Ainslie Bullion - Daily news, Weekly Radio and Discussions

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Postby AinslieBullion » Thu Nov 03, 2016

“Buy Gold No Matter Who Wins The Election”

That’s the words of banking giant HSBC who think there will be only one certain winner in next week’s US election… gold.

They are predicting at least an 8% jump regardless of who wins. The key word there is ‘least’ as they are calling much higher, of course, if it's Trump. At the time of the report from Bloomberg 2 days ago gold was at USD1289 and has already risen to USD1303 at the time of writing on renewed fears of a Trump victory.

HSBC are predicting $1500 if Trump wins (that’s up 15%!) and $1400 on Clinton. It’s not just a flash in the pan rise either as both have policies that are supportive of gold in the longer term too. Both are looking to employ fiscal spending to stimulate growth. Trump at one point in his ever changing ‘policy’ positions said he would put at least half a trillion dollars to work. Can we remind you that the US is over $19.5 trillion in government debt already! That is over 105% of GDP and rising and the highest level since World War II. So yes you could see an initial flurry of growth but that debt burden is getting mighty overwhelming. It’s incredibly ironic too that Trump is looking to increase deficit spending when he had this to say about raising the US debt limit:

“Let's say you come home from work and find there has been a sewer backup in your neighbourhood. Your home has sewage all the way up to your ceiling.

‘What do you think you should do? Raise the ceiling, or pump out the s**t?”

It’s not just fiscal policy with Trump of course, as HSBC says:

"Gold is seen as a hedge against political uncertainty, and President Trump would bring more political unpredictability than any president for generations, particularly over the U.S. Federal Reserve’s leadership and monetary policy strategy,"

We’ve written before about Jim Rickards views. Via the Daily Reckoning guys, this is what he just said in an interview:

“There are a lot of reasons to think this is going to be extremely close and he could win. Now, here is the point, markets are fully priced for Hillary; gold, stocks, everything is priced for a Hillary victory. If she wins, nothing happens because it’s already priced. But, if he wins, the markets are going to go like this [points higher] — gold will go up $US100 an ounce.[pretty much identical to HSBC]

‘So, I would buy gold now, or shortly before the election. If Hillary wins nothing is going to happen, you won’t lose much. But, if Trump wins, you’ll make a fortune. So, it’s an asymmetric trade.”

Rarely in life so you get an asymmetric trade.

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Postby AinslieBullion » Sun Nov 06, 2016

Making America Great Again

That's the slogan Trump has used from day one to tap into the discontent within that nation. That 'policy' has been scant and inconsistent at best hasn't mattered; the people are not happy. As we mentioned in last week's Weekly Wrap, all eyes were on the US non farm payrolls employment data on Friday night for cues as to whether there was enough in it to support a rate hike in December.
The data again disappointed with 161,000 new jobs created in October against expectations of 173,000 and taking the 2016 average to 181,000 per month compared with 229,000 in 2015. The household survey actually saw a drop, its first since April, of 43,000 for the month. The unemployment rate fell to 4.9% because the participation rate dropped, i.e. more people gave up or dropped out of the workforce altogether. 425,000 people left, taking non participants to 94.6m. The headlines were neither bad enough to rule out a rate hike nor good enough to bake the cake. But it was what was behind the headlines that brings us back to The Donald's slogan.
The all important 'average hourly earnings' rose 0.4%, a little above expectations of 0.3%. That was received well by markets as it supports the Fed's aim of higher wages translating into more consumption and hence demand lead inflation. Inflation is their number one aim as that is the only tool left to address all the debt that's been racked up. However drill down on that number and you find that 82% of the workforce, in the subsets of production and non-supervisory private workers (the do-ers) were about half that rate at 0.2%. Annualising that and you find that it is almost the same as core inflation. i.e. they are going nowhere. One of Trump's core 'policies' is to tear up all the trade agreements and clamp down on imports to support domestic manufacturing. Why? Well again the data behind the headline shows a continuation of a loss of manufacturing jobs, once the backbone of the nation. According to ZeroHedge "In October, according to the BLS, while the number of people employed by "food services and drinking places" rose by another 10,000, the US workforce lost another 9,000 manufacturing workers….. since 2014, the US had added 547,000 waiters and bartenders, and has lost 36,000 manufacturing workers."
People vote with their wallet and that Trump's policies could cause a global financial crisis appears to be lost on many of those 82% who likely see a sharemarket crash only affecting the rich and Clinton as the embodiment of them. Should she win then the ensuing social unrest could manifest in a completely different but equally destructive way. 322 million people and we have these two. Incredible.

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Postby AinslieBullion » Mon Nov 07, 2016

Deadly Potion of Emotion

What a night on markets last night! It was ‘risk on’ as the market re-fully priced in a Clinton victory. The S&P500 surged 46 points, up 2.2% in one night and ending its longest losing streak since December 1980. Gold and silver were down 1.7% and 1.2% respectively but the USD fell too which put the AUD up and gold and silver were down 2.3% and 1.8% respectively in AUD. An emotions driven night….

