If there is one thing Ben Bernanke got right, it was this. In 2009 during the worst of the worst monetary crisis in four generations, the Federal Reserve’s Chairman was asked in front of Congress if we all should be worried about zombies. Senator Bob Corker wasn’t talking about the literal undead, rather a scenario much like Japan where the financial system entered a period of sustained agony – leading to the same in the real economy, one lost decade becoming a second and then a third.
Bernanke retorted that there weren’t going to be zombies in the United States. The American people needn’t worry because the key to staving off economic apocalypse was pretty simple.
If there is one message that I’d like to leave you with, if we’re going to have a strong recovery, it has got to be on the back of a stabilization of the financial system.
Bernanke was already busily trying to do just that, steady the banking system. Unfortunately for all of us, while he could see what needed to be done, doing it was altogether a different matter. His tenure was a total failure for this one thing. Neither he nor any of his fellow central bankers had any idea how to put this theory into practice.
Here’s a slide from the (what they thought was the) confidential pitch out of (what they hope to be) The Next Big Thing to hit the potstock world, African Wheaton:
And over there in the top right is the reason why they want this to be big, an obscene level of greed on show in the private rounds. According to the seed run, currently being pitched all over Canada, the 213.8m shares once done will give the company a market cap of $106.9m. And over half of those shares were distributed at under 2c! Disgusting greed, yet another no-lose proposition from people who take no risk and get all the reward. This is not capitalism, it’s a crony scam and needs to be stamped out.
The United States: The spread between job gains for workers vs. managers (especially in cyclical sectors) declined last month. If the trend continues, it would indicate that we are in the late phase of the economic cycle.
Banking regulation is never easy. Shifting regimes and tightening things up a bit during a rip-roaring global economy, however, makes it much less stressful. Among global banking systems the one in India has lagged. Much of the rest of the world had moved on to higher capital requirements in addition to (sappy) liquidity constraints long ago so as to keep something like 2008 from happening again.
It has only served to demonstrate just how little regulators figured out about that supposedly long ago crisis in any one place let alone across the world. To catch up with fighting the last problem, the Reserve Bank of India alongside state banking authorities have been pushing banks to hold more capital. Until this year, that is.
Last month, under intense pressure from the government, India’s central bank relented before imposing the last part of higher capital requirements. These were strengthened in 2017 with every expectation counting on continuing the process, but the world in 2018 is very different.
What three things do these three junior exploreco companies have in common?
Evrim Resources (EVM.v)
Silver Bull Resources (SVBL)
Azucar Minerals (AMZ.v)
If you answered “All in Mexico”, score two points.
If you also answered “All did deals this year to let major mining companies into their flagship assets”, score 5 points.
If you added to your answer, “All did those deals with majors at way higher prices than today’s market because the major just waded in and then a whole bunch of retail fools who were cocksure the major “knew something special” also bought at the same time only to have their asses handed back to them on a silver platter as well”, score ten points.
This thing about major mining companies knowing more than the rest of us, can we bin it now, please? Geologists are crappy at corp dev decisions.
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The United States: The overall consumer debt (as % of disposable income) has declined in recent years even as the total household net worth rose. This divergence suggests that, on average, US household balance sheets remain relatively healthy. Of course, these trends have been highly uneven across income categories.
China: China’s manufacturing wage increases have been substantially larger than pay gains elsewhere in Asia.
Apart from a 2-week period around the middle of the year, my Gold True Fundamentals Model (GTFM) has been bearish since mid-January 2018. There have been fluctuations along the way, but at no time since mid-January have the true fundamentals* been sustainably-supportive of the gold price. However, significant shifts occurred over the past fortnight and for the first time in quite a while the fundamental backdrop is now very close to turning gold-bullish. In fact, an argument could be made that it has already turned bullish.
Below is a chart comparing the GTFM (in blue) with the US$ gold price (in red).
The above chart understates the significance of the recent fundamental shift, because it appears that the GTFM has done no more than rise to the top of its recent range while remaining in bearish territory (which, of course, it has). However, a look beneath the surface at what’s happening to the GTFM’s seven individual components reveals some additional information.
The Baby Boom generation may be the first generation to leave less to their children than they inherited. Or to leave nothing at all. We hear lots—often from Baby Boomers—about the propensities of their children’s generation. The millennials don’t have good jobs, don’t save, don’t buy houses in the same proportions as their parents, etc.
We have no doubt that attitudes have changed. That the millennials’ financial decision-making process is different. And that millennials don’t see things like their parents (if you’ve ever seen pictures of Woodstock, you may think that’s not a bad thing). However, we believe that the monetary system plays a role in savings and employment. And the elephant that is trumpeting in the monetary room is: the falling interest rate. Interest has been falling since 1981. That’s when the first millennial was born.
By the time the oldest millennial cohort was ready to enter the work force, the dot-com boom was blowing up. What a time to look for a job, eh? Seven years later—when more than half of millennials were still not old enough to work full-time—was an even bigger bust. And what have we had since then? Seven years of interest rates pinned at zero (on the short end of the curve). And then a tepid rise since then.
Total Non-Financial Debt (NFD) expanded at a 4.4% annual rate during Q3 to a record $51.324 TN. Since the end of 2008, NFD has increased $16.3 TN, or 46%. Q3’s NFD growth rate was down from Q2’s 5.2% and Q1’s 6.3% – and lower as well than Q3 2017’s 4.9%. Total Household borrowings accelerated to 3.4% growth from Q2’s 2.9%, led by a jump in Consumer Credit growth (5.4% from 3.7%). Household Mortgages expanded at a 3.1% pace, up from Q2’s 2.7% and the year ago 2.9%.
Evidence of tighter financial conditions, Total Business borrowings slowed markedly. After Q2’s 6.9% rate (strongest since Q1 ’16), Total Business debt growth slowed to 3.9%. The expansion of Corporate (a component of Business) borrowings slowed markedly, from 7.2% to 4.1%. State & Local government debt contracted at a 1.4% pace (Q2 -0.38%). Winning the Piggy Borrower contest, perennially, was our federal government. Federal borrowings expanded at a 6.8% pace, down slightly from Q2.
Over the past few days there’s been lots of chatter about the recent flattening of the yield curve. The rising of short term yields with the opposite move at the longer-end has caused the 2 and 5-year portion of the curve to invert. With any inversion, suddenly everyone is a bond trader and has an opinion about what it means for risk assets and the world in general. Of course, the MacroTourist is no exception, but before I throw my opinion into the sea of sound bites, let’s examine how we got here.
The macro has moved through a time of moderately rising inflationary concerns when economies were cycling up, many commodities were firm and risk was ‘on’. Contrary to the views of inflation-oriented gold bugs, that was not the time to buy gold stocks.
As I have belabored again and again, the right time is when the inflation view is on the outs, gold is rising vs. stock markets, the economy is in question, risks of a steepening yield curve take center stage (the flattening is so mature now that steepening will be a clear and present risk moving forward) and by extension of all of those conditions, confidence declines.
In short, the improving sector and macro fundamentals I’ve been writing about for a few months now continue to slam home as the cyclical world pivots counter-cyclical. And what do you know? Gold stocks are reacting as they should. Well, it’s about time, guys!