FRANCE ELECTION, TRUMP TAX AND PRECIOUS METALS

The French Election is over and Macron seems to be the media's favourite to win in the Second Round. Will Le Pen stage a come back? In 2016, Remain was in favour to win vs Brexit and so was Hillary vs Trump. I still believe it could go either way and what's going to happen in the coming weeks could determine that.

On the back of the Macron's victory gold was smashed by almost US$20 in the early hours of trade but clawed back by the end of the day to end about US$12 lower. US$ fell as the Euro gained strength. In the next two to three days gold could be trading on the low side due to the expiry of options.

However with Trump unveiling a corporate tax cut of 20% from 35% to 15% effectively, the market optimism will quickly vanish as this would add US$2T in debt over the next 10 years.

Not only that, there is no backstop to the fall in tax revenue which the Freedom Caucus will not support and the Democrats, who are pro-company tax will also not support. So it is likely to be a grand plan by Trump but will be DOA (dead on arrival) when it comes to Congress.

Trump is also not giving in to scuttle his border wall in order to prevent a government shutdown on Friday which was what the Democrats demanded in order to continue to fund the government.

So despite some early of the week pressure on gold, as the fallout in the tax and funding unveil themselves, gold could be some upside, which could erase the downside on the miners at the beginning of the week as well.

Silver was hardly affected all through the day. More importantly some supply stress is anticipated as Peru which is the third largest producer saw production dropped by more than 10% in the most recent data, suggesting that the silver on the top surface have depleted significantly and without a further rise in price, going deeper to extract silver will not be cost efficient.

MARGIN DEBT AT DANGEROUS LEVEL

According to the NYSE total margin debt in February stands at US$528B!

But that excludes other 'shadow' financing which is offered by other fin-tech companies to clients who can pledge against their securities as collateral. According to Zerohedge, this could amount to another US$250B.

Taken together, the potential of margin debt is a whopping US$778B!

On top of that, I previously covered that public and corporate pension funds have bet trillions of US$ in the US stock market.

A significant correction or fear of recession (which all economic indicators are pointing to) could manifest into a massive sell off as public and corporate pension funds exit and margin calls escalate.

If you look at the chart, you can see how margin debt has grown exponentially when compared to the growth in the S&P index.

This is a nightmare unfolding in slow motion.

INDIA IS BUYING MORE GOLD THAN EXPECTED

For those who think that India's demand for gold has been crimped by the government's war on cash. Here' the chart that shows India's gold import skyrocketed in February and that's excluding the black market which some say could even be more.

Meanwhile China continues to buy gold at a steady pace. Hong Kong is often touted as another entry point for gold passing into China.

Gold price has stabilised and no matter what the Fed says about raising interest rate, they are already behind the inflation curve. And that's is why gold will continue to shine because real interest rate after deducting inflation is negative.

Real interest rate will stay negative as long as the interest rate is behind the inflation curve.

The only way to get ahead of inflation is to raise the interest so high that it defeats inflation. But that comes with a price. With total US debt at US$68T and government debt of US$20T, such an environment will collapse the government, corporations and households.

So that is why I think the Fed will not raise rate aggressively because they can't afford to. Signs of stagflation are very real. Consider this. Q3 2016 GDP was 3.5%. Q4 2016 GDP was 2.1% and Atlanta GDP now puts it at 0.9%. But inflation is creeping up and has surpassed 2.0%.

So to boost the economy, the Fed will not raise rate aggressively and if economy goes into recession rest assured there will be a QE4.

Then what follows will be a hyperinlfation.

Meanwhile stay protected by acquiring physical gold and silver buying miners and related ETFs.

WALL STREET'S SMOKE AND MIRRORS

During the Presidential Elections campaign, all the bankers were saying how bad Trump will be for the economy. then Trump got elected and in the wee hours the Dow fell by almost 800 points. Just as quickly the bankers changed the narrative saying Trump's plans will reflate the economy and GDP could grow 3% - 4% under Trump and of course since that day all the indices have been reaching record levels. Never mind the fact that all other hard economic data were pointing to a weakening economy.
In the past week, despite having a majority representation in the House, the Republicans failed to repeal and replace Obamacare. The stock market tanked, and within hours the bankers quickly changed the narrative that the healthcare vote was not important because what Wall Street wants was the tax reforms. And since healthcare was out of the way,, the administration can now focused on tax reforms. And the stock market rose
Never mind that the healthcare plan carries with it tax credits which was part of the overall tax reform plan.
Never mind the fact that despite the majority in the House, the Republicans failed to reach a consensus.
Never mind the failure of the healthcare plan would also result in a failure to save the government approximately US$500B
Never mind the fact that the US debt ceiling suspension has expired and the government will run out of cash by end of April. And thus far no one has even consider the Democrats' threat that they will force a government shutdown unless Trump withdraws the ban on immigration from certain countries and stop building the border wall. The Freedom Caucus from the Republicans will likely oppose raising the debt ceiling.
Never mind that unfunded liabilities in pension funds all across the US has now reached US$1.9T vs just US$292B in 2007.
Never mind the rising delinquencies in Student and Auto Loans, both of which carries total loan amounts of more than US$1T each.Never mind that the Border Tax proposed by Speaker Ryan will add to inflationary pressure among the consumers. Retailers are already falling like flies across US. Why should US consumers buy from US based retailers if the Border Tax is sure to raise prices even more? They might as well buy online from overseas retailers. I expect to see more layoffs from the retail sector if the plan pushes through.
Never mind that the powerful Koch Brothers and US retailers are against the Border Tax. Should the Border Tax fails to garner any votes just like the healthcare plan, then the government will also fail to realise an extra US$1T in tax receipts. So how will the government finance the US$1T infrastructure plan? I would expect another major sell off.
And lastly, never mind that the the divergence of hard data vs soft data has never been wider (See chart. Source: Zerohedge)

