2018 Stock Market Bubble vs. Gold & Silver

The U.S. Stock Market is reaching its biggest bubble in history. When the price of the Dow Jones Index only moves in one direction… UP, it is setting up for one heck of a crash. While market corrections aren’t fun for investors’ portfolios, they are NECESSARY. However, it seems that corrections are no longer allowed to take place because if they did, then the tremendous leverage in the market might turn a normal correction into panic selling and a meltdown on the exchanges.

So, we continue to see the Dow Jones Index hit new record highs, as it moved up 765 points since the beginning of the year. Now, if we go back to 1981 when the Dow was trading about 800 points, it took five years to double itself by another 800 points. However, the Dow Jones Index just added 765 points in less than two weeks. It doesn’t matter if the (1) point increase in the Dow Jones today is insignificant compared to a (1) point increase in 1981, investors feel rich when the numbers are increasing in a BIG WAY.

This is the same phenomenon taking place in the Bitcoin-Crypto Market. Crypto investors who are used to 10-20 baggers (10-20 times increase) no longer have the patience to invest in a real company that might grow on a 10-25% basis annually. Why the hell put money in a real business that employees a lot of people when you can turn $ 1,000 into $ 50 million in a few weeks?

Unfortunately, the Bitcoin-Crypto Market has destroyed the new Millennials ability even to consider making old fashion sound investments in real capital-intensive companies. Today, the Entrepreneurs rather make money trading Cryptos on their I-Phone, sporting a few thumbs-up Selfies, compared to the previous generation of business people doing deals out of their briefcases.

Regardless, as the stock markets head even higher, it should provide a big RED WARNING LIGHT to investors that all is not well. I put together my first YouTube video titled, THE STOCK MARKET BUBBLE vs. GOLD & SILVER;

In my video, I show how the Dow Jones Index and certain stocks are truly in bubble territory. I also explain why the gold and silver values compared to the Dow Jones and these stocks are tremendously undervalued. Furthermore, I provide an update on the cost to produce Bitcoin versus Gold.

I plan on putting out 1-2 new videos each week on various subjects and believe the video platform will be able to explain some difficult concepts and analysis about how Energy and the Falling EROI will impact precious metals, mining, economy, financial system and our future society.

Precious Metals News & Analysis – Gold News, Silver News




Bitcoin Comedy & Stock Market Melt-Ups

Tyler here with this week’s Macro Musings.


Recent Articles/Videos —

Blockchain — We discuss the real value of cryptocurrencies like Bitcoin — blockchain. We explain how blockchain works and its potential transformative uses.


Articles I’m reading —

A Hedge-Fund Titan Puts Away the Punch Bowl

Our favorite macro investor, Ray Dalio, has some sobering thoughts on how financial assets will perform over the next 10-years.

The problem is that with interest rates and risk premia near all-time lows and debt and asset values near all-time highs, there’s little fuel to repeat the process. Just as the Fed can’t cut rates much, it can’t raise them much either, or debt servicing would swamp cash flow and asset prices would sink. Thus Mr. Dalio sees years of low interest rates, and while he thinks stocks are fairly valued, returns to a typical stock-bond portfolio over the next decade will be around zero after inflation and taxes. Whatever you need to retire, save it now: Don’t count on portfolio returns.

We agree with his long-term outlook. The FED has to battle the end of a long-term debt cycle which is incredibly hard to do. This reality is a tough pill to swallow for passive investors — but as macro traders we look forward to the opportunity that a deleveraging cycle will bring.


Video I’m watching —

Bitcoin has officially entered the manic/euphoric phase. It seems like every single article on yahoo finance is about ‘crypto’ instead of stocks.

I’ve been trying to limit my crypto media consumption because it can easily waste your time away, but this comedic video from Seth Myers is well worth the 5 minutes. It’s friggin’ hilarious and perfectly describes the type of mindless buying we are seeing right now in the crypto space.


Podcast I’m Listening To —

If you want a break from the bitcoin bullish chorus take a listen to Patrick O’Shaughnessy newest podcast on crypto — A Sober View on Crypto.

In this episode he interviews Adam Ludwin founder and CEO of Chain, a blockchain technology company targeted at large enterprises. Adam is long the space but with a healthy dose of skepticism and caution. His background is in venture capital so he knows how the game works — it isn’t all about instant riches and 100% wins.

I found it refreshing to hear a balanced take on bitcoin and crypto from a professional investor. His sentiment mostly aligns with ours — the underlying technology in crypto is super exciting but the actual value of the coins/tokens is questionable.


Chart(s) I’m looking at —

Jeremy Grantham’s latest note included the chart below showing a possible blow-off top scenario in the S&P 500.

We agree with Jeremy in that the market is likely to accelerate higher in the short-term. We have synchronized economic strength coupled with easy central bank policy. This sets the stage for financial assets to rally considerably until the Fed and the other CBs get further down their hiking cycle.


Trade I’m looking at —

The Nikkei has started off 2018 with a roar. Price has completed an upside breakout of an ascending triangle pattern.

We’ve been long since before the holidays and have recently added to positions.  

We’re across the board bullish on stocks (in the short-term) but the Nikkei has the most attractive setup from a technical perspective which is why are are putting on exposure here.


Quote I’m pondering —

The central truth of the investment business is that investment behavior is driven by career risk. In the professional investment business we are all agents, managing other peoples’ money. The prime directive, as Keynes knew so well, is first and last to keep your job. To do this, he explained that you must never, ever be wrong on your own. To prevent this calamity, professional investors pay ruthless attention to what other investors in general are doing. The great majority ‘go with the flow,’ either completely or partially. This creates herding, or momentum, which drives prices far above or far below fair price. There are many other inefficiencies in market pricing, but this is by far the largest. It explains the discrepancy between a remarkably volatile stock market and a remarkably stable GDP growth, together with an equally stable growth in ‘fair value’ for the stock market.  ~ Jeremy Grantham

We should see even more investment managers and individuals buy the market out of FOMO during this final ascent. If you’re going along for the ride make sure to keep your stops tight. There’s no long-term value at these levels.

That’s all for this week’s Macro Musings.

If you’re not already, be sure to follow us on Twitter: @MacroOps and on Stocktwits: @MacroOps. Alex posts his mindless drivel there daily.

Here’s a link to our latest global macro research. And here’s another to our updated macro trading strategy and education.

Cheers!

Your Macro Operator,

Tyler

 

 

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Macro Ops




Finding Good Buys in a Pricey Market

As we approach the New Year, markets are (mostly) reveling in the festive spirit, following the seasonal trend known as the Santa Claus Rally. However, most people I know find it scary to buy a stock when it’s at its all-time high… which is where many stocks are these days.

Facebook… Amazon… Apple… Netflix… Google… and, yes, Bitcoin…

They’re all trading at or near their all-time highs.

They are, indeed, “scary buys.”

But here’s the thing…

There ARE ways to find good buys, even in this environment. You’ve just got to use the right strategy. That is… Momentum!

Momentum strategies exploit the tendency for new all-time highs to beget even higher new all-time highs.

You don’t have to buy stocks at their all-time highs to exploit the momentum factor.

And you don’t have to pick the market’s “hottest” stocks of the day (i.e. the FAANGs) to make big money on momentum moves.

Look, I get it… psychologically, it’s extremely difficult to enjoy buying a stock or ETF after it’s hit a new high. You feel like you’re late… like the “easy” gains have already been had… like you missed out on “buying low.”

But you don’t get paid to feel comfortable as an investor.

In fact, more often than not, the scariest trades end up being the most profitable ones.

So, don’t avoid buying an investment just because it’s close to its highs, even if doing so feels awkward. You aren’t “shopping” for a new car, so buying near the highs doesn’t mean you’re getting a bad deal.

Let’s take a look at the principles of momentum in action, by way of actual trades I recommended to my Cycle 9 Alert subscribers this year.

I ran my Cycle 9 Alert algorithm on a basket of 50 equity market ETFs, going back 20 years.

I found that Cycle 9 signals were most accurate when the ETF was trading between 0% and 20% from its five-year high. An impressive 70% of these types of trades were profitable, generating an average return of 2.9% in three months. (Note: We use options in Cycle 9 Alert and our average profit since inception is 45% per trade).

That’s proof that buying near the highs is not a loser’s strategy… it’s “classic momentum,” a winner’s strategy.

That said, you do have other options…

Finding “Zone 2” Opportunities

Let’s look at it this way…

According to how far off its five-year high a stock or ETF is, you could aim to make Cycle 9-style momentum trades in any of five “zones,” as outlined here:

Momentum “works” in each and every one of these zones, but there are trade-offs between accuracy and potency (as the next table shows).

Cycle 9 signals produced on Zone 1 investments are the most accurate (with a 70% win-rate). And the win-rate decreases as you go from Zone 1 to Zone 5.

But when you look at average profit per trade, you’ll see a steady increase in profit potency as you go from Zone 1 to Zone 5.

