The Ultimate Regulatory Reform: Abolish Fractional Reserve Banking!

Convocation of the Clueless

The Trump Administration has presented the first part of its plan to overhaul a number of Wall Street financial regulations, many of which were enacted in the wake of the 2008 financial crisis.  The report is in response to Executive Order 13772 in which the US Treasury Department is to provide findings “examining the United States’ financial regulatory system and detailing executive actions and regulatory changes that can be immediately undertaken to provide much-needed relief.”*

Neo gets a dose of financial system red-pilling. [PT]

In release of the first phase of the report, Treasury Secretary Steven T. Mnuchin stated:

“Properly structuring regulation of the U.S. financial system is critical to achieve the administration’s goal of sustained economic growth and to create opportunities for all Americans to benefit from a stronger economy.  We are focused on encouraging a market environment where consumers have more choices, access to capital and safe loan products – while ensuring taxpayer-funded bailouts are truly a thing of the past.”**

Some of its highlights include:

Community financial institutions – banks and credit unions – are critically important to serve many Americans
Capital, liquidity and leverage rules can be simplified to increase the flow of credit
We must ensure our banks are globally competitive
Improving market liquidity is critical for the U.S. economy
The Consumer Financial Protection Bureau must be reformed
Regulations need to be better tailored, more efficient and effective
Congress should review the organization and mandates of the independent banking regulators to improve accountability***

Not surprisingly, most of the banking industry expressed support for the report, critics (mostly Democrats) pointed out that it would lead to the type of practices that produced the 2008 panic in the first place. Both opponents and those in favor as well as the clueless financial press fail to grasp the underlying cause of not only the recent crisis, but the majority of those which have occurred for the past century.

The broad true US money supply since 1988. Clearly, there is not enough inflation just yet… still, don’t you feel richer already looking at this? There is this huge pile of money, which has increased by 332% since the year 2000 alone. Some people are probably wondering where it all came from, and who has got it. And what does “getting” any of it even mean when there is now 4.32 times as much money in the economy than existed 17 years ago? Of course, only deplorables would think of such petty questions… the most important thing is that the banking system is hale and hearty again! As Hank Paulson said in July of 2008 (right after Indymac Bank failed): “It’s a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation.”  And sure enough, all it took was a little bit of fudging with accounting rules and pressing the “Ctrl. Print” key combination – with the appropriate regulatory verve. [PT] – click to enlarge.

A Ruinous Practice

Quite simply: the …read more

America’s Silent Crisis

This post America’s Silent Crisis appeared first on Daily Reckoning.

I ran into some disturbing news recently. News that makes me both angry and perplexed.

And it has to do with America’s pensions.

But here’s why it’s so important — even if you don’t have a pension:

Your tax bill could explode as governments around the country seek to bail out insolvent pension plans. And you know how much politicians like to use your tax money to bail out some constituent. They like to prove their “compassion” with your money!

And frankly, the disturbing news I recently discovered could wreck your retirement plans.

All because some bozos on Wall Street are completely inept at investment management. Actually, I’m not sure it’s it’s incompetence… or sheer laziness. But frankly, it really doesn’t matter.

What matters is that millions of retirees are going to wake up one day and realize that their pension fund payments stopped coming. At the same time, tens of millions of retirees are going to wake up to a market calamity.

And it all ties back to the miserable job U.S. pension fund managers are doing.

Let me explain…

As you know, we’re currently in a long-term bull market for stocks. Ever since the market bottomed following the financial crisis, stocks have been moving steadily higher. The current bull market is one of the longest-standing bull markets in history, now approaching eight straight years of advances.

In fact, I read where this is currently the third-longest bull market in modern history.

You would think that pension funds would be benefiting from this extreme bull market, right? After all, we know that there is a pension crisis in the U.S., with an estimated $414 billion shortfall in what corporations need to be able to pay retirees.

But instead of investing in the stock market, allowing strong returns to make up pension shortfalls, pension fund managers have been underweighting U.S. stocks.

Regardless of whether the market is in a Fed-inflated bubble, no one can deny that it’s been an impressive run. And pension plans are missing the boat.

You see, when the financial crisis hit, pension funds reduced their exposure to stocks to the lowest level since the 1960s. Ironically, this is the exact time that pension funds should have been increasing their exposure to stocks!

