By Keith Weiner
For years, people blamed the global financial crisis on greed. Doesn’t this make you want to scream out, “what, were people not greedy in 2007 or 1997??” Greed utterly fails to explain the phenomenon. It merely serves to reinforce a previously-held belief. Far be it from us to challenge previously-held beliefs (OK, OK, we may engage in some sacred-ox-goring from time to time), but this is not a scientific approach to explaining observed events. To properly understand a crisis, you have to look for the root cause. And if the crisis did not occur previously, your theory needs to explain why not then, and why only now.
Suppose an old company, XYZ, goes out of business. “Times change,” people say, to explain an economic phenomenon. Or, perhaps slightly less imprecisely, “the market changed.” Sometimes they’ll get even closer to saying something. They say, “Company XYZ did not adapt to changes.”
These statements are copouts.
Continue reading Rising Interest and Prices, Report
By Steve Saville
The ‘true fundamentals’ began shifting in gold’s favour in October of last year and by early-December the fundamental backdrop was gold-bullish for the first time in almost a year. However, there is not yet confirmation of a new gold bull market from the most reliable indicator of gold’s major trend. I’m referring to the fact that the gold/SPX ratio is yet to achieve a weekly close above its 200-week MA. Here’s the relevant chart:
The significance of the gold/SPX ratio is based on the concept that the measuring stick is critical when determining whether something is in a bull market. If a measuring stick is losing value at a fast pace then almost everything will appear to be in a bull market relative to it. For example, pretty much everything in the world has been rising in value rapidly over the past few years when measured in terms of the Venezuelan bolivar. It should be obvious, though, that not everything can be simultaneously in a bull market. To determine which assets/investments are in a bull market we can’t only go by performance relative to any national currency; we must also look at the performances of assets/investments relative to each other.
Continue reading No Confirmation of a Gold Bull Market, Yet
By Steve Saville
About five months ago I posted an article in response to stories that the Chinese government had pegged either the SDR-denominated gold price or the Yuan-denominated gold price. These stories were based on gold’s narrow trading range relative to the currency in question over the preceding two years, as if government manipulation were the only or the most plausible explanation for a narrow trading range in a global market. To illustrate the silliness of these stories I came up with my own story — that it was actually the Japanese government that was pegging the gold price. My story had, and still has, the advantage of being a better fit with the price data.
Just to recap, my story was that the Japanese government took control of the gold market in early-2014 and subsequently kept the Yen-denominated gold price at 137,000 +/- 5%. They lost control in early-2015 and again in early-2018, but in both cases they quickly brought the market back into line.
The following chart shows that they remain in control.
Continue reading The Japanese Government is Still Pegging the Gold Price
By Keith Weiner
One of the most important problems in economics is: How do we know if an enterprise is creating or destroying wealth? The line between the two is objective, black and white. It should be clear that if business managers can’t tell the difference between a wealth-creating or wealth-destroying activity, then our whole society will be miserably poor.
Any manager will tell you that it’s easy. Just look at the profit and loss statement. Profit is so powerful an incentive for managers, that one could never persuade them to operate based on any other indicator. And it would work—if economists had done their jobs properly.
But have they?
Continue reading Surest Way to Overthrow Capitalism, Report
By Keith Weiner
Last week, we wrote about the concept of discounting. This is how to assess the value of any asset that generates cash flow. You calculate a present value by discounting earnings for each future year. And the discount rate is the market interest rate. We said:
“If the Fed can manipulate the rate of interest, then it can manipulate the value of everything…
There is no other rate to use, other than the market rate. You don’t know the right rate any better than the people who centrally plan our economy. The problem is not that the wrong people are in the job. The problem is not even that they use the wrong magic formulas to determine what rate to set.”
The Fed cannot make a company more profitable, but it can reduce the discount rate so that market participants are willing to pay more for its shares. We noted that no one knows the right rate any better than the Fed. Thus, the only rate to use is the market rate. But we did not really make the case in favour of using the market rate.
Continue reading Rising Rates Falling Assets, Report
In January of 2018 we noted a cyclical leader (Semiconductor Fab Equipment) in trouble: Semi Canary Still Chirping, But He’s Gonna Croak in 2018.
We also ran a series of articles featuring the happy-go-lucky 3 Amigos (of the macro) in order to gauge a point when larger herds of investors would become aware of cyclical issues facing the global (including the US) economy. Each Amigo (SPX/Gold Ratio, Long-term Treasury yields and a flattening Yield Curve) would ride with the good times but signal an end to those good times when reaching destination (Amigos 1 & 2 got home but #3, the Yield Curve is still out there). Here is the latest Amigos status update from October: SPX/Gold, 30yr Yields & Yield Curve.
Today I would like to stick with a cyclical macro view, but do so through a lens filtered by the ultimate counter-cyclical asset, gold. As market participants, we are lost if we do not have road maps. That is why we (NFTRH) gauged Semi Equipment vs. Semi (and Tech), the unified messages of the macro Amigo indicators and many other breadth and cyclical indicators along the way to safely guide us to Q4 2018, which has been a challenge for many, but business as usual for those of us who were prepared.
Continue reading Cyclical Assets vs. Gold
By Keith Weiner
We could also have entitled this essay How to Measure Your Own Capital Destruction. But this headline would not have set expectations correctly. As always, when looking at the phenomenon of a credit-fueled boom, the destruction does not occur when prices crash. It occurs while they’re rising. But people don’t realize it, then, because rising prices are a lot of fun. They don’t realize their losses until the crash. So we want to look at stocks when they’re high, before people realize what’s happened to them.
How do you value a stock? The classic methodology, proposed by Benjamin Graham and Warren Buffet, is to discount future free cash flows. Let’s leave aside the problem of how to predict future revenues much less cash flows in our crazy resonant system with positive feedback. For purposes of this discussion, we will just assume that a stock generates a known and constant cash flow of, say, $1 per year, in perpetuity.
Continue reading Are Stocks Overvalued, Report
By Trey Reik
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By Keith Weiner
For the first time since we began publishing this Report, it is a day late. We apologize. Keith has just returned Saturday from two months on the road.
Unlike the rest of the world, we define inflation as monetary counterfeiting. We do not put the emphasis on quantity (and the dollar is not money, it’s a currency). We focus on the quality. An awful lot of our monetary counterfeiting occurs to fuel consumption spending. And much of this, certainly a very visible part of it, is government borrowing to pay for the welfare state that is not supported by taxation.
There are four components to our definition of legitimate credit:
- The lender knows that he is lending
- The lender agrees to lend
- The borrower has the means to repay
- The borrower has the intent to repay
It is counterfeit credit, if one or more of these criteria are breached.
If the government cannot pay current expenses out of tax revenues, then obviously it can never amortize its debt. So this shows the Treasury bond itself to be counterfeit credit. But let’s consider the dollar.
Continue reading Why Do Investors Tolerate It, Report
By Steve Saville
Apart from a 2-week period around the middle of the year, my Gold True Fundamentals Model (GTFM) has been bearish since mid-January 2018. There have been fluctuations along the way, but at no time since mid-January have the true fundamentals* been sustainably-supportive of the gold price. However, significant shifts occurred over the past fortnight and for the first time in quite a while the fundamental backdrop is now very close to turning gold-bullish. In fact, an argument could be made that it has already turned bullish.
Below is a chart comparing the GTFM (in blue) with the US$ 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.
Continue reading The Fundamental Backdrop Turns Bullish for Gold… Almost
By Keith Weiner
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.
Continue reading The Prodigal Parent, Report
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!
Continue reading Gold Stocks Acting as They Should During Market Stress