January is a Critical Month for Markets

For more than three decades, my grasp of economic and business fundamentals, demographics, and cycles has allowed me to empower my readers… to let them see ahead of the curve and prepare for booms and busts in the economy, the business cycle, and stock markets long before their peers.

Then something happened that I never believed could happen…

In 2008, when the Economic Winter Season began to take its toll, Central banks stepped up and printed trillions upon trillions of dollars.

Because of the deflationary cycle we should have been experiencing since 2008, their efforts have had a muted effect on the economy. For all the cash they’ve injected into the system, 2% growth on average is pathetic.

But, their efforts have had an outsized impact on the stock market, creating the most unpredictable and dangerous situation for investors that I’ve ever seen.

I mean, markets are totally unhooked from fundamentals.

Stock prices aren’t going up because of the underlying companies’ performance.

They’re not going up because people are spending that much more money.

They’re not going up because the economy is booming stronger than ever.

So why are they going up? Because of the something-for-nothing environment central banks have created.

I explain this in more detail in my latest video… and then discuss what I think we could see next…

The post January is a Critical Month for Markets appeared first on Economy and Markets.

Harry Dent – Economy and Markets ()




Stocks Markets Charge Ahead; Gordon Chang: Blowup w/ China, N. Korea Could Change Almost Everything

Happy New Year and welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

Coming up we’ll hear a wonderfully insightful interview with Asian expert Gordon Chang. Gordon shares his views on Donald Trump’s much-hyped Tweet about the size of his nuclear button, gives his very studied view on the state of the Chinese economy and what the state of all of the Asian geopolitics will mean for the global markets. Be sure to stick around for my very interesting conversation with Gordon Chang, coming up after this week’s market update.

Precious metals markets are off to a strong start in the New Year.

The gold market shows a 1.2% gain this week to bring spot prices to $ 1,319 an ounce. The first key technical level to watch going forward from here is $ 1,350 – gold’s high mark for 2017. After that, the $ 1,375 and $ 1,400 levels will come into play. A breakout above $ 1,400 would represent a multi-year high and likely induce some strong momentum buying for the first time in years. But for now the yellow metal still remains mired in a long-term basing pattern.

Turning to silver, prices currently come in at $ 17.24 per ounce and are higher by 1.5% for this first week of 2018. Platinum was the laggard in the PM space in 2017 but is a leader in the first few trading days of 2018 – posting a gain of 4.0% this week to trade at $ 970. Its sister metal palladium made a new all-time high on the heels of a 3.0% weekly advance and currently trades at $ 1,095 an ounce as of this Friday morning recording.

On Wednesday, the Federal Reserve released the minutes from its December meeting. Metals initially sold off as the dollar strengthened, but those market reactions both reversed on Thursday.

Policymakers raised the Federal funds rate by a quarter point this past December. But as the meeting notes reveal, opinion is divided over whether to continue raising rates at a gradual pace this year. The consensus forecast is for the central bank to push through three rate hikes in 2018. Traders are now putting the odds of a March hike at close to 70%.

The GOP’s tax cut passage may tilt the Fed slightly more hawkish. Fed economists now project modestly higher GDP growth thanks to the tax cut stimulus.

The fiscal stimulus should help push inflation rates up toward the Fed’s 2% target by the end of the year – and perhaps beyond. In recent weeks, inflation-correlated assets such crude oil, precious metals, and resource stocks have perked up while interest rate sensitive assets such as bonds have struggled.

The stock market, of course, keeps chugging ahead – where it finally stops, no one knows. Momentum chasers keep buying, which pushes prices higher, which creates more momentum to chase. The stock market has long past the point of being a place for value investors – at least when it comes to the major averages such as the Nasdaq and S&P 500. Valuations are now in bubble territory.

Investors may look back on 2018 as the opportunity of a lifetime to switch from overvalued stocks to undervalued precious metals.

The supply and demand fundamentals for precious metals are set to improve in 2018. Low gold and silver prices over the past few years have severely hurt the mining industry. It has continued to operate existing mines – sometimes at losses – even as it has slashed exploration and development of new projects. That will mean years of stagnating or even declining output ahead.

Metals Focus projects mining output of gold in 2018 will show a slight decrease from 2017. Analysts expect a more significant drop could occur in 2019.

A similar pattern is expected to play out in silver, though it’s more difficult to forecast since few primary silver miners exist. Demand for silver is also more variable, with investment demand being the biggest wild card.

Commodity markets analysts at TD Securities believe silver may be the metal to own in 2018. They forecast silver prices will hit $ 20 this year. That would be an important technical level to hit. Yet $ 20 per ounce silver would still be less than half of its all-time high. You can’t say that about gold or most any other commodity or asset class on the planet right now.

From a value perspective, silver looks compelling. Stacking more silver may be a great new year’s resolution for investors to keep in 2018.

Well now, without further delay, let’s get right to this week’s exclusive interview.

Gordon Chang

Mike Gleason: It is my privilege now to welcome in Gordon Chang, author, television pundit, and columnist at the Daily Beast. Gordon is a frequent guest on Fox News, CNBC, and CNN, among others, and is one of the foremost experts on Asian economics and geopolitics, having written books on the subject and it’s great to have him back on with us.

Gordon, it’s a real honor to have you on again, and thanks so much for your time today. I know it’s been a busy week for you given all of your media appearances, and we’re grateful that you could join us today. How are you?

Gordon Chang: I’m fine, thank you, and thank you so much, Mike. I really appreciate the opportunity.

Mike Gleason: Well, there are many things to cover here given all that’s going on right now. We certainly appreciate your expertise, particularly when it comes to the developments in Asia. There’s a lot going on in that part of the world with big implications for investors. Let’s start with North Korea. That’s obviously been at the forefront of the news this week with tensions getting ratcheted up again.

Kim Jong-Un and President Trump are both bragging about their nuclear arsenals. The over the top posturing on both sides makes it hard to gauge just how seriously the threat of nuclear exchange should be taken. The market seems to have stopped paying attention for the most part. Please give us your thoughts on the matter. Is there any likelihood the disagreement over North Korea’s nuclear weapons program will escalate beyond words, Gordon, or is this war only going to be fought on Twitter?

Gordon Chang: If you look at Twitter, this certainly is a matter of concern, but I think the reality is much different. Right now, Kim Jong-Un, the ruler of North Korea, is feeling sanctions. We saw a hint of that in his New Year’s address where he referenced it, at least indirectly, and at one point he actually called the sanctions an existential threat.

What he’s trying to do right now with his overture to South Korea is to get the South Koreans to shovel money into his regime. What he would like in return for sending two figure skates to the winter Olympics in South Korea next month would be for South Korea to lift sanctions to resume inter-Korean projects, like the Kaesong Industrial Complex, and also for more North and South Korean aid.

I don’t think that those expectations are realistic. Some of what he wants would be a violation of UN sanctions, and President Trump’s policy has been to cut off the flow of money to Pyongyang so it can’t launch missiles or detonate nukes. This is going into, I think, a very crucial period, because if you look back in history, and I’m talking seven decades, we have seen North Korea engage in military provocations shortly after making peace overtures. And this whole concept of the Olympics and his opening of dialog with South Korea, that’s a peace overture.

Mike Gleason: We’ve got two huge wild cards at the forefront of all this with President Trump and Kim Jong-Un being rather unpredictable, to say the least. Is Trump’s tit-for-tat responses to his adversary here going to make diplomacy harder to achieve as our allies might have a hard time joining in full force to combat the North Korean threat?

Gordon Chang: I think on Tuesday, the second of his two tweets certainly made diplomacy harder. I think it was a setback for the American position. You’ve got to remember that in the morning, the first tweet was actually quite constructive. In the first tweet, President Trump talked about how sanctions were biting the North Korean regime.

What Trump needs to do, and this is not just among friends, but also neutral countries and potential adversaries like Russia and China, the backers of North Korea, what he needs to do is to get them to cut off the flow of money to the North. Any time that he talk about sanctions, that’s important. That’s good for us, but Tuesday evening in that exchange of messages, we saw President Trump with his tweet about button size. This was a setback in the sense that we’re no longer talking about what’s important for diplomacy, which are sanctions. We’re now talking about infantile behavior on the part of the American president. That’s not a good thing.

Mike Gleason: Now, let’s talk about North Korea’s much larger neighbor for a bit. Chinese officials just held the Communist Party’s National Congress, a gathering held once every five years to formalize the party leadership. Some think the event may be significant in that it will mark a turning point, the theory being that officials there worked hard to prevent a slowdown in the Chinese economy until after Congress has concluded, and now that it is done, a much-needed correction could be underway. Do you see National Congress as meaningful, Gordon, and what are you expecting for the Chinese economy in the year ahead? Because as we know, what happens in China has far-reaching effects on markets globally.

Gordon Chang: The Congress was important I think because Xi Jinping outlined a very expansive notion of Chinese power. That’s going to be I think an overstretch. I think that their commitments now are far bigger than their resources. This has implications, of course, for the economy and the strains on it. This year, this whole issue is going to be deleveraging. Chinese officials have been talking about deleveraging for years. They haven’t been able to accomplish it. And that’s largely because they are not willing to undertake structural reforms. They’re not willing to see the economy go into a recession.

In 2016, the last year where we really had good numbers, the World Bank thinks that the Chinese economy grew not at the 6.7% pace that the official national bureau statistics claimed. They actually released a chart in the middle of 2017 and with a little arithmetic, you can see that the World Bank thinks that the Chinese economy grew by 1.2%. Also, that 1.2%, although it might be shockingly low to many people, is consistent with the most reliable indicator of Chinese economic activity. That’s the overall consumption of energy.

In 2016, overall energy consumption increased, but only by 1.4%. So, we’re talking an economy that is growing maybe now a little bit better than 2016. Maybe we’re talking 2%. I don’t know. But the point is that they’re accumulating debt at a pace which is about six, seven, maybe eight times faster than they are producing output. They can do that for a little while because they control the banks, they control the big state enterprises, they control the markets, but they can’t do that forever.

Mike Gleason: You haven’t been terribly optimistic about the Chinese economy, and for good reason. However, from a certain point of view, there is a massive amount of central economic planning going on everywhere. You just alluded to that. Obviously, there’s a lot of that going on here in the U.S., of course. We’ve seen some extraordinary maneuvers from the U.S. Federal Reserve over the past decade, and the truth is that we almost certainly don’t know the full extent of what our central bank has been doing to intervene in markets. If history is a guide, all of the tampering could lead to serious trouble.

It probably isn’t fashionable to ask since most are talking about strength in the U.S. economy, but it is at least possible that there are bubbles waiting to pop in both the US and China. Admittedly, there are lots of differences between the two nations, and the potential for central bank policy errors is just one piece of the equation. What are your thoughts? Is the risk of a bubble bursting lower here than in China?

Gordon Chang: Well, I don’t know if it’s lower. In China, there’s going to be a bubble bursting. It could be a lot later than I think, but it will burst. Of course, in the United States, when you have a run up in the economy, you’re going to have a rundown at some point. But whether it’s going to be a 2008 style burst, I just don’t think so.