Over the next eight years, not much changed. As the market plowed steadily higher, pension fund managers kept their portfolios conservative — allocating capital to things like Treasury bonds and “investment-grade” corporate bonds that paid next to nothing.

Remember, this is an eight-year period with interest rates at or near zero percent! What a horrible time to be invested in bonds!

So during one of the greatest bull markets in history, pension fund managers have put their investors’ capital on the sidelines, missing out on huge potential gains and investing in bonds that pay next to nothing in interest.

Can you see why I’m so angry?

But if you somehow think your Social Security retirement package is any better, think again. The Social Security trust fund has zero exposure to …read more

The Best Income Opportunities as Wall Street Shifts Course

This post The Best Income Opportunities as Wall Street Shifts Course appeared first on Daily Reckoning.

Don’t look now, but there’s a major shift underway on Wall Street. One that is poised to grow your profits and accelerate your income over the next few months.

That is, of course, if you know how to take advantage of this shift.

Today, I want to explain how the winds of change are blowing on Wall Street… how speculative investors are already starting to lose money… and, finally, how you can protect yourself from this shift and actually grow your retirement wealth in the process.

Now let me explain what’s happening.

Speculative Stocks Falling out of Favor

It was bound to happen eventually.

Earlier in the month, shares of Wall Street’s favorite growth stocks began falling fast. During this dive over the last two weeks of June, more than $50 billion of investor wealth had been lost!

In case you’re wondering which of Wall Street’s favorite stocks I’m talking about, I’m referring to the FANG growth stocks, or Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Alphabet (NASDAQ:GOOG).

These four stocks have been trading sharply higher this year and are responsible for a large portion of the market’s gains. So the sudden drop in price for all four of these stocks certainly caught investors off guard.

Take a look at the damage to each of these stocks below:

Hopefully, the pullback in these stocks didn’t catch you off guard. After all, considering how quickly these stocks have moved higher (and how expensive the shares are compared with earnings), investors should have realized there was a lot of risk in these names.

Still, the pullback got the attention of many traditional investors, and it certainly gave the talking heads on CNBC and other media outlets something to talk about.

But one thing these reporters were not talking about is where investors are flocking toward after selling their shares of these speculative stocks.

Where Is the FANG Money Going?

Whenever investors pull money out of one area of the market (causing prices to drop), that capital is usually reinvested in another area.

That’s what makes this business of investing so great! There’s always a bull market somewhere. And often, conservative, cash-paying dividend stocks become extremely attractive to investors who have sustained losses in other areas of the market.

And that’s exactly what is happening right now.

Dividend stocks are starting to get the attention that they deserve.

After nearly a year of underperformance, dividend stocks are starting to accelerate. You can see this trend shifting in the chart below, which plots the relative performance of dividend stocks to the broad S&P 500:

Now, I should explain that just because this chart moved lower throughout the last year does not mean that my recommended dividend stocks have been losing money. It just means that shares have not been trading higher as quickly as the broad market.

That’s largely because the S&P 500 has been fueled by the speculative rise in the FANG stocks pictured above.

But now that those speculative stocks are starting …read more

Considering Switching Your IRA – Make Sure You Do It Properly Or It Could Be An Expensive Decision

The fact that you are reading this post shows that you are a focused individual who cares about their retirement. This may seem like a strange comment to make, but the vast majority of workers simply pay in money to their retirement accounts and let their chosen company manage the investment. In our opinion, this is a bad idea, even if your chosen company is doing an excellent job at the end of the day that money is still your retirement pot, and nobody else will care as much about it as you do.

With the recent volatility in the stock market, many people have been contemplating switching at least some of their investment into the relative stability of gold bullion. Although gold may not experience the huge growth potential of the stock market, it is also much less volatile and viewed by many people as the safe option. If you are considering venturing down this path, then it is critical that you switch the funds properly; do not simply transfer funds from an IRA to a Gold IRA. The most cost-effective strategy is to rollover the funds from one IRA to another, as there are significant tax advantages.

