CARNAGE IN THE BOND MARKET AND THE DISCONNECT IN THE STOCK MARKET

A lot has happened in recent weeks. But lets tackle one issue at a time.

Saudi Arabia and China are dumping US Treasuries, thereby causing the yield to rise. Dumping US Treasuries by billions (USD375B in the last 12 months to be exact) is akin to dumping of USD. By right, it should cause a fall in the value of USD. However, the increase in yield is prompting many to speculate that the Fed will raise interest rates aggressively, which boosted the value USD.

Herein lies the disconnect.

1) A strong USD will hurt US multi-nationals as Emerging Markets currencies have collapsed vs the USD. This could cause a fall in earnings in Q4.

2) Similarly, US exports could hurt as a stronger USD will make US made goods more expensive. So export based companies could see their earnings being hit in Q4.

Yet, the Trump euphoria continues unabated as the various indices made record highs. If 1) and 2) is likely to happen, with new record highs being made, this means that the PE ratio could explode higher, pushing the risk to reward ratio higher in the process.

3) High interest rates means that mortgage rates will spike. In fact, right now the US mortgage rate has spiked above 4% which is a 50 basis point move. Meanwhile property price in Miami, San Francisco and NY are under pressure. Foreclosures in the month of October rose 27% vs September. So with higher mortgage rates, expect more foreclosures culminating in a Housing Crash 2.0. Yet investors choose to ignore this underlying problem.

4) While Trump's fiscal stimulus looks good on paper, how are they going to be finance remains a BIG question. On this question, this is what his chief strategist, Bannon has to say:

"The conservatives are going to go crazy. I’m the guy pushing a trillion-dollar infrastructure plan. With negative interest rates throughout the world, it’s the greatest opportunity to rebuild everything. Ship yards, iron works, get them all jacked up. We’re just going to throw it up against the wall and see if it sticks.”

Is he inferring that Trump would squeeze the Fed for more QE?

What about the US debt? Higher interest rates would mean higher debt service. So how will the budget conservative House react to the fiscal stimulus? Will it be trimmed down? Watered down? Full support?

As it is, the market has got ahead of itself which make the coming weeks and months dangerous.

Two events to look out for are the early December voting by the Italians and Austrians. According to the polls, the right-wing and Leave EU parties in both Italy and Austria are forging ahead.

In France Le Pen who is anti EU is also ahead of the polls.

Rest assured, there will be a lot of volatility and with the EU facing a banking crisis, any major disruption in the EU could snowball into a major crisis due to the interlinked financial derivatives.

Meanwhile, the Fed refused to commit a rate hike December even as the market priced in a 100% chance of a rate hike. Yellen kept on repeating that the case to raise interest rate is high and likely to be soon. As Peter Schiff, a well known economist said, "Why say soon? Why not just say in December?"

The reason as he reasoned out, even the Fed is not 100% sure.

WHY THE US IS HEADING TOWARDS HIGHER INFLATION

Been away for a few days, but still keeping tap on the news in several fronts.

Let's talk about the Trump euphoria and the upward trend in the US indices.

The Dow made historic record high levels while the S&P and Nasdaq continue to trend higher. The argument is that Trump's policies will be good for US growth, and a strong US economy means a stronger US$ and rising interest rates.

Trump intends to have 15% corporate taxes and scale back payroll tax. Lower corporate tax will allow companies to repatriate their trillions of dollars back to the US from overseas and relocate their manufacturing back to the US.

Trump indicated he would implement strict immigration rules and deport illegal immigrants with criminal record, and according to some early estimates, as many as 2 -3 million people.

Also, Trump would slap 35% tariffs on a selected range of imports.

Besides the above mentioned, Trump's plans include spending US$1T to upgrade and build new infrastructure and continue to expand US military.

According to Ray Dalio, total US debt and unfunded liabilities is 1,100% of US GDP. Herein, lies the main challenge and why the US will face tremendous headwinds going forward.

And according to Zerohedge China has not bought any US Treasuries for quite some time and has been aggressively selling them since the election.

Here's my take based on the news:

1) Debt and unfunded liabilities remain the most thorny issue but Trump has not announced any plans how to combat these two which is why I think debt will continue to skyrocket under Trump due to spending on infrastructure and military in a reduced tax environment which in turn lowers government income. Sure, the growth in the economy could increase corporate tax and payroll tax revenue but according to the Congressional Budget Office, Trump's plans could likely increase US debt by another US$5T.

