Global Debt Exceeds $200 Trillion and is Rising Rapidly

What storm? The Dow Jones Industrial Average (DOW) reached another all-time high. Interest rates in the U.S. are yielding multi-decade lows, some say multi-century lows. Trillions of dollars in global sovereign debt have negative yield and European junk bonds yield less than 10 year U.S. treasuries. “Official” unemployment is low. Borrowing is inexpensive. Things are good, so they say!

I Doubt It!

Do you believe the above is a fair and accurate representation of our economic world? If so, how do you explain the following?

  • Global debt exceeds $ 200 trillion and is rising rapidly. This massive debt will NOT be paid back in currencies with 2017 purchasing power. Debt MUST be rolled over in continually DEVALUING dollars, euros, yen and pounds.
  • The financial system rolls over maturing debt, adds more, and pretends repayment will not be problematic. Those who hope this will remain true ignore the lessons of history, including sky-high interest rates in the late 1970s, the Asian and Long Term Capital crises in the late 1990s, many defaults and hyperinflations in the last century and the credit-crunch-recession-market-crash of 2008.
  • Official inflation statistics show that consumer price inflation is low – supposedly in the two percent range. However, if you pay for health care, hospital bills, prescription drugs, Obamacare, beer, cigarettes, college tuition, fresh vegetables, processed food, auto insurance, and many other necessities, you know better. The Chapwood Index agrees with your experience. Their statistics show consumer price inflation is much higher than official numbers.
  • National debt – the official debt of the U.S. government exceeds $ 20.5 trillion – more than the U.S. Gross Domestic Product. The debt has increased exponentially (straight line on a log scale chart) for the past century.

  • Interest paid on the official national debt is approximately $ 500 billion per year and climbing. Congress is influenced by the financial elite and will not operate within a balanced budget. Therefore the U.S. will pay more interest each year.

  • U.S. government expenditures increase every year. Since annual revenues are less than expenses by a trillion or so, the shortfall is borrowed. Hence national debt rises every year and interest must be paid on ever-increasing debt.

  • Debt, out-of-control expenses, and economic craziness are universal in our current system. Race, gender, and political party make no material difference. Why should they? Corporations, politicians, lobbyists, military contractors, Big Pharma and individuals want more dollars to spend every year and the government satisfies everyone by adding to the debt load.
  • Debt and currency in circulation rise far more rapidly than growth of the economy which must support the debt. HENCE PRICES RISE.
  • Rising consumer prices are essential to a financialized economy. Do you remember prices in 1970? If you don’t, examine the following overview.

What Could Improce Our Finance World?

  • Balanced budgets and honest accounting at all levels of government. Not likely.
  • Honest currency units, currency units created from productive effort, not units conjured out of “thin air” by central banking and commercial
  • Global peace. Military and defense expenses could be reduced to a fraction of current levels. Redirect those resources toward more productive purposes. All but impossible!
  • Political honesty, absence of corruption and effective, non-intrusive government. Hmmmmm. Maybe we should write to our congressmen.

What Could Make Our Economic World Worse, but we Hope Does Not Occur?

  • Wars with North Korea, Iran, Russia, China, and others.
  • Hyperinflation in western countries, because central banks will be forced to “print” an almost unlimited number of currency units to address their self-created financial problems.
  • Derivatives implosion (remember 2008), nuclear war, electromagnetic pulse weapons, and global plague.

Prognosis:

The world will muddle through its problems in spite of wars, pestilence, corruption, central bankers, and self-serving politicians. Based on centuries of economic history, we should expect increasing financial trauma, periodic market crashes, devalued currencies, debt defaults, and … that someone else will be blamed.

What Can We Do for Self Protection?

  • Realize that markets rise and fall. The stock markets have enjoyed a long bull market while many commodities are relatively inexpensive. Expect a reversal, perhaps soon.
  • Buy silver and gold. Why buy metals? They have been real money and a store of value for centuries. They are currently undervalued compared to total debt and the stock market. See below.

Graph silver prices divided by the official U.S. national debt. Silver prices have increased less rapidly than exponentially increasing national debt for 25 years, and are currently selling for multi-decade lows compared to national debt. National debt will increase 8 – 10% per year and silver prices will rise more rapidly in coming years.

Graph silver prices divided by the S&P 500 Index. Silver prices are currently near a two-decade low when compared to the S&P 500 Index. Silver prices will rise and the S&P will correct, possibly soon.

Based on decades of history, silver prices are inexpensive compared to exponentially increasing national debt and stock market prices. Silver prices will rise compared to both, perhaps soon.

Conclusions:

  • Debt and government expenses are excessive and too large for the economy to support. However, they exponentially increase.
  • Positive change is possible but given the massive economic resistance from debt, central banker intrusion into markets, and over-valued stock markets, significant improvement in revenues, debt loads and balance sheets seems unlikely.
  • Expect a reversal in stock market prices. Expect gold and silver prices will rebound much higher in 2018. Guaranteed – no! Likely – yes!
  • Silver and gold will protect your savings, retirement assets and purchasing power from continual currency devaluations, central bank policy errors, and excessive government debt.

Precious Metals News & Analysis – Gold News, Silver News




Gold’s Global Supply Artery: Heading for Cardiac Arrest

An oceanic-scale demand push from “all parts Far East” is building, as the desire to own gold and silver promises to place an increasingly solid foundation for years to come.

China, India, and Southeast Asia have historically accumulated precious metal as a savings vehicle, a hedge against political uncertainty (e.g. India’s surprise call-in last year of 80% of the country’s paper currency), and as an expression of affection. China’s newly-emerging affluent middle class alone is set to become larger than the population of the U.S. Frank Holmes collectively refers to these elements as “love and fear trades”.

China’s One Belt-One Road (OBOR) Initiative – the world’s largest-ever construction project – is designed to link 60% of the world’s population in a cooperative financial and economic matrix. Taken together, the continued migration of gold supply from West to East is baked into the cake.

For a deeper understanding of how and why China is leading the charge – and going about capturing an outsized portion of the global gold supply – see my essay from last summer, titled China’s Get the Gold Plan: Part II.

Even as the West ships much of its remaining gold eastward (largely via Swiss refineries who “repurpose” it into .9999 fine gold), countries like Germany and Turkey have stepped up to the plate, becoming noteworthy demand drivers in their own right.

Fund managers are finally realizing that gold deserves to be a permanent portfolio asset holding category. In The Morgan Report and in Riches in Resources, David Morgan has written extensively about this for both individual investors and institutional clients. Just one more “silent lever” by which a long-term, rock-solid foundation is being built under gold’s demand… and price.

Gold Supply Vein Seizures

Metaphorically-speaking, available data strongly suggests (with evidence mounting sharply since 2015), that over the next few years an ongoing narrowing of the global gold supply’s veins and arteries is leading to a series of demand seizures, climaxing in a systemic “heart attack”.

Peak Production is Expected ~2015 (Chart)

As of 2017-18, this trend shows no signs of abating

South Africa’s Gold Production Keeps Heading Further South

South Africa’s Witwatersrand Basin has been the source of almost 40% of all the gold ever recovered. But the government has become so obdurate that its current declining rank as the world’s 7th largest producer looks set to fall even more.

They have once again decided to “amend” the country’s mining code, demanding higher royalties and increased Black Empowerment participation, leading to a dire warning from the rating agency Moody’s. It states that “If the substantial expansionary investment required to reconfigure loss-making mining operations and make them profitable is not forthcoming, mines will either be restructured or closed.”

South Africa’s next move on the resource supply chessboard follows recent gambits against other large gold producers in Indonesia (Freeport) and Tanzania (AngloGold). Dave Forest, who keeps track of this in his letter, Pierce Points, remarks:

Mining “nationalism” has re-introduced one of the most crippling elements a mining producer – or explorer can face…unpredictability.

