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Gold Re-Monetization Is Much Closer Than Many Realize
Gold Re-Monetization Is Much Closer Than Many Realize
Monetary policy is largely responsible for the market conditions we have today. Whether we like it or not, central planning in the capital markets will remain with us for the foreseeable future. Capital flows will be as much a function of market fundamentals as they are of policy.
This is very true for gold.
Gold was formally de-monetized in 1978 with the Jamaica Accord. It is now being re-monetized. This paper aims to answer the questions of how and why.
Serious players in the world of finance are acquiring enormous sums of physical gold. In the last quarter alone (Q3 2018), central banks added 148 metric tonnes of physical gold to their reserves.
February 2018 marked a major turning point for gold – monetary gold to be more specific – when the Swiss National Pension Fund switched out of synthetic gold derivatives into physical gold. Monetary gold is defined, in the new Basel III banking capital rules, as “physical gold held in their own vaults or in trust.”
The Swiss decision complied with the new banking standards regarding capital adequacy as it relates to solvency and viability. All Systemically Important Financial Institutions (SIFI) must comply with the new rules for Net Stable Funding Ratio (NSF) and Liquidity by January 2019.
Lessons learned from the last liquidity crisis, when Lehman Brothers nearly caused a global financial meltdown, forced a rethink in how assets held on an institution’s balance sheet are to be valued.
Counter-party risk became extremely important again. In short, when trust between SIFIs fails, liquidity dries up as lending ceases due to solvency fears. The need for liquidity was a key change in the creation of the new standards, and it shone a spotlight on an asset that had largely been ignored for this purpose – physical gold.
…click on the above link to read the rest of the article…
As Short-Term Rates Hit Levels Not Seen Since 2008 – Trillions Are At Risk
As Short-Term Rates Hit Levels Not Seen Since 2008 – Trillions Are At Risk
Readers know that I haven’t shied away from stressing over the Federal Reserve’s tightening.
As a firm believer in the Austrian Business Cycle Theory – first drafted by Ludwig Von Mises in early 1900’s – I believe that artificially moving interest rates away from the markets natural rate is opening Pandora’s box.
Sure – lowering rates across the yield curve is good for stimulating the economy. And like John Maynard Keynes explained, it’s a good tool for ‘papering over’ a slowdown – a quick fix.
But like Mises said – it’s not the boom that matters (from lowering rates). It’s the bust that will follow (from raising rates).
Suddenly and artificially raising short-term rates – which the Fed does when they hike – disrupts the current equilibrium.
Think about it this way: all those borrowers – whether having mortgages, student loans, car loans, credit cards, and even corporations – now must pay more in interest.
Business projects that were barely economic at a 3% interest rate are completely uneconomicat 5%.
And mom and dad barely affording their mortgages at 5% won’t be able to at 7%.
Of course these are just a couple of examples. There are many things throughout the economy that will be negatively affected by suddenly raising rates – which will all trigger their own unintended consequences.
That’s the problem with complex systems like the U.S. economy and financial system. Everything’s interconnected.
But there’s one thing from the Fed’s tightening that’s worth mentioning yet again. . .
And that’s rising short-term dollar funding costs – which is slowly popping this worldwide debt bubble.
First and foremost, the global dollar shortage – which I’ve written about many times (read hereand here) – is a huge threat to the global economy. In fact – I believe it’s the number oneoverlooked threat out there today.
…click on the above link to read the rest of the article…
Emerging Markets Face a New Problem as Trillions in Bonds Mature – and Soon
Emerging Markets Face a New Problem as Trillions in Bonds Mature – and Soon
The U.S. dollar continues being the single most important factor for the Emerging Markets.
And as the dollar keeps getting stronger – it will continue crippling them.
“But isn’t a strong dollar supposed to be better for Emerging Markets by making their exports cheaper?”
Yes – and no.
True, a stronger dollar does make foreign currencies cheaper – which can boost their exports.
But the problem today is that Emerging Markets are bogged down with massive amounts of dollar-denominated debts. And the weaker their currencies are – the harder it is to repay those debts.
That’s very important to keep in mind – especially as trillions of dollar-denominated bonds mature over the next few years.
Let’s take a closer look. . .
Since 2009 – Emerging Market governments and corporations have gorged on cheap dollar debt.
