Resistance Created by Long-Suffering “Hodlers” – Precious Metals Supply and Demand

 

Gold vs Other Assets

The prices of the metals went up +$15 and +$0.23. We will be brief this week, as Keith just got off a 17-hour flight from Perth to London.

Stocks continue their march upwards. And hence the gold price seems stalled—or is it? It may seem like gold goes up, when stocks go down and vice versa. That’s been the recent pattern. Why should people own money without return, when stocks are where the action is?

Gold-SPX ratio: in long-term gold bull markets, this ratio will trend higher. It has recently made a secondary, higher low, but not yet a higher high – which will be required to confirm a new bull market trend. In the short term, gold and stocks can be positively correlated, but in the long term they are antagonists (a rising gold price denotes rising demand for money, which usually coincides with falling demand for “risk assets” such as stocks). [PT]

But actually, we have done some research recently. And put together a white paper, to look at what gold does for a dollar-denominated portfolio. We replicate the same research that many others have done before: it reduces volatility and drawdowns, and improves the Sharpe Ratio (we also add analysis of what a yield on gold does—surprise, it enhances overall returns).

Anyway, the point being that gold is not particularly correlated to stocks or bonds.

There is a tension between stocks are where the action is … vs … stocks are risky here. Between falling interest and rising assets … vs … if they don’t offer much interest, it’s better to own money with no risk.

Is now the turning of the trend? The price action sort of suggests it. But anecdotally, talking to several dealers, we hear that retail owners of coins and small bars have been taking advantage of the now-higher prices to dump their gold, to get out. Indeed we see bids on 1oz gold Eagles below spot price.

This is what chartists call “resistance”. Long-suffering holders (HODLers?) waited for their opportunity to exit a speculation that was long underwater and now hated. It is hard for the price to go higher, until that wave of selling abates. Some of them have been suffering a long time, as the price of gold peaked eight years ago, in 2011.

The prices of the metals fell last week, with that of gold -$9 and silver -$0.32. Of course, it was a week of stock market exuberance. Why would anyone want to own money, or seek safety when the Fed can seemingly push interest down / assets up indefinitely? As the old TV ad for Lotto proclaimed “you gotta be in it, to win it!”

Fundamental Developments

Now let’s look at the only true picture of supply and demand for gold and silver. But, first, here is the chart of the prices of gold and silver.

Gold and silver priced in USD

Next, this is a graph of the gold price measured in silver, otherwise …read more

The Four Dimensions of the Fake Money Order

A Good Story with Minor Imperfections

“If you don’t know where you are going, any road will get you there,” is a quote that’s oft misattributed to Lewis Carrol. The fact that there is ambiguity about who is behind this quote on ambiguity seems fitting. For our purposes today, the spirit of the quote is what we are after. We think it may help elucidate the strange and confusing world of fake money in which we all travel.

Consumer price index, y/y rate of change – the Fed is not satisfied with the speed at which monetary debasement raises everybody’s cost of living lately. And no, they don’t think said speed should be lowered. [PT]

For example, the monetary policy outlook immediately following last month’s FOMC meeting was as clear as a flawless (FL grade) diamond. The principal message, if you recall, was that inflation was muted and the Fed, after suffering an overt beating from President Trump, would soon be shaving basis points off the federal funds rate. You could darn near take it to the bank.

Wall Street took the news and acted upon it with conviction.  Investors piled into stocks and bonds without pausing to take a closer look for imperfections.  Why worry when fortune favors the bold?

From June 19 through Wednesday July 3, everything held up according to plan.  The S&P 500 rallied 2.5 percent to close at a new all-time high of 2,995. The yield on the 10-Year Treasury note, over this period, dropped 13 basis points, as mindless buyers positioned to front run the Fed.

But then, in the form of Friday’s job’s report, several feathers of imperfection were identified.  According to the Bureau of Labor Statistics, the U.S. economy added 224,000 jobs in June. This far exceeded the consensus estimates of 160,000 new jobs.  As this week began, doubt and hesitation crept into the market.  What to make of it?

Powell Stays on Point

To begin, in today’s fake money world, clear thinking and honest appraisal are handicaps for investors.  What is really important is the inverse relationship between the economy and the stock market.  Good economic reports are bad for stocks.  Conversely, bad economic reports are good for stocks.

