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- Post #6,301
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- Mar 20, 2019 9:45am Mar 20, 2019 9:45am
- | Commercial Member | Joined Dec 2014 | 11,697 Posts
- Post #6,302
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- Mar 20, 2019 11:55am Mar 20, 2019 11:55am
- | Commercial Member | Joined Dec 2014 | 11,697 Posts
Canadian dollar could sink to record low of 62 cents as economy slides closer to recession, says David Wolf
Former adviser to Bank of Canada is not the only one bearish on the loonie
https://financialpostcom.files.wordp...trip=all&w=640
Toronto-Dominion Bank downgraded its forecast of the Canadian dollar on Friday, seeing at within a range of 74 U.S. cents to 71 U.S. cents for much of this year. Citigroup technical strategists are targeting 73.52 US cents to 72.99.Peter J Thompson/National Post
Bloomberg News
Esteban Duarte
March 18, 2019
8:03 AM EDT
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CIBC sees Canadian dollar falling to 15-year lows — that’s 71 cents
If you thought this year was bad for the loonie, how does 70 cents sound?
Five fearless predictions for 2019, from a lagging loonie to potential privatizations
The Canadian dollar may sink back to its record low of 62 U.S. cents as the country retrenches from a consumer-spending boom into the face of a slowing global economy, said David Wolf at Fidelity Investments.
A 17 per cent drop from current levels of around 75 U.S. cents may sound like a lot but the currency has already fallen about 30 per cent from above par in 2011 when Canada’s economic stars were aligned, said the Toronto-based portfolio manager. Back then, the country was revving up from the financial crisis and oil was over US$100 a barrel.
Now, the nation may already be in recession after growing at an annualized pace of just 0.4 per cent in the fourth quarter and a pretty “soggy” start to the year, said Wolf, part of the asset allocation team at Fidelity Investments Canada, which manages about $136 billion. He stressed his views were his own, not the firm’s.
“There’s a good chance that those stars are going to be misaligned,” Wolf said in an interview at Bloomberg’s Toronto office.
- David Rosenberg: Don’t let ‘blockbuster’ job numbers fool you, Canada is one rung away from recession
- Canada’s income tax rates have become uncompetitive, and the economy will pay the price
- Why central banks — including Canada’s — are finding it so hard to get interest rates back to ‘normal’ territory
The big problem for Canada is that a household deleveraging appears to be starting just as the global economy is slowing, said Wolf, who was an adviser at the Bank of Canada before joining Fidelity in 2014. Home values fell nationwide last year for the first time since at least 1990, while household debt burdens touched a record high. Meanwhile, Canada’s competitiveness problems remain, he said.
“It may not meet that technical definition, but it could very well feel like a recession for a big part of the economy,” said David Tulk, an institutional portfolio manager who works with Wolf. History has shown that it takes a “long, long” time to restore household balance sheets, a situation that will be all that more difficult with trade and business spending hampered, he said.
Wolf and Tulk said it’s hard to say how long or deep Canada’s slowdown will be.
“You’ve never had debt levels as high, relative to incomes in Canada,” said Tulk. Even if the Bank of Canada has stopped raising rates, “there’s still kind of a big bulge in the python, so to speak, in terms of prior increases in interest rates and prior actions.”
While Canada’s job market has been on fire, posting its best start to the year since 1981, Tulk points out said the gauge is a lagging indicator; hours worked have receded. Business investment in the final three months of 2018 meanwhile, fell 5.9 per cent from the first quarter of last year, and 22 per cent below record high levels in 2014.
Wolf has been bearish on the loonie in the past. Lately, he’s getting some company. Toronto-Dominion Bank downgraded its forecast on Friday, seeing at within a range of 74 U.S. cents to 71 U.S. cents for much of this year. Citigroup technical strategists are targeting 73.52 US cents to 72.99.
The median of analyst forecasts’ compiled by Bloomberg puts the loonie at 77.52 U.S. cents in the fourth quarter of the year.
One option to shield investors from potential shakeout of Canadian assets is to replace some of them with emerging markets, which are cheaper and have better long term growth prospects, said Wolf.