How?
Because when the Federal Reserve cut interest rates to zero and launched three rounds of money printing (via Quantitative Easing) in attempt to save the global financial system post-2008 – two critical things ended up happening.
First – U.S. investors were starved for yield. Meaning they couldn’t make enough interest from government bonds to meet their future obligations. So they started lending abroad to foreign countries that offered higher rates of interest (although much riskier).
And even though some of these borrowers didn’t deserve such favorable rates (like Turkey and Argentina and Greece) – lenders still gave them what they wanted.
And Second – the Emerging Market governments and corporations saw this as an opportunity to get cheaper dollar financing. They could now get dollar loans at lower rates of interest than what was available locally.
Here’s an example of a ‘free money’ tactic Emerging Markets would do with their cheaper U.S. debt. . .
…click on the above link to read the rest of the article…
The Global Dollar Shortage is Here – And It’s Becoming A Big Problem
The Global Dollar Shortage is Here – And It’s Becoming A Big Problem
Another week and another signal flashing red to deal with. . .
The credit market – in my opinion – is indicating an inevitable ‘crunch’ coming up. And even worse – we’re seeing the global dollar shortage deepening.
Many readers know I haven’t exactly been shy about focusing on this dollar shortage problem all year – you can read more here, and here.
Personally – I think this may be the trigger that kicks off a brutal, worldwide, financial crisis. . .
For instance – just look at what’s happened with Emerging Markets because of a tightening Federal Reserve, a stronger dollar, and drying liquidity.
Don’t forget – a dollar shortage is synonymous with disappearing liquidity. Which means we can expect more violent and sudden market crashes to occur – just like we saw last over the last two weeks.
Stock markets (and bond markets) around the world took big losses. The only thing that really outperformed was gold.
The fear of rising ‘real’ U.S. interest rates and slowing economic growth (especially from China) is making investors rethink their positions.
Not to mention the cost of borrowing short-term dollars via LIBOR (aka London Interbank Offered Rate) is indicating aggressive financial tightening.
Take a look at the 3-month U.S. dollar LIBOR rate – it just had its biggest one day jump since late May.
And even more startling – it’s now at its highest level since 2008.
So what does this mean?
Well – it’s indicating that the short-term borrowing of dollar denominated debt’s getting very expensive. And investors – especially overseas – are finding it harder and costlier to get their hands-on U.S. dollars.
This isn’t a big surprise – but what’s making me worried is just how costly and scarce these dollars are becoming. . .
Corporations worldwide borrowing dollars for business operations. And even ordinary citizens with mortgages and credit cards (which are mostly driven by LIBOR) will face higher interest payments.
…click on the above link to read the rest of the article…
Soaring Deficits and Interest Costs Leave the U.S. Looking Very Fragile
Soaring Deficits and Interest Costs Leave the U.S. Looking Very Fragile
If you take a step back and look at the macro picture of the U.S. economy – it resembles a huge, upside-down, glass pyramid.
Constantly teetering back and forth – struggling with everything it has to keep from collapsing.
And so far – it’s done a good job maintaining its balance. But nonetheless, it’s extremely fragile. And gets more so as each day passes by.
All it needs is a slight push in the any direction and down it goes – shattering into pieces. . .
It’s not hard to see that the ever-growing U.S. deficits – along with the soaring interest costs on the National debt – are going to be the focal point of a worldwide crisis.
Especially over the next few years. . .
To start – the U.S. deficit almost eclipsed $800 billion for the entire fiscal year (which ended September 2018) – a 17% year-over-year increase.
And it’s the largest deficit the U.S. has had in six years.
“Hold up – isn’t the economy doing well? Why’s the deficit soaring?”
See – That’s the problem.
The U.S. is borrowing at levels not seen since the direct aftermath of 2008. When the economy was in shambles.
As usual – government spending greatly outpaced revenue.
U.S. Treasury ‘outlays’ (spending) increased $127 billion compared to government ‘receipts’ (income) of only $14 billion.
That’s a $113 billion more than last year’s deficit.
The main causes for the increased deficit was because of Trump’s Tax Cuts (which brought in less federal revenue). And from soaring spending – which came from Defense/Military, as well as Medicaid, Social Security, and Disaster Relief.
It doesn’t look good – does it. But here’s the worst part – things are only going to get worse going forward.