S&P 500 Index performance vs. US macroeconomic data surprises – this is the biggest disconnect ever observed. [PT]

According to the prevailing logic, with unemployment below 4 percent, real GDP growth at an annual rate of 3.1 percent, and stocks at all-time highs, the Fed shouldn’t be cutting rates.  Instead, it should be raising rates.  But if the Fed raises rates, there will be less cheap credit to speculate on stocks with.  Therefore, stocks will go down.

So how can the Fed possibly cut rates later this month when the economy’s headline numbers appear so doggone good?  This question, and many others, greeted Fed Chairman Jay Powell this week during his two-day semiannual testimony on monetary policy to the House Financial Services Committee and the Senate Banking Committee.

Powell – that is, the post pivot dovish Powell – stayed …read more

Wall of Worry M.I.A. –  Precious Metals Supply and Demand

 

Too Much Excitement?

The prices of the metals fell last week, with that of gold -$9 and silver -$0.32. Of course, it was a week of stock market exuberance. Why would anyone want to own money, or seek safety when the Fed can seemingly push interest down / assets up indefinitely? As the old TV ad for Lotto proclaimed “you gotta be in it, to win it!”

“Stablecoin” Tether is used as a dollar stand-in on cryptocurrency exchanges that offer no fiat currency pairs. There has been a lot of speculation about the extent to which Tether is actually backed by US dollars. Despite these rumors and a recent admission by the company managing Tether that is is actually not fully backed with USD, it continues to be popular. It should be noted that BTC has a market cap of USD 224 billion and daily trading volume of USD 25 billion. [PT]

In the meantime, we saw a fascinating graph comparing the bitcoin price to the market cap of USD Tether. We are not entirely sure what to make of it, but it suggests that the more dollars pour into tether, the more the price of bitcoin is pushed up.

Now, we are not experts in the mechanics of bitcoin much less Tether. But this does not strike us as organic demand for bitcoin, based on growing evidence that bitcoin will become money.

It smells to us like either some kind of arbitrage, or like a way to use Tether as a cheap way to fund a speculation. This is a question that will most likely have to be answered by the Bitcoin and Tether Supply and Demand Report.

There is a correlation between Tether’s market cap and the price of BTC, but the question is whether this is unusual (it probably isn’t). For instance, the largest cryptocurrency exchange by volume (Binance) does not offer BTC/USD , BTC/EUR or BTC/JPY trading pairs. If people trading on it want to buy or sell BTC, they must do so via one of the stablecoins – of which Tether is established the longest. [PT]

In other news, Deutsche Bank is laying off 18,000 people and restructuring. Other layoffs are surely coming to other major corporations, not to mention the perennially money-losing enterprises.

Will this be the signal for everyone to pile into gold and silver again? One reason for caution is the incredible switch from depression to mania in the space. Nearly everyone is convinced this is the breakout. That gold is going to rocket higher.

Where is that wall of worry that bull markets, especially in the early stage, are supposed to climb? On the other hand, as of the previous Report, the fundamentals of gold — if not silver — kept getting stronger.

Fundamental Developments

Now let’s look at the only true picture of supply and demand for gold and silver. But, first, here is the chart of the prices of gold and silver.

Gold and silver …read more

Independence Day in America Circa 2019

Freedom and Apple Pie

The days are long and hot in the Northern Hemisphere when real American patriots raise the stars and stripes. Today the free and brave, with duty and self-sacrifice, begrudgingly accept federal holiday pay to stand tall upon their own two feet. Rugged individualism and uncompromising independence are essential to their character.

Independence day festivities…

With purpose and intent, they assemble as merry mobs along the shoreline to celebrate American Independence. Freedom lovers – descendants of Daniel Boone – gather to eat hot dogs and pitch horseshoes while downing tipples of corn syrup and fermented grain. When the sun slips beyond the western horizon and the stars twinkle bright, they hoot and holler at the brilliance of fireworks and sparkling pyrotechnics.

These festivities certify that, even in an era of big government, there remains a time and place to revel in the virtues of representative self-rule. All are welcome, of course, so long as their vehicles are registered, they have paid their income taxes, and have proper documentation.