Listen to or read any news this morning and a Clinton victory is ‘in the bag’ with a 3 point lead in the last polls. It’s what the world’s emotions want to here. You might, however, remember another vote in the middle of this year where the result differed to the polls. Should the polls again prove to be wrong this will be “Brexit x 10”, as Jim Rickards puts it. But let’s assume the cake is baked and Clinton gets in… what next for markets?

The US election circus has been one of the few distractions big enough to divert the markets’ attention away from its US rate hike preoccupation. That said, part of what contributed to the S&P500’s historic losing streak these past weeks has been the now 80% market odds of a rate US rate hike in December. Should Clinton get in we may well see a combination of ‘buy the story, sell the fact’ AND the inevitable sell down on rate hike expectations given a Trump win was about the only credible excuse not to hike in December. Don’t dismiss either a Supreme Court challenge on the result, ala the 2000 election when Bush won 5-4 in court. This time however we have the temporary situation of an even number of Supreme Court judges and the prospect of a split decision even there. This could be a drawn out affair to test the emotions further…

Clinton represents ‘business as usual’ for the US. As regular listeners to our Weekly Wrap know, ‘business as usual’ in the US is lacklustre at best and recessionary in reality for many sectors. A rate hike makes no sense other than they need to do it to curtail the financial asset bubbles it produced. So should the Fed actually go through with it this time (they’ve been saying “probably next time” for the last 10 months) you could very well see the same result as last December with a January crash. January was a relatively little one as crashes go. The system is even more ‘inflated’ now and so too the precariousness.

It is easy to be emotionally drawn in by the latest ‘events’. Last night shows how one ‘story’ to the next can swing a market in the short term. A truly balanced portfolio, a mix of uncorrelated assets, takes the emotion out of investment. Emotion is an awful investment input, and hence the famous quote:

“Those who beat the market beat their emotions first”

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Postby AinslieBullion » Tue Nov 08, 2016

There is a famous quote that "there is no new way to go broke, it's always too much debt".

Whoever wins the US election today will inherit a fiscal mess of a scale that makes you wonder why they even want the job. A Bloomberg article titled "Obama's Successor Inherits Bond Market at Epic Turning Point" spells it all out. Here's a summary:

Obama has sold more US Treasury bonds and at a lower rate than any president in history. (For newcomers, bonds sold by the government are debt that must be repaid together with interest along the way. That debt pays for continual deficits and the interest paid adds to those deficits. At some point the interest burden becomes too great).

Those low rates were, in part, courtesy of the 'independent' US Fed buying an unprecedented amount of US Treasuries. So prolific was this QE bond buying 'money printing' program, it soaked up a quarter of the total debt issued between 2009 and 2014, some $1.7 trillion worth, and became the biggest single holder in the world. The US Fed's balance sheet has ballooned to an incredible $4.45 trillion.
International demand was very strong, especially China with all its reserves, collectively buying $3 trillion over that period. However foreign central banks have now reduced their stake in Treasuries for an unprecedented three consecutive quarters with foreign holdings shrinking at the fastest pace since 2013.

The government's marketable debt has more than doubled under Obama to a record $14 trillion (and nearly $20t in total) and that debt burden is about to bite. Despite record low rates, the interest costs are now the highest in 5 years and rates look about to rise as the Fed appears more serious about a rate hike in December, the first in a year.

Obama enjoyed a "Free lunch" as one analyst put it, but all of a sudden the world's biggest bond market looks decidedly shaky and the next President will have to deal with that, ironically as both candidates talk up fiscal spending on infrastructure.
An analyst interviewed put it well: "All these years we've been kicking the can down the road, and suddenly we're seeing a brick wall…. There's been so much borrowing going on that's been enabled by extremely low interest rates, one shudders to think what would happen if rates actually ever did go back to normal……The impact on the interest expense would be significant, and could really bring deficit concerns back to the fore."
These 3 graphs from the government's very own Congressional Budget Office tell a scary tale for the next President and the market as a whole….

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Postby AinslieBullion » Wed Nov 09, 2016

President Trump – What Next?

The people have spoken again and it should come as a very clear and very loud signal to European leaders. The people are tired of the establishment, tired of being left behind as the rich get richer on monetary stimulus, and tired of the effects of globalisation. As the diagram below shows there are a string of elections still to come where this theme will likely dominate. Of main concern are the Italian referendum next month, the French elections in April, and the same for Germany in September. Those are the 3 biggest economies in the EU and each represents the same threat but arguably on a larger scale as each could trigger a breakup of the 2nd biggest monetary union in the world. Unlike the ‘unknown’ effects of Trump, the effects of a collapse of the EU is a known known. That is not a flash in the pan.

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Postby AinslieBullion » Thu Nov 10, 2016

Tick Tock The Leverage Clock

Sharemarkets surged higher again last night. Optimism rules on Trump promises of fiscal stimulus. The world has lived under central bank created monetary stimulus since the GFC with terrible results so let’s rejoice this new approach!…. Fiscal stimulus is fancy speak for spending lots of government money on things like infrastructure and, say, big walls etc. The problem is the US already has massive deficits and this new big spend is going to coincide with lower tax income on promised broad based tax cuts. As we discussed in today’s Weekly Wrap this ordinarily sees inflation and rates rise and Ray Dalio, the head of the world’s largest hedge fund and twice Forbes’ 100 most influential people, says it will be this mix of even higher debt and higher rates that will cause the financial crash.

