Federal Reserve

The Federal Reserve concluded the October FOMC meeting by announcing that there would be no rate hike. With rates remaining low, investors should be happy. However, stocks that should be climbing, like Amazon (AMZN) and Alphabet Inc. (GOOG + GOOGL), are having a hard time in the market. Today, we’ll discuss why these stocks are having a hard time and what we can expect to see from the US market as a whole moving forward.

Why Stocks Are Having An Adverse Reaction To The News

Low interest rates are generally a great thing for investors. In fact, the historically low Federal Reserve interest rate is largely what has fueled the bull market that we’ve seen for so many years. This is because when interest rates are low, consumers spend less money on interest, leaving more money available for spending on products and services. This lends a hand to corporate earnings and takes some of the risk out of investing. It’s not the fact that interest rates are low that’s putting resistance on the market; instead, it’s why interest rates are remaining low that’s concerning investors.

The reality here is that interest rates remain low because the Federal Reserve doesn’t believe that the US economy is strong enough to handle the impact of higher interest rates in a positive way. This becomes concerning for investors because under negative economic conditions, regardless of interest rates, consumers spend less money. Here are the economic factors that are causing concern:

  • Consumer Spending – Consumer spending accounts for a large part of the United States gross domestic product, and throughout 2015 consumer spending has been growing at a snail’s pace. Not only does this weigh heavy on the economy, it weighs heavy on corporate earnings and causes quite a bit of concern for investors.
  • Jobs – US jobs growth was doing relatively well at the beginning of the year. However, this figure has started to plummet recently. In the United States, positive jobs growth is considered to be anything over 200,000 jobs per month. In the months of August and September, the US missed this figure by a wide margin, insinuating that corporate sales are declining and the economy is struggling.
  • New Home Sales – When consumers are happy with the state of the economy, we tend to see strong growth in new home sales. After all, consumers aren’t going to make such a large decision if they are not absolutely positive that they will be able to maintain the obligations associated with the decision for the long run. Unfortunately, new home sales in the United States have begun to fall flat! This creates even more concern for investors.

While we are facing an economic downturn in the United States, investors are also concerned with global economic growth. The reality is that many companies in the United States, including Coca Cola (KO), make the vast majority of their money over seas. With dwindling economic conditions abroad, there’s no doubt that the economy in the United States will feel the pain as well. Unfortunately, conditions in China, Europe, Japan, Brazil, and several other regions simply don’t seem to be getting better any time soon.

What We Can Expect To See Moving Forward

Unfortunately, I’m not expecting to see much positivity out of the market throughout the rest of the year. While there will be good days, based on the economic data mentioned above, I believe that there will be more bad days in the market than there will be good. So, hold onto your hats, it’s going to be a bumpy ride.

What Do You Think?

Where do you think US markets are headed and why? Let us know in the comments below!

[Image Courtesy of Wikipedia]

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Would you pay $400,000 for a single helmet?  Of course you wouldn’t – but that is precisely what the U.S. government is doing.  Just the helmet for the pilot of the new F-35 Lightning II is going to cost taxpayers nearly half a million dollars.  And since we are going to need 2,400 of those helmets, the total bill is going to end up approaching a billion dollars.  But what is a billion dollars between friends, eh?

Sadly, our military has a very long history of wasting money like this.  Back in the 1980s, the “six hundred dollar toilet seat” became quite famous.  Average Americans were absolutely outraged that the government was wasting so much of our hard-earned money, and promises were made that things would change.  Here is more on what transpired back then from Wikipedia

Beginning in 1981, President Ronald Reagan began an expansion in the size and capabilities of the United States armed forces, which entailed major new expenditures on weapons procurement. By the mid-1980s, this spending became a scandal when the Project On Government Oversight reported that the Pentagon had vastly overpaid for a wide variety of items, most notoriously paying $435 for a hammer, $600 for a toilet seat, and $7,000 for a coffee pot.

But of course things haven’t changed, have they?

Instead, they have gotten even worse.

I have no idea how a single helmet could be worth $400,000.

Does it grant magic wishes?

Does it turn the user into a mutant superhero?

Here is an excerpt from the USA Today article that is reporting on this super expensive helmet…

When the joint strike fighter, the F-35 Lightning II, finally takes to the skies on its first official mission, it will be one of the most advanced and one of the most expensive planes ever.

And the pilots flying the aircraft will be wearing the most advanced and most expensive helmet ever.

The helmet will give pilots quicker access to the information they need to see and has special cameras to “see” through the bottom of the plane. But it will cost an estimated $400,000 per helmet — more than four times as much as the Air Force paid for head wear for other aircraft such as the F-16.

Is that why the helmet is so expensive?

It can help the pilot see through the bottom of the plane?


If you just go down to your local Ford dealer they will be glad to show you lots of new trucks that can “see behind them”, and the best truck on the lot only costs about $50,000.

Or better yet, if F-35 pilots really want to see what is going on underneath them they should just slap a window on the bottom of the plane.