Why Choose Rollover Compared To A Simple Transfer

Many people think that transferring money from one IRA to another has the same result as performing a rollover. Unfortunately, the government views the two processes entirely differently. With a rollover, you as the owner of both products, never actually take possession of the money, and this is the key difference as far as your tax commitments are concerned. Because the money is never in your possession with a rollover, it is not taxable and remains inside the tax exempt bubble. When you withdraw money from one IRA and move it to another, although you might imagine the result is the same, Uncle Sam will take his share, as the money is considered to have left the tax free exemption during the transaction.

The Rules That Govern A Gold IRA Rollover

Whenever a rollover takes place, the entire process must be completed within 60 days. If you go over this period, then that money becomes taxable at your current rate of tax (If you are under 59 ½) PLUS an additional 10 Percent penalty. Let’s imagine you are transferring $300,000 and your tax rate is 25%. By transferring the money, rather than performing a rollover, it could potentially cost you $105.000. Quite an expensive error! Please note that you are also limited to one rollover per tax year.

Direct Transfer IRA Rules

If You are simply switching from one Gold IRA to another, then the 60-day limitation does not apply. Because the money will simply flow directly between the two providers, you are excluded from the transaction and therefore have no tax implications.

Don’t Start Anything Without Talking To Your Employer

If your current retirement plan is managed by your employer in the form of a 401k or other savings vehicle, then speak to them before instigating any …read more

Why Shaw Communications Stock Is Rated a "Buy With Caution" Today

shaw communications stock shaw communications earnings 2

Shaw Communications (NYSE: SJR) is a $12 billion company today. Investors that bought shares one year ago are sitting on a 20.92% total return. That’s above the S&P 500’s return of 17.81%.

Shaw Communications stock is beating the market, and it reports earnings tomorrow. But does that make it a good buy today? To answer this question, we’ve turned to the Investment U Stock Grader. Our Research Team built this system to diagnose the financial health of a company.

Our system looks at six key metrics…


✗ Earnings-per-Share (EPS) Growth: Shaw Communications reported a recent EPS growth rate of 25%. That’s below the media industry average of 37.65%. That’s not a good sign. We like to see companies that have higher earnings growth. 

✓ Price-to-Earnings (P/E): The average price-to-earnings ratio of the media industry is 35.76. And Shaw Communications’ ratio comes in at 13.42. It’s trading at a better value than many of its competitors.

✗ Debt-to-Equity: The debt-to-equity ratio for Shaw Communications Stock is 102.45%. That’s above the media industry average of 62.48%. That’s not a good sign. Shaw Communications’ debt levels should be lower.

✓ Free Cash Flow per Share Growth: Shaw Communications’ FCF has been higher than that of its competitors over the last year. That’s good for investors. In general, if a company is growing its FCF, it will be able to pay down debt, buy back stock, pay out more in dividends and/or invest money back into the business to help boost growth. It’s one of our most important fundamental factors.

✓ Profit Margins: The profit margin of Shaw Communications comes in at 11.27% today. And generally, the higher, the better. We also like to see this margin above that of its competitors. Shaw Communications’ profit margin is above the media average of -1.72%. So that’s a positive indicator for investors.

✓ Return on Equity: Return on equity tells us how much profit a company produces with the money shareholders invest. The ROE for Shaw Communications is 20.04%, and that’s above its industry average ROE of 12.51%.

Shaw Communications stock passes four of our six key metrics today. That’s why our Investment U Stock Grader rates it as a Buy With Caution.

Please note that our fundamental factor checklist is just the first step in performing your own due diligence. There are many other factors you should consider before investing. That’s why The Oxford Club offers more than a dozen newsletters and trading advisories all aimed at helping investors grow and maintain their wealth.

If you’re interested in finding Strong Buy stocks yourself, check out Fundamental Analysis Pro. It’s a free five-part mini-course that will teach you how to grade stocks like a Wall Street veteran. Click here to learn more. …read more

Macro Liquidity Time Bomb Ticks Toward Zero

Composite Liquidity Indicator

This post Macro Liquidity Time Bomb Ticks Toward Zero appeared first on Daily Reckoning.

[This post is from Lee Adler. To find out more about his work – visit Wall Street Examiner.]

US macro liquidity has grown slowly over the past year. Meanwhile, stock price inflation has surged, setting up a large divergence versus liquidity. It suggests that the market has become overextended due to excessive bullish sentiment. This is the mirror image of the oversold reading in February 2016.

