Category Archives: Silver

PM ImagesThe U.S. dollar has been strong, partially driven by the high interest rate policy of the U.S. Federal Reserve (Fed) in recent years to get inflation under control. With the Fed poised to start lowering rates, some are speculating that the U.S. dollar may go through a period of depreciation. Who stands to benefit from such a regime change? Emerging market equities. Dollar Strength and U.S. Equity Dominance Coming out of the global financial crisis of 2008–2009, few equity markets kept up with the U.S. markets. Big companies—the “Magnificent 7,”1 in particular—delivered strong returns. It is difficult to find companies outside of the U.S. that are operating at the scale and heft of the trillion-dollar market capitalization giants in the U.S. Capital has flowed strongly into the U.S., chasing these returns and bidding the U.S. dollar higher, in general, over this period. In figure 1, we note the ratio of cumulative performance, looking at the MSCI USA Index (U.S. equities) and the MSCI Emerging Markets Index (EM equities) as we also plot a measure of the U.S. dollar against a basket of other currencies. Figure 1: Emerging Market Equities Underperformed U.S. Equities as the U.S. Dollar Appreciated Sources: MSCI, Board of Governors of the Federal Reserve System (U.S.), Nominal Broad U.S. Dollar Index [DTWEXBGS], retrieved from FRED, Federal Reserve Bank of St. Louis for the period 1/1/06–7/1/24. You cannot directly invest in an index. Past performance is not indicative of future results. If we dig into the two distinct periods, denoted from basically the end of August 2010 to the present for “Dollar Appreciating” and from the start of the time series to August 2010 for “Dollar Depreciating,” we see figure 2: The MSCI USA Index, on an annualized basis, significantly outperformed as the U.S. dollar appreciated. Also, we would note that the MSCI Emerging Markets Index return is measured in local terms, so it is not running into a currency headwind in these figures. On the other hand, while the dollar depreciated, the MSCI Emerging Markets Index, albeit for a shorter overall period, dramatically outperformed the MSCI USA Index. Some of us might have forgotten what it looks like to see emerging markets outperforming U.S. equities in a sustained way. Figure 2: Emerging Market vs. U.S. Equities in Periods of Dollar Appreciation and Depreciation Source: MSCI. “Dollar Appreciating” refers to the period 8/31/10–7/31/24. “Dollar Depreciating” refers to the period 12/31/05– 8/31/10. Past performance is not indicative of future results. There Are Many Flavors of Emerging Market Equities WisdomTree has a range of options for emerging market equities, a number of which have been around for longer than 10 years. The WisdomTree Emerging Markets Quality Dividend Growth Fund (DGRE) seeks to track the investment results of dividend-paying companies with growth characteristics in the emerging markets region. The WisdomTree Emerging Markets High Dividend Fund (DEM) seeks to track the total return performance, before fees, of the WisdomTree Emerging Markets High Dividend Index. The focus is on higher-yielding dividend payers within emerging markets. The WisdomTree Emerging Markets SmallCap Dividend Fund (DGS) seeks to track the total return performance, before fees, of the WisdomTree Emerging Markets SmallCap Dividend Index. The focus is on dividend-paying smaller market capitalization stocks within emerging markets. The most widely followed emerging market equity performance benchmark is the MSCI Emerging Markets Index. Recent Evolutions of Emerging Market Equity Performance If we look at DGRE, DEM and DGS relative to the MSCI Emerging Markets Index on a performance basis, we see different things over different periods: Those looking at the long term, periods like 5 years or 10 years, see that DGS has been the leader. Those looking at the most recent three years see the defensive nature of DEM has come to the fore. Those looking over the past year see DGRE taking the lead. Figure 3a: Average Annual Total Returns Sources: WisdomTree, MSCI. Fund data specifically from the Fund Comparison Tool in the PATH suite of tools, as of 6/30/24. Performance is historical and does not guarantee future results. Current performance may be lower or higher than quoted. Investment returns and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. WisdomTree shares are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Total returns are calculated using the daily 4:00 p.m. EST net asset value (NAV). Market price returns reflect the midpoint of the bid/ask spread as of the close of trading on the exchange where Fund shares are listed. Market price returns do not represent the returns you would receive if you traded shares at other times. Figure 3b: Different Periods Have Exhibited Different Performance Leadership in Emerging Market Equities Sources: WisdomTree, MSCI. Fund data specifically from the Fund Comparison Tool in the PATH suite of tools, for the period 7/31/14–7/31/24. Performance is historical and does not guarantee future results. Current performance may be lower or higher than quoted. Investment returns and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. WisdomTree shares are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Total returns are calculated using the daily 4:00 p.m. EST net asset value (NAV). Market price returns reflect the midpoint of the bid/ask spread as of the close of trading on the exchange where Fund shares are listed. Market price returns do not represent the returns you would receive if you traded shares at other times. Location, Location, Location… When people talk about real estate, all of us know the mantra—location, location, location. In emerging market equity investments, the same mantra applies. The world has been very excited about the stability of India, in that the country has elected the same leader through three elections. Even if no government is perfect, sometimes stability and the capability to actually implement policy over a longer time is more important than any one leader being perfect. Business and investment can follow as long as people know what is going on. As we look to figure 4: DGRE has roughly one-third of its assets in India’s equities. Taiwanese companies have a culture of paying dividends, and this market has been well-represented in DEM and DGS for many years. China is a polarizing topic across the U.S., particularly in an election year. In fact, people might even say it is not polarizing because it feels like it could be one’s patriotic duty to be “against China.” On a pure benchmark basis, China has the biggest equity market by market capitalization in emerging markets. Many strategies have significant exposure. DGRE has taken the opposite stance, offering investors a way to have a diversified approach but without any China exposure. While we don’t know if China will always underperform, we think the geopolitical conflicts and economic challenges motivate more options like DGRE for investing in emerging markets ex-China. Brazilian equities have historically been characterized by higher dividend yields, leading to more exposure in DEM. South Korea, on the other hand, does not tend to be a high-yielding dividend market, but it is at least looking at some Index providers like FTSE. It is a developed country,2 so there is a lot of equity market activity with some very interesting global companies to choose from. Figure 4: Location, Location, Location—the Country Exposures of DEM, DGRE and DGS Source: WisdomTree, specifically the PATH fund comparison tool, with data as of 6/30/24. Holdings subject to change. Earnings Growth or High Dividend Yields? One of the trade-offs that investors often have to make is as follows: One group of stocks has a low valuation, possibly seen through a very high dividend yield or a very low P/E ratio. There are some who see this and find it exciting, not needing to know too much more. There are others who tell us, yes, but…aren’t these companies “cheap for a reason”? This is a version of asking—what if this is a “value trap”? It is absolutely true that certain companies may be inexpensive on a valuation basis and getting even more inexpensive, potentially even going out of business. Another group of stocks may not have as low a valuation but may have stronger earnings growth metrics. Usually, companies with better earnings growth metrics never showcase the lowest valuation metrics because investors appreciate the growth in earnings and tend to bid the share price levels higher. Historically, DEM’s strategy of following the highest-yielding dividend payers has been more defensive in consistently finding the lowest valuations but also finding the lowest earnings growth. DGRE is meant to be a contrasting style of investment, finding companies with stronger earnings growth over time. DGS is a bit different, being more of a broad-market small-cap strategy exposed to hundreds of underlying stocks. Emerging market companies pay dividends very early in their respective life cycles. We see a version of this story playing out in figure 5. Figure 5: Where Is the Earnings Growth in EM? Source: WisdomTree, specifically the PATH fund comparison tool, with data as of 6/30/24. Past performance is not indicative of future results. Conclusion: Know Your Regional Exposures What are emerging markets? What are developed markets? The real answer these days is that it depends on who you ask. It is more important than ever to look under the hood and think about which countries might be poised to provide strong, pro-business conditions. 1 Apple, Amazon, Meta Platforms, Alphabet, Tesla, Microsoft and Nvidia. 2 Source: Christopher Woods, “Classifying South Korea as a Developed Market,” FTSE Russell, 1/13. https://research.ftserussell.com/products/downloads/FTSE_South_Korea_Whitepaper_Jan2013.pdf Christopher Gannatti, CFA, Global Head of Research Christopher Gannatti began at WisdomTree as a Research Analyst in December 2010, working directly with Jeremy Schwartz, CFA®, Director of Research. In January of 2014, he was promoted to Associate Director of Research where he was responsible to lead different groups of analysts and strategists within the broader Research team at WisdomTree. In February of 2018, Christopher was promoted to Head of Research, Europe, where he was based out of WisdomTree’s London office and was responsible for the full WisdomTree research effort within the European market, as well as supporting the UCITs platform globally. In November 2021, Christopher was promoted to Global Head of Research, now responsible for numerous communications on investment strategy globally, particularly in the thematic equity space. Christopher came to WisdomTree from Lord Abbett, where he worked for four and a half years as a Regional Consultant. He received his MBA in Quantitative Finance, Accounting, and Economics from NYU’s Stern School of Business in 2010, and he received his bachelor’s degree from Colgate University in Economics in 2006. Christopher is a holder of the Chartered Financial Analyst Designation. Original Post Continue reading →