Freedom. Liberty. Independence.  Limited representative government. Sound money.  Private property rights.  A humble and esteemable populace.  Avoidance of foreign entanglements.  Rafting down the Mississippi River.  Classic rock.  Trim waist lines.

These ideas, in truth, faded from daily life over the last century like the horse drawn plow.  Alas, the republic was lost long before Elvis popped his last pill.  Washington’s casted nets have since ensnared the globe.  There is little you can do to avoid getting caught up in its tangled web.

Intimate encounters at the border… [PT]

But why spoil such a magical day with the truth?

Instead, we’ll add to the magic with a look back to the not too distant past.  To a magical time and place – before the Department of Homeland Security, Facebook, and Google were around to track your every move.  Back when freedom was a little freer.  And currency destruction was a little subtler.

Creative Destruction

Boiling points in politics, business, and popular culture are often exceeded with seemingly little advanced notice.  Then, in short order, a revolution explodes the status quo out of existence.  Not until later is it apparent that the pot was simmering for many years – or decades – before the eruption.

In the early 1990s, Steve Rocco, a scrub freestyle skater from Hermosa Beach, delivered an epic haymaker to the corporate skateboard industry. On a shoe string budget, financed with predator loans from a shark named Kirby, Rocco rapidly took down the big three skate companies that, in hindsight, had grown fat and stale. In a classic case  of Joseph Schumpeter’s “gale of creative destruction,” he revolutionized the industry and subculture.

Steve Rocco, the man who “souled” the world – and revolutionized the skateboarding industry.

The big skate companies, which had capitalized on the popular attraction of vert ramp skating in the late 1980s, had taken the sport to a place that was unreachable to the next generation of skaters.  To protect marketing investments in their sponsored pros, many which had fallen …read more

The Strange Behavior of the US Dollar in the Wake of Fed Rate Cuts

 

A Change in Interest Rate Expectations

In the last issue of Seasonal Insights I discussed the typical pattern of stock prices when the Federal Reserve cuts interest rates.  As one would expect, the stock market tends to stabilize after cuts in the federal funds rate.

The issue is topical, as many investors and analysts expect rate cuts to be implemented soon given that signs of an economic slowdown are beginning to proliferate.

Market expectations about the direction of administered interest rates have changed significantly since last November. [PT]

Today I want to examine a market that reacts differently to rate cuts than one would perhaps expect: the foreign exchange market.

What is the Effect of Fed Actions on Exchange Rates?

The chart below shows the average pattern of the US dollar index (DXY) in the 140 days before and after cuts in the federal funds rate. The pattern was calculated as an average of the past 30 years, which included altogether 46 rate cuts. The horizontal axis shows the number of days before and after the event, the vertical axis shows the average moves of the dollar index in percentage points. The day of the rate cut is highlighted in orange in the middle of the chart.

Pattern of the US Dollar Index in the 140 days before and after US rate cuts, average of 30 years (46 events, 1989 – 2019). Rate cuts mark the timing of trend reversals in the dollar with pinpoint precision!

As can be seen right away, on average the US dollar declined in the months leading up to rate cuts. However, the trend typically reversed precisely on the day the rate cut was implemented. As the chart illustrates, thereafter the dollar tended to appreciate for several months.

Why do Exchange Rates Behave so Strangely?

Perhaps you expected that the dollar would decline in concert with the federal funds rate – after all, investment in US dollar-denominated fixed-rate instruments becomes less attractive. In reality the US dollar typically strengthens after a rate cut.

Let me take this opportunity to give you the reason for the dollar’s odd behavior favored by myself. Rate cuts are relatively easy to predict. Many investors will therefore already be positioned accordingly and will tend to close out their positions once rate cuts are actually implemented –  “sell the rumor, buy the news”, as the saying on Wall Street goes.

Take advantage of the Fed’s predictability…

There are certainly other possible explanations. For example, rate cuts are often associated with crisis scenarios. In crisis conditions demand for US dollars often increases, either due to the need to repay USD-denominated debt, or because the dollar is considered a “safe haven” currency. Economic considerations may play a role as well.

Contrary to the explanation I prefer, namely that this behavior represents a typical “sell the rumor, buy the news” situation, these approaches cannot explain why the trend changes coincide precisely with rate cuts. The reasons cited above nevertheless may play a role as additional drivers.