The Congressional Budget Office (CBO) recently published, ‘The 2018 Long-Term Budget Outlook at a Glance’ white paper.
…click on the above link to read the rest of the article…
‘Ground Zero’ – Will The Dollar Shortage Kick Off The Next Financial Crisis?
‘Ground Zero’ – Will The Dollar Shortage Kick Off The Next Financial Crisis?
There’s an old saying.
“You can’t fight the dollar.”
And what this means is: because the world’s chained to the U.S. dollar (thanks to its reserve status) – everyone’s constantly affected by whichever way the dollar’s value goes.
If the dollar declines – then the foreign economies and currencies get a boost from an inflow of capital.
But if the dollar rises – then the opposite happens. Foreign economies and their currencies sink.
You can understand why, then, so many countries today are peeved with the Federal Reserve’s tightening. They’re all suffering the unintended consequences of a stronger dollar.
I’ve written about this problem before. . .
Foreign Central Banks from all over the world – such as Argentina, India, Vietnam, Indonesia, and many more – are all defending their own local currencies against a stronger dollar.
Those that borrowed trillions of dollars are exposed here. A rising dollar against their own falling local currencies creates a mismatch between liabilities (the rising U.S. dollar). And assets (their own weakening currencies).
Also keep in mind that as rates rise, the dollar-indebted foreign corporations and banks are all feeling the pain of increased borrowing costs.
For instance – I wrote last week that onshore bond defaults in China just hit a record high as liquidity gets tighter. . .
That’s why today – as U.S. interest rates rise (especially as of late hitting a seven-year high). And the dollar gets stronger – the global cost of capital keeps getting more expensive.
Thus – putting it simply – overseas investors and corporations are finding it increasingly difficult and costlier to get their hands on dollars.
And yet – so far – the market doesn’t realize just how costly and scarce U.S. dollars are becoming. . .
…click on the above link to read the rest of the article…
“Something Has to Break” as China’s Onshore Defaults Hit a New Record
“Something Has to Break” as China’s Onshore Defaults Hit a New Record
Recent news from China has been really ugly.
But what can you expect? They’re trying to fight a trade war against the U.S. – deal with slowing growth – and survive against a stronger U.S. dollar.
And because of these problems – China’s major stock exchanges have really suffered this year.
But – contrary to what the mainstream says – I think things are going to get much worse. . .
For starters – the latest Chinese Manufacturing PMI (purchasing manager index) showed a continued downturn. Both in the NBS and Caixin Indexes.
Clearly the trade-war with the U.S. is being felt. And with little progress in negotiations between the U.S. and China – expect the near-and-midterm to continue being weak.
Now – Unfortunately – this slow down in the Chinese economy and the loss of sales and income are coming at a bad time. . .
Especially for their corporations.
The combination of a slowing economy, a stronger dollar, and a tightening Federal Reserve is putting pressure on indebted Chinese firms.
This is putting China’s elites between a rock and a hard place. . .
That’s because with the trade-war raging on and a tightening Fed – the Communist Party of China will want to ease and help their economy.
The Peoples Bank of China (the Chinese central bank) can cheapen the yuan to try and boost exports. And as I wrote before – the weaker yuan will offset Trump’s tariffs.
For example – if the U.S. places 20% tariffs on all Chinese goods – China simply must devalue the Yuan by 20%. This would offset the increased costs from the tariffs – keeping the price for U.S. consumers unchanged. Basically rendering the imposed tariff worthless.
But the problem with this is Chinese firms have significant dollar-denominated debts. So a stronger dollar makes their debt-burden much harder to service.
…click on the above link to read the rest of the article…
As The Trade War Rages – China Won’t Be Held Hostage By The U.S. Dollar
As The Trade War Rages – China Won’t Be Held Hostage By The U.S. Dollar
In last week’s Palisade Weekly Letter, I wrote about how the Chinese are now selling their U.S. debt. And since this was an important write-up, I also published it as an article – so if you missed it, click here.
I mentioned that although China’s now a net-seller of U.S. debt – they’re slowing doing so.
I reckon they’re doing just enough to let the Treasury and Trump know that they can send yields soaring and can’t afford it if China unloads the whole $1+ trillion amount.
