Though Marks’ directs his wisdom to a well-heeled group of readers – primarily professional money managers – it should not be lost on the rest of us. Too much attention these days is focused on the short term and not enough on picking a long-term course of action that makes sense and sticking with it. All of which brings us to the notion of gold and silver as candidates for contrarian consideration. If you were asked to choose the one primary asset “that others haven’t flocked to and caused to be fully valued,” what would it be? It is difficult to read Marks’ advisory (aptly titled, by the way, “I Beg to Differ”) without gold and silver coming to mind – even though, we should add, he never mentions either metal.
“I have found throughout my long investment career that an investor needs to make very few investment decisions in their lifetime. The key is to identify a long-term trend as it begins to emerge, invest in that trend, ride it until it ends and another trend replaces it. As an example, U.S. stocks in the 50s and 60s, commodities in the 70s, Japanese stocks in the 80s, tech stocks in the 90s, commodities in the 2000s, and tech and paper assets in the 2010s. The next trend that is emerging will favor things or hard assets. This is what the gold markets are telegraphing now. This trend will be inflationary driven by resource shortages and a tsunami of money printing.” – James Puplava, Financial Sense, September 2020
Short & Sweet
US FINANCIAL MEDIA WIDELY REPORTED CHINA’S DROPPING TO NUMBER TWO behind Japan as a holder of US Treasury debt last week. What was overlooked in those reports was the rationale behind China cutting its holdings, i.e., a desire by Beijing to avoid ‘the risk of possible conflict’ with Washington, according to the Hong Kong-based South China Morning Post. The article quotes Tan Yaling, head of the Beijing-based China Forex Investment Research Institute, saying that China “could shift its attention to gold” as one of a handful of alternatives under consideration at the Peoples Bank of China. China is both the largest producer and consumer of gold in the world. Should the PBOC decide to go to the open market to partially fill the hole left by US Treasuries liquidations, it could put substantial pressure on physical supplies. Global mine production is already in decline. Three of the top ten producing countries (China, Russia, and Ghana) keep their production at home as a matter of national reserve policy.
IS THE FED DOVISH OR HAWKISH? Is it doing too much or too little to contain the inflation rate? SGH Macro Advisor’s Tim Duy says, “nobody knows what the terminal rate is going to be. We’re in an economy we’ve never seen before.” Though he has a point (these are unpredictable times), we see former Fed governor Larry Lindsay (also quoted in this article) more in tune with what is required. He says the Fed will have to get the fed funds rate above the inflation rate before we have “significant disinflation.” That is in keeping with what we saw in the Volcker era. The following is self-explanatory. It shows the yawning gap between headline inflation and the current Fed funds rate. Up until then, inflation is likely to rule the day.
US inflation rate and the Fed funds rate
Sources: St. Louis Federal Reserve [FRED], Bureau of Labor Statistics
NOURIEL ROUBINI WARNS WE ARE SETTING UP for a stagflationary crisis worse than the 1970s and the Great Financial Crisis. “There are many reasons why we are going to have a severe recession and a severe debt and financial crisis,” he recently told Bloomberg TV. ‘The idea that this is going to be short and shallow is totally delusional.”
IS THE DOLLAR IN A MANIA? Bloomberg columnist Jared Dillian sees signs that it might be and worries that there will come a time when it falls out of favor. “Naturally, betting on gains in the greenback has acquired a huge following,” he says, “even among retail investors, gaining a cult-like status almost equal to the self-described ‘apes’ that cheerlead for meme stock AMC Entertainment Holdings Inc.” Will it suddenly fall out of favor, as is often the case with the latest hot investment? “That,” he adds, “is what inevitably happens when sentiment gets extremely hot,” he says, “and it may be happening now.” With that in mind, it might be wise to consider the extraordinary leverage at work in the currency markets – a prospect that suggests the risk of a meltdown. The Office of Comptroller of the Currency reports notional derivative exposure in FX trading at $43.6 trillion – second only to interest rate derivatives. In other words, though it might seem far-fetched at this juncture, there is potential for a downside just as fearsome as the upside.
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“IT IS ACTUALLY POSSIBLE FOR THIS MODERN MONETARY THEORY IDEA,” writes Tim Worstall of the Adam Smith Institute – government should just print whatever money it needs then spend it – to reach the stage that tying the money supply to the productivity of the mining industry is a good idea. Or, perhaps, it is possible for governments to be so incompetent that it becomes that good idea.” Why is it so difficult for thoughtful individuals to declare themselves gold bugs? We’ve never appreciated the term, but we do appreciate the sentiment attached to it. Though we do not see a gold standard on the horizon, we do see the need for private gold ownership in an environment of declining currency values and rising systemic risks.