The difference today is that the Federal Reserve has announced that it will soon begin withdrawing liquidity from the system. The Composite leading indicators (CLI) will flatten later this year and probably turn lower next year. Today’s market overextension represents an extreme level of risk.

My proprietary macro liquidity indicator combines 5 different measures of US systemic liquidity. The most important of these is a measure of the cash flowing from the Fed to the Primary Dealers. Other components include a measure of the change in bank deposits not resulting from flows from money market funds, and several measures of commercial bank trading and investment activities. Finally, I include a measure of direct foreign central bank purchases of US securities.

The current wave bandwidth from overbought to oversold has expanded to around 400 points or around 20%. That’s about the same percentage bandwidth as at the start of of this chart in 2009. With liquidity likely to turn down next year, the implication is that the market is likely to decline more than 20% from around current levels. How much more can’t be predicted at this point, but 20% looks like a minimum.

Over the past 12 months, the Liquidity Composite has risen by 3.1%. Stock prices have inflated by nearly 15% over that time. Since July of last year, liquidity has grown by just 2.4%. Stock prices have risen 14.1% over the same period. Stocks are now the most overbought they have been relative to macro liquidity since the market bottomed in 2009.

That was a very different environment with the Fed going full blast on quantitative easing (QE). The Fed took its foot off the accelerator at the end of 2014. Soon it will begin to actually siphon gas from the tank.

Macro Liquidity Components

The Fed continues to push more cash into Primary Dealer accounts through replacement purchases of its paid down mortgage-backed security (MBS) holdings. These settlements come every month at mid month. Those payments diminished when mortgage rates fell late last year. The Fed’s purchases rose slightly when rates backed down a bit and have been stable at low levels since then.

Net bank deposits (not coming from money market funds) continue to be a positive factor. While US bank loan growth has slowed, deposit growth hasn’t. We can deduce that that’s because of inflows from Europe and elsewhere as foreigners buy US assets. But deposit growth has fallen back to its long term trendline. Any slowing from here will break that trend.

That’s likely to happen as the Fed …read more

A Better Way to Invest in an Expensive Market

startup equity stock prices 1

Benjamin Graham, widely considered the father of value investing, once said, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”

In other words, over short periods, markets tend to move irrationally along with market psychology. But over longer market cycles (at least 10 to 12 years), fundamentals are ultimately what matter.

Since 1996, the U.S. stock markets have acted almost entirely like voting machines. Only during brief bear markets and corrections do they seem to act like weighing machines.

The chart below shows the average price-to-earnings ratio of the S&P 500 since 1970.

As you can see, for the last two decades, stock market P/E ratios have been elevated most of the time. Since 1996, the average P/E has been 23.36. Meaning that stocks are almost always expensive. And dividend yields are almost always low.

Only during brief and sporadic crashes and corrections do we get a chance to buy stocks at bargain prices.

The average bear market lasts around 15 months (since 1900), though they vary widely. The crashes happen fast, while the bull markets take years to peak.

Now, once again, we find ourselves facing historically pricey stocks pushing higher and higher.

Clearly, it’s good to own some stocks for the long run. So you can either “dollar cost average” into it (invest the same amount monthly over years), or try to time it using stops and/or gut feeling.

Both strategies can work, but they have their own drawbacks. Dollar cost averaging into stocks means that you’re overpaying most of the time.

Trying to time the market is difficult and can be terrifying.

Personally, I use a combination of the two for stocks. I mostly dollar cost average into stocks I want to own forever. But I do hold onto more cash when stocks are pricey, take some profits, and wait for a correction or crash. It’s the modern version of value investing.
The Cause and Result
I believe this problem is primarily created by persistent low interest rates.

Eight years of near-zero percent interest rates have distorted markets greatly.

The sheer size of government as a percentage of the economy is also problematic, since large bureaucracies are woefully inefficient. But that’s another article entirely.

It’s primarily these low rates that have convinced the market that risk/speculation will be rewarded. And it’s “working” in the sense that stocks are going up due to artificial forces acting on them.

Toss in the rise of algorithmic trading funds, which now make up 27% of all stock market volume, and the moves are even harder to predict.

This is probably why 90% of actively managed funds have underperformed against their indexes over the last 15 years. That’s 1.5% a year for a cumulative gain of 25% for the Jack Bogle fans.