(Bloomberg) — Bond yields fell as a big downward revision of US payrolls reinforced bets the Federal Reserve will cut rates in September.Most Read from BloombergTreasuries rose across the curve, with the move led by shorter maturities. Swap traders are pricing in about 100 basis points worth of easing in 2024. The implied rate on the contracts show traders expect a quarter-point cut next month — and a roughly 20% chance for a half-point reduction. Equities fluctuated.While the annual revision to US jobs growth isn’t something that would usually impact trading, it got attention this time around due to the recent concern the labor market is cooling too much amid elevated Fed rates.US job growth was probably far less robust in the year through March than previously reported. The number of workers on payrolls will likely be revised down by 818,000 for the 12 months through March — or around 68,000 less each month. It was the largest downward revision since 2009.“The main message from the revisions in my mind is reinforce just how ‘silly’ it is to let the next jobs number be the determinant in whether to go 25 or 50 in September,” said Neil Dutta at Renaissance Macro Research. “What this revision data imply is that whatever the next jobs number is going to be, it’s probably lower in reality.”Jamie Cox at Harris Financial Group says that “if you are in the rate cut in September camp, these data all but ‘seal the deal’ on what Fed needed to cut rates.”In the run-up to Jerome Powell’s Friday speech in Jackson Hole, traders will scour minutes from the latest Fed policy meeting on Wednesday. Any clues on the path ahead for rates will be in focus, as well as any guidance on when the Fed will complete its current course of quantitative tightening.Treasury 10-year yields declined three basis points to 3.78%. The S&P 500 hovered near 5,600. Target Corp. climbed 12% after ending a string of sales declines in the second quarter, citing improved discretionary spending. Macy’s Inc. slightly missed estimates for its quarterly revenue and lowered its outlook for sales during the rest of the year.Krishna Guha at Evercore says the big payroll revisions will reinforce the Fed’s assessment that the labor market has been softening under restrictive policy and that it will need to recalibrate rates in a timely manner to prevent this from extending further than desired.All this favors a relatively “low bar” for 50 basis-point rate cuts. The base case remains a string of 25 basis-point moves.“We are confident this will be the takeaway from Powell at Jackson Hole Friday,” Guha noted. “But in the interim, we suspect minutes from the July meeting may well feel ‘hawkish-stale.’ A lot has happened since then.”At Strategas, Don Rissmiller says the case for lower policy rates got stronger. The Fed will need to validate this rate cut cycle – which likely means multiple cuts, he noted, pointing to Powell’s speeech on Friday at Jackson Hole.To Jennifer McKeown at Capital Economics, central bankers are unlikely to offer much forward guidance at the Jackson Hole symposium, preferring to stress their “data dependence”.“Since most economies are expanding, inflation is easing back to target and financial markets have stabilized after the recession scare a few weeks ago, there is less pressure for them to steer markets than there has been around past events,” she noted. “But they risk keeping rates too high for too long.”With the Fed poised to cut interest rates from restrictive levels and still strong economic and earnings fundamentals, the the environment remains supportive for stocks, with still strong economic and earnings fundamentals, and a Fed poised to cut interest rates from restrictive levels, according to Solita Marcelli at UBS Global Wealth Management.“Our base-case year-end and June 2025 S&P 500 price targets remain 5,900 and 6,200, respectively.”Marcelli believes quality growth remains well placed to outperform. Firms with competitive advantages and exposure to structural drivers should be better positioned to grow and reinvest earnings consistently, she noted.“The volatility from the past month has settled, as macro fears subside, expectations were reset, and investors used the weakness as an opportunity to add to risk exposure,” said Mark Hackett at Nationwide. “The next catalyst for markets is Fed data, including the minutes from the FOMC meeting and the Jackson Hole speeches. This likely results in a wait-and-see approach until Friday.”Corporate Highlights:Ford Motor Co. is recalibrating its electrification strategy yet again, canceling plans for a fully electric sport utility vehicle in a shift that may cost the carmaker around $1.9 billion.Walmart Inc. raised about $3.6 billion by selling its stake in Chinese e-commerce firm JD.com Inc., winding down an eight-year partnership that appears to be paying diminishing returns amid a challenging landscape for Chinese tech giants.US coal producer Consol Energy Inc. agreed to merge with Arch Resources Inc. in a $2.3 billion deal as the transition to greener fuels threatens the industry’s long-term outlook.Brookfield Asset Management is asking banks to line up about €9.5 billion ($10.6 billion) of debt for its potential take-private deal for Spanish pharmaceutical producer Grifols SA, according to people with knowledge of the matter.Key events this week:Eurozone HCOB PMI, consumer confidence, ThursdayECB publishes account of July rate decision, ThursdayUS initial jobless claims, existing home sales, S&P Global PMI, ThursdayJapan CPI, FridayBOJ’s Kazuo Ueda to attend special session at Japan’s parliament to discuss July hike, FridayUS new home sales, FridayJerome Powell speaks in Jackson Hole, FridaySome of the main moves in markets:StocksThe S&P 500 rose 0.1% as of 12:24 p.m. New York timeThe Nasdaq 100 rose 0.1%The Dow Jones Industrial Average was little changedThe MSCI World Index rose 0.2%CurrenciesThe Bloomberg Dollar Spot Index was little changedThe euro rose 0.1% to $1.1146The British pound rose 0.4% to $1.3081The Japanese yen rose 0.1% to 145.10 per dollarCryptocurrenciesBitcoin rose 0.5% to $59,592.77Ether rose 0.5% to $2,602.99BondsThe yield on 10-year Treasuries declined three basis points to 3.78%Germany’s 10-year yield declined two basis points to 2.19%Britain’s 10-year yield declined two basis points to 3.89%CommoditiesWest Texas Intermediate crude fell 1.3% to $72.24 a barrelSpot gold fell 0.4% to $2,504.93 an ounceThis story was produced with the assistance of Bloomberg Automation.Most Read from Bloomberg Businessweek©2024 Bloomberg L.P. 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The purpose of this update is to bring to your attention that silver is on the verge of commencing a massive unprecedented bull market which will “officially” kick off with it breaking above the key $30 level, which is important for reasons that will soon become apparent when we consider the charts and this could happen very soon. Gold’s massive unprecedented bull market has already begun and where gold leads, silver will follow.

The reasons for silver’s bull market will be the same as for gold and are well set out by Doug Casey with the link to his recent article Gold’s Next Explosive Move, which is included in the parallel Gold Market update, repeated here for convenience. See also Surging Silver Demand Depleting Global Inventories. In the Gold Market update we deduced that, taking inflation over the years into consideration, gold has essentially been stuck in a giant trading range since its 2011 peak, that it only succeeded in breaking out of in the Spring of this year, with this trading range being comprised of an equally gigantic Cup & Handle continuation (consolidation) pattern.