2) Trump may have the private sector funding part of the infrastructure development and allow the private sector to collect toll in return. So this would pass the burden to the consumer, possibly impacting on their consumption and create inflationary pressure due to price increase of goods as the tolls will increase the cost of delivery. In this case we have consumer with lower payroll tax but needing to pay for tolls and increase in price of goods. This may negate the impact of a lower payroll tax.

3) Deportation of illegal immigrants and a strict immigration policy could cause labour shortage. In a tight labour market, wages would have to increase and this could eat into companies profit. Company earnings could be pressured. The only way to offset this is to pass the labour cost to consumers. So inflation would rise.

4) As a result of rising inflation, the Fed would have to raise interest rates. As interest rates rise, so too will be the amount of interest the US government has to pay for its debt. The US deficit rose to more than more US$600B in 2016 with interest rate at 0.50%. With inflation expected to rise, the US deficit will continue rising going forward, and at a 5% normal rate, will push the US interest payment to US$1T a year based on a US$20T debt level! With mounting deficit and higher debt service, the US will have to resort to money printing. While the expectations of higher interest rates push up the US$, once the US government resorts to printing its way out of debt and to fund its liabilities, the US$ will tank.

Raising interest rates could impact upon the earnings of many companies as many have borrowed excessively to buy back shares in the last few years. So companies may have to cut spending or increase price to ensure earnings growth.

Not to forget any huge shift in interest rates could unravel the US$1.5Q derivatives market.

If the US is serious about reining in its debt, it would have to cut spending drastically, but which government will do that? Especially the US, which spends more in military and any country in the world?

5) A strong US$ will result in US multinationals being hit hard as their earnings in US$ will fall drastically. Export based companies will also be similarly impacted. Lower earnings could push the indices back to lower levels. The S&P now is valued at almost 60% higher than its historic average.

6) Slapping a 35% tariffs on goods will lead to higher inflation. So again this cost will be passed on to consumers. With costs such as toll, finance, labour and tariff being passed to the consumer, it could affect the consumer behaviour. In the event of higher interest rates, consumer will likely to spend less (due to inflation) and save more (saving against further inflation). So collectively, the impact on the economy could be worse and thought.

All the talk the inflation is bad for precious metals is unfounded. In the period of hyperinflation in the 1970 - 1980 gold rose 325%.

So in the end, we will come back to the vicious circle of more money printing, QE and loose monetary policies. It is by this rational that China is dumping US Treasuries. The world economy has gone past the point of no return with global debt now standing a record high. The only salvation is to rein in excessive government spending. But which government is ever willing to do that for fear of public discontent and revolt?

AFTERMATH OF THE US ELECTIONS

Yesterday has been a very volatile day. Gold spiked US$60 per oz before the usual suspects (central and bullion) came in and whack it back down to the pre-election level as most were shorting gold in preparation that Hillary will take the presidency. But in the retail market space, there was frenzy buying of gold, so much so that some retailers have to demand for more gold (source: KWN).

Meanwhile you have the banks coming in and talked up the US$ by restating that the Fed is still on course to raise interest rate in December when it tanked more than 1.5% points vs other currencies.

The unexpected result was of course the market spiking more than 1% after experiencing a limit down in the afternoon before the US open. Suddenly the market is receptive of Trump's plans which include making US infrastructure second to none. This of course entails more spending via debt issues.

So in this case, the inverse ETF failed to deliver the desired result yesterday. However, I believe there will be further volatility ahead such as the December 4 Italy referendum,where a Trump victory has emboldened the Leave-EU party. And in mid December we will know if the Fed will raise interest rate. News came out that Yellen will not be renewed a second term by Trump. So the inverse ETF is still an important tool as an insurance policy but never use it as a major investment (a 10% - 15% holding will suffice).

The miners did end in the green and as of this morning gold is also trending up.

Some analysts are predicting that the establishment, whose candidate Hillary lost in the election, will attempt to crash the markets so that Trump will be under pressure to include the establishment in his plans. This remains to be played out

Meanwhile something happened to the bond market. China sold off a large portion of US Treasuries yesterday, while the auction for the US 10 Year Note went badly. The 30 Year Treasury also saw similar sell off. And here's the question: How is the US going to finance her spending on infrastructure if US Treasuries are being dumped? The answer of course, direct printing of money and this will expand the monetary base, making gold attractive in the process.

As bond yields climb, the pressure will be on the stock market to deliver higher yields than bonds, and if this does not happen, then the overvalued stock market will fall. The current S&P is overvalued about 60% above historic average, so when it falls it will fall hard. Your inverse ETF then will ensure your investment is "protected".

The above is my opinion, you are encouraged to do your own research. Meanwhile, I continue to be bullish on precious metals, miners and inverse ETFs.

