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Institutional Demand Will Drive Gold Ever Higher

INSTITUTIONAL DEMAND WILL DRIVE GOLD EVER HIGHER

Embrace uncertainty has long been one of my personal mottos. Because from this moment on, everything is uncertain whether it is your personal health, the stock market or the economy. Sure, we work with probabilities and the most likely is that the sun will rise tomorrow again and that I won’t die today. But we are now at a point in history when trend extrapolation is going to be not only precarious but also both foolish and impossible.

END OF A MAJOR CYCLE

That we are at the end of a major economic and social cycle is totally clear in my mind. But cycles don’t end overnight, if the world isn’t hit by a massive meteorite or nuclear bomb. Whether we are at the end of a 300 year cycle or a 2,000 year cycle, only future historians can tell the world. What is clear, at least to me, is that the end of this cycle started in 1971 when Nixon closed the gold window. Since then global debt has gone up exponentially and now we are in the very final stage of the cycle. This end of the end, that we are now in, was first evidenced by gold turning up at the beginning of this century.

This significant trend change in gold that started 20 years ago was a clear indicator that we are now seeing the end of the fiat money system. Even though manipulated through a corrupt paper market, gold still reveals the deceitful actions of governments and central banks. There is no better evidence than the fall of fiat in this century.

CENTRAL BANKS ARE PANICKING

…click on the above link to read the rest of the article…

Great Depression to our Depression: Debt Deflation Doom Loop Lessons

Great Depression to our Depression: Debt Deflation Doom Loop Lessons

We are now in the crosshairs of a mega debt deflationary bankruptcy phase.

Some of our sharpest forefathers left us illustrations to better understand how this cycle operates. It helps that many both actually lived through and studied the last one fresh off it happening. No not this fiat currency bifurcated ivory tower era thinking either ( not you bailout Bernanke).

☠️DEBT DEFLATION BANKRUPTCY LESSONS ☠️

Described as the last honest Federal Reserve governor, John Exter (1910 – 2006) believed by the early 1960s that the Federal Reserve was locking itself into currency expansionism it could not stop without disastrous outcomes and blowback.

He reportedly would say that the Fed was becoming a prisoner of its own currency stock and debt-based growth (effectively painting itself into a corner). Then a trend that risked a credit expansion reaching total US debt levels far in excess of the country’s GDP (quaint times). 

His was an envisionment of a major debt crisis ahead of his life, and he believed the crisis would then turn the economy down, to levels not seen since the Great Depression. 

Exter warned the Fed would one day find itself unable to prevent a wide-scale deflationary depression.

Perhaps the man could never envision our current viral scapegoat or how this global economic shutdown would quicken into existence some of his worst economic predictions.

But by the late 1950s and early 1960s, our financial system was effectively already devolving into a debt-based, debt-driven economy. To illuminate its growing unstable structure, Exter devised an upside-down debt pyramid as this original illustration shows.

Within it, the former central banker presented the US debt pyramid and drew attention to the fact that all foreign economies also had debt pyramids too. The structures are always perched in an unstable manner which Exter believed was also true for the financial system generally.

…click on the above link to read the rest of the article…

MacroView: The Next “Minsky Moment” Is Inevitable

MacroView: The Next “Minsky Moment” Is Inevitable

In 2007, I was at a conference where Paul McCulley, who was with PIMCO at the time, was discussing the idea of a “Minsky Moment.”  At that time, this idea fell on “deaf ears” as the markets, and economy, were in full swing.

However, it wasn’t too long before the 2008 “Financial Crisis” brought the “Minsky Moment” thesis to the forefront. What was revealed, of course, was the dangers of profligacy which resulted in the triggering of a wave of margin calls, a massive selloff in assets to cover debts, and higher default rates.

So, what exactly is a “Minskey Moment?”

Economist Hyman Minsky argued that the economic cycle is driven more by surges in the banking system, and in the supply of credit than by the relationship which is traditionally thought more important, between companies and workers in the labor market.

In other words, during periods of bullish speculation, if they last long enough, the excesses generated by reckless, speculative, activity will eventually lead to a crisis. Of course, the longer the speculation occurs, the more severe the crisis will be.

Hyman Minsky argued there is an inherent instability in financial markets. He postulated that an abnormally long bullish economic growth cycle would spur an asymmetric rise in market speculation which would eventually result in market instability and collapse. “Minsky Moment” crisis follows a prolonged period of bullish speculation which is also associated with high amounts of debt taken on by both retail and institutional investors.