The big difference here between silver and gold is that, while gold has already broken out and is forging ahead, silver has so far only managed a “preliminary” breakout that was followed by a reaction back into the pattern, but with gold striding ahead this is not a situation that can be expected to last much longer and it is already starting higher. WHAT THIS MEANS IS THAT SILVER AND ALL THINGS SILVER ARE A TERRIFIC BARGAIN HERE WITH THESE SORTS OF PRICES NOT EXPECTED TO LAST MUCH LONGER, AND MAY NEVER BE SEEN AGAIN. That the giant Cup & Handle base shown on our long-term chart for silver going back to 2000 is valid is made clear by two important technical factors. One is the strong volume on the rally to form the right side of the Cup in 2020 (and on the attempted breakout this Spring) which is a sign that the pattern is genuine and the other is the strong On-balance Volume line which has been marching steadily higher. Thus the reaction back into the pattern of the past couple of months is seen as presenting the perfect “buy spot” for silver and all things silver ahead of a genuine breakout leading to a vigorous bull market especially given the serious escalation of military conflict in different theaters around the world that we are now right on the verge of.

Zooming in now via a 7-year chart, which shows the right side of the Cup and the subsequent “Handle” in much more detail, we can see that the Handle has been comprised of a Head-and-Shoulders continuation pattern with the price staging a clear breakout from it in April, in sympathy with gold’s advance, and this breakout has been followed by a normal reaction back to a classic “buy spot” at support at the upper boundary of the H&S pattern and although it is starting to advance again, we are clearly in a very good buying area here with silver still oversold on its MACD. After the price broke out in April it drove through the key $30 level, but due to overhead resistance – recall that silver got as high as $50 in 2011 – and due to it having become overbought, it reacted back below it again. However, this was not in any way a negative development as it was simply a normal post-breakout reaction back to test support, and the foray of about $30 drained off some overhanging supply thus clearing the way for the next upleg to make more progress.

Lastly, on its 6-month chart, we can see how silver is perfectly positioned for renewed advance following a normal correction back to support in the vicinity of its rising 200-day moving average. We don’t often attempt to employ Elliott Wave Theory because it can be complicated and tricky and has a tendency to work very well in retrospect but on this occasion, we see that silver has exhibited a near-perfect 5 waves up in the direction of the primary trend followed by a 3-wave correction which are believed to be waves 1 and 2 of a larger order uptrend. If so then big wave 3 is imminent which is likely to be substantial.

End of update. Continue reading →

Anthony BradshawGold rose to another in a long series of record highs on August 20 when the December COMEX futures price (XAUUSD:CUR) reached $2,570.40 per ounce. Gold is now an official tenbagger since the 1999 $252.50 low. A unique asset, gold is part commodity, part currency. Its historical volatility tends to be lower than that of other raw materials but higher than that of foreign exchange assets. Gold is the world’s oldest means of exchange and was money long before there were paper currencies. The SPDR® Gold Shares ETF (NYSEARCA:GLD), introduced in 2004, was the first commodity ETF product and has been the most successful. As the ETF owns physical gold bullion, it does an excellent job tracking gold prices. New highs in gold In a bull market that is now twenty-five years old, gold continues to make new and higher highs. Long-Term COMEX Gold Futures Chart (Barchart) The long-term chart highlights that gold has not traded below $1,000 since 2009, under $1,500 since 2020, and below $2,000 since February 2024. The continuous gold futures contract eclipsed the $2,500 per ounce level in August 2024. Gold’s ascent has been a textbook bull market. De-dollarization is bullish for gold President Xi of China and Russian leader Vladimir Putin shook hands on a “no-limits” alliance in what was a watershed 2022 event. Russian troops marched into Ukraine less than one month later. U.S. and Western European sanctions on Russia caused Moscow to stabilize the economy through trade protocols with Beijing and other allies. The U.S. dollar has been the world’s reserve currency over the past century, making the dollar the primary pricing mechanism for most commodities and cross-border transactions. The Chinese-Russian alliance and sanctions have caused a wave of international de-dollarization. As China, Russia, and their allies abandon the U.S. dollar for other payment vehicles, the dollar’s reserve currency role has diminished along with the effectiveness of sanctions. As the dollar’s role declines, gold’s value has increased, as gold is the world’s oldest means of exchange, and governments hold the precious metal as an integral part of foreign currency reserves. China and Russia are leading gold-producing countries. The Leading Gold-Producing Countries in 2023 (Statista) As the chart illustrates, China was the leading gold-producing country in 2023, with Russia tied with Australia for second place. With around 3,000 tons of annual production, China and Russia are responsible for around 22.7% of the world’s yearly output. Meanwhile, in another move to increase de-dollarization, Saudi Arabia abandoned a 50-year petrodollar protocol that prices its oil output in U.S. dollars. The Saudis have been selling China crude oil for yuan payment, while India has purchased the energy commodity using rupees. Central banks keep buying Central banks own gold as a critical part of foreign currency reserves, validating gold’s role as a reserve asset. Since 2004, “The total quantity of gold held in central bank reserves has increased by almost 19% by weight.” Meanwhile, the leading buyers have been Russia, China, India, and Turkey, the countries that are leading the de-dollarization. Moreover, since Russia and China are leading producers, they are likely vacuuming domestic production, increasing gold reserves even more than the official statistics show. China and Russia have also been leading the development of a BRICS currency with some gold backing to challenge the dollar’s reserve currency position and offer an alternative to the U.S. currency. As central banks, monetary authorities, and governments continue to build gold reserves, it sends a message to investors that gold needs to be an integral part of all investment portfolios. The GLD ETF is an excellent option for gold exposure The most direct route for gold investment is the physical market for bars and coins. Governments tend to own physical London Good Delivery 400-ounce bars, each worth $1 million at $2,500 per ounce. The fund profile for the GLD ETF states: Fund Profile for the GLD ETF Product (Seeking Alpha) At $231.80 per share on August 20, GLD had $68.88 billion in assets under management. GLD trades an average of over seven million shares daily, making it a highly liquid ETF product. GLD holds all its assets in physical gold bullion in London, New York, and Zurich. GLD charges a 0.40% management fee. GLD Seeking Alpha ETF Grades (Seeking Alpha) GLD gets high Seeking Alpha ETF grades. Momentum is at an A+ rating as the bull market continues to make higher record highs. Expenses at a B- reflect GLD’s 40 basis point per year expense ratio. The D+ in risk relates to the all-time high gold price that increases the odds of an eventual correction. GLD receives an A+ in liquidity as it is the commodity ETF with the most assets and volume. Gold’s latest rally took the futures 40.96% higher from $1,823.50 in October 2023 to $2,570.40 on August 20. One-Year COMEX Gold Futures Chart (Barchart) Over the same period, the GLD ETF rose 39% from $168.30 to $234.01 per share. Since the ETF only trades during U.S. stock market hours and gold trades around the clock, GLD can miss highs or lows occurring when the U.S. stock market is not operating. Other factors supporting higher gold prices Aside from the trend toward de-dollarization and central bank gold buying, the following factors favor a continuation of gold’s ascent to higher prices: The trend in any market is always your best friend. Gold’s trend has been higher for a quarter of a century, with every downside correction a golden buying opportunity. The U.S. debt is over $35 trillion and climbing, eroding the U.S. dollar’s value, which is bullish for gold. The geopolitical landscape remains a mess, with wars in Ukraine and the Middle East threatening world peace. Geopolitical turmoil tends to be bullish for gold. The U.S. election is fostering significant uncertainty about the future policy direction. Uncertainty causes a flight to quality, and gold is the world’s oldest asset and store of value. Gold’s upside potential is a function of market sentiment and could reflect the decline of fiat currency values. The sky could be the limit for gold as commodity prices often rise to unreasonable, irrational, and illogical levels during bull markets that deft technical and fundamental supply and demand analysis. Gold is not a typical commodity, as it is a hybrid between a means of exchange or currency and a raw material. Therefore, its position as a unique asset has tempered its volatility, but the price continues to rise to new and higher highs. The bottom line is we should respect gold’s trend, which remains bullish in early September 2024. However, even the most aggressive bull markets rarely move in straight lines. Gold could be overdue for a correction, which would be another buying opportunity if the quarter-of-a-century trend remains intact. Since 1999, buying every dip in gold has yielded golden returns. Continue reading →

