting a black swan event.
“’The rapid growth of stablecoin issuance could, in time, have implications for the functioning of short-term credit markets,’ Fitch’s analysts said, pointing to a ‘potential asset contagion risks linked to the liquidation of stablecoin reserve holdings.'”
USAGOLD note: This can’t be true, can it? A general financial contagion starting with crypto? Gotta love the not so cryptic reference to Las Vegas.
This Wall Street legend has lived through every bear market since the 1950s. He says the one coming could hit the S+P 500 with a 30% loss
“Bob Farrell, a 90-year-old retiree in Florida, is hardly a household name on Main Street. But on Wall Street, Farrell is an absolute legend. To say that Farrell has seen it all is an understatement.”
USAGOLD note: Nice to have an experienced resource like Bob Farrell giving us the benefit of his knowledge and experience. His “Ten Investing Rules for Tough Markets” is an eye-opener – a list of market verities and insights that every stockholder should read. Farrell now believes that the fun is over – to sell the rallies rather than buy the dips. The tenth entry in his rules list is “bull markets are more fun than bear markets.”
“The U.S. intelligence community assesses Russia is preparing for a ‘prolonged conflict’ in Ukraine that is likely to become ‘more unpredictable and escalatory’ due to a ‘mismatch’ between Vladimir Putin’s ambitions and military capabilities, Director of National Intelligence Avril Haines testified Tuesday.”
USAGOLD note: If the conflict in Ukraine extends to the long term, it will carry profound economic implications including prolonged pressure on the inflation rate. Haines goes on to say that Putin believes Russia has a “greater ability and willingness” to endure the economic challenges resulting from a war of attrition than the West “as food shortages, inflation and energy prices get worse.”
“There is seemingly no corner of the market that is providing a safe haven less than halfway into 2022, and stocks, bonds, and the once high-flying cryptocurrency market are all getting crushed. This means that diversification — a key tenet of a healthy portfolio — has failed to protect investments from a trifecta of risks that include rising interest rates, record inflation, and slowing economic growth.”
USAGOLD note: There is one investment up so far this year against that trifecta of risks. Gold. It’s up over 2%. That doesn’t sound like much until you compare it to the DJIA being down 11.6% and the bond market being down almost 20.6%. In relative terms, that’s a fairly significant swing.
“I’m slightly fearful [inflation] might stick around a while as well – this won’t be come and gone in a matter of months. I think this could be years — rather than months.” – Anthony Haldane, former Bank of England chief economist
USAGOLD note: Haldane is not the only high-profile economist worried about entrenched inflation. Not many, though, have come public with the notion that it could last for years.
Cartoon courtesy of MichaelPRamirez.com