Why Oil Prices Can’t Bounce Very High; Expect Deflation Instead

Economists have given us a model of how prices and quantities of goods are supposed to interact.

Figure 1. From Wikipedia: The price P of a product is determined by a balance between production at each price (supply S) and the desires of those with purchasing power at each price (demand D). The diagram shows a positive shift in demand from D1 to D2, resulting in an increase in price (P) and quantity sold (Q) of the product.

Unfortunately, this model is woefully inadequate. It sort of works, until it doesn’t. If there is too little a product, higher prices and substitution are supposed to fix the problem. If there is too much, prices are supposed to fall, causing the higher-priced producers to drop out of the system.

This model doesn’t work with oil. If prices drop, as they have done since mid-2014, businesses don’t drop out. They often try to pump more. The plan is to try to make up for inadequate prices by increasing the volume of extraction. Of course, this doesn’t fix the problem. The hidden assumption is, of course, that eventually oil prices will again rise. When this happens, the expectation is that oil businesses will be able to make adequate profits. It is hoped that the system can again continue as in the past, perhaps at a lower volume of oil extraction, but with higher oil prices.

I doubt that this is what really will happen. Let me explain some of the issues involved.

[1] The economy is really a much more interlinked system than Figure 1 makes it appear.

Supply and demand for oil, and for many other products, are interlinked. If there is too little oil, the theory is that oil prices should rise, to encourage more production. But if there is too little oil, some would-be workers will be without jobs. For example, truck drivers may be without jobs, if there is no fuel for the vehicles they drive. Furthermore, some goods will not be delivered to their desired locations, leading to a loss of even more jobs (both at the manufacturing end of the goods, and at the sales end).

Ultimately, a lack of oil can be expected to reduce the availability of jobs that pay well. Digging in the ground with a stick to grow food is a job that is always around, with or without supplemental energy, but it doesn’t pay well!

Thus, the lack of oil really has a two-way pull:

(a) Higher prices, because of the shortage of oil and the desired products it produces.

(b) Lower prices, because of a shortage of jobs that pay adequate wages and the “demand” (really affordability) that these jobs produce.

[2] There are other ways that the two-way pull on prices can be seen:

(a) Prices need to be high enough for oil producers, or they will eventually stop extracting and refining the oil, and,

(b) Prices cannot be too high for consumers, or they will stop buying products made with oil.

If we think about it, the prices of basic commodities, such as food and fuel cannot rise too high relative to the wages of ordinary (also called “non-elite”) workers, or the system will grind to a halt. For example, if non-elite workers are at one point spending half of their income on food, the price of food cannot double. If it does, these workers will have no money left to pay for housing, or for clothing and taxes.

[3] The upward pull on oil prices comes from a combination of three factors.

(a) Rising cost of production, because the cheapest-to-produce oil tends to be extracted first, leaving the more expensive-to-extract oil for later. (This pattern is also true for other types of resources.)

(b) If workers are becoming more productive, this growing productivity of workers is often reflected in higher wages for the workers. With these higher wages, workers can afford more goods made with oil, and that use oil in their operation. Thus, these higher wages lead to higher “demand” (really affordability) for oil.

Recently, worker productivity has not been growing. One reason this is not surprising is because energy consumption per capita hit a peak in 2013. With less energy consumption per capita, it is likely that, on average, workers are not being given bigger and better “tools” (such as trucks, earth-moving equipment, and other machines) with which to leverage their labor. Such tools require the use of energy products, both when they are manufactured and when they are operated.

Figure 2. World Daily Per Capita Energy Consumption, based on primary energy consumption from BP Statistical Review of World Energy and 2017 United Nations population estimates.

(c) Another “pull” on demand comes from increased investment. This investment can be debt-based or can reflect equity investment. It is these financial assets that allow new mines to be opened, and new factories to be built. Thus, wages of non-elite workers can grow. McKinsey Global Institute reports that growth in total “financial assets” has slowed since 2007.

Figure 3. Figure by McKinsey Global Institute showing that growth in debt in financial instruments (both debt and equity) has slowed significantly since 2007. Source

More recent data by McKinsey Global Institute shows that cross-border investment, in particular, has slowed since 2007.

Figure 4. Figure by McKinsey Global Institute showing that global cross-border capital flows (combined debt and equity) have declined by 65% since the 2007 peak. Download from this page.

This cross-border investment is especially helpful in encouraging exports, because it often puts into place new facilities that encourage extraction of minerals. Some minerals are available in only in a few places in the world; these minerals are often traded internationally.

[4] The downward pull on oil and other commodity prices comes from several sources.

(a) Oil exports are often essential to the countries where they are extracted because of the tax revenue and jobs that they produce. The actual cost of extraction may be quite low, making extraction feasible, even at very low prices. Because of the need for tax revenue and jobs, governments will often encourage production regardless of price, so that the country can maintain its place in the world export market until prices again rise.

(b) Everyone “knows” that oil and other commodities will be needed in the years ahead. Because of this, there is no point in stopping production all together. In fact, the cost of production is likely to keep rising, putting an upward push on commodity prices. This belief encourages businesses to stay in the market, regardless of the economics.

(c) There is a long lead-time for developing new extraction capabilities. Decisions made today may  affect extraction ten years from now. No one knows what the oil price will be when the new production is brought online. At the same time, new production is coming on-line today, based on analyses when prices were much higher than they are today. Furthermore, once all of the development costs have been put in place, there is no point in simply walking away from the investment.

(d) Storage capacity is limited. Production and needed supply must balance exactly. If there is more than a tiny amount of oversupply, prices tend to plunge.

(e) The necessary price varies greatly, depending where geographically the extraction is being done, and depending on what is included in the calculation. Cost are much lower if the calculation is done excluding investment to date, or excluding taxes paid to governments, or excluding necessary investments needed for pollution control. It is often easy to justify accepting a low price, because there is usually some cost basis upon which such a low price is acceptable.

(f) Over time, there really are efficiency gains, but it is difficult to measure how well they are working. Do these “efficiency gains” simply speed up production a bit, or they allow more oil in total to be extracted? Also, cost cuts by contractors tend to look like efficiency gains. In fact, they may simply be temporary prices cuts, reflecting the desire of suppliers to maintain some market share in a time when prices are too low for everyone.

(g) Literally, every economy in the world wants to grow. If every economy tries to grow at the same time and the market is already saturated (given the spending power of non-elite workers), a very likely outcome is plunging prices.

[5] As we look around the world, the prices of many commodities, including oil, have fallen in recent years.

Figures 3 and 4 show that investment spending spiked in 2007. Oil prices spiked not long after that–in the first half of 2008.

Figure 5. Monthly Brent oil prices with dates of US beginning and ending QE.

Quantitative Easing (QE) is a way of encouraging investment through artificially low interest rates. US QE began right about when oil prices were lowest. We can see that the big 2008 spike and drop in prices corresponds roughly to the rise and drop in investment in Figures 3 and 4, above, as well.

If we look at commodities other than oil, we often see a major downslide in prices in recent years. The timing of this downslide varies. In the US, natural gas prices fell as soon as gas from fracking became available, and there started to be a gas oversupply problem.

I expect that at least part of gas’s low price problem also comes from subsidized prices for wind and solar. These subsidies lead to artificially low prices for wholesale electricity. Since electricity is a major use for natural gas, low wholesale prices for electricity indirectly tend to pull natural gas prices down.

Figure 6. Natural gas prices in the US and Canada, indexed to the 2008 price, based on annual price data provided in BP Statistical Review of World Energy, 2017.

Many people assume that fracking can be done so inexpensively that the type of downslide in prices shown in Figure 6 makes sense. In fact, the low prices available for natural gas are part of what have been pushing North American “oil and gas” companies toward bankruptcy.

For a while, it looked like high natural gas prices in Europe and Asia might allow the US to export natural gas as LNG, and end its oversupply problem. Unfortunately, overseas prices of natural gas have slid since 2013, making the profitability of such exports doubtful (Figure 7).

Figure 7. Prices of natural gas imports to Europe and Asia, indexed to 2008 levels, based on annual average prices provided by BP Statistical Review of World Energy, 2017.

Coal prices have followed a downward slope of a different shape since 2008. Note that the 2016 prices range from 32% to 59% below the 2008 level. They are even lower, relative to 2011 prices.

Figure 8. Prices of several types of coal, indexed to 2008 levels, based on annual average prices provided by BP Statistical Review of World Energy, 2017.

Figure 9 shows the price path for several metals and minerals. These seem to follow a downward path as well. I did not find a price index for rare earth minerals that went back to 2008. Recent data suggested that the prices of these minerals have been falling as well.

Figure 9. Prices of various metals and minerals, indexed to 2008, based on USGS analyses found using this link: https://minerals.usgs.gov/minerals/pubs/mcs/

Figure 9 shows that several major metals are down between 24% and 35% since 2008. The drop is even greater, relative to 2011 price levels.

Internationally traded foods have also fallen in price since 2008.

Figure 10. Food prices, indexed to 2008 levels, based on data from the United Nations’ Food and Agricultural Organization.

In Item [4] above, I listed several factors that would tend to make oil prices fall. These same issues could be expected to cause the prices of these other commodities to drop. In addition, energy products are used in the production of metals and minerals and of foods. A drop in the price of energy products would tend to flow through to lower extraction prices for minerals, and lower costs for growing agricultural products and bringing products to market.

One surprising place where prices are dropping is in the auction prices for the output of onshore wind turbines. This is a chart shown by Roger Andrews, in a recent article on Energy Matters. The cost of making wind turbines doesn’t seem to be dropping dramatically, except from the fall in the prices of commodities used to make the turbines. Yet auction prices seem to be dropping by 20% or more per year.

Figure 11. Figure by Roger Andrews, showing trend in auction prices of onshore wind energy from Energy Matters.

Thus, wind energy purchased through auctions seems to be succumbing to the same deflationary market forces as oil, natural gas, coal, many metals, and food.

[6] It is very hard to see how oil prices can rise significantly, without the prices of many other commodities also rising.

What seems to be happening is a basic mismatch between (a) the amount of goods and services countries want to sell, and (b) the amount of goods and services that are truly affordable by consumers, especially those who are non-elite workers. Somehow, we need to fix this supply/demand (affordability) imbalance.

One way of raising demand is through productivity growth. As mentioned previously, such a rise in productivity growth hasn’t been happening in recent years. Given the falling energy per capita amounts in Figure 2, it seems unlikely that productivity will be growing in the near future, because the adoption of improved technology requires energy consumption.

Another way of raising demand is through wage increases, over and above what would be indicated by productivity growth. With globalization, the trend has been has been lower and less stable wages, especially for less educated workers. This is precisely the opposite direction of the change we need, if demand for goods and services is to rise high enough to prevent deflation in commodity prices. There are very many of these non-elite workers. If their wages are low, this tends to reduce demand for homes, cars, motorcycles, and the many other goods that depend on wages of workers in the world. It is the manufacturing and use of these goods that influences demand for commodities.

Another way of increasing demand is through rising investment. This can eventually filter back to higher wages, as well. But this isn’t happening either. In fact, Figures 3 and 4 show that the last big surge in investment was in 2007. Furthermore, the amount of debt growth to increase GDP by one percentage points has increased dramatically in recent years, both in the United States and China, making this approach to economic growth increasingly less effective. Recent discussions seem to be in the direction of stabilizing or lowering debt levels, rather than raising them. Such changes would tend to lower new investment, not raise it.

[7] In many countries, falling export revenue is adversely affecting demand for imported goods and services.

