Common Sense Monics

By Keith Weiner

[biiwii comment: gold and silver supply/demand funda follow opening segment]

Suppose you’re driving a car, and you turn the steering wheel left. You will feel the door and pillar of the car push your left shoulder (in a left-drive car). This is an observed fact.

Common Sense Physics

One idea—let’s call it common sense physics—is that a force is pushing you outward into the door. If you picture the center of the circle that the car is making in its turn, there is an apparent radial force on you. The direction of this force is outward. It is called centrifugal force.

Or suppose you fill a jar with water and mixed soil sediments. You put it into a machine that spins it rapidly, with the lid facing inwards toward the center. After the machine spins for a while, you stop it and remove the jar. The heavier particles are at the bottom of the jar. Above them are the slightly less heavy, and so on, to the lightest. The water is at the top. This experiment confirms the idea. Something apparently pushes the heaviest particles farthest out from the center. Centrifugal force.

In any group of people who have not studied physics, this view is entirely uncontroversial. Indeed nearly everyone who hasn’t studied physics would agree with what we wrote above.

However, if you go to a group of people who have taken a college-level physics class, you would get the opposite reaction. The above view is wrong. And not a single one (who received a passing grade) would defend it.

Any first-year university student in physics would draw the circle and the radius. But he would add an additional concept—velocity. The velocity of the object is tangential to the circle. There is a force pulling the object. That is, there is a radial force, but its direction is inward—centripetal force. The object does not fall into the center, because its velocity is tangential. The net result is that the path is a circle.

Continue reading Common Sense Monics

Eurozone Credit Risk Pricing

By Callum Thomas

This chart of Eurozone credit risk pricing attracted a lot of interest when I originally posted it, and it remains extremely topical, so I thought I would do a quick update.  The chart shows the z-score (standardized values) of high yield corporate credit spreads and the spread between the average 10-year government bond yield for the Eurozone vs Germany.  Again, what stands out to me on this chart is how relaxed credit risk pricing has become, certainly relative to what we’re seeing in sovereign risk pricing.  As I mentioned previously, risk flareups in Europe often take at least a couple of months to run their course, so I am taking a cautious stance on Eurozone risk assets for the time being (particularly when you add the softer earnings/macro pulse to the picture).


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Novo Resources (NVO.V): A Conversation (from IKN 472)

By Otto Rock

A minor part of the Weekly IKN473, out last night.

We join this conversation half way through:

A: So do you agree that it’s going to be very difficult to reach a 43-101 or JORC compliant resource number for NVO?
B: Yes, we agree on that. But that doesn’t make the company worthless! They clearly have a lot of gold!
A: And I agree with you on that. But what I’m interested in is monetizing it, making the company profitable.
B: Me too.
A: Good! We’re on the same page. But what really matters is being able to justify the current market cap, because if you include those very-in-the-money warrants (and you have to, really) NVO is now revolving around a $1Bn market cap. That’s expensive.
B: Okaaaay…if you say so. I think NVO is cheap!
A: Fine. So in that case, I’m not even going to ask you to justify a future where NVO is double or triple today, all we are going for is to justify $1Bn.
B: They have a lot of gold!
A: And a lot of market cap valuation, too. Let’s justify its market price with that gold, yes?
B: Well, you do what Bob Moriarty says! You mine it!
A: I agree 100%. Now, how do you mine it?

Continue reading Novo Resources (NVO.V): A Conversation (from IKN 472)

World Wrassling Diplomacy

By James Howard Kunstler

Why not war with Canada? That pissant “nation” is cluttering up the northern half of OUR Continent, which we struggled mightily to free from wicked Old Europe. What doesn’t Justin Trudeau get about that? And when we’re done with him, how about a few rounds with Frau Merkel and the wee frog, Monsieur Macron? I’d like to see the Golden Golem of Greatness in a leotard and one of those Mexican wrestling masks, tossing these peevish international dwarves out of the ring like so many sacks of potting soil.