If there is no certainty that some sort of “rule of law” will prevail, then trying to anticipate/ predict how much gold and copper will/can be produced in a given operation flies out the window. Look how much is going on right now as gold hovers “merely” around $ 1,300 per ounce. What do you think that this witches’ brew of greed, corruption, power-grabbing and incompetency is going to produce when gold trades – as it will before long- at $ 2,000, $ 3,000, $ 5,000 or more?

Even without heavy-handed regulations, South African mining would be facing increasing costs as they go deeper to access gold and platinum. The way things are going, the last nails in the coffin appear set to be hammered into place. In the early 1970s, annual production topped out at an amazing 1,000 tons. Since 2000, gold production has literally fallen off a cliff, as it spirals downward toward a paltry 200 tons/year.

South Africa's Gold Output has Benn in Steady Decline for More than 45 Years (Chart)

Courtesy sources as listed.

When a Gold Giant Speaks, You Should Listen…

Pierre Lassonde is a giant in the mining business. In 1982, he co-founded Franco-Nevada, the first publicly-traded gold royalty company, which now has a seven billion dollar market cap. He played a critical role in the growth of Newmont Mining, the world’s second largest gold producer. When he speaks, you and I should pay attention… In a recent interview, discussing the global gold supply going forward, Lassonde said:

Production is declining and this is going to put an enormous amount of pressure on prices down the road. If you look back to the 70s, 80s, and 90s, in each of those decades the industry found at least one 50+ million ounce gold deposit, at least ten 30+ million ounce deposits and countless 5 to 10 million ounce deposits. But if you look at the last 15 years, we found no 50 million ounce deposit, no 30 million ounce deposit, and only very few 15 million ounce deposits. So where are those great big deposits we found in the past? How are they going to be replaced? We don’t know. We do not have those ore bodies in sight…

They have not put anywhere near enough money into research and development, particularly for new technologies with respect to exploration and processing… it takes around seven years for a new mine to ramp up and then come to production. So it doesn’t really matter what the gold price will do in the next few years: Production is coming off and that means the upward pressure on the gold price could be very intense.

Average Number of Years Between Discovery and Production

You Can’t Fight a War – or Produce Gold – without Reserves

Of the 5 formal categories estimating the amount of economically-recoverable gold a mining company has in the ground, “Reserves” ranks highest. The other 4 categories decline in estimated value and the likelihood they will ever be profitably recovered. As of this year, global gold reserves barely equal those prevailing in 2004 – the very beginning of the current metal’s bull run. This, despite gold having risen from $ 250 to (briefly) $ 1,900 the ounce, and now around $ 1,280.

The inescapable truth is that every ounce of mined gold that is not replaced by a new reserve places a producer just that much closer toward going out of business.

The trend of annual declining gold yields is well-established.

This Is the Calm before the Storm

Do not be lulled into complacency by this year’s muted U.S. gold and silver sales figures.

“High grading” – mining the best ore bodies first in order to remain profitable, lack of exploration success in replacing reserves in spite of increased funding, and elevated “country risk” around the globe are placing declining supply on a collision course with increasing demand.

Establish and keep adding to your gold “stash” now while the price is favorable. Don’t be shut out when an unpredictable but inevitable “gold supply heart attack” takes place.

Precious Metals News & Analysis – Gold News, Silver News




Global Silver Demand Still Double Pre-2008 Market Crash Level (Despite Decline)

While physical silver investment demand experienced a pronounced decline this year, the volume is still much larger than the level prior to the 2008 U.S. Housing and Banking Crash. Investors frustrated by a silver market plagued with lousy sentiment and weak demand, may not realize that silver bar and coin demand is projected to be double what it was in 2007.

Thus, long-term precious metals investors continue to acquire silver on price dips while others may be selling out and placing their bets into the bubble stock market or cryptocurrencies. It’s not the larger precious metals investor who is worried about the short-term price, rather its the smaller investor.

Regardless, according to the Silver Institute’s 2017 Interim Report, global silver bar and coin demand are projected to fall to 130 million oz (Moz) in 2017 compared to 206 Moz last year. Even though physical silver investment demand will drop by 37% this year, it will still be more than double the 62 Moz in 2007:

Global Silver Bar & Coin Demand (2007-2017f)

Furthermore, silver bar and coin demand in 2012 was only 29 Moz higher than the estimate for this year, but the price was nearly double at $ 30 an ounce. As we can see, precious metals investors continued to purchase record amounts of silver bar and coins in 2013, 2014 and 2015 with the hope that prices would eventually start to head higher. However, the majority of the market’s funds since 2012 flowed into STOCKS, BONDS, and REAL ESTATE.

Then after the election of President Trump to the Whitehouse, along with falling precious metals sentiment, investors pulled back on gold and silver investment purchases. From what I have heard through the grapevine, precious metals dealer sales this year are down about 40% across the board. And of course, the massive price increase in Bitcoin and the cryptocurrencies starting in March of this year funneled money away from the metals.

With the new rush of investors into the Bitcoin market mania, several alternative media analysts have given up on precious metals and are now touting cryptocurrencies as the best place to be. In fact, some have stated that gold is no longer useful as a monetary instrument because cryptos will take over this role. Unfortunately, these analysts, just like our mainstream media counterparts, have simply forgotten about the terrible ENERGY PREDICAMENT we are facing. It’s almost as if the lure of $ 100,000 Bitcoin has totally destroyed their ability to understand that fundamentals still matter…. especially the Falling EROI – Energy Returned On Investment.

Yes, it’s nice to have been one of the fortunate individuals who purchased Bitcoin back when it was $ 100 (or even less). But, as I stated, the world is still facing a severe energy predicament that Bitcoin or the cryptos can’t solve. When I listen to interviews where analysts say we are moving into a new high-tech world, I wonder where on earth they think we are going to get the energy to run all this stuff. Even though I enjoy watching Sci-Fi movies, it’s totally unrealistic to build spaceships that can be a mile long. The very day after the spaceship is built, all its components and parts start to break down. The more complex the parts, the faster they breakdown.

People need to realize that technology won’t solve our energy predicament, it only makes it worse. Thus, the more complex the technology, the more energy it consumes. So, when someone thinks that, “technology will solve our problems,” then they must also believe in the ENERGY TOOTH FAIRY… a term coined by Louis Arnoux.

I bring up these points because precious metals will still be one the best stores of value in the future as global oil production peaks and declines. We also must remember, the world runs on liquid fuels, not electricity. Even though we see more electric vehicles on the road, they can’t be manufactured without the burning of COAL, NATURAL GAS or OIL. Hence, renewable energy sources such as wind, solar and electric cars are nothing more than fossil fuel derivatives.

Okay, getting back to silver. The GFMS Team at Thomson Reuters, who provide the data for Silver Institute, forecast that global silver production will decline to 870 Moz in 2017:

World Silver Mine Production (2007-2017f)

As we can see in the chart, world silver mine supply peaked in 2015 at 894 Moz and will decrease by 24 Moz in 2017. However, I believe actual global silver production will be less when all the data comes in. Regardless, once the U.S. and worldwide markets finally crack, world silver production will fall even faster. This will be due to the drop in demand for base metals where 58% of global silver production originates (35% byproduct of zinc-lead production and 23% byproduct of copper production).

One segment of the silver market that experienced an uptick was industrial silver fabrication. Global industrial silver fabrication is projected to increase by 19 Moz this year to a total of 581 Moz. However, this increase is still far below the record high of 661 Moz set in 2011:

Global Silver Industrial Fabrication (2007-2017f)

The majority of the rise in world silver fabrication was due to higher usage in solar PV manufacture and electronics. Even though the global demand for silver by the solar industry will continue to increase over the next few years, it won’t be the driving force in determining the silver price in the future. Instead, the collapse in the value of STOCKS, BONDS, and REAL ESTATE, due to the disintegrating oil industry, will be the factor that forces investors to protect their wealth in gold and silver.