IT NOW TAKES US$4 OF DEBT TO CREATE US$1 OF GDP

Student Loans have reached US$1.3T. Back in 2007, subprime mortgage reached US$1.3T as well.
The difference between the two? Subprime mortgage is backed by real estate as a collateral, but student loan? It is not backed by anything at all, save the US government guarantee. Lately the number of delinquencies have risen past the 10% level. Eventually it will require yet another government bailout.
Meanwhile used cars value has been collapsing which prompted a number of auto financing companies to warn of impending fall in earnings. By the way, auto loans too have moved past the US$1.0T mark.
It just need a sequence of events, one after the other before the house of cards built on endless supply of debt will fall and fall hard.
In the most recent research, it now takes US$4 of debt to grow the economy by US$1. How crazy is that?

PRECIOUS METALS RISE, STOCK MARKET TANKS, USD FALLS BELOW CRUCIAL 100 LEVEL

Precious metals proved their resilience as the stock market tanked and USD fell below the important 1.00 level. This is why it is important to own precious metals, especially in a scenario where global risks and uncertainties prevail.

Despite the stock market falling, most of the mining stocks and inverse ETFs gained. They are the best hedge against a falling stock market.

But what did actually happen?

Some reports pointed to the coming House vote on the repackaged Obamacare (ACA) on Thursday as a catalyst. There were only some minor changes on the original ACA and a group of the conservatives among the Republicans did not like the repackaged version, rather they wanted a full repeal of it.

Without this group support, the repackaged ACA will not likely be passed as the Democrats will also vote against the repackaged ACA.

Not only that, even if the House passes the bill on the ACA, it will be DOA (Dead On Arrival) at the Senate.

This is Trump's first and major hurdle. If he fails to get it passed by both House and Senate, it means a failure on his part to get the support he wanted and this could also affect and derail his tax reform and infrastructure plans.

Which let to the market finally waking up to the fact the Trump will not have it easy.

On top of that the Fed has been proven to be clueless with regard to the economy, hiking rate into a weakening economy and where wage growth is falling behind inflation.

We also have the debt ceiling where the US Government has just enough cash to last another two months (or less) as the suspension of the debt ceiling expires. And until today, nothing has been done to raise it. This adds to the risk of a government shutdown and more uncertainties in the market.

The recent fall could be the straw that finally breaks the camel's back and we could see further weakening in the stock market.

POTENTIAL US RECESSION DESPITE GOOD JOBS NUMBERS?

The ADP jobs report blew past expectations reaching 298k jobs in the month of February.  This immediately sent the 10 year bond yield spiking, the USD rising and the chance of a Fed hike, 100%.

The rise in ADP is a result of strong survey data such as Business Confidence which rose to highest levels in years, and strong consumer sentiment.

Precious metals of course weaken, as they normally do when the banks, hedge funds and algos worked in unison.

On surface it looks like a rosy picture. The ADP report was the headline feature but everyone seems to ignore 3 other reports which also came out the same day.

1) Productivity growth in Q4 was 1.3% vs 1.5% expectations, and after a 3.3% surge in Q3.

2) Wholesale inventories tumbled in January to -0.2% which was way below expectations. In the prior month it rose +1.0%  

3) The Atlanta Fed GDP Now has revised down the Q1 GDP to 1.2% from as high as 3% at the start of the year.

If the Q1 GDP falls below 1.9% then the US is in a TECHNICAL RECESSION. 

Against this backdrop the Fed is intent on raising the interest rate by 0.25% just as the US GDP is falling behind expectations. This could not end well for the stock market. 

Inflation is running above expectations and this suggests a potential stagflation if US GDP remains low.

Going back to the exuberant consumer confidence consider this. Major retailers are reporting Q4 earnings below expectations and many saw losses, resulting in several major retailers announcing bankruptcies and closure of stores. The chart below shows the severity of the situation.

This has put the shopping malls at risk due to a rise in vacancy. The commercial real estate debt is also at risk as some bonds are trading less than the par value. 

With trillions of dollars at stake, this could be a bubble that is worse than the 2008 housing bubble.

Source: Zerohedge