Current Thoughts for 7/18/2016

Gold continued its range bound moves and today silver slipped below $20 for the first time showing some weakness. Is silver leading gold lower? The dollar is still holding steady at 96.60, and putting pressure on the metals. A move over 97 and staying there may be the first nail in the short term coffin for gold. What you really need to consider is whether Europe will continue the weakness and if China and Japan will do some currency maneuvering that can push the dollar over 100 again. What happens to gold then? We’re only about 3 points away and for those that are uber bullish, don’t discount that this won’t happen as we move forward. We just have to get through this consolidation phase first.

Below is why I lean towards a higher dollar and the deflationary contraction, both the positives from another poster on Seeking Alpha and the negatives presented by this writer.

Two sides to the coin. Below I present a reply to a comment someone made on a Peter Schiff article. They were replying to someone else, but I wanted to offer the other side of this “everything bullish USA scenario” he was promoting.

What separates me from most analysts who talk about how the economy in the U.S. can do no wrong is I provide data. I never got a reply back from this person, but that typically happens when you make a strong case. (quotes are him quoting someone else, not me and he was replying to them). One last note, I think most of you know I am not a doom and gloomer but try to point out the data as I said. I think that’s why many don’t reply to me as they are used to attacking doom and gloomers and not have a real discussion.

His mostly bullish scenario; 

“the national debt is growing quicker then what we take in revenue wise with the federal government.” Economists rightly look at sovereign debt as a percentage of GDP to gauge it, not your way. Our National Debt is not going to break the bank. Not in your lifetime. All the gloomers are just wrong. Tax revenues are highly leveraged to growth in GDP and money supply, so they potentially can shoot up. Not to mention that tax rates are very flexible and are quite low now. So there’s room to raise and a Democratic Congress probably would. When incomes/profits rise, even without rate hikes, taxes go up. The Treasury’s ability to borrow, as long as Congress isn’t being moronic like this one has in not raising debt ceilings, is actually a function of the money supply. (Nobody seems to get this!) The Fed prints new dollars, they need a parking place that guarantees principal, that parking place is Treasuries for any sane manager of large institutional cash piles. Schiff’s prediction that the Treasury will simply run out of buyers of its bonds will never happen. No disorderly panic exodus from US Treasuries ever. The Fed can step in as buyer and in so doing create new money to put in the hands of any sellers, which shortly finds its way back into shorter term Treasuries. If you don’t believe my prediction check back in a few decades when I’m proven right.

“The US dollar is worth 95% less then it used so that alone makes paying down debt even harder.” The first part is true but the rest of this statement makes no sense.

“Stimulus, bailouts don’t do anything productive other then keep people’s jobs, providing money to companies, and helping with housing.” Really? The US auto industry almost died out. The bailouts allowed it to recover and now it’s doing very well. The banks too. TARP monies were repaid in aggregate with interest and the gov’t also made a fat profit on the AIG bailout. Taxpayers made a killing overall not to mention the huge benefit that big gov’t stopped the dominoes from falling and causing who knows how much collateral damage. Nothing productive?? Averting a 1930’s style Depression is probably among the most productive things our Federal gov’t has ever done.”

The 2008 bust is merely just a pause in the debt going down.” Nope. The coast is clear, no day of reckoning is coming. We are just in a holding pattern until the velocity of money picks up and feeds on itself (higher growth). Bust is over. Gloom is pervasive. One day the gloom lifts and there will be some narrative that turns sentiment around. Don’t know what that narrative will be. In the 80’s-90’s it was trickle down Economics and then tech/internet euphoria. In the 50’s-60’s it was post war euphoria, abundant Union jobs with pretty much full employment and GI benefits fueled spending. I don’t know when the tide will turn or what the encouraging narrative will be but bust has played out, it’s done for a long time. It will take the excesses of a new boom that decades from now will sow the seeds of the next big bust which is decades away and I’ll be very old or dead when it comes.

The Case/Shiller P/E is not relevant right now. It is good to use it when the current year’s earnings are anomalous. For example in 2008 trailing 12 month earnings on the S&P 500 went negative so P/E was a garbage number. Since Shiller goes back 10 years and takes a growth adjusted average P/E, you can throw out the current anomalous year and have some P/E to work with. However Case/Shiller will greatly overstate the P/E when future earnings are poised to be much higher than the last 10 years’ average (when there will be higher growth or when the last ten years are not indicative). It’s sort of like looking at your personal last 10 years average income to forecast your future income. In some cases it is sensible to do that but not when you are changing careers etc. Gold bugs are grasping at straws now in their claim that stocks are a bubble. They have to use unorthodox measures to make that case: instead of forward 12 months’ P/E as is customary to measure market bubbles, they go back 10 years and suddenly “Case P/E” is their preferred measure. Terrible analysis. Case/Shiller P/E is a good tool but only for special unusual situations. Prior ten years’ earnings mean nothing unless future earnings will look similar. Several of the last ten years were when companies were reeling from the crisis and booking large losses in many cases. So unless you think large losses are coming again soon it’s a terrible measure.