Of course I am just being facetious, but I think that you get the point.

We all work really hard for our money, and it is quite disheartening to watch the government waste it so flippantly.

And this week the Republicans in Congress have agreed to suspend the debt ceiling for the rest of the time that Barack Obama is in the White House.  In one of his final acts as House Speaker, John Boehner has given Barack Obama a wonderful parting gift

Outgoing House Speaker John Boehner presented his newly forged budget deal to his Republican colleagues at a private meeting this morning, outlining his plan to avert another government shutdown and raise the debt ceiling as a parting gift to his successor.

The deal would increase federal spending by $80 billion over two years and raise the federal borrowing limit through 2017. The 144-page bill, which was released Monday shortly before midnight, was welcomed by Democrats who have been pushing for budget negotiations all year.

Thank you John Boehner for selling us all down the river time after time.  You have done a great disservice to our nation.

This new budget agreement is actually going to significantly increase spending.  Here are some more of the details from the New York Times

For this fiscal year alone, the deal would add $50 billion in spending, divided equally between defense and domestic programs, as well as $16 billion for emergency war spending, half for the military, half for the State Department. Together, that represents an increase of $66 billion in the spending limits for 2016, not far off the $70 billion increase Mr. Obama requested in his budget.

Personally, I can’t wait to see how much of that 16 billion dollars is for lethal military aid for Ukraine.  Many of you that have been following this closely know exactly what I am talking about.

Of course this budget deal still must be approved by Congress, but that is just a formality at this point.  Many “conservatives” in Congress are voicing displeasure with this deal, but is anyone listening?  The following comes from Business Insider

Conservatives moved quickly to revolt over a blockbuster budget deal reached among congressional leaders and the White House early Tuesday morning, calling it a “betrayal” days before US House of Representatives Speaker John Boehner (R-Ohio) is set to leave Congress.

“This budget deal is a betrayal of all the fiscally conservative promises Republicans made in the last election. It is emblematic of why working-class Americans are angry with congressional Republicans,” said prominent right-leaning economist Stephen Moore, in a statement released by the conservative group FreedomWorks.

The Tea Party is supposed to be standing against the tax and spend agenda of the Democrats and the establishment Republicans, but enthusiasm for the Tea Party seems to be subsiding.  In fact, according to Gallup support for the Tea Party has hit an all-time low of 17 percent.

So we will just continue to witness business as usual in D.C. until disaster strikes.  At this point it is expected that somewhere around 100 Republicans in the House will support this deal, and with all of the Democrats on board that should be enough to get it to pass.

Since Boehner reached his first “budget deal” with Barack Obama back in 2011, the U.S. national debt has increased  by $3,970,023,503,348.07.  It is a betrayal of a magnitude that is difficult to put into words.

Overall, the federal government has been stealing 100 million dollars from future generations of Americans every single hour of every single day since Barack Obama first entered the White House.

When I tell most people that, I can tell that they don’t really believe me, and truthfully that statistic does sound completely and utterly ridiculous.

But it is true.

When you multiply 100,000,000 by 24 by 365 you get 876,000,000,000.  And if you multiply that number by 7 (the number of years that Obama has “served” so far rounding up), you get 6.132 trillion.

Well, according to the U.S. national debt has risen by more than seven and a half trillion dollars since Barack Obama was first inaugurated…

Since Obama took office, the total debt of the federal government has already increased by $7,525,761,885,381.30—rising from $10,626,877,048,913.08 on Jan. 20, 2009 to $18,152,638,934,294.38 on Oct. 23, 2015.

When you break that number down, the amount of new debt added under Obama comes to $64,134.73 per household

The $7,525,761,885,381.30 that the total debt has increased so far during the Obama presidency equals $64,134.73 for each of the 117,343,000 households that were in the United States as of June.

Are you ready to cough up your share?

The truth is that it is already mathematically impossible for the U.S. government to pay off this debt.

What our politicians are attempting to do now is to keep borrowing money and extending the game for as long as they possibly can.

If that sounds like a really bad plan to you, that is because it is a really bad plan.

What our leaders have done to future generations of Americans is beyond criminal.  But the American people have come to accept this as “normal”, and only a very small percentage of us are still complaining about it.

So the jokers in Washington will just keep on doing what they are doing until it all comes tumbling down all around them.  By then, it will be far too late to do anything about it.

Source: The U.S. Government Is Spending 400,000 Dollars On A Single Helmet

Debt Ceiling

Gold and silver spot prices lost ground to a strengthening U.S. dollar last week. The dollar enjoyed its best week in 5 months, as other major world currencies weakened. European central bankers are once again hinting at more stimulus, and the Chinese government cut interest rates for the 6th time in the past year.


Federal Reserve officials meet on Wednesday, and almost no one expects them to change interest rates. Because of the overwhelming build-up of government and private debt, the economy appears totally unable to withstand higher interest rates.