Precious Metals News & Analysis – Gold News, Silver News




Global Gold Investment Demand To Overwhelm Supply

When the next market crash occurs, global gold investment demand will likely overwhelm supply. When this occurs, we could finally see the gold price surpass its previous high of $ 1,900. Now, this isn’t mere speculation, as we already have seen this taking place in the past. When the broader markets crashed to the lows in Q1 2009 and the 10% correction in Q1 in 2016, these periods were to two highest quarters of Gold ETF investment demand.

I don’t really care on whether the physical gold is actually in the Gold ETF’s, rather I like to look at it as an important indicator that shows us how much investor fear there is in the market. Moreover, with the amount of leverage and debt now in the system, when the market crashes this time around, it will push gold investment demand up to a record we have never seen before.

The chart below shows the amount of physical global gold investment demand over the past 14 years. As the gold price increased, so did amount of gold bar and coin demand:

Global Physical Gold Bar & Coin Demand

As we can see, during the U.S. Banking and Housing Market crash in 2008, gold bar and coin demand doubled to 868 metric tons (mt), up from 434 mt in 2007. That was quite a lot of gold bar and coin demand as it totaled nearly 28 million oz (1 metric ton = 32,150 oz). Furthermore, as the gold price jumped to $ 1,571 in 2011, gold bar and coin demand shot up to nearly 1,500 mt (48 million oz).

Now, the reason for the huge spike in physical gold investment in 2013 was due to the huge price smash as the gold price fell from nearly $ 1,700 in the beginning of the year to a low of $ 1,380 by the middle of April. Investors thought this was a huge sale on gold so demand for bars and coins reached a new record of 1,716 mt.

However, net gold investment demand in 2013 was only 804 mt because Gold ETF’s experienced a massive outflow of 912 mt. Basically, the gutting of the Gold ETF’s by the gold price takedown allowed investors to purchase that record amount of gold bar and coin. Moreover, Gold ETF flows continue to be negative in 2014 and 2015. Over the three years, (2013-2015) a total of inventory of the world’s Gold ETF’s declined by 1,221 mt. Thus, net global gold investment remained below 1,000 mt from 2013 to 2015.

But, this changed in 2016 when the U.S. stock market experienced a 2,000 point drop during the first quarter. The Dow Jones Index fell from 17,500 in the beginning of January to a low of 15,500 within a month:

Dow Jones Index Q1 2016

During this first quarter of 2016, Gold ETF inflows spiked to 349 mt, up from a net outflow of 66 mt in Q4 2015. You see, gold continued to flow out of Gold ETF’s right up until the point the market fell 11% in the first quarter of 2016. As I mentioned before, the only other quarter that experienced a higher amount of Gold ETF inflows was the first quarter of 2009 when the Dow Jones was falling precipitously to a low of 6,600 points. Gold ETF inflows surged to 465 mt in Q1 2009 versus 95 mt Q4 2008.

We must understand that investors panicked into gold during a lousy 11% in Q1 2016 in similar fashion to the market meltdown in the first quarter of 2009. Thus, investors are likely to rush into gold to a much larger degree during the next market crash.

Taking these factors into consideration, I produced the following chart:

Global Gold Investment Demand During Market Crash & $ 2,000 Gold Price

Now, assuming current market conditions, investors will purchase roughly 1,050 mt of gold bar and coin and 250 mt of Gold ETF’s for a total of 1,300 mt. However, I believe the next big market crash could push global physical gold bar and coin demand to 3,000 mt. This will have a significant impact on the price as available supply vanishes. We could easily see a $ 2,000 gold price as the stock market crashes by 25-50%.

Again, we have evidence that the gold price surged by $ 200 when the Dow Jones fell by only 11% in the first quarter of 2016:

Gold Price Q1 2016

Today, it’s a totally different ballgame. Not only is the gold price almost trading at $ 1,300, the Dow Jones Index is 6,000 points higher than what it was at the beginning of 2016. If the Dow Jones experienced another severe 10-15% correction, we could easily see gold move up by $ 200. So, what happens when the markets tank by 25-50%? And what about gold demand?

As I stated above, we could see total gold investment demand surpass 3,000 mt when the stock market crashes. This is bad news because there won’t be the available supply… maybe at much higher prices. Furthermore, the highest annual total net gold investment was 1,730 mt in 2011. This included 1,498 mt of bar and coin as well as 232 mt in Gold ETF demand. But, we must remember, there wasn’t a stock market crisis in 2011. Thus, Gold ETF demand was in the normal range.

Mainstream investors are the wild card. By that, I mean when the markets turn south in a big way, they are going to go totally wild. While physical gold demand in the U.S. is down 50% compared to last year I don’t look at it as being negative, instead it indicates a bottom or low in precious metals sentiment. The situation in the precious metals market can turn around on a dime.

Lastly, when total global gold investment demand surges to 3,000 mt in one year, it will put a great deal of pressure on available supplies. Total global gold annual supply is approximately 4,500 mt. However, we also have to include jewelry (2,000 mt), technology (200 mt), and Central Bank demand (300 mt). So, if we experienced 3,000 mt in total gold investment and added all other demand it would equal 5,500 mt. This would be 1,000 mt more than supply. The highest annual deficit the market experienced was 198 mt in 2013. The world has never suffered a 1,000 mt deficit.

For this reason, Central Banks make sure investors continue to put their funds into the Greatest Paper Ponzi Scheme in history rather than in a very rare precious metal called gold. There is one thing for sure, all Ponzi Schemes collapse, but a 2,000+ year history of sound gold money won’t be forgotten.

Precious Metals News & Analysis – Gold News, Silver News




How The Elite Dominate The World – Part 5: The Endgame Is Complete And Utter Global Domination

Do you want your children and grandchildren to grow up in a global socialist “utopia” in which everything about their lives is micromanaged by bureaucrats working for a worldwide system of government instituted by the elite?  To many of you this may sound like something out of a futuristic science fiction novel, but the truth is that this is exactly where the elite want to take us.  This is their endgame.  Their agenda has been quietly moving forward for decades, and if we don’t take a stand now, future generations of Americans could very well end up living in a dystopian nightmare with none of the liberties or freedoms that we enjoy today.

Bill Clinton’s mentor at Georgetown University, Dr. Carroll Quigley, wrote about this network of elitists in a book entitled Tragedy and Hope

In fact, this network, which we may identify as the Round Table Groups, has no aversion to cooperating with the Communists, or any other groups, and frequently does so. I know of the operations of this network because I have studied it for twenty years and was permitted for two years, in the early 1960’s, to examine its papers and secret records. I have no aversion to it or to most of its aims and have, for much of my life, been close to it and to many of its instruments…my chief difference of opinion is that it wishes to remain unknown, and I believe its role in history is significant enough to be known…because the American branch of this organisation (sometimes called the “Eastern Establishment”) has played a very significant role in the history of the United States in the last generation.

In other parts in this series, I have discussed the tools that the elite are using to achieve their goals.  In part I, I talked about how debt is used as a tool of enslavement, and in part II I explained how central banking is a system of financial control that literally dominates the entire planet.  Professor Quigley also mentioned this system of financial control in his book

“The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole.”

Today, a system of interlocking global treaties is slowly but surely merging us into a global economic system.  The World Trade Organization was formed on January 1, 1995, and 164 nations now belong to it.  And every time you hear of a new “free trade agreement” being signed, that is another step toward a one world economy.

Of course economics is just one element of their overall plan.  Ultimately the goal is to erode national sovereignty almost completely and to merge the nations of the world into a single unified system of global governance.