With assistance from Theophilos Argitis
Bloomberg.com
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- Mar 20, 2019 2:06pm Mar 20, 2019 2:06pm
- | Commercial Member | Joined Dec 2014 | 11,697 Posts
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- Post #6,304
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- Edited 2:37pm Mar 20, 2019 2:15pm | Edited 2:37pm
- | Commercial Member | Joined Dec 2014 | 11,697 Posts
Powell 'Throws In The Towel' On Growth & Inflation, Sees Just One More Rate-Hike In Cycle
https://zh-prod-1cc738ca-7d3b-4a72-b...?itok=LY4e264-
by Tyler Durden
Wed, 03/20/2019 - 14:04
Fed has some 'splaining to do. The market is pricing in 16bps of rate-cuts in 2019 while they are forecasting - at last call - 2 rate-hikes...
https://zh-prod-1cc738ca-7d3b-4a72-b.../bfm1AC5_0.jpg
One of the big issues the Fed's wrestling with is what constitutes neutral, and while there's a lot of false precision in the r* framework, by one popular measure the funds rate is already bang on neutral. Bloomberg notes that if we compare the real policy rate (deflated by the core PCE price index) with the Laubach-Williams estimate of the real neutral rate, we find a perfect match.
https://zh-prod-1cc738ca-7d3b-4a72-b...es/bfmCDB2.jpg
And furthermore, 10Y yields have been glued to the Fed's long-term dot-plot rate forecast since the start of 2018...
https://zh-prod-1cc738ca-7d3b-4a72-b...es/bfm51E4.jpg
Expectations are that the FOMC will maintain its more dovish "patient" stance and shift from two hikes to one (zero would likely scare the markets) in 2019.
Currently, there is a 73% chance that the Fed doesn't hike in 2019. This will be evident in the SEP with a lowered inflation and growth outlook. As of December, the Fed was anticipating 2.3% growth in 2019 and 2.0% in 2020.
“The focus is going to be entirely on their dot plot and whether or not the Fed has taken any chance of a rate hike out of their own internal forecast,” said Lara Rhame, chief U.S. economist at FS Investments, which manages $24 billion.
“It’s going to be interesting to see if any of the Fed has priced in a rate cut, which I doubt they have, and then how many are thinking they may still need to adjust rates higher once or twice more throughout the year -- because I think it’s been a little premature for the market to discount any rate hike.”
And, along with when to stop shrinking its asset portfolio, the Fed faces another decision - what mix of Treasurys it holds, with implications for the economy.
Of course, The Fed's biggest issue is being perceived as dovish enough - the rates market is priced for 16bps of cuts... and how dovish is too dovish (what does Powell know that we don't?) and too hawkish risks a violent repricing in bonds and stocks which are expecting the Fed to be patient, data-dependent and on hold.
https://zh-prod-1cc738ca-7d3b-4a72-b.../bfm7AEC_0.jpg
So what did The Fed do today to bridge the gap between their hawkish, optimistic forecasts for growth and their pessimistic narrative for rate trajectories...
Jay Powell went full dovetard:
- *FED LEAVES RATES UNCHANGED, SAYS ECONOMIC GROWTH HAS SLOWED
- *FED SIGNALS NO RATE HIKE THIS YEAR WITH ONE INCREASE IN 2020
Median assessment of appropriate pace of policy:
- 2019 2.375% (range 2.375% to 2.875%); prior 2.875%
- 2020 2.625% (range 2.375% to 3.375%); prior 3.125%
- 2021 2.625% (range 2.375% to 3.625%); prior 3.125%
- Longer Run 2.75% (range 2.500% to 3.500%); prior 2.75%
https://zh-prod-1cc738ca-7d3b-4a72-b...es/bfmDC4C.jpg
The Fed has entirely folded to the market (but the market is still pricing more dovishness)...
https://zh-prod-1cc738ca-7d3b-4a72-b...es/bfmE47D.jpg
Additionally, The Fed plans to end balance sheet normalization in September.
