FORGET ABOUT THE MARCH RATE HIKE, THE LOOMING EXPIRATION OF DEBT CEILING HOLIDAY IS OF GREATER IMPORTANCE

Gold and silver continued to be hammered while miners lost more ground.

This is likely due to the upcoming March 15 Fed meeting which many banks have already priced in a 0.25% rate hike.  

The main stream media is down playing an important event on March 15 which is the expiry of the debt limit holiday. Upon the expiry, the government has a some $300B plus with which to sustain unless the debt ceiling is raised again.

Will the debt ceiling be raised?

It is expected that to continue spending the way the US currently does, the US government debt will double in a decade, that means by 2027, the debt will reach $40T!

With interest rate hike in March. An additional 0.25% hike in interest is equivalent to paying an additional $50B in interest payment based on the current debt of $20T, more if the debt ceiling is raised to meet Trump's spending requirements, ie: border wall, infrastructure and military spending, reduction in taxes, etc.

In an environment of worsening political tensions between the Republicans and Democrats and infighting among Republicans, will raising the debt ceiling be approved by Congress? The Democrats look set to go against Trump on all grounds, and Republicans being the conservative party have criticised Obama often on the amount of debt. So will they eat their own words  and vote to raise the debt ceiling themselves, which will anger their grassroots?

Some Republicans have come out to say that there won't any tax reduction without a spending cut, which could also put Trump's spending plans at risk. For Trumps plans to kick off, THE DEBT CEILING MUST BE RAISED.

If the debt ceiling is not raised, we could potentially see a government shut down and scaling back of payments in entitlements such as Social Security, Medicaid, etc.

Here's how I see it. 

1) Debt ceiling is raised, the stock market may respond positively, but the bond market could see a selloff. A selloff in the bond market will result in higher yields, which the market may misread as a stronger $, as such the price of the precious market may be kept in check. Eventually a skyrocketing debt will result in a weaker currency as it will deter investors from buying US treasuries as the inflation that comes with it may not be enough to yield a positive return. The Fed will have to step in and monetise the debt which in other words, another round of QE. And we know what happened to precious metals in the last QE. 

2) The debt ceiling is not raised, and turmoil erupts in the stock market which will also result in traders and investors losing faith in the US economy and a selloff in $$$ ensues.

So either way will be bullish for precious metals and miners.

Since the Fed is likely to hike rate in March, it will be pretty much like what happened in December. Precious metals and miners weakening ahead of the hike and resume an uptrend thereafter. 

The above is just my opinion.

SIGNS OF STRESS IN CHINA AND JAPAN

Most of my writings thus far have been focused on the US and EU. But something dangerous is also manifesting beneath the calm surface in China and Japan.
Look at the for mortgage loan (orange) and and net profits (grey) for commercial banks in China. What does it tell you? A falling net profit in the loans could very well mean surging NPLs and this could have dire consequences for the banks which have over extended the loans to a staggering level.

Next is the chart form Japan. Despite the suport from the BOJ in buying up bonds and ETFs, the Japanese population is just not spending. Meanwhile the BOJ has over extended the balance sheet by more than 250% of GDP. If the Japanese are not spending, the economy will continually be in the doldrums, not to mention the BOJ missing its inflation target.

Added together we have the US, EU, China and Japan all tethering on the edge of a precipice with their enormous debt.

PRECIOUS METAL TAKEDOWN AND ATLANTA GDP NOW FORECAST AT 1.8%, THAT'S A TECHNICAL RECESSION

Both gold and silver hav ebeen repeatedly hit over the the last week. Gold amnaged to hold above US$1,230 per oz but silver got hit badly when someone dumped US$2B in paper silver to caus ea massive drop in the price of silver on Thursday.
Who is the someone? Silverdoctors said it could be a major silver player coming to rescue the commercial shorts. 
This resulted int he miners being ht as well. Meanwhile, we have a parade of Fed speakers, including Yellen saying now's the time to raise interest rate because the economy is getting stronger. Stronger? Is that a joke? The Atlanta Fed GDP Now is forecasting Q1 2017 GDP at 1.8%. That vs 1.9% in Q4 2016 and 3.5% in Q3 2016. That's a 2 month consecutive drop in GDP! And in my dictionary, that signals a technical recession!
Once the reality sinks in, we could see a stock market sell off and a move into safe haven assets like precious metals.