The United Nations is the apex of this planned structure, and the globalists are always looking for ways to transfer more power to this institution.  For example, that is what the Paris Climate Accord was all about.  Since the climate affects everyone, it gives the globalists a perfect excuse to argue that the world needs to “work together”.  The following comes from the official UN website

To address climate change, countries adopted the Paris Agreement at the COP21 in Paris on 12 December 2015. The Agreement entered into force less than a year later. In the agreement, all countries agreed to work to limit global temperature rise to well below 2 degrees Celsius, and given the grave risks, to strive for 1.5 degrees Celsius.

Implementation of the Paris Agreement is essential for the achievement of the Sustainable Development Goals, and provides a roadmap for climate actions that will reduce emissions and build climate resilience.

“Protecting the environment” sounds like a reasonable goal, right?

Well, when you click on the link for the “Sustainable Development Goals”, it sends you to a website where you can read about the 17 pillars of the plan to “end poverty, protect the planet, and ensure prosperity for all” that were agreed to by all of the members of the UN in September 2015.

This plan is also known as “Agenda 2030”, and when you dig into the details of this plan you quickly realize that it is literally a blueprint for global government.

Sadly, most Americans don’t realize this, and neither do they understand that this has been the goal of the elite for a very long time.  For instance, during an address to the General Assembly of the United Nations in 1992, President George H.W. Bush made the following statement

It is the sacred principles enshrined in the United Nations charter to which the American people will henceforth pledge their allegiance.

Say what?

Once you start looking into these things, you will see that the elite are very openly telling us what they intend to do.

One of my favorite examples of this phenomenon is a quote from David Rockefeller’s book entitled Memoirs

Some even believe we are a part of a secret cabal working against the best interests of the United States, characterizing my family and me as ‘internationalists’ and of conspiring with others around the world to build a more integrated global political and economic structure – one world, if you will. If that’s the charge, I stand guilty and I am proud of it.

As David Rockefeller openly admitted, they are “internationalists” that are intent on establishing a one world system.

Candidates for Congress are not supposed to talk about this stuff, but if I am elected I am promising to fight the globalists on every front.

We are literally in a battle for the future of our children and our grandchildren.  If the globalists have their way, American sovereignty will continue to erode and the United States will slowly but surely be merged into a one world system.

But that isn’t going to happen on our watch.  Those of us that love liberty and freedom are going to take this country back, and we will never stop fighting the insidious agenda of the globalists.

Michael Snyder is a Republican candidate for Congress in Idaho’s First Congressional District, and you can learn how you can get involved in the campaign on his official website. His new book entitled “Living A Life That Really Matters” is available in paperback and for the Kindle on Amazon.com.

The Economic Collapse




The Global Macro Renaissance

John Curran was the former head of commodities at Caxton Associates — the hedge fund founded by market wizard Bruce Kovner.

He wrote a great article in Barron’s titled The Coming Renaissance of Macro Investing. In the piece, John writes about what he sees as the coming paradigm shift in markets and how this shift will lead to the resurgence of macro investing. Here’s a snippet from the article:

In meetings with fund managers, asset allocators, and analysts, I have found a virtually universal view that macro investing—investing based on global macroeconomic and political, not security-specific trends—is dead, fueled by investor money exiting the space due to poor returns and historically high fees in relation to performance. This is what traders refer to as capitulation. It occurs when most market participants can’t take advantage of a promising opportunity due to losses, lack of dry powder, or a psychological inability to proceed because of recency bias.

It’s a great article and I suggest you read it. I agree with his main points, especially that we’re on the verge of a macro renaissance (I’ve written about this quite a bit recently) and how the market is ill-positioned for this. In other words, the consensus is wrong.  

Consensus’ in the market has a long history of being wrong. There’s good reason for this.

Expectations become embedded in price. And due to the common knowledge herding tendency of the market, dominant narratives (consensus) eventually become over-embedded in that price. The market becomes priced for a very narrow outcome set so any deviation from this predicted future leads to large price swings.

So while consensus narrative adoption can be self-fulfilling in the short-term (ie, it drives the trend the more popular it becomes) it’s ultimately self-defeating in the end. Because the consensus is built off looking at the past while the future is always changing. And even more importantly, market consensus today always changes the future set of outcomes due to the reflexivity inherent in markets (ie, beliefs today change outcomes tomorrow). Thus we get the boom and bust cycles that George Soros so often talked about.

This is why we want to identify consensus embedded in market prices along with alternative future outcomes and potential catalysts that could shatter this consensus. Popular narrative changes equate to profit opportunities.

The famous hedge fund manager, Michael Steinhardt, wrote about how he and his firm went about doing this in his book No Bull:

I defined variant perception as holding a well-founded view that was meaningfully different from market consensus. I often said that the only analytic tool that mattered was an intellectually advantaged disparate view. This included knowing more and perceiving the situation better than others did. It was also critical to have a keen understanding of what the market expectations truly were. Thus, the process by which a disparate perception, when correct, became consensus would almost inevitably lead to meaningful profit. Understanding market expectation was at least as important as, and often different from, fundamental knowledge.

As a firm, we soon found that we excelled at this… Having a variant perception can be seen benignly as simply being contrarian. The quintessential difference, that which separates disciplined, intensive analysis from “bottom fishing,” is the degree of conviction one can develop in one’s views. Reaching a level of understanding that allows one to feel competitively informed well ahead of changes in “street” views, even anticipating minor stock price changes, may justify at times making unpopular investments. They will, however, if proved right, result in a return both from perception change as well as valuation adjustment. Nirvana.

I’ve been writing lately about how the budding market consensus is that inflation will remain low… and that this low inflation is due to structural reasons (even though no one’s sure exactly what these structural reasons are). The asymmetry to the inflation trade is to the downside; meaning any surprises to inflation will lead to lower numbers.

This is why bonds are priced so high (and yields so low) and volatility is nonexistent because no one is expecting inflation to rear its ugly head.

But I’ve also written how our intellectually advantaged disparate view, as per our Investment Clock framework, is that inflation is set to materially pick up going into the end of the year as we enter the Overheat phase of the investment cycle.

The inflationary pressures that come with this phase will be exacerbated by the largest increase in the global middle class that the world has ever experienced (+$ 4 billion people will move up in income over the coming decade). We call this the Wealth S-curve Tipping Point and it’s being primarily driven by India and will result in exponential increases in commodity demand in the years ahead.

Not only are the inflationary pressures building but the skewness of the inflationary trade is building, and not in favor of the market’s narrative. And that’s because of the many political developments around the world that could result in inflationary shocks. (Think the scrapping of NAFTA and the increasing use of tariffs or breakout of war.)

So we have a consensus market view of lower inflation for longer. This narrative is driving the financial news cycle, where journalists consciously or unconsciously cherry pick the data to confirm the market belief while ignoring disconfirming evidence. And this further drives the narrative adoption which is being overly reflected in market prices — and these market prices are likely to be wrong.

This means that it will only take a couple prints of higher inflation numbers to shake the consensus view and drive a large repricing of market assets. This means an asymmetric profit opportunity for global macro traders like us who are positioning on the other side of the market.

And I’m seeing many asymmetric opportunities at the moment. Some we’re in and some we’ll be getting into shortly.

John Curran concluded his Barron’s article with the following:

As my mentor, Bruce Kovner [the founder of Caxton Associates] used to say, “Nobody rings a bell at key turning points.” The ability to properly anticipate change is predicated upon detached analysis of fundamental information, applying that information to imagine a plausible world different from today’s, understanding how new data points fit (or don’t fit) into that world, and adjusting accordingly. Ideally, this process leads to an “aha!” moment, and the idea crystallizes into a clear vision.

Winners anticipate changes before the market. Right now the market expects low inflation and low volatility for longer. We’re anticipating and positioning otherwise.

If you’re interested in seeing how we’re positioned, check out the Macro Intelligence Report (MIR) here.

 

 

The post The Global Macro Renaissance appeared first on Macro Ops.