One way to look at “leverage,” as it relates to the financial markets, is through “margin debt,” and in particular, the level of “free cash” investors have to deploy. In periods of “high speculation,” investors are likely to be levered (borrow money) to invest, which leaves them with “negative” cash balances.

…click on the above link to read the rest of the article…

Is A “Classic End-Of-Cycle Melt-Up” Imminent?

Is A “Classic End-Of-Cycle Melt-Up” Imminent?

  • Potential for the data deterioration theme to pause in the next quarter
  • Phase 1 US-China deal could pivot Manufacturers from inventory destocking to restocking
    • Key manufacturers talking about this potential on earnings calls
  • This underappreciated catalyst could cause a temp bounce in the economic data, lift stocks and curve steepeners even higher – classic end of the cycle melt up

WARNING: This note contains content more positive than the past 10 months and may not be suitable for readers who are expecting a perma bear.

I jest obviously but the theme all year has revolved around the idea of data deterioration.  The question from those tired of that notion is always “what would change your view” and the answer is consistently:

1) CB’s adding liquidity

2) China-US trade war progress

3) EU fiscal stimulus

For the first time all year, all three potential catalysts emerging at the same time which risks a Q4 melt up in risk assets and (I hope you are sitting down) an improvement in some of the economic data – mainly the manufacturing sector.

Central Banks pumping liquidity once again

This has been THE driver of the cyclical “up crash” first kicked off around October 8th  when Fed Chair Powell noted that the Fed will soon announce steps to add to reserves over time through the purchases of T-bills.  Around the same time, as we discussed previously, many Fed officials began setting up the Oct cut which many thought was in question (Rosengren, Evans).

That powerful force of a coming Fed liquidity injection + another Fed cut to sustain the expansion caused a key reversal in the macro landscape where:

  • USD topped out and depreciated lower
  • Cyclical equities/commodities bottomed and started to break out higher 
  • Interest rates bottomed and started pricing out future Fed cuts
  • Yield Curves like 2s10s, that had been dormant, began to steepen       

 …click on the above link to read the rest of the article…

How the Fed Wrecks the Economy Over and Over Again

How the Fed Wrecks the Economy Over and Over Again

When people talk about the economy, they generally focus on government policies such as taxation and regulation. For instance, Republicans credit President Trump’s tax cuts for the seemingly booming economy and surging stock markets. Meanwhile, Democrats blame “deregulation” for the 2008 financial crisis. While government policies do have an impact on the direction of the economy, this analysis completely ignores the biggest player on the stage – the Federal Reserve.

You simply cannot grasp the economic big-picture without understanding how Federal Reserve monetary policy drives the boom-bust cycle. The effects of all other government policies work within the Fed’s monetary framework. Money-printing and interest rate manipulations fuel booms and the inevitable attempt to return to “normalcy” precipitates busts.

In simplest terms, easy money blows up bubbles. Bubbles pop and set off a crisis. Rinse. Wash. Repeat.

In practice, when the economy slows or enters into a recession, central banks like the Federal Reserve drive interest rates down and launch quantitative easing (QE) programs to “stimulate” the economy.

Low interest rates encourage borrowing and spending. The flood of cheap money suddenly available allows consumers to consume more – thus the stimulus. It also incentivizes corporations and government entities to borrow and spend. Coupled with quantitative easing, the central bank can pump billions of dollars of new money into the economy through this loose monetary policy.

In effect, QE is a fancy term for printing lots of money. The Fed doesn’t literally have a printing press in the basement of the Eccles Building running off dollar bills, but it generates the same practical effect. The Federal Reserve digitally creates money out of thin air and uses the new dollars to buy securities and government bonds, thereby putting “cash” directly into circulation. QE not only boosts the amount of money in the economy; it also has a secondary function.

 …click on the above link to read the rest of the article…

Imminent Recession Risk “Doubled” – 3 Signals Sounding the Alarm

recession risk signals

Imminent Recession Risk “Doubled” – 3 Signals Sounding the Alarm

It’s been more than 10 years since the last economic recession. Since the U.S. economy generally operates in cycles, it looks like the time is drawing near for another.

In fact, late last year the Dow Jones took a dive, but that was likely just an appetizer for the course to come…

A recent piece from Bloomberg reported the risk of a recession has “more than doubled this year as leading economic indicators deteriorate, the yield curve inverts and monetary policy tightens,” referencing a note by Guggenheim Partners.