That monetary stimulus to date has already set up a scary situation. CitiBank just released a report showing the effects.

To date companies have propped up their shares through share buy backs or paying dividends to improve yields (when the bank and gold gives you nothing) by borrowing at these record low interest rates to do so. The 2 charts below paint a very clear picture when you consider the timing of the last financial crashes. i.e. they are borrowing more to avoid a crash that would have, and previously has, happened on fundamentals:


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Postby AinslieBullion » Sun Nov 13, 2016

Bonds More Dangerous Than 007

It was another hard night Friday night for gold and silver, both down sharply as shares continued their Trump rally. This of course has many scratching their heads. This is clearly a market rallying on hope and emotion not fundamentals. Even Stanley Druckenmiller, who said he sold his gold on the night of the election (at its peak), when queried on why he is so optimistic on shares when it is projected to blow out deficits by so much that many Republicans are hesitant to back them, responded "I don't worry about the other stuff…”.

We discussed Friday the massive debt issue that exists already and potentially the key element in all of this is the bond market. For Trump to spend all that money on infrastructure whilst cutting income through tax cuts, he needs to issue more bonds to the market to fund it. The program will also be highly inflationary and put pressure on the Fed to raise rates more quickly as well. This all comes at a time when bond prices are already falling (yields rising) and the world is as leveraged as it’s ever been.

The types and holders of bonds are wide and varied. Apart from the aforementioned sovereign debt like US Treasuries, we have seen a proliferation of corporate bonds and just plain junk bonds (over $1.4 trillion more just since 2012). US corporate debt now stands at 45% of GDP, the same level as the top of the last 2 credit cycles in 2002 and 2008. Banks are tightening lending and defaults and credit downgrades are on the rise. But critically, this is all before the now certain rising yields and rates.

This “other stuff” is very real and of a scale that is in many ways incomprehensible. Goldman Sachs warned nearly a month ago of the repercussions of rising yields, stating a 1% rise would translate to over $1.1 trillion in losses to holders. That happened last week. Those rising yields also mean higher rates for mortgage holders (weighing down on property), and higher required rates of return for shareprice analysts (weighing down on shares fundamentals).

The elephant in the room is the appetite for the big bond holders/buyers to purchase more bonds to fund Mr Trump’s plans in such an environment and moreover any panicked sell off. Druckenmiller’s stated response was to go short the bond market. That’s not something everyday investors can easily do. Gold on the other hand is very easy and is essentially the same play.

This new era of high inflation and precarious bond markets is potentially very supportive of higher gold prices. We just need to get past the current hope and emotions stage….

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Postby AinslieBullion » Mon Nov 14, 2016

Why This is Not a 1980’s Bull Market

Some readers may have seen articles comparing now to 1980 as Reagan (another ‘right wing’ wild card) began his administration on a similar platform of fiscal stimulus to Trump. The ensuing years saw shares soar and a protracted bear market for gold.

If you are heavy shares it’s a wonderful story that you would quickly adopt as fact as it suits your narrative or bias. It’s also a nice story as it is one of hope when hope seemed to disappear for a few hours as Trump looked to become the next President. But short of a new right wing president who wants to unleash fiscal stimulus to make America great again, the story falls flat on facts. Real Investment Advice just penned this great article that we summarise below if you are short on time.

For a start we are starting at near record high share valuations not lows:

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Secondly, in terms of normal secular bull and bear markets we are clearly due one last big fall before the next secular bull could be called in:

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Thirdly we have a completely different macro economic and demographic environment set up. As they say:

“the ability to have a “1982-2000 affair” is highly improbable. The 1982-2000 secular bull market cycle was driven primarily by a multiple expansion process with a beginning valuation level of 5-7x earnings and a dividend yield of 6%. Interest rates and inflation were at extremely high levels and were at the beginning of a 30-year decline which would increase profitability as production and interest rate costs fell. Lastly, the consumer was at the beginning of a period of a leverage ramp up which spurred consumption levels to almost 70% of GDP. With inflation and interest rates currently at low levels, and consumers already heavily levered relative to historical norms, the drivers that led to the secular bull market in of the 80-90’s simply do not exist today.” Or in pictures…

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They conclude beautifully and devoid of the emotion, bias and (ironic) ‘hope’ underpinning much of what you will read lately:

“While being a “stark raving bull” going into 2017 is certainly fashionable currently; as investors, we should place our faith, and hard earned savings, into the reality of the underlying fundamentals. It is entirely conceivable the current momentum driven markets, fueled by ongoing Central Bank interventions combined with optimism over the potential for economic reforms under the new administration, could certainly drift higher in the months to come. However, the reality is that the current underlying demographic trends, economic realities, and market fundamentals do not provide the base to support current price levels much less the entrance into a secular bull market akin to that of the 80’s and 90’s.