…read more

Gold, the Safe Haven – Precious Metals Supply and Demand

Investments vs. Money

Last week the price of gold went up another $11, but the price of silver dropped 4 cents. The gold-silver ratio hit another new high, up another point, though down from Tuesday’s high water mark.

This obviously was not the week that wage-earners increased their money holdings or that institutions expressed a preference for the bargain of silver.

Prosperity is just around the corner… and so is the trade deal. [PT]

This coming week may be a week that brings news of a trade deal between America and China. If so, one would expect the stock market to rally. And therefore the prices of the metals, gold more than silver in this case, to drop a bit. That raises the question why.

Notwithstanding the paper-bug argument that gold is a terrible investment, and notwithstanding the goldbug argument that gold will be a great investment — gold is not an investment. It is money. And silver too.

One holds money if one expects investments to have a negative return.

So, when the stock market and property market turns (when, not if) this is a likely driver for people in general to turn to the monetary metals as a safe haven.

Arguably they have, already, which is why gold is $1,400. But while there is near-ubiquitous faith in the stock market, there may not be aggressive pursuit of gold.

Fundamental Developments

Now let’s look at the only true picture of supply and demand for gold and silver.

But, first, here is the chart of the prices of gold and silver.

Gold and silver priced in USD

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio (see here for an explanation of bid and offer prices for the ratio). The ratio rose further.

Gold-silver ratio, bid and offer

Here is the gold graph showing gold basis, co-basis and the price of the dollar in terms of gold price.

Gold basis, co-basis and the USD priced in milligrams of gold

In light of the continued drop in the dollar (i.e. rise in the price of gold in dollar terms), the drop in gold’s scarcity (i.e., the co-basis) looks modest indeed.

The Monetary Metals Gold Fundamental Price rose another $22 to $1,462.

Now let’s look at silver.

Silver basis, co-basis and the USD priced in grams of silver

With silver, we can see its scarcity is following the dollar price. That is, silver becomes scarcer when it sells, and more abundant when it is bid up.

The Monetary Metals Silver Fundamental Price rose 23 cents to $15.74.

Although the market gold-silver ratio rose, the Monetary Metals calculated gold-silver ratio barely budged.

© 2019 Monetary Metals

Charts by: Monetary Metals

Chart and image captions by PT

Dr. Keith Weiner is the president of the Gold Standard Institute USA, and CEO of …read more

How Beijing Uses Fake Money to Cannibalize the U.S. Transit Market

A Distorted Landscape

One of the more remarkable achievements of fake money creation is that it distorts and disfigures the world in odd and uncanny ways.  Dow (not quite) 27,000.  Million dollar shacks.  Over $13 trillion in subzero-yielding debt. You name it.  Any and every disfiguration is possible with enough fake money.

The global stock of outstanding government bonds with negative yields-to-maturity reaches a new record high of more than $13 trillion – this is insanity writ large. [PT]

However, when it comes to the full range of ways fake money distorts the economic landscape, asset price inflation is merely a cheap facade. The real, mega-disfigurations pile up in the arena of international trade.  What’s more, they extend well beyond a gaping trade imbalance.

Currency wars, competitive devaluations, and the race to the bottom are all hazards formed out of the confluence of fake money, foreign exchange markets, and international trade.  So, too, the impetus for tit for tat trade tariffs and trade wars ties back to the deceit and deception of fake money.  Still, these facets aren’t the half of it.

To better understand what exactly fake money has wrought, a brief detour is in order. You see, a world under the influence of fake money is a strange and curious place. The clearest path between two points is not always a straight line.

Thus, before we get to how Beijing is using fake money to cannibalize the U.S. transit market, we deviate to the fake capitalism of the technology sector. This may be an old and tired story.  But it offers important context for understanding the world at large…

Benevolent Investors

The 21st century has brought forth many absurdities. But none is perhaps greater than the popular delusion that profits don’t matter.  That growth is somehow the sole determinant factor of a stock’s value.

This goes counter to our antiquated conception of capitalism.  We still believe that current and future profits are critical to the growth of a company.  Yet, according to the voting machine of the market, and the bubble economy of the technology sector, profits mean diddly squat.  Technology investors even have a decade of rising portfolios to prove it.