But expect the usual parsing of officials’ every utterance for clues. It’s already been over nine years since the Fed has raised rates even a quarter point, so don’t hold your breath.

Meanwhile, the Treasury Department declared a debt ceiling deadline of November 3rd. Outgoing House Speaker John Boehner will try to push through a debt increase before his scheduled departure on Friday (when he’ll likely hand over the gavel to Paul Ryan). If Congress can’t come to an agreement this week, markets could get rattled on the looming possibility of a U.S. default.

It’s a remote possibility, though. Insiders say the Treasury and Federal Reserve could take additional emergency actions to pay the government’s bills well past the Obama administration’s arbitrary cut-off date.351321

As former Federal Reserve chairman Alan Greenspan said:

“The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default. We can guarantee cash benefits as far out and whatever size you like but we cannot guarantee their purchasing power.”

In other words, the real threat to investors is inflation, not default.

Meanwhile, stock investors must think better looking economic data is coming, as they have been buying. We’ll see if the latest data matches expectations.

Silver Premiums Have Fallen, but the Short-Term Outlook Is Uncertain

With silver prices rising almost 10%, retail buying of physical silver has lessened over the past three weeks – down from the frenetic pace over the past 4 months. That’s allowed premiums on many products to fall toward normal levels. Production backlogs and delivery delays have also been dissipating.

Ask premiums for the Maple Leaf, American Eagle, and Pre-1965 90% silver U.S. coins – the products that saw the sharpest hikes through the summer – are now leading the way down. The respite will help mints and refiners catch up. Dealers are taking the opportunity to replenish inventories.

One fly in the ointment is the upcoming annual halt in deliveries of silver American Eagles. The U.S. Mint is expected to stop production of 2015 dated coins sometime between early and mid-December and change out the dies for the 2016 date. (While private mints only require a few hours to make a switch, the U.S. government requires a few weeks.) So the market can expect a month of no deliveries until a resumption in mid January.


If dealers cannot build adequate inventory to supply the market during the Mint’s hiatus, we will see upward pressure on premiums once again. January demand for the new year’s coin is also traditionally among the strongest months of the year. That may also push premiums higher.

This adds up to an uncertain outlook for premiums in the short term. Much will depend on what happens to retail demand in the coming months. The extraordinary demand from June through September was based largely on safe-haven buying.

The crisis in Greece has shuffled out of the headlines. Meanwhile, the combination of additional stimulus and the threat of draconian punishment for anyone selling Chinese stocks seems to have stayed the collapse of share prices there.

U.S. stock markets are also recovering from their late September lows. These signals indicate that complacency and the narrative of economic recovery is creeping back into markets. There is no one better at pushing a narrative than officials in Washington, unless it is Wall Street. Their problem, as always, is supporting it with actual facts.

Spot prices will also be a significant factor in bullion demand, of course. Prices have risen well above the recent lows, tempering some interest among bargain hunters. The markets also have some convincing to do before investors trust that the recent recovery actually represents a reversal and the start of a new uptrend.

clint-siegnerClint Siegner is a Director at Money Metals Exchange, the national precious metals company named 2015 “Dealer of the Year” in the United States by an independent global ratings group. A graduate of Linfield College in Oregon, Siegner puts his experience in business management along with his passion for personal liberty, limited government, and honest money into the development of Money Metals’ brand and reach. This includes writing extensively on the bullion markets and their intersection with policy and world affairs.

[Image Courtesy of Wand]

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Chinese economy

It is no secret that the Chinese economy is struggling. In fact, this topic is being thoroughly discussed and debated just about everywhere you look across the finance community. That’s because the Chinese economy plays a crucial role in economic growth as well as market conditions around the world. Recently, the People’s Bank of China announced that it would be cutting interest rates further and making another change in an attempt to stimulate the country’s economy. Today, we’ll talk about why China plays such a crucial role in worldwide market conditions, the new stimulus the country is putting in place and what we can expect to see moving forward.

Why China’s Economy Plays Such A Key Role Worldwide

Do you remember just a few months back when the Chinese market crashed? Do you remember the effect that it had on worldwide markets? I’m often asked why this crash and the Chinese economy play such a big role in market conditions around the world. The answer is relatively simple. In today’s day in age, we live in a world with worldwide trade. This means that no matter what country you’re in, chances are that there are companies that sell products to consumers in other nations, investors in other nations likely invest in your market, and you likely invest in markets abroad. With that said, China is a huge country and one of the largest by population. This population isn’t just a group of potential prospects for Chinese businesses, they are a group of potential prospects for businesses worldwide. With devastating economic conditions in China, companies abroad can’t expect to sell as many products and services in the region. So, in that respect, economic conditions in China weigh heavy on market conditions elsewhere.