In any event, from the Chinese perspective, they look at the U.S. economy. They’re extraordinarily dependent on us. For instance, in 2016, the last year for which we have complete figures, a full 68% of China’s merchandise trade surplus related to sales to the U.S. When the U.S. is doing well, Chinese exporters do well, but there’s a real risk in the U.S. doing well, which I think people don’t talk about. And that is, the Chinese are able to hang on because they’ve been able to control the renminbi, but with the Federal Reserve tightening, that is putting pressure on the Chinese currency. It makes it much more difficult for Chinese technocrats to manage in a difficult environment already.

If you talk to the American citizen, they might even not know what the Federal Reserve is. They certainly don’t follow what’s going on in terms of interest rates for the most part, but if you go to China, many housewives can tell you a lot about what the Fed is doing because it affects their pocketbook in a very immediate way.

China has been able to staunch the outflow of currency. In 2015, it was about $ 1 trillion according to Bloomberg. 2016, probably a little bit more than that. Last year, a lot less because of extraordinary capital controls, some of them announced, some of them not. With the Fed tightening, that makes it very difficult for China to maintain those controls, which are difficult even under the best of circumstances. I think it’s going to be a very difficult environment for Beijing this coming year, much more difficult than it was in 2017 or 2016.

Mike Gleason: If we recall back to late summer of 2015 when the Chinese stock market had a sharp and deep correction, it had major implications for markets around the world, including the U.S., so they certainly are interconnected. If the Chinese markets were to be the first to falter, you would have to think that U.S. investors would feel that, as well, just like it did two and a half years ago.

Speak to that and then also comment about the likelihood that the Chinese and thus the world will be able to right the ship this time, like they did last go around, when they were able to prevent that snowball from really getting going.

Gordon Chang: Well, of course, any major downturn, especially a sharp one in China, is going to ripple through global markets. It will be felt here, but we’re relatively, I think, in good shape because China is less important to the global economy than people think. Yes, there’s a lot of growth there, but China has been taking growth away from other countries through predatory trade practices.

So, if it were to disappear down a dark hole, yes, we’d all be shot, but I think in six months, we’d realize, “Hey, this wasn’t so bad,” because when you have Chinese producers not able to flood the global markets as they have been, producers in other countries will take up that slack and there will be, I think, better conditions elsewhere, including the United States. So, I think that the effect of China’s problems really, I think are just exaggerated in people’s conceptions.

With regard to the second question, I think that central banks are not in as good a position today as they were in 2008, 2009 to take up the slack. And so I see things better of course in many, many, many ways than the last decade, but I don’t think that we’re going to get the relief efforts from central authorities that we did last time. But I think the economies are better than they were before, so I’m a relative optimist about the rest of the world, but we’ve got to remember, though, that geopolitical problems in North Asia could actually be the one thing that takes all of our assumptions and makes them incorrect.

Mike Gleason: Getting back to capital controls, Chinese citizens have certainly had a big appetite for cryptocurrencies like Bitcoin and others as they look to flee the local currency. Any developments there to update us on when it comes to the government cracking down and trying to prevent people from diversifying with cryptos?

Gordon Chang: I don’t think there’s been really very much in the way of developments in the last week or so. The most important thing is that the Chinese authorities are very suspicious of crypto-currencies. They are going to continue to try to attack Bitcoin and others. They may let up every once in a while, but I don’t think that they have given up in any event, because this is where Chinese technocrats view the last stand. They’ve got to protect the renminbi. If they don’t, it’s all over, and not only for the Chinese economy and financial system, but also for the political system. So, they’re going to do everything possible to make sure that currency doesn’t leave China.

As we saw in 2017, they were really determined. Now, they’re going to pay a big price, or actually many big prices, for their currency controls. What they did was they solved their immediate problem. These guys are looking at the short-term. They don’t look at the long-term. So, you can expect for them to go after Bitcoin, go after the crypto-currencies, go after any other conceivable way to get money out of China. The Chinese authorities are going to attack it. So, any sort of optimism short-term about Beijing changing its views I think is just misguided.

Mike Gleason: China recently launched an oil futures contract, which is denominated in yuan but convertible into gold. This looks to us like another assault on the supremacy of the Petrodollar, what we’ll see if the gold backing is enough to lure some of the energy trade away from the established markets. If you’ve been following that development, please give us your comments. Is the yuan a significant threat to the dollar here, Gordon?

Gordon Chang: No. If we’re talking 50 years, 60 years, 70 years down the road, yeah, it could very well be a threat to the dollar, but not now. Renminbi usage around the world over the last couple years has been in decline, and it will remain in decline as long as China has those capital controls announced and unannounced. By the way, having unannounced capital controls makes China look like a Banana Republic.

So, as much as they’re going to try to encourage use of the renminbi, it’s just not going to have significant success until they’re willing to open up their capital account. And I don’t see that (happening) any time soon because there’s just too much pressure on the currency for them to do that. So, they can devise whatever instrument they want. They might make a little bit of in road here and there, but long-term, renminbi usage probably will continue to fall. That’s just because if you can’t get the money out, you’re just not going to want to use that as a medium of exchange.

Mike Gleason: We often talk about how the Asian world is full of very strong hands as it relates to gold and that much of the precious metals that leave the West and head East don’t come back. Any thoughts there about what that might mean for the western world if we do have a big rush into precious metals as a safe haven investment during an economic and market downturn, given that so much gold has left western in recent years and gone over to China?

Gordon Chang: What leaves will come back. The U.S. has a strong economy. It’s relatively stable. Asia right now is a place of geopolitical danger, and I think that there’s going to be a long-term reversal. Right now, there’s just too many hot spots along the periphery of China. One of those situations is going to go wrong. I can’t tell you which one. It could be India. It could be South China Sea. It could be East China Sea. It could be North Korea. We don’t know, but if you’re looking at safe havens, Asia is not it.

Mike Gleason: Well, as we’re getting close here, Gordon, any final comments that you want to leave us with? Maybe give us an idea of what you’re watching most closely here over the coming weeks and months in terms of the geopolitical theater in Asia, and then the impact that it’s likely to have on U.S. investors.

Gordon Chang: The most important thing will be the attitude of the Trump administration towards China. There are a number of items on the agenda which could derail relations. For instance, the section 301 investigation into China’s intellectual property theft and a number of other investigations. There’s going to be continuing friction between the United States and China, not only over North Korea, but other matters. This is not going to be good for the markets. I can understand markets not discounting this now, but when things happen, I think that we will see sharp reversals. This is just the thing to keep in mind in terms of geopolitical risk, because it’s the one thing that could change almost everything, or even everything overnight.

When it comes to geopolitical risk, I think that there’s a mis-perception of things. The one thing that really concerns me is war talk in the United States. There’s an assumption in Washington among many people that the United States can strike North Korea without consequences. That could very well be true, but we’ve got to remember that in August of 2017, the Chinese said that if the United States were to strike North Korea first, it would come in and aid North Korea.

While although there could be no consequences to an American attack on North Korea’s missile and nuke sites, we could very well end up in an exchange of nuclear weapons, not only with the North Koreans, but with the Chinese and perhaps the Russians, as well. So, all of these scenarios are there. Of course, the extreme scenarios, the extremely good ones and the extremely bad ones usually don’t come to pass, but we’re at a time where it resembles in many ways the prelude to the Cuban Missile Crisis of 1962.

There are extraordinarily large number of ways that all of this can go wrong. I’m not saying it will, but I don’t think people have started to think about the consequences of some of the courses of action that they’re recommending. The United States can peacefully disarm North Korea, not use force in doing that, but there’s no political will in the United States to do that – which is essentially to impose cost on North Korea’s backers, primarily Russia and China. It is easier to start a chain of actions that could lead to global conflict than it is to go after North Korea’s backers. That’s a very dangerous situation.

Mike Gleason: Well, very good summary there to close us out. Gordon, it’s been a truly fascinating conversation. I really enjoyed it. It was great to have you on. Once again, I’m really glad you were able to find time for us this week with everything going on. Continued success to you in the new year, and I would love to have you on again in the future as this all unfolds. Thanks again and have a great weekend.

Gordon Chang: Thank you so much, Mike.

Mike Gleason: Well, that will do it for this week. Thanks again to Gordon Chang, Daily Beast columnist. You can follow him on Twitter @GordonGChang or check out his book The Coming Collapse of China.

And check back next Friday for the next Weekly 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




Precious Metals Markets 2018

The first trading days of 2018 are confirming signs of renewed investor interest in the precious metals sector after a long period of malaise.

Gold Bull

Gold and silver markets entered the year with some stealth momentum after quietly posting gains late in 2017. Gold finished the year above $ 1,300/oz. – its best yearly close since 2012.

Over the past five years, the yellow metal has been basing out in a range between $ 1,050 and $ 1,400. A push above $ 1,400 later this year would therefore be significant.

It would get momentum traders and mainstream financial reporters to take notice.

The alternative investing world was enthralled by Bitcoin in 2017. While we don’t expect a Bitcoin-like mania to take hold in precious metals in 2018, we do expect gold and silver markets to make some noise.

Stimulus to Push Up Commodity Prices Again

Even as the Federal Reserve vows to continue raising its benchmark interest rate and “normalizing” its balance sheet, a flood of new fiat stimulus is set to hit the economy. The recently passed tax cuts will cause hundreds of billions – perhaps eventually trillions – of dollars to be repatriated back to the United States.

For years, many corporations have hoarded business assets overseas in more favorable tax environments. The U.S. had one of the world’s least competitive corporate tax structures. With the corporate rate dropping to 21% in 2018, the U.S. suddenly becomes a much more attractive place in which to set up shop.

The good news is that dollars are coming back home and getting reinvested in capital projects, wage increases, new hiring. The potentially bad side effect is that higher inflation increasingly shows up in consumer prices.

An inflation uptick would likely cause long-term interest rates to rise, which would dig the government’s $ 20.6 trillion debt hole deeper. (Federal deficits are expected to grow by more than $ 1 trillion under the GOP’s latest budget, which fails to pair tax cuts with spending cuts.)

The flood of deficit-financed stimulus sets the economy up for a short-lived spurt of gains… followed by longer duration debt and inflation pains. For now investors are still enjoying gains, as reflected by the ongoing strength of the stock market. But inflationary pressures are already building in raw materials markets.

Mining Output Continues to Decline

The supply and demand fundamentals for precious metals are improved in 2018. Low gold and silver prices over the past few years have hurt the mining industry. Although it has continued to operate existing mines – sometimes even at losses – it has slashed exploration and development of new projects. That will means years of stagnating or even declining output ahead.

Miner

Metals Focus projects mining output of gold in 2018 will be 3,239 tonnes, a slight decrease from 2017. Analysts expect a more significant drop could occur in 2019.

A similar pattern is expected to play out in silver, though it’s more difficult to forecast since few primary silver miners exist (most silver comes as a byproduct of base metals mining operations). Demand for silver is also more variable, with investment demand being the biggest wild card.