Macro Ops




How The Elite Dominate The World – Part 2: 99.9% Of The Global Population Lives In A Country With A Central Bank

Even though the nations of the world are very deeply divided on almost everything else, somehow virtually all of them have been convinced that central banking is the way to go.  Today, less than 0.1% of the population of the world lives in a country that does not have a central bank.  Do you think that there is any possible way that this is a coincidence?  And it is also not a coincidence that we are now facing the greatest debt bubble in the history of the world.  In Part I of this series, I discussed the fact that total global debt has reached 217 trillion dollars.  Once you understand that central banks are designed to create endless debt, and once you understand that 99.9% of the global population lives in a country that has a central bank, then it finally makes sense why we have accumulated so much debt.  The elite of the world use debt as a tool of enslavement, and central banking has allowed them to literally enslave the entire planet.

Some of you may not be familiar with how a “central bank” differs from a normal bank.  The following definition of a “central bank” comes from Wikipedia

A central bank, reserve bank, or monetary authority is an institution that manages a state’s currency, money supply, and interest rates. Central banks also usually oversee the commercial banking system of their respective countries. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the monetary base in the state, and usually also prints the national currency,[1] which usually serves as the state’s legal tender.

Over the past 100 years or so, we have seen central banks steadily be established all over the planet.  At this point, there are just 8 very small nations that still do not have a central bank…

-Andorra
-Monaco
-Nauru
-Kiribati
-Tuvalu
-Palau
-Marshall Islands
-Federated States of Micronesia

When you add the populations of those 8 nations together, it comes to much less than 0.1% of the global population.

But even though central banking is nearly universal, only a very small fraction of the global population can tell you how money is created.

Do you know where money comes from?

Here in the United States, most people just assume that the federal government creates money.  But that is not true at all.

Many are absolutely shocked when they discover that U.S. currency is actually borrowed into existence.  The federal government gives U.S. Treasury bonds (debt) to the Federal Reserve in exchange for money that the Federal Reserve creates out of thin air.  The Federal Reserve then auctions off those bonds to the highest bidder.

Since the federal government must pay interest on those bonds, the amount of debt that is created in these transactions is actually greater than the amount of money that is created.  But we are told that if we can just circulate the money throughout our economy fast enough and tax it at a high enough rate, then we can eventually pay off the debt.  Of course that never actually happens, and so the federal government always has to go back and borrow even more money.  This is called a debt spiral, and at this point we will never be able to escape it until we do away with this horrible system.

But why does our government (or any government for that matter) have to borrow money that is created by a central bank in the first place?

Why can’t governments just create money themselves?

Oops.  That is the big secret that nobody is supposed to talk about.

Theoretically, the U.S. government doesn’t actually have to borrow a single penny. Instead of borrowing money the Federal Reserve creates out of thin air, the federal government could just create money directly and spend it into circulation.

Yes, this could actually happen.  Back in 1963, President John F. Kennedy signed Executive Order 11110 which authorized the U.S. Treasury to issue debt-free “United States Notes” which were not created by the Federal Reserve.  These debt-free notes began to be issued, and you can still find them for sale on eBay today.  Unfortunately, President Kennedy was assassinated shortly after this executive order was issued, and the notes were not in production for long.

If we had ultimately fully adopted “United States Notes” and had phased out Federal Reserve notes, we would not be 20 trillion dollars in debt today.

The elite of the world love to get national governments deep into debt, because it enables them to enslave entire populations while making an obscene amount of money in the process.

Back in 1913, an insidious plan was rushed through Congress just before Christmas that was based on a blueprint that had been developed by very powerful Wall Street interests.  Author G. Edward Griffin did an extraordinary job of documenting how all of this happened in his book entitled “The Creature from Jekyll Island: A Second Look at the Federal Reserve”.  A central bank was established, and it was purposely designed to create a government debt spiral, and that is precisely what happened.

Since 1913, the size of the national debt has gotten more than 6,000 times larger, and the value of our dollar has declined by more than 98 percent.  Many conservatives are still under the illusion that we could get out of debt someday if we just grow the economy fast enough, but I have shown in another article that we have gotten to the point where this is mathematically impossible.

And most people are also operating under the false assumption that the Federal Reserve is part of the federal government.  But that is not accurate either.  The following comes from one of my previous articles

There is often a lot of confusion about the Federal Reserve, because a lot of people think that it is simply an agency of the federal government. But of course that is not true at all. In fact, as Ron Paul likes to say, the Federal Reserve is about as “federal” as Federal Express is.

The Fed is an independent central bank that has even argued in court that it is not an agency of the federal government. Yes, the president appoints the leadership of the Fed, but the Fed and other central banks around the world have always fiercely guarded their “independence”. On the official Fed website, it is admitted that the 12 regional Federal Reserve banks are organized “much like private corporations”, and they very much operate like private entities. They even issue shares of stock to the private banks that own them.

In case you were wondering, the federal government has zero shares.

According to the U.S. Constitution, a private central banking cartel should not be issuing our currency.  In Article I, Section 8 of our Constitution, Congress is solely given the authority to “coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures”.

So why in the world has this authority been given to a central bank?

The truth is that we do not need a central bank.

From 1872 to 1913, there was no central bank and no income tax, and it turned out to be the greatest period of economic growth in all of U.S. history.

But since the Fed was established, there have been 18 different recessions or depressions: 1918, 1920, 1923, 1926, 1929, 1937, 1945, 1949, 1953, 1958, 1960, 1969, 1973, 1980, 1981, 1990, 2001, 2008.

Abolishing the Federal Reserve is one of the core issues of my platform, and I have been writing about these things for the last seven years.

As I discussed yesterday, the elite use debt to enslave all of the rest of us, and central banking allows them to literally dominate the entire planet.

Until we abolish this debt-based system and go to a currency that is debt-free, we are never going to permanently solve our very deep long-term economic and financial problems.

But because they are so immensely wealthy, the elite are able to wield extraordinary influence in our society.  They control the mainstream media, our politicians and even global institutions such as the United Nations.  Anyone that would dare to question the validity of the current system is marginalized, and for a long time very few politicians around the world were even willing to speak out against central banking.

However, that is starting to change.  A new generation of leaders is rising up, and they are absolutely determined to break the stranglehold that the elite have on our society.  It won’t be easy, but if we are able to wake enough people up, I believe that we will eventually be able to free ourselves from this insidious system.

Michael Snyder is a Republican candidate for Congress in Idaho’s First Congressional District, and you can learn how you can get involved in the campaign on his official website. His new book entitled “Living A Life That Really Matters” is available in paperback and for the Kindle on Amazon.com.

The Economic Collapse




The Best Trading Podcasts For Global Macro Investors

These days we’re flooded with information with barely enough time to digest it all.

To help solve this, our team at Macro Ops tunes into trading podcasts.

With trading podcasts, all those hours you spend driving, doing chores, or working out can also be used to catch up on markets and learn something new.

Below you’ll find a list of podcasts we listen to on a monthly basis to keep our game sharp. We’ve separated them into two categories — process based and news/commentary/narrative based.

The process based podcasts help us develop our macro trading strategies while the commentary helps round out our global macro research. We find both very useful.   

Process Based Podcasts

#1 Chat With Traders

Chat With Traders

Chat With Traders is the leading process podcast for anyone interested in markets. In each episode, host Aaron Fifield invites a guest trader onto the show and breaks down their strategies. The focus is always on their mental models and trading framework — not their current trade ideas.

One of the best ways to improve your own trading is to listen to how others approach markets. You can take their experience and advice and apply it to your own unique style.

The show’s guest list is diverse and ranges from HFT all the way to global macro traders. You’ll get as taste of everything.