That’s why we at Palisade Research have called this China’s ‘nuclear‘ option – it’s no doubt a financial weapon of mass-destruction (FWMD).
If China suddenly dumped their $1+ trillion of U.S. debt, it would cause markets worldwide to implode.
But that also means China would suffer. . .
Now, China isn’t stupid. They’ve worked decades to grow their massive dollar surplus and reserves. They won’t recklessly lose it all for nothing.
But still, this put’s China in a corner. Because although they won’t risk blowing themselves up to hurt the U.S. – what if the U.S. must cheapen the dollar to boost trade? Or get out of a recession? Or monetize the Treasury’s never-ending spending and huge fiscal deficits?
The depreciation of the U.S. dollar for any reason is a huge threat to China currently.
Today China holds roughly 3 trillion of dollar reserves. That’s down 25% from the 4 trillion they had in beginning of 2015 (the strong dollar really hurt them).
And putting things into context – if the U.S. dollar devalues by just 10%, that’s more than 300billion of purchasing power lost from China’s dollar reserves. . .
Gone – just like that. And completely out of China’s control.
Imagine if someone else held the power to devalue the money in your own bank account. That puts you at their mercy – in a very fragile place – right?
…click on the above link to read the rest of the article…
Global Central Bank Buying Puts A Floor Under The Price of Gold
Global Central Bank Buying Puts A Floor Under The Price of Gold
The only reason the price of gold’s down on the year is because of a strong dollar.
Actually – for how much the dollar’s rallied this year, gold holding around the $1,200 range is very bullish.
And if gold’s been able to hold its own during a stronger dollar and aggressive Federal Reserve tightening – imagine what it will do once they decide to begin easing. . .
Putting it simply – the price will soar. . .
So, who’s taking advantage of this weaker gold price?
The Global Central banks – but specifically the Emerging Markets.
Here is the latest data showing the Q2/2018 Central Bank gold reserves.
This comes after Central Banks added 116.5 tons to their ‘official’ reserves in Q1/2018. This was the highest first quarter increase over the last four years.
It’s widely known that in the 1990’s and first decade of the new millennium – Central Bank’s were dumping their gold.
Starting in the late 1980’s, gold reserves in Central Bank vaults declined from roughly 36,000 to just under 30,000. That’s a huge drop.
To be clear, they didn’t just sell the gold. The Central Banks also engaged in the ‘gold carry trade’.
This is when Central Banks ‘lease’ their gold reserves to investment banks for a set amount of time and a bit of interest.
The investment banks then sell that gold in to the market – get dollars in return – and buy bonds or equities.
After a while, they take the profits and buy the gold back – returning it to the Central Banks.
You can see how lucrative this trade is. And how it incentivizes the investment banks to keep the gold price down (since they have to buy back the gold later to return it to the Central Banks).
…click on the above link to read the rest of the article…
The Dollar Shortage & China’s Bond Selling Are About To Corner the Fed
The Dollar Shortage & China’s Bond Selling Are About To Corner the Fed
Earlier this week – news went by relatively unnoticed by the ‘mainstream’ financial media (CNCB and such) that Beijing’s started selling their U.S. debt holdings.
Putting it another way – they’re dumping U.S. bonds. . .
“China’s ownership of U.S. bonds, bills and notes slipped to $1.17 trillion, the lowest level since January and down from $1.18 trillion in June.”
Remember – dumping U.S. debt is China’s nuclear option (which I wrote about back in April – click here to read if you missed it).
And although they’re starting to sell U.S. bonds – expect it to be at a slow and steady pace. They don’t want to risk hurting themselves over this.
I believe China may be selling just enough to get the attention of Trump and the Treasury. A soft warning for them not to take things too far with tariffs and trade.
Yet already just as news hit the wire that China was selling bonds a few days ago – U.S. yields spiked above 3%. . .
Don’t forget that China’s the U.S.’s largest foreign creditor. And this is an asset for them.
And although them selling is worrisome – the real problems started months ago. . .
Over the last few months, my macro research and articles are all finally coming together. This thesis we had is finally taking shape in the real world.
I wrote in a detailed piece a few months back that foreigners just aren’t lending to the U.S. as much anymore (you can read that here).
I called this the ‘silent problem’. . .
Long story short: the U.S. is running huge deficits. They haven’t been this big since the Great Financial Recession of 08.