China’s Most Recent Stimulus

For the sixth time in the past year, China has made the decision to cut interest rates. This time, the People’s Bank of China has decided to cut both its lending and deposit rates by 0.25%. This brings the lending rate in china down to 4.35% and the deposit rate down to 1.5%. Another key change is that the country is requiring banks to have even less cash on hand. Here’s how the changes help the economy…

  • Lower Rates – With lower interest rates, Chinese consumers will spend less money to borrow money. Because less is being spent on interest, these consumers will have more money available to spend elsewhere.
  • Low Cash Reserve Requirements – When banks are required to hold onto less money, they have the ability to offer more money for loans. More loans mean that consumers have more money to spend, also helping to stimulate the economy.

What We Can Expect To See Moving Forward

While lower interest rates and less stringent bank requirements are good for the Chinese economy, I’m still not convinced that this will be enough to get the momentum moving in the right direction. As mentioned above, China has cut rates six times over the past year. However, each of their rate cuts have been relatively modest. While this will give consumers more money to spend and banks more lending power, I think that a more drastic rate cut would be necessary to see any momentous movement in the right direction. Nonetheless, only time will tell if this will be enough to save the struggling Chinese economy.

What Do You Think?

Do you think this stimulus plan will be enough to save the Chinese economy? Let us know your opinion in the comments below!

[Image Courtesy of The Telegraph]


“The clear and present danger is, instead, that Europe will turn Japanese: that it will slip inexorably into deflation, that by the time the central bankers finally decide to loosen up it will be too late.” Paul Krugman, “The Euro: Beware of What you Wish for”, Fortune (1998)

Most central bank policy makers, investors, and analysts around the world today are gripped by the worry of declining growth rates, dwindling international commodity prices, high unemployment, and other macroeconomic figures.

However, not many have given much consideration to one economic factor that has the potential to disrupt global economies, shut down economic activities, and become a catalyst for a worldwide depression.
We are talking about ‘deflation’ that if not tamed, could bring global economies to their knees creating a worldwide chaos never seen before in scale or length.

Paul Krugman, the renowned American economist and distinguished Professor of Economics at the Graduate Center of the City University of New York, had forewarned about the threat of deflation for European economies. He suggested that the European Central Bank policy makers need to look into the situation now before it’s too late for them to do anything about the situation.

The Eurozone today has well entered into a deflationary phase with other major economies including the US, UK, and Japan slowly heading into the same direction. In Japan and many European economies such Greece, Spain, Bulgaria, Poland, and Sweden, prices have been decreasing gradually for the past decade. This has created a number of problems for the central bank policy makers as they try to find out ways to diffuse the negative effects of deflation such as a slump in economic activity, drop in corporate incomes, reduced wages, and many other problems.
What the World can Learn from Japan’s Lost Decade (1990-2000)

The impact of the ongoing global deflationary trends on economies can be gauged by what Japan had experienced during the period between 1990 – 2000, which is also known as Japan’s lost decade. The collapse of the asset bubble in 1991 heralded a new period of low growth and depressed economic activity. The factors that played a part in Japan’s lost decade include availability of credit, unsustainable level of speculation, and low rates of interest.

When the government realized the situation, it took steps that made credit much more difficult to obtain which in turn led to a halt in the economic expansion activity during the 1990s.

Japan was fortunate to come out of the situation unhurt and without experiencing a depression. However, the effects of that period are being felt even today as corporations feel threatened of another deflationary spiral that could eat away at their profits. The situation analysts feel is about repeat in the Western economies, and that includes the US.

Deflationary Trend Could Threaten the Fragile US Economy

Inflation rates in the US is hovering near zero percent level for the past year. The Personal Consumption Expenditure Price Index has stayed well below the Fed’s 2% target rate since March 2012. Although, the US economy hasn’t entered into a deflationary stage at the moment, the continuous low level inflation despite the fed’s rate being at near zero levels for about a decade has increased the possibility that the US economy could also plunge into a deflationary stage similar to that of the Euro zone.

The deflationary trend could turn out to be a big concern for policy makers and investors that may well lead to a global depression. The lingering memories of the 2008 financial crises that had literally rocked the world are still fresh in the minds of most people. That is why it’s important for central banks to implement policies to fight the debilitating effects of deflation.

But, the question is how can the central banks combat the current or looming deflation trend?
The Japan’s lost decade has taught us that trying to contain the possibility of deflation and its negative effects can be difficult for policy makers. Economists have suggested various ways in which the debilitating effects of deflation can be countered.

However, one policy that central banks can use to fight off deflation is what economists call a Negative Interest Rate Policy (NIRP).

NIRP simply refers to refers to a central bank monetary measure where the interest rates are set at a negative value. The policy is implemented to encourage spending, investment, and lending as the savings in the bank incur expenses for the holders. On October 13ths I wrote in detail about NIRP. Then on October 23rd Ron Insana on CNBC talk about it here.

This unconventional policy manipulates the tradeoff between loans and reserves. The end goal of the policy is to prevent banks from leaving the reserves idle and the consumers from hoarding money, which is one of the main causes of deflation, which leads to dampened economic output, decreased demand of goods, increased unemployment, and economic slowdown.