Recommended Episode

Chat With Traders, EP. 79 featuring Raoul Pal

I don’t know any of the better known traders who didn’t start with a chart. Paul Tudor Jones always a chart, Stan Druckenmiller always a chart, George Soros always a chart. Many of these guys, most of these guys are all chart based. ~ Raoul Pal

Raoul cut his teeth advising the biggest macro names in the industry including Paul Tudor Jones, Stan Druckenmiller, and George Soros. He then used his knowledge and experience to run a macro fund before retiring at the ripe age of 36.

Aaron does a great job digging into Raoul’s trading process to figure out how he plays the global macro chess game.

Key areas discussed include:

  • The definition of global macro trading
  • Combining technicals and fundamentals to create better trade signals
  • How to quantify the business cycle using the ISM number
  • How to trade around a position as a macro theme plays out

This is a must-listen episode to see how a veteran global macro investor thinks.

#2 Masters In Business

Masters In Business

Masters In Business is a podcast hosted by Barry Ritholtz — a wealth manager and popular financial blogger. Barry has deep domain expertise that makes him an incredible interviewer. He uses his experience to ask the right questions and pull as much as possible out of his guests.

Recommended Episode

Masters In Business featuring Ed Thorp

When people talk about efficient markets they think it’s a property of the market. But I think that’s not the way to look at it. The market is a process that goes on. And we have, depending on who we are, different degrees of knowledge about different parts of that process. – Ed Thorp

Ed Thorp has proved the Efficient Market Hypothesis incorrect over and over again throughout his career. He’s shown that it’s possible to win if you understand the concepts of edge and probability. Thorp does a fantastic job breaking these concepts down into digestible bite-sized pieces.

Key areas discussed include:

If you’re looking to beef up your “quant chops”, listen to this now.

#3 Invest Like The Best

Invest Like The Best

Invest Like The Best is hosted by Patrick O’Shaughnessy — a portfolio manager at O’Shaughnessy Asset Management and blogger at http://investorfieldguide.com/. His show focuses on longer-term investing rather than shorter-term trading. Patrick invites guests with a variety of investing backgrounds in areas like cryptocurrencies, venture capital, and equities. The best episodes are equity related as Patrick always brings on the sharpest guys in the world of stock picking. If you’re into analyzing specific companies, this show is a must.

Recommended Episode

Invest Like the Best, EP.54 featuring David Gardner

Many of the really important things that determine what wins in business are not captured on the financial statements. – David Gardner

This episode does a great job explaining investment narratives. Successful investing, especially in global macro, isn’t always about the numbers. Narratives and investor expectations often drive the macro landscape more than the data itself.

David Gardner, co-founder of the Motley Fool, talks with Patrick about how he invests using compelling narratives instead of traditional valuation metrics.

Key areas discussed include:

  • Narratives over numbers
  • Wisdom of crowds
  • How visionary leadership is key
  • How “overvalued” can actually be a buy signal

This conversation ties in well with Soros’ theory of reflexivity. Positive beliefs about a company can influence its underlying fundamentals to create a positive feedback loop that sends prices higher and higher. Naive traders that short these positive feedback loops end up paying the price.

#4 Better System Trader

Better System Trader

Better System Trader is a show primarily focused on short to mid-term systematic trading. If you’re a discretionary trader looking to get into systems, this podcast provides a great look into that world. The show is also good for more experienced system traders as Andrew Swanscott does a fine job balancing system building basics with more advanced topics.

Recommended Episode

Better System Trader, Episode 59 featuring Scott Phillips

The first fix [for drawdowns] is to bank partial profits along the way at a point that doesn’t sacrifice your total return too much but reduces the standard deviation of your winners. – Scott Phillips

Scott Phillips has an incredible trading journey that began as a recovering meth addict in prison. While inside, Scott read every trading book he could get his hands on. He even had people send him high, low, open, and close data that he would record by hand in a scrap book! Scott is a high energy, no-bullshit guy that delivers brutal truths about the difficulties of system building.

Key areas discussed include:

I really enjoyed this episode because of Scott’s directness. There’s no fluff at all in this conversation. Every minute is well worth your time.

#5 Futures Radio Show

Futures Radio Show

Futures Radio Show is hosted by Anthony Crudele. Anthony got his start on the floor of the CME back in 1999. He’s traded millions of futures contracts over his lifetime and was also one of the first to trade the E-mini S&P electronic contract. Since Anthony’s show revolves around futures, it has a macro fundamental bias. You’ll find some newsy segments here and there but the majority of the content focuses on trading process.

Recommended Episode

Futures Radio Show, Minisode 16: Kevin Muir

All those gaps add up, and they actually cause the futures chart, when you are looking at the continuous chart over a longer period, to not be indicative of what the asset return is during that timeframe. – Kevin Muir

Anthony Crudele invites Kevin Muir aka “The Macro Tourist” on the show to talk process and current events. Kevin is a veteran macro trader who now trades for himself. He specializes in derivative products like futures and options. Since he’s no longer in the institutional game, all his advice is very applicable to the retail trader.

Key areas discussed include:

  • Thinking about carry in the futures markets
  • Adjusting futures charts to see the carry
  • How to think about implied volatility vs realized volatility when trading options

I thought Kevin did a great job breaking down these complex concepts. You’ll learn a whole lot about the derivative markets in just a half hour.

#6 The Tim Ferriss Show

The Tim Ferriss Show

This is the one podcast out of the entire list that isn’t finance focused. It’s on here because Tim specializes in process building across all disciplines. Successful trading and investing is a lifelong journey that requires optimization in every area — health, fitness, business, etc. Tim talks to top performers across a variety fields to help you build great systems and habits into your life.

Recommended Episode

The Tim Ferriss Show, Episode 264: Ray Dalio, The Steve Jobs of Investing

Every buyer has behavioral characteristics for certain reasons, let’s say stocks, to use a very simple example, a typical individual, maybe mutual fund buyer, will buy after something’s gone up because they think it’s a better investment. They’ll sell when it goes down because they’ll get scared, and they think it’s a worse investment. Whereas, a typical institutional investor or pension fund, will buy when it goes down because they have to rebalance their portfolio to keep an asset allocation mix at a certain level. – Ray Dalio

Ray Dalio is one of the preeminent macro traders of the modern era with the track record to prove it. His hedge fund, Bridgewater Associates, is the most profitable hedge fund of all time — making billions upon billions of dollars for its investors.

Any media Dalio does is worth a listen. The man has so much wisdom and insight, he could go on for hours and hours. We only get two here, but it’s a solid two hours. Tim is an excellent interviewer who knows how to pull the maximum amount from his guests.

Key areas discussed include:

There’s no way to master global macro without deeply understanding the concepts Dalio discusses. Listen to this once, and if it doesn’t quite click, keep listening again and again. The wisdom here is timeless.

News/Commentary/Narrative Based Podcasts

#1 Financial Sense Newshour

Financial Sense Newshour

Financial Sense Newshour is a podcast available as a paid subscription through the FS Insider program. In it you’ll find market strategists with various backgrounds sharing their views. This show is a useful tool to stress test your own market theses. Everyone suffers from confirmation bias and actively seeking out opinions that differ from your own helps “red team” your analysis.

#2 Adventures In Finance

Adventures In Finance

Adventures In Finance has the highest production value of any financial podcast on the net. The hosts always put on an entertaining show chock full of interesting nuggets. The content of each episode varies greatly, but for the most part it focuses on bringing you the most compelling global macro narratives. They also have a brilliant segment titled “Things I Got Wrong”, where a money manager explains mistakes they’ve made and what they’ve learned from them.

Recommended Episode

Adventures In Finance Episode: 22 – Murderer, Gambler, Aristocrat & Pauper. John Law, The Godfather of Central Banking

In this highly entertaining episode, the team explores the fascinating story of John Law, a man whose economic ideas have influenced and shaped modern central banking. Law’s financial shenanigans created the “Mississippi Bubble”, a spectacular boom and bust process that played out in early 18th-century France. Listening to history is a great way to educate yourself on the perils of modern monetary policy as well as the timeless fear and greed that dominates our markets.