Commodity markets analysts at TD Securities believe silver may be the metal to own in 2018. According to TD’s 2018 Global Outlook, silver prices should hit $ 20/oz this year (after finishing 2017 just under $ 17).

Palladium Is on a Tear

Turning to the platinum group metals, platinum is widely expected to go into a supply deficit this year or next after finishing 2017 at a small surplus. Its sister metal palladium experienced an annual supply deficit of 680,000 ounces last year and growing concerns of shortages, helping drive its big price gains.

Even with palladium prices now touching all-time highs, available supply is still on the wane. HSBC forecasts an expanding palladium deficit in 2018 to more than 1 million ounces.

The growing shortage figures to continue pressuring palladium prices upward. It’s also bullish for platinum. That’s because automakers and other industrial users of palladium now have an incentive to switch to less expensive platinum where possible.

Large-scale substitutions don’t take place immediately. But in 2018, demand drivers could finally start shifting back in favor of platinum.

Platinum, silver, and gold investors who have sat patiently on their positions waiting for them to break through to the upside will be rewarded. It’s a question of whether that happens early in 2018 with the economic stimulus, late in 2018 as a reaction to potential tremors in bond and stock markets, or in 2019 when supply destruction starts to kick in more strongly.

Only “Mr. Market” knows for sure.

While you can still buy gold under $ 1,400 and silver under $ 20, they remain (for now) compelling values. Silver looks especially compelling given its cheapness relative to gold and virtually every asset on the planet.

Precious Metals News & Analysis – Gold News, Silver News




The Oil Market’s Massive Repricing

The following is an excerpt from our Macro Intelligence Report (MIR). If you’d like to learn more about the MIR, click here.

Seeking out asymmetric trades today is a bit tougher than normal because of where we are in the cycle. We’re in the latter stages and valuations are high (very high) so upside is somewhat limited on the whole and completely dependent on sentiment.

But it’s not late enough in the cycle where it makes sense to start pressing shorts — the trend is still up and could persist for another couple of years.

The large vampire squid (aka, Goldman Sachs) noted recently that the “average valuation percentile across equity, bonds and credit in the U.S. is 90 percent, an all-time high.

A good approach in environments such as these is to stick with the large trends that are running, but to start toeing the water in the few discarded and unloved assets that have upside asymmetry and a relative margin of safety.

For our team at Macro Ops, the asset that fits the bill is oil.

Back in August we wrote about why we thought the puzzle pieces were coming together for a bullish oil rebound — a veritable “Marcus Trifecta” of macro, sentiment, and technicals signaling major upside asymmetry.

We made the argument that the market was overestimating oil’s future supply growth while understating demand. Furthermore, we remarked how the market was headed for a supply constrained environment due to a record level of cuts in CAPEX (ie, reduction in the investment into future supply) to the global oil market over the past few years.

Lastly, we wrote how the bullish case for oil was made even more delectable by the trend rates in GDP growth and inflation. The “Investment Clock” framework has us entering the “Overheat” phase of the business cycle. In this phase, commodities and oil and gas stocks in particular historically perform very well. The chart below shows energy’s relative total return outperformance in the final year(s) of a bull market.

This was, and remains, a very contrarian call. And that’s all for the better.

Since our August report, WTI crude has climbed from $ 49/bbl to a high of $ 59/bbl last week. The basket of three oil and gas stocks that we recommended is up over 12%; roughly double the S&P’s return over the same time.

So we’re off to a decent start.

But as we’ve continued to dig into the energy story we’ve become more convinced that there’s incredible asymmetry building in the space. Today we’re going to reiterate our bullish call for oil and gas equity outperformance going into 2018 and update the evidence on why it’s nearing time strike it rich.

There Will Be… Bull? — The Coming Oil Bull Market

One of the more difficult, yet important, jobs of a trader is tease out what’s likely to happen versus what’s already priced in. It’s at this intersection of the unfolding path of reality and embedded expectations where trades are born and die.

But getting inside the head of every other market participant and weighing their thinking against the price of the market is tough going for obvious reasons.

A workaround we use is paying attention to the popular stories that market participants are telling. And more importantly, how these stories evolve and react to new information, and then how these reactions get reflected in prices.

Narratives are the human way of trying to make sense of a chaotic, complex, system. The stories we tell ourselves are often wrong, incomplete, and sometimes crazy. But nonetheless our ability to believe in them has been so powerfully ingrained in us because it’s helped us thrive as a species.

Author of the book Sapiens, Yuval Harari, notes the following:

Sapiens rule the world, because we are the only animal that can cooperate flexibly in large numbers. We can create mass cooperation networks, in which thousands and millions of complete strangers work together towards common goals. One-on-one, even ten-on-ten, we humans are embarrassingly similar to chimpanzees. Any attempt to understand our unique role in the world by studying our brains, our bodies, or our family relations, is doomed to failure. The real difference between us and chimpanzees is the mysterious glue that enables millions of humans to cooperate effectively.

This mysterious glue is made of stories, not genes. We cooperate effectively with strangers because we believe in things like gods, nations, money and human rights. Yet none of these things exists outside the stories that people invent and tell one another. There are no gods in the universe, no nations, no money and no human rights—except in the common imagination of human beings. You can never convince a chimpanzee to give you a banana by promising him that after he dies, he will get limitless bananas in chimpanzee Heaven. Only Sapiens can believe such stories. This is why we rule the world, and chimpanzees are locked up in zoos and research laboratories.

We are genetically programmed to buy into the popular narratives that are shared by the crowd. That’s why it’s so damn hard to be a contrarian… it’s literally against our biological programming to go against the herd.

Similar to how species react, adapt, and evolve slowly in response to environmental stresses, so too do the popular narratives adjust slowly over time as new information enters the picture that challenges their validity.

This is why popular market narratives always lag the market. And once the market finally acknowledges the faults in the prior narrative, we see violent surges and reversals in price.

We want to identify the popular story that’s embedded in prices and look for instances where new information signals a diverging outcome. The more divergent, the more lucrative the trade.

We want to be ahead of this narrative adoption. If we can lead the story then we can make money.

Going back to the oil markets:

The popular story over the last three years of the oil bear market rested on two things (1) that the world is awash in oil thanks to the introduction of fracking and (2) the adoption of electric vehicles was going to soon kill the internal combustion engine, thus clipping off a big source of demand for oil.


But the data doesn’t support this narrative.

Like most popular stories, this one was born in some truth.

But that truth, or rather its supporting facts, have evolved. And the popular narrative of the oil market has not yet fully awoken to the new reality.

Once it does we’re likely to see $ 80, even $ 100/bbl oil in the coming year.

Here’s why.

The consensus in oil is predicated on the belief that fracking and the introduction of shale oil has led to a new paradigm of sustainable drilling productivity growth, making the US a major swing producer in the global market.

But recent data isn’t backing this up.

Supply forecasts have been predicated on the belief that improvements in fracking technology will continue to increase well productivity at the growth rates we’ve seen over the last few years. The expectations are that this rate will compound, bringing ever more supply growth online.

The problem is that these forecasters have mistaken the source of that “well productivity growth”.

For example, output in the Bakken shale (one of the most productive shale regions in the US) more than tripled from 2012 to 2015. Recent research done by MIT suggests this rise in well productivity was not actually due to improved fracking technology and efficiency gains… but rather because shale companies abandoned their less productive fields following the market slump and instead pumped from their prime acreage.

In addition, the E&Ps have been tapping their drilled but uncompleted (DUCs) wells.

The combination of only pulling from Tier 1 fields, along with draining pre-drilled wells, led to forecasters greatly overestimating future supply growth by misattributing the excess supply to technology driven productivity gains.

So while forecasters have been modeling out continuous well productivity growth of roughly 10%, the real number is likely closer to 6% or less. And while that difference may not seem like a lot, when you think about the compounding effect that 40% less growth has over time… it’s huge.

This has led to forecasters continuously overestimating US production over the last year.

Commodity Hedge Fund, Goehring & Rozencwajg Associates (GRA), wrote the following  in their latest quarterly letter (emphasis mine):

Most oil analysts at the start of 2017 believed US crude production would grow by approximately one million barrels per day between January 1st and December 31st. That level of growth would imply full-year 2017 oil production of 9.3 million barrels per day or 450,000 b/d above 2016 levels… Many analysts felt these estimates would ultimately be revised higher.

Even with substantial OPEC production cuts, the energy analytic community has vigorously argued that because of strong US shale oil growth, global oil markets would remain in long-term structural surplus…

However, data has now emerged suggesting that US crude production growth is rapidly slowing…

Between September 2016 and February 2017, US crude production grew by 100,000 barrels per day per month, but since then US production has ground to a near standstill. Between February and July, US production has only grown by 33,000 barrels per day per month – a slowdown of 67%. Moreover, preliminary weekly data for August and September (adjusted for the impact of Hurricanes Harvey and Irma) suggest that production growth has slowed even more.

The slowdown in US onshore production growth is even more puzzling given the huge increase in drilling that took place over that time. The Baker Hughes oil rig count is up 130% since bottoming in May of last year. In spite of a surging rig-count, onshore production growth is now showing signs of significant deceleration.

Although it is still early in the production history of the shales, it now appears the growth in US shale production may not be nearly as robust as originally expected. If our observations and analysis are correct, then the oil market will be even more under-supplied that we expected in the 4th Q of the year and incredibly undersupplied into 2018. The ramifications are going to be huge.

The deceleration in production growth has led to a large comparative drawdown in inventories.

GRA notes that “inventories have now drawn down to critical points where further inventory reductions will result in severe upward price pressure” and, “If our inventory extrapolation is correct and inventories reach these levels (and they should — our modeling has been correct over the past nine months), then prices have historically surpassed $ 100 per barrel.

Signs of a tightening supplies are beginning to show in the futures market where the spot price has recently pushed above long dated futures for the first time in years.

Despite this new data indicating a market moving closer to a supply deficit, the market continues to operate under the old narrative and faulty assumptions.

The irony is that these faulty assumptions (wrongly extrapolating shale productivity growth into the future) has driven OPEC to extend their output cuts — where compliance has been strong — for another year.

On top of this, oil companies are beginning to focus more on cash flows and less on production which means even less CAPEX (investing into future production). And this is all following the largest reductions to CAPEX in the history of the oil and gas market over the time for which we have data.  

This is setting the market up for a massive repricing sometime in the coming year(s). None of this is priced in.

Despite crude’s recent rally, the most bullish piece put out by the Street has come from Goldman Sachs which went out on a caveat filled limb saying they expected WTI to finish the year at a whopping $ 57.50 (it’s trading at $ 56 right now).

Oil trader and fund manager Pierre Andurand of Andurand Capital (who’s fund has returned over 560% since 2008) noted the following in his recent investment pitch in Sohn, London (summary via marketfolly):

Oil prices will go much higher than consensus. In the last 18 months there has been a lot of negative hype about oil prices. The two most discussed factors have been US shale production and electric vehicles. US shale has been called the internet of oil.

