Large Investors Can’t Buy US Dollars

By Steve Saville

I was recently sent an article containing the claim that during the next financial crisis and/or stock-market crash there will be a panic ‘into’ the US dollar, but that unlike previous crises, when panicking investors obtained their US$ exposure via the purchase of T-Bonds, the next time around they will buy dollars directly. This is wrong, because large investors cannot simply buy dollars. As I’ll now explain, they must buy something denominated in dollars.

If you have $50K of investments in corporate bonds and stocks, then you can sell these investments and deposit the proceeds in a bank account. You can also withdraw the $50K in physical notes and put the money in a home safe. In the first case you are effectively lending the money to a bank and therefore taking-on credit risk, but the deposit will be fully insured so the credit risk will be close to zero. In the second case you have no credit risk, but there will be the risk of theft. The point is that it is feasible for an investor with US$50K to go directly into US$ cash.

This is not true, however, for an investor with hundreds of millions or billions of dollars.

If you have $1B of investments and you want to ‘go to cash’ you can, of course, sell your investments and deposit the proceeds in a bank account. The bank will certainly be glad to receive the money, but less than 1% of the deposit will be covered by insurance. This means that more than 99% of the deposit will be subject to credit risk (the risk that the bank will fail), which can be uncomfortably high during a financial crisis. In effect, depositing the money at a bank will be risking a loss of almost 100%. Not exactly the safety you were looking for when you shifted to cash!

Also, if you have a huge sum of money then removing the money from the banking system will not be an option. First, you probably won’t be permitted to convert such a sum to physical notes, but even in the unlikely event that you are permitted you will have the cost of transporting, storing, insuring and securing the cash. This cost will be large enough to preclude the exercise. Furthermore, accumulating a physical cash position of that magnitude will have the undesirable side effect of drawing greater government scrutiny to your business dealings.

Therefore, if it’s US$ exposure that you want and you are looking for a place to safely park a large quantity of dollars for a short period, you really have no choice other than to lend the money to the US government via the purchase of Treasury notes or bonds. That’s why a panic ‘into’ the US dollar will always be associated with a panic ‘into’ the Treasury market.

Misunderstanding Saving

By Steve Saville

A Basic Misunderstanding About Saving

Keith Weiner often posts thought-provoking stuff at his Monetary Metals blog. A recent post entitled “Interest – Inflation = #REF” is certainly thought-provoking, although it is also mostly wrong. It is mostly wrong because it is based on a fundamental misunderstanding about saving.

Before I get to the main point, I’ll take issue with the following paragraph from Keith’s post:

Normally, you don’t spend your savings, only the income on it. In ancient times, people had to hoard a commodity like salt when they worked. In retirement, they sold it to buy food. Modern economies evolved beyond that, with the development of interest. Retirees should not have to liquidate their life savings.

Continue reading Misunderstanding Saving

Around the Web

By Biiwii

Market Analysis & News From Around the Pipes…


China: What’s Next?

By Elliott Wave International

What’s next for the high-flying Shanghai Composite?

With China’s main Shanghai Composite index up almost 40% this year, and the tech-heavy Shenzhen Composite index up more than 90% YTD, are Chinese stocks in a bubble?

It’s a legitimate question. You’ll find many answers out there, but this answer you won’t want to miss.

This answer comes from Elliott Wave International’s own Mark Galasiewski, the editor of EWI’s monthly Asian-Pacific Financial Forecast. Mark is on record for turning bullish on Chinese stocks almost a year ago, exactly on July 3, 2014. In that month’s issue — and at the time when almost no one was bullish on China — Mark wrote:

Continue reading China: What’s Next?

Biotech Sector Updated

By Biiwii

I am not here to promote the merits of Biotech or to claim it is or is not in a bubble.  I am just a dumb macro fundamentals and technical guy.  As such, I know that the macro has burped up all kinds of cheap, easy money that has flowed into speculative areas like the Biotech sector.  There are solid entities in this space, like Gilead for one (ref. April 21 NFTRH+ highlight), which are real companies transforming real qualities of lives, and then there are a lot of hopes, dreams and promotions.

There is also a secular bull market in Biotech vs. the balance of the Tech sector.  However, the post-2011 up cycle has now reached levels of leadership (and distance from the EMA 30) that have capped previous expressions of greed and momentum.


But it is not so clear as to just say ‘Bio’s are due for a correction’.  Bloomberg is noting that the bears are gathering against the sector (IBB iShares), but the stock market has other leaders with higher measured targets and one of our ongoing scenarios is for a classic manic stock market blow off.