It is not too surprising that the export revenue of Saudi Arabia has fallen, with the drop in oil prices.

Figure 12. Saudi Arabia exports and imports of goods and services based on World Bank data.

Because of the drop in exports, Saudi Arabia is now buying fewer imported goods and services. A person would expect other oil exporters also to be making cutbacks on their purchases of imported goods and services. (Exports in current US$ means exports measured year-by-year in US$ , without any inflation adjustment.)

It is somewhat more surprising that China’s exports and imports are falling, as measured in US$ . Figure 13 shows that, in US dollar terms, China’s exports of goods and services fell in both 2015 and 2016. The imports that China bought also fell, in both of these years.

Figure 13. China’s exports and imports of goods and services on a current US$ basis, based on World Bank data.

Similarly, both the exports and imports of India are down as well. In fact, India’s imports have fallen more than its exports, and for a longer period–since 2012.

Figure 14. India’s exports and imports of goods and services in current dollars, based on World Bank data.

The imports of goods and services for the United States also fell in 2015 and 2016. The US is both an exporter of commodities (particularly food and refined petroleum products) and an importer of crude oil, so this is not surprising.

Figure 15. US exports and imports of goods and services in US dollars, based on World Bank data.

In fact, on a world basis, exports and imports of goods and services both fell, in 2015 and 2016 as measured in US dollars.

Figure 16. World exports and imports in current US dollars, based on World Bank data.

[8] Once export (and import) revenues are down, it becomes increasingly difficult to raise prices again. 

If a country is not selling much of its own exports, it becomes very difficult to buy much of anyone else’s exports. This impetus, by itself, tends to keep prices of commodities, including oil, down.

Furthermore, it becomes more difficult to repay debt, especially debt that is in a currency that has appreciated. This means that borrowing additional debt becomes less and less feasible, as well. Thus, new investment becomes more difficult. This further tends to keep prices down. In fact, it tends to make prices fall, since new investment is needed to keep prices level.

[9] World financial leaders in developed countries do not understand what is happening, because they have written off commodities as “unimportant” and “something that lesser-developed countries deal with.”

In the US, few consumers are concerned about the price of corn. Instead, they are interested in the price of a box of corn flakes, or the price of corn tortillas in a restaurant.

The US, Europe and Japan specialize in high “value added” goods and services. For example, in the case of a box of cornflakes, manufacturers are involved in many steps such as (a) making cornflakes from corn, (b) boxing cornflakes in attractive boxes, (c) delivering those boxes to grocers’ shelves, and (d) advertising those cornflakes to prospective consumers. These costs generally do not decrease, as commodity prices decrease. One article from 2009 says, “With the record seven-dollar corn this summer, the cost of the corn in an 18-ounce box of corn flakes was only 14 cents.”

Because of the small role that commodity prices seem to play in producing the goods and services of developed countries, it is easy for financial leaders to overlook price indications at the commodity level. (Data available at this level of detail; the question is how closely it is examined by decision-makers.)

Figure 17. Various indices within US CPI Urban, displayed on a basis similar to that used in Figure 7 through 11. In other words, index values for later periods are compared to the average 2008 index value. CPI statistics are from US Bureau of Labor Statistics.

Figure 17 shows some components of the Consumer Price Index (CPI) on a basis similar to the trends in commodity prices shown in Figures 7 though 11. The category “Household furnishings and operations,” was chosen because it has furniture in it, and I know that furniture prices have fallen because of the growing use of cheap imported furniture from China. This category shows a slight downslope in prices. The other categories all show small increases over time. If commodity prices had not decreased, prices of the other categories would likely have increased to a greater extent than they did during the period shown.

[10] Conclusion. We are likely kidding ourselves, if we think that oil prices can rise in the future, for very long, by a very large amount.

It is quite possible that oil prices will bounce back up to $ 80 or even $ 100 per barrel, for a short time. But if they rise very high, for very long, there will be adverse impacts on other segments of the economy. We can’t expect that wages will go up at the same time, so increases in oil prices are likely to lead to a decrease in the purchase of discretionary products such as meals eaten in restaurants, charitable contributions, and vacation travel. These cutbacks, in turn, can be expected to lead to layoffs in discretionary sectors. Laid off workers are likely to have difficulty repaying their loans. As a result, we are likely to head back into a recession.

As we have seen above, it is not only oil prices that need to rise; it is many other prices that need to rise as well. Making a change of this magnitude is almost certainly impossible, without “crashing” the economy.

Economists put together a simplified view of how they thought supply and demand works. This simple model seems to work, at least reasonably well, when we are away from limits. What economists did not realize is that the limits we are facing are really affordability limits, and that growing affordability depends upon productivity growth. Productivity growth in turn depends on a growing quantity of cheap-to-produce energy supplies. The term “demand,” and the two-dimensional supply-demand model hide these issues.

The whole issue of limits has not been well understood. Peak Oil enthusiasts assumed that we were “running out” of an essential energy product. When this view was combined with the economist’s view of supply and demand, the conclusion was, “Of course, oil prices will rise, to fix the situation.”

Few stopped to realize that there is a second way of viewing the situation. What is falling is the resources that people need to have in order to have jobs that pay well. When this happens, we should expect prices to fall, rather than to rise, because workers are increasingly unable to buy the output of the economy.

If we look back at what happened historically, there have been many situations in which economies have collapsed. In fact, this is probably what we should expect as we approach limits, rather than expecting high oil prices. If collapse should take place, we should expect widespread debt defaults and major problems with the financial system. Governments are likely to have trouble collecting enough taxes, and may ultimately fail. Non-elite workers have historically come out badly in collapses. With low wages and high taxes, they have often succumbed to epidemics. We have our own epidemic now–the opioid epidemic.

 

 

Republished with permission by Our Finite World.




Where Oil Prices Are Headed

Oil has been in my “too hard” bucket the last six months. I couldn’t identify any catalyst that could drive it out of its trading range. I mostly expected it to chop around which has turned out to be the case.

But I figured it’s time I revisit oil and see if there’s anything on the horizon that could ignite a tradable trend in the near future. With many US E&Ps selling for what appears on the surface to be cheap, along with the oil and gas servicing industry trading at historically low relative values to the oil price; now seems like a good time to dig in.

To kick things off I’m going to share the framework I use to view the energy market. And we’ll then use that as a guide to understand the current environment.

To begin, I analyze every market from three vantage points. These are:

  1. Macro: This is the big picture supply and demand fundamentals of the market, along with the attributable macro/liquidity factors that drive them.
  2. Sentiment: I want to know what the market is thinking, what the dominant narratives are, and how the players are positioned.  We want a finger on the pulse so we can understand the expectations embedded in price.
  3. Technical: What’s the tape saying? I note areas of support and resistance and where the path of least resistance might lie.  

Macro

A useful model for thinking about supply and demand in oil, or any cyclical market, is to view it through the lens of the capital cycle which often moves in lock-step with the debt cycle.

In doing this it’s key to remember that we’re more interested in what the supply and demand picture will look like in the future (ie, 18-24 months down the road). The fundamentals of today are already reflected in price and we always want to be forward looking, but use present day data as an input in our framework.

Using the lens of the capital cycle or investment cycle framework, we’re concerned with how past, present and future investment (CAPEX) is going to affect future supply as well as the macro variables that drive demand.

The chart below from the book Capital Returns illustrates how the capital cycle works — I’ve written more about this process here.

Here’s a note from the hedge fund Bridgewater laying out the various stages of this cycle.

1) In the first phase, a pickup in commodity-intensive growth causes a global surge in demand for commodities to outstrip supply. As demand pushes up against capacity limits, prices rise.

2) In the second phase, high prices caused by the supply and demand imbalance induce large amounts of capital expenditure. As prices rise, margins for commodity producers widen and profits increase. These producers, flush with cash and looking at high prices, invest in profitable opportunities to expand production. There is a massive investment boom. This acts as a support to growth and inflation as capital expenditure accelerates.

3) The third phase is typically marked by a slowdown in commodity demand that occurs when the original growth that sparked the cycle fades and high prices incentivize reductions in demand growth, by encouraging substitution and efforts to improve efficiency. Simultaneously, the investment boom begins to bring new supply online, demand/supply imbalances ease, and prices stabilize. Thus, high prices help set in motion the increase in supply and reduction in demand that eventually lead to the turning of the cycle.

4) In the fourth phase, there is a supply glut. The balance between demand and supply swings sharply in the other direction, as production is much greater than demand. This phase is typically characterized by large price declines.

5) As prices fall, margins for commodity producers are squeezed. And, in the fifth phase, producers respond to low prices by slashing investment and in some cases shutting down production permanently. This decline in supply eventually brings the market back into balance, as the low investment deteriorates capacity, sowing the seeds for the next cycle.

Four of these long-term oil investment cycles have played out over the last century (chart via Bridgewater).

Let’s breakdown the current cycle by stage so we can see where we sit.

Stage one: The current oil investment cycle began in the early 2000s. There were three primary drivers that spawned a pickup “in commodity-intensive growth”. These were (1) the beginning of a cyclical bear market in USD (2) extremely easy monetary policy by the US Fed following the collapse of the US tech bubble which sent capital flowing out of the US and into emerging markets in search of returns and (3) accelerating growth in China that led to booming demand for commodities sparking a reflexive emerging market growth story.

This growth story in the periphery led to a large pickup in demand which pushed up against capacity limits causing oil prices to rise.

Stage two: Rising prices caused by the large supply and demand imbalance meant widening margins and greater profits for producers of oil and gas. Increasing returns on capital attracted new investment into capacity and an investment boom was started. The Fed’s loose monetary policy along with a falling dollar made capital cheap and readily available which led to more borrowing and more investment into future capacity.

All of this investment acted as a short-term boost to demand/growth which further led to rising commodity prices (a reflexive growth story).

Stage three: It began following the GFC in 09.’ This led to a slowdown in commodity demand growth.

The old economic adage, “the cure for high prices is higher prices” applies to this stage.

High oil prices incentivized new technology to lower extraction costs (ie, fracking) as well as lower consumption (ie, greater vehicle fuel efficiency).

This led to the unsustainable situation where we had high oil prices with lots of new supply coming online (from both fracking and conventional sources) while demand growth was falling due to more efficient vehicles and a tepid global economy.

Stage three was extended by large Chinese credit injections into its economy along with massive centrally planned commodity intensive investment projects. At one point, around 2010, China comprised something like 60+% of the worlds annual commodity consumption — which is larger than any share of demand by a single country in history.

Stage four: In 2014 China’s growth began to slow. Also, the Fed began to signal the beginning of the end of its easy monetary policy. This led to diverging expected rate paths between the US and ROW which kicked off a bull market in US dollars. And since oil is priced in USD, a higher dollar means oil becomes more expensive on a relative basis to the rest of the world. This leads to lower demand and is why the two move inversely to one another. At the same time, new production capacity was coming online as the result of investments made years earlier.

A supply glut plus a rising dollar led to the collapse of oil prices in 2014.

Stage five: Falling oil prices led to compressed margins and lower profits for commodity producers. At the same time, tighter US monetary policy and a rising dollar led to tighter liquidity in emerging markets which sent the reflexive growth story into reverse. Oil producers responded to the lower prices and tighter liquidity by reducing costs, cutting investment and shutting down unprofitable production.

This is where we find ourselves now.

Low oil prices have led to draconian level reductions in CAPEX. Remember, lower CAPEX today means lower supply in the future. Take a look at the chart below, showing global CAPEX in oil and gas.