Of course, with virtual entirety of Wall Street being extremely bullish on the markets and economy going into 2017, along with bullish sentiment at extremely high levels, it certainly brings to mind Bob Farrell’s Rule #9 which states:

“When all experts agree – something else is bound to happen.”

There are simply too many things we “don’t know that we don’t know.” For that reason alone, 2017 could well turn out to be an interesting year for all the wrong reasons.”

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Postby AinslieBullion » Tue Nov 15, 2016

Trump Honeymoon May Soon Be Over

A second day of falls on the ASX and the front page of the Australian Financial Review today remind us that the flawed exuberance following Trump’s win may be short lived.

Yesterday two heavyweight fund managers publicly warned of a tough year ahead for the Aussie sharemarket in the face of the effects of the tanking bond market and accompanying spiking yields. One said:

"The rally in shares will probably last through Christmas, with the typical Christmas rally, but we think it will prove to be a sucker's rally…..The backdrop for sustainable growth weakens while uncertainty is clearly on the rise. This is a less than favourable development in the risk/return trade-off for shares. Given elevated valuations, risks are accumulating in shares."

The other predicted the ASX will lose 5% in 2017.

This comes at the same time that the IMF and then our RBA warn of the risks of Australia’s excessive debt. From the AFR:

“Heavily indebted Australian households and governments are being urged to build greater financial resilience against a global economy facing fresh uncertainties following the rise of Donald Trump, the Reserve Bank of Australia and International Monetary Fund have suggested.”

To date the RBA have played down the effects of our record low interest rates in causing a property bubble. However that changed yesterday in a clear acknowledgement that another rate cut could cause even more reckless debt uptake. From new RBA chief Dr Lowe:

"It is unlikely to be in the public interest, given current projections for the economy, to encourage a noticeable rise in household indebtedness, even if doing so might encourage slightly faster consumption growth in the short term,"

Aussie markets have rallied alongside the US, in part because that’s what they do, but more independently because of the surge in commodities such as iron ore in the hope that Trump gets his massive infrastructure spending plans through congress. The reality however remains that we are the most personally indebted nation in the world (read here for more) and rising bond yields could be extremely dangerous for us.

The other issue the IMF is deeply concerned about is the impacts of Trump’s self protectionist agenda and indeed the worldwide social move against globalisation, meaning “a return to populism or protectionism among big economies would reverse globalisation and weight on trade. Nations will turn inward and there will be less global trade". This they see would hurt Australia more than most.

“Puncturing any sense of self-congratulation for having survived the end of the resources boom, the IMF warns that Australia hasn't escaped worldwide "symptoms of the 'new mediocre'."

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Postby AinslieBullion » Wed Nov 16, 2016

Banning ‘Big Note’ Cash

It was only a matter of time…. In the wake of last week’s announcement by the Indian government to ban larger denomination bank notes the good folks at UBS think Australia should do the same.

Earlier this year the European Central Bank (ECB) floated the idea of withdrawing the Eur500 note on the basis only criminals and the corrupt use them. So rather than the fact, in a region where negative interest rates exist, that you can’t apply negative rates to currency not in a bank account, they dress it up as stamping down on corruption….oh please! You may recall too we reported not long ago the surge in safe sales as Japanese stored their cash outside the banks given negative rates.

The backlash saw the ECB put that on the back burner but India last week went ahead with it, withdrawing the 500 and 1000 rupee notes (worth just $9.80 and $19.65 respectively). What ensued was incredible. There was a bank run of epic proportions where people were simply swapping them for smaller notes rather than trusting the banks with their deposits. Nearly half the country’s 202,000 ATMs were shut down as they ran out of cash. Not too surprisingly this saw gold demand skyrocket and premiums with it. Gold premiums rose between 15-20% over night as long lines formed to those selling it.

As a side note, we often speak of gold being real money, it ticks all 7 pillars of what constitutes money. Currency is a little shaky on one pillar, and that is Intrinsic Value as clearly a piece of paper has none. The basis of ‘intrinsic value’ for currency is the trust and confidence of the government promise backing it’s ‘value’ and use. Indians and Chinese probably get this more than most, it’s almost cultural. In the wake of the announcement and the ensuing chaos an Indian reporter said it perfectly as follows:

“Our entire monetary system depends on trust. A banknote is a piece of paper that says the RBI [Reserve Bank of India] will give the bearer another similar piece of paper, or make an entry in an electronic ledger for that amount. The system works because everybody believes that those pieces of paper will be accepted by everybody else and therefore, money serves as a useful medium of exchange. This move has shaken that trust.”