DRIVE DOWN MAINSTREET ANYWHERE USA, and it’s the same thing – Help Wanted signs in almost every window. Michael Burry, famous for his economic prescience ( The Big Short), sees the labor shortage as a sign of impending longer-term inflation and simultaneously slams the White House for its recession denial. He may be on to something. If you were to take a poll on that same street, you would likely find that the lack of workers is the greatest challenge facing the business community today. And that is why prices are skyrocketing at almost every retail outlet in America.
Cartoon courtesy of MichaelPRamirez.com
IT USED TO BE THAT GOLD INVESTORS TOOK A GREAT DEAL OF INTEREST in the inflationary implications of the U.S. national debt, but that has gone by the wayside in recent years as Fed monetary policy has taken center stage. Perhaps it is due for a comeback, though, in that much of Fed monetary policy has to do with the voracious needs of the federal government. In a captivating infographic from the Cato Institute, Ryan Bourne recalls Jagadeesh Gokhale’s likening the U.S. national debt problem to an iceberg. The official debts we see above the waterline reflect the consequences of historic borrowing. What really threatens our fiscal future are debts hidden underneath the surface: the contingent liabilities of promises that have been made to an aging population.”
THE IMPACT OF FED POLICY DECISIONS STRETCHES FAR BEYOND U.S. BORDERS. Bear Trap Report’s Larry MacDonald estimates global bank balance sheets are stressed to the tune of $20-$30 trillion in mark to market losses from an array of assets “in the middle of the worst emerging market crisis in decades.” If the Fed stays the course on tightening, he says in an article posted at Zero Hedge, we should “take the tragedy in Sri Lanka and multiply it by ten.” Many economists, at this juncture, “are highly delusional – a very dangerous group indeed,” he says. “When you hike rates aggressively with a strong dollar you multiply interest rate risk, which was already off the charts coming from such a low 2020 base in terms of yield – it’s a convexity nightmare. Interest rate hikes today – hand in hand with a strong U.S. Dollar – carry 100x the destructive power than the Carter – Reagan era.” Such is the stuff of unintended consequences……
“I’M NOT SURE BAILEY OR LAGARDE HAVE THE RIGHT BELIEF SYSTEMS,” writes British analyst Dominic Frisby in his regular MoneyWeek column. “In the case of Lagarde, I’m as sure as dammit the career, and reputational risk would be intolerable to her. So my view, on this side of the Atlantic at least, is that a softly, softly approach will prevail and that interest rates will go up slightly, while those in charge prevaricate and hope that this unfortunate inflationary episode does prove to be temporary and passes. We will have a clearer idea of Powell’s intentions later this week when he makes his announcement.” As it turns out, Jerome Powell did drop hints that the Fed might relent on its hawkishness. Moving along, Frisby recalls the invention of quantitative easing to combat the Great Financial Crisis of 2008, “We all looked on, baffled and blindsided,” he says. “Expect similar rabbits to be pulled out of hats.”
REAL INVESTMENT ADVICE’S LANCE ROBERTS says modern monetary theory policies were tried, and they failed. “[When you provide ‘ free capital,’ he says, “a market-based economy will adjust prices to compensate for the additional demand for products and services. Those primarily living paycheck-to-paycheck see their ‘ disposable incomes” getting ‘ taxed’ away, leaving their standard of living unchanged. … Such is why socialism in any form does not elevate the middle class but shrinks it.” [ Link] Those who advocate and perpetuate MMT will not be deterred by the fact that it created more problems than it solved – including the inflation the Biden administration would like to contain. They are likely to argue instead that we need considerably more of the same.