Take a look…

Note that Zone 5 opportunities – where an ETF is more than 80% below its five-year high – are extremely rare, which is why there is no win-rate or average profit in the table.

What’s all this mean?

Well, it just means you have options.

You don’t have to limit your momentum trades only to stocks and ETFs that are trading near their highs (Zone 1).

You could just as easily apply my sector-rotation momentum strategy to Zone 2 opportunities, or, of course, Zone 3 or Zone 4 (when they occasionally present themselves).

And, in fact, that’s exactly what I’ve done with my Cycle 9’ers this year.

We’ve capitalized on a number of profitable Zone 2 opportunities.

Take a look…

Note: Profit calculations are the average of multiple entries/exits.

As you can see, we’ve earned handsome profits on both Zone 1 and Zone 2 opportunities.

Interestingly, Zone 2 trades have been more than twice as lucrative as Zone 1 trades.

Of course, we’ve also had a few losing trades this year. But the winners have more than made up for the small handful of losers. All told, our average trade has netted us 82% in 2017.

We’ve made good profits this year by finding under-the-radar opportunities – off the all-time highs list and outside the FAANGs herd.

A Final Observation

Lastly, I’ve found it quite interesting that, in a year dominated by fervor over the FAANGs and Bitcoin, we’ve made really good money trading “boring” ETFs.

I think it’s a devastating misconception that you have to find the “next hot stock” if you want to double your money, or better.

Why not trade diversified ETFs… using a proven momentum system… with a reasonable amount of leverage (via options)?

My Cycle 9 approach may not be as sexy as buying the FAANGs.

But it works!

And I guarantee you… my momentum strategy will outlast any passing fad.

Whether you muster the courage to make “scary buys” in Zone 1, or find value in down-but-not-out Zone 2’s, a time-tested momentum strategy like Cycle 9 Alert can help you harvest market-beating gains in any environment.

To good profits,

 

 

Adam O’Dell
Editor, Cycle 9 Alert 

The post Finding Good Buys in a Pricey Market appeared first on Economy and Markets.

Adam O’Dell – Economy and Markets ()




2017 Has Been The Best Year For The Stock Market EVER

We have never seen a better year for stocks in all of U.S. history.  Just five days after Donald Trump entered the White House, the Dow Jones Industrial Average hit the 20,000 mark for the first time ever.  On Monday, the Dow closed at 24,792.20, and there doesn’t seem to be any end to the rally in sight.  Overall, the Dow Jones Industrial Average is up more than 5,000 points so far in 2017, and that absolutely shatters all of the old records.  Previously, the most that the Dow had risen in a single year was 3,472 points in 2013.

Yes, I know that it may seem odd for a website that continually chronicles our ongoing “economic collapse” to be talking about a boom in stock market prices.  But of course there has not been a corresponding economic boom to match the rise in stock prices.  This artificial stock market bubble has been created by unprecedented central bank intervention, and every previous stock market bubble in our history has ended with a horrible crash.

But for the moment, it is certainly appropriate to be in awe of what has transpired in the financial markets in 2017.  Never before have we seen the Dow close at a record high 70 times in a single year, and we still have almost two weeks to go.

Stocks have risen every single month in 2017, and that is the very first time that has ever happened as well.  No matter how much bad news has come out, stock prices have just kept climbing and climbing and climbing.

Since Donald Trump’s surprise election victory last November, the Dow is up a whopping 34 percent.

34 percent!

Wall Street has never seen better times than this.  Overall, U.S. stockholders have seen more than 5 trillion dollars in paper gains since Trump was elected, and this has created a real estate boom in some of the wealthier areas of the nation.

Of course markets go down a lot faster than they go up, and that 5 trillion dollars in paper gains could be wiped out very rapidly in the event of a major disaster, but for the moment investors are absolutely thrilled with what has been happening.

Of course there are red flags all over the place, but not too many people are even paying attention at this point. Right now the S&P 500 is the most overbought that it has been since 1958, and earlier today a CNBC article declared that U.S. stocks are “very, very overbought”, but this will probably just encourage people to buy even more.

These days, if stocks are up that is a signal to buy, and if stocks are down that is a signal to buy.

Of course we witnessed similar euphoria just before the dotcom bubble burst and just before the financial crisis of 2008, but most Americans have extremely short memories.

For most of us, those crashes might as well be ancient history.

But just like in each of those cases, market euphoria tends to hit a peak before things completely fall apart.  Bill Stone, the chief investment strategist for PNC Asset Management Group, recently made this point very succinctly

“It is going to get to a point where it can’t get any better anymore,” he said. “In the market it’s always brightest before it gets dark.”

Others are being even more blunt.  For example, trends forecaster Gerald Celente is convinced that “equity markets around the world are going to crash” in 2018…

“Yes.  Everyone knows that the markets are overvalued.  The Schiller PE ratios rival those of the pre-1929 stock market crash and the Dot-Com bubble…The Black Swan Event: When war breaks out in the Middle East, the equity markets around the world are going to crash.  The Black Swan that is going to create ‘Market Shock’ is going to be an outbreak of war in the Middle East.  And when that happens, you are going to see gold and silver skyrocket.  That’s our forecast for one of the top 10 trends of 2018.”

Personally, I never believed that the stock market bubble could ever be inflated to such absurd proportions, and so I am just in awe at what is taking place on Wall Street.

Since the last financial crisis our national debt has doubled, corporate debt has doubled, U.S. consumers are now 13 trillion dollars in debt, our economic infrastructure continues to be gutted, more than 40 million Americans are living in poverty and our financial institutions are being more reckless than at any other point in our entire history.

But for the moment, it is working.  We have been on the greatest debt binge in world history since the end of the last recession, and most people seem to believe that the debt-fueled standard of living that we are currently enjoying is somehow going to be sustainable.

Nothing about our long-term economic outlook has fundamentally changed.  Just because the authorities were able to extend this bubble for a little while longer does not mean that we are going to get to escape the consequences of decades of incredibly foolish decisions.

We just keep on mortgaging the future, but the funny thing about the future is that eventually it shows up.

And when our day of reckoning finally does arrive, the pain that it is going to cause is going to be absolutely off the charts.

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




What Really Drives the Housing Market

In the summer of 1992, my wife and I lived in Dallas. I had just turned 26 and had two years of marriage under my belt. My career was moving along, but I wasn’t making much money. And I was in grad school.

This is the point at which my wife informed me that we should have a baby. Clearly, with little or no savings, no time to spare, and not much life experience, we needed to bring another soul into the world.

Oh yeah, and before we have a child, she told me we needed to own a home. We bought our first place at the end of that year, almost eight months before our first child was born, using an FHA loan and what little savings we had.

Just three years later, I planned a career move that would take me to Tulsa, Oklahoma. We put our home on the market and began house hunting in the new town.

Our home sold in two days, and the job opportunity suddenly fell through.

I had to scramble for both a new job and a new home. That was OK, because our family now included two kids.

Six years later we had three children and my wife was itching for more space, both inside the home and out. She found a fabulous community north of town and the perfect home. For a couple of weeks we owned two residences but everything worked out.

Three years later, our business took me to Florida, where I bought another home, almost at the top of the market in 2005. I knew things were out of control, so we chose a more modest house than we otherwise would have purchased. We sold that home in 2010 then rented for a brief six months.

My wife told me that renting didn’t suit her because she couldn’t renovate. I thought that was a feature, not a bug, but I understood. We quickly purchased a home in a great area of Tampa… before moving back to Texas five years later after our last child left the nest.

That’s the story of my homeownership life. I bought homes out of want and need, which I think describes most of us.

Here’s what I didn’t do: Calculate the value of the property tax deduction; calculate the value of the mortgage interest deduction; compare those, along with other deductions, to my standard deduction based on the size of my family to determine if itemizing made sense in future years; then use that analysis to figure out if I should purchase a home and how much I could pay.

I’m certain there are people out there who do this, but I’m a numbers guy, and I didn’t do it. And none of my numbers-oriented friends do it. And my wife certainly didn’t care about such things. Instead, we all approached home ownership the same way, based on our age and stage of life.

Based on our 30 years of research and analysis at Dent Research, I know that most consumers approach life just like I do. We don’t ignore financial factors; we’re not stupid.

We just understand that if you lived life according to exact financial calculations, making nothing but quantitative, rational decisions, you’d miss out on many good things.

We wouldn’t drive nice cars, since basic vehicles provide the same thing (transportation between two points). We’d only buy homes if price appreciation and tax deductions outweighed associated costs, including the opportunity cost of doing other things with our capital.

I think if I tried to follow this logic my wife would hate me. I know my kids would, and I’d probably have a little self-loathing to throw in as well.

That’s what makes all the hand-wringing over eliminating or curbing the home mortgage deduction so laughable.

Such calculations aren’t what drive most homebuyers. It’s where they are in their life cycle!

Do they have kids? They need more room. Are the kids school age? They need good schools or close proximity to private institutions. Have the kids left? They need less space. Are they retiring? They might want something near the shore. No spreadsheets on interest rates and tax deductions can top such considerations.