In light of its discussions at previous meetings and the progress in normalizing the size of the Federal Reserve's securities holdings and the level of reserves in the banking system, all participants agreed that it is appropriate at this time for the Committee to provide additional information regarding its plans for the size of its securities holdings and the transition to the longer-run operating regime. At its January meeting, the Committee stated that it intends to continue to implement monetary policy in a regime in which an ample supply of reserves ensures that control over the level of the federal funds rate and other short-term interest rates is exercised primarily through the setting of the Federal Reserve's administered rates and in which active management of the supply of reserves is not required. The Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization released in January as well as the principles and plans listed below together revise and replace the Committee's earlier Policy Normalization Principles and Plans.
- To ensure a smooth transition to the longer-run level of reserves consistent with efficient and effective policy implementation, the Committee intends to slow the pace of the decline in reserves over coming quarters provided that the economy and money market conditions evolve about as expected.
- The Committee intends to slow the reduction of its holdings of Treasury securities by reducing the cap on monthly redemptions from the current level of $30 billion to $15 billion beginning in May 2019.
- The Committee intends to conclude the reduction of its aggregate securities holdings in the System Open Market Account (SOMA) at the end of September 2019.
- The Committee intends to continue to allow its holdings of agency debt and agency mortgage-backed securities (MBS) to decline, consistent with the aim of holding primarily Treasury securities in the longer run.
- Beginning in October 2019, principal payments received from agency debt and agency MBS will be reinvested in Treasury securities subject to a maximum amount of $20 billion per month; any principal payments in excess of that maximum will continue to be reinvested in agency MBS.
- Principal payments from agency debt and agency MBS below the $20 billion maximum will initially be invested in Treasury securities across a range of maturities to roughly match the maturity composition of Treasury securities outstanding; the Committee will revisit this reinvestment plan in connection with its deliberations regarding the longer-run composition of the SOMA portfolio.
- It continues to be the Committee's view that limited sales of agency MBS might be warranted in the longer run to reduce or eliminate residual holdings. The timing and pace of any sales would be communicated to the public well in advance.
- The average level of reserves after the FOMC has concluded the reduction of its aggregate securities holdings at the end of September will likely still be somewhat above the level of reserves necessary to efficiently and effectively implement monetary policy.
- In that case, the Committee currently anticipates that it will likely hold the size of the SOMA portfolio roughly constant for a time. During such a period, persistent gradual increases in currency and other non-reserve liabilities would be accompanied by corresponding gradual declines in reserve balances to a level consistent with efficient and effective implementation of monetary policy.
- When the Committee judges that reserve balances have declined to this level, the SOMA portfolio will hold no more securities than necessary for efficient and effective policy implementation. Once that point is reached, the Committee will begin increasing its securities holdings to keep pace with trend growth of the Federal Reserve's non-reserve liabilities and maintain an appropriate level of reserves in the system.
* * *
Full Redline below...
https://zh-prod-1cc738ca-7d3b-4a72-b...%20%281%29.png
Presumably, other than the growth downgrade, President Trump will be pleased?
https://zh-prod-1cc738ca-7d3b-4a72-b...0_10-51-26.jpg
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- Post #6,305
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- Edited 5:39pm Mar 20, 2019 2:50pm | Edited 5:39pm
- | Commercial Member | Joined Dec 2014 | 11,697 Posts
EU Tells UK Short Extension Only if UK Accepts the Deal, Rumors of May Resigning
https://imageproxy.themaven.net/http...PEeyEspKZ1kIrw
https://imageproxy.themaven.net/http...%3Fversion%3D0
by Mish
3 hrs[COLOR=rgba(0, 0, 0, 0.38)]-edited[/color]
The conditional extension process is winding up as I suspected all along according to the latest EU demands.
Currency Markets Got It Wrong
I thought it was farcical when the British Pound rallied on news the UK took a hard Brexit off the table then sought a long extension.
For starters, the UK can only take Brexit off the table if they agree to something the EU would accept. Second, I never expected the EU to honor a lengthy extension in the absence of a deal.
Nine Days Away
Nine days away from Brexit, European Commission President Donald Tusk told the UK that EU to Allow Short Article 50 Extension Only if MPs Vote for Deal.