Demand for oil has rarely been as strong as it is today. Demand is as high as it was 10 years ago when there was a lot of talk about the super cycle and demand growth. New oil discoveries are at all-time lows.

Supply will peak before demand at current oil prices. Oil demand will peak sometime between 2027 and 2035, much later than the consensus view. The supply of electric vehicles will be constrained by a shortage of batteries.

Supply will peak in 2020. Oil discoveries peaked in the 1960s. They stabilised in the 1990s making a lower peak with US shale discoveries in the early 2000s but they have been declining since then. We are finding 10x less oil than we were 20 years ago. Global reserves are going down fast. We have a 100bn barrels (or 10% less) of reserves than we had 10 years ago when everyone was worried about peak oil. The largest declines have been in ex-US small oil fields. The rate of decline will quicken and supply will be less than expected.

Nobody wants to invest in oil projects that take 6 years to come to market and 20 years to make a profit. Against expectations, US production is flat this year. Productivity per well will go down. We could need $ 100 a barrel oil to mitigate the fall in supply.

If OPEC goes back to full production, there would still be a deficit of half a million barrels per day. Inventories are low.

OPEC is unlikely to go back to full production leaving a deficit of 1m barrels per day. In this scenario oil could easily reach $ 80 per barrel.

While the “Death of the Combustion Engine” narrative sounds compelling, the data again doesn’t support it.

Even under the most bullish adoption estimates, EV’s impact is expected to be limited in the coming decade. Bridgewater notes that “in even the most bullish scenarios, only 0.2-0.3 mb/d of oil are expected to be displaced over the next five years.” (charts below via BW)

That’s a drop in the bucket.

While EV’s will undoubtedly change the energy landscape in the distant future, it’s not going to have a material impact within the next decade, which is the timeframe we’re investing in.  

In any case, EV’s impact pales into comparison to the growth in the global car stock that we’ll see over the next decade. Charts below again via BW.

This goes back to the powerful impact of Asia, which led by India, is hitting the wealth S-curve that we talked about in the October MIR.

We’re going to see the global middle-class balloon to over 4 billion people in the coming years. This means EXPONENTIAL growth in commodity consumption… and a lot more gas guzzling cars on the road.

Which brings us to our current cycle.

We are hitting that sweet spot in the global business cycle where the world economic engine is firing on all cylinders.

The OECD Growth Indicator below shows all 35 OECD countries are in growth and/or accelerating expansion mode for the first time since 2007.

And this has led to GDP forecasts being continuously revised upward.

The demand forecast for oil is also being continuously revised higher.

It’s frequent data surprises like these that eventually force new narrative adoption and drive new trends.

Under this backdrop of greater than expected rising demand and significantly lower than expected supplies, we have oil and gas equities priced near secular lows, and completely out of favor with the market.

Do you think there may be some asymmetry here?

Now of course, there’s potential downsides that may delay our bullish oil thesis.

The big unknown is China. With President Xi having consolidated power there’s now talk he’s going to make some moves to deleverage the economy. And there’s evidence in the data of this effort (look at the recent selloff in metals).

It’s unclear how aggressive the communist party will be in cleaning up China’s balance sheet. Since the CCP’s number one priority is maintaining social order, it’s unlikely they’ll move too swiftly and risk blowing up the system.

But China remains a black box. All we can do is look at the data available and adjust fire as we go.

Besides, there are numerous potential geopolitical shocks that could light a fire under our bull case.

There’s potential war brewing between Saudi Arabia and Iran using Lebanon and Hezbollah as proxies. Not to mention the new Saudi crown prince seriously shaking things up at home. Then there’s North Korea always on the brink of war and Venezuela which is quickly becoming a failed state. And the list goes on…

Arguably none of this is priced into the market at the moment.

But there are signs that the popular story is changing… albeit slowly.

This change is being led by the rise in price (as always). And we can bet that sometime next year, a reflexive loop will form where the rise in prices spurs adoption of our bullish oil thesis which further drives prices.

John Percival’s quip, “Listen to what the market is saying about others, not what others are saying about the market” perfectly applies here.

Summary

  • The popular narrative surrounding oil over the last 3 years has been:
    • 1) Supply is rapidly growing due to fracking driven productivity growth
    • 2) Electric vehicles are taking away a huge source of demand
  • But the latest data doesn’t support this narrative…
  • Forecasters have been misattributing increased oil supply to productivity gains when it was really from tapping Tier 1 fields and DUCs.
  • Drillers have cut production and CAPEX and are now experiencing large drawdowns in inventories.
  • The most bullish scenario for electric vehicles displaces only a miniscule amount of oil demand over the next decade. Oil demand is actually set to rapidly grow as Asia hits the wealth S-curve
  • The market is slowly waking up to this reality and there will be a massive repricing once it does.

The above was an excerpt from our Macro Intelligence Report (MIR). If you’d like to learn more about the MIR, click here.

 

 

The post The Oil Market’s Massive Repricing appeared first on Macro Ops.

Macro Ops




Quiet Metals Markets Catalyst

Fear and greed drive the precious metals markets, but there hasn’t been much of either pushing gold and silver prices lately. Investors have grown tired of worrying about geopolitical events, ever increasing federal debt ceilings and ever inflating equity bubbles.

Meanwhile, greedy trend traders continue piling in to hot markets.

With the exception of palladium, metals prices have been stagnant for most of the year. For the time being, gold and silver are looking pretty boring relative to the hefty gains in stock prices and the explosive rise in Bitcoin.

Goldbugs are still waiting for a catalyst to shift investor attention back to the metals markets. Let’s take a look at some of the possible near-term drivers for gold and silver…

The equity markets remain overdue for a significant correction, and that would definitely stir some safe-haven demand. Yes, we have been expecting a correction in stocks for some time and prices are still moving higher.

There is, of course, no telling when the next bear market in stocks will arrive. But price-to-earnings valuations have only moved higher into nosebleed territory and shares are truly priced for perfection. A good-sized hiccup could have investors heading for the exit.

Bitcoin prices may also correct, diverting some of that capital instead into gold and silver. Cryptocurrencies are an entirely different kettle of fish when it comes to valuation. If Bitcoin can deliver on its promise to revolutionize payments and finance, today’s prices will ultimately look cheap.

Bitcoin Caution

However, no one should expect Bitcoin to continue moving higher in a straight line, with price corrections measured only in days or hours. There are a couple of developments right now with the potential to derail the extraordinary bull run in Bitcoin – at least temporarily.

A number of major cryptocurrency exchanges have grown reliant on a token called “Tether.” The Tether token is supposed to be backed 1 to 1 with U.S. dollars held by the company behind the Tether. Traders swap Bitcoin and other coins into Tether, assuming it is akin to cash. However, there are serious questions about whether or not the backing exists.

If confidence is lost in the nearly $ 1 billion of Tether tokens floating around exchanges, much of which has been used to make leveraged purchases of Bitcoin, it could be a disaster rivaling the collapse of Mt. Gox.

Bitcoin is also getting a boost in anticipation of institutional money pouring into the markets. The CME Group (COMEX) will launch Bitcoin futures trading later this month and lots of people expect the influx of capital to be very good news for the price. Our perspective is a bit different given that the nearly unlimited supply of paper futures contracts has undermined precious metals prices.

We think Bitcoiners should be wary of the participation of establishment institutions, such as JPMorgan Chase, which are likely to heavily short Bitcoin. These banks have a record of defeating limited supply by selling paper contracts in unlimited quantity and profiting as prices fall. People should also understand that many of the institutions who will be playing in Bitcoin futures are not fans of Bitcoin.

There are also a couple other developments of particular interest for metals investors in the coming weeks. Tensions with North Korea and Iran are still escalating. And Michael Flynn, President Donald Trump’s former National Security Advisor, has taken a plea deal. The President’s many enemies in Washington DC are hoping Flynn will testify to some impeachable offense.

Should these players finally hang something serious on the President, we can definitely expect some turmoil in conventional markets.

It is quiet in the metals markets now, but there are plenty of ways for this quiet to be broken at any time.

Precious Metals News & Analysis – Gold News, Silver News




Markets Eye Tax Bill, IRS Fishing Targets Bitcoin; Gerald Celente: Middle East Wild Cards Could Drive Up Gold

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

Coming up we’ll hear from the one and only Gerald Celente of the Trends Journal. Gerald weighs in on the rise of cypto-currencies, the massive volatility he sees ahead in the crypto world and the key geopolitical ticking time bomb that he sees having a big effect on gold prices. Don’t miss another outstanding interview with Gerald Celente, coming up after this week’s market update.

Gold and silver markets lost ground this week as investors drove the stock market up to new highs – again.

With tax cuts ne aring passage in the U.S. Senate, investors preemptively celebrated. The Dow Jones Industrials surged by more than 700 points through Thursday’s close. It’s the biggest week for the Dow since the Trump bump last November.

Getting the corporate tax rate down to 20% would certainly help boost earnings and could lift economic growth up to 4% per year. That’s the upside. The downside to the GOP tax plan is that the Joint Committee on Taxation estimates it will add $ 1 trillion to federal deficits.

If growth projections disappoint, that number could be even worse. If the pessimistic scenario plays out, then the U.S. dollar stands to take a big hit.

Right now, most investors are focused on the optimistic scenario. Tax cuts should give at least some kind of boost to the economy in 2018.

The risk for bulls is that the boost has already been priced in to the stock market. They may also have to contend with some negative side effects of deficit-fueled tax stimulus. For one, inflation could come perking back up in the months ahead.

For now, inflation expectations remain relatively muted and inflation hedges are struggling to garner investor interest. This week, gold futures contracts experienced a large net liquidation as speculators unloaded positions.

As of this Friday recording, the yellow metal trades at $ 1,274 an ounce, posting a weekly loss of 1.2%. Silver is down 4.1% this week to bring spot prices to $ 16.36. Platinum is off 1.0% to $ 936 per ounce, while palladium is up 2.0% to trade at $ 1,025.

With the exception of palladium which touched a multi-year again high earlier this week, precious metals markets are mired in trading ranges. Hard money continues to be overshadowed by crypto-money. The leading crypto-currency Bitcoin spiked to about $ 11,000 this week before retreating.

Many holders of bitcoins are sitting on some enormous profits. Those gains translate into tax liabilities whenever bitcoins get sold or traded for goods or services. Some Bitcoin aficionados may be under the false impression that Bitcoin transactions are private and untraceable – and therefore outside the reach of the IRS.

Well, on Thursday the IRS won a federal court case that forces the leading crypto-currency exchange Coinbase to hand over information about its customers. More than 14,000 customers who engaged in transactions involving at least $ 20,000 in Bitcoin will have their records turned over to the IRS. They could face back taxes and penalties which require them to sell more of their Bitcoin in order to pay.

If the IRS expands its probes of cypto-currency transactions next year, a lot more people who may have recently jumped on the crypto-currency bandwagon could be in for an unpleasant reality check courtesy of the tax man.

