INTEREST RATES AND GOLD - DEBUNKING THE INVERSE RELATIONSHIP

One of the most common relationship between interest rate and gold is that when interest rates go up, gold will go down. This is norm that is painted by the financial media, so much so, that it becomes ingrained in the minds of ordinary investors and traders.

That relationship is totally untrue. let's look at the chart below:

Look at the period from 1972 to 1975. Interest rates moved up to approximately 13% while gold moved up in tandem.

Then look again at the period from 1977 to 1981. Interest rates moved up to almost 19% and gold moved up to its highest price ever during the same period.

Look again at the period from 2004 to 2007. Interest rates were up and so was gold.

The last example was the recent December 2015 hike. Gold went into a bull market .

So gold remains an excellent hedge in times of inflation and deflation.

As for deflation just look at the price of gold when interest rates are near zero from 2008 onwards. 

WILL THERE BE AN INTEREST RATE HIKE IN JUNE?

The FOMC meeting minutes highlighted that the Fed could hike interest rates in June due to the strong jobs growth and strong economy.

Funny thing is that the minutes were in April, but in first week of May, there was the disappointing jobs report and then there were the rising unemployment claims throughout May, yet everyone treated the news as current and started a sell off in almost anything. Which are the more  recent news?

Strong jobs growth is really quite a myth. The U3 feel good data of course shows unemployment rate a 5%. But if you look at the U6 data, unemployment is still mired at around the 10% region (see chart):

Source: ST Loius Fed



Look closer on the chart and you will see that the U6 data is much higher now than prior to the Global Financial Crisis. Is that good jobs growth? The US has been losing high paying manufacturing jobs and in its replacement it has part-time and low paying jobs such as retailers, bartenders and waiters/waitresses.What's going to drive the consumption economy?

What about the people who work two jobs simply because one is not enough to sustain the family. More jobs do not necessarily mean more people working. If the jobs growth is so spectacular, why are 47 million Americans on food stamps and nearly 100 million people of employable age remains unemployed?

Second point, the US economy. Despite the trillion dollars pumped into the economy, the GDP growth remains sub-par compared to the bull cycle in the 1990s. Is that considered as strong economy growth? The problem is that things are so bad that even centrals banks are lowering their own forecast, very much like the S&P00 earnings forecast, lowered so that the earnings could be an easy beat.

If the US economy is strong why are so many of the economic indicators pointing towards slowing global trade (Baltic Index), manufacturing and services (PMIs), goods movement within the US (Freight Index) and the the high inventories to sales? Look at the numbers of companies filing for Chapter 11, the retailers who are announcing massive closure of malls and layoffs.

Despite the indicators the Fed believes that 0.5% growth in Q1 2016 is a sign of  a strong economy.

Well, it looks like the Fed never waste an opportunity to talk up the dollar.

So what will be the ramifications?

1) Should interest rates hike we could see the US Government debt exploding due to the higher interest in borrowings. So the deficit could widen and the debts will keep piling. Will this make the dollar stronger?

2) Corporate America which have borrowed US$2.5T in the past few years for dividends and share buybacks now faced the prospect of higher interest which will squeeze their margins  all in the midst of major declines in earnings. Expect more Chapter 11 to be filed.

Recent ruling on US$15 per hour wage and overtime will cause employers to cut down the workforce. So expect to see more layoffs and spike in unemployment claims.

3) This could put a dent in housing sales as the mortgage rate rises, thus impacting the housing market.

4) A strong dollar could see pressure mounting in China. Will it trigger a Yuan devaluation, very much like what happened early in the year,causing a immediate crash of global stock markets worldwide? We could see a repeat of that moment because the Chinese do not want to see a strong Yuan (which is pegged to the dollar). Japan and EU would cheer because  it will improve their exports. So if China makes its move to devalue the Yuan, you can see another currency war ahead.

I think a series of poor unemployment and economic data in the coming weeks/months will stay the Fed's hand in raising interest rates. The debt burden is just too high and global trade is slowing down after the burst of of positive data, driven by China's US$1T stimulus. China has already signaled it will rein in its debts and put a brake on loans.

I still believe that the global economy will see a major setback in the coming months and that hedging in gold and silver remains a viable insurance against this backdrop. I continue to be bullish on miners.

You are encouraged to do your own research as our risk profile differs.