The amusing thing about the announcement is Tusk was the one campaigning for a long extension. I never bought the idea, but the currency markets did.
Theresa May to Make Statement
In the Commons, the Labour MP Ian Murray says it has been confirmed that Theresa May will make a statement to MPs at 8pm.
Tusk's Statement
Tusk rejected May's extension request. Here is the Full Statement with the key idea noted.
"In the light of the consultations that I have conducted over the past days, I believe that a short extension would be possible. But it would be conditional on a positive vote on the withdrawal agreement in the House of Commons."
In short, France torpedoed a lengthy extension as expected in this corner and as noted yesterday.
What the Announcement Means
- MPs now face a choice between passing Theresa May’s deal next week, and a no-deal Brexit.
- Hardline Tory Brexiters will welcome this ultimatum, because they believe a no-deal Brexit is better than Theresa May’s deal and the prospect of Brexit now being delayed until after May now seems very slim.
- Having the end of next week as a very hard deadline now creates a dilemma for Labour MPs. They are strongly opposed to May’s deal but, unlike some Tory Brexiters in the European Research Group, they are alarmed at what a no-deal Brexit might mean for their constituents. Given that at least 20 ERG Tories are certain to carry on voting against May’s deal (and it could be many more), May will only pass her deal with Labour help.
- The DUP will be in a quandary too. Nothing said by May or Tusk today suggests they are going to get much new in the form of backstop concessions. Like the ERG, they are philosophically comfortable with a no-deal Brexit. But the economy in Northern Ireland would suffer disproportionately in the event of a no-deal Brexit, and the DUP may be more nervous than the ERG about taking responsibility for a scenario that could put some of their constituents out of business.
Success?!
It appears Theresa May "succeeded" in binary choice play.
All along she was comfortable in winding down the clock. Curiously, so were Remainers who saw it as a chance for a referendum or long extension.
The hard-Brexit Tories were comfortable as well. As I pointed out, mathematically someone had to be wrong.
May speaks tonight. There are rumors she may resign.
Perhaps she does, but when?
Now? With a promise to do so immediately after her deal is approved?
I have no insight into this other than May's stubbornness. She may have picked up a few more votes for passage of her deal a couple of weeks ago had she done this, but hard Brexiters just might smell blood now.
Perhaps there is still a chance to opt for a softer Brexit. But that would require, as does everything else, a majority.
I just do not see Tories splintering the party to vote for the baseline Labour setup. That is why I though the Eurointelliugence position of May's deal or a custom's union would not fly.
That said, it's still possible, just very unlikely as I see it from this corner.
Odds of no-deal jumped higher again today, but it is still possible for May to scramble enough votes from Labour for her deal.
By the way, I expect a short extension, until mid-May if no-deal wins the day. That would give EU and the UK time to tie up some loose ends.
Tonight, we find out more. Importantly, it ain't over, till it's over.
Mike "Mish" Shedlock
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- Mar 20, 2019 10:25pm Mar 20, 2019 10:25pm
- | Commercial Member | Joined Dec 2014 | 11,697 Posts
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- VEEFX
- Joined Jun 2006 | Status: Member | 2,840 Posts
Quoting Nik-Nyc
As it relates to Harold, the whole order fill question is totally out of line, the man trades very well defined setups within 480 candles a week. That is an extremely short trading window. The setups either occurred or they didn't. The trade management is fully defined and automated. The system is simple and mechanical. The only variable is whether a trader can execute the system correctly. Execution is a prerequisite for long-term expectancy and it has nothing to do with the strategy, but everything to do with the trader.
Fills matter 100% to followers of any strategy and just for the record, I was NOT asking Harold to show his fills. Fills is the only way to gauge if someone trying out the strategy has got the grip of rules accurately per the original rules especially when there is micro-trend, half-candle, sl below/above tip of wick, cancel of pending etc type rules involved. The "reporting" of trades has to be accurate as even a +1 or -1T can alter the course of the overall outcome.That is all I am raising here. To each his own whatever they want to post. It really does not matter to me as I have learnt to ignore things that adds no value to me personally on forums. Even screenshots of MT4 with just trade lines add no value to me as they is no way to tell which candle the trade occurred. Preciseness is the key when it comes to learning and trying out someone's strategy and it is just good practice overall for the collective learning process that is going on in this thread.