Douglas RissingThe Fed is in great difficulty. The institution is part of the government, as defined by the Federal Reserve Act of 1913, but its typical role as the supervisor of banks and banking regulations has, for years, also provided money to the U.S. Treasury from the profits that it makes. Now, the profits have not only diminished but totally disappeared, which means that the U.S. government no longer receives money from the Fed, causing an even larger debt for the federal government. Let me tell you, regardless of some of the comments in the Press that everything is just fine, it is not! Here are the facts. In 2023, the Federal Reserve spent $114.3 billion more than it generated, according to the Fed’s records. This is its largest operating loss on record. This is compared to 2022, when the central bank brought in a net income of $58.8 billion and then distributed its profits to the US. Treasury. In its battle with inflation, as part of the Federal Reserve’s increases to the key rate, the bank had to shell out $60 billion more in interest on depository institutions’ reserve balances compared to the year before. And in the same period, it incurred an additional $62.4 billion in interest on securities sold under agreements to repurchase. Once again, the war with inflation has a very negative effect. The cost of borrowing money has just spiraled out of control. The Fed’s audited financial statements revealed interest payments to banks on excess reserves parked at the Fed hit a record $176.8 billion last year – almost triple the amount paid in 2022. Interest payouts from the reverse repo facility also swelled from $41.9 billion to $104.3 billion last year. When there’s a shortfall in earnings, the Fed uses a deferred asset – which essentially works as an IOU paid by the Fed to itself – to fund operations. So, when the central bank becomes profitable once more, it can divert the excess earnings to pay down the deferred asset until it reaches zero. Once the deferred asset is fully paid off, the Fed can continue to hand excess profits over to the Treasury again. However, a November report from the St. Louis Fed estimates the central bank will carry this deferred asset until mid-2027, which means it’ll be a few years before it can return profits to the government or, translated, several years ahead of adding to the government’s budget deficit. This is almost never mentioned in the Press or calculated in the government’s deficit, but it is there nonetheless. This will also have a continuing impact upon both the bond and equity markets, as our Gross Domestic Product (GDP) is nowhere close to the country’s debt. According to the St. Louis Fed, at the end of 2023, the debt-to-GDP ratio stood at 120.57%. In my opinion, that is one scary number and something we should all consider when investing, especially because the situation may only get worse, depending upon the actions of the government. Even now, according to MSN, the average interest rate for credit cards is 21.47% at the start of 2024. Rates have been steadily increasing in recent years, and dramatically so. In November 2021, the average rate for credit cards was 14.51%, and back in November 2017, for example, it was 13.16%. Lower inflation will help the economy and the markets. Higher interest rates will have an adverse effect. My advice is to keep your eyes on both. Original Source: Author Continue reading →