Central banks around the world can use this expansionary policy to combat deflationary trends and boost the economy. Implementing a NIRP policy will force banks to charge their customers for holding the money, instead of paying them for depositing their money into the account. It will also encourage banks to lend money in the accounts to cover up the costs of negative rates.

Has the Negative Rates Policy Been Implemented in the Past?

Despite not being well known or publicized in the media, NIRP has been implemented successfully in the past to combat deflation. The classic example can be given of the Swiss Central Bank that implemented the policy in early 1970s to counter the effects of deflation and also increase currency value.

Most recently, central banks in Denmark and Sweden had also successfully implemented NIRP in their respective countries in 2012 and 2010 respectively. Moreover, the European Central Bank implemented the NIRP last year to curb deflationary trend in the Eurozone.

In theory, manipulating rates through NIRP reduces borrowing costs for the individuals and companies. It results in increased demand for loans that boosts consumer spending and business investment activity. Finance is all about making tradeoffs and decisions. Negative rates will make the decision to leave reserve idle less attractive for investors and financial institutions. Although, the central bank’s policy directly affects the private and commercial financial institutions, they are more likely to pass the burden to the consumers.

This cost of hoarding money will be too much for consumers due to which they will invest their money or increase their spending leading to circulation of money in the economy, which leads to increase in corporate profits and individual wages, and boosts employment levels. In essence, the NIRP policy will combat deflation and thereby prevent the potential of global depression knocking at the door once more.

Final Remarks

The possibility of deflation causing another global recession is very real. Central policy makers around the world should realize that deflation has become a global problem that requires instant action. In the past, even the most efficient and robust economies used to struggle in taming inflation rates. In the coming months, most economies around the world, including the US, will have difficulty curbing the effects of deflation.

The fact is that central bank policy makers have largely ignored the possibility of deflation causing havoc in the economy similar to what happened in Japan during its “lost decade”. The quantitive easing program that is being used in the US by the Feds to boost economy is not proving effective in raising the inflation rate to its targeted levels. In fact, the inflation level is drifting even lower and is hovering dangerously close to the negative territory.

Blaming the low inflation levels on the low level of oil prices is not justified. Inflation levels were hovering at low levels well before the great plunge in commodity prices. Moreover, low level inflation rates cannot be blamed on muted wage levels. The fact is that unemployment rates have decreased both in the US and the UK in the past few years, but consumer spending has largely remained unmoved.

Taming deflation is necessary if the central banks want to avoid its debilitating effects on the economy. Policies like the Quantitive Easing program used by the Feds may allow easy access to credit, dampen exchange rate, and reduce risks of financial meltdown; but it cannot prevent the possibility of another more severe situation of deflation wreaking havoc on the economy.

The concept of NIRP may seem counter intuitive at first, but it is the only effective way of combating the deflationary trend. The world economy could sink further into a deflationary hole if no action is taken to curb the trend. And the time to start thinking about it is now. Any delay could result in a global economic meltdown that may cause deep financial difficulties for millions of people around the world.

We as employees, business owners, traders and investors are about to embark on a financial journey that couple either cripple your financial future or allow to be more wealthy than you thought possible. The key is going to that your money is position in the proper assets at the right time. Being long and short various assets like stocks, bonds, precious metals, real estate etc…

Follow me as we move through this global economic shift at:
Chris Vermeulen

Gold Price News

What gold and silver investors want to know above all is when the bull market will resume. In a very real sense, it already has resumed. Futures market prices aside, evidence abounds that a raging bull market in physical precious metals is now underway.

In the third quarter (ending September 30th), coin demand went through the roof. Mints literally couldn’t keep up with demand. The dysfunctional U.S. Mint rationed deliveries of Silver Eagles, failing to fulfill its mandate under law of keeping the market supplied. Even so, investors bought up a record 18.59 million ounces’ worth of silver Eagle coins in the past 4 months.

Steve St. Angelo of compared the 2015 Silver Eagles shortage situation with the infamous 2008 incident. He found the current shortage occurred even as the U.S. Mint produced three times as many Eagles this time around!

Extraordinary conditions in the silver market are causing the mainstream media to sit up and take notice.

As Reuters reported, “The global silver-coin market is in the grips of an unprecedented supply squeeze, forcing some mints to ration sales and step up overtime while sending U.S. buyers racing abroad to fulfill a sudden surge in demand.”

Record Demand for Coins Sends Premiums Soaring

Record demand for silver coins has driven premiums on virtually all bullion products substantially higher. Some of the biggest premium spikes are being seen on pre-1965 90% silver coins. These premium increases represent real gains in value for holders of physical silver. During periods of elevated premiums, national dealers such as Money Metals Exchange have and will pay prices up to several dollars above spot on buy-backs of most silver products from customers.