Startups: A Market That Always Has Bargains
I still own public stocks, don’t get me wrong. But that stuff is mostly on autopilot, with a few exceptional cases.

Ninety-five percent of my attention is on startup equity these days.

With startups, you can almost always find …read more

The China Tech Bull is Back!

This post The China Tech Bull is Back! appeared first on Daily Reckoning.

Tech stocks stumbled once again yesterday…

The semiconductor sector – one of the bull market’s strongest fortresses – was besieged by sellers Monday morning.

After opening higher, the Philadelphia Semiconductor Index slipped and fell 1% by the closing bell while the S&P 500 finished the day near breakeven.

While one losing day isn’t the end of the world for these high-tech standouts, some traders are concerned about the drop. After all, these tech winners are supposed to rise every single day. No one has time for consolidation. Or worse – a pullback!

But we shouldn’t complain about a soft day from the semis. Many of these stocks are sitting on double-digit gains during the first half of the year. Aside from the FAANG brigade, it’s almost impossible to find returns that even come close, right?

Think again.

While the financial media have pounded the table for semiconductors and the big tech stocks for the better part of the past six months, the biggest momentum stocks of 2017 are all coming from one place: China.

China’s tech ADRs continue to rip higher at we barrel toward the end of the second quarter. If you’ve been following along this year, you already know that we’ve booked gains on Momo Inc. (NASDAQ:MOMO). We were able to harness a fast 50% gain in just a few weeks with this quick trade. And MOMO isn’t the only Chinese name lighting up the market this year…

Alibaba (NYSE:BABA) is another solid winner from our trading portfolio. We cashed in our chips on this trade in early May for gains of 23%. The stock continues to prove all the naysayers wrong as it pushes to new all-time highs once again this month. In fact, Alibaba stock has posted gains every single month of the year so far. It’s now up an incredible 62% in 2017.

Even lesser-known Chinese tech ADRs like Weibo Corp. (NASDAQ:WB) are getting love from short-term traders.  Weibo is the most popular of China’s Twitter-like microblogging platforms (Twitter and Facebook are both banned in China). This stock is up more than 75% year-to-date.

There’s no question that these Chinese tech stocks are attracting new buyers this year. It’s the perfect place to look for your next hot momentum trade.

But before I get to today’s play, we need to check up on a Chinese ADR that’s sat idle in our trading portfolio for the past several weeks. When we first jumped onboard Baidu Inc. (NASDAQ:BIDU) back in May, I mentioned that the stock has been a bit of laggard so far this year.

“China’s Google” couldn’t seem to get over the hump. We hopped on the stock as it was breaking out to new year-to-date highs. But it hasn’t followed through just yet. As of this morning, BIDU remains stuck in a choppy range.

The stock is up about 9% so far this year. That’s not terrible. But it’s also not very exciting. While I haven’t totally lost hope for BIDU, …read more

Canadian Company Regains 100% Ownership of Portugal Project

Source: The Gold Report 06/27/2017

A junior explorer has taken back the reins of a project in Portugal that is showing results.

Avrupa Minerals Ltd. (AVU:TSX.V, 8AM:FWB) announced on June 19 that it has restored 100% ownership in the Alvalade copper-lead-zinc project in Portugal, reaching agreements with its two partners.

In a June 26 press release, Avrupa announced a private placement to raise $500,000, which will “be used for exploration and operations in Portugal, Kosovo, and Vancouver, and for general working capital.”

Paul Kuhn, Avrupa’s president and CEO, commented, “Now that we have successfully consolidated the Alvalade copper-zinc project, we have work to prepare for the next stage of drilling.”

Kuhn explained that Avrupa already has “a number of compelling targets [at Alvalade] in the immediate surrounding sectors at Sesmarias, as well as drill-ready targets at Monte da Bela Vista (10 km north of Sesmarias) and in the Pombal area (15 km south of Sesmarias). We are actively engaging potential partners for the opportunity to JV into the Project.”

In the June 16 edition of J. Taylor’s Gold, Energy & Tech Stocks, Jay Taylor stated that “promising values from several holes drilled on this property. . .have been drilled over an 1,800-meter strike length to a depth of 300 meters in a single, structurally deformed sedimentary rock unit.” Taylor highlights that one target “likely to be tested in the not-too-distant future is the possible faulted extension of the Sesmarias West Target. In addition, massive sulfides have been identified on the shallow dipping eastern flank of this structure in a setting similar to operating world-class mines within the Iberian Pyrite Belt.”