And, according to CIO Scott Minerd, it appears the next recession could last longer than the previous one (emphasis ours):

The next recession will not be as severe as the last one, but it could be more prolonged than usual because policymakers at home and abroad have limited tools to fight the downturn…

Guggenheim oversees $200 billion as an investment banking firm. They issued this dire warning along with major concerns about corporate debt, a severe stock market drop, and uncertainty about the Fed.

Debt, Yield Curve Inversion & QE Signaling Recession Risk

We’ve previously reported that U.S. National, corporate, and consumer debt are at all-time highs. This dangerous “debt trifecta” has even gotten the attention of several billionaires.

Rising national debt currently tops $22 trillion. Corporate debt topped $6 trillion at the end of 2018. And the “ATM” of consumer debt has hit $4 trillion. Americans are tapped out. Combined together, this signal alone should sound recession alarms.

But this is just one of multiple major warning signs…

The yield curve is dangerously close to inverting at only 16 basis points between 2- and 10-year treasuries. What’s even more troubling is yield curve inversion has preceded every major recession over the last 50 years.

 …click on the above link to read the rest of the article…

My Speech in the European Parliament on the Coming Economic Collapse

Zero percent interest rates have created the largest bubble in human history, when it bursts it will be worse than 1929.

Washington’s Latest Match Made In Hell

Washington’s Latest Match Made In Hell

Almost Predictable

One of the more enticing things about financial markets is not that they’re predictable.  Or that they’re not predictable.  It’s that they’re almost predictable… or at least they seem they should be.

For a long time people believed – and from what we read and hear, many still do – that economic cycles move in easily predictable, regular time periods. All you had to do was create a chart of the up and down waves of your favorite cycle model and extrapolate it into the future, and presto, your prediction was ready to be sold. But it turns out it is not that simple. The chart above was published by the “Inflation Survival Letter” in the late 1970s and purported to show the future trend of the so-called Kondratiev Wave, a cycle invented by Soviet economist Nikolai Kondratiev (who was eventually deported to the GULAG and killed by the Stalin regime, after a fellow American economics professor denounced him to the communists in Moscow as a “counter-revolutionary”). Interestingly, their forecast of the trend in wholesale prices turned out to be correct, but everything else they predicted in this context was incorrect. According to the K-Wave theory, the year 2000 was supposed to have been the trough of a major economic depression, with extremely high unemployment, a plunging stock market and all the other symptoms associated with a giant bust. In reality, the year 2000 was the peak of a major boom, with unemployment almost reaching a record low and stock prices soaring to unprecedented valuations. There was a time when the seeming elegance and simplicity of models like Kondratiev’s had our attention as well. There are ways of rationalizing such models.

…click on the above link to read the rest of the article…

Hedge Fund CIO: “Some See Parallels Between Today And The Late-1930s, Which Led To World War II”

The future is unknowable. Yet never has capital been so concentrated in strategies that depend on the future closely resembling the past. The most dominant of these strategies requires bonds to rally when stocks fall. For decades, both rose inexorably. And a new array of increasingly complex and illiquid strategies depends on a jump in volatility to be followed by a rapid decline of equal magnitude. They appear uncorrelated until they are not.

Virtually every investment portfolio measures risk by utilizing some combination of volatility and correlation, both of which are backward-looking and low. But the present is knowable. The past too. And the multi-decade trends that carried us to today produced levels of inequality rarely seen.

Low levels of inflation, growth, productivity, and volatility are features of this cycle’s increasingly unequal distribution. But cycle extremes produce pressures that reverse their direction.

On cue, an anti-establishment political wave washed away the globalists, with promises to turn the tide. Such change is nothing new, just another loop around the sun.

Now signs of a cycle swing abound; shifting trade agreements, global supply chains, military dynamics, immigration, wage pressures, polarization, nationalism, tribalism.

To an observer, it’s neither right nor wrong, it simply is. Some see parallels between today and the late-1930s, which led to World War II. We also see parallels with the mid-1960s, which led to The Great Inflation.

What comes next is sure to look different still. But investment strategies that prospered from the past decade’s low inflation, growth, productivity and volatility will face headwinds as this cycle turns.