Market conditions will eventually normalize. But since this great public buying spree in physical silver was spurred by low spot prices, it may take significantly higher spot prices to lessen demand-driven shortages and backlogs. Buyers who wait for premiums to come down may, in turn, end up having to pay higher spot prices.

Market tightness is less of a problem for gold bullion products. For the most part, supply is keeping up with demand. That’s not to say that gold bullion hasn’t experienced a demand surge of its own. It definitely has. Sales of gold American Eagles surged to 397,000 ounces in the third quarter, up from 127,000 ounces for Q2.

When Will the Physical Bull Market Kick Off a Bull Market in Prices?

Will Q4 produce more explosive demand figures for gold and silver bullion? It’s possible. In the meantime, bullion investors will be looking for evidence that the bull market on the physical side is stimulating a bull market in the spot prices set by highly leveraged futures exchanges.

The price action in gold and silver futures so far this year has been disappointing – and, frankly, baffling from a fundamental standpoint. Metals prices shouldn’t be falling given what’s going on in the world. Central banks across the globe are desperately trying to stimulate weak economies. A worried Federal Reserve backed off on purported plans to raise rates.

Although industrial demand for silver is down, so is mine production (as discussed more fully below).

The falling supply and through-the-roof investment demand for physical gold and silver are more than enough to pick up the slack.

Unfortunately, while fundamentals matter to investors, they don’t matter to the traders and the large financial institutions that have cornered the gold and silver futures markets where paper metal is in ample supply. Several big banks hold outsized short positions on precious metals. The trade has worked out well for them lately, and that’s all they care about.

Shorting precious metals won’t be profitable forever. When the market for gold, silver, or any commodity gets depressed in price for an extended period, the forces of supply and demand start pressuring prices back up. The pressure may build for months before it starts showing up on the price charts.

But eventually, something will break. Artificially low prices encourage increased consumption and discourage production – a veritable recipe for higher prices at some point down the road.

To be sure, low prices for gold and silver have absolutely decimated the mining industry. That means that supplies in the months and years ahead are headed for a decline that will not be easily reversed.

In a recent interview on our Money Metals Weekly Market Wrap, mining industry analyst David Smith talked about an emerging global supply squeeze. He said, “We’re seeing a fairly substantial fall off in production, not just in one country, but in several – in Australia, in Mexico, in Peru, and even in the United States. And most recently Canada. These are very large falloffs in supply production, right at the very moment when demand is going through the roof. Those two things don’t make for lower prices. They make for higher prices…”

Keeping It Simple and Looking Long Term Will Pay Off in the End

These fundamental supply and demand forces will make for higher precious metals prices – perhaps starting in the final three months of 2015; perhaps not until a bit further out on the calendar.

Long-term investors should leave the short-term market timing to day traders. When the stealth bull market in precious metals shifts into a full-fledged bull market on the charts, those who hang on for the ride will do better than most of those who try to trade in and out. And those who own physical precious metals will have more security, and more ways to profit, than those who hold paper contracts.

[Image Courtesy of Wikipedia]

Debt Ceiling

It’s campaign season, and that means non-stop media coverage of candidate polls, quips, gaffes, tweets, emails, controversies, lies, and scandals. It all makes for a good soap opera. Unfortunately, it’s almost all irrelevant in the big picture.

The media prefer to focus on the sideshow rather than the 800-pound gorilla in the room: the looming debt crisis. Nothing that comes out of a pundit’s mouth or a Hillary Clinton email will close the $210 trillion long-term fiscal gap the U.S. now faces.

More immediately, Congress faces a likely debt ceiling debacle in the next few weeks.

First up, Members of Congress are considering full funding for Obama’s budget, and the fiscal year begins October 1st. Not surprisingly, the Obama administration’s new budget calls for spending much more than the federal government will take in. So Congress will need to raise the statutory debt limit within a few weeks in order to make that spending possible.

Disgraced Speaker Boehner Vows to Ram through More Deficit Spending before Exiting

To their credit, fiscal conservatives have just forced Speaker John Boehner (R-OH), a proponent of runaway deficit spending, to announce his resignation. But Boehner is defiantly vowing to ram through Obama’s budget and a higher debt limit before his exit in 30 days.

Meanwhile, the chief Republican in the Senate, Majority Leader Mitch McConnell, recently called efforts to rein in Obama’s spending proposals “an exercise in futility.”

If enough members of Congress raise enough of a fuss, they can still prevent a debt limit increase from going through. But the Treasury Department says the “extraordinary measures” it’s taking will only keep the government funded into November. So the threat of a default are already getting played up by the Obama administration, its apologists, and the media.

But the debt ceiling drama isn’t the debt crisis that Americans should be most concerned about. There is a near 100% chance that the government’s borrowing limit will ultimately be raised – just like it has been every other time Congress faced the specter of default. Despite some tough talk, enough politicians can be counted on to capitulate just in time to spare the country from having a government that lives strictly within its means.