Taylor concluded, “the Alvalade project that appears to hold the potential to host a world class VMS deposit. . .is likely to soon become the flagship project for Avrupa and one that I think will fire up the imagination of the market. Living within the prospect generator model, I would expect Avrupa to prudently advance this project along to the point where it would attract a major mining company’s interest.”

Read what other experts are saying about:

Avrupa Minerals Ltd.

Want to read more Gold Report articles like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent articles and interviews with industry analysts and commentators, visit our Streetwise Interviews page.

1) Melissa Farley compiled this article for Streetwise Reports LLC and provides services to Streetwise Reports as an employee. She owns, or members of her immediate household or family own, securities of the following companies mentioned in this article: None. She is, or members of her immediate household or family are, paid by the following companies …read more

The Discoveries Keep on Coming for Quebec Gold Explorer

Balmoral Project Map

Source: The Gold Report 06/27/2017

Balmoral Resources’ drilling keeps discovering new zones of gold mineralization at the Martiniere property in Quebec, says CEO Darin Wagner, and he expects the trend to continue with the summer drill program just getting underway.

The Gold Report: Darin, it’s a pleasure to have you with us. Would you bring us up to date on what’s happening at Balmoral Resources Ltd.’s (BAR:TSX; BALMF:OTCQX) Bug South deposit in Quebec?

Darin Wagner: We are just getting started on the summer drill program along the Bug Lake Trend and waiting for the last few holes from the spring program. Bug South is one of four deposits in a tight little cluster on the Martiniere property. All of the deposits have high-grade cores with results commonly in the quarter-ounce range. And all the deposits are open and the summer program will look to continue to grow them.

Bug South was a 2016 discovery. We spent the better part of the last nine months drilling it. We’ve chased it down to about 400 meters below surface. And it remains open below that depth.

The summer program has a dual-focus, both infill drilling on the Bug Lake deposits to get them ready for their debut—the initial resource—and also continuing to grow them, which is obviously key to shareholders, the continued growth of the system out there.

TGR: Your drilling at Bug South is following the deposit down plunge. What drilling do you have planned for continuing exploration?

DW: We would expect to see around 25,000 meters drilled out over the summer/fall, with the bulk of it being on that Martiniere property and a good chunk of it obviously on that expanding Bug South deposit.

We’ve moved into “underground” depths, so we’re chasing that high-grade core of the deposit down to depth, letting it lead us where it’s going to take us over the next few months, with the objective of having most of the area between surface and about 500m vertical depth drilled out as we head into the fall. That will form the basis for our next update on the project. At the same time, we’ll be working on some of the other components of that bigger system, the other deposits that are close by and a series of new high-grade gold discoveries.

TGR: When would you expect to start having some results back from the lab?

DW: We usually try and batch up a series of related holes. So, if we have 6 to 10 holes that are specific to Bug South, we’ll batch those up. We still have about 10 holes left over from the spring program that we’ll release in fairly short order, sometime in the next couple of weeks.

Once the drills have started to turn, every six weeks or so after that we will release results. It depends on the workflow through the lab. But usually every six weeks or …read more

Dudley in a Good Place


Crashing Unemployment

Dear Mr. Dudley, Your recent remarks in the wake of last week’s FOMC statement were notably unhelpful. In particular, your explanation that further rate hikes are needed to prevent crashing unemployment and rising inflation stunk of rotten eggs. Quite frankly, crashing unemployment is a construct that’s new to popular economic discourse, and a suspect one at that. Years ago, prior to the nirvana of globalization, the potential for wage inflation stemming from full employment was the main concern.

US unemployment rate vs. labor force participation rate. The employment situation may not be as all-around copacetic as the U3 unemployment rate seems to indicate… just a hunch.

Now that the official unemployment rate’s just 4.3 percent, and wages are still down in the dumps, it appears the Fed has fabricated a new bugaboo to rally around.  What to make of it? For starters, the Fed’s unconventional monetary policy has successfully pushed the financial order completely out of the economy’s orbit.  The once impossible is now commonplace.