#3 Macro Voices

Macro Voices

Macro Voices is a weekly podcast reviewing the largest global macro themes driving equities, rates, currencies, and commodities. The host, Erik Townsend, is a tech entrepreneur turned global macro fanatic who loves discussing the big picture. Erik’s show has a different flavor than your typical market commentary because he actively trades through a small hedge fund. He has skin in the game and cares about getting things right.

If you want to hear more about Erik, Chat With Traders did a feature on him that you can listen to here.

#4 McAlvany Weekly Commentary

McAlvany Weekly Commentary

David McAlvany hosts this valuable global macro show where he discusses all the latest political and economic news that matters to financial markets. There’s a strong bias against central banks and for gold, but if you can get past that, there’s plenty of interesting macro themes to chew on. This show is best used to help with trade idea generation, but there are also various intelligent guests that come by and talk broader macro theory.

That concludes the list of podcasts we listen to. If you have any recommendations that we missed, just leave them in the comments below…  

If you’re interested in a thorough global macro book list, be sure to check out our rundown of the best global macro books here.

And if you’d like to see how our team trades, check out the Macro Ops Handbook here.

 

 

The post The Best Trading Podcasts For Global Macro Investors appeared first on Macro Ops.

Macro Ops




The Wealth S-Curve That’s Driving Current Global Macro Trends

Standard Logistic Sigmoid Function

The graph above shows a logistic function that maps out a sigmoid curve… otherwise known as an S-curve.

This function was popularized by mid-19th century scientist Pierre Francois Verhulst who applied it in his study of population growth.

Verhulst found that population growth follows a certain S-curve. It grows at a steady state until it hits a certain point where it grows exponentially. This exponential growth sustains until the system hits a saturation point where it slows and eventually stops.

The S-curve is one of those strange universal laws that shows up all over the place. Similar to how power laws, as put forth by Pareto, dominate nature and the law of entropy permeates the universe, so to does the S-curve show up time after time in natural systems.

The S-curve has been successfully used in projecting growth in new technology adoption (we used it to analyze Apple’s business and iphone adoption rates), to biological systems, nonlinear geoscience relationships, economics, demography and the list goes on.

You’re probably wondering why I’m talking about some 19th century Belgian scientist, logistic functions, S-curves… and all this jazz.

Fair question.

Here’s the reason:

The S-curve lies at the foundation of what I think will be one of the largest global macro forces driving markets over the next decade.

We’re about to begin seeing its effects very soon.

Put simply, THIS WILL BE BIG.

Let me explain.

French philosopher Auguste Comte, rightly said that “demography is destiny”.

He was referring to national power. But, if you take demography and combine it with rising wealth, then you have economic and market destiny as well.

The IMF wrote recently that, “History has shown that as countries become richer, their commodity consumption rises at an increasing rate before eventually stabilizing at much higher levels.”

The more wealth people have, the more nonessential goods people buy, and the more commodities they consume.

There’s a very interesting and well documented relationship between rising GDP (as noted by GDP per capita) and commodity intensive consumption. In other words, once a country hits a certain level of GDP per capita (ie, wealth) they begin to consume a lot more oil, gas, wheat, copper, livestock etc… This consumption grows exponentially.

Can you guess what type of shape this gdp/commodity consumption relationship takes?

That’s right, an S-curve.

The chart below shows the S-curve (on top) and per capita energy consumption on the bottom.

When a country’s GDP per capita hits the ‘Tipping point’, energy consumption begins to rise at an exponential rate.

The same S-curve dynamics occur in agricultural consumption too.

Once a country passes the GDP per capita tipping point, they begin to eat significantly more protein.

Raising livestock is over seven times more grain-intensive than producing for a simple plant based diet. The resulting impact on the agriculture sector is significant.

Keeping track of where the world’s population sits on the GDP per capita S-curve, or let’s call it the wealth S-curve, is important.

If a large portion of the global population is transitioning from the turning point to the zero-growth point (refer to the chart above), or tipping point to turning point, it would have far reaching impacts on not just commodities but global markets as a whole.

For example, one of the largest drivers of the last secular commodity bull market which started in the early 2000s and ended in 2011 was the rise of China.

China, the most populous country in the world with 1.4 billion people, crossed the tipping point of the wealth S-curve in around the early 2000s.

GDP Per Capita S-Curve Tipping Point

From our global macro research we know the tipping point on the wealth S-curve that signals more intensive commodity consumption is in the range of $ 2,300 to $ 3,300.

Once a country crosses this point its commodity consumption begins to rise exponentially over the following decades.

Goehring & Rozencwajg Associates (GRA), a commodity fund, explained in their latest quarterly letter how this commodity intensive growth works. Excerpt below:

The average Chinese citizen in 2001 consumed 1.4 barrels of oil over the course of the full year. Total vehicle sales in 2001 averaged 2.2 vehicles per thousand Chinese citizens, while the airlines carried approximately 57 out of every thousand Chinese citizens. In many respects, 2001 was a typical year for Chinese per capita oil demand growth: it grew by 0.02 barrels per person that year, very much in line with the average rate it had grown over the prior 25 years of 0.03 barrels per person per year.

But shortly after it hit its “tipping point” in the S-curve….

The average Chinese citizen consumed 2.2 barrels of oil over the course of the year. Instead of two vehicles being sold per thousand citizens, by 2008 this figure reached nearly nine vehicles. Similarly, total passengers carried by airlines increased from 57 per 1,000 Chinese citizens to nearly 100. Before most analysts realized what had happened, Chinese oil demand growth had quadrupled from 0.03 barrels per person per year to 0.12 barrels per person per year in only seven years.

We can see the S-curve dynamic play out on the chart below.

A 20-year bear market in the Thomson Reuters equal weighted commodity index bottomed in 02’ and began a 11 year secular bull market right as China and its billion plus people crossed the tipping point.

GDP Per Capita S-Curve Tipping Point and Commodities

If you bought the commodity index in 2000, right as the tech bubble was bursting, you would have compounded your money at over 20% annually over the following decade.

Wealth + demographics = market and economic destiny.

Now that you know the massive impact shifting populations along this curve can have on global markets, here are some excerpts from a recent — and widely unnoticed — research paper put out by the Brookings Institute. It’s titled The Unprecedented Expansion of the Global Middle Class (emphasis mine).

There were about 3.2 billion people in the middle class at the end of 2016. This implies that in two to three years there might be a tipping point where a majority of the world’s population, for the first time ever, will live in middle-class or rich households.

The rate of increase of the middle class, in absolute numbers, is approaching its all-time peak. Already, about 140 million are joining the middle class annually and this number could rise to 170 million in five years’ time.

An overwhelming majority of new entrants into the middle class—by my calculations 88 percent of the next billion—will live in Asia.

The implications are stark. By 2022, the middle class could be consuming about $ 10 trillion more than in 2016; $ 8 trillion of this incremental spending will be in Asia.

By 2030, global middle-class consumption could be $ 29 trillion more than in 2015 . Only $ 1 trillion of that will come from more spending in advanced economies. Today’s lower middle-income countries, including India, Indonesia, and Vietnam, will have middle-class markets that are $ 15 trillion bigger than today.

We are witnessing the most rapid expansion of the middle class, at a global level, that the world has ever seen. And, as Figure 7 makes clear, the vast majority— almost 90 percent—of the next billion entrants into the global middle class will be in Asia: 380 million Indians, 350 million Chinese, and 210 million other Asians.

Brooking’s definition of global middle class income is approximately the same as our wealth S-curve tipping point. And as the chart above shows…

The new S-curve driver of this commodity intensive growth trend is going to be India.