Assuming the debt ceiling is eventually raised, the move will make the coming debt reckoning that much bigger. Officially, the national debt now comes in at $18.1 trillion – about equal to the nation’s total economic output for a year. Adding in all projected unfunded liabilities brings the total to about $210 trillion, as calculated by economist Lawrence Kotlikoff.

Meanwhile, demand for U.S. debt obligations appears to be on the wane. China, formerly the largest holder of U.S. government bonds, recently trimmed back its Treasury holdings by more than $140 billion. It also boosted its gold bullion reserves.

This could be the early stages of a longer-term trend that would not bode well for the bond market. “If Beijing dumped hundreds of billions of dollars of Treasuries, U.S. yields would skyrocket,” warns

Bloomberg View columnist William Pesek.

The world’s largest holder of Treasuries is now Japan. Japan itself is one of the world’s most indebted nations, making its leveraged Treasury position precarious. How much longer will the Japanese be able to continue issuing debt in yen in order to fund purchases of dollar-denominated Treasuries?

And who will be able or willing to fill in the void left by waning demand from Japan and China? Europe is broke, and most of the rest of the world’s countries are too small, too poor, and/or too indebted to be a major financier of Uncle Sam’s massive spending habits. It’s difficult to see private investors flooding into Treasuries en masse without the incentive of significantly higher real interest rates.

The Fed Is Eager to Buy Government Bonds with Negative Real Yields

The problem is that the government’s financing model depends on issuing debt with a negative real yield – which is to say, an interest rate below the actual rate of inflation. The only institution with an outsized appetite for bonds that sport negative real returns is the Federal Reserve (whose balance sheet has swelled from $1 trillion to $4.5 trillion since the 2008 financial crisis). The Fed is Uncle Sam’s lender of last resort and has been the great enabler of runaway debt spending.

Since 1971, the federal government has failed to run a balanced budget 91% of the time. It’s no mere coincidence.

As financial analyst Mike Patton tells Forbes readers, “In July 1971, President Nixon ended the right to convert U.S. currency to gold and caused what became known as the ‘Nixon Shock.’ Without a gold standard, there was nothing to back the dollar, and the door was opened for increased Congressional spending.”

Absent a return to sound money and a gold standard or some other form of independent, objective restraint on Congress and the central bank, there’s little reason to believe a debt crisis can be averted. The temptation to paper over excess spending with excess currency creation is simply too great.

As the debt grows and the currency supply grows along with it – both at higher rates than the rate of economic growth – the debt crisis will likely morph into an epic inflation crisis. Prepare accordingly.

[Image Courtesy of Outside The Beltway]

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The odds for a Fed rate hike are falling like a stone, or so it appears based on the implied inflation forecast via the yield spread on nominal less inflation-indexed Treasuries. The slide is especially pronounced for 10-year maturities, which are now pricing future US inflation at the lowest level since the end of the last recession in 2009 (based on daily data from as of Sep. 28). The accuracy of the Treasury market’s inflation projections are questionable, as always. Nonetheless, it’s clear that the crowd’s managing expectations down on the outlook for inflation.

Economist Scott Sumner advises that the recent slide in inflation expectations “is reaching frightening proportions.” As a result, “the case for tightening is getting weaker and weaker,” writes the Bentley University professor.


New York Fed President Bill Dudley argued the opposite yesterday, telling The Wall Street Journal that the first round of monetary tightening is still on track for later this year. “If the economy continues on the same trajectory it’s on… and everything else suggests that’s likely to continue… then there is a pretty strong case for lifting off” before the end of this year, he said.

Maybe, although the prospect of higher rates looks dodgy while the Treasury market’s inflation outlook is plunging. “The break-even rate [for inflation] declined considerably yesterday,” noted Kei Katayama at Daiwa SB Investments in Tokyo via Bloomberg. “At the same time, the Fed is trying to calm down the market, saying the US economy is healthy.”

What might resolve the conflict? Economic data, of course. The Treasury market’s latest move looks excessive when viewed through the prism of yesterday’s upbeat August report on personal income and spending.

But for the moment Mr. Market’s effectively forecasting that the economic numbers will deteriorate going forward. The stock market’s on board with a bearish view–the S&P 500 fell a hefty 2.5% yesterday, leaving the benchmark close to its lowest level in nearly a year.

The crowd’s assumption that more macro trouble is coming faces a stress test in tomorrow’s ADP estimate of US private payrolls in September–the first major release of hard economic data for this month. In contrast with the Treasury’s market’s dark outlook (aided and abetted by yesterday’s rout in stocks), economists are looking for a decent if unspectacular increase in the number of jobs at American companies.’s consensus forecast sees private payrolls rising 190,000 in September, matching the previous monthly gain. If the guesstimate holds up, the news will dull the edge in the Treasury market’s dark assumptions about future inflation. A substantial disappointment in the ADP report, on the other hand, will likely confirm the worst fears of the bears.