Taxes also apply to any realized gains on physical precious metals, of course. But unlike digital currencies, tangible currencies don’t automatically generate records that can be obtained by bureaucrats or exploited by data thieves. In an era when your financial privacy is under constant threat, you can rest assured that your gold and silver coins won’t be digitally tracked or hacked into.

You don’t have to worry about losing your digital key as with crypto-currencies. There are lots of sad stories of people who are locked out of their bitcoins, or who died without being able to pass them on to their loved ones. Because they aren’t tangible, there’s no hope of ever recovering lost bitcoins without any digital records of their existence.

It is less likely, but still possible, to lose track of your precious metals holdings. That’s why you need to be careful and deliberate in where you store them. People who take to hiding their gold coins in obscure places – perhaps behind walls or beneath floor boards or in the ground – risk forgetting about them in old age, or dying without loved ones knowing where to look.

One viable alternative to storing your entire metals stash at home is to store at least some of it in a secure storage facility. Money Metals Depository offers segregated storage at the lowest fees in the industry, as low as $ 96 a year. For more information on our storage programs, just call us at 1-800-800-1865 or visit MoneyMetals.com/depository.

Well now, without further delay, let’s get right to this week’s exclusive interview.

Gerald Celente

Mike Gleason: It is my privilege now to welcome Gerald Celente, publisher of the renowned Trends Journal. Mr. Celente is perhaps the most well-known trends forecaster in the world and it’s always great to have him on with us.

Gerald, thanks for taking the time and welcome back.

Gerald Celente: Thanks for having me on.

Mike Gleason: Well, Gerald, to start off here, we still have the equities markets ripping and roaring and there is seemingly no news that can derail the train. So, as we head into the end of the year, what does your forecast show for the crowd on Wall Street? Is the party going to end anytime soon?

Gerald Celente: Well, as they go through with this tax deal, it’s just going to bring more money to the bigger corporations and you saw what the corporations have done with the profits from the past, what do they do with them? They reinvested them into the stock market rather than building their companies and investing in capital improvements.

So, giving them more money will give them more stock buybacks. The more stock buybacks, the higher the market goes. I mean that’s the reality of it. So, if the tax breaks go through the way they’re being planned, we’re going to see more stock buybacks, more cheap money to reinvest back into the markets.

Again, we’re looking at a very small segment of the population that’s really playing the markets. For example, only 10% of Americans are in the markets at the range that makes any difference, so that 10%, for example, that’s playing, they have about in equity about $ 350,000 (on average). The rest of society that has money into it, the so called middle class, of those that have any money in it, and again the 10% own over 90%. For the rest of the society, they only have about $ 15,000 in equity.

So, the markets are just going to keep going up if the cheap money keeps existing. Again, that’s going to also see what happens when they raise interest rates, which are about a 99% sure shot now, later in December. And if the cheap money flows stop, then the markets stop. It’s as simple as that, but we don’t think a 25 basis point increase is going to have much of an impact.

Mike Gleason: Clearly the world has a problem with crooked bankers and corrupt politicians. We talked about this a bit when we had you on back in August. The two aren’t unrelated, of course. Bankers and politicians have a very long and dark history of collusion.

On one hand, if history is a guide, there isn’t much reason to expect anyone will be held to account for their crimes. “They are too big to jail,” as former Attorney General Eric Holder might say. On the other hand, we can’t help but be a little bit hopeful. It looks to us like some of these crimes, such as the Uranium One deal, are getting harder to ignore.

What do you make of the recent news? Are you feeling any more optimistic about some of these crooks actually going to prison?

Gerald Celente: No, quite the opposite. Look at the new Fed chair that’s coming in. He’s already saying that the banking regulations in place now are too tough and tough enough. So, if under the current regulations nobody went to jail and they soften them, they could steal more, and get fined, and also accused of less crimes.

So, no, it’s going in the opposite direction. Under the new administration, they’re not draining the swamp, they’re just filling the swamp with different swamp creatures. I mean look at the Trump White House. Who’s running it? Mnuchin and Cohn on the financial end and those are both Goldman Sachs guys. It’s just more of the same.

Mike Gleason: The rise of cryptocurrencies, Bitcoin in particular, is making waves in the precious metals markets. Some of the demand for gold and silver has been diverted to Bitcoin. People see it as another form of honest money and there is plenty of excitement over the huge price gains. Lots of people are wondering what the rise of Bitcoin might mean for precious metals over the longer term.

Now, our take is that Bitcoin offer hope as honest money and we are certainly fans of anything that can circumvent central bankers. Gold and silver, on the other hand, are proven stores of value with a track record extending back thousands of years and they are totally off the grid. Physical metals work with or without electricity or an internet connection and they can be used without leaving digital tracks behind.

What are your thoughts on the relationship between Bitcoin and bullion?

Gerald Celente: Well, we’ve been writing a lot about it now in our Trends Journal. One of the points that we keep making is that we see this isn’t a fad, it’s a trend in the cryptocurrency world, but the volatility’s going to be enormous.

Again, when you look at volatility in gold … I remember, back in 1980, I bought gold in the highest point of the trading day at $ 875 an ounce and then it went down from there. It was down for, what, almost 20 years.

So that’s the kind of thing you’re going to see in cryptocurrencies, as well. You’re going to see great volatility. They’re not going to go anywhere, but in looking at it, you see what happens when there’s geopolitical unrest. For example, you saw what happened in Zimbabwe, when they were getting rid of Mugabe, who had been running the joint since 1980. All of a sudden, Bitcoin over there spiked.

So, you’re going to see that kind of thing, but, again, there’s definitely playing a role as another safe haven asset of sorts, relative to gold and silver, but the volatility aspects in the crypto world are far higher and far greater than any of the precious metals. Also, in the cryptocurrencies, or what we call “Millennials’ Gold.”

My generation was gold, this generation, they’re looking more at digital. It’s a digital world. You’re in China, you don’t pay anything with cash or credit cards, it’s an app. So, it’s a different world.

However, saying all that, again, the big point is, you’re going to see a lot of the cryptos come and go. There’ll be some for the long term. The volatility will be enormous, but we don’t see them going away in the long term. And when you look, again, at particularly gold, the central banks around the world are buying it up in much greater proportions now, although the public is buying less physical gold.

So the demand for physical gold among the central banks, particularly Russia, China, will continue. And the crypto markets will have their place, but again, the volatility’s real, something we’ve been forecasting for quite some time and you can see it in the numbers.

Mike Gleason: One of the potential drivers for Bitcoin prices moving forward… it looks like the CME Group, the people behind the COMEX Exchange will soon launch a futures contract for Bitcoin. Lots of people in the crypto space are excited that the market will be opened up to “institutional money” and expect additional demand will be good for the Bitcoin price.

That might be true, but we have a dim view of the COMEX and how crooked the markets for gold and silver have become. According to the recent Wikileaks memo, they showed evidence that gold futures were first launched in the early 1970’s to help to rig the gold price, trade volatility, and discourage ownership for physical gold. 40 years later, we can look back and see precious metals futures worked exactly as intended.

In light of that and in light of this news now, what are we going to see a Bitcoin future exchange mean and can you comment about whether this will be good news or bad news for the cryptos?

Gerald Celente: Well, you summed it up. You’re going to see a lot more volatility. Again, I remember, going back to 1980 with the volatility of the gold markets and how also, though, and this is very important. Because of the futures trading, that’s what really drove the prices up.

What we expect to see is that you’re going to see a real surge and a price drive, higher, but you’re also going to see a greater downward collapse of the prices as well. Again, you see it with the futures contracts in many different fields, naked shorts, all of a sudden, the whole market changes in a flash.

So it can be very easily manipulated by bigger players. And again, with cryptos, it’s a bit more difficult considering how difficult it is to buy them, the periods of time you have to wait in order for you to buy them, so it’s going to be a little harder to manipulate, but they’ll figure a way how to do it.

So, expect, when the CME futures happen, and also other futures exchanges opening around the world, much more volatility. So what we see is a real spike up and a real sharper spike down.

Mike Gleason: Getting back to the Fed a little bit here. Jerome Powell was recently tapped to replace Janet Yellen as Fed chair, as you mentioned earlier. Powell looks like another garden variety central planner to us. He’s an attorney with decades of experience spread across Wall Street to Washington D.C. Obama installed him on the Board of Governors at the Fed in 2012.

Give us a little bit more about what your take is on Powell and can we expect any difference happening with the monetary policy?

Gerald Celente: Well, again, Powell has already made clear that the bank regulations are too difficult already for the banksters. So, what that means is that the bigger banks will have less regulation, more trading opportunities.

Again, who made up this thing that banks are supposed to be investment banks. Banks were there just as commercial banks. When I was a kid growing up, banking was boring. Banks used to open up at like 10:00 in the morning and be closed by 3:00. I mean, really. I know it sounds like ancient history, and it is when you get older, but there was no such thing as an investment bank.

So, what he’s going to do is the that the bigs are going to be bigger, more manipulation in the system, and again, he is a proponent, he says, of raising interest rates. However, we don’t see them going up that high. And as long as interest rates remain low, the Ponzi scheme on Wall Street continues.

I mean, there’s only one factor that’s driven the markets. It’s cheap money. Period. Paragraph. The rich have gotten richer and everybody else has gotten poorer. Those are the facts. Median household income in the United States is below 1999 levels.

Do you realize you have five people in the world, five people, that have more money than 3.5 billion people, half the world’s population? Same thing in the United States. Buffett, Gates, and Bezos. Three people have more money than half of the American population combined.

So, Powell is just one of the white shoe boys. He’s going to keep the club going and it’s going to go in the same direction it was going before. Again, the bubble can happen because it is a bubble and it’s only being pumped up by this monetary methadone. That’s all it is. It’s a fix.

There’s wild cards that would change this in a flash. And the wild cards, for example, could be what’s going on in the Middle East, with the new crown prince over there in Saudi Arabia saying that Lebanon and Iran have declared war against Saudi Arabia, which they never have. And you know how he became a crown prince, don’t you, that everybody’s bowing down to? You must remember when you were a kid. A princess kissed a frog and the frog became a prince and then a king.

I mean, who’s making this garbage up? Crown prince. Give me a break, man. They just made the Saudi government up in about 1934. It’s an oligarchy. It’s one of the most repressed nations on earth and they’re starting wars. They’ve slaughtered over 10,000 Yemenis. 50,000 Yemeni children are going to die this year because of the war conditions started by Saudi Arabia, supported by the United States. We just sold them another $ 7 billion worth of armaments.

Again, now that the Arab League, minus Syria, Qatar, and Iran, and Iraq, are declaring a new Arab NATO and a war against terrorism. A war against terrorism? Hey, it’s the Saudis that gave the money to Al Qaeda and ISIS to overthrown Qaddafi in Libya and Assad in Syria.

But, again, the presstitute news doesn’t bring these facts out. Going back to gold, gold is the ultimate safe haven in times of geopolitical economic instability. And geopolitical and economic instability in the Middle East could bring down the markets and drive up gold prices.