Trader's Execution is 100% true for any successful trading regardless of strategy. This is especially true with microscalping. And I am the first to report, I suck at razor sharp executions!
Staying in my lane...
COMMENTS FROM BENJAMIN: Good Day VEEFX and anyone else reading my comments here this morning. Anyone that has spent time on my thread has learned why with no disrespect to anyone that uses technicals as their basis for Forex trading is DOOMED to failure most of the time.
You cannot predict anything with consistency trading using only charts. Why ? A chart is only an XRAY of the moment.
What chart told you in advance what the FED would do at 2:00 PM yesterday where they COMPLETELY reversed what they told the world during December 2018 and now everyone that understands knows the FED has no more clothes.
Futures are down again this morning because of the FED decision of yesterday. What about BREXIT on March 29, 2019 ? Even Prime Minister May has no CLUE what will happen so how can the charts predict what will happen ?
I use as you know RISK ON or RISK OFF with many other methods so that is why short term loveandpeace has achieved incredible results after never having done anything except lose money as do 95% of all Forex traders including the Professional ones.
Today we start with RISK OFF.
- Post #6,309
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- Mar 21, 2019 6:01am Mar 21, 2019 6:01am
- | Commercial Member | Joined Dec 2014 | 11,697 Posts
"Fed Returns To The Punchbowl": The Biggest Surprises In Today's Fed Decision
https://zh-prod-1cc738ca-7d3b-4a72-b...?itok=LY4e264-
by Tyler Durden
Wed, 03/20/2019 - 21:14
The Fed is returning to the punchbowl.
That's how Bank of America summarized today's second consecutive dovish surprise by the FOMC regarding rates and balance sheet policy. As we noted earlier, there were two major developments in today's FOMC decision:
- the dots dropped substantially to show no further hikes this year and only one hike in 2020. This means that the increasingly "patient" Fed is signaling that policy will remain accommodative relative to the long-run rate expectation.
- the balance sheet unwind will start in May and be completed by the end of September.
As before, the Fed doubled down on patience and a strong desire to allow inflation to run "hot" and above the 2.0% target (it remains unclear just which inflation the Fed is targeting as tuition, medical, rent and food inflation, not to mention assets of all shapes and sizes, are already increasing at a far greater pace than 2% annually). Ultimately, as Powell said in his opening remarks, the Fed's overarching goal is to sustain the economic expansion. The latest unprecedented dovish turn "clearly shows such commitment" according to BofA's chief economist Michelle Meyer.
For those who missed our earlier recap, here are the main highlights again, starting with...
The Dots
As Powell said during the press conference, he is comfortable "watching and waiting", and he is hardly alone: the FOMC consensus for such a position was telegraphed with the dots shifting dramatically lower in today's moment of sheer Fed humiliation (which we previewed over the weekend), and now expects no more rates hikes for this year (down from an expectation of 2 hikes in December) and just one hike in 2020. Drilling down, 11 FOMC officials expected no hikes this year with 4 for 1 hike and 2 for 2 hikes. A confirming of just how doved up the Fed has become is that 2020 was also very close with only 2 FOMC officials away from moving to no hikes in 2020. The expectation for long-term rates did not shift, holding at 2.75%. This means that the consensus of the FOMC does not anticipate reaching the long-run expectation for rates, which implies an undershoot in policy and an overshoot in inflation over the next two years, even if the Fed actually dropped its PCE inflation forecast to 2.0% from 2.1% for both 2020 and 2021. Remarkably, in just six months, the Fed has gone from an outlook with rates in restrictive territory to rates still somewhat accommodative by the end of 2021
The Fed's Balance Sheet
While the market was not expecting any major announcements on the balance sheet, it got them nonetheless, providing more specificity and detail than most had expected. The Fed announced that they would:
- End the securities portfolio unwind at end Sept '19.