“A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship.” – Alexander Fraser Tytler, Scottish historian, (1747-1813)
Image attribution: J4lambert, CC BY-SA 4.0 <https://creativecommons.org/licenses/by-sa/4.0>, via Wikimedia Commons
Notable & Quotable
“Historically speaking, if you buy gold when the yield curve inverts and hold that gold for 36 months (three years), you’ll make a solid return. At some point during this period, there will be a wild swing in gold prices, and those who are patient could reap rewards. This has worked like clockwork.…If we take the average of the last three times this happened, the price of gold jumped by about 30%. Assuming something like this happens again, we could be looking at gold that’s well above $2,200 per ounce.” – Moe Zulfiqar, Lombardi Letter
“Yet soaring above all the financial-market turmoil is the US dollar, which is now the strongest it has been in 20 years, having appreciated against many other currencies, including the euro. From a standard currency-valuation perspective, the dollar has reached the point at which many investors might seriously consider selling it. It is probably around 20% overvalued against most major currencies such as the euro and yen, and that simply does not happen very often.” – Jim O’Neil, former chairman, Goldman Sachs Asset Management, Project Syndicate
“So what does this mean? Past performance is no guarantee of future results, but we could be looking at a pullback, if not this year then the next. More specifically, stocks and other risk assets may not have found a bottom yet. From its all-time high in early January, the S&P 500 has fallen 20%, but historically it’s dropped as much as 35% on average when a bear market coincides with a recession. Do with that information as you wish, but I believe it’s wise and prudent to have exposure to gold at this time, between 5% and 10% of your portfolio.” – Frank Holmes, US Global Investors
“Once an investor gets the concept that gold isn’t, say, $1,700 an ounce, but rather the U.S. dollar is 1/1,700th of an ounce of gold, from that point on they view the world in an entirely new way. For example, they understand that the role of gold in a portfolio is not, at least foundationally, as an investment…but rather as insurance against the inevitable loss of purchasing power of currencies. They can appreciate, in a great metaphor that Real Estate Guys’ Russ Gray popularized, that currencies are like skydivers — constantly in free fall. Some are falling more quickly for a few moments, then others take their place in the lead. But they’re all falling.…” – Brien Lundin, Gold Newsletter
“Developments in the US economy have recently been going the Federal Reserve’s way, with price pressures peaking even as economic growth and strong payroll gains have been sustained. But don’t be fooled: The task of getting inflation back to the Fed’s 2% target remains extremely daunting, both practically and politically.” – Bill Dudley, former president of the New York Federal Reserve, Bloomberg
“Today, there is a spreading awareness that our monetary situation is rather rotten. Leaving things up to central bankers, who are obviously making it up as they go along, has not worked out very well. Most recently, these central bankers got very aggressive in response to Covid in 2020; and the “inflation” that has followed has not been very surprising. People generally find monetary affairs to be extremely confusing. But, in the end it really amounts to a choice of two alternatives: The Gold Standard, and the PhD Standard.” – Nathan Lewis, Forbes
“Yes, it’s been a bad year. There’s no question about it. And when this happens, safety becomes ever more important.… Currently, our strategy essentially remains the same. We’re keeping a good portion in cash in U.S. dollars. We also advise keeping your long-term U.S. government bonds and/or bond funds. We’re also keeping our precious metals, shares and resources, and riding through this weakness, which is poised to end soon. And finally, continue to avoid stocks. We think you’ll be glad you did.” – Mary Anne and Pamela Aden, Money Show
“This level of inflation will come as a shock to many, especially those who have been falsely comforted by a US Federal Reserve narrative that, from day one of this inflation episode, has failed to understand the dynamics in play, grasp the seriousness of what’s ahead, and act promptly and decisively to avoid undue harm to so many.” – Mohamed El-Erian, Cambridge economist, Financial Times
“We are approaching an inflection point at which the scope for further rate hikes becomes less feasible, due to the severe impact on indebted businesses and consumers, and policymakers’ focus will likely shift towards protecting employment. We believe the hawkish rate hike programme is now largely priced into the gold sector, hence any shift in policy toward a more accommodative stance should prove a catalyst for the next bull market phase for gold, particularly as inflation, which we believe to be predominantly supply-side driven, is unlikely to be fully tamed by rate hikes.” – Baker Steel Capital Management, LinkedIn
“Historically, equities have been the worst-performing asset in stagflationary periods because they are vulnerable to both falling growth and rising inflation. Other predominantly growth-sensitive assets like credit and real estate also perform poorly. Nominal bonds are closer to flat in such environments.… Within these monetary policy regimes, the relative returns of assets still align with their biases, with index-linked bonds, gold, and commodities giving investors better relative returns regardless of how policymakers respond.” – Bob Prince, Bridgewater Associates, Financial Times
“Inflation oscillates: it’s an idea when it’s not about, and a defining feature when it is. The only other word which comes to mind with similar status is ‘war’. Irrelevant or inexorable – the human mind finds it hard to make a judgement between the two extremes.… Inflation and deflation are generational in scale. Most commentary centres around what inflation will do in the short term – which gives, at best, uninteresting answers, and, more importantly, irrelevant answers. The thought that central bankers can do much to change the broad sweep of inflation is, in my view, far-fetched.” – Jonathan Ruffer, Ruffer Investment Review