So back to UBS’s idea that Australia should follow suit… They cite that 92% of all currency value in Australia is locked up in $50 and $100 notes and that the latter is “rarely seen”. They list the benefits as reduced crime and welfare fraud, increased tax revenue and a “spike” in bank deposits. The latter would see an average 4% rise in household deposits on $100 notes alone. So of course the good folk at UBS are just thinking in our interests… nothing to do with shoring up an over leveraged banking system and ultimate government control of our ‘money’…. We are reminded of some famous quotes:

“All previous attempts to base money solely on government edict or fiat have ended in inflationary panic and disaster” – Winston Churchill

“Betting against gold is the same as betting on government – He who bets on governments and government money bets against 6000 years of recorded history” – Charles De Gaulle

You have to choose between trusting the natural stability of gold and the natural stability of the honesty and intelligence of the members of the Government. And, with due respect for these gentlemen, I advise you, as long as the Capitalist system lasts, to vote for gold. – George Bernard Shaw

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Postby AinslieBullion » Thu Nov 17, 2016

Quotes Of The Week – Trump On The Markets

What a week! There was a lot going on in the world this week as markets continued to react to the Trump election. Our Weekly Wrap gives you a worldwide wrap up of the ramifications this week. It’s definitely worth a listen today.

Rather than us rabbiting on today let’s see what the ‘experts’ had to say.

Here’s our quotes of the week:

Firstly, Ray Dalio is the head of the world’s biggest hedge fund and twice voted Forbes’ Top 100 most influential people. Here’s what he had to say:

“As for the effects of this particular ideological/environmental shift, we think that there's a significant likelihood that we have made the 30-year top in bond prices. We probably have made both the secular low in inflation and the secular low in bond yields relative to inflation. When reversals of major moves (like a 30-year bull market) happen, there are many market participants who have skewed their positions (often not knowingly) to be stung and shaken out of them by the move, making the move self-reinforcing until they are shaken out.

The question will be when will this move short-circuit itself—i.e., when will the rise in nominal (and, more importantly, real) bond yields and risk premiums start hurting other asset prices. That will depend on a number of things, most importantly how the rise in inflation and growth will be accommodated”.

Jeffrey Gundlach is head of the $100 billion DoubleLine fund and who Barron’s famously called the “King of Bonds”. He also publicly predicted the Trump victory back in January. Via Reuters/Fortune:

“Trump "does not have a magic wand" to rapidly improve the economy. He [Gundlach] said federal programs take time to implement, rising mortgage rates and monthly payments are not positive for the "psyche of the middle class and broadly", and supporters of defeated Hillary Clinton are not in a mood to spend money.

"Maybe liquor sales will go up," Gundlach said on the regular investor webcast. "The Trump win is not positive for consumer spending." Gundlach also said that in the short-term, "It's way late to be selling bonds and buying stocks. Probably should be doing the opposite."

“But even though Gundlach was right about Trump, he still thinks the President-elect spells doom for the market. “The Trump win is economically negative in the near term,” Gundlach said, noting that investors are underestimating how much the “despair of Clinton supporters” will be a drag on consumer spending…..After economists falsely warned that Trump’s victory would cause a stock market crash, investors have now gotten too caught up “in this very bizarre 180 that Trump is the best thing ever for the stock market,” Gundlach said, predicting that “we’re going to see some backlash of negativity.””

For those still trying to figure out this whole fiscal stimulus / bond market thing, legendary analyst/commentator Bill Bonner puts in his usual straightforward manner:

“In the long run, an easier fiscal policy will be catastrophic. The world economy now depends on ultra-low bond yields. And that depends on ultra-low inflation rates. You can get ultra-low inflation with easy monetary policies but not with easy fiscal policies.

The Treasury market is already anticipating rising inflation. Bond prices are falling; yields are rising…exactly what you’d expect if investors were no longer worried about deflation.

When consumer price inflation starts to spike in earnest…bonds will fall hard…and all Hell will break loose.

What will the feds do?

What could they do? The responsible thing would be to raise interest rates to head off the inflation. But that would bring on the correction that they’ve worked so hard to avoid. Instead, they will do what all irresponsible governments do.

More spending…more stimulus…more inflation.

Buenos Aires, here we come!””

Finally, the man himself, President Elect Donald J Trump, from his first debate with Clinton:

“Believe me, we are in a bubble right now, and the only thing that looks good is the stock market, but if you raise interest rates even a little bit, that’s going to come crashing down. We are in a big, fat, ugly bubble.”

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Postby AinslieBullion » Sun Nov 20, 2016

Italy’s Double Edged Sword

We are now just 2 weeks out from the Italian referendum. As we reported in the Weekly Wrap on Friday the No vote is now firmly in the lead with 32 polls by 11 different pollsters since 21 October. We are now in the pre referendum poll ban so there won’t be any others. That said, after Trump people probably take them with a grain of salt anyway. The bookies however have the No at 75%... that seems pretty clear.

Prime Minister Renzi reaffirmed over the weekend that he will definitely resign should the vote on constitutional reform not get up. The reform sees more power shift to the lower Parliament, weakening the ‘checks’ of the Senate. Only a third of Italians supposedly understand what the referendum is even about. It is that fundamental shift in power that raises the double edged sword that voters, and indeed the Euro, should understand.