Yommy8008/iStock via Getty ImagesPreamble Since the price of gold was around $2,006 six months ago, we can say that the metal has risen by a whopping 25% over this period. Why such a big rise? Yes, there are a lot of geopolitical shenanigans going on, or is the USD heading lower. Personally, I believe it is a combination of the two. I’m also of the opinion that once the investment community fully appreciates the direction the US empire is heading, gold will go to the mooooooon! In the past couple of years, there has been the steady drumbeat of articles suggesting that the US is paralleling the Roman Empire into decline. But, it’s not just the Roman Empire that the US appears to be copycatting, there are some similarities to the collapse of other empires, such as the Ottoman Empire, the Weimar Republic and, more recently, the British Empire. There is one thing that unites the mentioned collapsed empires, a nosedive in the value of their currencies relative to gold. Debt and currency debasement often go hand-in-hand in the decline of empires, which then boosts the value of gold in their respective currencies. As governments struggle to finance social stability or their ambitions, which typically involves wars, they may resort to printing more money, leading to inflation and the erosion of their currency’s value. This pattern was evident in the Roman Empire, the Ottoman Empire, and even the more recent British Empire, where excessive debt and the loss of confidence in their currencies contributed in no small extent to their eventual downfall. The US today faces a growing mountain of debt, and concerns are growing about the potential for currency debasement. If the government continues to rely on deficit spending and the Federal Reserve maintains loose monetary policies, it could trigger inflation and a decline in the dollar’s value. This scenario could have serious repercussions for the US economy, potentially undermining its global standing and leading to a loss of confidence in its financial system. In this article, I cover a number of signposts that indicate that the US has the potential for a downward spiral, beginning with the implications of the current trajectory of the debt-to-GDP ratio and the consequences of US dollar depreciation for the price of gold. Debt-To-GDP Ratio After the devastation of World War II, the UK’s debt-to-GDP ratio soared to a staggering 250%, a colossal burden that cast a long shadow over the nation’s economic recovery. This massive debt overhang severely constrained the government’s ability to invest in infrastructure, education, the military and social programs, thereby accelerating the demise of the UK’s influence around the globe. The strain on the British economy was immense, resulting in sluggish growth, high unemployment, and persistent balance of payments crises. The situation reached a critical point in the 1960s when the UK was forced to turn to the International Monetary Fund for a bailout, a humiliating blow to an empire that only a hundred years ago ruled over 24 percent of the Earth’s total land area. The effect on the value of the British pound versus gold, which, in large part, resulted from the decline of the empire and humongous national debt, was truly astonishing. If we look at the price of gold shortly after the end of the Second World War, say 1946, it traded at $38.25. At that time, the British pound was $4.03 v the USD. So, the price of one ounce of gold in GBP in 1946: $38.25 / $4.03 per GBP = 9.49 GBP Current price of gold in GBP using the latest conversion rate of GBP = $1.27 we get the following: Current price of gold in GBP: $2,500 / $1.27 per GBP = 1,968.50 GBP If we subtract the price of gold in 1946 and today’s price, we get 1,959.01 GBP. To get the percentage change is a simple calculation. Percentage change since 1946 = (1959.01 GBP / 9.49 GBP) * 100 = 20,642.89% Japan Debt-To-GDP Ratio Another country with a high Debt to GDP ratio is Japan, and, at the moment, it stands at 263%. The country’s currency, the Yen, has been in the news quite a bit recently, as the carry trade has been highlighted as a reason for the selloff in stocks last week. The historically low-interest rates in Japan have made it an attractive funding currency for carry trades. Traders borrow yen at low rates and invest in higher-yielding assets, often denominated in other currencies, such as the US dollar. This creates a substantial short position on the yen. The massive debt-to-GDP ratio amplifies these dynamics. Many traders believe the Japanese government is constrained in its ability to raise interest rates due to the already immense debt servicing costs. This reinforces the expectation of continued low rates, making the yen even more attractive for carry trades. Last week, traders were spooked because the Japanese government increased interest rates by a quarter of a percent, leading to a sell-off in stocks. But now, there are reports that traders are turning back to the carry trade as they are convinced that the Japanese government cannot increase rates given that this would lead to a massive uptick in servicing costs. These short positions have led to a fall in the value of the Yen v the USD, and so in Yen terms, gold has had an even greater rise than gold v the USD. Yen v USD (Trading Economics) US Debt-To-GDP Ratio I’m certain everyone by now is familiar with the new figure for the national debt, which stands at around $35 trillion, and that the debt-to-GDP ratio is approximately 122%. I’m equally confident that most readers have heard that the debt is increasing at circa $3.6 trillion a year. Given that the debt is increasing at such an alarming rate, it would be interesting to calculate how soon the debt-to-GDP ratio could hit 200%, which is bad news for a national currency. First, let’s calculate the Compound Annual Growth Rate (“CAGR”) in the rise of the debt, from say 2018 to now, using the $35 trillion figure. Between 2018 and today 2024, debt increased by around $13.6 trillion ($35.167 – $21.516), so we get a CAGR of 8.5% over the last 6 years. CAGR = (Ending Value / Beginning Value) ^ (1 / Number of Years) – 1 ((35 / 21.516) ^ (1 / 6)) – 1 = 8.5% Now let’s figure out the CAGR in the rise of GDP over the same period. In 2018, GDP was $20,656 trillion and, in 2024, the latest estimate is that it will be $28,176 trillion. Using the same formula as above, we get a CAGR of 5.31%, assuming the 2024 estimate holds true. (($28,176 trillion / $20,656 trillion) ^ (1 / 6)) – 1 = 5.31% So, we can conclude that debt is rising 3.2% faster than GDP. Let’s now assume that GDP remains constant and debt rises by 3.2% in order to calculate an estimate of the time it will take for the debt-to-GDP ratio to get to 200%. Year Debt (trillions) Increase in Debt (trillions) Debt-to-GDP Ratio 2024 $35 – 125% 2025 $38.72 $3.72 138% 2026 $42.55 $3.83 152% 2027 $46.52 $3.97 166% 2028 $50.63 $4.11 181% 2029 $54.88 $4.25 196% Click to enlarge And the answer is; 5 short years. Of course, this is a back-of-an-envelope calculation, debt could accelerate further due to the various conflicts taking place around the world or an increase in social costs, such as the billions needed to pay for newly arrived migrants. It is also possible that the government could control spending as the debt balloons out of control. There are some who may, quite rightly, point out that debt is not so bad if a country can afford the interest on the loans. As of today, the US pays circa $870 billion in interest and given that Federal Revenues are estimated to be $4.864 trillion for FY 2024, the percentage of revenues is about 17.88%. But, as the debt-to-GDP ratio rises towards 200%, that 17.88% is going to rise more than a tad. When this happens, the country may face pressures similar to those experienced by the UK, potentially leading to cuts in spending on infrastructure, education, the military, and social programs. Then there is a problem with the number for GDP, and that is that around 35% of the figure is government spending, which has been increasing, as the IMF data below illustrates. So, it seems that the US government is dealing with some economic hardships by boosting spending. This is similar to the Weimar Republic, which also faced the classic dilemma, either cut government spending in an attempt to balance the books or increase it in an attempt to juice-up the economy. Government Spending As A Percentage Of GDP (IMF) The Ottoman Empire There is a study of the debasement of the currency used in the Ottoman Empire freely available for those interested. This work discusses a number of issues that contributed to the eventual collapse of the Empire in 1922, three of which I will highlight and their parallels in the US today. On page 25 of the text, you can find reference to the debasement of the Ottoman currency, which led to a decline in purchasing power of 83% relative to other European currencies, and, by implication, a rise in the value of gold in that currency. Since there was this intentional debasement, lenders to the Empire began to lose their enthusiasm for loaning money in return for a currency consistently losing value (Page 28). Finally, some economic historians; “argue that free trade contributed to deindustrialization in the Ottoman Empire. In contrast to the protectionism of China, Japan, and Spain, the Ottoman Empire had a liberal trade policy, open to imports.” Of course, a decline in exports would naturally lead to a lower demand for the currency, thus contributing to the decline in purchasing power. Parallels To The Ottoman Empire Back in the days of the Roman and Ottoman Empires, currencies would be debased through the reduction of the amount of silver in a coin. The US does things differently, but the effect is the same. To increase the money supply, a form of monetary policy known as quantitative easing (“QE”) is used. With this technique, the Federal Reserve purchases securities in the open market, which increases the money supply, effectively, debasing the dollar. In recent years, trillions of dollars have been magicked into existence through the miracle of QE. Seemingly; “$3 trillion in 2020 alone.” As with the Ottoman Empire, many buyers are losing their enthusiasm for buying US debt, as the chart below confirms. Foreign Holdings Of US Bonds (Apollo Academy) According to some researchers; “Reports of American manufacturing’s death, however, are greatly exaggerated. While it is undeniably true that certain manufacturing industries—particularly labor-intensive, low-tech ones—are no longer primarily located in the United States, many other, more advanced ones have flourished.” However, in my humble opinion, the market for US companies is shrinking, which I have covered previously. For instance, primarily as a result of US sanctions on China, according to a report by the Federal Reserve Bank of New York, the US semiconductor industry has lost business in the Chinese market which may not recover due to homegrown Chinese companies filling the gap left by US companies. If indeed the international market were indeed shrinking for US products and services, you would expect revenues to decline in markets outside the US. According to research by FactSet; “S&P 500 Companies With More International Exposure Reporting An Earnings Decline of -21%.” And this, despite a weaker dollar. Of course, there are other potential reasons for this drop, such as a weak global economy, but it does support my thesis. Supply Chain Issues The British Empire, now known simply as the United Kingdom, faced many supply chain issues, most of which began during World War 2. German submarines torpedoed ships bringing raw materials to British industry. Then many countries of the empire became independent, beginning with India in 1947. This meant that the UK had to compete with other countries for the commodities these countries produced for UK manufacturing. Now the US is also facing challenges with supply chains. I’ve previously discussed difficulties being faced by the nascent US battery industry due to the supply of graphite being choked off. Now, China has imposed restrictions on the supply of antimony, which is important for the manufacture of many products, including a host of different weapons systems. Given the recent sabre rattling between the US and China, one wonders when the Chinese may stop supplying the 41% of parts necessary to produce US weapons systems. Others There are other parallels I could draw, such as loss of technological edge (Check out Intel v TSMC) and political polarization. In addition, there are ongoing discussions among BRICS countries for an alternative to the dollar and many countries are opting to trade in national currencies, but I think readers have already got the picture. Summary The primary focus of the article is the potential decline of the US and its parallels to historical empires. The rising US debt-to-GDP ratio, coupled with other factors such as a shrinking international market and supply chain vulnerabilities, raises concerns about the future of the US dollar and the potential for a significant increase in the gold price. The recent rise in the gold price could be an early indicator of these underlying issues, and I maintain my view that gold could see further substantial gains as the market fully grasps the implications of the US’s current trajectory. Continue reading →

The U.S. and China have signed agreements for cooperating on financial stability, according to a People’s Bank of China readout Monday.
The agreement was part of a meeting of the U.S.-China Financial Working Group in Shanghai Thursday and Friday.
The readout described the conversation as “professional, pragmatic, candid and constructive,” according to a CNBC translation of the Chinese.

A bank employee count China’s renminbi (RMB) or yuan notes next to U.S. dollar notes at a Kasikornbank in Bangkok, Thailand, January 26, 2023.
Athit Perawongmetha | Reuters

BEIJING — The U.S. and China last week signed agreements for cooperating on financial stability, according to a People’s Bank of China readout Monday.
The agreement was part of a meeting of the U.S.-China Financial Working Group in Shanghai on Thursday and Friday. Brent Neiman, deputy under secretary for international finance at the Treasury Department, and Xuan Changneng, deputy PBOC governor, co-lead the working group.

The two sides also exchanged a list of people to contact in the event of financial stress or risk events, the PBOC readout said. A Treasury readout was not available as of early Monday afternoon Beijing time.
Representatives from the Federal Reserve, U.S. Securities and Exchange Commission, National Financial Regulatory Administration and China Securities Regulatory Commission also attended, the PBOC said.
The readout described the conversation as “professional, pragmatic, candid and constructive,” according to a CNBC translation of the Chinese statement. Topics discussed included capital markets, cross-border payments and the two countries’ monetary policy, especially in the context of China’s recently concluded Third Plenum meeting, the PBOC readout said.

Technical experts reported on each country’s systematically important global banks, financial institutions’ operational resilience and climate risk stress testing.
China’s government bond market saw heighted volatility earlier this month amid a report of PBOC intervention. Central bank governor Pan Gongsheng said Thursday via state media that China’s financial risks have dropped, including from local government debt.