If you want proof, just consider the last five years. Since real estate bottomed in late 2011, home prices have shot higher while interest rates remained in the basement.

If we all based our homebuying decisions on financial calculations, home ownership should be at the highest rate in history, or more than 69%. But it’s not.

In fact, we’re still languishing around 64%, just off of the 25-year low of 63% registered in the second quarter of last year. Interestingly, as prices moved higher, home ownership dipped.

Of course, there are other considerations, such as affordability and availability. But the point remains that we base most of our consumption on major lifetime milestones, like getting married, having children, becoming empty nesters, and retiring.

That’s why we’ve focused our research on such predictable consumer spending patterns. We want to know where consumers are headed next.

We get there by determining the next big change in their stage of life, not by calculating tax savings on potential mortgage deductions.

Rodney Johnson
Follow me on Twitter @RJHSDent

The post What Really Drives the Housing Market appeared first on Economy and Markets.

Rodney Johnson – Economy and Markets ()




More Investors Sell Bitcoin for Gold/Silver; Michael Pento: Stock Market & Fixed Income Bubble

Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

Coming up we’ll hear a truly explosive interview with Michael Pento of Pento Portfolio Strategies. Michael describes for us what may be coming in the bond and fixed income markets and the impact on the stock market and on gold prices in 2018. He also shares some of his very strong feelings about Bitcoin and the crypto-currencies. You absolutely must hear my conversation with Michael Pento, coming up after this week’s market update.

On Thursday, Congress hastily passed a short-term funding bill that averts a government shutdown – but only for two weeks. Republicans and Democrats will have to come back to the negotiating table later this month in order to reach a deal on spending and contentious issues such as “deferred action” for illegal immigrants.

There are a handful of Republicans in Congress who oppose these bipartisan budget deals on grounds that they grow government and grow the deficit. But whether fiscal conservatives have enough clout to force any meaningful concessions from leadership is doubtful. The political forces pushing for more spending and more borrowing on Capitol Hill are simply too great.

And while unsustainable spending will have ruinous long-term consequences for the U.S. dollar, those consequences aren’t being felt just yet… at least not the negative ones. The stimulus of debt spending and currency creation is helping corporations boost their profits and their share prices, at least for now.

Meanwhile, precious metals markets are having a rough go of it this week. Gold prices are down 2.5% since last Friday’s close to bring spot prices to $ 1,249 per ounce. Silver is off 63 cents or 3.8% for the week to trade at $ 15.83. Platinum is down 5.5% to $ 889, while palladium shows a weekly loss of 1.4% to come in at $ 1,010 per ounce as of this Friday morning recording.

The U.S. Dollar Index is up over 1% for the week, but that doesn’t fully explain the weakness in gold and silver prices over the past few months. The dollar remains down significantly for the year, yet metals markets haven’t put on much of a counter-dollar move, with gold up only about $ 100 and silver now slightly negative for the year.

The lack of investor interest in gold and silver this year may have more to do with what’s been going up. As long as the stock market keeps plowing ahead, the safe-haven appeal of hard assets will be limited mainly to those who are true contrarians, to those who are willing to go against the direction of the herd.

Even among alternative asset investors and free-market money advocates, gold and silver have been overlooked in favor of newfangled digital currencies such as Bitcoin. This week Bitcoin surged to over $ 18,000 amidst volatile trading and soon to be opened futures contracts for the crypto-currency.

Bob PIsani (CNBC): The first Bitcoin futures market, that’s going to begin Sunday night. Let’s talk to the man in charge of all this. Ed Tilly is the CEO of the CBOE.

And Ed, congratulations, you’ve won this sort of arms race to get to the first Bitcoin futures. CME will be doing it a week later.

You’re familiar with Jamie Dimon’s famous comment. Mr. Dimon had said, “If you’re stupid enough to buy Bitcoin, you’re going to pay the price for it one day.” He called it a fraud. Do you think this is an opportunity for Bitcoin? Do you think this is another great investment, or is it a fraud?

Ed Tilley: There’s a suitability issue with every investment. Bitcoin should be no different. I don’t think we’re setting up Bitcoin and saying that’s for everybody, but we certainly know there’s interest out there on the long and the short side.

Just about all of us can look back with regret for not having bought Bitcoin – or not having bought enough of it – when it was trading below $ 1,000. But there’s no point in dwelling on what you could have done in retrospect. There will always be something – whether it’s a penny stock, or an obscure commodity, or a rare piece of art, or an ideal plot of land – that you could have made a fortune on if only you had known what and when to buy.

By the same token, those who own Bitcoin may one day regret not selling at what in retrospect was the top. Maybe we’re at it now. Maybe it has much further to go. But an asset class as volatile and speculative as crypto-currency won’t simply reach a plateau.

When the upside momentum runs out for whatever reason, a crash of some magnitude will likely follow. Saxo Bank came out with a prediction that Bitcoin will hit $ 60,000 in 2018…only to crash back down to $ 1,000.

If a scenario like that played out for the crypto-coin, the crash phase could be hugely bullish for hard coins – gold and silver. Bitcoin holders tend to value things like privacy, free markets, and being contrarian to what Wall Street and the banking establishment are pushing. If they lose confidence in crypto-currencies, many are likely to come back home to physical precious metals.

In fact, we’ve recently seen a significant uptick in Money Metals customers buying gold and silver using their bitcoin for payment. It’s super easy to do that at Money Metals.com. And over the phone, you can also do larger buy OR sell transactions exchanging gold and silver for crypto currencies — or vice versa. Just call us at 1-800-800-1865 to do so.

Well now for more on the state of the markets, the perilous situation the new head of the Federal Reserve will likely face in 2018, and for much more on the rise and potential fall of Bitcoin, let’s get right to this week’s exclusive interview.

Michael Pento

Mike Gleason: It is my privilege now to welcome in Michael Pento, President and founder of Pento Portfolio Strategies and author of the book, The Coming Bond Market Collapse: How to Survive the Demise of the U.S. Debt Market. Michael is a well-known and successful money manager and has been a regular guest on CNBC, Bloomberg, Fox Business News, and also the Money Metals Podcast, and shares is astute insights on markets and geopolitics from the perspective of an Austrian School economist’s viewpoint.

Michael, welcome back. Thanks for joining us again and how are you?

Michael Pento: I’m doing fine. Thanks for having me back on Mike.

Mike Gleason: Well, Michael, you focus a lot on the bond markets. Let’s talk for a minute here as we begin about the bubble that has been created and maintained there, and then we will get into the potential ramifications for precious metals. I was researching this morning and the yield on the 10-year Treasury note was 2.242% on December 20, 2015, just after the Federal Reserve made the first rate hike in the current cycle of raising the Fed funds rate. Today, the 10-year yield is 2.327%, a tiny increase from two years ago, so the yield has barely budged despite the funds rate ratcheting up a full percentage point higher. Now, the funds rate isn’t directly tied to Treasury yields, but shouldn’t this tightening be translating to higher yields? Why is that not happening?

Michael Pento: What a great question to start off the show. So, I’ll just dovetail on what you just said and say that in the beginning of 2017, the yield on the 10-year note was 2.4%, or just around that level. Now, as you said, it’s 2.32%. So, there’s a very good reason for why this is happening because the long end of the bond market is concerned with inflation and if the Fed is hiking rates from pretty much zero to one and a quarter percent as we sit today, the effective Fed funds rate is just a little bit above 1%, that doesn’t mean that the yield should go higher on the long end of the yield curve. Actually, what that does mean, is that the Fed is vigilant, for now at least, on fighting inflation.

They’re reigning inflation out of the economy. That means the long end is going to come down to meet the short end, and I will tell you on that front that in the beginning of 2014, 260 basis points was the spread on the two and 10-year note. And we’ve had five rate hikes since then and guess what the spread is today as we record this interview, 51 basis points. So, you don’t have to have an advanced degree in calculus to figure out that you have two rate hikes left, two, assuming that the two-year note rises commensurately with the Fed funds rate, two rate hikes left before the yield curve is completely flat.

And the problem is that when I’m reading a lot of material in the past few days that the all-knowing pundits on Wall Street from the big brokerage houses, the big wire houses, are claiming that we’re going to have five rate hikes. Mike, five rate hikes between today, December 6th and the end of 2018, five. Not two, five. That means the Fed funds rate is going to be well above where the 10-year note yield is trading today, so you’re going to have a massively inverted yield curve by the end of 2018. Not only that, you pile onto the fact that central banks are going from a $ 120 billion worth of counterfeit confetti each month to zero by October. So, if you’re not worried about a recession, if you’re not worried about an inverted yield curve, if you’re not worried about the central banks moving their massive bid from stocks and bonds and if you’re not worried about the stock market imploding in the next few quarters, if not months, you should be.