Remember, Saudi Arabia needs oil at $ 100 a barrel for its economy to break even, to balance its budget. We were playing with $ 40, $ 50, now $ 60 oil since 2014. They’re in great financial straits. You look at the numbers, man. Anybody. All they have to do is look at them. Look at the oil revenue coming in from 2006 to Saudi Arabia to 2017 and it’s lower now in 2017 than it was even back in 2006.

Going back to gold. Our forecast of gold has been steady since 2013. November 2013, we said, “Gold prices have to stabilize over the mid $ 1,400’s.” $ 1,450, $ 1,480, $ 1,460, $ 1,470. Then it would spike to $ 2,000. Absent that, we saw a downside risk of gold at around $ 1,150. Saying this constantly. We maintained that forecast.

We see gold coming under more pressure even though we see interest rates coming up and most people are expecting it. There’s an opportunity cost for holding gold. Bond yields go higher, become more attractive, gold less attractive.

However, in this time of economic and geopolitical uncertainty, we still maintain that gold is the ultimate safe-haven asset in this geopolitical and economic climate.

Mike Gleason: Well, finally, as we begin to close here, Gerald, anything else that you’re focusing on as we head towards the final month of 2017 and start looking at 2018? What’s on the horizon and what are you watching most closely?

Gerald Celente: What we’re watching most closely, really, is the events in the Middle East. People are talking a lot about North Korea. We’re not so concerned about that, because if the United States does anything to North Korea, in terms of war – and by the way, again, we’re getting a one-sided story. The United States keeps launching these massive military maneuvers. Matter of fact, there’s going to be a new one in December with about 16,000 U.S. troops, hundreds of aircraft, and also naval forces on their shores.

So the United States is provoking North Korea and North Korea’s made it very clear they’re not going to give up a nuclear weapon because they saw what the United States did to Qaddafi and Hussein when they gave up their nuclear capability.

What we’re saying is that North Korea’s not on our radar as being the hot spot that could explode, because if the United States launches war against North Korea, say goodbye to South Korea. What do you got? 24 million people living in Seoul, Korea, about 35 miles away from the North Korean border? Say goodbye to Japan. It’s not going to happen.

Again, (North Korea) that’s a country, by the way, with a GDP smaller than West Virginia’s and a population the size of Texas. They don’t have the wherewithal to withstand the long war, so what they’ll do is, they’ll go all out and destroy anything anywhere near them.

Again, while the focus is on North Korea and everybody’s pumping up this king over there, or the crown prince, excuse me, who’s really the de facto leader at 32 years old, in Saudi Arabia, as the new enlightened guy over in the region, we see just the opposite. So that’s where our focus is really on, very heavily now.

And looking at the real news and really reading through and sifting through the propaganda that’s being sold by their government, our government, and other governments, and repeated by the presstitute media, those reporters that cut paid to put out by their corporate Johns and their Washington whoremasters.

Mike Gleason: Well, thanks so much for your time again today and we appreciate it, as always, and love getting your candid and unfiltered comments on the state of things. Now, before we let you go, please tell listeners how they can get their hands on the Trends Journal and the other great information that you put out there on a regular basis at the Trend Research Institute.

Gerald Celente: Well, the new Trends Journal will be out this week. You could got to TrendsResearch.com or TrendsJournal.com. And not only do we put out the Trends Journal, we do Trends in the News Broadcast, we have Trends Monthly, Trend Alerts each week. Money back guarantee, the only place you’ll read history before it happens. TrendsResearch.com or TrendsJournal.com.

Mike Gleason: Well, thanks again, Mr. Celente, for being so generous with your time, as always. Have a great weekend and we’ll look forward to our next conversation. Take care.

Gerald Celente: Thank you for having me on and thank you for all that you do.

Mike Gleason: Well, that will do it for this week. Our sincere thanks, again, to Gerald Celente, publisher of the renowned Trends Journal. For more information, the website again is TrendsResearch.com. Be sure to check that out.

And 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 Federal Reserve Has Just Given Financial Markets The Greatest Sell Signal In Modern American History

Why have stock prices risen so dramatically since the last financial crisis?  There are certainly many factors involved, but the primary one is the fact that the Federal Reserve has been creating trillions of dollars out of thin air and has been injecting all of that hot money into the financial markets.  But now the Federal Reserve is starting to reverse course, and this has got to be the greatest sell signal for financial markets in modern American history.  Without the artificial support of the Federal Reserve and other global central banks, there is no possible way that the massively inflated asset prices that we are witnessing right now can continue.

The chart below comes from Sven Henrich, and it does a great job of demonstrating the relationship between the Fed’s quantitative easing program and the rise in stock prices.  During the last financial crisis the Fed began to dramatically increase the size of our money supply, and they kept on doing it all the way through the end of October 2017…

Unfortunately for stock traders, the Federal Reserve has now decided to change course, and that means that the process that has created these ridiculous stock prices is beginning to go in reverse.  In fact, according to Wolf Richter this reversal just started to go into motion within the past few days…

On October 31, $ 8.5 billion of Treasuries that the Fed had been holding matured. If the Fed stuck to its announcement, it would have reinvested $ 2.5 billion and let $ 6 billion (the cap for the month of October) “roll off.” The amount of Treasuries on the balance sheet should then have decreased by $ 6 billion.

And that’s what happened. This chart of the Fed’s Treasury holdings shows that the balance dropped by $ 5.9 billion, from an all-time record 2,465.7 billion on October 25 to $ 2,459.8 billion on November 1, the lowest since April 15, 2015

Does anyone out there actually believe that the immensely bloated balance sheet that the Fed has accumulated can be unwound without having an enormous negative impact on Wall Street?

And even more frightening is the fact that central banks all over the planet appear to be acting in coordinated fashion.  I really like how Brandon Smith made this point…

An observant person, however, might have noticed that central banks around the world seem to be acting in a coordinated fashion to remove stimulus support from markets and raise interest rates, cutting off supply lines of easy money that have long been a crutch for our crippled economy.  The Bank of England raised rates this past week, as the Federal Reserve indicated yet another rate hike in December.  The Europeans Central Bank continues to prep the public for coming rate hikes, while the Bank of Japan has assured the public that “inflation” expectations have been met and no new stimulus is necessary.  If all of this appears coordinated, that is because it is.

When interest rates are low and central banks are injecting money directly into the financial system, that tends to promote economic activity.

But when they raise interest rates and pull money out of the financial system, the exact opposite is true.

At this point Americans are more optimistic about the stock market than they have ever been before, and it is at this exact moment that the Fed is pulling the financial markets off of life support.

And it isn’t as if the “real economy” ever recovered in any meaningful way.  Most American families are still living paycheck to paycheck, and a new economic crisis would push millions more out of the middle class.

For a long time I have been warning that the only reason why stock prices ever got this high was because of the central banks, and I have also been warning that they could crash the markets if they wanted to do so.

Hopefully there is nothing nefarious going on, but I do find it very strange that all of the major global central banks are moving toward tightening at the exact same time.

If things go south for the global economy in the months ahead, we will know exactly where to point the blame…

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




A “Marcus Trifecta” Look At Markets

Over the last few months I’ve written about how we expect growth and inflation to pick up and surprise to the upside in the coming quarters.

This belief is built on positive pressures we’re seeing within the economy as we move into the ‘overheat phase’ and the world benefits from the wealth S-curve tipping point. And with the market holding consensus expectations for continued low inflation, we find this contrarian hypothesis an interesting and potentially lucrative one should it unfold.

But we never wed ourselves to a trade hypothesis because it’s just that, a hypothesis.

Cognitively we’re wired to latch onto single or binary outcomes when thinking and planning for the future. Reality is much messier than that. “Man Plans and God laughs” as the saying goes, which is why we prize mental flexibility above all else.

A favorite trading quote of mine that I often refer to comes from Bruce Kovner. He explains how one should think about markets:

One of the jobs of a good trader is to imagine alternative scenarios. I try to form many different mental pictures of what the world should be like and wait for one of them to be confirmed. You keep trying them on one at a time. Inevitably, most of these pictures will turn out to be wrong — that is, only a few elements of the picture may prove correct. But then, all of a sudden, you will find that in one picture, nine out of ten elements click. That scenario then becomes your image of the world reality.

The overheat phase is just one alternative scenario that we’re “trying on”. But there are many potential catalysts, such as a China crackdown on leverage or a large illiquidity impact from Treasury cash balance normalization, which could derail this narrative.

This is why we have to routinely turn to the data to see where we are and to get a better idea of where we may be headed.

So let’s take a look at the Marcus “Trifecta” of Macro, Sentiment, and Technicals of the market to get a sense of where the risks and opportunities lie over multiple timeframes.

Macro: Global reflation picking up steam

Global GDP is hockey sticking higher and the world economy is now growing at 4.3%; the highest level in 7 years.

This growth is matched by global trade which is also growing at its fastest pace since 2011.

The pickup in global growth is routinely beating estimates and trailing twelve month global GDP forecast revisions are at their highest levels in over 7 years and trending higher.

The global manufacturing PMI is trending upwards and hitting new cycle time highs. And the latest Markit PMI report suggests growth and inflationary pressures are building. Here’s a few highlights from the report:

National PMI indices signalled expansion in almost all of the nations covered by the survey… Manufacturing production rose at the quickest pace in six months, underpinned by further increases in both total new orders and international trade volumes. 

The continued upturn in new order inflows exerted further pressure on capacity, leading to one of the steepest increases in backlogs of work over the past three-and-a-half years. This in turn encouraged manufacturers to raise employment to the greatest extent since May 2011.

Staffing levels were increased in almost all of the nations covered by the survey… Price pressures intensified in September. Input cost inflation rose sharply to a seven-month high, a key factor underlying the steepest increase in selling prices since May 2011. Companies linked higher purchasing costs to rising commodity prices and increased supply-chain pressures (reflected in a steep lengthening of average vendor lead times).

Global oil demand is routinely beating estimates. We’ve noted over the last few months that demand forecasts were overly pessimistic and low balling likely demand growth. This still remains the case.

Global liquidity is extremely loose and the trend is still towards more easing though this trend should begin to slow at the start of next year.

The data isn’t all great though. In the US corporate buybacks have rolled over. This is typical late cycle behavior. Companies are diverting money from buying back their stocks and using it to invest in new capacity to meet rising demand and increasing competition.

While this sounds good for the economy it’s not good for the market. This acts as a liquidity suck as demand for stocks is pulled and that money goes into CAPEX which will lead to increased capacity and hence lower margins 1-2 years out.

In the US, the ISM is at its highest level since 1987.

This means the economy is running hot but it also suggest things might be a bit overextended in the short to intermediate term. The chart below marks every time over the last 35 years that the ISM has crossed 60 (vertical yellow lines). Each time has coincided with a short-term market top.

According to Goldman Sachs, the average return for the S&P 500 following over a 3 and 6 month period after the ISM has crossed 60, have tended to be weak.

The sample size for this is small. But something to keep in mind.