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

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

Knowing that, it’s hard to imagine a future (next 1-3 years) where we don’t enter an extremely supply-constrained environment which would send oil prices much higher.

But one of the things that’s delaying this imbalance from showing up in price is US shale producers pumping at a loss and only being kept alive by cheap financing. Read the following from the FT:

As one Oklahoma oil and gas man I know says: “There is still unlimited capital, and as long as that is true, you can grow anything. If the companies had been forced to live within their cash flow, then their production would go down. Then they would have run into a death spiral where nobody would want to invest in them.” The shale companies struggling with sub-$ 40 or sub-$ 50 oil prices were also able to live off the excess inventory of drilled-but-uncompleted (DUC) wells that had built up during the boom years.

And

As our Oklahoman says: “There were thousands of DUCs that had not been taken account of. The companies could just complete and connect those to offset the declines in production from older wells.” Along with the sunk-cost inventory and cheap refinancing, the US E&P companies made real advances in the use of geoscience to find new oil in already-known fields. They also drilled longer lateral holes, and made more effective use of fracking techniques. So productivity went way up in places such as the Permian Basin in Texas.

While fracking has placed a temporary ceiling on oil, it’s only going to last as long as financing remains available (ie, rates low).

But this doesn’t permanently change the longer-term supply and demand picture. Here’s Jeremy Grantham of GMO on why:

After 1999 the costs of finding new oil started to rise very rapidly. By today, in my opinion, the price needed to support the development of new oil reserves has risen to at least $ 65 a barrel. This rise from $ 16 (in today’s currency) constitutes a second paradigm shift in oil. Less is found each year in smaller fields and is more difficult and costly to extract.

  • U.S. fracking oil is a small resource, under one and one-half years of global consumption. It will soon run off and show the underlying implacable rising costs of finding ever-diminishing pools of new oil.
  • Existing oil wells deplete faster than they used to because enhanced technologies squeeze more into the early years. Over 5 million barrels a day out of a global total of 95 a year now needs to be replaced every year. Half a new Saudi Arabia!
  • Today’s draconian cutbacks in exploration almost guarantee another sharp price spike in the next two to four years.

Another short-term factor that’s been weighing oil prices down are high levels of inventory which have been papering over the supply gap.

Over the last two years, a steep futures curve incentivized the increase in storage capacity. This is when higher future prices make it profitable to buy oil now and store it to sell at a later date. This steep curve led to a glut in inventories within OECD countries, and with the US nearly maxing out its storage capacity.

But over the last year the curve has started to flatten. This is leading to inventories being drawn down which is bullish for the oil price down the road. You can see the curve/inventory relationship on the chart below showing the WTI 12M futures price over spot, along with the year-over-year change in US inventories ex. SPR.

Another factor that muddies the macro picture is that we’re in the early stages of a major technologically driven secular change with the rise of electric vehicles (EVs). This will eventually have a major impact on the price of oil, the only question is when.

Transportation is by far the largest source of oil demand, comprising over 55% of global consumption with passenger vehicles making up about a quarter of total demand.

Increasing fuel efficiencies and the rise of hybrid and pure EVs spell trouble for high cost oil producers. And there are a number of countries that are trying to accelerate this trend to greener tech through policy and regulation.

For example, the UK and France have formalized plans to ban fossil fuel vehicles over the next two decades.

The US’s CAFE standards are forcing auto makers to produce ever more fuel efficient cars. And China, the largest market for EVs last year, is aiming to be the largest maker of lithium-ion batteries as well as increase the number of hybrids and EVs on its roads from 2M by 2020 up to 7M within a decade.

And while the transition to EVs will eventually remake the energy market — not to mention have cascading and long-term geopolitical impacts — I’m suspicious of the speed at which this secular shift occurs along with its near-term (over next 5 years)  impact on the price of oil.

Currently, EV’s make up a tiny fraction of the total auto market. Just last year there were only 750K EVs sold around the world which is less than 1% of the new-car market and only 0.2% of the total market.

The IEA is forecasting demand for oil to fall by 12% in OECD countries over the next decade. But it’s expected to grow by 19% in non-OECD countries over the same period and where by that time, over 60% of global oil demand will come from these developed markets.

So even though the fuel intensity of global growth is declining, the aggregate level of demand will continue to rise, at least into the foreseeable future.  

So the macro backdrop for oil can be summarized by the following:

  • We’re in the fifth stage of an oil investment cycle (ie, capital cycle)
  • A record amount of global oil and gas investment has been cut over the last three years which is going to lead to a highly supply-constrained environment sometime in the next 1-3 years
  • This phase is being drawn out by low interest rates and cheap financing allowing unproductive producers to stay in business
  • The global credit cycle is also being extended by China’s credit injections which is propping up demand and is likely to continue into its November Congress
  • The short-term supply glut has been exacerbated by a steep curve which led to record high inventories. But over the last year the curve has begun to flatten bringing inventories down with it
  • The rise of EV’s will eventually reshape the energy landscape but that future is still a ways off

As one analyst was quoted in the FT, “The Permian is preventing high prices today, but ensuring high oil prices tomorrow. The low prices are holding back investment in most of the world, and that is storing up a significant problem in meeting demand in the future”

Sentiment

For sentiment I like to track things like speculative positioning in COT, open interest and commercial hedging, fund flows and positioning data, and the futures time spread, along with other more qualitative factors like news flow and popular narratives.

And when looking at sentiment I’m looking for signs of extreme consensus. Instances where it appears there’s dominant narrative adoption and positioning is one-sided. Like Kovner said, we want to look for a “consensus the market is not confirming. I like to know that there are a lot of people who are going to be wrong.”

And right now, I’m not seeing any evidence of extreme or consensus sentiment in the oil market.

There’s some anecdotal evidence of the bearish oil narrative gaining adoption along with some notable longtime energy bulls being forced to close up shop. But these aren’t near the extremes that are indicative of a major trend change.

You can take a look at the COT chart below via FreeCOTData as an example. Specs were extremely bullish at the beginning of the year but have since tapered off to more neutral-bullish positioning.

I can foresee a scenario where oil prices stay low for a good deal longer causing a number of E&Ps to go belly up which would lead to the “Rise of the EVs” or “Death to the Combustion Engine” narrative gaining adoption. The Economist’s most recent cover is an example of this narrative becoming more popular.  

Technicals

I’ve found the late 90’s analog to be useful for today’s market. There’s a number of similarities (an extended core driven equity and dollar bull market marked by an EM and commodity crisis) as well as many differences (ie, definitely lacking the euphoria of the late 90s amongst other things).

Analogs have no predictive value whatsoever but they’re still useful for getting a sense for what’s possible and what’s happened in the past under similar circumstances. This analog helped us catch the short dollar trade that started a couple months ago.

With that said, the tape is following a similar pattern to its path in the late 90’s, early 2000’s. The chart below shows the oil price in monthly bars.

The way the macro data looks with a short-term supply glut persisting into the near future eventually leading to a large supply deficit in the next 1-3 years, plus the neutral to bullish sentiment and positioning, I would not be surprised to see price action largely mirror that of the early 2000s.

This would mean that oil would continue to chop around in its range. And there’d be a higher probability of it moving lower than higher over the next 6-months.

The potential 18-month H&S topping pattern in crude suggests this scenario may be starting to unfold.

My base case has the US and global markets moving into an illiquid environment around the end of this year/ beginning of next. This will reverse the fall in the dollar and kick off the final leg of the dollar bull market.

A rising dollar will further tighten global liquidity. And it’ll send oil and other commodities lower, with crude falling back to somewhere in the $ 30-$ 40bbl range.

During this time credit spreads will widen and financing for unproductive frackers will evaporate.

Sentiment will turn very bearish and adoption of the rise of EVs and other oil bearish narratives will become popular.

This will play out until the bull market in USD ends and a new commodity investment cycle begins.

In short, I don’t believe oil will start a major trend over the next six months and therefore isn’t worth trading at the moment. The fact that it’s been unable to rally out of its range to the upside while the dollar has been shitting the bed suggests the short-term supply glut is still weighing on the market.

And since I believe the recent weakness in the dollar is going to reverse in the coming months, I think the path of least resistance for oil remains lower.

I think in the next 1-2 years, long oil will make for a great trade. This will happen once this capital cycle fully completes and that will be when rates rise, credit spreads widen and financing dries up leading to the last of the unproductive producers to come off line. Then we’ll enter a multi-year severely supply-constrained market which should coincide with the start of a new bear market in the US dollar.

This is currently my base case for oil. It’s just what I view to be the most probable path at this point in time and I’ll be quick to flip my script should some new evidence, like war for example, change the outlook.

To learn more about our investment strategy at Macro Ops, check our Trading Handbook here.

 

 

Macro Ops




Selling from Gold ETFs Keeping a Lid on Prices; Insider’s Take on the Political Situation

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

Coming up we’ll hear our recent interview with Paul-Martin Foss of The Carl Menger Center for the Study of Money and Banking and former legislative assistant for Congressman Ron Paul. Paul-Martin shares his firsthand account of what those on Capitol Hill truly think of our monetary system, and how most in Congress simply don’t have a clue about the Federal Reserve banking cartel, let alone the importance of sound money. You simply won’t want to miss my interview with Paul-Martin Foss, coming up after this week’s market update.

Gold and silver markets traded in a narrow range this week through Thursday as traders question whether the price recovery seen in July has further to go. For gold, prices will need to break out strongly above the $ 1,300 level to confirm an uptrend.

But it’s not happening this week and we’re seeing a bit of a selloff today. As of this Friday recording, gold trades at $ 1,258 per ounce and shows a weekly loss of 0.9%. Silver is off 3.0% for the week to bring spot prices to $ 16.33 an ounce.

The precious metals mining stocks aren’t leading strongly one way or the other. The price action in the HUI gold miners index has been unusually tepid over the past 6 months. Normally, the mining sector exhibits big week to week swings, but volatility has tamped down as a trendless sideways trading range persists. Eventually, of course, this low volatility environment will give way to a big directional move.

A pick up in investment demand for precious metals could certainly help drive a bull market in prices. On Thursday, the World Gold Council released a report on gold demand for the second quarter. It showed total gold buying down about 10% compared to last year.

That seems like bad news for gold bulls. However, drilling down to the individual categories of gold demand shows that most are actually gaining strength.

Jewelry demand showed a rise of 8%, thanks largely to a bump up in buying out of India. Central bank buying continues to be robust, climbing 20% in the 2nd quarter. And investment demand in the form of bullion coins and bars improved by 13%.

So how did gold demand actually come in down overall? It was due to a massive 76% drawdown in buying from exchange-traded products. ETF inflows had hit a record in 2016. But because these vehicles are popular with short-term traders and speculators, inflows and outflows can swing dramatically from quarter to quarter.

Since Election Day last November, most trend followers have been too busy chasing the stock market higher to engage in the gold trade. Even though gold prices are up 9% for the year, the yellow metal likely won’t get much notice within conventional financial markets as long as the Dow Jones keeps making headline-grabbing record highs.

Close to $ 4 trillion in paper wealth has been added to the stock market since Donald Trump’s election. Stocks won’t keep going up forever. When fear reemerges among stock market investors, they might run to bonds and cash for safety. And if just a small percentage of them rotate out of equities and into precious metals proxies, the boost to demand coming from ETFs could be huge.

Demand for actual physical bullion products could see a huge increase as well. Bullion buyers are more likely to be committed to holding their metal for a long period of time.