Should the No win and Renzi resigns that opens the door for the Anti EU and Anti Euro party, Beppe Grillo’s Five Star Movement (M5S), to take control, but would do so under the old system. Some believe the bigger risk is that Yes wins and M5S, who are ahead in the polls, would take government later and without the checks of the Senate, even if the Italian version is highly flawed. It’s a little ‘damned if you do’, ‘more damned if you don’t’. The graph below from Wikipedia collates a number of polls to show the average. Critically though it is from August and evidence shows that the Trump victory has legitimatised and emboldened the disenfranchised, anti EU and anti establishment crowd and M5S is now in front.

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As we reported in the Weekly Wrap podcast the Italian bond market is reacting badly. Whilst it is caught up in the global post Trump bond rout, it has taken that to a worse level on growing fears of the referendum outcome. Their once heralded 50 year bond has lost 14% since October adding pressure to the already fragile Italian economy.

Political upheaval is not new to Italy, after all they have seen 64 governments since the last World War. But this presents a very significant and different case. They are now part of a combined quasi government and financial system far far bigger than themselves, the EU. Should M5S come to power, and particularly if this is later with a Yes vote handing absolute power to the government, the exit of the 3rd biggest economy in the EU would see the whole house of cards come down.

Oh, and did we mention Marine Le Pen is now ahead in the French polls and Merkel confirmed over the weekend she will run again in September….?

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Postby AinslieBullion » Mon Nov 21, 2016

Irrational Exuberance

Last night the S&P500, Dow Jones and NASDAQ hit simultaneous all-time highs for the first time since 1999. Here’s a graph of what happened soon after last time:

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There are a couple of takeaways from this graph. Firstly when you start to hear continued calls of new highs you can feel like you are missing out, especially as it coincides with falling precious metals prices. The temptation is to jump in to get that extra growth you are clearly missing out on. But it’s the second glaring takeaway from this graph that is too often missed. In chasing that extra few percent in a rallying market you risk losing 50% or more (the NASDAQ plummeted nearly 80%) of your wealth. In the ‘down the escalator, up the stairs’ playbook, you then need to make 100% on what’s left to get back to where you started and that can take many years.

Since the GFC the US sharemarket has pretty much mirrored the profile of monetary stimulus injections. US Fed prints money (QE), market goes up; US Fed stops, market goes down or sideways. Here’s a graph from tonight’s presentation showing exactly that.

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So what is fuelling this current sharemarket rally? The PROMISE of more stimulus. This time however it is not the apolitical choice of the US Fed to print money and keep interest rates near zero (monetary stimulus), it’s the political promise of Mr Trump to unleash fiscal stimulus in the form of infrastructure spending and lower taxes. The key distinction here is the word political. The US Fed acts independent of political influence (in theory at least) whereas Trump has yet to get the very thing driving this market through Congress. As Reagan found out, that is not very easy. The thing is, Reagan didn’t have any of the massive fiscal roadblocks that Trump has to overcome. We will discuss that in more detail tomorrow.

The 2 charts above tell a tail of a market rally based on hope of stimulus and irrational exuberance ignoring valuation fundamentals and history. As Goldman Sachs pointed out yesterday:

"Donald Trump will take office next January in what will be the 91st month of the current expansion—the fourth longest in US history"

But it’s probably different this time yeah?

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Postby AinslieBullion » Tue Nov 22, 2016

Counting The Trump Chickens

Yesterday we spoke to the surging sharemarkets in the wake of the Trump victory.

So why did we call it irrational exuberance? Well it looks like the market is counting its chickens before they hatch.

For a start the market is pricing in fiscal stimulus that hasn’t even been approved yet. It also appears to be comparing this to ‘Reaganomics’ without comparing the two eras. When Reagan came into power US government debt was just 25% of GDP, interest rates were sky high, the 10 year Treasury bond yielded 12.7%, inflation was 13.6%, and they were enjoying a bull market. Trump inherits government debt over 76% of GDP and an eye watering $19.6 trillion, interest rates are at record lows near zero, 10 year US Treasuries were just 1.7% (and now already 2.3%), inflation struggling to make the Fed’s target of 2%, and the market showing signs of wobbles (though now surging…). Just months after Reagan took office the US entered a recession and shares fell 22% after a Trump like 7% surge on his election to the end of November. The talking heads discount that happening next year but many more objectively think it’s a real possibility, especially if the Fed hike in December.

People forget that some of what Reagan wanted to do was blocked by Congress and seem to forget the GOP are hardly in love with Trump. Beliefs that somehow a Republican Congress (in both houses) will rubber stamp a Trump fiscal package that proposes adding $5 trillion to a $20 trillion debt pile they have already pushed Obama back on, seems a little presumptuous at best.

This week US Fed vice chair Fischer issued a clear warning to the new administration that there is “not a lot of room to increase the US deficit without adverse consequences down the road”. i.e. at a time when the US Fed actually really probably might raise rates in December, that 0.25% will cost the government an extra $50 billion in annual interest and add to debt stress already evident throughout the market. This aint 1980…

A lot of this markets action is on the belief these policies will bring inflation (you will read about ‘Trumpflation’ more and more), something that until only recently monetary stimulus has been unable to achieve. Inflation is the only tool left to try and whittle away that debt pile. However, high inflation without strong growth leads to that bogey man, stagflation (if you think gold likes inflation, it simply LOVES stagflation). Whilst the fiscal stimulus proposed will bolster segments of the US economy, the accompanying higher USD together with immigration controls could see significant adverse pressures in many others. This at a time when the growth starting position is just 1.7% GDP.