Take Spotify, for instance.  During the first quarter of 2019, the music streaming service delivered revenue of $1.5 billion.  But, to do so, they produced earnings of negative $142 million.

Spotify since its IPO – yet another profitless wonder of the modern-day version of the tech bubble. This is highly reminiscent of the late 1990s, when the initial wave of dotcom companies that had come to the market was valued on the basis of “eyeballs”. A few of these lottery tickets had phenomenal growth and eventually made investors rich, but the vast majority of them simply went under when the NDX suffered an 80% wipe-out from 2000 – 2002. [PT]

Nonetheless, investors piled into Spotify like it was gushing cash.  Year to date, its share price is up 25 percent.  Mind you, this is for a company with trailing twelve month earnings per …read more

Rick Rule on Investing in Junior Resource Stocks

Maurice Jackson Interviews Rick Rule

Rick Rule is a renowned investor in junior resource stocks. He is currently working for Sprott USA. Recently Maurice Jackson of Proven and Probable sat down with him for an extensive interview which you can watch below.

Rick Rule, legendary resource stock investor

We found this interview quite enlightening and it is probably useful to anyone investing in the junior mining space. Since gold prices have recently broken out above a long term resistance level (fulfilling our expectations, see A Surprise Move in Gold), this is quite timely, particularly as many junior and exploration stocks have not really moved much yet.

We should mention that Rick Rule apparently shares our assessment of political risk, which is always an issue when investing in mining companies. As he points out, one is actually not truly safe in so-called safe jurisdictions – often they turn out to be just as risky as the more dodgy places on the planet where explorers ply their trade. The latter locales do have an advantage though: they are often under-explored, which increases the chances of making an economically viable discovery.

As an aside, it also turns out that Rick Rule is a fan of Ludwig von Mises.

Without further ado, here is the interview (further below you will find a download link to a PDF file of the transcript) –  enjoy!



Maurice Jackson interviews Rick Rule

Download link:

Transcript of Rick Rule interview, June 2019 (PDF)

…read more

Workers of the World, Unite Around Your Metal!  Precious Metals Supply and Demand

Buyers of Gold vs. Buyers of Silver

Wow! What a week for dollar! It dropped a whole milligram from 23.2 to 22.2mg gold. The dollar is now at its lowest level in years, and on the verge of breaking down.

Silver, the precious metal of the common man [PT]

We insist that the dollar cannot be measured in terms of its derivatives, such as the euro or the pound. These currencies depend on the dollar, not the other way around. When all the dollars are sucked out of them (when they are fully de-dollarized), they will be worth exactly zero.

Well, though in a more abstract sense, the dollar is derived from gold. When all the gold is sucked out of the dollar, then the dollar (and any dollar-derivative currencies that may have survived until that point) will be worth zero. This is my permanent gold backwardation thesis.

Anyway, on a more pedestrian note, the price of gold shot up $58 and the price of silver rose rather less by proportion, ¢47. That brings the gold-silver ratio to a new high.

We talked a bit about this last week, noting that the demand for both gold and silver is monetary reservation. The difference being who demands silver as compared to gold. In the modern era, the ratio has only been higher than this in the episode from 1990-1993. Here is a graph showing the ratio from 1968-present.

Gold-silver ratio, 1968 – today.

The first question is: is it cyclical? What if it isn’t? This would mean silver has been demonetized, silver stocks are rapidly being consumed, and silver could crash or shoot the moon depending on facts specific to events in the mining sector and automotive or solar utilization.

We do not believe this to be the case. And we would add that, unlike stocks and bonds, there is no credit risk. Silver cannot default. A bar of silver today is the same quality as it was in 2011 when the ratio was around two thirds lower than today (i.e., silver was three times more valuable in gold terms).

Gold has long been called the “money of kings” as it was held by governments and the wealthy. Silver, by contrast, was used by wage-earners. One might think that the difference between the two metals is just price (or value). Gold is more expensive, and the not-so-wealthy cannot afford it.

That is true. But it is more than that. Gold is the most marketable commodity in the large. One can do large transactions, without fear of moving the gold market.