…click on the above link to read the rest of the article…

A Stock Market Crash Scenario

A Stock Market Crash Scenario

The one thing we can know with certainty is it won’t be easy to profit from the crash.
After 8+ years of phenomenal gains, it’s pretty obvious the global stock market rally is overdue for a credit-cycle downturn, and many research services of Wall Street heavyweights are sounding the alarm about the auto industry’s slump, the slowing of new credit and other fundamental indicators that a recession is becoming more likely.
Few have taken the risk of projecting a date for the crash, this gent being a gutsy outlier: Hedge Fund CIO Sets The Day When The Next Crash Begins.
Next February is a good guess, as recessions and market downturns tend to lag the credit market by about 9 months.
My own scenario is based not on cycles or technicals or fundamentals, but on the psychology of the topping process, which tends to follow this basic script:
When there are too many bearish reports of gloomy data, and too many calls to go long volatility or go to cash, the market perversely goes up, not down.
Why? This negativity creates a classic Wall of Worry that markets can continue climbing. (Central banks buying $300 billion of assets a month helps power this gradual ascent most admirably.) The Bears betting on a decline based on deteriorating fundamentals are crushed by the steady advance.
As Bears give up, the window for a Spot of Bother decline creaks open, however grudgingly, as central banks make noises about ending their extraordinary monetary policies by raising interest rates a bit (so they can lower them when the next recession grabs the global economy by the throat).
As bearish short interest and bets on higher volatility fade, insiders go short.

…click on the above link to read the rest of the article…

Armstrong On Why Cycles Exist

GC1868-D

QUESTION: I was listening to a podcast on Bloomberg interviewing Peter Borsch who I remember you know for the two of you were together on a cycle research board and he worked for Paul Tudor Jones who handed me a copy of the Greatest Bull Market you wrote back in 1986. That was my introduction to you. On this show they were talking about cycles and the two people mentioned were you and Dewey. If you could boil down the reason for cycles, what would you say? What made you explore cycles to begin with?

Video Player

Toast-of-NYANSWER: Western culture is prejudiced for we think everything is a straight line. My introduction to cycles was actually in high school. The teacher brought in a movie we were to watch in class the Toast of New York. This was about the Jim Fisk manipulation of gold in 1869. In the movie they said gold reached $162. I thought that was just Hollywood. It bothered me so I was compelled to go to the library and look it up in the newspapers on film back then. Low and behold, there it was the quote of $162. I knew gold was $35. Suddenly the world was not a straight line (I highly recommend watching this movie).

This was the movie that changed my life. I did not read about Kondratieff or Dewey or anyone else. They were never mentioned in school. So I came at this totally fresh and unbiased by anyone else. I began writing about cycles in the 1970s. As I did, after discovering the Economic Confidence Model, many people responded overwhelmingly positive. A professor from the military school, the Citadel, called me and said I was a modern-day Hegel. He asked me if they could teach the ECM at the Citadel. I said of course.

…click on the above link to read the rest of the article…

Prepare For “Manias, Panics And Crashes”: An Ominous Warning From Bank Of America

Prepare For “Manias, Panics And Crashes”: An Ominous Warning From Bank Of America

Bank of America’s Michael Hartnett is back with another controversial note overnight, reminding readers that “it ain’t a normal cycle” for one overarching reason: central banks.

As Hartnett explains, the catalyst for bull in equity and credit markets since 2009 was the “revolutionary monetary policy of central banks” who, since Lehman, “have cut rates 679 times and bought $14.2tn of financial assets.” And, once again, he warns that this central bank “liquidity supernova” is coming to an end, as is “the period of excess returns in equities and corporate bonds, as is the period of suppressed volatility.”

With an entire generation of traders having grown up “trading” in centrally-planned markets, few can make sense of the fundamentals that accompany the market. As a result, Harnett writes that “risk markets continue to climb a wall of worry, defying bearish structural trends in the financial industry, taunting skittish skeptics by paraphrasing Margaret Thatcher…”You turn if you want to. The market’s not for turning.”

Demonstrating how insane just the past year has been in markets, Hartnett reminds us that just eight months ago belief in debt deflation & secular stagnation induced lowest interest rates in 5000 years.

  • On July 11th 2016 Swiss government could have issued 50- year debt out to 2076 at a negative yield (of -0.035%)…
  • …and in 1989 the Imperial Palace in Tokyo worth more than all real estate in California…
  • …and in March’2000 the market cap of Yahoo was 25X greater than market cap of Chinese equity market (MSCI)…
  • …and in 2008 the combined assets of Iceland’s three biggest banks were 14 times the size of the nation’s GDP…
  • …all manias, all over now.

While the current mania almost ended in early 2016, it was once again China that was responsible for the latest leg higher:

…click on the above link to read the rest of the article…

“A Total Illusion from QE and Financial Engineering”

“A Total Illusion from QE and Financial Engineering”

The 10-Year Treasury Is Less Than You Think

When the Fed was created in 1914, it was set to task of controlling short-term interest rates in an attempt to iron out financial cycles. It succeeded for many years. But by avoiding the natural rebalancing (and occasional pain) from free markets, we just got a bigger bubble into 1929. Then, when it finally burst, we got the greatest depression in all of modern history!

