WHY THIS IS UNNERVING EUROPE

Source: Zerohedge

Phone poll on EU referendum shows 45% for BREXIT while 42% for BREMAIN and 13% undecided.

Online survey by Guardian shows 47% for BREXIT and 44% for BREMAIN, with 9% undecided.

This is certainly unnerving Europe as it could impact the financial sectors of both UK and EU.

Not only that, it could lead to more referendums within the EU members and could possible implode the EU.

It is no wonder the UK Government has stepped up its pro EU rhetoric.

So it is best for your investment  to stay out of the financial sector for the time being.

It could lead to demand for safety. Therefore I continue to be long in gold and silver, related miners and ETFs

ARE THESE THE SIGNS OF A STRONG ECONOMY?

Nuf said.....

 

Source: Zerohedge

GOLD IS UNDER PRESSURE BUT CHINA AND RUSSIA CONTINUE TO STACK UP THE PRECIOUS METAL

Gold has been under pressure for the greater part of May and the sell off escalated towards the end of the options expiry period. Since reaching a high US$1,300/oz, gold has fallen by almost 7% to US$1,212/oz.

Most of the fall has been the result of the Fed's hawkish stance which spiked up the US$. With many investors believing that gold moves inverse to interest rates hike, added to the sell off. To recap in my earlier post, gold DOES NOT have an inverse relationship with interest rates. See the chart here:



More than anything, it is a hedge against both inflation and deflation.

Now if gold does not carry that value, why are central banks accumulating gold and dumping the treasuries?

The World Gold Council reported that in April,

Russia added 16.2 tonnes of gold
China 10.9 tonnes
Kazakhstan 3.2 tonnes
Turkey 2.6 tonnes

Notice that these countries are linked to the "One Belt, One Road" project, linking Central Asia with Europe? Behind the scenes something is brewing. Will the common denominator for trade in this massive project be a gold backed Yuan or Ruble? We can only wait and see. But the ramifications on US$ could be huge.

Then there was a report in SchiffGOLD that central banks have sold US$123 billion in US debt in Q1 2016 and last year, the amount was US$226 billion. In fact, the Treasury Department reported that central banks were selling US Treasuries at a pace not seen since at least 1978.

Could this the be reason that the Fed went into full throttle in jawboning the US$ with interest rates hike? Otherwise who wants to buy the US Treasuries when major debtors like Russia and China are selling them? Recent reports seemed to confirm the fact that US Treasuries were back in demand after the series of jawboning by the Fed officials.

Is there a currency war that is presently fought in the stealth between major economic powers?

Meanwhile China is responding with a devaluation in the Yuan which could be followed by even more devaluation in the future as the US$ grows stronger.

Incidentally, China has also been signaling that it may issue bonds in SDR which is the IMF's Special Drawing Rights. China has also suggested that the SDR be used more widely.

All these moves seem to suggest that China is moving away from US hegemony.

The currency war has only just begun.

WAS YELLEN HAWKISH OR DOVISH?

There were a lot of self congratulatory notes by the Fed during Yellen's speech but let's focus on the three:

"We want to do everything to head off a financial crisis."
"With gains, hike in coming months may be appropriate."
"Don't have typical scope to cut rates in case of shock."

While the talk of raising rates sounds hawkish, the concern of a major financial crisis happening is pretty much in the minds of the Fed and they are afraid they have no more tools in their arsenal to head of a potential crisis, thus the need to raise rates - which is all dovish to me.

But it does seem like a self fulfilling prophecy.

The Fed is fearful of a lack of tools to battle a coming financial crisis.
Raises interest rates.
US$ spiked and exports hurt.
Earnings form multinationals hurt.
Companies who borrowed in share buybacks now have higher finance costs
More layoffs and reduce spending
Economy tanks further
Fed comes to the rescue with more easing

So will there be any normalisation in interest rates? If we follow the cycle above - apparently not. There won't be any normalisation if the Fed continues to prop up over leveraged banks, businesses and institutions. Only when these are allowed to fail would there be reallocations of capital.

Since Yellen also touched on the impressive job numbers and improving economy, here are some charts to ponder (Source: Zerohedge):





The problem with the market is that it looks at the present but always forgoes the past. So despite the lower revisions, the market just ignores it.

Then in the week we have falling PMIs from manufacturing (50.5) and services (51.2).

And if job numbers were so good why are states reporting a fall in income tax revenue by 9.8%?

Oh yeah! The economy is great and strong.

HERE'S WHY THE NEW JOBS CREATED ARE MOSTLY LOW PAYING JOBS

The 5% unemployment rate does sound nice doesn't it? The government continues to boast how many millions of jobs they have created since the last crisis,

It does not take into consideration that most of the jobs are either low paying or part time jobs. Neither does it consider the fact that people are taking on two jobs to help pay the absurdly high rentals and medical bills, or just to help sustain the family.

Well, here's the fact that supports what many economists have warned about. The US is generating low paying jobs while losing high paying jobs in the manufacturing and energy sectors.

Zerohedge reported today that personal income tax revenue fell by an average of 9.88% compared to the same period last year in the 32 states in April.

And this is the chart:


Source: Zerohedge

Here's how the income tax revenue has deteriorated greatly for some of the states:

Louisiana down 81.5%
North Dakota down 34.7%
New Jersey down 14.8%, 
Illinois down 28.8%
Ohio down 41.3%

How will the badly affected states compensate for such huge losses in tax revenue?

Will it impact state pension funds? What about education and public facilities?

For sure, it is a disaster in the making.

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.