And now it’s off to Singapore for a championship bout with the opponent known as “Little Rocket Man.” There’s an odd expectation that these two avatars of unreality will settle the hash that has been simmering for sixty years between the divided Korea and the USA. Mr. Trump will make a deal to turn North Korea into a golfer’s paradise and Mr. Kim will promise to beat his nuclear arsenal into nine irons and putters. And then they’ll celebrate on Air Force One with bags of Big Macs and Buckets o’Chicken. (Let the aides and advisors fight over the Singapore Noodles and squid beaks in garlic sauce.)

Continue reading World Wrassling Diplomacy

Thankful For Their Skepticism

By Kevin Muir

I have been banging on the inflation drum for so long I feel that even Todd Rundgren would be sick of hearing from me. While a couple of years ago, the majority of pundits were not talking about inflation – most were focused on the Fed’s inability to create rising prices in anything except financial assets – recently the market has awoken to the risks that accompany a decade of bat-shit-crazy central bank monetary policies.

With the current popularization of warnings about the coming inflation, I don’t know if I can add any value rehashing the points filling financial airwaves. The market seems to have finally caught on. Inflation is coming. In fact, it’s already here. And it will get a lot worse.

Instead of writing yet another piece reiterating my beliefs about why inflation will be a problem in the coming decades, I have decided to explore how market inflation expectations have changed over the past couple of years.

At the start of 2016, the market was pricing in a 1% 5-year breakeven inflation rate. That meant inflation had to average less than 1% for the next five years for nominal bonds to outperform TIPS (Treasury Inflation Protected Securities). Stop and think about that for a moment. The Federal Reserve has an inflation target of 2%. Yet the market did not believe they could achieve an inflation rate of even half their target.

The three Ds (deflation, demographics, and debt) were on everyone’s lips. It made little sense to invest in inflation-protected securities when everyone knew there could be no inflation.

Continue reading Thankful For Their Skepticism

Testing Your Stock Market Hypothesis With Facts

By Chris Ciovacco

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What Is Fiat Currency?

By Steve Saville

The term “fiat” is often associated with irredeemable-paper or electronic currency, but existing only in paper or electronic form is not the defining characteristic of fiat currency. In fact, paper or electronic currency is not necessarily “fiat” and hard commodity currency can be “fiat”.

Regardless of the form it takes, fiat currency is simply currency by government decree. If the government dictates that a certain ‘thing’ is money and must be accepted in payment for goods, services and debts, then that ‘thing’ is a fiat currency.

Obviously, all of today’s national currencies are fiat currencies. Not so obviously, gold was a fiat currency during the Gold Standard era. It could be claimed — without any argument from me — that during the Gold Standard era gold would have been the most widely used currency without the government making it so, but this is beside the point. In the situation where the government has commanded that gold is money, gold is a fiat currency.

Also not so obviously considering what has been written on the topic in other places, Bitcoin is not a fiat currency. If anything it is the opposite of a fiat currency, because it was created by the private sector and is not supported in any way by the government. This doesn’t mean that Bitcoin is a good currency, as there is a lot more to being a good currency than being outside the direct control of government.

Summing up, people should be careful when applying the word “fiat” to currency/money. The word is routinely used to mean irredeemable or non-physical, but that’s not what it actually means.

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Q1 2018 Z.1 Flow of Funds

By Doug Noland

Credit Bubble Bulletin

The first-quarter 2018 Z.1 “flow of funds” report can be viewed in two ways. From one perspective, key conventional data are un-extraordinary. Household debt expanded at a 3.3% rate during the quarter, down from Q4’s 4.6%. Home Mortgage borrowings slowed from 3.4% to 2.9%. Total Business debt grew at a 4.4% pace, unchanged from Q4 and down from Q1 ’17’s 6.1%. Financial sector borrowings were little changed, after expanding 1.6% during Q4. Bank lending was, as well, unremarkable.

From another perspective, extraordinary Credit growth runs unabated. Total System (non-financial, financial and foreign) Credit expanded at a (record) seasonally-adjusted and annualized rate (SAAR) of $3.513 TN during 2018’s first quarter, compared to Q4’s SAAR $1.411 TN and Q1 ’17’s SAAR $860 billion. This booming Credit expansion was fueled by an SAAR $2.519 TN increase of federal borrowings. Granted, this was partially a makeup from Q4’s slight contraction in federal debt growth.