There are economic reasons for this, but suffice here to say that gold has such high specific value (value per cubic centimeter, or value per kilogram) that it is practical to move it anywhere in the world. The major depositories and refineries are all within 24 hours by airplane from one another. So the supply or demand of gold is not just local, it is global.

This is not …read more

Feeling the Heat of a Civilization on the Downside

An Epic Folly for the Ages

Today we begin with a list.  A partial list.  And in no particular order…

Angela Merkel. Donald Tusk. Mario Draghi. Donald Trump. Jerome Powell.  Shinzo Abe.  Haruhiko Kuroda.  Theresa May. Boris Johnson. Mark Carney. Xi Jinping.  Emmanuel Macron.  Vladimir Putin. Justin Trudeau. Juan Trump.  And many, many more…

Politicians and bureaucrats of the modern age of statism and central planning… fighting a rearguard action doomed to fail. [PT]

These central planners – though they may not know it – are facing a no-win situation. They have extrapolated the past and are attempting to preserve the status quo into the future.  Yet their efforts to perpetuate the upward growth curve of their countries and unions are useless against the relentless turn of history.

The political, financial, economic, and social foundations that have been in place over the last 75 years – and perhaps, over the last 220 years – are breaking down.  And no policy directive, no interest rate adjustment, no trade tariff, no five year plan, no extraordinary measures, no green new deal, and no technocratic prevarication is going to stop it. Big Government doesn’t stand a chance.

The entire apparatus, from social welfare programs to a ridiculously complex capital structure, is based on perpetual growth. But growth, as we are all presently discovering, is ephemeral. The rapid creation of fake money by central planners may be able to forestall the downside that follows a mega-growth cycle. But it cannot avert it.

Still, the central planners are doing anything and everything to resist the downside. They are taking emergency actions. They are employing extreme currency debasement. They are slapping price controls across the economic landscape. They are starting wars. They are harnessing populism. They are doing all of these – and more.

They are also slipping and sliding and falling and flailing.  Indeed, this is an epic folly for the ages.  With this as context, what follows are several of this week’s choice proceedings…

Perpetual Stimulus

On Tuesday, German Chancellor Angela Merkel suffered visible tremors while listening to the German national anthem.  She was standing next to Ukrainian President Volodymyr Zelensky at a welcome ceremony in Berlin when the heat and stress got to her.  Can you blame her?



Angela Merkel trembles through the national anthem [PT]

Merkel has spent 14 years in office, toiling to keep the European project from fragmenting.  That’s a long time for anyone to stare down doom on a daily basis. Fortunately, after consuming three glasses of water, Merkel was doing much better.

On the same day, European Central Bank President Mario “whatever it takes” Draghi reaffirmed his commitment to currency debasement. His objective is to, somehow,provide perpetual stimulus to the euro zone economy. Much like  Elizabeth Warren’s Economic Patriotism plan, Draghi aims to boost exports via the destruction of money.

Following Draghi’s utterances, the great European bond bubble expanded into the outer stratosphere.  The yield on the German 10-year Bund dropped to a record negative 32 basis points.  What’s more, the yield on the 10-year French OAT briefly slipped into negative territory for the first time in recorded history.  But that is not all…

Europe’s …read more

“We’re All Socialists Now”

An Ominous Sign of Things to Come

Despite being probably robbed of the Democratic Party’s nomination by the Clinton political machine, the success of the Bernie Sanders’ 2016 campaign with his advocacy of “democratic socialism” was an ominous sign of things to come and, in some sense, more telling of the political climate than Donald Trump’s improbable victory in November, 2016.

Bernie Sanders, yet another professional finger-wagger (he is actually famous for his constant finger-wagging by now). Never trust a politician who keeps wagging his finger in  admonishment – he or she is almost certainly a wanna-be authoritarian. [PT]

Photo by Win McNamee / Getty Images

The millions of votes garnered by Sanders in the Democratic primaries has emboldened other socialists to seek political office, while socialist ideas are openly spoken of with little fear of political recriminations.