For example, the absurdity of negative interest rates was unfathomable until very recently. But that was before years of central bank asset purchases made this a reality. Perhaps the imminent danger of crashing unemployment will give way to the impossibility of negative unemployment.  Crazy things can happen, you know, especially considering the design limitations of the Bureau of Labor Statistics’ birth-death model.

Secondly, muddying up the Fed’s message with inane nonsense like crashing unemployment severely diminishes the Fed’s goal of providing transparent communication.  In short, Fed communication has regressed from backassward to assbackward.

During the halcyon days of Alan Greenspan’s Goldilocks economy, for instance, the Fed regularly used jawboning as a tactic to manage inflation expectations.  Through smiling teeth Greenspan would talk out of the side of his neck.  He’d jawbone down inflation expectations while cutting rates.

Certainly, a lot has changed over the years.  So, too, the Fed seems to have reversed its jawboning tactic.  By all accounts, including your Monday remarks, the Fed is now jawboning up inflation expectations while raising rates.

William Dudley indicates how far consumer price inflation is from its ideal height…

Photo via

Congratulations and Thank You!

History will prove this policy tactic to be a complete fiasco.  But at least the Fed is consistent in one respect.  The Fed has a consistent record of getting everything dead wrong. If you recall, on January 10, 2008, a full month after the onset of the Great Recession, Fed Chair Ben Bernanke stated that “The Federal Reserve is not currently forecasting a recession.”

Granted, a recession is generally identified by two successive quarters of declining GDP; so, you don’t technically know you’re in a recession until after it is underway.  But, come on, what good is a forecast if it can’t discern a recession when you’re in the midst of one?

Bernanke’s quote ranks up there in sheer idiocy with Irving Fisher’s public declaration in October 1929, on the eve of the 1929 stock market crash and onset of the Great Depression, that …read more

What Is the Fundamental Gold Price? Precious Metals Supply and Demand [extended version]


Fundamental Drivers of Gold Prices

[Ed. note by PT: we believe there is a lot less disagreement with Steve Saville’s approach than Keith assumes – we are adding comments in the chart captions below as well as an addendum and footnotes to illustrate what we mean – all our comments are marked with [PT] below – we have essentially made a discussion out of this week’s supply-demand report, as we believe these issues are of interest to all gold aficionados]

Steve Saville wrote a post this week, in which he proposed a model that indicates the fundamentals of gold. According to him, these are: (1) the real interest rate, (2) the yield curve, (3) credit spreads, (4) the relative strength of the banking sector, (5) the US dollar’s exchange rate, (6) commodity prices, and (7) the bond/dollar ratio.

Steve Saville’s fundamental gold price model (details see here) – this looks actually quite good to us. We follow the macroeconomic indicators it is based on as well – see e.g. “An Overview of Macroeconomic Gold Price Drivers” from mid April. As we understand it, the model is not trying to determine a specific gold price. It merely tries to show in if macroeconomic pressures are pointing toward a rising or falling gold price, and it seems to be doing that quite well. As Steve Saville mentions, the model is slightly leading the gold price (or at least has done so in recent years and on numerous previous occasions – that is not always the case as we have discussed in the past, see also our comment on the yield curve). Keith’s methodology of bringing the trading on gold futures into context with the spot market does the same most of the time (i.e., the fundamental price he derives is usually leading the market gold price). Both models are largely based on market-derived data, so this should be no surprise – we would assume they ultimately show the same forces at work. [PT]

We consider him a friend, and certainly appreciate his view that when gold moves from an ETF to China or India, it has no effect on the price. However, we disagree with his fundamental model. Let’s do a quick rundown of these factors and move on to a broader point.

The Real Interest Rate.

We have addressed this before, saying:

The Nominal Interest Rate means the rate at which lenders lend and borrowers borrow in the market. The Real Interest Rate is the Nominal Interest Rate – inflation. Notice the switcheroo. The actual rate charged by actual lenders to actual borrowers is dismissed as merely nominal. A fictitious rate which is not used in any transactions is elevated to the status of real. Got that?

While we cannot speak for Steve Saville, we are well-acquainted with his views, and we believe he wouldn’t disagree with most of what Keith says here about real interest rates.* We cannot possibly “know” what the real interest rate is, since we can neither precisely quantify the loss of purchasing power …read more