And it shouldn’t come as a surprise to many.
Because of Trump’s tax cuts, there’s less government revenue coming in. And that means the increased military spending and other Federal spending has to be paid for on someone else’s tab.
…click on the above link to read the rest of the article…
This ‘Deflationary’ Bull Markets Ending – And Here’s What’s Coming Next For Investors
This ‘Deflationary’ Bull Markets Ending – And Here’s What’s Coming Next For Investors
After many years of cheap money and asset bubbles – it looks like the upside is finally over.
That is – the potential upside against the amount of risk taken on – is over.
I often write about investors needing to find asymmetric (low risk – high reward) opportunities. And lately – as I’ve written about earlier this month – many key indicators are now flashing potentially huge downside ahead.
As I wrote then – it’s not like I’m predicting markets to tank tomorrow. Or even next week.
But what I’m getting at is that there’s significantly more risk ahead than reward – at least for the general market and equities.
I’m not alone thinking this way. . .
Bank of America & Merrill Lynch (BAML) recently published a white paper with an interesting trading suggestion. . .
First, they show us that the nearly 10-year monster U.S. bull market has been highlydeflationary. And in case you forgot, deflation refers to when there’s an overall decline in the prices of goods and services.
The ‘deflationary assets’ group includes U.S. investment grade bonds, government bonds, the S&P 500, ‘growth stocks’, U.S. high yield credit, and U.S. consumer discretionary equities (aka non-essential goods – such as luxury goods, entertainment, automobiles, etc.) . . .
And the ‘inflationary assets’ group which includes commodities, developed market stocks (excluding U.S. and Canada), U.S. bank stocks, ‘value stocks’, cash, and treasury inflation protected securities (aka TIPS) . . .
Since the end of the 2008 crash – the Fed embarked on a ‘easy money’ and expansionary path via ZIRP (zero interest rate policy) and QE (quantitative easing; aka money printing).
But even after all this – deflationary assets have seriously outperformed inflationary assets. . .
…click on the above link to read the rest of the article…
As The Fed Raises Rates, The Ghost of Lehman Bros Lingers
As The Fed Raises Rates, The Ghost of Lehman Bros Lingers
In just two days – September 15 – it will be the 10-year anniversary of Lehman Brothers collapse. The date they filed bankruptcy.
With nearly $620 billion in debts, it was the largest bankruptcy in history.
Now, a decade late – it appears the mainstream’s learned nothing. And many have forgotten the crisis that was 2008. . .
The banks are bigger and the damage of them crashing will be even greater this time around.
The elites – led by the Federal Reserve – have since 2008 told banks to continue lending and for consumers to continue borrowing. They did this by cranking interest rates down to zero (technically 0.25%). This allowed funds and ‘shadow banks’ to borrow huge amounts on margin.
It also kept commercial banks continually lending out loans. And at the end of the day if they lent out too much and didn’t have enough legal ‘reserves’ (deposits) to close, they’d simply ring up another bank (or the Fed) and borrow the amount needed.
“Hey BofA, we need $26 million.”
“Okay Citi, sounds good.”
Borrowing at near zero and lending out at higher rates was very lucrative. And basically, free money.
Banks can ultimately borrow from the Fed for 0.25% and lend out to the U.S. government for a solid 2-3% nominal return. Or even better, they’ll lend out to consumers who want a new house at a higher interest rate. Students that need debt for college. Auto loans. Or Emerging economies that need funding.
There’s more to it – and I’ll highlight it more in-depth in later articles. But aslong as interest rates are low, the game continues.
But the problem is – and just like before 2008 kicked off – short term interest rates are now rising.
…click on the above link to read the rest of the article…
Beware Buffet’s Words: These 3 Critical Stock Market Indicators Signal Huge Losses Ahead
Beware Buffet’s Words: These 3 Critical Stock Market Indicators Signal Huge Losses Ahead
Last month, I wrote a piece about Warren Buffet’s favorite stock market metric and how it was signaling huge losses ahead.
If you haven’t read it yet – you can here. It’s even more relevant today.
And though Buffet’s favorite market indicator’s signaling huge danger ahead for investors – he just recently preached that stocks are still attractive.
This seems rather contradictory if you ask me. . .