Mike Gleason: Interest rates are essentially the price of risk and the market seems to be saying there just isn’t much. However, you and I both know there is plenty, as you just discussed there, but this is bubble has persisted for years now. The truth is we don’t have real properly functioning markets and this extraordinary mispricing of risk will go on until, and probably suddenly, it doesn’t. What signals are you watching for in the bond markets, if you would expand on that, that would indicate the game is about up and are you seeing any of those signs?

Michael Pento: Well, you have to watch high yield spreads and the nominal yield. If you see those yields starting to spike, then you should worry. They were spiking a few weeks ago. They’ve since come down a little bit, but keep an eye on that. There were good break-even spreads, inflation break-even spreads. I watch those very insidiously. Of course, like we just talked about, you watch for the yield curve to invert.

When the yield curve flattens out and inverts, it means this – and it doesn’t really matter why it happens – some people will say, well, I hear this Mike, that you shouldn’t worry about the yield curve inverting this time because it’s inverting because. Because, is the 10-year (German) bund is yielding .29%. Mario Draghi over in Europe is bending the whole yield curve to the south in Europe and that’s putting pressure on our yields here in the United States. Well, that’s true to some extent, but let me ask you a question, if the yield on the 10-year bund was .5% not too long ago, why is it .29% now in light of the fact that everybody knows the ECB is going to taper from 60 billion euros of QE today to 30 billion come January, and eventually stop their QE probably in October around the same time the Fed steps up their monthly sales to 50 billion.

The answer is because the economy is slowing. It’s very clear to me, the economy and inflation is slowing. That it’s putting further pressure down on long-term yields. That means the yield curve is going to invert and it’s not different this time. What that means is that if you’re a depositor at the bank and you’re going to be getting say X% on your money, whatever it is, one, two percent on your money, and then the private banks make the same loans are yielding the same as they’re paying in deposits, it no longer benefits the bank to lend out money. So, money supply growth crashes and that means deflation starts to diffuse across the economy and that means asset bubbles crash.

And I just want to make one thing very clear. What happened this week, this week happened, this data point was breached. The total market capital stocks is now a staggering 140% of GDP. Yes. It did reach 140% of GDP. That ratio has only been higher at one time in history and that was during just a few short months around the very peak of the NASDAQ bubble. Outside of that very short duration, that ratio for decades was 50%. So, we don’t just have a regular stock market bubble, we have an epic Stock Market bubble that is couched within the biggest bubble in fixed income that the world has ever seen and it’s not going to end very well.

Mike Gleason: Now, let’s talk about what a bursting of the debt bubble might mean for precious metals. One could argue that if real interest rates move sharply higher, it will weigh on metals, which don’t offer a yield at all. It’s zero or even negative real interest rates that gold bulls want to see. But that certainly hasn’t been the case in recent years. Maybe gold and silver will respond as safe-haven assets in the turmoil in markets created by a collapse in bonds will drive demand for metals. What would you expect the long overdue reckoning in bonds will mean for gold and silver prices, Michael?

Michael Pento: The last time we had an inverted yield curve in a recession was circa 2006-2009. And gold benefit is very greatly leading up to the Great Recession, but if you look on your data points and see what happened in 2008, gold did not do very well at all. And that was partially because real interest rates rising is not good for gold, but it was also the case that there was a huge dollar short occurring at that time.

So, people were borrowing in dollars and investing in the so-called BRIC countries, Brazil, Russia, India, China. When it became evident that we were having a global recession, the manifestation of the global recession, people had to unwind those carry trades. So, in other words, they sold renminbi and they sold the ruble and they went back into dollars driving the value of the dollar way up. That crushed gold in the short term. But then you remember, from 2009 all the way to really late 2011, early 2012, gold had a huge run and that’s because deficits absolutely soared. We had annual deficits in this country were well over a trillion dollars. We’re going back there again and then the dollar started to again weaken.

This time around there is no massive dollar short. As a matter of fact, it’s quite the opposite. In this next iteration of a recession, there may actually be dollar weakness. Even though you have rising real interest rates, which has always been the death knell for gold, you’re not going to have that rise in the dollar. That will mollify or attenuate the swollen gold prices, if there is any at all, but on the other end of this recession, and once this recession becomes manifested and you see the Fed going from wherever they are at that juncture, maybe 2% back to zero and then QE… and then we have Mr. Marvin Goodfriend on the Board of Governors – he’s been nominated by Donald Trump – he wants negative, nominal interest rates. He wants to ban cash. You’re going to have universal basic income. You’re going to have negative nominal rates. You’re going to have QE. You’re going to have perhaps even helicopter money. You’re going to have some version of that dangerous inflation cocktail and that has to be incredibly bullish for gold.

Mike Gleason: It sounds like a “perfect storm” sort of scenario there for the yellow metal. These days, when you talk about markets, the topic of bitcoin and crypto currencies is almost certain to come up. Bitcoin hit $ 13,000 earlier today as we’re talking here on Wednesday afternoon. It’s epic run higher this year cannot be ignored. Have you taken any interest in this space? We’d like to get your thoughts on where this phenomenon is headed.

Michael Pento: Well, you were you asking me about crypto-currencies. I’ve been on record for well over a year saying that it’s a scam. I’ve been wrong for well over a year. I will never own a crypto-currency in my life. I will never own a bitcoin or Etherium or any of these things. When you think about it Mike, what is a crypto-currency. Well, what you really own … You always see these pictures of people holding a coin with a B on it with a dollar sign through it. That’s not a bitcoin. A bitcoin, and I’m far from a computer programmer, so please understand, but from my knowledge of what a bitcoin is, it’s a private key. So, what you actually own is a private key, which is just a series of letters and numbers. I think it’s about 64 of these. It’s a series of letters and numbers, characters, that exist not even in tangible form, they exist in the Internet, so they exist digitally. So, how could a bunch of numbers be considered money?

The definition of money, it has to be portable, tangible and it has to be transferrable, but the most important factors of money, they have to be extremely rare and virtually indestructible. Now, what the heck is extremely rare or indestructible about numbers and letters? They’re very, very common and they have zero utility. Bitcoins and crypto currencies have zero utility. Let me repeat that. Zero utility outside of that ecosystem. So, you have to agree, in order to believe in Bitcoin, that this chain of numbers and letters can be worth $ 13,000 per unit and that that chain of numbers and letters is money, but outside of that ecosystem, there’s zero utility and you have ask yourself what good is it to be able to move numbers and letters via the Internet. Well, you could move U.S. dollars electronically over the Internet.

What you really should be asking is how can I move gold. Gold, which is all the properties of money, gold has. And most importantly, it’s virtually indestructible and extremely rare. There are over a thousand crypto-currencies, so various versions of those numbers and letters in the private key. There’s an immutable open ledger that is used to transfer bitcoins, but you can use a private blockchain to move gold. There are companies that do that. That’s the value of the blockchain. The blockchain’s value is not to move letters and numbers over the Internet and then somehow think that unit could be anywhere near $ 13,000. It’s a scam. It’s going to come crashing down and I’ll not be a part of it.

Mike Gleason: Well, I don’t think anyone’s going to wonder where you stand on that, thanks for honest assessment on that. Now, what are your thoughts on Jerome Powell taking over for Janet Yellen as the new Fed Chair. He’s a mainstream dovish-minded economist from all indications, so will it be more of the same, or do you have any insights on what a new Powell Fed will look like?

Michael Pento: Well, everybody says he’s going to be more of the same. He’s another dove like Janet Yellen, but you have to understand – and there’s two things I want to mention about Mr. Jerome Powell. Everybody knows he’s nominated by Donald Trump, but why did Donald Trump make the switch from Janet Yellen to Powell? Well, Mr. Powell is going to assent to two things. Number one, what does Donald Trump love to talk about more than almost anything else? Well, he likes to talk about how great the stock market’s doing, so I can assure you one thing is Jerome Powell will not allow the stock market to go down very much, very quickly. That’s number one.

Number two, Donald Trump is on record now, not Candidate Trump, President Trump is on record saying, he wants a weaker currency and he’s also a lover of debt. So, I expect in the long run, maybe not the short run because you’ve seen this baton has been passed to Mr. Powell, who’s going to carry on with Janet Yellen’s interest rate hikes and the reduction of the balance sheet. But, once the recession hits and the stock market turns south, and I’m talking about the 10% hit that I see happening very, very soon is going to quickly morph into 30%. And once we get 30% plus down in the stock market, you’re going to see Mr. Powell reverse course very quickly, because Mr. Trump can no longer brag about the stock market when it’s down 30%. And you’ll see all those things that I mentioned, some variation of that cocktail and that is negative interest rates, QE, universal basic income and helicopter money.

Mike Gleason: Well Michael, as we approach the end of the year here and start looking forward to 2018, I would like to ask you what you think people might be talking about this time, say a year from now, in the markets? What are a couple of those key events that you see happening in the next 12 months and also, your outlook for gold next year?