People who trade exchange-traded proxies for gold in their brokerage accounts aren’t necessarily interested in gold’s long-term fundamentals. And some of these supposedly gold-backed instruments may not necessarily hold enough or even any physical gold for backing.

There likely wouldn’t be enough gold bars available to satisfy a sudden surge in physical demand from ETFs. After a few down years in the gold market since prices peaked in 2011, the forces of supply destruction are beginning to play out. According to the World Gold Council, supply dropped 8% in Q2 as mining output tapered off and recycling fell.

The drop off in supply is just as significant as the increases in retail bullion, jewelry, and central bank demand. It will be difficult for the mining industry to ramp up production to any significant degree. Higher spot prices might justify major new investments in the exploration and development, but new mines take years to actually go into production.

Investing in gold mines is fraught with risk. Some will return fortunes. Some will return jack squat even when the gold market’s hot. History shows that gold itself provides investors with superior risk-adjusted returns when compared to the gold mining sector.

Those who are seeking more upside potential than gold without incurring the risks of miners should consider loading up on silver. The gold:silver ratio has been stretched toward the high end of its normal range, now at about 77:1. Gold is expensive relative to silver. For bargain hunters who are willing to put up with a little more price volatility, silver just might be a fantastic buy at these levels.

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

Paul-Martin Foss

Mike Gleason:It is my privilege now to welcome in Paul-Martin Foss, founder and president of The Carl Menger Center for the Study of Money and Banking, an organization whose mission is to educate the American people on the importance of sound monetary policy. Prior to starting The Carl Menger Center, Paul-Martin worked on Capitol Hill for seven years, including a six year stint with none other than Congressman Ron Paul. As Paul’s legislative assistant, he worked closely with Dr. Paul on his Audit the Fed and End the Fed bills.

Paul-Martin has a Master’s degree from both the London School of Economics and Georgetown University, and has dedicated much of his professional life to the cause of sound money and the values of Austrian economics. So it’s a real pleasure to have him on with us today. Paul-Martin, thanks so much for joining us and welcome.

Paul-Martin Foss: Well, thank you very much for having me on.

Mike Gleason: Well, I guess we’ll start at the beginning here, and I’ll ask you to explain why you’ve made it a goal and a mission to spread the ideals of sound money and sound banking. So first off, what does sound money and sound banking mean, and why should the average American citizen even concern themselves with these causes in the first place?

Paul-Martin Foss: Sound money basically is money that the government cannot debase and devalue. It’s money that allows civilization and commerce to flourish. It protects savers. It protects consumers. It allows individuals to save and invest and plan for the future. What we’re seeing is for the past century since the Federal Reserve was created is basically unsound money. It’s money that is constantly being devalued. It favors debtors, especially the biggest debtor of all, the Federal government. It’s silently taking money out of the pockets of savers and the average individual and putting that money in the pockets of Wall Street. The average American person doesn’t really understand or see… who was it, I think Keynes quotes Lenin as saying that “the surest way to debase a civilization is to debase its currency.” This is basically what’s happening in our country today, so I’m trying to make it an important issue and make people realize just how important sound money and sound banking is in the United States.

Mike Gleason: Furthering the point here, you wrote a great article about how the government essentially funds itself through three methods, taxation, borrowing, and inflation, and you explained how sound money is essential to keeping spending in check. Talk more about that, and then also explain more about the role that gold and silver can serve to rein in government spending.

Paul-Martin Foss: Yeah, it’s like you said, you have taxation, you have borrowing, and you have inflation. Those are the three methods that the government can use to fund itself. Taxation is kind of self-limiting because once you get the tax rates high enough, people are going to stop paying taxes and the government’s not going to take in as much money. Borrowing, eventually people… if you are spendthrift and not paying back your debts, they’re going to stop lending you money or they’re going to lend you money at higher interest rates, so there’s kind of a self-limiting factor there too.

So inflation ends up being their preferred method of funding themselves, again because it’s very subtle. The Fed says 2% inflation rate every year, that’s their definition of stable prices. Well, that’s devaluing government debt by 2% every year. Over the course of a decade, you devalue your debt by 25%, and you can pay back your debts in devalued dollars, so it’s a win-win for the government all around, basically spending a lot more money than it actually has.

Gold and silver have always been great checks against the government because there’s just a limited supply of it, and the government doesn’t have a monopoly on the possession of gold and silver, the use of gold and silver. It can’t print gold and silver. It’s an item. If it wants to issue bank notes and spend money that way, it’s limited by the amount of gold and silver that is physically in its possession. So it’s always been a great check on government spending, and that’s why governments around the world for the past 100 years have done everything they can to demonetize gold and silver, keep people from being able to use because they don’t want gold and silver to be money because it limits their power.

Mike Gleason: You obviously had first-hand knowledge of what our politicians know about these subjects and what they think about our whole Federal Reserve System. I’m curious, how do they see it? You know, I get the sense that at first Dr. Paul was truly a lone voice in the wilderness when it comes to advocating for sound money, but we’re seeing a few others in D.C. who share the same concerns about the direction that things are going with our nation’s monetary policy. What is your sense of the current situation?

Paul-Martin Foss: Well, I think you have basically two groups of politicians, well maybe 3 groups of politicians when it comes to the Federal Reserve and monetary issues. You have the people who are kind of fatalistic. I remember Dr. Paul was talking, he was grilling Bernanke at one of his semi-annual hearings, and I stepped back in the anteroom and heard a senior staffer say, “well you know, Dr. Paul’s probably right about this, but what can we do? We’re so heavily invested in the system we’re in.” So they see it as basically an unchangeable system. It’s just going to run its course. That’s one group.

You have another group of people who obviously are the ones who benefit from the Federal Reserve and from the banking system. They’re the ones who get the campaign contributions from Goldman Sachs, from Bank of America, from Citigroup, etc. And then you have a third group, and I’d say this is probably the largest group, is the guys who just get in there and they’re completely in over their heads. They have no clue what’s going on, and they just (say), “well the Federal Reserve is here and it’s not going to change, but I don’t know enough to take a position either way” and they just they don’t want to open their mouths and say anything about the Fed even if they have an inkling that something’s wrong with it because they’re afraid that they’ll make a mistake and Paul Krugman or some other liberal economist will jump down their throats and make them look like a fool, so they just keep their mouths shut and the system just keeps on rolling along.

Mike Gleason: Where do we stand with the Audit the Fed bill at this point? I know it had passed the House but failed to obtain the 60 votes necessary to break the Senate filibuster late last year. Ron’s son, Senator Rand Paul, voiced an unbelievable amount of frustration over the fact that the Fed officials themselves were openly lobbying against the bill so they can maintain their secrecy, making the claim that it’s just necessary for them to have no transparency or accountability in order to do their job effectively. So where do things stand on the drive to audit the Fed, and how important is this legislation in terms of truly reining in the Federal Reserve?

Paul-Martin Foss: Well, the Audit the Fed legislation it’s the first step towards reining in the Federal Reserve, it won’t do anything in and of itself necessarily. What we want to do basically is just blow the doors open on the system and let Congress and let the American people know what exactly the Fed is up to. What are they buying, what is backing their mortgage-backed securities? I mean, they have nearly 2 trillion dollars in mortgage-backed securities. What’s backing that up? Are those performing loans or non-performing loans? Especially when you’re starting to get now to where people are talking about helicopter money and purchases of corporate debt and purchases of ETFs, the Fed could get involved in a whole bunch of other markets, and Congress needs to know what the Fed is up to. So it’s a very important bill.

I remember when these audit restrictions were first being discussed in the late ’70s. Obviously this was before my time, but looking at the testimony, GAO (the U.S. Government Accountability Office) themselves said that they could not adequately audit the Fed if they had no access to monetary policy operations because that was the largest dollar amount of the Fed’s activity. And here we are 40 years later, and GAO still is not allowed to access those and see what’s going on, so it’s a very important bill. Yeah, the roadblock really is the Senate. That’s the problem, it’s been a problem for years and years. It was always a problem when we were in the House. Even the Democrats when they were in the majority and Barney Frank wanted to push all his legislation, he always complained about the Democratic Senate, that they would never pass anything. It seems like they’re hardly ever doing any business. They’re not passing bills. They just don’t want anything that passes the House to come through.

So the bill gets a tremendous amount of House support. When we first introduced it, it had 320 co-sponsors. It’s just an incredibly popular bill on the House side, and the Senate side, you know, Senate leadership is just not going, they are essentially doing the Fed’s bidding, and I don’t think under this House leadership that the prospects for it passing the Senate are particularly good unfortunately.

Mike Gleason: Speaking of that, the banking lobby is probably the most powerful special interest group out there. The banksters really seem to have a lot of the politicians in their hip pockets. We often see political officials leaving D.C. and heading to Wall Street to work for these banks or “consult” for them, so given all of this cronyism, is there any chance to expect meaningful reform, and what should that reform look like in your view?

Paul-Martin Foss: Well, I think meaningful banking reform is going to have to be a complete bottom up overhaul. The national banking system in the U.S. was created in the 1860s for the purpose of funding and fighting the Civil War, and it’s essentially just an old patchwork of regulation that been added on top of that, and every time there’s a financial crisis… in the Depression, you had Glass-Steagall patched onto it, and then you had all these, you’ve had Dodd-Frank now and Sarbanes-Oxley, and all these pieces of legislation that just get kind of patched on to this 150 year old system, it’s a very rickety system.

The banks, they receive government subsidies through deposit insurance with their line of credit at the Treasury Department. That is a huge subsidy for their operations. There are high barriers to entry, so smaller banks and financial technology firms and financial services firms have a hard time breaking into the industry, which helps the entrenched Wall Street banks. The whole Federal Reserve System was designed and created to ensure that New York maintained its position of prominence and power within the financial system. So there’s just so much institutional weight against any sort of reform effort that I’m very discouraged that there will be any substantive reform in the near future. It may very well have to be that the banking system will completely collapse before somebody gets serious about reforming and replacing things.

Mike Gleason: In the wake of 2008, there was massive fraud all the way up to the top of the banks. We had fraud in loan underwriting. The derivative market fraud was incredibly pervasive. These prop trading desks at the big banks were illegally operating and colluding together, and we would read something like they’d be profitable like 199 out of 200 days or something like that. Is there any chance that the public outrage over this is going to reach a point where the elected officials will be forced to do something should it happen again, or, and not to take a fatalistic view here, will these guys be able to operate without any accountability forever?

Paul-Martin Foss: Well I think there possibly could be some great public anger if something like this happens again, but I was honestly discouraged by the ’08 financial crisis because I remember the bailouts. We were using still an email system where we printed out emails on paper to assign them, letters to respond to constituents and non-constituents. I had a stack of papers probably about 5 feet high sitting on my desk from people who were opposed to the bailouts, and every other office was the same. I heard some of these Senate offices were getting 100,000 phone calls in a week. People were horrendously pissed at the bank bailouts, but then a month and a half later at the elections, only one Congressman who voted for the bailout lost his seat.

People can be very mad, but they have to maintain that anger for a long period of time. The Tea Party kind of had the twin issues of the bailouts – anti-bailout and anti-Obamacare – that kind of caused that movement to form. But people are really going to have to pay attention to these issues and pay attention to them for months and months, and maintain that anger in order for them to be able to put enough pressure on their congressman to actually get something changed.

Mike Gleason: We talked earlier a little bit about the purpose of inflation, but generally speaking, why is deflation viewed as such a negative thing by Keynesians, because this is really one of the main differences between Austrian economists and the Keynesians, although there are many more, but the idea that the cost of things going up is somehow beneficial to the economy has always been a curious one to me. Why do they believe this?