Sum up: Overall, the data is constructive for the global economy on a cyclic timeframe. Increasing global growth should continue to push economies up against capacity constraints bringing greater cost pressures and leading to rising inflation.

The macro environment remains supportive of risk assets.

Sentiment: A tale of two tales

This market has been a tough read sentiment wise.

There’s definitely pockets of wild speculation, such as in the cryptocurrency market. And equity prices are becoming somewhat richly valued even though there’s still plenty of room for appreciation on an equity risk premium basis.

Depending on what sentiment gauge you look at, market sentiment reads as either extremely frothy or mildly complacent.

I think the case here is that the psychological scars from the GFC run deep and these are just now starting to be overcome.

This market has acted as bad news teflon to everything from dumpster fire politics to the threat of all out nuclear war. And market participants are beginning to read this as an all-clear to up their risk exposure while many perma-bears who’ve missed out on the rally continue to gripe from the sidelines and look for a top that refuses to appear.

Here is the more interesting sentiment and positioning data that I’m tracking at the moment.

According to the latest BofA fund manager survey, the dominant market narrative has shifted from that of “secular stagnation” to “goldilocks” where participants expect continued above trend growth and below trend inflation.

The latest Investors Intelligence sentiment survey has net sentiment (bull – bear) at the survey’s highest level since 1987’.

Fund managers have been upping their exposure to equities.

The global equity net overweight reading is now 45%. The 40-45% zone has historically coincided with equity underperformance versus bonds and cash over the following 3-6 months.

S&P 500 futures sentiment is extended and near a level that typically coincides with reversal points.

And the SPX multiple conditional analysis chart below via Nautilus shows that the probabilities over the 1-3 month timeframe have shifted bearish.

Under this backdrop, positioning appears to be the most crowded in financials and the eurozone. While bonds, energy, and the US are some of the more underweighted assets, according to the BofA survey.

But despite these signs of frothy sentiment and increasing exposure to risk assets, fund managers cash balances remain fairly high and nowhere near the levels that typically mark a cyclical top.

Morgan Stanley’s net leverage ratio paints the same picture. Investor leverage remains muted and stands in stark contrast to the picture of exuberance that the other sentiment/positioning indicators paint.

Sum up: Sentiment and positioning are telling two different stories. It seems that over the short to intermediate term, sentiment and positioning are excessive and will act as a headwind for stocks.

This seems to be particularly true for financials and the eurozone where positioning and expectations appear to be stretched on a short-term basis.

But on a bigger picture basis, I’m not seeing signs of the leverage and low cash balances that indicate investors are overextended and which typically marks a market top.

So over the short-term, sentiment and positioning puts odds on a market pullback. This would reset crowded positioning in long financials and European equities.

Technicals: All Signs Point Up

The market remains technically strong. The trend is up, breadth is good, and credit is bid.

The only negative factor on a technical basis is that the short-term trend is overextended. But this is not a condition for a selloff by itself. Trend persistence is powerful and overextended moves have a tendency to become more overextended.

One thing to watch out for is the current breakdown in bonds. If yields rise significantly over a short period of time then that will likely lead to equity volatility.

Bonds and stocks compete for capital flows. When yields move higher it makes richly valued stocks less attractive to hold. So one indicator we like to track is the 26 week percentage change in Moody’s Baa bond yields.

When yields rise fast over a short period of time and cross the top red dotted line, a market selloff tends to follow shortly after. The change in yields currently remain well below that mark.

Trifecta Conclusion:

  • The macro data points to a continued strengthening cyclical global recovery but with some potential short-term headwinds.
  • Most signs point to increasing growth and inflation in the months ahead.
  • Sentiment and positioning tell two different tales. Sentiment and equity positioning is currently excessive and will act as a headwind for stocks and increase the likelihood of a market pullback. But in the bigger picture, cash balances are not excessively low and leverage is not at levels that are indicative of a top.
  • Technically the market is in a strong uptrend. Over the short-term the market is overextended but trends can remain overextended for a long time.

Looked at holistically, I’d say that the odds are increasing for a nearterm market selloff in the 3-10% range. But bigger picture, we remain in a strong bull market that’s unlikely to end anytime soon. A selloff should be viewed as an opportunity to add to positions, but not something to over react to.

One of the most common errors investors make is to fret too much over the potential for a correction and then chase the trend higher from a position of weakness. This leads to buying and selling at inopportune times.

Instead, we’ll sit long and add positions as opportunities present themselves.

If you’d like to dive deeper into the positions we’re targeting and how we’re playing them, then check out the Macro intelligence Report (MIR).

The MIR is our monthly report that cuts through the noise to alert you of the largest macro trends and how you can profit from them.

In November’s report (which we will release next week) we’re covering all the latest large macro events and how they’ll affect the markets and economy, including:

  • The conclusion of China’s November Congress
  • Shinzo Abe’s win in Japan
  • The new Fed chair
  • And more

If you want to know what these macro shifts mean for you and your investments, 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!

Our November issue will also have a special in-depth look at the mania that is Bitcoin. At this point I’m sure you’ve even heard your Uber driver talk about it…

Is it all hype? Should you buy in? Or is a spectacular crash coming?  

We’ll give you an Operator look at exactly what’s going in the cryptocurrency markets.

And of course, as always, we’ll show you a few of the stocks we’re targeting that are close to rocketing higher.

You won’t want to miss out on these plays… especially with the new option strategy we have to play them!

Remember, there’s no risk to try the MIR. Your subscription comes with a 60-day money-back guarantee. If it’s not right for you, we’ll return your money immediately.

Click Here To Learn More About The MIR!

 

 

The post A “Marcus Trifecta” Look At Markets appeared first on Macro Ops.

Macro Ops




Separating Signal From Noise In Markets

There’s not much information to get. The most important variables in global macro are the economic conditions and how central banks respond to those conditions.

To get that information, I read the paper, look at the data, watch what the officials say, and try to read between the lines. From an actual trade point of view, it’s price action that determines when and where to put on a trade.

Otherwise, there’s a huge amount of noise in the world. Other people’s opinions are irrelevant. I can’t bear talking to salespeople because all they want to do is tell you something new, and things don’t change enough to warrant that. I don’t pick up the phone if I can avoid it.

– The Currency Specialist, from Drobny’s Inside the House of Money

My take:

A big part of successful trading is learning how to effectively separate wheat from chaff and signal from noise.

This is no easy task.

We live in a world of 24/7 information flow. It’s easy to drown in the constant firehosing of data, opinions, and hot takes.

Traders get into trouble when they mistake the noise for actionable intelligence. This happens because they don’t yet have a framework for which to filter out what’s useful and what’s not.

All a framework is is a set of mental models, broad first principles, and general truths that you stress test for robustness and which hold up through time.

The key is to start with the simple truths and build, slowly, while never sacrificing veracity for complexity.

Munger gave a killer speech about how to do this back in the 90’s. Here’s a cut from it (emphasis mine).

Well, the first rule is that you can’t really know anything if you just remember isolated facts and try and bang ’em back. If the facts don’t hang together on a latticework of theory, you don’t have them in a usable form.

You’ve got to have models in your head. And you’ve got to array your experience both vicarious and direct on this latticework of models. You may have noticed students who just try to remember and pound back what is remembered. Well, they fail in school and in life. You’ve got to hang experience on a latticework of models in your head.

What are the models? Well, the first rule is that you’ve got to have multiple models because if you just have one or two that you’re using, the nature of human psychology is such that you’ll torture reality so that it fits your models, or at least you’ll think it does. …

And the models have to come from multiple disciplines because all the wisdom of the world is not to be found in one little academic department. That’s why poetry professors, by and large, are so unwise in a worldly sense. They don’t have enough models in their heads. So you’ve got to have models across a fair array of disciplines.

You may say, “My God, this is already getting way too tough.” But, fortunately, it isn’t that tough because 80 or 90 important models will carry about 90% of the freight in making you a worldly-wise person. And, of those, only a mere handful really carry very heavy freight.

For the Currency Specialist, the framework he carried was focused on a few global macro and economic variables, how central bankers responded to these conditions, and then constantly testing his resulting assumptions against the truth mechanism that is the market.

At MO we apply a range of mental models from Capital Cycles to Investment Clocks to Game Masters and Liquidity Levers to name a few.

Like the Currency Specialist, these models help us distinguish the signal from the noise while keeping us from chasing something shiny that’s of little value.  

And more importantly, it gives us a framework from which to value these inputs and our responses to them.

This allows us to continuously refine our tools and mental models which hopefully drives us closer and closer to truth and profits.

Market Wizard Michael Marcus said the most valuable thing he learned at Commodity Corp (CC) was how “to see the signal, like the signal, follow the signal.”

Focus on developing your latticework of mental models and you’ll get better and better at seeing the signal.

Drop any questions/comments in the comment section below. And if you’d like to get my thinking, ramblings, and occasional trade ideas, then just put in your John Hancock along with your email below.

Thanks for reading,

Alex

 

 

 

The post Separating Signal From Noise In Markets appeared first on Macro Ops.

Macro Ops




The Situation In The Markets Is Worse Than You Realize

It’s about time that I share with you all a little secret. The situation in the markets is much worse than you realize. While that may sound like someone who has been crying “wolf” for the past several years, in all honesty, the public has no idea just how dire our present situation has become.

The amount of debt, leverage, deceit, corruption, and fraud in the economic markets, financial system, and in the energy industry are off the charts. Unfortunately, the present condition is even much worse when we consider “INSIDER INFORMATION.”

What do I mean by insider information… I will explain that in a minute. However, I receive a lot of comments on my site and emails stating that the U.S. Dollar is A-okay and our domestic oil industry will continue pumping out cheap oil for quite some time. They say… “No need to worry. Business, as usual, will continue for the next 2-3 decades.”

I really wish that were true. Believe me, when I say this, I am not rooting for a collapse or breakdown of our economic and financial markets. However, the information, data, and facts that I have come across suggest that the U.S. and global economy will hit a brick wall within the next few years.

How I Acquire My Information, Data & Facts

To put out the original information in my articles and reports, I spend a great deal of time researching the internet on official websites, alternative media outlets, and various blogs. Some of the blogs that I read, I find more interesting information in the comment section than in the article. For example, the Peakoilbarrel.com site is visited by a lot of engineers and geologists in the oil and gas industry. Their comments provide important “on-hands insight” in the energy sector not found on the Mainstream Media.

I also have a lot of contacts in the various industries that either forward information via email or share during phone conversations. Some of the information that I receive from these contacts, I include in my articles and reports. However, there is a good bit of information that I can’t share, because it was done with the understanding that I would not reveal the source or intelligence.

Of course, some readers may find that a bit cryptic, but it’s the truth. Individuals have contacted me from all over the world and in different levels of industry and business. Some people are the working staff who understand th reality taking place in the plant or field, while others are higher ranking officers. Even though I have been receiving this sort of contact for the past 4-5 years, the number has increased significantly over the past year and a half.