- Taper the Treasury unwind by reducing the cap on monthly redemptions from the current level of $30 billion to $15 billion beginning in May '19.
- Reinvest maturing MBS across the UST curve, not towards the front end as we expected.
- Cap MBS redemptions at $20 bn/month; Prepayments above this amount would be reinvested into MBS.
- Hold their aggregate securities holdings constant for a time and allow for a continued shrinking of reserves via non-reserve liability growth (i.e. currency in circulation).
- In October, the Fed will purchase enough Treasuries to offset the reduction in MBS holdings. The aggregate portfolio will be unchanged starting in October
As a result of the early end to the runoff, BofA now projects that the Fed's total balance sheet size will end the normalization experiment at $3.76trillion with $1.22 tn in reserves. As a reference, the balance sheet peaked at $4.5 trillion, rising from well under $1 trillion prior to the financial crisis. While overall, the balance sheet announcements were consistent with what consensus had anticipated (would be revealed in June, with Goldman previously correctly predicting the September end date), the biggest surprise was the decision to reinvest US Treasuries across the curve as opposed to concentrating these reinvestments at the front end, meaning that there are no plans to launch a reverse Operation Twist at this time. Additionally, such a plan would only gradually reduce the average maturity of the Fed's Treasury holdings. The average maturity of the Treasury debt outstanding is about 70 months (5.8 years).
Looking ahead, while the overall Fed portfolio will be flat after September, the Fed should be buying roughly $45bn per quarter to offset the liquidation of MBS. Annualized, the Fed should be a net buyer of about $180bn per year of Treasury securities. If the Treasury is financing $1.0tn deficits annually, purchases by the Fed become a meaningful source of funding, which according to Socgen "will enhance its ability to offer fiscal stimulus when or if a slowdown takes place."
https://zh-prod-1cc738ca-7d3b-4a72-b...0of%20TSYs.jpg
Finally, SocGen writes that someday, quite possibility in the very near future, the Fed will likely need to grow its portfolio again. The Fed admitted this in its update of, "Balance sheet normalization principles and plans." According to SocGen, the Fed can start increasing the balance sheet in 2H20. The growth should be accomplished with even more Treasury purchases.
Does the Fed know something Others don't?
The biggest question on most traders' minds (in addition to another one to be discussed below, is why is the Fed so incredibly patient? Powell shared a few reasons including i) the slowdown in growth in China and Europe, ii) the market disruptions in Q4, iii) mixed data at the start of the year and, iv) the fact that they believe that they have not met the inflation mandate. With inflation running below 2%, the Fed believes it is not meeting the mandate in "a symmetric way", i.e., it will overshoot on inflation without tightening if CPI comes in hot. The policy prescription is therefore for the Fed to hold policy and be "patient" for inflation to move up. This also means that the only gating factor for a reversal to a more hawkish Fed will be a jump in inflation, something Morgan Stanley expects will take place in late 2019 and early 2020, at which point the Fed will resume hiking an additional three times in 2020.
https://zh-prod-1cc738ca-7d3b-4a72-b...%20outlook.jpg
The Fed also tweaked its projection forecasts, looking for weaker growth this year and next and a slightly higher unemployment rate. The forecast for inflation did not change as the Fed looks for core PCE to hold at 2.0% through the forecast horizon. This shows that the Fed believes that the Phillips Curve is flat, penciling in no inflation response despite the unemployment rate persistently sub-NAIRU and easy monetary policy.
https://zh-prod-1cc738ca-7d3b-4a72-b...rch%202019.jpg
On financial stability risks, i.e., an asset bubble, Powell once again downplayed concerns arguing that the Fed does not see vulnerabilities as elevated. They are monitoring certain aspects of financial markets but they are not allowing it to alter their policy for interest rates. As Powell said, the key tools for managing financial stability are "regulatory" rather than rates. How regulation will bail out the financial system once this current bubble pops, remains unclear.