Michael Pento: Well, I think you’ll be talking about the epic crash of crypto-currencies a year from now. I think a year from now, you’ll be talking about the inversion of the yield curve. I think you’ll be talking about a crash in inflation and the onslaught of deflation. You’ll be talking about a crash in the major markets and in the capital markets. You’ll be talking about a reversal in the Fed’s monetary policy. You’ll be talking about a falling dollar and you’ll be talking about gold, which will be well over $ 2,000 an ounce by the end of next year, given the fact that construct I just laid out. If half those things that I just mentioned occur, gold will be well on its way to its all-time record nominal high.

Mike Gleason: It should be a very interesting year. I know we have talked a lot with you and you, of course, write a lot about the oscillations between the inflation cycle and the deflation cycle. And it’s always great to get your commentaries here and read them on a regular basis. We always appreciate your time, Michael. Thanks so much for the times you’ve come on this year and I certainly look forward to doing it again. Now, before we let you, please tell people how they can follow you more regularly, get those great commentaries in their email inbox each week, and also other information that they might need to know if they would like to potentially become a client of your firm there Pento Portfolios Strategies.

Michael Pento: Thank you Mike. The office number here is 732-772-9500. You can email me directly at mpento@pentoport.com. And the website is PentoPort.com.

Mike Gleason: Well, thanks again Michael. Enjoy the Christmas season and I look forward to our next conversation in the New Year. Take care and thanks for all you do.

Michael Pento: God bless you. Merry Christmas Mike.

Mike Gleason: Well that will wrap it up for this week. Thanks again to Michael Pento of Pento Portfolio Strategies. For more info just visit PentoPort.com. You can sign up for his email list, listen to the mid-week podcasts and get his fantastic market commentaries on a regular basis. Again, just go to PentoPort.com.

And don’t forget to check back here next Friday for our next Market Wrap Podcast, until then this has been Mike Gleason with Money Metals Exchange. Thanks for listening, and have a great weekend everybody.

Precious Metals News & Analysis – Gold News, Silver News




The Coming Bull Market In Oil

To be a smart contrarian you need to have the confidence to dive into unloved areas of the market and sort through the rummage in search of asymmetric opportunities.

Our team at Macro Ops has been digging deep and has finally “struck oil” in the energy market.  

The popular narrative driving oil’s bear market over the last 3 years has consisted of two core ideas:

  1. Fracking has caused the supply of oil to explode.
  2. The adoption of electric vehicles is killing a huge source of oil demand.  

Combine increased supply with decreased demand and of course you’re going to get a drop in prices.

Though this remains the popular narrative, the latest underlying data is telling a different story. And as always investors are slow to react, creating an opportunity for us.

First off, the market is overstating oil’s supply growth.

OPEC’s recent decision to extend their current output agreement means production will hold steady into the end of 2018.

And production outside OPEC, Russia, and the US and Canada has been shrinking. Over the last year aggregate production as fallen by 0.3 mb/d. It’s expected this number will fall by another 0.1 mb/d in 2018 as well.

This puts pressure on US frackers to pick up the slack. For them to fill the gap they’ll need to grow their output by 20% in 2018.

But what we’re finding is that shale productivity growth is slowing at an alarming rate. This is because frackers have already pulled the easy oil from their tier 1 properties they’re now having to move on to less productive fields.

In addition, oil companies in the US and the rest of the world have significantly cut their CAPEX over the last 3 years.

Global oil and gas investment, as a percentage of GDP, has collapsed from a cycle high of 0.9% in 2014 to just 0.4% today.

That means CAPEX into future capacity is now less than half of what it was just a few years ago. This makes it one of the largest capex reductions in the global oil and gas space, in history.

At the same time, global oil demand is increasing.

And this will only accelerate as we progress further into the “Overheat” phase of the business cycle where commodity prices shoot higher.

You can see how well energy performs in the final years of a bull market in the chart below:

The result of this mismatch in supply and demand has caused inventories to fall drastically.

So what we have here is a market that believes there’s an ever-growing supply of oil faced with shrinking demand, when in reality, the opposite is true. Demand is growing and supply is shrinking which will cause prices rise.

As traders we’re rarely given scenarios where the market is so wrongly positioned. This is one of them.

The argument we’ve made here is just scratching the surface of our full oil thesis. In this month’s Macro Intelligence Report (MIR), we layout the evidence we’ve gathered that shows just how off the market is.

We’ll also show you exactly how we plan to play this oil reversal. We’ve got a basket of oil stocks that are primed to take off along with an options play on the commodity itself.    

And we’re not just covering oil either… we also have some key information about the financial and industrial sectors of the market that you’ll want to hear.

If you’re interested in riding these macro trends with us, then subscribe to the MIR by clicking the link below and scrolling to the bottom of the page:

Click Here To Learn More About The MIR!

There’s no risk to check it out. There’s a 60-day money-back guarantee. If you don’t like what you see, and aren’t able to profit from it, then just shoot us an email and we’ll return your money right away.

Like I said, blatant contrarian opportunities like this are rare. Don’t miss your chance to take advantage.

Click Here To Learn More About The MIR!

 

 

The post The Coming Bull Market In Oil appeared first on Macro Ops.

Macro Ops




Precious Metals Analyst Totally Omits Silver Investment Demand From Market Fundamentals

The motivation to write this article came from several of my readers who sent me an interview by CPM Group’s Jeff Christian, at the San Franciso Gold and Silver Summit. In the video, Jeff claims that there has been a silver market surplus for ten years and those industry analysts, who have reported deficits, “Are simply wrong.” Jeff goes onto to say, “they have been wrong the entire time they have been on the silver market.”

Jeff continues by explaining that to analyze the silver market correctly, you must look at surplus and deficits based on total supply versus total fabrication demand. Furthermore, he criticizes industry analysts who may be promoting metal by throwing in investment demand to arrive at a deficit. He says this is not the proper way to do “commodities research analysis.”

Jeff concludes by making the point, “that if you keep silver investment demand as an “off-budget item,” then the price matches your supply-demand analysis almost perfectly.” Does it? Oh… really?

If we look at the CPM Group’s Supply & Demand Balance chart, I wonder how Jeff is calculating his silver price analysis:

Silver Supply and Demand Balance (CPM Graph)

This graph is a few years old, but it still provides us with enough information to show that the silver price has nearly quadrupled during the period it experienced supposed surpluses. According to the CPM Group’s methodology of analyzing total fabrication demand versus supply, how on earth did the silver price rise from an average of $ 5.05 during the deficit period to an average of $ 19.52 during the surplus period? I arrived at the silver prices by averaging the total for each time-period.

Again, Jeff states during the interview that their supply-demand analysis, minus investment demand, provides an almost perfect price analysis. According to the CPM Group’s 2016 Silver Yearbook, the total surplus for the period 2008-2016 was approximately 900 million oz. With the market enjoying a near one billion oz surplus, why would that be bullish for a $ 20 silver price?? It isn’t… and I will explain why.

As I have mentioned in many articles and interviews, the price of silver has been based upon the price of oil which impacts its cost of production. If we look at the following chart, we can plainly see how the price of silver has corresponded with the oil price going back until 1900:

Annual Silver Price vs Oil Price: 1900-2016

You will notice the huge price spike in the 1970’s after Nixon dropped the Gold-Dollar peg causing inflation to run amuck in the United States. Now, the oil price didn’t impact just silver; it also influenced the value of gold:

Annual Gold Price vs Oil Price: 1940-2016

As with the oil-silver trend lines, the gold and oil price lines remained flat until the U.S. went to a 100% Fiat Currency system in 1971. So, if we decided to throw out all gold and silver supply-demand forces, we can see that these precious metals prices paralleled the oil price. Now, the reason the price of silver shut up to an average of $ 19.52 from 2006-2017 was due to its average cost of production. Today, the market price of silver is $ 16.42, and the average cost of primary silver production is between $ 15-$ 17 an ounce. According to my analysis of the top two gold mining companies, their cost of production is about $ 1,150. Hence, the 71-1 Gold-Silver price ratio.

Did Jeff Christian include the cost of production in his analysis of the silver price? How many silver mining companies are producing silver for $ 5 an ounce and making an $ 11 profit? Or how many silver mining companies are producing silver at $ 35 and losing nearly $ 20 an ounce? I will tell you… ZERO.

The only way an individual would believe that the primary silver mining companies are producing silver at $ 5 an ounce is if they believe in the investor presentations that report CASH COSTS. Anyone who continues to use CASH COST accounting needs to get their head examined. It is by far the most bogus metric in the industry that has caused more confusion for investors than anything else… well, if we don’t include faulty analysis by certain individuals.

I find it utterly amazing that the CPM Group entirely omits silver investment from their fundamental analysis. Here is a chart of their total world silver fabrication demand from their 2016 Silver Outlook Report:

Annual Silver Fabrication Demand

If you are a silver investor, your demand doesn’t count. It doesn’t matter if you purchased 100 of the half a billion oz of Silver Eagles sold by the U.S. Mint since 1986. How many Silver Eagles have been sold back, melted down and returned to the market to be used for industrial applications?? According to the 2017 World Silver Survey (GMFS), total Official Silver Coin sales were 965 million oz (Moz) since 2007. If we add Official Silver Coin sales for 2017, it will be well over one billion. I highly doubt any more than a fraction of that one billion oz of Offical Silver Coins were remelted and sold back into the market.