Sanders has doubled down on his advocacy of democratic socialism in a recent speech at George Washington University, calling for the completion of Franklin Delano Roosevelt’s New Deal of the 1930s:

“Today I am proposing we complete the unfinished work of Franklin Roosevelt and the Democratic Party by putting forth a 21st century economic bill of rights.”*

When not wagging his finger, Sanders seems to be prone to dispensing clenched-fist salutes in the tradition of socialist/communist comrades. [PT]

Even supposedly “moderate” Democrats are trying to tout their “progressive” credentials, such as creepy Joe Biden, who recently said:

“I’m told I get criticized by the New Left.  I have the most progressive record of anybody running for… anybody who would run.”**

While Sanders’ chance of becoming the Democratic nominee in 2020 is still uncertain, President Trump has already indicated what is going to be a centerpiece of his election strategy: oppose socialism. The first hint of the strategy came at this year’s State of the Union address when the President declared:

“America will never be a socialist country.”***

Cartoonists are having a field day with the Democratic Party’s sudden infatuation with socialism [PT]

While President Trump will espouse his supposed accomplishments (tax cuts, deregulation, trade) as a contrast to democratic socialism, his emphasis will also  deflect attention away from his most solemn campaign pledge which has not been achieved – a border wall and a crack down and deportation of illegal immigrants.

Whether this is a winning formula remains to be seen.  If the Democrats are led by Bernie Sanders in 2020, they will probably lose, unless the economy falls off a cliff (very possible) or the Donald follows the suicidal advice of the war- mongering team of Messrs Bolton and Pompeo and starts a war with Iran.

Long Imbibed Tenets of Marxism

While the Trump campaign narrative for 2020 may convince the masses who may still not be ready to vote for outright socialism, the country – like most of the Western world – has long ago imbibed and adopted many of the philosophy’s tenets.

Frank Chodorov, one of the most perceptive and courageous writers of what was affectionately known as the “Old Right,” …read more

How Do Stock Prices React to Rate Cuts by the Fed?

 

The “Greatest Economy in History” Stumbles

“This is the greatest economy in the history of our country”, Donald Trump opined just a few months ago.

Alas, recently there is growing evidence of an economic slowdown.

The Morgan Stanley MSBCI business conditions gauge plummets to its lowest level since 2008, as recent economic data releases ominously persist in disappointing. [PT]

This has fueled speculation of imminent rate cuts by the Fed. You may therefore wonder: how do stock prices typically respond to rate cuts by the central bank?

The Fed Does Have an Effect on Stock Prices

The effect of rate cuts can be examined with the help of the Seasonax app. Its charting tool provides the quickest way of studying the impact of exogenous events on all kinds of asset prices.

The chart below shows the average move of the S&P 500 Index in the 140 days before and after US rate cuts were implemented. The average was calculated over the past 30 years, in which rates were altogether lowered 46 times.

The horizontal scale shows the number of days before and after the event, the vertical scale the average price change in percent. The time of the rate cut is highlighted in orange in the middle of the chart.

 

Average move of the S&P 500 Index 140 days before and after rate cuts by the Fed (1989 – 2019). Rate cuts have typically stabilized stock prices in the short term [PT]

It can be seen right away that stocks typically decline in the months preceding rate cuts, but turn around immediately thereafter. Then they tend to rise moderately for approximately two and half months before the recovery stalls out again.

In short, Fed rate cuts have a significant effect on stock prices. Administered interest rates are typically lowered during bear markets, which explains why prices typically decline ahead of rate cuts. As soon as the Fed becomes active, it stabilizes prices for a while and a counter-trend move ensues.

The Fed’s Actions Also Affect Other Markets

In the past these counter-trend moves were on average definitely large enough to suggest that it would make sense to close out short positions and perhaps even venture into a small long position.

However, the Fed’s actions not only have an impact on stock markets, but on many other markets as well. In the next issue of Seasonal Insights I will examine the Fed’s influence on foreign exchange rates.

Moreover, there are of course a great many more events and cyclical factors that influence asset prices. You can easily find them yourself, either at www.app.seasonax.com, or with the aid of your Seasonax app on Bloomberg or Thomson-Reuters and thus become a pioneer in the search for little known, but potentially highly profitable financial interrelations.

PS: important events affect asset prices!

Dimitri Speck specializes in pattern recognition and trading systems development. He is the founder of Seasonax, the company which created the Seasonax app for the Bloomberg and Thomson-Reuters systems. He also publishes the website www.SeasonalCharts.com , which features selected seasonal charts for interested investors …read more