Market implications
Since this was an unexpectedly dovish statement, the reaction was abrupt and violent: the rates market viewed Fed communications, especially through the SEP fed funds projections, as signaling a very dovish stance by the FOMC. This was manifest in the rates market rallying sharply following the release of the SEP led by the front end given the expectation the Fed will not hike rates any time in the near future. In fact, the yield curve is now inverted between the effective Fed Funds rate (2.40%) all the way to the 5 Year.
https://zh-prod-1cc738ca-7d3b-4a72-b...203%205%20.jpg
At the same time, the curve steepened by 5 bps between 5 - 30Y tenors given the Fed did not lower its longer-run dot but used the SEP medians in '19 - '21 to signal an undershoot of the expected fed funds rate path. Breakeven rates of inflation also rose following the more dovish Fed policy stance. Overall, today's Fed communications reinforce a view of a steeper US rates curve (which incidentally is bad news for momentum and growth stocks as Nomura's Charlie Mcelligott has been repeating often in recent months) and wider breakevens. What is surprising, is that despite the Fed's express desire to increase future growth and potentially allow the economy/inflation to run hot, the 10Y yield also tumbled, as the bond market is now growing concerned the Fed committed another policy error, with a curve inversion once again imminent.
Meanwhile, as noted above, the biggest surprise was the decision to reinvest Treasuries across the curve as opposed to concentrating at the front end, suggesting greater potential for belly USTs to richen vs OIS. In the press conference there was also a notable lack of communication on any potential Fed ceiling tool. We expect the March FOMC meeting minutes to have greater discussion of such a possible tool which will likely be introduced later this year as despite the $1.3 trillion in reserves, it is all too likely that banks will find themselves starved for liquidity as the US Treasury issuance spree picks up.
One place where there was no surprise is that the dollar sharply weakened after the dovish FOMC decision. According to BofA, given the possibility of an unchanged Fed this year, with external growth now showing signs of stabilization, that US growth convergence should eventually translate to monetary policy convergence as global central banks follow through with the policy normalization process. This should, at least in theory, drive the next leg lower in USD as long as global risks are contained. Yet while BofA remains bearish USD in 2019 as the topping process may now be under way, many other banks have also opined on the dollar as being very rich and yet the greenback refuses to drop appreciably, suggesting that the market is concerned that other banks may engage in even more aggressive easing as the global economy stalls in the coming months.
Finally, and perhaps related to this, was the surprise reaction in stocks: after initially spiking higher, as risks always does when the Fed surprises dovishly, the market then sold off, and while the drop wasn't substantial, the fact that the day's biggest sell program hit at precisely 3:30pm and pulled stocks sharply lower, indicates that at least one player decided that - for one reason or another - the top was in. Whether that has to do with the recurrent concern of "what does the Fed know about the economy if it is doubling down on dovish", and is signaling an imminent recession, or because of growing conviction that the Fed is now powerless and has committed a policy error will be revealed in due time.
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However, the most disturbing feature of today's late-day selloff, is that after the aggressive seller emerged, not only major investor had the conviction to reverse the late-day drop in what appears to have been a major hit to the "dovish Fed is bullish" narrative.
If today's late day swing lower is not reversed tomorrow now that traders have had time to digest the FOMC decision, it will be a concerning indication that all the market upside that can be extracted from monetary policy has now been priced in, and would suggest that another retest of the December lows would be required to force Powell to commence rate cuts or even launch QE4.
- Post #6,310
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- Edited 6:30am Mar 21, 2019 6:11am | Edited 6:30am
- | Commercial Member | Joined Dec 2014 | 11,697 Posts
ONLY GOLD STANDS AGAINST THE FINAL CATASTROPHE
March 21, 2019
by Egon von Greyerz
Have the Ides of March been delayed in 2019? Normally the Ides of March just means the date March 15th. Shakespeare made the expression ominous as it was the day that Julius Caesar was murdered. Today in 2019, the 29th of March seems more significant than the 15th. Because on the 29th, we first have the conclusion of Brexit. Or maybe we don’t! Brexit has been a tortuous process that after 3 years has got nowhere. All it has done is to reveal the EU elite’s megalomania as well as their intransigence. It has also revealed the complete incompetence of the UK government as well as Mrs May’s total indecisiveness and her inability to distinguish between activity and achievement.