Moreover, what term do we give to companies who produce Silver Eagles or private silver rounds?? Aren’t companies fabricating silver bars and coins? While it is true that physical silver bar and coins can be sold back into the market, a lot of new demand is coming from fabricating new silver bullion products.

CPM Group only values silver as a mere commodity for the sole purpose of supplying the market for industrial, jewelry, silverware, photography and photovoltaic uses. I gather 2,000+ years of silver as money no longer matters. Yes, I would imagine some precious metals investors are feeling a bit frustrated as they watch Bitcoin go vertical towards $ 12,000. But a word of caution to Bitcoin investors who are dreaming about sugar plums dancing in their heads and dollar signs in the eyes.

Now, when you see an article titled, Signs Of A Market Top? This Pole Dancing Instructor Is Now A Bitcoin Guru; it might be prudent for you to recall a memorable part of the move in The Big Short:

There is a wonderful scene where a pole dancer is explaining to a fund manager how she’s buying five houses.

A lowly paid pole dancer who survives on unpredictable tips should not be able to afford multiple houses, but this was the sub-prime USA where the ability to repay a loan was apparently not a prerequisite.

What a coincidence… ah?? Pole dancers buying five homes and becoming a Bitcoin Guru. What’s next? LOL.

Regardless, the notion by CPM Group that investment demand shouldn’t be included in supply and demand forecasts suggests that the gold market has experienced a total 418 million oz (Moz) surplus since 2006. Yes, that’s correct. I calculated total global gold physical and ETF investment demand by using the World Gold Council figures:

Total Net Global Gold Investments (Physical & ETF)

The reason for the drop-off in net gold investment in 2013-2015 was due to Gold ETF liquidations. For example, 915 metric tons (29 Moz) of Gold ETF inventories were supposedly liquidated into the market. Even though the gold market experienced a record 1,707 metric tons of physical bar and coin demand in 2013, the liquidation of 915 metric tons of Gold ETF’s provided a net 792 metric tons of total gold investment. Please understand, I am just using these figures to prove a point. I really don’t care if the Gold ETFs have all their gold. I look at Global Gold ETF demand (spikes) as an indicator for gauging the amount of fear in the market.

The CPM Group does the same sort of supply and demand analysis for gold. They omit investment demand from the equation:

Gold Fabrication Demand (Annual, Projected Through 2015)

(CPM Group Chart Courtesy of Kitco.com)

Again, according to the CPM Group, gold bar and coins aren’t fabricated. They must be produced by Gold Elves in some hidden valley in the Grand Canyon. No doubt, under the strict control by the NSA department of the U.S. Government.

For anyone new to reading my work… I am being sarcastic.

Moreover, the significant change in gold investment demand is a clear sign that investors are still quite concerned about the highly inflated bubble markets. If we go back to 2002, total gold investment was a paltry 352 metric tons compared to 358 metric tons of technology consumption and 2,662 metric tons of gold jewelry demand. However, in 2011, the gold market experienced a massive 1,734 metric tons of total gold investment versus 2,513 metric tons of jewelry and technology fabrication.

What is significant about this trend change? In 2002, global gold investment was a mere 10% of total gold demand. However, by 2011, gold investment demand surged to 41% of the total, not including Central Bank demand. Even in 2016, global gold investment demand was still 40% of the total. As we can see, investors still represent 40% of the market, whereas they were only 10% in 2002.

Precious metals investors need to understand there is a huge difference between Gold and Silver versus all other metals and commodities. The overwhelming majority of commodities are consumed while gold and to a lesser extent, silver, are saved. And, they are being purchased as investments and saved for an excellent reason.

The world continues to add debt at unprecedented levels. In just the month of November, the U.S. Government added another $ 137 billion to its total debt. This doesn’t include the $ 610 billion of additional debt added since the debt ceiling was lifted on September 8th. So, the American public is indebted by another $ 747 billion in less than three months.

Getting back to silver, according to the GFMS team at Thomson Reuters, who provide the World Silver Survey for the Silver Institute, the market will experience a small annual silver surplus this year for the first time in several decades:

Global Annual Silver Net Balance 2004-2017

The reason for the surplus has to do with a marketed decline of silver investment demand this year. With the election of President Trump to the Whitehouse and the “Pole Dancing Guru” Bitcoin market moving up towards $ 12,000, demand for the silver investment fell by 50% this year. However, I don’t look at it as a negative. Oh no… it’s an indicator that the market has gone completely insane.

This reminds me once again of the movie, The Big Short. In the movie, the main actor bets big against the Mortgaged-Backed Securities. Unfortunately, just as the housing markets start to crash and the mortgage-back security market begins to get in trouble, the bets that the main actor in the movie made, began to go against him. That’s correct. His short bets against the market should have started to gain in value, but the banks wanted to dump as much of that crap on other POOR UNWORTHY SLOB INVESTORS before they would let it rise.

We are in the very same situation today. However, the entire market is being propped up, not just the housing market.

It is impossible to forecast a more realistic gold and silver price when 99% of the market is invested in the wrong assets. So, for the CPM Group to value gold and silver based on their fabrication demand totally disregards 2,000+ years of their use as monetary metals.

Thus, it comes down to an IDEOLOGY on why Gold and Silver should be valued differently than mere commodities, or even most STOCKS, BONDS, and REAL ESTATE. Valuing gold and silver can’t be done with typical supply and demand fundaments. The only reason I analyze supply and demand fundamentals is to understand what is happening to the market over a period of time.

For example, if we look at total global silver investment demand and price, there isn’t correlation:

Total Global Silver Demand vs Silver Price

But, if we look at what happened to silver investment demand since the 2008 Housing and Banking collapse, we can spot a significant trend change:

World Physical Silver Bar & Coin Demand

As we can see, world physical silver bar and coin demand nearly quadrupled after the 2008 Housing and Banking collapse. This is the indicator that is important to understand. While silver investment demand after 2008 has increased partly due to the higher price, the more important motivation by investors is likely a strategic hedge against the highly-leveraged fiat monetary system and stock market.

Investors who follow the CPM Group’s analysis on gold and silver based upon fabrication demand only, are being misinformed. Jeff Christian who runs the CPM Group has no idea about the Falling EROI – Energy Returned On Investment or does he understand the dire energy predicament we are facing. Thus, Mr. Christian and the CPM Group still look at the markets as if they will continue business as usual for the next 50 years.

We are heading into a future that we are not prepared. The economy and markets will likely disintegrate much quicker than anything we have experienced before. I believe the Bitcoin-Cryptocurrency market is going to collapse shortly due to what I see as extreme leverage in the system with very little in the way of cash reserves. I hear stories that trading in and out of cryptos isn’t a problem until you want to receive a substantial amount of funds in your bank. That is a huge RED FLAG.

So, take this warning… as well as the knowledge that pole dancers are becoming Bitcoin gurus. If it’s too good to be true, it’s likely too good to be true.

Precious Metals News & Analysis – Gold News, Silver News




The Dow Peaked At 14,000 Before The Last Stock Market Crash, And Now Dow 24,000 Is Here

The absurdity that we are witnessing in the financial markets is absolutely breathtaking.  Just recently, a good friend reminded me that the Dow peaked at just above 14,000 before the last stock market crash, and stock prices were definitely over-inflated at that time.  Subsequently the Dow crashed below 7,000 before rebounding, and now thanks to this week’s rally we on the threshold of Dow 24,000.  When you look at a chart of the Dow Jones Industrial Average, you would be tempted to think that we must be in the greatest economic boom in American history, but the truth is that our economy has only grown by an average of just 1.33 percent over the last 10 years.  Every crazy stock market bubble throughout our history has always ended badly, and this one will be no exception.

And even though the Dow showed a nice gain on Wednesday, the Nasdaq got absolutely hammered.  In fact, almost every major tech stock was down big.  The following comes from CNN

Meanwhile, big tech stocks — which have propelled the market higher all year — were tanking. The Nasdaq fell more than 1%, led by big drops in Google (GOOGL, Tech30) owner Alphabet, Amazon (AMZN, Tech30), Apple (AAPL, Tech30), Facebook (FB, Tech30) and Netflix (NFLX, Tech30).

Momentum darlings Nvidia (NVDA, Tech30) and PayPal (PYPL, Tech30) and red hot gaming stocks Electronic Arts (EA, Tech30) and Activision Blizzard (ATVI, Tech30) plunged too. They have been some of the market’s top stocks throughout most of 2017.

Many believe that the markets are about to turn down in a major way.  What goes up must eventually come down, and at this point even Goldman Sachs is warning that a bear market is coming

“It has seldom been the case that equities, bonds and credit have been similarly expensive at the same time, only in the Roaring ’20s and the Golden ’50s,” Goldman Sachs International strategists including Christian Mueller-Glissman wrote in a note this week. “All good things must come to an end” and “there will be a bear market, eventually” they said.