Last week, U.S. and Chinese financial institutions also met in their first roundtable meeting under the framework of the working group, the PBOC said, without providing specific names. The institutions shared potential cooperation opportunities and discussed how finance could contribute to sustained growth.
U.S. Treasury Secretary Janet Yellen and Chinese Vice Premier He Lifeng launched economic and financial working groups in September 2023 through which Treasury officials would meet regularly at a vice minister level with the Ministry of Finance and PBOC, respectively. Continue reading →

Richard DruryBy Daniel Lacalle The recent market weakness suggests a combination of profit-taking and concerns about the latest United States jobs and manufacturing figures, added to the abrupt unwinding of part of the yen carry trade. Valuations had soared, and market participants now demand central bank easing. However, rate cuts may not be enough to send markets to new all-time highs. Money supply growth and quantitative easing are needed to maintain these valuations. Investors are turning to utilities and real estate stocks, but these sectors need more than low rates; they need a buoyant economy and strong consumer demand, so interest rate decisions may be insufficient. If we look at the long-term trend, the market remains in a cyclical bullish mode, but we need to understand why and be aware of the rise in volatility. Markets have been rising, discounting an ever-increasing money supply and future currency debasement. However, the next wave of central bank easing may not come until 2025. Fundamentals may have been weak and earnings not as robust as required by demanding valuations, but investors understand that the fiscal challenges posed by rising government expenditure and public debt will ultimately mean ultra-loose monetary policies, which make sovereign bonds more expensive, erode currency purchasing power and, by comparison, make equities and risky assets more attractive. Investors may continue to accept higher valuations for equities and risky assets because they fear monetary and fiscal insanity more than they are concerned about a recession. It is not that markets like fiscal imprudence. Extreme monetary policies erode the currency’s purchasing power, and equities and risky assets become protection for real inflation. Murray Rothbard calculated the true money supply (TMS), which is the most realistic indicator of inflation. As Professor Joseph Salerno explains, “three items which are not included in any Fed measure of the money supply (Ml, M2, M3) or even of overall “liquidity” (L) find a place in the TMS.” These are the demand and other deposits held by the U.S. government, foreign official institutions, and foreign commercial banks at “U.S. commercial and Fed banks.” When we look at True Money Supply, we can understand what market participants really look at for a bullish market trend, even if they may not be calculating it in the Rothbard way. The available money for market transactions. The quantity of money that is put to work to generate a return that offsets inflation. “Liquidity,” as most market participants call it. Mike Shedlock, a great macroeconomic analyst and investor, discusses these important differences when analyzing money growth because they basically give us an idea of the buying or selling pressure in a market. The True Money Supply (TMS) includes the currency component of M1, total checkable and savings deposits, as well as U.S. government deposits, note balances, and demand deposits from foreign banks and public institutions. Any market trader understands this when they are talking of “cash on the sides,” “high liquidity,” and “bullish sentiment.” All these money measures, when rising, indicate stronger demand for risky assets looking for a return. Alternatively, Professor Frank Shostak’s definition of total money supply includes cash plus demand deposits with commercial banks and institutions plus government deposits with banks and the central bank. Why are these measures more important than the traditional M2 and M3 money aggregates? Because they show us the level of buying pressure in the market. Many Keynesian economists see deposits and savings accounts as idle money and invented the ludicrous “excessive savings” concept. There is no such thing as excessive savings or idle money. The reason they see those savings as negative is because their political view of economics perceives that any money not spent by the government is not productive. Far from it. Those savings and deposits are invested in the capital markets and are the key to originating lending, investment, and growth in the real economy. Keynesians tend to think of the “social use of money,” which means more printing of currency through deficit spending because they mostly perceive that the government is the only one making a real social use of currency issued. However, inflationism is not a social policy, but a tool for serfdom that creates hostage clients of citizens by destroying the purchasing power of their wages and deposit savings. It is a transfer of wealth from the middle class to the government. Once we understand that what matters for market participants is the elusive “liquidity” and “sentiment” perception and that bullish sentiment and liquidity come from a rising true money supply, while bearish signals arise from a decline in this measure of liquidity, then we can understand that the allegedly hawkish messages of central banks disguise a much looser policy than headlines suggest. Furthermore, using any of the different measures of true money supply previously mentioned, we can understand why market participants try to defend their clients from the current and future loss of purchasing power of the currency by taking more risk and accepting higher valuations for growth assets. Most market participants are aware that higher liquidity injections will mask the current fiscal imbalances. Unsustainable deficit spending is money printing, which creates strong long-term pressure on the purchasing power of fiat currencies. Thus, market corrections are always an opportunity to buy stocks and risky assets that will always rise in value in fiat currency terms because the unit of measure, money, loses purchasing power. Once it is established that fiscal insanity will make currencies fall in value and, consequently, markets denominated in that currency rise, investors need to understand the timing and where to invest. The difficulty this time is that now we have persistent inflation and central bank losses in their bond portfolio. Thus, timing is essential. The lag effect of a market correction and its subsequent bounce may be longer. It will happen, but we need to guess when. After the Fed decided to hold rates steady at its two-day meeting, equities slumped, even though Powell seemed to signal that rate cuts could be coming as soon as September. Markets discounted a slump in liquidity, therefore lowering buying pressure. Hence, multiple compressions. Rate cuts do not signal a healthy economy but a slowing one, so equities slump despite the promise of a rate cut because investors continue to see lower buying pressure. Even with the bounce after Black Monday, most indices remain significantly below the level when markets started to weaken on July 22. The lag effect of the true money supply started to show its effect on March 13. The Nasdaq and the S&P 500 were leading markets that had begun to slow down and pointed to lower highs and deeper lows. What can we learn ahead of the next bullish wave of money growth? First, pay attention to the components mentioned above and their trends. Second, analyze when the Fed may start a true easing path, being realistic. The trend now signals liquidity drying up. There may not be a recession, but monetary buying pressure is slowing down markedly. The tap is not closed, but the flow is slow. The Fed may cut rates in September, but that is only realizing that the economy is weaker than headlines suggest. A rate cut of 25 or 50 basis points is unlikely to generate an immediate burst in credit demand or rising deposits. Hence, the truly bullish signal would come when the Fed returns to purchasing mortgage-backed securities and treasuries. However, that may not happen until elections have passed and there is clarity about the next chairman of the Fed. We may be talking about March 2025. The next wave of monetary excess will be more aggressive than the past one, that is guaranteed. Disclosure: no positions. Original Post Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors. Continue reading →