In short there is much water to flow under the yet to be constructed Trump bridge and this market reaction has all the hallmarks of a ‘buy the rumour, sell the fact’ set up. Stay tuned, don’t count your chickens, and stay balanced.

Speaking of balance, last night we had ‘The Future Proof Portfolio’ seminar at the State Library Queensland. The feedback from attendees was fantastic thanks. Simon Gabbie gave us great insight into how to more effectively invest in shares, Matthew Gross provided an unbiased and insightful lesson in property investment and yours truly presented on gold and silver bullion. If you couldn’t make it and want to learn more please don’t hesitate to contact us.

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Postby AinslieBullion » Wed Nov 23, 2016

Gold – History Repeating

Last night gold broke down through the support line of USD1200, currently sitting at USD1188/oz after hitting USD1181 at the low. This can be a little unsettling for some so it is worth taking a deep breath and looking objectively at the bigger picture.

For a start the price action last night was largely off a combination of US Fed minutes from the November meeting leading the market to 100% expectations of a rate rise on the 13th December. This was bolstered by a better than expected Durable Goods Orders print (though we will discuss that is flawed in tomorrow’s Weekly Wrap). What does this mean? Well it reinforces the ‘everything is awesome’ narrative and saw shares continue to rally and gold and bonds sold off. The chart below shows what has happened since that November Fed meeting:

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Does this story seem familiar though? That’s right, it’s a repeat of this time last year. On the expectation and then reality of the US Fed raising rates for the first time in 9 years gold hit a low of just USD1,054 and the S&P500 at 2,100 after 1,884 just a couple of months before. But it’s what happened afterwards that may be relevant. Shares crashed back to 1859 in January and gold jumped over USD1200, and kept going up to $1357/oz along with US shares in a rare positive correlation. The more normal negative correlation between gold and shares is back in and that is potentially good news. We showed the following graph at our seminar on Tuesday night. Note the spike in negative correlation during crashes:

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As we wrote the other day an increase of just 0.25% in December adds $50b to the US government’s interest bill but that of course is minor compared to the broader market. Reality may hit home.

Keep in mind too that nearly every crash in history followed an interest rate hike (that came too late).

Finally, remember that even after last night gold is up 11% for the year and silver up 17%. The S&P500 is up 7.9% and the All Ords is up just 3.8%... As we wrote yesterday, much of the hype in the sharemarket is hope, not reality, based.

Now is not the time to panic. Contrarians take note…

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Postby AinslieBullion » Thu Nov 24, 2016

Quote of the Week - Hathaway

John Hathaway of Tocqueville Asset Management, as you know, is one of our favourite analysts as he presents a balanced view. The following are excerpts from a piece he wrote this week.

“In our view, the systemic risks that existed prior to the presidential election have not suddenly vanished. Most important among these is a massive bond-market bubble. Close behind, equity valuations remain at historically extreme levels. How the new administration deals with these vexing issues, assuming that it even begins to comprehend them, is a complete unknown. Any unwinding promises to be precarious, full of pitfalls and setbacks, all of which are reason enough to hedge bets on a trouble-free return to robust economic growth with exposure to gold….

And according to David Rosenberg of Gluskin Sheff, “There is no bid in the Treasury market and the price chart looks like Bank stocks in the summer and fall of 2008. Globally, we have seen (post-election) $1.2 trillion of bond value wiped out.” Bonds are weak based on expectations of rising deficit spending and inflation. Higher bond yields would seem to undermine the idea of higher stock prices, especially with valuations near all- time highs, perhaps second only to levels seen during the dot-com bubble.

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Postby AinslieBullion » Sun Nov 27, 2016

Indian Gold Ban Put to Bed

A couple of weeks back we reported on India banning large denomination notes (here). Whilst generally originally being accepted by most voters as it was ostensibly about stamping out ‘black money’ the move is starting to cause more widespread panic in India and some of the more hysterical conclusions even globally. As reportedly 60% of notes have not been handed in the government has been upping the ante to move things along, now with a shorter deadline to get them into a bank and the threat of a penalty tax on deposits considered too large to be legitimate.

The more concerning rumours were around gold being banned for citizens. The theory is that the black money is just being converted to gold. That this rumour emanates from the world’s second biggest consumer certainly caused consternation in markets. When asked we have maintained a very strong view this would never happen given Indian’s very deep seeded and cultural need to hold gold. The uproar and cost of political capital would be devastating. Indeed a top finance ministry source has just categorically put it to rest saying:

"There is no such proposal before the government on restricting domestic gold holding,"

The Indian government’s battle with gold is nothing new. In 2013 we saw layers of restrictions introduced to curtail imports as it was worsening the Indian balance of trade (gold is second to only oil as an import). Modi has actually wound some of this back since taking power and given his political opposition has now turned against him on the cash ban there is little chance he would change tact.

