Weekly Article 05-24-2018
I am away at the Raymond James National Conference in Washington DC this week so this will just be a short note to share a few ideas.
It appears to me that, as everyone was so concerned about the 10-year treasury yield breaching 3%, it appears to have been a non-event … so far anyway. My take on this is that, in an over-indebted global economy, the fact that interest rates have risen- and risen as fast as they have- in a normal real economy this could have had a major negative effect on asset prices- particularly those that are being artificially propped up like stocks, bonds and real estate.
Of course, since these “markets” are really only markets in name only because the central banks have become the “markets” this is just one more example of normal expectations being thwarted with central bank buying of assets. This greatly distorts both prices and expected outcomes in different scenarios.
Maybe 3% should have been that number- maybe not- but as long as there are entities propping up certain assets there is no outcome that should come as a shock. As I often say 2+2=4 in my world. In central bank land 2+2= what the guy “printing” the money says it is.
I have to wonder where the rates would have to go to actually get the outcome that a prudent investor would expect. I do believe there is a number that will cause major problems but we haven’t hit it yet.
As I was driving to Washington I noticed that gas prices are way up. $3.15 for regular and $3.75 for premium is the going rate. I’m getting a little tired of the made-up inflation numbers and hearing that prices have to go higher. Just as an example here are a few commodity prices and how much they have risen in the past 12 months:
Commodity Price Increase (12 mos.) Commodity Price Increase (12 mos.)
Crude Oil +40% Wool +27%
Wheat +21% Copper +20%
Cotton +15% Steel +10%
Rice +13% Iron + 5%
Coal +39% (Courtesy of King World News 5-24-18)
Do these numbers look like inflation is too low? What does this mean for finished manufactured products going forward? Clue- they will likely be a LOT more expensive. Either the costs get passed on to us or the companies selling the goods eat the price increases and their profits suffer.
There is simply too much “money from nowhere” appearing to create demand where none actually exists.
Just think, if we could all “print” money like the central banks we could all sit around and play video games and drink lattes all day and wine all night. Sounds like a great gig right? I have a question- if we all did just that WHO would it be producing the necessities of life so we would have something to buy?
Since central banks have been “printing” money and buying assets- or selling them short depending upon whether they want the asset price to move up or down- the economies of scale are thrown WAY off. Many gold and silver producers- as well as some industrial metals producers have not explored for new deposits as they may have if prices were higher. As Rick Rule is famous for saying- “The cure for low commodity prices is low commodity prices”. Exploration slows down, production slows down which leads to less production and eventually higher prices because of a lack of supply.
In the case of gold and silver I believe that the paper contracts have been used to artificially lower the price and the action is easy to see in the daily charts. I believe there is massive pressure built into those markets and prices could increase substantially at any time.
In the meantime as we are bombarded daily with what I see as propaganda by the financial game shows gold has outperformed the DOW in 2018 but one would NEVER hear that on CNBC. We will also not be made aware of Russia’s massive buying of gold- now over 1900 tons. Or China’s massive hoard and continuing purchases.
There is also very little, if anything, said about Turkey, Germany, Venezuela and many other countries wanting their gold sent back to their own countries. Why is it they want the gold at home but are perfectly ok with keeping their fiat holdings wherever they may be? Think about that!
Oh yeah- by the way the London Metals Exchange, likely after seeing how well the Petro Yuan trade is going (it is growing exponentially) 2, is in talks to start a Yuan-based metals exchange in London.1 It appears to me they know that China is on the rise and would like to keep close tabs on them to keep control of the market. More than likely they will lose control anyway but that won’t stop them from trying.
As if we don’t have enough economic problems to keep us occupied I just saw that the meeting with North Korea has been called off, Turkey breached Greece’s airspace 56 times in a day and Israel and Iran are trading insults, threats and bombs.
What could possibly go wrong?
Mike Savage, ChFC, Financial Advisor
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1- ZeroHedge Article 05/24/2018
2- The PetroYuan trade mentioned is the trading of oil in Shanghai and denominated in Chinese Yuan rather than the US dollar
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The London Metals exchange (LME) is a commodity exchange in London, England that deals with metal futures. Contracts on the exchange include aluminum, copper, cobalt and zinc. The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. The 10-year treasury note is s debt obligation issued by the United States government with a maturity of 10 years upon initial issuance. Individual investors results will vary. Past performance does not guarantee future results. Investors may not make direct investments into any index.