As central banks cut back their quantitative easing, pushing up the premiums investors demand to hold longer-dated bonds, returns are “likely to be lower across assets” over the medium term, the analysts said. A second, less likely, scenario would involve “fast pain.” Stock and bond valuations would both get hit, with the mix depending on whether the trigger involved a negative growth shock, or a growth shock alongside an inflation pick-up.

Nobody believes that this crazy stock market party can go on forever.

These days, the real debate seems to be between those that are convinced that the markets will crash violently and those that believe that a “soft landing” can be achieved.

I would definitely be in favor of a “soft landing”, but those that have followed my work for an extended period of time know that I do not think that this will happen.  And with each passing day, more prominent voices in the financial world are coming to the same conclusion.  Here is one recent example

Vanguard’s chief economist Joe Davis said investors need to be prepared for a significant downturn in the stock market, which is now at a 70 percent chance of crashing.  That chance is significantly higher than it has been over the past 60 years.

The economist added, It’s unreasonable to expect rates of returns, which exceeded our own bullish forecast from 2010, to continue.”

A stock market crash has followed every major stock bubble in our history, and right at this moment we are in the terminal phase of one of the greatest stock market bubbles ever.  There are so many indicators that are screaming that we are in danger, and one of the favorite ones that I like to point to is margin debt.  The following commentary and chart were recently published by Wolf Richter

This chart shows margin debt (red line, left scale) and the S&P 500 (blue line, right scale), both adjusted for inflation to tune out the effects of the dwindling value of the dollar over the decades (chart by Advisor Perspectives):

Stock market leverage is the big accelerator on the way up. Leverage supplies liquidity that has been freshly created by the lender. This isn’t money moving from one asset to another. This is money that is being created to be plowed into stocks. And when stocks sink, leverage becomes the big accelerator on the way down.

Markets tend to go down much faster than they go up, and I have a feeling that when this market crashes it is going to happen very, very rapidly.

The only reason stock prices ever got this high in the first place was due to unprecedented intervention by global central banks.  They created trillions of dollars out of thin air and plowed those funds directly into the financial markets, and of course that was going to inflate asset prices.

But now global central banks are putting on the brakes simultaneously, and this has got to be one of the greatest sell signals that we have ever witnessed in modern financial history.

Even Federal Reserve Chair Janet Yellen says that she is concerned about causing “a boom-bust condition in the economy”, and yet she insists that the Fed is going to continue to gradually raise rates anyway

Federal Reserve Chair Janet Yellen said the central bank is concerned with growth get out of hand and thus is committed to continuing to raise rates in a gradual manner.

“We don’t want to cause a boom-bust condition in the economy,” Yellen told Congress in her semiannual testimony Wednesday.

While Yellen did not specifically commit to a December rate hike, her comments indicated that her views have not changed with her desire for the central bank to continue normalizing policy after years of historically high accommodation.

I never thought that this stock market bubble would get this large.  We are way, way overdue for a financial correction, but right now we are in a party that never seems to end.

But end it will, and when that happens the pain that will be experienced on Wall Street will be unlike anything that we have ever seen before.

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




Bruce Kovner On Listening To The Market, Politics, & Risk Control

The following is a fantastic speech from Bruce Kovner on Caxton Associates’ 20th anniversary. Kovner shares a plethora of trading wisdoms including the three most important contributors to his hedge fund’s success. You can read the original speech from 2003 here.

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To all my colleagues, to friends and associates who have worked and invested with us over the years, may I say welcome to this 20th anniversary party. This is the first time Caxton has thrown a party for our extended family and I am happy and thrilled to welcome all of you. If we are able to catch Peter D’Angelo in a generous moment, we may not have to wait another twenty years for the next event!

This particular room has always been one of my favorites – combining a modern space with the elegant and mysterious beauty of this ancient Egyptian temple. But this setting also suggests another theme: that nothing is permanent in human affairs, that the apparent solidity of these stones of Egypt counted for nothing as dynasties came and went and especially when the Pharaoh of the 1950’s and 60’s, Gamal Abdul Nasser, now himself long gone, determined that the great Aswan Dam would flood the plains of the Nile, submerging much of Egypt’s history in the vast lake then to be formed.

The World changes. In some small sense, Caxton’s story has its roots in similar observations. Caxton was born twenty years ago amid extraordinary changes in the world of money, finance, and politics, changes that have helped transform the world economy. Tonight, I would like to talk briefly about the circumstances both in the markets and in my own life and experience that have shaped Caxton’s performance over the last two decades. I would like to start with events that predated the founding of Caxton but which are important in understanding the origins of the company. Then I would like to describe important periods in Caxton’s evolution and close with some thoughts about the future.

Caxton was started in a period of economic transition – a time of creative destruction, as fans of Professor Schumpeter would say – when the old order of fixed exchange rates and fixed gold prices ($ 35 per ounce, I believe) could no longer contain the enormous pressures of the 1960’s and 1970’s. We wanted guns and butter, Vietnam and the Great Society. Around the world there were vast and differentiated changes in inflation, productivity, and wealth. So, the Gold window was shut in 1968. Three years later, Richard Nixon abandoned fixed exchange rates and let the dollar float. A new economic era had begun.

The inflation, volatile exchange rates, rising commodity prices and high nominal interest rates that followed in the 1970’s created an environment in which the old ways of investing no longer functioned well. Long-only stock and bond trading were not the optimum ways to capture the opportunities that the 1970’s created. On the contrary, between 1968 and the early 1980’s, stocks and bonds suffered through a long bear market, destroying the value of equity and bond portfolios and undermining confidence in traditional investing styles. On the other hand, opportunities to profit from being long or short in currencies, fixed income, stocks and commodities abounded. The stage was set for active ‘macro trading’ as the increasingly popular term would label it.

New York, with its long-only equity culture and preponderance of establishment institutions, was not a congenial host for the new trading culture. That had to emerge in Chicago where people like Leo Melamed, a former egg broker, became head of the Chicago Mercantile Exchange and initiated trading of financial futures. The Chicago Board of Trade followed suit with the establishment of a market for trading Ginnie Mae futures. The process of creative destruction operated on the structure of financial markets far more effectively on the frontier in Chicago than it did in New York.

Cambridge, Massachusetts in the 1960’s was also not a bad place to learn that innovation and change are at the heart of survival. I had learned some of that from the history of my family – Jewish refugees from Czarist Russia. But I learned more after I enrolled as a freshman at Harvard College in 1962, reading Schumpeter on “creative destruction”, Keynes and Samuelson on counter cyclical fiscal policy, Tocqueville on the Ancien Regime, Fainsod on the Russian Revolution, Keynes (again) on the Economic Consequences of the Peace (meaning the punitive Treaty of Versailles), and a range of historians on the two World Wars. All were lessons on the impermanence of institutions and on the unintended consequences of government policy.

I did not know that these lessons were going to be put to any practical use by me. I had thought I would enter government service, not the financial world, when I left graduate school in 1970 and began to wander around the world for a few years. When I finally moved back to the United States in 1974, I was not seeking a Wall Street career (and I had no qualifications to begin one). I taught politics during the day and began to study financial markets at night. And by 1977, when I made my first tentative steps into financial markets, the financial world had already begun its remarkable transformation.

In my one-bedroom apartment on 57th Street, down the block from Carnegie Hall, I was only four miles away from Wall Street but a universe away in terms of my approach to markets. The new world of financial futures reduced the barriers to entry to currency and interest rate markets. Perhaps, I thought, efforts to understand what moved these markets might be well rewarded. I speculated on commodity prices, interest rates, currencies and was gratified to make money. And I found my way to Commodities Corporation, started by economists from MIT and Princeton, to learn more of my newly chosen trade. After five and a half years, with the blessings of my former employers, I decided to establish a company that reflected my own particular vision of how to adapt to this new financial world. With $ 7MM from investors and $ 5MM of my own funds, I started Caxton in March of 1983.

The new company’s operations were guided by principles and observations that helped us to pursue successful trading.

Barriers to entry to financial markets of all kinds were coming down. New markets were developing for the new financial instruments. Early providers of liquidity and expertise were likely to find excess returns.

Analysis of macro conditions was not being done systematically or well in most large money market institutions! Good analysis would provide excess returns.

Exogenous shocks – say, for example, oil price shocks – to the economies of the world were likely to be numerous. Being a quick responder to these shocks would provide excess returns.

Most investment managers and operators in equity and debt markets had institutional and cultural restraints on the kind of trading they could do – and tended heavily to favor long-only approaches. Few traders were highly skilled in the use of derivatives. Excess returns were therefore more likely to be earned by those who could go short as well as long, and who could use derivatives well.