(Bloomberg) — European and US equity futures rose on Friday, building on gains in Asian stocks as traders piled into risk assets amid growing optimism that the US economy will avoid a recession. The yen is set for its worst week since May.Most Read from BloombergContracts on the Euro Stoxx 50 rose 0.3% and those on the S&P 500 added 0.2%, extending Wall Street’s overnight gains. Asia’s benchmark equity gauge is poised for its best weekly performance in over a year, led by Japanese shares as a weak yen boosted exporters’ earnings. The currency fell 1.3% versus the dollar Thursday, and was trading around the 149 level, easing fears of a massive carry trade unwind.A slew of US data this week, from inflation to jobless claims to retail sales, has reassured investors, supporting the view that the world’s biggest economy is heading for a “Goldilocks” scenario where inflation is contained without stalling growth. Global stocks have largely erased last week’s losses, when traders were worried the Federal Reserve won’t cut rates fast enough to prevent a recession.“Asian equities are enjoying an impressive run today, driven by a renewed sense of ‘perfect balance’ thanks to recent well-anticipated economic releases,” said Hebe Chen, an analyst at IG Markets Ltd. “Japanese stocks, in particular, continue their robust recovery with no signs of slowing down yet.”Treasuries in Asia were steady after Thursday’s dip as signs of a resilient US economy in the latest data releases prompted traders to dial back bets for a jumbo September rate reduction. They are now pricing in less than a 30-basis point cut next month, with a total of 92 basis points of reduction expected for the remainder of 2024.As fears around the US economy eased, equities continued a rebound from last week’s meltdown that rattled global markets. The S&P 500 extended a six-day rally to 6.6% on Thursday, marking the best performance in such a span since November 2022. Walmart Inc., often seen as a barometer of growth, jumped on a solid outlook.Meanwhile, Wall Street’s “fear gauge” — the VIX — dropped around 15 after spiking to 65 last week. This rebound for US stocks from the heavy selling last week suggests that trend-following quant funds may soon return, which could provide further support to stocks.In Japan, stocks headed for their biggest weekly advance since April 2020, driven by renewed weakness for the yen. This weakness may even attract some hedge funds back to the carry trade that blew up two weeks ago.“Exporters are gaining on a weak yen and solid US economic figures,” said Hiroshi Namioka, chief strategist at T&D Asset Management Co. “Stocks that saw a huge selloff in the past month are being bought back as the market calms down from the rout.”Elsewhere in Asia, China’s central bank chief pledged further measures to support the country’s economic recovery, while cautioning that it won’t adopt “drastic” measures.Alibaba Group Holding Ltd. rose as optimism over tech stocks outweighed concerns about its earnings. JD.com Inc. gained the most since March after beating net profit estimates in results released late Thursday.Soft LandingUS officials have been trying to use higher rates to ease inflation without causing the economy to contract — a scenario known as a “soft landing.” Fed Bank of St. Louis President Alberto Musalem said the time is nearing when it will be appropriate to cut rates. His Atlanta counterpart Raphael Bostic told the Financial Times he’s “open” to a reduction in September.“A soft landing is no longer a hope. It’s becoming a reality,” said David Russell at TradeStation. “These numbers also suggest that recent market volatility wasn’t really a growth scare. It was just normal summer seasonality amplified by moves in the currency market.”In commodities, gold was on track for a small weekly gain. Oil edged lower as the market weighed strong US economic data and a possible attack by Iran or its proxies on Israel against a lackluster Chinese demand outlook.Key events this week:US housing starts, University of Michigan consumer sentiment, FridayFed’s Austan Goolsbee speaks, FridayCanada housing starts, FridaySome of the main moves in markets:StocksS&P 500 futures rose 0.2% as of 6:40 a.m. London timeNikkei 225 futures (OSE) rose 3.5%Japan’s Topix rose 2.8%Australia’s S&P/ASX 200 rose 1.1%Hong Kong’s Hang Seng rose 1.9%The Shanghai Composite was little changedEuro Stoxx 50 futures rose 0.3%Nasdaq 100 futures rose 0.3%CurrenciesThe Bloomberg Dollar Spot Index fell 0.1%The euro rose 0.1% to $1.0984The Japanese yen rose 0.2% to 149.01 per dollarThe offshore yuan fell 0.2% to 7.1766 per dollarThe Australian dollar rose 0.3% to $0.6631The British pound rose 0.2% to $1.2878CryptocurrenciesBondsThe yield on 10-year Treasuries declined one basis point to 3.90%Japan’s 10-year yield advanced 4.5 basis points to 0.875%Australia’s 10-year yield advanced six basis points to 3.94%CommoditiesThis story was produced with the assistance of Bloomberg Automation.–With assistance from Winnie Hsu.Most Read from Bloomberg Businessweek©2024 Bloomberg L.P. Continue reading →

DNY59/iStock via Getty ImagesThe editorial on inflation in the Wall Street Journal on August 14 seemed to me to be “spot on.” I don’t find myself saying this very often, so I felt I needed to follow up on this feeling. The opening paragraph: “The financial press is cheering that Wednesday’s inflation report makes an interest rate cut next month a fait accompli. Go, Jay, go. Yet while cooling inflation shows that the Federal Reserve’s monetary policy medicine is working, Chairman Jerome Powell’s caution to date has been warranted.” The year-over-year rate of inflation in July, according to the Labor Department’s consumer price index (CPI), was 2.9 percent. This is the lowest inflation has been since March 2021. Consumer Price Index__Year-over-year change (Labor Department) But, the editorial issues this warning. “Markets seem to think inflation is whipped, and the Fed should start worrying about being late to cut rates. But, Mr. Powell was right to postpone easing policy earlier in the year, as inflation readings ticked up. Cutting rates in September might make sense, though inflation still isn’t dead, and prudence is advised.” Prudence is advised. Yes, sir. The Fed, not only wants to get inflation down around its target rate of 2.0 percent, but the Fed wants to create an environment of trust, trust that it will maintain a monetary policy that will be consistent with a 2.0 percent annual rate of inflation, month after month after month. The Fed must create a market atmosphere that “believes” that the inflation rate will be maintained at 2.00 percent…and that the Fed is not going to go off here…or, go off there…chasing some other “goal.” The Federal Reserve was able to do this after the Great Recession. Note that in the early part of the above chart, the inflation rate in the U.S., according to the CPI, was right around 2.0 percent during the decade following the Great Recession. Following the battle against inflation in the 1970s that ended with a major financial tightening around 1980-81, the Federal Reserve, under the leadership of Paul Volcker, convinced investors and others that it would not tolerate a rising inflation rate and would fight any effort to raise consumer prices at a rate higher than 2.0 percent. Alan Greenspan, who followed Mr. Volcker as the Fed Chair, also conveyed this message to market participants. And, Ben Bernanke followed suit. Thus, we see during the decade of the 2010s, inflation posting numbers that were acceptable to the Federal Reserve so that the Fed could focus on other things, like keeping the economy moving ahead. Hence, the longest economic expansion in post-World War II history. It should be noted that the U.S. economy was changing during this period of time, becoming much more driven by information technology and by the innovation that surrounded the new environment. For one, as I have written about many times, business advancements tended to be more of a continuous process based upon “time pacing” than upon completed “new” generations of change. That is, rather than waiting for an entirely new model change, businesses were bringing innovations to market every two or three years, regardless of whether the changes represented a full model change. Competition was driving this. Given the new technologies coming to market, firms could focus on this strategy and, as a consequence, if firms didn’t keep up, they fell behind. And, we are seeing this business strategy playing out in the world of artificial intelligence. In the world of AI, it is so important for the “new” to be brought to market just as soon as it can to keep up with or drive the competition. Sometimes, in the world of AI, it seems as if we hear of “new” things being made available quarterly, if not sooner. Innovation is almost continuous. And, this is one reason why Federal Reserve Chairman Ben Bernanke sought to modify the way the Fed did business. Periods of “quantitative easing” became the Fed’s way to help underwrite this new era of innovation and investment. It seemed to have worked. Then the Covid-19 pandemic hit. The Federal Reserve reacted. After three rounds of quantitative easing through 2016, the Federal Reserve, with Jerome Powell as the Chairman, began a fourth round of quantitative easing in early 2020 and expanded the Fed’s holding of securities enormously. Inflationary numbers rose dramatically as the economic and financial world saw all the focus on maintaining inflation give way to keeping the U.S. economy from falling into a major downturn. As can be seen in the above chart, “core” CPI inflation topped out at over 9.0 percent in 2023. Quantitative tightening followed, and as reported the inflation rate dropped, reaching the 2.9 percent reported for July. The really interesting thing, however, is that the economy continued to “chug” along during this period. Yes, there was a recession, the shortest one on record…two months in February and March 2022. But, for the most part, the movement of innovation and information continued on in a very persistent way during this period of time. I was just amazed at all the new ideas and innovations that were developed during this time period. My work in venture capital and angel finance during this time kept on going…money was available…companies were formed…innovation carried on. And, that is what we are seeing on the other side of the 2022 recession. Even though the Federal Reserve has been conducting a period of quantitative tightening for 27 months now, the U.S. economy keeps on, innovation and investment continue, and the economy grows. But, the Federal Reserve continues on its efforts. Although there have been mounting pressures on the Federal Reserve to lower its policy rate of interest, the Fed has not moved. To me, “trust” is the key element that is behind this Fed stance. The “new” economy is working. Innovation and change is almost continuous. Money is available to finance this innovation and change. As the Wall Street Journal article closes… “The economy doesn’t show signs of an imminent recession. Best for the Fed to use the running room it now has to keep reducing its $7.2 trillion balance sheet and stay on a path to normalize monetary policy.” In the past, the Fed has always moved on too easily to another stance, once people feel that its past work has been done. The Federal Reserve is regaining the “trust” the market had in the Fed during the 2010s, but work still needs to be done to cement this “trust.” To support this, the federal government could, at this time, also move to regain some “trust” over the way it manages its budget, but that seems a long way off. Continue reading →