The other thing that we are now seeing too is rising premiums paid over the spot price which in itself is a positive sign of surging gold demand.

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Postby AinslieBullion » Mon Nov 28, 2016

‘Risk on’ Returns – Italian Banks ‘Risk Failing’

There was a somewhat predictable change in mood in markets overnight as the so called Trump Trade was overcome by some global realities. Shares and the USD came off and bonds and gold rallied all around the world as fears mount on the outcome of Italy’s referendum. With the No vote looking certain to be the victor, attention again turned to Italy’s banks as the most immediate victims. The Financial Times reported that eight Italian banks were at risk of failing on refinancing concerns that could evaporate with a No vote. Italian bond yields spiked further and the Risk Premium, which is the difference between their 10 year yields and the 10 year Bund (German bonds) hit a 2 ½ year high.

We reported on the Euro banking crisis most recently here (with links to previous) but the core issue with Italy’s banks is non performing (bad) loans (NPL’s) at a time of inordinate banking stress courtesy of EU negative interest rates and a stagnant economy. To clearly quantify this for you, they have $600 billion of NPL’s but only $375 billion of equity on their books. They have been unable to fix this with capital raisings and the EU rules say the Italian government cannot ‘bail out’ the banks. That leaves bail in’s which is political suicide given Italy’s extraordinarily large number of domestic ‘mum & dad’ depositors and bank bond holders in Italy.

It also of course would see enormous pressure to bear on other EU banks. The graph below clearly shows the ‘everything is awesome’ Trump jump in EU banking shares is now over and heading south.

A No vote has no immediately obvious outcome, with many scenarios that could play out. Uncertainty could reign for some time yet which is just as toxic for these precarious banks. And then we have the French elections in April….

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Postby AinslieBullion » Tue Nov 29, 2016

GFC Redux – Here We Go Again…

We were struck by a Tweet yesterday by The National Property Research Co. (who co-presented with us at The Future Proof Portfolio seminar recently) quoting the definition of stupidity as ‘Knowing the truth, seeing the truth, but still believing the lies’. The context for them was the apartment market and we will go through that tomorrow, but let’s look at shares first.

Vern Gowdie of The Daily Reckoning in his article on Saturday included the following:

“The US share market is in dangerous territory. Each new high makes the market cheerleaders joyous, but it should make prudent investors nervous.

This table compares a number of valuation and economic data sets between the previous market high in September 2007 (and we know what followed that) and now.

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Source: TCW

To quote from the report:

‘It’s back to the future — again. Leverage has returned, most notably in the corporate sector where debt metrics have not just round-tripped, but are now in excess of the levels experienced before the Great Recession.’

Lessons have not been learned. The addiction to debt is even greater than it was in 2007.”

Too often we are not so much ‘stupid’ as lead astray by people supposedly more learned than ourselves and whose message reinforces our investment bias or, quite simply, what we hope to be true. Vern Gowdie spends most of that article deriding the vested interest of most financial analysts and advisors who never tell you shares are looking over valued.

Whilst you may think we spruik a similar vested interest we are at lengths to remind you we spruik nothing more than balance; reminding you that a financial crash is a certainty and that gold is historically highly uncorrelated to financial assets. That can make gold an excellent hedge, and indeed a profitable investment, with such an occurrence.

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Postby AinslieBullion » Wed Nov 30, 2016

GFC Redux – housing too?

Yesterday we showed the similarities between US financial markets now and 2007, so let’s look at property today. You will recall that it was a US property crash that triggered the GFC. So how are things looking now?

Marc Hanson of property market specialists M Hanson Advisors recently published this collection of charts and commentary:

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As Hanson says: “It’s never different this time. Easy/cheap/deep credit & liquidity has found its way to real estate yet again. Bubbles are bubbles are bubbles. And as these core housing markets hit a wall they will take the rest of the nation with them; bubbles and busts don’t happen in “isolation”.”

Just as we are seeing in Australia (we will discuss more tomorrow), it is getting harder to afford housing as well:

“Houses have NEVER BEEN MORE EXPENSIVE to end-user, mortgage-needing shelter buyers. The recent rate surge crushed what little affordability remained in US housing. It now it requires 45% more income to buy the average-priced house than just four years ago, as incomes have not kept pace it goes without saying.”

The following graph from the OECD published earlier this year reinforces how US house prices have grown faster than wages since 2010. You will note Australia has been far worse and our friends across the ditch top the list.

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The elephant now in the room however is the impacts of rising bond yields and soon to be official interest rates as well. Mortgage payment stress is coming as increases in servicing interest amid stalled wage growth bites. The other victim could be retail as consumers are less likely to fund purchases by simply drawing from their (to date) ‘cheap’ home loan. Indeed, as the Wall Street Journal reported off the back of a Mortgage Bankers Association report:

“The MBA estimates refinances will fall 46% next year, to $484 billion, which will hurt Americans’ ability to free up cash by reducing the cost of their monthly mortgages.”

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Tomorrow we discuss property in the Aussie context, hot off the heels of yesterday’s Building Approvals plunge per below:

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