US UNEMPLOYMENT CLAIMS ROSE BY 20,000 AND CHINA'S BRAKE ON LOANS

The headline says it all. Unemployment claims rose more than expected by 20,000 (294,000 vs expected 274,000), following a miserable jobs report in early May. This follows last week claims which has also risen above expectations.

This seems to indicate that US payrolls could see some headwinds in the coming months.With retailers continue to deliver poor Q1 2016 results, we can expect more layoffs in the near future, and possible bankruptcy in others.

Ignore the Fed's optimism. US economy is weakening. How else can you explain the fourth quarter in a row where earnings are in negative growth?

The S&P's rise has reached its limit, and likely to see further downward pressure in the coming weeks.

As Jeff Gundlach says, there is likely another measly 2% upside for the S&P vs a potential 20% downside. So the odds are increasing for a substantial  drop in the S&P which could hurt investors.

There is a rush into US treasuries, especially the 10 year treasuries, which cause the US$ to spike vs other currencies. This could result in US made goods being more expensive than other countries and could likely hit the US companies earnings in Q2 2016.

On the EU side, Italian banks are facing a crisis as their NPLs skyrocketed to 360B Euros  The ECB is in a bind. Should it bail out the Italian banks, what abut the banks in Greece? Spain? How the treatment of one differs from another? And if the Italian banks crisis is dragged further it could undermine the ECB's efforts and cause a chain reaction.

In Japan Abenomics is proving to be a flash in the pan. Meanwhile the BOJ continues to rack up its balance sheet with more bonds and ETFs buying, so much so that the BOJ is the top ten shareholder in 90% of the Nikkei stocks.

China's pro Beijing media recently ran an article that suggested that China should reduce its leverage and focus on restructuring rather than stimulating the economy with even more debt. It said that debt in China has reached a dangerous level. Another economist also suggested that China's growth in the coming years will likely be in "L" shape rather than "U" or "V" shape. So we can safely assume that China will start to deleverage, settle for a period of low growth and focus on restructuring its economy. Gone are the days of double digit growth. What will be the impact?

As deleveraging China could result in the following:

1) A devaluation of the Renminbi, This could spark a currency war that will spread across the globe, causing further deflation.

2) A deflation hits, commodities prices will fall and commodities based economies will suffer, putting them at risk of a recession.

3) A slowing China will mean slowing global trade which is already trudging along at snail's pace, and put central banks' policies at risk.

The trillions of dollars in global debt accumulated since 2008 will force the world into yet another financial crisis, only this time, it will be worse than ever before experienced. Yes, it will be the Greater Depression.


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WARREN BUFFET IS NOT ALWAYS RIGHT.

No doubt he has legion of fans across the globe and being one of the wealthiest men on earth does help to cement that. However he is not always on the right side of trade. He too has made some wrong investments.
In particular IBM which has cost him billions in losses. His other investment in Wells Fargo looks set blow up a big hole in his investment as Wells Fargo problematic loans swelled 62% from $18.5B to $30.0B. So in adopting his buy and hold strategy, one needs to constantly review the company's performance and NOT hold too long. 
I am a fan of him too but I am also critical of his choices for investments.
Last but not least Buffet sees gold as a "pet rock" and abhors it. This is where he is very wrong. $ is a fiat currency and not real money. Gold is the real money and never a pet rock. Gold has risen more than 20% this year, outperforming the S&P and the gold miners? Some are up more than 100% this year! 
So always take his investment choices which a grain of salt. I always follow other fund managers as well such as Jeff Gundlach, Stan Druckenmiller and Carl Icahn.
For those uninitiated, Druckenmiller's fund has outperformed Berkshire Hathaway in recent years, chalking an annual average growth rate of more than 30%.
And recently both Jeff Gundlach and Stan Druckenmiller have recommended that investors exit the stock market and stay long in gold.
However, for those who have done their research much earlier, the case for both gold and silver and related miner stocks was in the writing since late last year. To really benefit in your investments, you have to stay ahead of the curve, way before the crowd moves in.

THE US JOBS REPORT - WHAT'S NEXT

US jobs fell to 160,000 from an estimate of 200,000. What is the significance of this?