Inflation refers to the general rise in the price of goods and services. The U.S. Federal Reserve aims to keep the consumer price index (CPI) measure of inflation growing at an annual rate of 2%, and the central bank will adjust the federal funds rate (overnight interest rates) when it deviates too far from that target.The CPI hit a 40-year high of 8% in 2022, triggering one of the most aggressive campaigns to hike interest rates in the history of the Fed. The rate of inflation has cooled considerably since then, so the central bank appears set to reverse that policy.That means interest rates may be cut for the first time since March 2020. If history is any guide, that could trigger a big move in the benchmark S&P 500 (SNPINDEX: ^GSPC) stock market index — but the direction might surprise you.The Fed could cut interest rates three times before the end of 2024The U.S. government injected trillions of dollars’ worth of stimulus into the economy during 2020 and 2021 to counteract the negative economic effects of the COVID-19 pandemic. At the same time, the Fed slashed interest rates to a historic low of 0% to 0.25%, and it injected trillions of dollars into the financial system through quantitative easing (QE) by buying government and agency bonds.Loose monetary policy and drastic increases in money supply tend to be inflationary, but disruptions to global supply chains also drove prices higher. Factories and shippers were periodically shutting down all over the world to stop the spread of COVID-19, which led to shortages of everything from televisions to cars.So, a cocktail of factors sent the CPI surging during 2022, which triggered the flurry of rate hikes that followed. The federal funds rate ultimately settled at 5.25% to 5.50% after the Fed’s last rate hike in August 2023. That’s a long way from the pandemic low point.But here’s the good news: It’s working. The CPI ended 2023 at 4.1%, and it came in at an annualized rate of 3% in June 2024, which is the most recent reading. In other words, inflation is closing in on the Fed’s 2% target.That’s why most experts are expecting imminent rate cuts. According to the CME Group’s FedWatch tool, the Fed is likely to cut rates three times by the end of 2024 (once each in September, November, and December).The stock market doesn’t always respond well to rate cutsConventional wisdom suggests rate cuts are great for the stock market. They reduce the yield on risk-free assets like cash and Treasury bonds, which pushes investors into growth assets like stocks and real estate.However, if we examine the chart below, which overlays the federal funds rate with the S&P 500 going all the way back to 2000, we can see that falling interest rates often foreshadow a decline in the stock market.^SPX ChartTo be clear, the prevailing trend is always up for the S&P 500, so long-term investors shouldn’t be swayed by the potential for imminent weakness. Plus, there were some overriding themes in the past that make this correlation a little murky. In other words, we have to look at why the Fed was cutting rates during the periods depicted in the above chart:During the early 2000s, the dot-com tech bubble burst, which triggered a recession in the economy. The S&P 500 fell by 9.1% in 2000, 11.9% in 2001, and 22.1% in 2002.During the late 2000s, the global financial crisis forced a decisive intervention by the Fed, which included rapid rate cuts and the introduction of QE for the first time. The S&P 500 plunged 37% in 2008.Finally, the sharp fall in rates in 2020 was triggered by the pandemic. The S&P 500 suffered a peak-to-trough decline of 31.8% in 2020, but it actually ended the year in positive territory thanks to all of the stimulus I mentioned earlier.Therefore, we can’t exactly say that the stock market fell because the Fed cut rates. Rather, it likely fell on each of those occasions because of what else was happening in the underlying economy.Image source: Getty Images.Will this time be different?There are no signs of an impending crisis for the U.S. economy right now, nor of a garden-variety recession. But there are some signs of weakness. The unemployment rate, for example, has ticked higher to 4.3% (from 3.7% in January), and a softening jobs market can be a precursor for weak consumer spending in the near future.Since the CPI is almost back to the Fed’s target, it probably isn’t appropriate to maintain a restrictive policy stance. Plus, interest rate moves tend to have a lagged effect on the economy, so it’s possible we haven’t even seen the full effect of the Fed’s past hikes just yet.By the same token, any rate cuts at the end of this year probably won’t feed through to the economic data until sometime in 2025. That means the sooner the Fed starts cutting, the higher the probability the U.S. economy will avoid any unnecessary deterioration down the road.The stock market trades based on corporate earnings, and it’s very hard for companies to deliver growth in a slowing economy. If Wall Street starts to reduce earnings forecasts, that will almost certainly lead to a down period for stocks. In that scenario, the S&P 500 could be falling while the Fed is cutting rates at the same time.The Fed typically cuts rates when it observes weakness in the economy, which can be a signal that the S&P 500 is heading lower in the short term. But imminent rate cuts aren’t a reason to sell stocks — as I mentioned earlier, they often recover over the long term, so any weakness might actually be a buying opportunity.Don’t miss this second chance at a potentially lucrative opportunityEver feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:Amazon: if you invested $1,000 when we doubled down in 2010, you’d have $19,172!*Apple: if you invested $1,000 when we doubled down in 2008, you’d have $41,859!*Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $349,472!*Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.See 3 “Double Down” stocks »*Stock Advisor returns as of August 12, 2024Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool recommends CME Group. The Motley Fool has a disclosure policy.Interest Rates Are About to Do Something They Haven’t Done Since March 2020, and It Could Trigger a Big Move in the Stock Market was originally published by The Motley Fool Continue reading →

Kutay TanirBy James Knightley Consumer resilience continues The initial wave of today’s US data was quite a bit firmer than expected with retail sales rising 1% month-on-month versus the 0.4% consensus with the control group, which excludes some of the volatile items, seeing sales rise 0.3% MoM versus expectations of a 0.1% gain. There were some downward revisions to the history, but this is still a firmer-than-anticipated outcome. The headline figure was boosted by a 3.6% MoM jump in vehicle sales, but there was also decent strength in electronics (+1.6%), building materials (+0.9%), food & beverage (+0.9%) and health/personal care (+0.8%). These gains more than offset weakness in miscellaneous stores (-2.5%), sporting goods (-0.7%), department stores (-0.2%) and clothing (-0.1%). We had been thinking the risks were skewed to the downside on the basis that the June control groups gain of 0.9% was vulnerable to a correction after hot and humid weather across the US boosted traffic at shopping malls. This resilience in consumer spending gives enough excuse to push the market to increasingly favour a 25bp Fed interest rate cut over a 50bp move in September. US retail sales levels Source: Macrobond, ING Jobless claims show lay-offs remain low Meanwhile, jobless claims surprisingly moderated to 227k from 234k (consensus 235k) with continuing claims dipping to 1864k from 1871k (consensus 1870k). This is the second consecutive slowing in initial jobless claims and is the lowest number since the first week of July. As such it reinforces the message that the rise in the unemployment rate is being caused by increased labour supply exceeding labour demand rather than job lay-offs, which again points to a greater chance of a 25bp cut than a 50bp move that we had penciled-in in the wake of the jobs report. Weekly initial jobless claims Source: Macrobond, ING Industrial production remains subdued Rounding out the main US numbers, we have industrial production falling 0.6% MoM with June’s growth rate revised down to +0.3% from an initially reported +0.6% gain. Hours worked in the sector are the best guide for output growth and the fact they fell 0.6% indicated downside risk to the consensus forecast of a 0.3% decline. Hurricane Beryl played a major part of this as it disrupted the Gulf Coast. The ISM manufacturing index remains in contraction territory and weak orders levels point to a sector that will continue to struggle. Nonetheless, the US economy is dominated by services these days and that remains in a stronger position, for now. MoM change in industrial output and the hours worked in the sector Source: Macrobond, INGContent Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user’s means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Original Post Continue reading →