In nominal dollars, Total U.S. System Credit expanded a blazing $962 billion during Q1 to a record $69.717 TN (349% of GDP). Non-financial Debt (NFD) expanded a record (nominal) $874 billion, with one-year growth of $2.413 TN. One must return to booming 2007 for a larger ($2.508 TN) four quarter-period of Credit expansion. NFD ended Q1 at a record $49.831 TN, matching a record 250% of GDP. NFD expanded $4.086 TN over the past two years, the strongest expansion since ’07/’08.

Continue reading Q1 2018 Z.1 Flow of Funds

Too Much Love For QQQ

By Tom McClellan

QQQ shares outstanding

The FANG stocks have been leading the market higher in 2018, and a lot of traders are choosing to tag along on that trade by buying into QQQ, the ETF which tracks the Nasdaq 100 Index (NDX).  As more traders buy into QQQ, the sponsoring firm (Powershares, part of Invesco) issues more shares in order to keep the share price as close as possible to the net asset value.

This week’s chart shows how the number of QQQ shares outstanding varies over time.  Not surprisingly, it goes up and down in sympathy with price movements.  There is nothing like an uptrend to get traders wanting to buy.  By the same token, there is nothing like a selloff to get them to want to bail out.

Continue reading Too Much Love For QQQ

The Glacial Taper Continues!

By Anthony B. Sanders

Fed’s Treasury Note and Bonds Holdings Back To April ’14 Levels While Agency MBS Holdings Back To August ’15 Levels

It took the Fed five-and-a-half years to amass $3.4 trillion in Treasury securities and mortgage-backed securities (MBS) during Quantitative Easing (QE). The Fed is now reversing that process, including the opposite of “tapering,” as it is “ramping up” its QE unwind. Call it “the glacial tapering.”

The Fed’s balance sheet for the week ending June 6, released Thursday afternoon, shows a total drop of $141 billion since October, the beginning of the era officially called “balance sheet normalization.” At $4,319 billion, total assets have dropped to the lowest level since May 7, 2014, during the middle of the “taper.”

If the Fed continues to follow its plan, it will shed up to $420 billion in securities this year, and up to $600 billion a year in 2019 and each year in the future, until it considers its balance sheet to be “normalized” — or until something big breaks. For May, the plan calls for the Fed to shed up to $18 billion in Treasuries and up to $12 billion in MBS.

On the Treasury note and bond side, we are back to April  2014 levels.


On the agency MBS side, The Fed’s holdings are also dropping and are back to August 2015 levels. But they are not declining that rapidly.

Continue reading The Glacial Taper Continues!

Sir Chop-A-Lot

By Tim Knight

I was amused – and a little amazed – to see this item this morning:

For the two or three of you unfamiliar with John McAfee’s famous bet, allow me to summarize it with one sentence and photo; as you can see, the former tech titan is looking a bit out of sorts these days:

See, I was convinced that this man has stumbled only publicity gold, because he made a provocative, amusing statement that swept the airwaves, but the prediction was far enough out that he could enjoy the fruits of this weird publicity stunt for a while without risk or bodily harm.

Continue reading Sir Chop-A-Lot

The Summer of Discontent

By James Howard Kunstler

The ill-feeling among leaders of the G-7 nations — essentially, the West plus Japan — was mirrored early this morning in the puking financial market futures, so odious, apparently, is the presence of America’s Golden Golem of Greatness at the Quebec meet-up of First World poobahs. It’s hard to blame them. The GGG refuses to play nice in the sandbox of the old order.

Like many observers here in the USA, I can’t tell exactly whether Donald Trump is out of his mind or justifiably blowing up out-of-date relationships and conventions in a world that is desperately seeking a new disposition of things. The West had a mighty good run in the decades since the fiascos of the mid-20th century. My guess is that we’re witnessing a slow-burning panic over the impossibility of maintaining the enviable standard of living we’ve all enjoyed.

Continue reading The Summer of Discontent