OCTOBER JOBS REPORT. WHY CONSUMER SENDING IS NOT AS STRONG AS THE FED SAYS

Here are some excerpts from Zerohedge and how I see it.

The Non-Farm Payroll came in at 161K below expectations of 173K, although August and September numbers were revised higher by 44K in total

The disturbing data must be the number of people not in the labour force which spiked 425K to 94.6M.

Not only that, the number of people holding multiple jobs just spiked to 8.05M, the highest on record. While the number of jobs growth may look impressive it is NOT one job per person across the board. The US has lost a lot of full time jobs, only to be replaced by part time and minimum wage jobs.

Meanwhile the labour participation rate remains low.

These are the signs that show that consumers may not have the money to continue spending like before.The fall in consumer confidence is a sure sign that going forward, things will be much more bumpy.

Don't believe so? Look at the US Debt Clock. Credit card debt is just shy of US$14B to reach US$1T. Consumers are loading up their credit card debts to sustain their livelihood or to fund purchases which they can no longer afford!

It seems all types of debts in the US is on course if not already surpassing the trillion dollar mark.   

Both student and auto loans have long since surpassed that mark - which brings us to an interesting article about auto loans from Zerohedge. 

In the recent FOMC meeting minutes the Fed was saying that consumer spending was strong... here's the chart (source: Zerohedge) which shows how 'strong' they were as repossession of vehicles spike alarmingly to levels seen in the previous recession. This is an indication the the subprime auto loans granted to push auto sales is now rearing its ugly head.

So here's how I see it. There may not be any hike in interest rate in December at all, and the present rate will continue indefinitely, or a 25 basis point hike in December, and no other rate hike thereafter indefinitely.

WHY I THINK RETAILERS WILL HAVE A POOR Q4

Part of the increase in the US Q3 GDP has been inventories build up, possibly in advance to meet consumers holiday season spending in Q4. But consumer confidence has dropped and many would likely wait for the outcome in the election before sending. Also with healthcare cost and insurance premiums surging (due to Obamacare), consumers have less dollars to spend vs the same time last year. Not forgetting that the majority of jobs growth in the US have been minimum wage and part time jobs. So I believe the retailers will be disappointed with the retail sales in Q4.

Basically, I think the Q3 GDP could possibly be revised lower as other economic data just do not support that kind GDP number. For example big ticket items like construction spending, car sales, and others like freight volumes, companies earnings, have all fallen prior to the announcement of the GDP. I think very likely the Q4 GDP will be a poor read out.

The above is just my opinion.

GOLD IS SURGING TODAY. REASON? TRUMP HAS TAKEN LEAD IN ABC/WASHINGTON POST POLL

God is surging more than US$15.00 per oz now.

The reason could be the recent poll from the ABC/Washington Post which showed Trump in the lead. Just a week ago, Hilary was leading by 13 points.

The market anxiety and fear will continue till election day.

Whoever wins will be good for gold and silver due to more spending on infrastructure envisaged and higher debt to fund such spending.

Source: Zerohedge

GDP IS UP BUT STOCK MARKET DID NOT HAVE A LIFT OFF

Prior to the release of the US GDP, Atlanta Fed had the GDP Now at 1.9% and surprise, surprise, the released figure was 2.9%, higher than the consensus estimate of 2.5%.

Though the GDP looked good on the surface, the worrying component has been consumer spending, which increased by only 2.1% vs the previous quarter increment of 4.3% As you may well be aware of, it accounts for more than 70% of the US GDP. The GDP was boosted by the built up of inventories and exports. In fact, the export of soybeans accounted for the major increase in exports.
But why did the US stock market tank despite the good news in the GDP?
There are three reasons.
1) Consumer confidence fell to 87.2 from a prior 87.9. This means that consumers could be spending less in the coming months. This is not good for the economy
2) Bond yields have risen lately. The reason for the increase in yield is due to the sell off in bonds (Bonds interests are fixed. Higher price, lower yield. Lower price, higher yield). This was the reason why it got the market spooked. Will the sell off in the bond market continue? If it does it could cause a great impact on the global markets. As yield rise, the pressure to raise rates increases, which is bad for the markets. If it worsens, the sell off in bonds could cause a loss of confidence in the global markets, and investors could lose trillions.
3) The late afternoon news that came which the FBI said will reopen the case on Hilary's emails. This could be a black swan event if it results in Hilary pulling out or even a delay in the US Presidential Election. 
As uncertainties continue to plague the global economy, gold and silver continue to trend higher 
Here's a chart which tell us all is not well with the popularity of the Renzi's government in Italy. This could be another black swan event in December.
I continue to be bullish on precious metals, miners and inverse ETFs.