Here are my thoughts:

1) Despite the huge amount of debt borrowed by US companies, little were put back into the business. Instead they were ploughed into financial engineering to improve the EPS but not the revenue nor the net profit. With little money spent on the business, and with falling revenue and profit, hiring of employees will also be affected. So this should come as no surprise as the egineer of growth and high paying jobs- manufacturing sector has steadily declined y-o-y.

Jobs loss from the oil and gas sector continues to grow as yet another string of oil and gas companies filed for bankruptcy protection in Q1 2016.

2) The retailing sector has been among the hardest hit. With major retailers reporting disappointing results and many malls are destined to be closed in the coming months, the number of unemployed will grow and negate the impact of jobs growth.

This is further reinforced by a spate of bankruptcy among several retailers.

3) Financial institutions too are laying staff as has been reported in several new media. When financial institutions are laying off staff, it is the greatest indication that all is not well with the economy.

4) Slower jobs growth will impact upon the overall US economy which is consumption driven. This is again reflected in both lower consumer and business confidence reading over the last week.

So it looks like a vicious cycle has begun.

If you look at the U6 data and not the feel good U3 data used by the Fed, unemployment has remained persistently in the 10% range, higher than the period before the Global Financial Crisis. What does this show? No one needs to be reminded that growth in the US, EU, Japan and China are stalling.

This goes to show that despite the QEs, ZIRP and NIRP and bonds buying, after spending trillions of dollars, the central banks have failed. All we have now are inflated assets bubbles and a world tethering on the brink of yet another crisis as debt skyrocketed higher than ever before.

I believe we are now on the verge of further disappointments in both GDP and jobs growth, and a high probability of assets bubbles bursting, sending major stock indices down in a massive correction. If common folks can see it coming, one wonders what the central bankers see. Oh yeah, an anomaly that will soon pass....

So it pays to prepare yourself as this correction could send us all into no-man's land because never in the history of finance has the world accumulated so much debt and printed so much fiat currency.

I still believe that owning physical gold and silver, related miners and ETFs are the best hedge against any disruptions. You can also look at ETFs that are inverse to the various indices.

Remember to do your own research because our risks acceptance differs.

HAVE THINGS JUST GOTTEN WORSE FOR MAJOR BANKS?

The Q1 2016 for major banks have been rather disappointing in both revenue and net profit.

Here are some of the results:

Deutsche Bank: Revenue 22% down and Net Profit 58% down y-o-y.
JP Morgan: Revenue 3% down and Net profit 7% down y-o-y
Bank of America:Revenue 2% down and Net Profit 18% down y-o-y
Morgan Stanley: Revenue 21% down and net Profit 54% down y-o-y
Wells Fargo: Revenue 4% up while Net Profit 5% down y-o-y
Citi: Revenue 11% down and Net Profit 27% down y-o-y
Goldman Sachs: Revenue 40% down and Net Profit 60% down y-o-y

Despite the fall in Net Profit all the 6 US banks reported EPS beat - mainly due to lower earnings expectations and share buybacks.

This shows that something is very wrong with the way Wall Street set its expectations, lowering the bar to ensure an easy beat in the EPS.

Following the Q1 results, analysts have raised some red flags concerning the financial health of several of the banks. Among them:

Both JP Morgan and Deutsche Bank have financial derivatives that are more than US$50T each. In fact, JP Morgan received a letter from the Fed which voiced its concern on amount of derivatives JP Morgan has outstanding.

Wells Fargo reported a 62% increase (from US$18.5B to US$30.0B) in problematic loans, mainly attributed by the oil and gas related sector.

JP Morgan on the other hand reported that its problematic loans have increased 45%  from US$14.6B to US$21.2B.

As the many of the companies in the oil and gas sector continue to face potential default, it is envisaged that the provision for loss will gradually grow higher among the major banks.

That is why it is best to avoid investing in these banks at this juncture.

US banks aside, the prospects in the EU are far worse. Major Italian banks will continue to face pressure from the high level of NPLs, while Greece's funding will come into question yet again in the summer, made worse by a potential BREXIT, while Deutsche Bank tethers on the brink.

Recent polls have indicated that those "for" BREXIT have taken a lead, no thanks to Obama who subtly warned the British people against moving out of the EU - an unnecessary move that provoked much anger among the people and has now backfired.

This uncertainty will put pressure on the British banks and the Pound. Therefore I am SHORT both RBS and Barclays at the moment.

Still it is important you always do your own research.