Source: Treasury Market’s Inflation Expectations Tumble

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The Federal Reserve may or may not raise interest rates today—the mystery will be solved when today’s policy announcement hits the streets at 2:00 pm eastern. Meanwhile, what’s the case for squeezing liquidity, if only slightly? US economic growth, after all, has been sluggish lately, which inspires Goldman Sachs CEO Lloyd Blankfein (among others) to recommend that the central bank delay the first hike in over a decade. The economic data “is not compelling to raise interest rates right now,” he says. An open-and-shut case? Not quite, which explains the recent obsession with analyzing/forecasting the Fed’s decision that’s finally upon us. So, how might the monetary mavens rationalize raising rates today? By focusing on the specific data points that support a hike. Although Blankfein suggests otherwise, there are some indicators that suggest that tighter policy is appropriate. To be precise, certain models are a hawk’s best friend for arguing that it’s time to pull the trigger.

Exhibit A is the Taylor Rule, which the St. Louis Fed describes as “a simple formula that [economics professor] John Taylor devised to guide policymakers. It calculates what the Federal funds rate should be, as a function of the output gap and current inflation.” Recent estimates via the Taylor Rule tell us that a higher Fed funds rate is warranted—something on the order of 2.5% (blue line in chart below), which is far above the current zero-to-0.25% target (red line).


A simple linear regression also offers cover for arguing that a rate hike is needed. Let’s run the econometric grinder on the effective Fed funds rate in context with two proxies for the central bank’s primary mandate—keeping inflation low/stable and maximizing employment.  The proxies: the year-over-year change in unadjusted core CPI and the seasonally adjusted monthly levels of the unemployment rate. Both offer updates through last month. The result? Fed funds should be sharply higher, according to this model: a bit over 3% (red line in chart below), based on monthly data through August 2015.


Let’s tweak the linear regression model a bit by adding two other key indicators with fresh numbers through last month: industrial production and retail sales. The resulting four-factor model for estimating the Fed funds rate calls for a hike today as well, albeit to a relatively modest 1.25% (blue line)–well below the first model’s recommendation.


Janet Yellen and company are no doubt looking at a range of models, some of which are probably advising that’s it’s time to nudge the policy rate higher (or at least drop the zero from the current zero-to-0.25% target rate).

If rates do rise today, it’s likely to be small–anything above 25 basis points would certainly be a surprise. Models may inform the hawkish view, but there are limits. In any case, we’ve already reached a new milestone. Never have so many spent so much time and effort on analyzing the outlook for such a small rate hike.

Source: Rationalizing The Case For A Rate Hike With Models

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Today’s updates on US economic activity—housing starts and jobless claims–offer a fresh round of encouragement for expecting moderate growth in the near term. The numbers are a net positive for monetary hawks who argue that the Federal Reserve should announce a rate hike today.  Economic growth has been sluggish lately, raising concerns that it’s still too early to start tightening policy. Nonetheless, the data du jour provide some support for arguing that the US economy is still on a path for moderate growth.

New filings for unemployment benefits dropped to an eight-week low last week, pushing claims closer to the four-decade low that we saw in July. Meantime, residential construction for August declined, and by more than expected, but the latest data point looks like noise. Why? The year-over-year trend for housing starts is still rising at a solid pace and newly issued building permits—a leading indicator for starts—perked up last month. In both cases, the annual rate of growth strengthened in August.

Let’s take a closer look at today’s numbers, starting with claims. Today’s release reaffirms the bullish signal that’s been conspicuous all year. New filing fell 11,000 last week to a seasonally adjusted 264,000—the second-lowest reading since the early 1970s! That’s no anomaly, as the year-over-year comparison reminds. Claims dropped by nearly 9% last week from the year-earlier level. That’s hardly surprising—claims have been falling in annual terms, with rare exception, for several years. As bullish signals for this leading indicator go, the recent updates are about as good as it gets. Using this data as a guide points to ongoing growth for the labor market, which implies that the economy will continue to expand as well.


Meanwhile, the trend in housing starts looks upbeat as well. The bullish aura is relatively mild compared with starts, but the year-over-year numbers offer a persuasive case for expecting a moderate pace of growth in the near term. The modest monthly dip for August suggests otherwise, but the annual rate of growth remains solid. In fact, starts and permits posted strong year-over-year gains in August–+16.6% and 12.5%, respectively.


The bottom line, today’s numbers offer support for the hawks’ argument that the Federal Reserve should raise interest rates today. The doves will argue otherwise, and for good reason—the broad US macro trend has stumbled lately. The good news is that today’s numbers suggest that the recent soft patch for growth doesn’t signal the end of the recovery that began in mid-2009.

“The housing recovery will continue to be bumpy, but we expect it to continue.” Michelle Meyer, says the deputy head of US economics at Bank of America via Bloomberg. “The labor market has improved, the economy has improved and we’re seeing pent-up demand for housing. So the backdrop is very supportive.”

Source: Upbeat US Data Ahead Of Today’s Fed Decision

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