Paul-Martin Foss: Yeah, it seems to be that they think when prices go up that people get richer. When things go up just in nominal terms that everybody is better off, which is not true. They might make some small comments about, “oh yeah, there can be beneficial deflation like the price of computers decreasing over the years,” but then they start thinking about aggregates, and they say, “well, but if the price level overall decreases, then things are bad.”

For some reason, they think that when prices go down, people will stop buying, which is not the case. When gold goes down, it’s a buying opportunity. When silver goes down, it’s a buying opportunity. If somebody has a sale, 25% off or 50% off, people start coming into stores and they start buying. That’s Sales 101. The Keynesians for some reason tend to think that these things that are true at the micro level are not true at the macro level, and their entire public policy response is based on this bogus notion that falling prices are a bad thing and will lead to a drop-off in consumption, and then kind of a self-fulfilling spiral of lack of consumption feeds lack of production, etc. And it’s theoretically unsound, it’s practically unsound, but it’s been disproven in experience, but they still continue to cling to it. And that’s why they pursue their inflationary policies as a response to every single economic downturn.

Mike Gleason: At some point, their inflation target of 2% you have to think is just going to sort of get away from them, and all of a sudden we’re going to have maybe hyperinflation, maybe not, but certainly we’ve seen our dollar lose an unbelievable amount of value, I believe 98 cents on the dollar from the 1913 dollar when the Federal Reserve was originally created.

Paul-Martin Foss: Yeah, and they’re talking about overshooting on inflation. They said, well maybe 3 or 4% isn’t bad, maybe 5 or 6% for a short amount of time. When you start talking about that, then definitely they stand a chance of losing control.

Mike Gleason: We’re now seeing negative interest rates in Europe, which is just a tremendous punishment to savers, and maybe we’ll see negative interest rates here in the U.S. as well. So the war on cash is ratcheting up, and that’s a topic we’ve talked a lot about here. There’s a concerted effort out there from the central planners to demonize cash holders and paint them as terrorists or criminals and so forth. All of this seems to be an attempt to perhaps bring about a cashless society and thus better regulate and track the citizens and all of our money. Talk about the war on cash movement and how damaging this is to the idea of liberty.

Paul-Martin Foss: Yeah, the war on cash… the major driver or the supposed driver, the kind of bogeyman they like to pull out of the closet is, “oh if we eliminate cash or reduce cash payments, then it’ll make it far more difficult for terrorists and drug dealers and human traffickers, etc. to operate, so we have to get rid of cash to ensure that we can crack down on these types of activities,” and it’s completely bogus. Even if you tried to get rid of cash, these people are going to find ways to do what they want to do. They’re going to find alternatives. The only person who is going to suffer is the average man and woman who just wants to go down the street and pay for 20 bucks’ worth of stuff with a 20 dollar bill or go to yard sales and estate sales on the weekend and pay with cash.

The real reason is that governments want control. France is one of the big governments driving things in the war on cash in Europe. It’s largely because they have incredibly high taxes all around, labor taxes, VATs, income taxes, and there’s a large black market economies and they want to ensure that people cannot escape to the black market to escape taxation. How do you do that? Well, you make sure that all payments are electronic so that they can be recorded, the government can get the data, and then the government can say “hey, did you pay your VAT on this” or “hey, you sold this many goods, but we’re not receiving enough tax payments from you, pay up.”

It’s all about governments wanting to get tax money and wanting to maintain control over the populace. I think Europe is probably a little farther advanced than we are. They’re starting to get rid of the 500 Euro note. It’s probably only a matter of time before they get rid of the 200 Euro note. Who knows, maybe the 100 Euro note will go by the boards. You’ve got this discussion of getting rid of hundred dollar bills in the U.S. There’s just not enough opposition and not enough attention being paid by people in the United States to the war on cash and how it’s going to affect them, and I’m afraid that unless there’s a strong resistance to this, we’re going to get railroaded and most people won’t wake up until it’s too late.

Mike Gleason: We certainly believe precious metals ownership is an excellent way to protect yourself against the war on cash as it’s essentially an off-the-grid way to store your wealth and gives you some independence from the banks. What are your thoughts there and how might folks fight against this initiative by the central planners to track all of our money and make it digital?

Paul-Martin Foss: Yeah, I certainly advocate people holding gold and silver. I own gold and silver. I try to use as much cash as I can now. Credit cards are convenient. You have to give them that, but there’s just sometimes where you want to use cash just to kind of stick it to the system, I guess. A lot of people need to hold alternative assets. The problem is a lot of people put their assets in a bank account or in investment accounts, mutual fund accounts, etc., and it’s like they say, possession is 9/10ths of the law or a bird in the hand is worth two in the bush. If you don’t actually have physical possession of the gold and silver that you own, if you don’t actually have physical possession of cash, you don’t really own it. I think you need to always have some cash at home and gold and silver.

Mike Gleason: Well, as we begin to close here, Paul-Martin, what is your biggest fear for the U.S. and the global economy as well if things continue down this road… one paved with massive inflation, money printing, and completely out of control debt? What are we headed for if we don’t find some sound money religion here?

Paul-Martin Foss: Well, my biggest fear is that we’re going to first head towards hyperinflation. I don’t trust the central banks that they know what they’re doing. I think they’re grasping at straws. I think they will probably make a horrendous mistake that is entirely predictable and that will destroy the monetary system in this country, or it may not even be the Federal Reserve that starts it. It may be the European Central Bank or some foreign central bank that starts things, and everything, other central banks respond, and it becomes kind of a worldwide contagion.

That is my biggest fear, but then as it relates to a cashless society and the war on cash, my big fear there too is that eventually people will be forced into the banking system. People who don’t want to have bank accounts are going to be forced to have them so the government can force them then to purchase health insurance or force them to purchase whatever the government thinks they need to, and they can just garnish their accounts whenever they want to for tax purposes. And people just need to be made aware that that is the ultimate end goal, so that they can take steps to resist it.

Mike Gleason: Yeah, education is certainly key. We need to have more people informed about these issues and what’s going on. Certainly your organization there is a big part of that.

Well, Paul-Martin, I really want to thank you for your insights, and thanks for the work that you’re doing there at The Carl Menger Center and for working to spread the ideals and concepts of liberty, free markets, and sound money. We hope we can visit with you again as things unfold, and hope you have a great weekend.

Paul-Martin Foss: All right, sounds good. Hope you have a good weekend too.

Mike Gleason: Well that will do it for this week. Thanks again to Paul-Martin Foss, founder and president of The Carl Menger Center for the Study of Money and Banking, and former legislative assistant for Congressman Ron Paul. For more information, please visit MengerCenter.org, and you can also find Paul-Martin’s wonderful commentaries on sites such as VoicesOfLiberty.com, Mises.org and LewRockwell.com among others, and you can also follow him on Twitter @PMFoss. Be sure to check that out.

Check back next Friday for our 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




Goldman Sachs Says That There Is A 99 Percent Chance That Stock Prices Will Not Keep Going Up Like This

Analysts at Goldman Sachs are saying that it is next to impossible for stock prices to keep going up like they have been recently.  Ever since Donald Trump’s surprise election victory in November, stocks have been on a tremendous run, but this surge has not been matched by a turnaround in the real economy.  We have essentially had a “no growth” economy for most of the past decade, and ominous signs pointing to big trouble ahead are all around us.  The only reason why stocks have been able to perform so well is due to unprecedented intervention by global central banks, but they are not going to be able to keep inflating this bubble forever.  At some point this absolutely enormous bubble will burst and investors will lose trillions of dollars.

The only other times we have seen stock valuations at these levels were just before the stock market crash of 1929 and just before the dotcom bubble burst in 2000.  For those that think that they can jump into the markets now and make a lot of money from rapidly rising stock prices, I think that it would be wise to consider what analysts at Goldman Sachs are telling us.  The following is from a CNBC article that was published on Monday…

Investors may be in for disappointing market returns in the decade to come with valuations at levels this high, if history is any indication.

Analysts at Goldman Sachs pointed out that annualized returns on the S&P 500 10 years out were in the single digits or negative 99 percent of the time when starting with valuations at current levels.

Do you really want to try to fight those odds?

Unfortunately, it appears that is precisely what a lot of investors are planning to do.  In fact, Schwab says that they are opening new accounts “at levels we have not seen since the Internet boom of the late 1990s”

New accounts are at levels we have not seen since the Internet boom of the late 1990s, up 34% over the first half of last year. But maybe more important for the long-term growth of the organization is not so much new accounts, but new-to-firm households, and our new-to-firm retail households were up 50% over that same period from 2016.

And a different survey found that Millennial investors in particular are eager to pour money into the stock market

Furthermore, according to a June survey from Legg Mason, nearly 80% of millennial investors plan to take on more risk this year, with 66% of them expressing an interest in equities. About 45% plan to take on “much more risk” in their portfolios.

One of the fundamental tenets of investing is to buy low and sell high.  Those that are getting in at the peak of the market are going to get absolutely slaughtered.  Trillions of dollars of paper wealth will be completely wiped out by the coming crash, and I wish that I could get more people to understand what is about to happen.

I recently wrote about how some really big investors are betting millions upon millions of dollars that a major stock market crash is going to happen in the very near future.  The financial markets are far more primed for a crash than they were in 2008, and there are certainly a lot of potential “black swan events” that could push us over the edge.  In his most recent article, Simon Black listed some of the things that he is currently watching…

– North Korea is threatening to nuke the US
– Donald Trump is firing his entire cabinet
– The Federal Reserve has dropped interest rates to record lows and drowned the world in trillions of dollars of cash
– Debt levels are at record highs
– Entire banking systems, especially in Europe, are in need of massive bailouts
– The US government will run out of money in less than 90-days and hit the debt ceiling once again

You only make money in the stock market if you get out in time.  And since just before the crisis of 2008 I have never seen so many prominent names in the financial community warn about a coming stock market crash as I have over the last 90 days.  For example, legendary investor Jim Rogers is warning that there will almost certainly be a crash “this year or the next”, and that it will be “the worst in your lifetime and my lifetime”

The best-selling author expects the next financial crisis to be the “worst” he has ever seen.

“We’ve had economic problems in the U.S. or in North America every four to eight years since the beginning of the Republic so to say that we’re going to have a problem is not unusual,” he told Kitco News from the Freedom Fest conference in Las Vegas.

“I would expect it to start this year or the next…and it’s going to be the worst in your lifetime and my lifetime.”

What goes up must come down, and markets tend to go down a whole lot faster than they go up.

And in the environment that we are in today, caution is a very good thing.  I really like how billionaire Howard Marks put this the other day…

I think it’s better to turn cautious too soon (and thus perhaps underperform for a while) rather than too late, after the downslide has begun, making it hard to trim risk, achieve exits and cut losses.

Perhaps this will be the first giant financial bubble in our history to end smoothly, but I wouldn’t count on it.

In the end, I expect this one to end just like all of the others.  And I anticipate that the coming crisis will ultimately be worse than anything we have ever faced before because this current bubble has been artificially inflated for so long.

Hopefully stock prices will go up again tomorrow, but it would be exceedingly foolish to ignore all of the warnings.  Goldman Sachs says that there is a 99 percent chance that stocks cannot continue surging like this, and in this case I believe that Goldman Sachs is entirely correct.

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




Does the National Debt Matter for Silver Prices? [Explained w/ Charts]

Silver currently sells around $ 16, which would be sensible if the U.S. national debt was much less than its current $ 20 trillion.