You’re right that millennials are hurting, good jobs aren’t there, wages stagnant, student loan debt very worrisome. Yet these problems have caused some pundits to claim we’re on the brink of catastrophe for years when in truth corporate revenues have just kept on growing as well as profits. So stocks /should/ move up when that happens. Ain’t no bubble. Pretty simple. The global middle class is growing albeit more slowly. Eurozone problems, China slowdown, the US middle class gutted actually make me more bullish longer term because if these problems are alleviated at all then growth prospects actually improve. If not I’ll take slow growth for now as long as it’s growth.

“No that is wrong the fed’s monetary policy has failed. Look at the velocity of money. [lower]” The Fed doesn’t control velocity or claim to control it; it controls to some degree the quantity of money, not velocity. Velocity is money turnover, basically how many times a year the average dollar is spent. Sure it’s low now because people are both poorer and much more scared to spend than they’ve been in preceding decades. After all we had the crisis of a century in 2008 and job prospects are terrible. In fact the reason for QE is essentially to put more dollars out there to *make up* for low velocity. That’s one way to look at the whole purpose of QE. There are a few different ways to arrive at GDP. The standard way is C+I+G+NE=GDP but GDP is also money supply times velocity. It’s total spending. And what is that? Total gross income. Ah, eureka!”

IMO higher inflation is a almost a given.” No. Next couple of decades at least I predict prices rise at very most 5-6% per year on average. I’d be quite surprised if it was that high but allow the possibility. Historical average of around 3% I’d say is much more likely but 1-2% might continue for a long time. Price inflation sea changes are not that predictable but the idea that printing a lot of money means price inflation HAS to turn high is nonsense. I’ve been on the record saying that since 2009 so you’d think I’d have some cred but I see fools who got it horribly wrong being interviewed all the time. I wrote back in 2009 when Schiff and fools were loudly calling for “hyperinflation soon” the same thing I’m predicting now: price inflation no more than mid single digits for many years to come. Pretty much as if QE didn’t happen.

My Reply: 

Growth can be an illusion without production, although we have had a blip up at times here. Reading the data, we had a blip up in Auto sales. Why? Subprime lending. We know how that worked last time and to no surprise, June 15th headline; Slumping autos weigh on US manufacturing output; inflation tame http://reut.rs/29ViSMA

Weak U.S. wholesale inventories seen weighing on second quarter GDP growth 7/12/2016
http://reut.rs/29MVIti

We have had a blip up in manufacturing here with the falling dollar, but the dollar seems to have steadied with all the issues abroad, including a global economy that is still contracting.

Here’s the Real Reason the Global Economy is Slowing Down
http://bit.ly/29Vibme

But China’s economy slowing is an issue.

As China’s Economy Slows, Beijing’s Growth Push Loses Punch
http://nyti.ms/29MVDpA

I agree debt isn’t quite an issue at present and think rates continue to fall overall. The CBO came out July 12 with this statement; CBO says U.S. debt to rise faster than previously expected http://reut.rs/29ViPAj

Mind you that Congress’ definition of a balanced budget is 9 more years of adding to the debt (spending) and the 10th year coming in under budget. The CBO projections themselves showed no inflation moving forward (which has never happened).

An investor can still make money in the markets no matter what the data says. They don’t have to be a doomsdayer 100% the same as they don’t have to be an eternal optimist 100%.

Agree no hyperinflation and could easily say that if I wanted to make more money selling gold. I still think we have one more smackdown coming in gold but I think it is coinciding with a deflationary contraction of credit that has already started in the rest of the world. Australia is one example; Australia Insolvencies +14%, Debt Agreements +25%, Bankruptcies +7%http://bit.ly/29MVEd1

“Credit” is what most Austrian’s like Schiff don’t address. They only look at printed money (M2) and that’s why they scream dollar crash and buy gold. I am dollar bullish overall, as I view Treasuries and the U.S. in general to be the last bastion of safety. Meaning, as the world’s leading economies continue to struggle with internal issues, and we know Europe has many with their banking situations in Italy and Deutsche Bank, and Japan’s decline in exports is the only thing that makes them tick, remember one thing; the Asian financial crisis was started by Thailand devaluing their currency.

Will be an interesting story that unfolds and we may read data differently. That’s ok. I’m not a one sided thinker, but try to read all the data and come to conclusions. Because of the interconnectedness of economies, banks, and monetary policy, triggers can come from many areas.

Not trying to argue with you as I respect your opinion. Just saying I can take the opposite side with some data and not be a doomsdayer, and still think gold fits into a diversified portfolio, whether it is viewed as insurance or something else (based on asset allocation models).