GOLD AND SILVER CONTINUE TO TREND HIGHER IN THE OPTIONS EXPIRY PERIOD

The options expiry period saw gold and silver advancing substantially instead of the expectations of takedown by the bullion banks.

However miners lost some ground despite the gold and silver advancing. Most likely many traders see this as an opportunity to cash out the miners which have risen substantially over the last 2 months.

Some blamed a takedown in the gold ETF, GLD by institutional funds to jolt the confidence in gold and silver to stem the rise of the precious metals further, which also impacted the miners as well.

Nevertheless, a correction is good for the miners as they have been on a tear recently. Last year, the bullion banks together with the BIS sold more than US$10B worth of gold to knock gold off from its high in the US$1,300 - US$1,360 range but gold continue its advance. Is it money wasted?

Somehow I tend to believe that each attempt to suppress the price of gold and silver requires an even greater amount of shorts to cover the previous shorts, which becomes a growing vicious cycle and put the banks in dangerous positions. On top of that, each major short will emerge a major buyer who will demand physical gold in delivery, gold which the western banks do not have. In the previous takedown after the election, it was rumoured that the major buyer was the PBOC.

Why do I say that the western banks have little physical gold left? The Bundesbank of Germany reported that they have repatriated most of their gold back into the country but the gold bars have to be recast. Recast? Because the gold bars that they received belongs to others while those that they sent for safekeeping are no longer available in their original form. This is a clear sign that the western banks are running short in physical gold.

In the past few months, hundreds of tonnes of gold have moved from the western banks vaults to Switzerland where they are melted and recast into kilobars before being sent to an eastern nation, most probably China, in which case supports the theory that China has emerged as a major buyer during the preivous takedown. It will be interesting to watch next week as

Trump will be addressing the Congress on Tuesday, the option expiry on Monday for the COMEX and LBMA option expiry on Tuesday.

A looming debt ceiling debate in March could set the tone for the US economy and Trump's economic plan.

WHY THE S&P IS WAY OVERVALUED

This is a very interesting chart from Wolfstreet.
Despite the S&P Index at record levels, the earnings have pretty much remain at the Q4 2011 level. Compared to that period, the S&P is trading at 87% higher. 
Now, if you look at the light blue bars, the amount of share buybacks have actually increased from the period of Q4 2011 to the present by more than 30%!
The worrying part is that the share buybacks are being fueled by companies taking in even more debt to fund the purchases. 
So looking at the chart we can surmise that:
1) The S&P is overvalued by 87%. To fall back into the same valuation the S&P index have to fall by more than 45% from its current level!
2) Because much of the buybacks are driven by debt, further increase in interest rate will erode earnings. The anticipation of higher interest rate is also pushing the USD stronger. 50% of the S&P companies derive their earnings from overseas. Thus, a stronger USD will weaken earnings. This will be a double whammy on the stocks.  
3) The S&P is driven earnings using non-GAAP method. If the GAAP is applied, companies which have positive earnings will suffer losses. In part Wall Street rigs the game by pushing the earnings estimates lower so that it will be an easy beat, and thus beneficial to the stocks.
One of the ratios that I am always against is using the Debt to EBIDTA Ratio which often paints a brighter picture of a company's finances since it excludes, Interest Payments (ironic with so much debt at hand), Depreciation (capital invested in plant and equipment reduce in value over time) and Tax (like the government is going to let you get away with it). never mind the Amortisation which is subjective. So if the EBIDTA base is large (with so many items being excluded), then the ratio will be small. Isn't that a rosy picture!
But if you include all these items, the base is going to be small and thus the ratio will be big, and suddenly the picture turns ugly.
So it pays to study the financial statements diligently.
Meanwhile despite a series of takedown in gold and silver, the prices still remain stubbornly where they were.
However, with Thursday through Monday being in the options expiry period look out for more attempts to drive down the prices of gold and silver. With silver shorts being at high levels with physical being in demand, and production trailing demand, it will be an interesting few days ahead.