Fine Silver Bar

Given the massive national debt and 100 years of experience, silver prices could easily be double or triple their current prices, and far higher in a panic.

WHY?

Examine over a century of official national debt data graphed on a log scale. Official debt in 1913 was $ 3 billion. Since then it has risen 8% to 9% every year to reach $ 20 trillion or $ 20,000 billion. Debt will continue rising as long as politicians spend and bankers lend.

Proof: Name the Senators, Representatives, Presidents, military contractors, pharmaceutical companies, and Medicare recipients who wish to see the government reduce expenses.

U.S. National Debt Graph

Silver prices have increased, but more slowly than national debt, as dollars have been devalued for over a century.

Annual Average Silver Graph

Silver Prices Graph

Silver prices, after the 1980 bubble and crash, have increased erratically since their low in 1993 at $ 3.51. The exponential trend line, as drawn, indicates that silver prices in mid-2017 are well below their long-term trend. Daily silver prices exceeded $ 48 in April 2011 before crashing back to $ 13.60 in late 2015.

Silver prices are, in the big picture, too low and will rise above their exponential trend.

CONSIDER RATIOS:

Multiply average annual silver prices by one trillion and divide by the ever-increasing national debt. For the past 30 years the ratio has ranged between 0.7 and 2.9. The ratio is currently very low at about 0.8. Someday silver prices will rally substantially and force the ratio toward 3 and higher. For comparison the ratio, using average annual silver prices, reached 26 in 1980, and surpassed 50 using the daily prices for silver.Silver to National Debt Ratio

SUMMARY:

  • Politicians spend and bankers lend. Debt increases, total dollars in circulation increase and dollars purchase less. Prices for stocks, commodities, food, energy, gold, silver, beer and many others rise.
  • Silver prices have risen erratically but inevitably, along with debt and most consumer prices, for decades. As of July 2017 silver prices, compared to the national debt, are too low and will rise.
  • The next rally in silver should be huge based on the prospects for expanded war, financial chaos, and central bank “printing” that will devalue all currencies.

1970 Cost of Living

Silver will sell for $ 100 per ounce! Impossible? Look at price increases for Amazon ($ 6 to $ 1,000 in 16 years), Bitcoin, and many others. Yes, $ 100 silver (and higher) seems likely within a few years.

Precious Metals News & Analysis – Gold News, Silver News




Short Position on Silver Prices; George Leef on Sound Money

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

Coming up we’ll dive into a disturbing topic of just how far our nation has strayed from the Founding Fathers’ ideals when comes to sound money – with devastating effects on our freedoms and the economy. In my exclusive interview with George Leef of Forbes Magazine, you’ll also learn about the growing movement to restore gold and silver back into the monetary system. Don’t miss my conversation with George Leef, coming up after this week’s market update.

A busy news week in Washington gave investors cause for both hope and fear, but they chose to focus mostly on hope. Major U.S. stock averages lifted toward new record highs as the Trump administration rolled out its tax cut proposal. Meanwhile, gold and silver markets got hit with selling despite escalating tensions on the Korean peninsula and a weakening U.S. dollar.

Gold prices currently check in at $ 1,267 an ounce, down 1.5% on the week. Silver is off 80 cents or 4.4% since last Friday’s close to trade at $ 17.25 per ounce. The one bright spot in the precious metals complex is palladium, which closed Thursday near its high mark for the year and is surging again today. As of this Friday morning recording, palladium is up 4.3% on the week to $ 832 an ounce and now sits at a 26-month high. And finally, platinum is off 2.7% to trade at $ 949.

In both the gold and silver futures markets, commercial traders have amassed enormous short positions. Banks and other large institutions have bet big on falling precious metals prices. In silver, the net short position among the commercial trading institutions has reached record levels. The latest Commitment of Traders data show the net short position at about 125,000 contracts, which is equal to 625 million ounces of silver or more than 70% of annual silver production.

It’s difficult to see any particular fundamental reason why such an outsized bearish position would be taken out at this time. The mining industry doesn’t have a sudden need to hedge in a much bigger way than it ever has before. The likely explanation is that commercial traders want to drive the price lower by taking out concentrated short positions. They’ve gotten two straight weeks of price drops in silver despite the U.S. Dollar Index falling now for three straight weeks.

Whether you want to call it manipulation or something else, it’s no coincidence that the banks usually get their way when they pile onto one side or the other of a market. The risk for precious metals investors is that the current correction could persist for weeks before the commercial traders shrink their net short positions back to neutral levels.

That doesn’t necessarily mean silver prices will go down any further. It could be a more of sideways correction from here. It could also be the case that some event causes short covering to accelerate and prices to rally at any time.

Political and geopolitical developments could certainly spark volatility in markets without warning or notice. As I noted earlier, stock market investors are still putting a great deal of hope in the ability of Team Trump to deliver for the economy. Optimism toward the prospects for economic growth persist even as the GDP report due out today is likely to show the economy got off to a weak start in the first quarter.

Tax cuts, if enacted, could certainly provide some stimulus for the economy. President Trump wants to lower the tax rate on corporations, and on capital gains and dividends, while providing working families with a larger standard deduction.

But establishment Republicans in Congress are insisting that the tax package be revenue neutral. That means the total amount of revenue extracted from taxpayers wouldn’t actually be cut. Any lowering of rates would have to be offset by eliminating loopholes and deductions. The Trump administration also wants to employ so-called “dynamic scoring” – a budgetary trick that assumes tax cuts will partially pay for themselves over time through projections of higher rates of economic growth.

It’s true that an economy less burdened by taxes will tend to grow faster. But not even the rosiest of growth projections will lead to a balanced budget absent gigantic cuts in federal spending. And right now even small cuts to any of the largest portions of the federal budget are politically impossible.

Quibbles in Congress over budget priorities could extend the threat of a so-called government shutdown into next week. Although a shutdown makes for dramatic news coverage, markets probably won’t take it too seriously. When the last government shutdown occurred in 2013 from October 1st to October 16th, the S&P 500 actually posted modest gains during the impasse. Gold prices traded range bound with no major fear-driven buying spikes.

Regardless of what Washington does or doesn’t get done this year, the fiscal outlook for the years ahead will include rising spending commitments, rising deficits, and the risk of much higher borrowing costs. Government’s appetite for dollars will grow and grow by the trillions. If the dollars can’t be taxed from the productive economy, they will be created out of thin air by the Federal Reserve.

It’s a dangerous environment in which to invest based solely on hope. Prudent investors prepare for good times as well as bad, and physical precious metals are the only asset class that can fare well when bad times hit currencies and financial markets.

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

George Leef

Mike Gleason: It is my privilege now to welcome Forbes Magazine columnist George Leef. George is a hard money advocate and a law graduate who has dedicated his professional life to teaching and education rather than practicing law, and over the past fifteen years has worked at the James G. Martin Center for Academic Renewal, a free market think tank that takes a critical view of higher education. Underneath George’s byline on any of his Forbes.com columns, you’ll find the words, “I write on the damage big government does, especially on education.” And today, we’re going to get into just how uneducated many are when it comes to the government’s heavy-handed role as to our money.

George, thank you very much for taking the time to visit with us today. How are you?

George Leef: I’m very good, and my pleasure to be on with you, Mike.

Mike Gleason: I’m excited to cover this topic with you and first would like you to brush up our listeners on the role the US government was originally designed to play vis-à-vis our money. And contrary to popular belief, nowhere in the Constitution do we find anything about granting our governmental overlords a monopoly power in the creation of money, do we?

George Leef: No, we don’t. The Constitution sets forth the powers that the government is supposed to have. In Article 1, Section 8, the powers of Congress are enumerated and that includes the power to coin money and regulate the value thereof and also the power to punish counterfeiting of US securities or US money. As I note at the beginning of my article, which is available on Forbes.com, that does not include the power to create a governmental monopoly in the creation of money. There would be no reason to think that the founders would have wanted such monopoly for several reasons. They had been unhappy with British monopolies like the East India Company that tried to sell them overpriced tea, and we know what happened to that tea.

We also know that at the time prior to the founding and after the ratification founding, there was lots of non US-produced coinage in circulation. There were coins in circulation that had been minted by the Spanish government. That’s where we got the idea that the “piece of eight” and “two bits”. The colonists liked to cut the Spanish eight-real piece up into smaller pieces and they used that in trade. There were also privately minted coins in circulation. The people who wrote the Constitution knew about this and it didn’t bother them in the slightest.

What they had in mind as the monetary system of the new country would be based on gold and silver. In fact, they wrote that into the first Coinage Act in 1792. They couldn’t have cared less who minted gold or silver coins. All they were intent upon was that the coinage of the United States not be counterfeited. That, of course, was also written into law early in the country that it was illegal to counterfeit. They did not by any stretch of the imagination envision that the federal government would have monopoly on the production of money.

Mike Gleason: It was a certain amount of gold and silver grains, I guess, made up a dollar. They did have the ability to change that metric if they needed to, but that was the true backing.

George Leef: That’s true. They adopted a bimetallic system. The dollar was designed both as a weight of gold and a weight of silver, but they understood that the market value between gold and silver would probably change over time, which is what they meant when they said “regulate the value”. What they meant was that they could change the ratio between gold and silver as needed, which, in fact, Congress did in about 1834, as I recall, changing the ratio between gold and silver. I’m trying to remember whether it was gold that was starting to go out of circulation or silver because one was over-valued. Anyway, that’s what they meant by regulate the value of money.

Again, it does not entail any power to punish people for making other forms of money. In fact, I think if you had been able to talk to James Madison or any of the other drafters of the Constitution back then and asked, “Does this mean that the federal government can punish people who produce gold or silver coins or copper or anything else?” they would have said, “Of course not. As long as you’re not counterfeiting or defrauding people with these coins, we don’t care what coinage people use in their transactions.”

Mike Gleason: Now as we turn towards the Bernard von NotHaus case that I’ll ask you about in a moment, the role of government with respect to money was primarily, if not exclusively, to prevent people from producing fake money, counterfeiting, which you alluded to a moment ago. They’ve taken that notion and really expanded it, haven’t they?

George Leef: Yes. During the Civil War, Congress added a section to the criminal code, Section 18 of the United States Code, Section 486, which purports to make it a crime to produce coins that could be used in substitution for “the current money” of the United States. They didn’t want competition with the cheap money the Union was producing during the Civil War. That provision still remains on the books and has recently become key in a case against a man who was producing what was called the Liberty Dollar. His name was Bernard von NotHaus. Oh, quite a few years ago, back in 2005 and earlier, he began producing a pure silver coin, which, of course, the US government itself stopped doing way back in the mid-1960s. They took the silver out of the coinage and just made these clad coins we now use.

He was making a silver dollar he called the Liberty Dollar, which he sold to people at the price of the silver in it plus a markup. His point was that he wanted to emphasize that the United States was not living up to its legal obligation of providing true money, valuable money, money backed by something. His activities came to the attention of the federal government, which, of course, loves to throw people in jail who speak ill of its policies these days, and, of course, the policy for a long time has been to flood the country with Federal Reserve notes, cheap money that’s backed by nothing.

So they prosecuted Bernard von NotHaus for violation of 18 USC 486, and they said, “You are producing money that competes with current money of the United States, and that is illegal.” The case went to trial in the western district of North Carolina, Federal Court, in 2009 and Mr. von NotHaus was found guilty of violating federal law in 2011 and he was recently sentenced, although the sentence is fairly light. He was sentenced to only six months of house arrest by the judge, which I think speaks at least of a token of good sense inasmuch as the taxpayers have wasted enough money and they don’t need to waste more money putting this innocent and harmless man in jail.