India is nearing the tipping point on the wealth S-curve. It’s GDP per capita is exactly where China’s was in 2001, right before the last commodity bull market began. India has a population of over 1.3 billion people. Just 60 million shy of China’s.

GRA also shared the following in its quarterly letter (emphasis mine).

From 1970 to 2000, the average number of people going through the S-Curve tipping point globally was relatively stable at approximately 700 million. If we are correct, then we are on the verge of having four billion people globally all going through the S-Curve tipping point together. Simply put, we are potentially entering the largest period of commodity demand growth the global economy has ever experienced.

And as we’re about to enter the largest period of commodity demand growth the global economy has ever experienced, how exactly are commodities fairing?

Commodities have only been priced this low, relative to financial assets (as represented by the Dow), two other times in the last 100 years.

100 Years of Commodity Valuation

This is one of those things that makes you go “hmm….”

Right?

The market is clearly not seeing the forest from the trees in the commodity market and it’s about to be caught offsides.

And remember our discussion from last month’s Macro Intelligence Report (MIR) about how we’re in the third phase of the Investment Clock cycle, otherwise known as the overheat phase, where commodities are the best performing asset?

Here’s a quick refresher from that report.

Four Phases of Investment Clock

Phase 3 – Overheat phase: Productivity growth slows and the GDP gap closes causing the economy to bump up against supply constraints. This causes inflation to rise. Rising inflation spurs the central bank to hikes rates. As a result, the yield curve begins flattening. With high growth and high inflation stocks still perform but not as well as in phase 2. Volatility returns as bond yields rise and stocks compete with higher yields for capital flows. In this phase, commodities are the best asset class and cyclical value the best equity sector.

We have MASSIVE secular tailwinds lining up with third phase drivers plus commodities at 100-year lows relative to the stock market.  

Am I missing anything?

Oh, yeah, there’s sentiment. It’s negative…  

Not surprising given the horrid price action in commodities over the last five years. The BofA fund manager survey has hedge funds holding very low levels of commodities relative to historical positioning.

Morgan Stanley recently shared that the long/short equity managers they broker for have rarely had lower exposure to energy stocks than they do now. And the ratio of longs to shorts is in the bottom decile of the past seven years!

Energy Long/Short Ratio

As a contrarian, I love situations like this.

Finding and executing great trades is about peeling back the curtains of time and peering into the future and putting the pieces of the puzzle together better and faster than the market.

This is one of those times, where the market’s narrative has been carried to an extreme and is based off a past that’s no longer relevant and differs completely from the coming future.  

Macro trading legend and former Soros compatriot, Jim Rogers, said the key to his success was that he “waits until there’s money lying in the corner, and then all I have to do is go over there and pick it up.”

Well, right now, I see a big pile of commodity backed money lying over in the corner. And all we have to do is start picking it up!

We did this last month, by initiating our long position with an energy basket. In that report we recommended RIG, CRR, and COG. We bought those and also threw in WTI and ESV which our Collective members were notified of.

The basket is off to a good start. Since the MIR’s publication RIG’s up 27%, CRR +18%, COG +0.5%, ESV +30%, and WTI +57% (climbing as high as 90% at one point).

We believe, for the reasons stated above, that this is just the start of the run in the commodity market.

We expect a lot of up and down action in our holdings. This is usual at the start of a new bull market. But we’ll hold through the volatility, while respecting our risk points of course. And we’ll look to build on our energy plays as well as other commodities we’re stalking and which I will talk to you about next.

Summary:

  • The S-curve lies at the foundation of one of the largest macroeconomic forces driving markets over the next decade.
  • When a country’s GDP per capita hits the ‘Tipping point’ on the S-curve, commodity consumption begins to rise at an exponential rate.
  • The new S-curve driver of this commodity intensive growth trend is going to be India.
  • We have MASSIVE secular tailwinds lining up with third phase drivers (Investment Clock) plus commodities at 100-year lows relative to the stock market. This will propel a commodity bull market forward.

If you’re interested in learning more about the Macro Intelligence Report (MIR), click here.

 

 

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Macro Ops




The Chinese Global Economic Strategy

In the fall of 1993, I was sitting in class in grad school. We were using case studies to explore business management decisions. My professor walked through the history of Otis Elevators, noting that the company had reached market saturation and had choices to make.

I was sort of paying attention… sort of not.

Then he called on me.

“Rodney! What should a company do when it reaches market saturation?!”

I fumbled. “Develop a new product or service?”

He thundered back, “Find another market!”

His point was that Otis Elevators had saturated the U.S. market, but had all of Europe to explore. It would be much easier to exploit untapped markets with a product they already provided than it would be to introduce a new product or service they’d need to develop.

I think the Chinese took the same class.

In 2013, the Chinese government introduced the Silk Road Economic Belt and 21st Century Maritime Silk Road initiative, which has been shortened to One Belt, One Road.

The plan was to develop infrastructure to facilitate trade among many players in Eurasia and Northern Africa. Or so that’s what the Chinese government told everyone. The details indicated other immediate goals, with trade as a long-term, add-on benefit.

After the financial crisis, China poured on the monetary coals to propel its economic engine. The county expanded credit at a torrid pace, fueling an unprecedented building boom. Roads, bridges, and condominiums sprung from the ground.

China produced and used more cement between 2011 and 2013 than the United States did in all of the 20th century.

That’s a lot of concrete.

But even in a land of 1.3 billion people, that pace of building couldn’t last.

Eventually, there would be a dramatic slowdown.

China now has empty cities. Not because everyone left, but because they built them and no one came.

Now, as their domestic expansion slows down, the Chinese have created an outlet for all of their resources and construction know-how…

Under the One Belt, One Road Initiative, the Chinese provide the resources, expertise, and much of the labor to build roads, bridges, ports, and other infrastructure in Pakistan, Kenya, India, Malaysia, and even Russia and Greece.

The initiative is expected to touch 68 countries and billions of people.

Of course, many of those countries can’t pay for expensive new ports and roads, but that’s not an obstacle, it’s an opportunity, if you’re the Chinese.

China will not only provide the materials, expertise, and labor, but also the funding! Through the Asian Development Bank and other entities, China is loaning money to foreign nations that then use the capital to buy stuff from China.

And once those projects are completed, guess which country will have a claim on the assets to repay the loans, and also have priority status when it comes to trade?

And the strategy doesn’t end there.

China has another issue that it’s turning into an opportunity.

The country is pretty good at building coal-fired electric plants. But, as one of the vocal members of the Paris Climate Accord, building a bunch of new coal plants creates bad optics. At least, when you build them at home.

The country also already has a lot of electricity generation capacity, and a fair amount of renewable energy. So as with their other spare capacity, they went looking elsewhere.

Over the next 10 years, China expects to build 700 new coal-fired electric plants, but 20% of the capacity will be overseas. While the new plants (with all of the environmental issues that come with them) will benefit the local populations, they’ll also support operations along the trade routes that will carry Chinese goods.

And I’m guessing that the plants in foreign countries will buy their coal from the Chinese.

The strategy is bold, but not without risks. What happens when locals in Pakistan get annoyed with Chinese workers? What happens when a friendly foreign government is toppled by a political foe that doesn’t want to honor previous arrangements?

These legacy issues will be interesting to watch. Will China be better at dealing with them than, say, every other nation in history that’s tried the same thing? We’ll see.

For now, it’s impressive to watch the Chinese implement their plans in so many locations, providing a much-needed outlet for their overcapacity at home.

For anyone interested, the Chinese are touting the initiatives as some sort of global, hand-holding, kumbaya thing that will unite the planet.

They’ve even released videos and songs to promote it, like this one. That way, people can feel good about helping the Chinese cement their hold on global trade for decades to come.

Rodney
Follow me on Twitter @RJHSDent

P.S. Want to hear exactly what Harry, Adam, Charles, John, and I have to say about the markets right now?

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Rodney Johnson – Economy and Markets ()