THE GREAT DISCONENCT

THE DOW vs REVENUE DISCONNECT

I have mentioned a few times the disconnect between the indices valuation vs revenue and earnings. With the Dow trending at record highs, here's a dose of the reality of what's happening (source: Wolfstreet).

This is despite all the billions of borrowed money spent on acquisitions and management's fantasy on prospects of greater revenue.

THE NON-FARM PAYROLL DISCONNECT

The market cheered when the non-farm payroll shot up to 227K jobs, way above the expected 175K jobs.

Two things stood out. Unemployment edged up to 4.8% from 4.7% earlier. If the jobs were so great why was unemployment edging up. Peter Schiff, well known economist and writer put it simply as there being more people re-entering the labour force.

The US has a peculiar way to classify unemployment. If you are not looking for a job, you are not part of the labour force. So this means that now more people are starting to look for jobs and with 95M Americans who can work but not working, the jobs have to grow greater than 227K jobs a month to bring the unemployment rate back down.

The other thing is the hourly wage which grew a measly 0.1% vs expected 0.3%. So with slower wage growth the Fed will have a tough time to convince the market that an interest rate hike is on the cards.

The Fed may not be able to hike interest rate as many times as it wants. In which case, why the euphoria that higher interest rate is good for the economy in the first place? Can anyone see the disconnect here? 

Truth is, that is how Wall Street rig the game. Good news is good news and bad news is also good news. To win the game, you have to go ahead of the curve.

Here are two charts (source Zerohedge) which I think reveal the current state of affairs. US productivity, which remains in decades low despite the uptick and the hourly wage which continues to remain in a multiyear low. That is why the Fed is faced with a daunting task ahead. To raise rate to 3%, productivity has to grow and wage earners must have the capacity to sustain in a higher interest rate environment.

THE 'ECONOMIC IS AWESOME' DISCONNECT

Oil price fell when the API released a report on continual buildup of gasoline over the week. What is surprising in this report is not the increase in supply but the FALL IN DEMAND. Look at the chart below (source: Zerohedge)

Demand falls because consumers are travelling less or shipment of goods via land is falling which according to Goldman Sachs only happens in a RECESSION.

And yet the major indices and crude oil continue to tread higher. This is beginning to look like a dotcom bubble where fundamentals take a back seat and greed takes over.

In the latest 12 month rolling period in tax collection, the Treasury Department reported that receipts fell 0.3% on an annual basis (see chart, source: Zerohedge).

As the chart shows, each time the receipts fell into negative territory, the US is on the cusp or already in a recession. The last time it turned negative was July, 2008.

So many indicators are pointing towards a softening economy where the 2016 GDP fell below 2015 GDP, and a rising inflation which have risen 2.6% in 2016 vs the Fed's 2.0% target. In all likelihood, we could be seeing the early signs of stagflation. 

JUDGE REVERSED JUDGEMENT ON JPM'S SILVER MANIPULAITON CASE AND UTAH INTRODUCES BILL TO MAKE GOLD AND SILVER LEGAL TENDER

Some interesting developments are taking place in the US. The Appeals Court has just reversed the judgement in favour of JP Morgan (JPM) in a civil suit for silver manipulation. The judge believed that there was ample evidence that JPM was involved in rigging the price of silver. So it is back to the lower court to embark on a fact finding mission to uncover more evidence.

JPM has accumulated almost 550M oz of silver in the last few years!

In Utah, the local government has introduced a bill to make gold and silver legal tender and transactions could be made with either. This bill will be put to vote. This is an attempt to remove the control of money by the Fed.

Both events;if JPM is found guilty for manipulation and the bill is passed could be positive to gold and silver.