Even though his favorite market value metric is at an all-time high – more so than during the DotCom bubble and Housing bubble. And with the S&P 500, NASDAQ and Dow Jones Index at record levels – Buffet’s still recommending stocks.
But, here’s the best part: he went on to say that he believes there will be another stock market crash eventually.
So, why does he talk about buying stocks when he’s expecting a coming crash?
His reasons are pretty simple: investors can’t time when the market will crash. So instead of sitting on the sidelines – waiting and missing the upside – just buy now. And when market prices do crash eventually – which he acknowledges they will – you can simply buy more at lower prices (also, he adds, compared to bonds – stocks are more attractive).
I kinda-sort-of agree with him. It’s not the best idea to try and time a market crash, as many value guys call it a ‘fools errand’.
There’s always that one person (we all know them) who thinks they will sell out right before prices collapse. But in reality, it never works out that way.
History’s littered with the corpses of investors and the hedge-funds that thought they could do this.
So instead of trying to time things accurately – just measure the potential risk and reward.
…click on the above link to read the rest of the article…
‘Tipping Point’: These Charts Show Some of The Worst Currencies Of 2018
‘Tipping Point’: These Charts Show Some of The Worst Currencies Of 2018
Foreign currencies – especially the Emerging Markets – are having one of their worst years on record.
And investor anxieties aren’t easing up. . .
I wrote two weeks ago about the strong dollar and the chaos it’s creating for the Emerging Markets. But many don’t realize just how bad things have gotten. And it’s all thanks to the Federal Reserve’s tightening and quantitative tightening.
For starters, let’s just take a look at some of the worse performing currencies this year. . .
First – The Turkish Lira
I wrote a very bearish assessment of Turkey and their currency – the Lira – back in early March.
And since then, the crisis in Turkey has dominated the news stream.
A big reason for Turkey’s currency crisis stems from the fact that their external debt burden has soared over the last few years. This means that Turkey borrowed significant amounts of U.S. dollar denominated debts (and euros).
Remember: when the dollar gets stronger – and when the Federal Reserve raises rates – the external debt burden gets harder to service.
And because the country has had a plaguing inflation problem over the last couple of years – this caused the Lira to slowly depreciate on foreign exchange markets.
But due to the U.S. dollar’s shocking rally since March 2018, the Lira really started to collapse. For instance, more than a third of its value got wiped out in just the last 30 days.
Making matters worse – the Turkish Central Bank Deputy Governor is rumored to resign. And Moody’s just downgraded the credit ratings of 20 Turkish financial institutions – such as banks.
Turkey’s increasingly fragile economy and currency signals that things are still far from over. . .
…click on the above link to read the rest of the article…
These 4 Charts Show How World Trade Has Collapsed In Just One Year
These 4 Charts Show How World Trade Has Collapsed In Just One Year
Lately, nothing seems able to shake Wall Street’s bullish attitude.
Investors and the mainstream continue to still ignore the worsening trade war – which is evolving into a currency war – with China.
But since early May – we at Palisade have maintained that there’s going to be a worldwide earnings recession sometime in summer 2019. . .
I haven’t been shy writing about this topic – and if you haven’t read my thesis of why I think this yet, you can check it out here – and here.
If you looked at the markets enthusiasm today – and share prices – you’d think I was dead wrong.
But if you look between the lines – things are getting even worse for global corporations.
Goldman Sachs recently published some damning data that only bolsters my global earnings recession hypothesis. . .
To summarize: world trade has continually declined since early 2017 – long before the trade war talks – and the recent data only suggests this trend is worsening.
The U.S. Dollar has rallied significantly since March of this year – after declining nearly 15% between January 2017 and February 2018.
This paired with the Federal Reserve’s tightening has created chaos for the emerging markets and their currencies throughout much of 2018.
And yet, instead of weaker currencies boosting foreign exports, things have only worsened since. This signals that there’s a deceleration in world wide demand.
Just take a look at the following charts. . .
If you study the growth of ‘global air and sea freight volumes’ year-over-year (YoY), there’s significant declines over the last 24 months – especially for air freight volume. It recently dipped into negative YoY growth.
Making matters worse – China’s economy has slowed down considerably the last couple of years. This no doubt has affected world trade.
But it’s not just China that’s seeing a slowdown in trade activity. . .
…click on the above link to read the rest of the article…