More generally, Caxton adopted an institutional model that built in more flexibility in the creation of optimal portfolio mix than was normal on Wall Street. We had three structural advantages: First, there were no institutional limits on the range and style of our trading. We would go to any asset class where we saw opportunity, and we would trade in a range of trading styles (long, short, differential based, trend-following, mean-reversion, or arbitrage to name a few). Second, we chose to target risk levels, not nominal dollar levels, to calibrate our trading size. This enabled us to use leverage and portfolio theory to optimize our risk profile. There is plenty of opportunity to do risk management badly, of course; but the advantages of doing it well were enormous. And thirdly, we believed in a process of dynamic risk allocation – that is, we would put more capital at risk when either market conditions or macro economic conditions convinced us of the possibility of excess return. Caxton wouldn’t be stuck with a fixed asset allocation to stocks or bonds or currencies or commodities. We would change our capital allocation with conditions. Do that well and returns would not be a passive captive of the business cycle. On the contrary, dynamic capital allocation could turn what was for more inflexible institutions a source of difficulty into an advantage for a young firm capable of adapting to changing conditions.

The first ten years of Caxton’s existence certainly provided ample opportunity for us to test both premises of our new model and our skills in deploying it. We had macroeconomic shocks aplenty – rising and falling rates, oil shocks, the Plaza accord, the market crash of 1987, the Iran-Iraq War, not to mention the first US-Iraq War. We had new markets, new financial instruments, new Presidents, new Prime Ministers, currency unions … No shortage of fun, for we dyed-in-the wool macro traders. And, fortunately, although we made many, many mistakes, we managed to execute well enough to have good returns. During the first ten years of its existence, starting with about $ 10MM in capital, Caxton earned some $ 3 billion in profits, with a gross trading return of 55.6 percent per year. In the same period (although it included nearly all of the first ten years of a great bull market) the S&P 500 grew at the rate of about 15.7 percent per year. And even though Caxton’s trading during those years felt, to me, a little too much like Coney Island’s Cyclone roller coaster, the quality of our return, with a Sharpe ratio of 1.68, was about three teams higher than the S&P’s .54 during the same period.

Our success notwithstanding, by the mid-nineties, several of the opportunities which had facilitated Caxton’s success had changed. A large number of new players – hedge funds, prop desks at banks, speculators – had entered the market, reducing the advantages of early entrants. Macro analysis had become routine in wire houses, investment banks, and prop desks. And Caxton, with $ 1.6 billion in assets, was no longer small enough to make its returns with quick trades in smaller markets. We felt stale. Our performance – down 2.4% in 1994 – felt awful. It was time for a change. We sent our investors 60% of their funds, reduced our capital to $ 650MM, and went back to the drawing boards.

Prior to 1994, Caxton was largely focused on top-down macro trading. By 1994, we had concluded that we needed more tools than those that macro trading provided. Nothing works all the time. We wanted a variety of trading strategies across all liquid asset classes. And we didn’t want to be confined to one trading style, such as momentum-based trend following. So we began a systematic process of searching for new strategies, new styles, new markets and new traders. Let 1000 flowers bloom, it was said. But make sure they bloom with good risk management, and with low correlation! In the years since 1995, Caxton has spent a lot of time searching for these techniques, strategies and traders. We kissed a lot of frogs, as my good friend Joe Grundfest might say. (Actually, does say.) And we wound up with some 50 trading centers covering virtually all liquid asset classes, employing a multiplicity of approaches – trend following, of course, but also mean reversion strategies, fundamentals based models, arbitrage, computer-based approaches to markets, discretionary trading of equities, active trading of mortgage markets and related instruments, and many others.

We wouldn’t be here tonight, having this rather wonderful celebration in the Metropolitan Museum, if the results of that effort had not been acceptable. In fact, since January 1995, Caxton has earned $ 8.5 billion in trading profits, starting with a base of $ 650MM. Our average annual return has been 33.1 percent, and our Sharpe ratio rose from the first decades 1.68 to just below 2.00. In the same period, the S&P’s annual return was 12.7% for the S&P, with a Sharpe ratio of .50.

Today, Caxton has nearly 50 trading centers, divided among:

Macro oriented centers, which deploy about 35% of the risk of the company;

Equity oriented centers, which deploy about 25% of our risk;

Quantitative systems, deploying another 25% of our risk; and

Fixed income strategies which deploy another 15% of risk.

My own role in all of this has changed substantially over these years. Whereas in the first years of Caxton, I had tactical responsibility for almost everything in the portfolio, my trading accounts for something like 10% to 15% of the company’s risk presently. I spend a great deal of time on strategic development. It is more important for me to help find and develop areas of opportunity than it is for me to trade them. And it is more important to have a robust process of strategic development than it is to have one dependent on one human being. That is why Caxton devotes many millions of dollars a year to research and development aimed at finding new quantitative techniques or new areas of trading likely to yield high returns, and developing information technology and risk control techniques. I spend most of my time on these efforts, and on working with traders when they need advice, encouragement or help.

In these efforts, I try to pass on something of the proverbs, ethos and culture of trading that I have regarded as essential to Caxton’s success. Of these, I will mention three:

  1. Listen to the market. Close observation of price behavior is always necessary for the discipline of successful trading and it is very often very helpful in providing evidence about the nature of current conditions. If we can understand what the market is telling us, we will most likely be able to understand how to trade it. Listen to the market, hear it, don’t tell it what to do. Listen.
  2. Take politics and policy seriously. Changes in policy matter. Changes in leadership matter. Study them seriously. This doesn’t mean that politicians and policy makers will get it right – indeed very often they will get it wrong and these ‘mistakes’ in and of themselves may be important to markets. But ignore them at your peril. Policy matters. Politics matter.
  3. Above everything else, never let the discipline of risk control become lax. Those 100-year storms have a way of coming round every few years. If in real estate it’s “location, location, location”, in leveraged trading it is “risk control, risk control, risk control”. It is surprising how often this focus is lost.

Listening to the market. Taking politics and policy seriously. Risk control – to these we need to add one more on the level of the firm. And that is our old friend “creative destruction”: the process of creative destruction operates on trading techniques (and their embodiment in individual traders) as much as it does on any market structure. Any trading technique has a finite life in which it yields extraordinary returns. As more capital and knowledge are applied, markets become more efficient and rates of return drop – until eventually high risk adjusted returns disappear. Then it is time to retire the technique and move on.

The flexibility and learning that must be applied to trading also should be applied to capital allocation. We can’t be static in how we allocate capital to a particular strategy, nor to all of them together. So Caxton only wants the amount of capital it can deploy successfully. We are not asset gatherers. Despite a long list of investors who want to get in to Caxton funds, we will most certainly send money back to investors again in the near future. Barring unforeseen developments, we will return between 10 and 20% of our capital to investors at the end of this year. Flexible capital allocation. When rate of return drops, send capital back home to our investors.

In the meantime, we will continue to develop new techniques and new trading centers. As they bear fruit, we will nurture them and introduce them into our portfolio as they are proven and as conditions permit.

There is little doubt in my mind that the financial markets will remain as dynamic in the next twenty years as they were in the last. Look at the enormous changes in Asia, where China is emerging as a giant already. One cannot understand world commodity markets today without understanding China – and therein, of course, lies much opportunity as well as risk. Look at the extraordinary long cycle in Japan. Twelve years of recession and decline, of policy mistakes, of opportunities lost. And perhaps now, finally, of some policy initiatives which may finally lift Japan deflation and seemingly unending recession.

And one doesn’t have to look only across the oceans for big structural changes that make markets different in this decade than in the last. Look at the fixed income market, where mortgages and floating rates have changed the character of supply and demand and market behavior in recent years. The mortgage market now dwarfs the U.S. Treasury market. Outstanding mortgage debt now exceeds total marketable Treasury debt to 50 percent. A decade ago that rate was reversed. No one can understand the path of yields in the United States without understanding these new conditions.

And look at the universe of possible exogenous shocks we confront today. Perhaps we all have some sense of the potential disturbance of terror attacks. But have we correctly priced them in the market? How do you price low probability high damage events? And how do you know the right probabilities?

And what about technological change, which still promises to create enormous values (I am thinking now of biotech as well as information technology)? And what about new oil shocks? Or geo-political conflict, such as India-Pakistan?

Clearly, this list could go on and on.

There is no certainty that Caxton will be able to adapt successfully to these and other risks and changes, but we do structure ourselves to be able to analyze such changes and risks and try to respond to them. And certainly those institutions which do not have the capability to respond leave themselves at the mercy of events. The premise of our operational philosophy was always and still is: The World Changes. Nothing is Permanent. Those who fail to adapt to change risk everything. Look around you, here in this beautiful room. Look at the magnificence of the Temple of Dendur and of the civilization of Egypt. The World Changes and nothing is permanent. If that is one of the lessons that family history and education taught me, it is also the lesson that imbues the practice of Caxton. Study the world. Study markets. Listen to the markets. Then, perhaps, with a little luck and skill, you may be able to find ways not simply to be a victim of circumstances but to profit from them.

Thank you.

 

 

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