Also, and this, I think, is what really makes the government’s point, they seized some seven million dollars’ worth of his assets, gold, silver, the presses used to make the coins. Most of that is going to be kept by the federal government at the judge’s order under civil assets forfeiture. Some of it is supposed to be returned to Mr. von NotHaus. So they made a spectacle of this guy, convicted him for doing something that was perfectly honest and harmless.

Mike Gleason: Yeah. They definitely feel like they should be the only ones that have the ability to counterfeit our money or what should have been money and definitely don’t like other people doing it. I guess the fatal mistake he made was that he put the dollar label on those coins. Is that what I understand?

George Leef: Yeah. He put the dollar sign on it, and the prosecution made a big deal about that. In point of fact, nobody who bought a Liberty Dollar could possibly have thought that it was actually United States currency. It was made out of silver, which our coins are no longer made out of. It didn’t say United States Government on it. It certainly was not a case of fraud or of counterfeiting. It did not look like US coins. No one could have possibly mistaken them for US coins.

Mike Gleason: Turning to the Federal Reserve’s role in all of this, you alluded to it a moment ago. It seems that the current system is all about the Fed monkeying with the money supply, controlling interest rates, and even stepping into the market to buy literally trillions of dollars of bonds. This has not only created tremendous distortions in asset prices and bubbles, crashes, financial turmoil, but also the purchasing power of the dollar is down some ninety-seventy percent in the last century. Now in a column you wrote earlier this year where you reviewed a great book by Professor Richard Timberlake titled Constitutional Money, you quoted Timberlake as saying, “What we have learned is that the rule of experts, no matter how brilliant their credentials, is far inferior to the stability of a self-regulating market.” Explain why you believe that to be the case.

George Leef: I’m glad you brought that up, Mike. I’d like to encourage people to read this excellent book by Professor Timberlake entitled Constitutional Money, published last year by Cambridge University Press and which I reviewed on Forbes. What his argument is a counterargument to the progressive status argument we hear about, medical care, Obamacare, and many other things, that we have to rely upon government experts to get things right, whether it’s medical care or the money supply or something else. If we turn it over to the right people, they will create the right circumstances for the country, and then we’ll be just fine, but we couldn’t rely upon market processes.

What Timberlake is arguing is that we should rely on market processes and stop relying upon the so-called experts at the Fed, for instance, because what they have done is ruined, they’ve undermined our monetary system. They have given us this, among other problems, this zero interest rate policy that is ruinous to people who used to depend and thought they could depend on the return from monetary assets that they had invested in. We’d be much, much better off if we returned to the constitutional concept of money, which is a market-based money, money based on gold and silver or any other valuable commodity that people would like to use in making their exchanges and take the power of manipulating money away from these federal bureaucrats. That’s his argument.

In fact, he continues by saying that the entire Federal Reserve system really should be regarded as unconstitutional the way it has turned out. They’re doing things that are clearly in violation of the role of government and money that the founders had envisioned.

Mike Gleason: Speaking of manipulation, we got a great example of that in past history. In the column you wrote about Timberlake’s book, you also point out the Fed’s policy decisions and immediate reaction to the early stages of the Great Depression made it much worse because they prevented gold from functioning as the monetary base. Gold ownership was made illegal in America. It was officially demonetized and then locked up in Fort Knox by the politicians. With gold drummed out of the monetary system and taken out of people’s hands, they could essentially politicize the nation’s economy. Why was that so detrimental?

George Leef: That’s precisely what the progressives, FDR and his New Dealers had in mind. They wanted to politicize everything, including the monetary system. That’s why they confiscated gold; they made it illegal to make contracts for dealings using gold. They wanted to lock the people into dependency upon the federal government in every way they could, including the use of money. Perhaps the most striking argument in Timberlake’s book is his point about how gold was locked away, seized by the government, put into Fort Knox. If that had not been the case, he argues, the money supply of the country would not have shrunk the way it did. That’s what really caused the wave of bank failures and business failures that hit the country in the early ’30s, lasting into FDR’s first term. It was all the monetary blundering of the Federal Reserve officials that made a bad situation much, much worse.

Mike Gleason: Well this notion of free currency and the resurgence of precious metals is an important monetary asset across the globe. It seems to be gaining traction even here in America, particularly in several states, that the US Constitution says that states should recognize gold and silver coins as legal tender in the payment of debts. We’re seeing several states, Utah being the first, if I’m not mistaken, formalizing this through legislation in the past few years. So this is an issue on the rise and thank goodness more people like you are talking about it. You’ve covered this a lot. Are we gaining traction in this area?

George Leef: Oh, I think people are becoming more and more nervous about our monetary system as the federal debt continues to go up and will no doubt continue to go up at an exponential rate. People are going to get more and more nervous about money and they’re going to start asking the right questions about what has the government done to our money? What should our monetary system really be like? What are the alternatives to this system we have where the supposed experts in the Federal Reserve just crank out as much money as they think is ideal. This is going to gain traction. I think we’ll see more states taking these kind of steps, which they’re perfectly entitled to do under federalism, to allow people to make their own transactions however they want to. That’s the freedom that the founders envisioned. Maybe it’s due for a comeback, and I think we’re going to start seeing it.

Mike Gleason: It definitely starts with education, and you’re, of course, at the forefront of that. We definitely appreciate what you’re doing there and certainly thank you for your insights and the works you’re doing there at Forbes.com, and we hope we can visit with you again as this all unfolds.

George Leef: Oh, absolutely, Mike. Glad to be on with you.

Mike Gleason: Well that will do it for this week. Thanks again to Forbes columnist George Leef of the James G. Martin Center for Academic Renewal.

Be sure to check back next Friday for our 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




What Is America Going To Look Like When Stocks, Home Prices And Even Used Cars All Crash By At Least 50 Percent?

Have you ever thought about what comes after the bubble?  In 2008 we got a short preview of what life will be like, but most Americans seem to have come to the conclusion that the last financial crisis was just a minor bump in the road toward endless economic prosperity.  But of course the truth is that the ridiculously high debt-fueled standard of living that we are enjoying now is not sustainable, and after this bubble bursts it will be an extremely painful adjustment for our society.

Since the last financial crisis, the U.S. national debt has nearly doubled, corporate debt has doubled, stock valuations have reached exceedingly ridiculous extremes, the student loan debt bubble has surpassed a trillion dollars, we are facing the largest unfunded pension crisis in U.S. history, and in many parts of the country (particularly the west coast) we are facing a housing bubble that is even worse than the one that burst in 2007 and 2008.

And even with all of these bubbles, U.S. GDP growth has been absolutely anemic.  Even if you believe the grossly manipulated numbers that the federal government puts out, the U.S. economy grew at a “miserably low” rate of just 1.6 percent in 2016…

In terms of GDP, the fourth quarter was revised up slightly, but there were adjustments for prior quarters, and overall GDP growth for the year 2016 remained at a miserably low 1.6%. We’ve come to call this the “stall speed.” It’s difficult for the US economy to stay aloft at this slow speed. As Q4 gutted any hopes for a strong finish, GDP growth in 2016 matched the worst year since the Great Recession.

And corporate profits, despite a stock market that has been surging for years, are even worse. A lot worse. They’ve declined for years. In fact, they declined for years during the prior two stock market bubbles, the dotcom bubble and the pre-Financial-Crisis bubble. Both ended in crashes.

Things have continued to get even worse early in 2016.  At this point, it is being projected that U.S. GDP will grow at an annual rate of just 0.9 percent during the first quarter of 2017.

So anyone that tries to tell you that the U.S. economy is in good shape is simply not being honest with you.

But even though things don’t look great now, they are going to look far, far worse after the biggest debt bubble in human history bursts.

For example, what do you think that America will look like after half of all stock market wealth disappears?  In a recent note to his clients, John P. Hussman stated that his team is projecting that by the end of this current market cycle “roughly half of U.S. equity market capitalization – $ 17 trillion in paper wealth – will simply vanish”.

And of course that projection lines up perfectly with what I have been saying for quite a while.  In order for key measures of stock market valuation (such as CAPE, etc.) to return to their long-term averages, stocks are going to have to fall at least 40 to 50 percent from their current levels.

As this coming crisis unfolds, other asset classes will experience astounding downturns as well.  This week, Morgan Stanley (one of the too big to fail banks) released a report that said that used car prices “could crash by up to 50%” over the next several years…

For months we’ve been talking about the massive lending bubble propping up the U.S. auto market. Now, noting many of the same concerns that we’ve highlighted repeatedly, Morgan Stanley’s auto team, led by Adam Jonas, has just issued a report detailing why they think used car prices could crash by up to 50% over the next 4-5 years.

Housing prices are primed for a major plunge as well.  This is especially true on the west coast where tech money and foreign purchasers from Asia have pushed home values up to dizzying levels.  Half a million dollars will be lucky to get you a “starter home” in San Francisco, and it was being reported that one poor techie living there was paying $ 1400 a month just to live in a closet.  Many believe that some cities on the west coast will be quite fortunate if home values only go down by 50 percent during the coming crash.

Everywhere you look there are bubbles.  In a recent piece, Daniel Lang pointed out some more of them

  • Eric Rosengren, the president of the Federal Reserve Bank of Boston, recently made a startling tacit admission. We may be in the midst of yet another real estate bubble. Major financial institutions in this country are in possession of over $ 14 trillion worth of residential real estate loans. That’s well over $ 40,000 for every man woman and child in America.
  • Low interest rates have fueled a bubble in subprime auto loans, and that bubble appears to be reaching its limits. There are now over 1 million ordinary and subprime auto loans that are delinquent, a number that hasn’t been this high since 2009.
  • There is now well over a trillion dollars worth of student loan debt in this country; much of it owned by low income families. And there’s little hope that these students will ever see a return on their investment. That’s why at least 27% of student loans are in default. While more than one in four students are in default now, that number was one in nine a decade ago. And if current trends continue, there could be $ 3.3 trillion of student loan debt by the end of the next decade.

At some point the imbalances become just too great and the system collapses in upon itself.

In other words, we are heading for a massive implosion.

And once the implosion happens, people are going to go absolutely nuts.  Anger and frustration are already rising to the boiling point all over the country, and it isn’t going to take much to push millions of Americans completely over the edge.

In a recent interview with Greg Hunter, author James Rickards warned that when things get really bad in America we could actually see what he refers to as “money riots”

So, could we be facing a “Mad Max” world if the financial system totally crashes? Rickards says, “In ‘Road to Ruin,’ I talk about what I call the money riots.  There is a lot of reasons for rioting.  When you start shutting banks and the stock exchange and they say you can’t get your money, it’s only temporary, trust us, people will go out and start to burn down banks.  The government is ready for that also with emergency response and martial law. . . . Governments don’t go down without a fight. . . . You can see the shutdown coming because they will try to buy time until they come up with a solution, whether it’s gold, Special Drawing Rights (SDR), guarantees or whatever it might be.  There are only two or three possibilities here, but all of them will take time, and they will have to shut down the system. . . . People will not sit for that.  So, that means people will riot.  They’ll burn down banks.  They will smash windows, but what is the reaction to that?  The answer is martial law, militarized police, actual military units and you get something that looks like fascism pretty quickly.”

I very much agree with his assessment.

All it is going to take is another major financial crisis and this nation will go completely and utterly insane.