That being said, these individuals contacted me after coming across my site because they wanted to share valuable information and their insight of what was going on in their respective industires. The common theme from most of these contacts was…. GOSH STEVE, IT’S MUCH WORSE THAN YOU REALIZE. Yes, that is what I heard over and over again.

If my readers and followers believe I am overly pessimistic or cynical, your hair will stand up on your neck if you knew just how bad the situation was BEHIND THE SCENES.

Unfortunately, we in the Alternative Media have been lobotomized to a certain degree due to the constant propaganda from the Mainstream Media and market intervention by the Fed and Central Banks. A perfect example of the massive market rigging is found in Zerohedge’s recent article; Central Banks Have Purchased $ 2 Trillion In Assets In 2017:

….. so far in 2017 there has been $ 1.96 trillion of central bank purchases of financial assets in 2017 alone, as central bank balance sheets have grown by $ 11.26 trillion since Lehman to $ 15.6 trillion.

What is interesting about the nearly $ 2 trillion in Central Bank purchases so far in 2017, is that the average for each year was only $ 1.5 trillion. We can plainly see that the Central Banks had to ramp up asset purchases as the Ponzi Scheme seems to be getting out of hand.

So, how bad is the current economic and financial situation in the world today? If we take a look at the chart in the next section, it may give you a clue.

THE DEATH OF BEAR STEARNS: A Warning For Things To Come

It seems like a lot of people already forgot about the gut-wrenching 2008-2009 economic and financial crash. During the U.S. Banking collapse, two of the country’s largest investment banks, Lehman Brothers, and Bear Stearns went belly up. Lehman Brothers was founded in 1850 and Bear Stearns in 1923. In just one year, both of those top Wall Street Investment Banks ceased to exist.

Now, during the 2001-2007 U.S. housing boom heyday, it seemed like virtually no one had a clue just how rotten of a company Bear Stearns had become. Looking at the chart below, we can see the incredible RISE & FALL of Bear Stearns:

The Death of Bear Stearns

As Bear Stearns added more and more crappy MBS – Mortgage Backed Securities to its portfolio, the company share price rose towards the heavens. At the beginning of 2007 and the peak of the U.S. housing boom, Bear Stearns stock price hit a record $ 171. Unfortunately, at some point, all highly leveraged garbage assets or Ponzi Schemes come to an end. While the PARTY LIFE at Bear Stearns lasted for quite a while, DEATH came suddenly.

In just a little more than a year, Bear Stearns stock fell to a mere $ 2… a staggering 98% decline. Of course, the financial networks and analysts were providing guidance and forecasts that Bear Stearns was a fine and healthy company. For example, when Bear was dealing with some negative issues in March 2008, CBNC’s Mad Money, Jim Cramer made the following statement in response to a caller on his show (Source):

Tuesday, March 11, 2008, On Mad Money

Dear Jim: “Should I be worried about Bear Stearns in terms of liquidity and get my money out of there?” – Peter

Jim Cramer: “No! No! No! Bear Stearns is fine. Do not take your money out. Bear sterns is not in trouble. If anything, they’re more likely to be taken over. Don’t move your money from Bear. That’s just being silly. Don’t be silly.”

Thanks to Jim, many investors took his advice. So, what happened to Bear Stearns after Jim Cramer gave the company a clean bill of health?

Bear Stearns Stock - Five Days Later - Down 85%

On Tuesday, March 11, the price of Bear Stearns was trading at $ 60, but five days later it was down 85%. The source (linked above) where I found the quote in which Jim Cramer provided his financial advice, said that there was a chance Jim was replying to the person in regards to the money he had deposited in the bank and not as an investment. However, Jim was not clear in stating whether he was talking about bank deposits or the company health and stock price.

Regardless, Bear Stearns stock price was worth ZERO many years before it collapsed in 2008. If financial analysts had seriously looked into the fundamentals in the Mortgage Backed Security market and the bank’s financial balance sheet several years before 2008, they would have realized Bear Stearns was rotten to the core. But, this is the way of Wall Street and Central Banks. Everything is fine, until the day it isn’t.

And that day is close at hand.

THE RECORD LOW VOLATILITY INDEX: Signals Big Market Trouble Ahead

Even though I have presented a few charts on the VIX – Volatility Index in past articles, I thought this one would provide a better picture of the coming disaster in the U.S. stock markets:

Volatility Index | September 8, 2017

The VIX – Volatility Index (RED) is shown to be at its lowest level ever when compared to the S&P 500 Index (GREY) which is at its all-time high. If we take a look at the VIX Index in 2007, it fell to another extreme low right at the same time Bear Stearns stock price reached a new record high of $ 171. Isn’t that a neat coincidence?

As a reminder, the VIX Index measures the amount of fear in the markets. When the VIX Index is at a low, the market believes everything is A-OKAY. However, when the VIX surges higher, then it means that fear and panic have over-taken investment sentiment, as blood runs in the streets.

As the Fed and Central Banks continue playing the game of Monopoly with Trillions of Dollars of money printing and asset purchases, the party won’t last for long as DEATH comes to all highly leveraged garbage assets and Ponzi Schemes.

To get an idea just how much worse the situation has become than we realize, let’s take a look at the energy fundamental that is gutting everything in its path.

WHY THE BIG MARKET COLLAPSE IS COMING: It’s The Energy, Stupid

Even though I belong to the Alternative Media Community, I am amazed at the lack of understanding by most of the precious metals analysts when it comes to energy. While I respect what many of these gold and silver analysts have to say, they exclude the most important factor in their forecasts. This critical factor is the Falling EROI – Energy Returned On Investment.

As I mentioned earlier in the article, I speak to many people on the phone from various industries. Yesterday, I was fortunate enough to chat with Bedford Hill of the Hill’s Group for over 90 minutes. What an interesting conversation. Ole Bedford knows we are toast. Unfortunately, only 0.01% of the population may understand the details of the Hill’s Group work.

Here is an explanation of the Hill’s Group:

The Hill’s Group is an association of consulting engineers and professional project managers. Our goal is to support our clients by providing them with the most relevant, and up to-date skill sets needed to manage their organizations. Depletion: A determination for the world’s petroleum reserve provides organizational long range planners, and policy makers with the essential information they will need in today’s rapidly changing environment.

I asked Bedford if he agreed with me that the hyperinflationary collapse of Venezuela was due to the falling oil price rather than its corrupt Communist Government. He concurred. Bedford stated that the total BTU energy cost to extract Venezuela’s heavy oil was higher than the BTU’s the market could afford. Bedford went on to say that when the oil price was at $ 80, Venezuela could still make enough profit to continue running its inefficient, corrupt government. However, now that the price of oil is trading below $ 50, it’s gutting the entire Venezuelan economy.

During our phone call, Bedford discussed his ETP Oil model, shown in his chart below. If there is one chart that totally screws up the typical Austrian School of Economics student or follower, it’s this baby:

Petroleum Price Curve

Bedford along with a group of engineers spent thousands and thousands of hours inputting the data that produced the “ETP Cost Curve” (BLACK LINE). The ETP Cost Curve is the average cost to produce oil by the industry. The RED dots represent the actual average annual West Texas Oil price. As you can see, the oil price corresponded with the ETP Cost Curve. This correlation suggests that the market price of oil is determined by its cost of production, rather than supply and demand market forces.

The ETP Cost Curve goes up until it reached an inflection point in 2012… then IT PEAKED. The black line coming down on the right-hand side of the chart represents “Maximum Consumer Price.” This line is the maximum price that the end consumer can afford. Again, it has nothing to do with supply and demand rather, it has everything to do with the cost of production and the remaining net energy in the barrel of oil.

I decided to add the RED dots for years 2014-2016. These additional annual oil price figures remain in or near the Maximum Consumer Price line. According to Bedford, the oil price will continue lower by 2020. However, the actual annual oil price in 2015 and 2016 was much lower than the estimated figures Bedford, and his group had calculated. Thus, we could see some volatility in the price over the next few years.

Regardless, the oil price trend will be lower. And as the oil price continues to fall, it will gut the U.S. and global oil industry. There is nothing the Fed and Central Banks can do to stop it. Yes, it’s true that the U.S. government could step in and bail out the U.S. shale oil industry, but this would not be a long-term solution.

Why? Let me explain with the following chart:

Debt Wall: Amount of Bonds U.S. Energy Companies Below Investment Grade Need To Pay Back Each Year

I have published this graph at least five times in my articles, but it is essential to understand. This chart represents the amount of below investment grade debt due by the U.S. energy industry each year. Not only does this debt rise to $ 200 billion by 2020, but it also represents that the quality of oil produced by the mighty U.S. shale oil industry WAS UNECONOMICAL even at $ 100 a barrel.

Furthermore, this massive amount of debt came from the stored economic energy via the various investors who provided the U.S. shale energy industry with the funds to continue producing oil at a loss. We must remember, INVESTMENT is stored economic energy. Thus, pension plans, mutual funds, insurance funds, etc., had taken investments gained over the years and gave it to the lousy U.S. shale oil industry for a short-term high yield.

Okay, this is very important to understand. Don’t look at those bars in the chart above as money or debt, rather look at them as energy. If you can do that, you will understand the terrible predicament we are facing. Years ago, these large investors saved up capital that came from burning energy. They took this stored economic energy (capital) and gave it to the U.S. shale oil industry. Without that capital, the U.S. shale oil industry would have gone belly up years ago.

So, what does that mean? It means… IT TOOK MORE ENERGY TO PRODUCE THE SHALE OIL than was DELIVERED TO THE MARKET. Regrettably, the overwhelming majority of shale oil debt will never be repaid. As the oil price continues to head lower, the supposed shale oil break-even price will be crushed. Without profits, debts pile up even higher.

Do you all see what is going on here? And let me say this. What I have explained in this article, DOES NOT INCLUDE INSIDER INFORMATION, which suggests “The situation is even much worse than you realize… LOL.”

For all my followers who believe business, as usual, will continue for another 2-3 decades, YOU HAVE BEEN WARNED. The energy situation is in far worse shape than you can imagine.

PRECIOUS METALS: Are Stores Of Economic Energy.. Stocks, Bonds & Real Estate Are Energy IOU’s

If you want to lose all your money (most of it), I suggest that you keep it invested in most STOCKS, BONDS and REAL ESTATE. I still receive emails from individuals who try to convince me that real estate is a safe-haven during economic distress. Yes, real estate was good to own in the past, but we are living in much different times today.

Years after the markets finally crack, I see thousands and thousands of suburban homes, commercial and industrial properties empty… never to be used again. We just won’t have the energy to run them. Thus, there will be Trillions of Dollars of sunk investment capital gone forever.

So, if you are still watching late night infomercials on how to become RICH buying Real Estate, you have my sympathies.

Lastly, if you are one of the few Americans not suffering from BRAIN DAMAGE, I suggest that you consider owning some physical precious metals to protect your wealth. Once the markets finally implode, there will be few bids for most STOCKS, BONDS and REAL ESTATE.

The time to get out of highly-inflated garbage assets is before everyone else tries to.

GOD HATH A SENSE OF HUMOR….

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