Look, I have been thinking a market correction could start by now and this correction has not yet come about.  Most recently, market sentiment took a real lurch toward over bearish and as usual, that proved supportive.  Now Bloomberg is highlighting the bubble in Biotech and the sharks are circling.

What’s a poor schlep to do?  Keep an open mind and respect the charts.  The monthly above shows that Biotech leadership is at a point that has triggered reversals, historically.  The daily chart shows the iShares (IBB) above initial support and filling a little gap.  Better support exists down to 360 or so.  MACD and RSI are each constructive.


Market Sentiment

By Biiwii

A snapshot of the latest data courtesy of shows that Dumb Money had recently gotten the willies big time, while Smart Money firmed up.  Then a post-FOMC feel good fest unsurprisingly whipped up.  This has not yet brought the short-term sentiment indicators back to a contrarian bearish stance.

Short-term, Dumb Money got spooked and has been rebounding a bit with the markets, while Smart Money does the opposite.  This is not a bearish configuration.

Long-term is a different story as Dumb Money has been trending higher with the markets throughout the post-2008 cycle.  So there is a supportive short-term condition for the market but an ongoing long-term bearish one.

Here is the aggregate of various sentiment indicators.  The red box shows what a really bearish setup looks like.  Still nowhere near that.


Sentiment indicators like all others, need to be considered as part of an overall view.  They are conditions, not directors.

Gold Demand Confusion

By Steve Savlle

More confusion about gold demand

“Nonsensical Gold Commentary” was the title of a recent Mineweb article in which the author, Lawrence Williams, laments that a significant amount of commentary published on gold can be uninformed and misleading. This is ironic, since the bulk of Lawrence Williams’ writings about the gold market (and the silver market) are uninformed and misleading.

When it comes to his gold-market commentary, Mr. William’s most frequent mistake is to focus on the amount of gold ‘flowing’ into China as if this were one of the most important drivers, if not the most important driver, of the gold price. To be fair, in this regard he has a lot of company and much of what he writes on the topic is copied from the wrongheaded analyses put forward by reputed experts on gold.

Continue reading Gold Demand Confusion

Whither Bonds?

By Michael Ashton

Whither Bonds? Arnott Answers

I really enjoy reading, and listening to, Rob Arnott of Research Affiliates. He is one of those few people – Cliff Asness is another – who is both really smart, in a cutting-edge-research sense, and really connected to the real world of investing. There are only a handful of these sorts of guys, and you want to align yourself with them when you can.

Rob has written and spoken a number of times over the last few years about the investing implications of the toppling of the demographic pyramid in developed markets. He has made the rather compelling point that much of the strong growth of the last half-century in the US can be attributed to the fact that the population as a whole was moving through its peak production years. Thus, if “natural” real growth was something like 2%, then with the demographic dividend we were able to sustain a faster pace, say 3% (I am making up the numbers here for illustration). The unfortunate side of the story is that as the center of gravity of the population, age-wise, gets closer to retirement, this tailwind becomes a headwind. So, for example, he figures that Japan’s sustainable growth rate over the next few decades is probably about zero. And ours is probably considerably less than 2%.

Continue reading Whither Bonds?

Accumulating Accumulation…

By Alhambra Investment Partners

The Problem Is Accumulating Accumulation

The home market may literally be testing the notion that interest rate manipulation has the net effect of pulling forward demand. Existing home sales, as tabulated by the National Association of Realtors, surged in May to a new six-year high. That sounds like terrific news about a rebound in the real estate market after quite a rough period dating back to the middle of 2013, but even the usual monetarism-always-works places are sounding cautious. In this case, with the Fed having spent months and months talking about rate increases, many economists are actually worried that May’s jump in home sales was the last before such conventional outlooks become reality.

The average 30-year fixed mortgage has moved back toward and even above 4% again, which “threatens” to derail what is thought to be a sustainable gain in housing overall.

Continue reading Accumulating Accumulation…

Silver-Gold Ratio & USD

By Biiwii

Okay, one last precious metals short-term micro management exercise before moving back to a more generalized market view.

Actually, this one is pertinent to many other items as it is our gauge for the probabilities of an anti-USD ‘inflation trade’ bounce.  Silver-Gold ratio is still alive despite silver’s hard down this morning, and Uncle Buck is still below his MA 50 despite today’s strong bounce.



By Biiwii

Well here is what GDX-GLD (equiv. to HUI-Gold ratio) did out of the gate this morning, which is interesting, considering HUI-Gold has been making historic long-term lows lately.