Unfortunately, all of our long-term economic problems have proceeded to get a lot worse since the last time around, and so when things fall apart this time we will likely be looking at a scenario that is absolutely unprecedented in American history.

A lot of people have become very complacent out there these days, but that is a huge mistake.

Just because a crisis is delayed does not mean that it is canceled.  And because our leaders have kept making this economic bubble larger and larger, that just means that the coming crisis will be even more painful than it otherwise could have been.

The Economic Collapse




JPMorgan Chase Rigging Silver Prices

JPMorgan Chase is back on the list of bullion banks being sued for rigging silver prices and cheating clients. Last week, a New York appeals court overturned a lower court’s dismissal of the suit, paving the way for additional discovery.

The JPMorgan suit has been built largely upon trading data and patterns. This differs from the suit recently settled by Deutsche Bank and still pending against a group of other large banks. The evidence there includes chat logs and voice recordings representing what appears to be “smoking gun” evidence of traders colluding with one another to cheat.

The ruling represents another victory for metals investors in civil court. It is very good news indeed. Years of stonewalling and incompetence on behalf of government regulators and prosecutors had left many feeling angry and frustrated. The civil courts may finally be the solution for holding crooked bankers to account.

Precious Metals News & Analysis – Gold News, Silver News




Silver Prices for the Year 2017

How low and how high will the price of silver range on the PAPER markets during 2017? Knowing the influence central bankers, politicians, HFT algos, bullion banks and JPMorgan exercise over increasingly managed markets … it is impossible to answer the question, and it is probably the wrong question to ask.

Instead, what do we know with a high degree of certainty?

  1. The U.S. national debt will substantially increase as it has almost every year since 1913. We can trust politicians and central bankers to act in their best interests to spend in excess of their revenues and increase total debt. See chart below.
  2. Politicians and central bankers are unlikely to change a century of their spend, borrow, tax and inflate behaviors.
  3. The price of silver on the paper markets will be volatile but, over the long term, will exponentially increase as it has since 1913.
  4. Silver prices relative to their own history and to the S&P 500 Index are low and far more likely to rise than to fall further. See charts below.

CONCLUSIONS:

  • Silver prices will, like the national debt, consumer prices and currency in circulation, increase. The inevitable long-term direction of silver prices is upward.
  • Silver prices are currently low by many measures so the probable move higher should be substantial. Risk of lower prices is small.

What analysis supports these conclusions?

National Debt:

Plot the official national debt on a log scale every four years – presidential election years. The exponential increase (about 9% per year – every year) is unmistakable. Doubling debt approximately every eight years is not a winning strategy for the U.S. economy. Take cover!

Population Adjusted National Debt:

Yes, the official national debt, even adjusted for population growth, has increased exponentially for 100 years. Expect it to rise further and probably more rapidly as baby-boomers retire, uncontrolled Medicare costs skyrocket, and politicians aggressively spend with borrowed currency.

Silver Prices – The Long Term:

Silver prices have risen exponentially for 100 years, along with debt, consumer prices and currency in circulation. Note the log scale.

Silver to S&P 500 Ratio:

Plot monthly prices for the ratio of silver to the S&P 500 Index. In the long term both increase exponentially however the current price of silver is low compared to the price of the S&P 500. Note that silver prices are off two-thirds from their 2011 high while the S&P is at an all-time high. Expect silver prices to move much higher regardless of a potential correction in the S&P.

Silver Prices on a Log Scale:

Silver prices bottomed in 2001 and have risen erratically since then. The log scale trend channel has expanded which indicates wide volatility, because silver prices rise too rapidly and then crash. Prices are currently at the low end of the expanding channel. Expect silver prices to rise substantially from here.

How High?

The center line of the expanding channel reaches approximately $ 50 by the end of 2017. The high end of the channel is about three times higher. This guarantees nothing but it indicates, based on the last 17 years of price history, that a paper silver price of $ 50 should NOT be surprising. Of course it will be a shock according to official pronouncements from “experts” on Wall Street who believe that all savings should be invested (trapped) in their digital accounts, but … consider the source.

From The Burning Platform:

“… there is only one thing more frightening than not knowing what is coming next, and that is living in a world run by ‘experts’ who think they know exactly what is going to happen next. These are the same ‘experts’ who didn’t see the 2005 housing bubble, the 2008 financial collapse, the EU implosion, Brexit, or the Trump presidency.”

RISK and DEBT!

Our financial world sits upon a precarious peak of debt, monetary ignorance, rising interest rates, risky derivatives and flawed economic models, while politicians and central bankers aggressively pursue failed policies, to the detriment of all but the financial and political elite. 2017 will probably be the year of the implosion and that suggests silver prices should easily exceed $ 30. I certainly will not be surprised if the paper silver price reaches and exceeds $ 50 in 2017 – 2018. Based on spending, debt, warfare, welfare, currency devaluations, monetary stupidity, cyber wars, loss or dollar reserve currency status, declining silver ore concentrations, central bank interventions, currency wars, Italian banking problems, and so much more, we should consider prices of $ 50 – $ 100 as not only possible in 2017 but a near certainty by 2019 – 2022.

Silver Cycles:

Cycles are slippery but consider the following chart which shows that silver reached lows in 1994-5, 2001, 2008 and 2017, about every seven years. The vertical lines on the chart below are spaced every 84 months. Note that silver bottomed in December 2015 and the next bottom is not due until about 2022-23.

WHAT ELSE?

Our central bankers and commercial bankers, thanks to fractional reserve banking, excessive debt creation, shadow banking, QE, bailouts and more have created a great many digital dollars. The price of gold (similar for silver) versus the monetary base shows how low the price of gold (silver) is compared to the zillions of digital currency units created by banks. Consider the following chart (unknown source).

WHAT ELSE?

From an interview with Ted Butler:

“The facts surrounding silver have never been more bullish.”

“In only a few years, JPMorgan has accumulated the largest hoard of silver in the history of the world.” [… physical silver, not the paper stuff…]

“A price rise is inevitable.”

“Imagine silver as a poker game. The stakes are in the billions. JPMorgan is holding an ace, king high royal flush. It’s a lock so they can’t lose. Everybody else at the table has four of a kind or a full house. JPMorgan is in no hurry to win the pot.”

CONCLUSIONS – Continued:

  • Politicians and central bankers will promote failed policies while devaluing fiat currencies which will push silver prices much higher. Expect $ 30 in 2017 and $ 50 if one or more implosions occur. Physical prices may be far higher than paper prices.
  • Long term silver cycles indicate the market bottomed in late 2015 and should rise for another three to five years.
  • Assuming Ted Butler is correct JPMorgan will stimulate the coming substantial rise in silver prices, NOT for our benefit, but for the benefit of JPMorgan and their management bonuses.
  • $ 50 silver may not happen in 2017 but it certainly is NOT unlikely.
  • $ 100 silver seems inevitable in a few years unless U. S. politicians reduce spending by at least one third, slowly repay the national debt, abolish the Federal Reserve, reduce military expenses and face the voters during a massive depression. Nope, political change and a return to monetary sanity are not likely, but $ 100 silver – before the next cycle low in 2022 – 23 – is quite likely. Hyperinflation of the U.S. dollar, should bankers and politicians choose that road, will accelerate price increases and push prices to unimaginable levels.

Gary Christenson

Republished with permission by The Deviant Investor.




Gold Prices Hacked! (Shocking New & Old Facts Surface…)

Major U.S. and international banks cheat their customers and rig markets. Revelations have been piling up since the 2008 financial crisis. Hundreds of billions have been paid in fines, penalties, and settlements. The fraud, price manipulation, lying, and theft – once considered conspiracy theories – are now incontrovertible conspiracy facts.

This reality is dawning now in the precious metals industry. GATA, the Gold Anti-Trust Action Committee, labored for years making the case for price manipulation in the markets. They, and others, made a powerful argument complete with price charts and trading patterns that simply could not be explained in free and fair markets.

But their argument was universally disregarded by regulators and largely ignored by major players inside the industry. Gold and silver miners, refiners, and users never took meaningful action to combat price rigging, even as price volatility wreaked havoc in their business. GATA lacked enough “smoking gun” evidence, and most people simply assumed their claims couldn’t be true.

The recent settlement deal in which Deutsche Bank handed over 350,000 pages of internal documents and more than 70 voice recordings is changing that. Attorney’s behind class action suits against a handful of major banks say the trove of information is “smoking gun” evidence of a widespread and systemic campaign to cheat customers and rig markets.

It is one thing to look at trading data and surmise that someone is trying to manipulate prices. It’s another to see chat logs where traders laugh about actually manipulating prices and sticking it to unwitting market participants:

June 8, 2011

UBS [Trader A]: and if u have stops…

UBS [Trader A]: oh boy

Deutsche Bank [Trader B]: HAHA

Deutsche Bank [Trader B]: who ya gonna call!

Deutsche Bank [Trader B]: STOP BUSTERS

Deutsche Bank [Trader B]: deh deh deh deh dehdehdeh deh deh deh deh dehdehdeh

Deutsche Bank [Trader B]: haha16

The chat above, and a host of others like it, demonstrate what GATA has been saying for almost 20 years. The metals markets are a playground for unscrupulous bankers, and price discovery is completely dishonest.

It looks more and more like these phony markets are working just as officials in our government hoped. Here is an excerpt from a memo sent from London to the U.S. Treasury Department in 1974, compliments of Wikileaks:

TO THE DEALERS’ EXPECTATIONS, WILL BE THE FORMATION OF A SIZABLE GOLD FUTURES MARKET. EACH OF THE DEALERS EXPRESSED THE BELIEF THAT THE FUTURES MARKET WOULD BE OF SIGNIFICANT PROPORTION AND PHYSICAL TRADING WOULD BE MINISCULE BY COMPARISON. ALSO EXPRESSED WAS THE EXPECTATION THAT LARGE VOLUME FUTURES DEALING WOULD CREATE A HIGHLY VOLATILE MARKET. IN TURN, THE VOLATILE PRICE MOVEMENTS WOULD DIMINISH THE INITIAL DEMAND FOR PHYSICAL HOLDING AND MOST LIKELY NEGATE LONG-TERM HOARDING BY U.S. CITIZENS.

The “expectations” were spot on. The futures markets have been plagued by extraordinary volatility, paper trading is hundreds of times bigger than physical trading, and ownership of bullion today is a tiny fraction of what it once was.

A conspiracy theorist might say our government has an interest in undermining gold as money, in favor of the fiat dollar.

Officials view the futures markets as an essential tool for achieving those ends.

Price volatility, concentrated short selling, and pain for metals investors serves to discourage ownership so regulatory agencies like the Commodity Futures Trading Commission (CFTC) turn a blind eye.

Manipulation Strings

After all the CFTC spent five years investigating price rigging in silver and failed to prosecute a single case. One wonders how they managed to miss what appears to be overwhelming evidence of systemic cheating, and if the trove of documents and voice recordings now available will be grounds enough to reopen an investigation.

The civil courts, not the regulators, appear to be metals investors best shot at recovery of some of what has been stolen from them in these rigged markets, and for moving toward free and honest price discovery. The Deutsche Bank settlement and the evidence it produced is changing the game.

Last week, Keith Neumeyer of First Majestic Silver, one of the largest primary silver producers in the world, announced he hopes to join in the class action. He is also working to recruit other big players in the industry. Mr. Neumeyer will be our guest on the Money Metals podcast to discuss these issues Friday. Stay tuned.

Precious Metals News & Analysis – Gold News, Silver News