Since the Fed and other central banks were created, they have always manipulated short-term interest rates to try to encourage borrowing and spending in slowdowns – to make the natural economic cycle “go away.”

And every time, it suppresses the economic cycles that were already in place, until finally they come roaring back.

So it always strikes me as funny to see highly educated, seemingly reasonable people in pin-striped suits and pantsuits stand in front of us and basically say that there’s a free lunch after all – that we can get something for nothing!

To them, economics is no longer a matter of supply and demand, free markets and rebalancing. They think we’ve found a way to program the economy so we never have a recession again.

All the apparent education and sophistication of these top economists, financial officials and central bankers boils down to this simple automaton explanation: if we don’t keep taking more of the financial drug that we used to keep the bubble going, like zero interest rates and QE, we will collapse and go into detox.

It’s the same logic of any extreme addict. When a serious drug addict comes off a high, he realizes the only non-painful choice is to take more of the drug.

As Charlie Sheen said: “the key to drinking is to not stop.”

…click on the above link to read the rest of the article…

Are We Headed for Another Bust?

Are We Headed for Another Bust? 

Are We Headed for Another Bust?

On Wednesday December 16, 2015, Federal Reserve Bank policymakers raised the federal funds rate target by 0.25 percent to 0.5 percent for the first time since December 2008. There is the possibility that the target could be lifted gradually to 1.25 percent by December next year.

Federal Funds Rate Target
Federal Funds Rate Target

Fed policymakers have justified this increase with the view that the economy is strong enough and can stand on its own feet. “The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident the inflation will rise over the medium term to its 2 percent objective,” the Fed said in its policy statement.

Unwarranted Optimism

Various key economic indicators such as industrial production don’t support this optimism. The yearly growth rate of production fell to minus 1.2 percent in November versus 4.5 percent in November last year. According to our model the yearly growth rate could fall to minus 3.4 percent by August.

Although the yearly growth rate of the CPI rose to 0.5 percent in November from 0.2 percent in October according to our model the CPI growth rate is likely to visibly weaken.

The yearly growth rate is forecast to fall to minus 0.1 percent by April before stabilizing at 0.1 percent by December next year.

So from this perspective Fed policymakers did not have much of a case to tighten their stance.

%Chng US Industrial Production YOY

%Chng US CPI (YOY)
Fed policymakers seem to be of the view that the almost zero federal funds rate and their massive monetary pumping has cured the economy, which now seems to be approaching a path of stable economic growth and price stability, so it is held.

With this way of thinking the role of monetary policy is to make sure that the economy is kept at the “correct path” over time.

Following in Greenspan’s Footsteps

…click on the above link to read the rest of the article…

The “Syrian Sickness”: What Crude Oil Gives, Crude Oil Can Take Back.

The “Syrian Sickness”: What Crude Oil Gives, Crude Oil Can Take Back.

Syria is one of the greatest disasters of recent times. Here, I argue that the origins of the Syrian collapse are to be found in the economic downturn generated by the gradual depletion of the Syrian oil reserves. Crude oil had created modern Syria, crude oil has destroyed it. This phenomenon can be termed the “Syrian Sickness” and the question is: “which country will be affected next?”
Crude oil is a great source of wealth for the countries that possess it. But it is also a wealth that comes as a cycle. Normally, the cycle spans several decades, even more than a century, so that those who live through it may completely miss the fact that they are heading to the end of their wealth. The cycle is especially visible in those areas where the amount of oil is modest; then, the cycle goes faster; wealth and misery appear one after the other in a dramatic series of events.

One of these rapid cycles of growth and decline is that of Syria. It is a country that never became a major world producer, less than 1% of the world’s total production when it peaked, around 1995. (graph below, from Gail Tverberg’s blog). For the small Syrian economy, however, even this limited amount was important

The Syruan oil production went through its unavoidable cycle over a span of little more than three decade. Depletion generated progressively higher production costs and that led to a scarcity of capital investments to keep production increasing. The result was the “bell shaped” production curve that is often called the “Hubbert curve”. Eventually, around 2011, the internal consumption curve crossed the production curve and that transformed the country from an oil exporter to an oil importer. The cross-over point corresponded to the start of the civil war.

…click on the above link to read the rest of the article…

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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