VALUE OF CASH NO LONGER DOUBLE THE VALUE OF GOLD
March 29th is also very important in the banking world since it is the date when gold is recognized as a Tier 1 asset and thus equal to cash. Until now, gold was only a Tier 3 asset and its value was taken at 50% for the purpose of a bank’s solvency. It is of course totally ridiculous that cash or fiat currencies which we know always go to zero over time, should have been taken at twice the value of gold.
There are people speculating that gold becoming a Tier 1 asset will have major significance for the gold price. Also, some market observers even think that this is the beginning of a new era with gold again resuming the mantle of backing currencies or SDRs (Special Drawing Rights). Obviously this would require a substantial revaluation of gold in relation to the dollar in order to achieve sufficient cover for the debt outstanding.
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So shall we beware of the Ides of March as Shakespeare said and will they be delayed to March 29th in 2019? I doubt that Brexit, which is a mess that won’t end well, will be resolved by March 29. Also, the global debt situation will necessitate a restructuring of the currency system. And sadly, there are no SDRs or no new government crypto currencies that will make the debt just disappear. As the story goes: “All the king’s horses and all the kings men couldn’t put Humpty back together again.”
But even if the Ides of March are not delayed and March 29th 2019 does not have a major influence on the world, it will serve as a warning of things that are likely to happen in the world financial system. Desperate debt laden governments will take desperate decisions. We could easily see a time when the US devalues the dollar significantly or introduces a crypto dollar and backs it with gold at a massively higher price.
HEGEMONY OF DOLLAR SOON TO FINISH
I doubt that the US will succeed in maintaining the hegemony of the dollar in the longer term, for a number of reasons.
Firstly, the US is unlikely to be able to prove that they have the 8,000 tonnes of gold that they purport.
Secondly, China and Russia would never accept that the debt infested USA is still in control of the world’s reserve currency. A country with 60 years of real deficits, 45 years of trade deficits and at least $200 trillion of debts and unfunded liabilities does not deserve to have the reserve currency of the world.
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UNLIMITED OPPORTUNITIES TO LOSE MONEY
The next few years will give us all unlimited opportunities to lose money. Last week I talked about 3 dozen reasons to buy gold and risks to investors’ assets.
At least 99.5% of investors are oblivious to the risks I outlined which is clearly surprising since they will lead to the biggest asset destruction in history.
But the norm is that maximum bullishness occurs at market peaks. The coming decline in all asset markets, be it stocks, bonds or property will shock investors, as they in real terms will lose at least 75% of their assets and probably more than 90% in most cases. The 3 dozen financial, economic, political and geopolitical risks will see to that.
The problem is that the world is now entering an era when money printing and deficit spending no longer will work. It has been an absolute miracle that the world has survived on fake money and fake promises for such a long time. But we have now reached the point where it will no longer be possible to fool all of the people all of the time.
RETURN TO THE DARK AGES
Throughout history governments have mismanaged the economy and thus destroyed the people’s hard earned money. This is the rule rather than the exception. There are numerous examples of countries collapsing under their own debt but the best analogy to the world’s situation today is the Roman Empire because of its size. During a 500 year period, the Romans dominated an area, both militarily and culturally, which included major parts of Europe, North Africa and parts of Asia.
As with all empires, the Roman one carried the seeds of its own destruction. Interestingly the world is now at a point when virtually all countries carry these destructive seeds. After the fall of the Roman Empire, the Dark Ages lasted for over 500 years. But as opposed to the Roman Empire, the current period of debts, deficits and decay encompasses the whole world and is of a magnitude much greater than 2,000 years ago. Therefore, it is likely that the effects of the coming collapse of the world economy could last a very long time. Just as the term the “Dark Ages” was only invented in the 14th century, future historians will only know afterwards if the world is now entering a period which will be a Return to the Dark Ages.
If that will be the case, there would be a total destruction of both the financial system and the world economy with all its infrastructure. It would also involve wars, civil wars, a breakdown of society and a fall in population by several billion. To most people, this clearly sounds like unrealistic scaremongering and a prophecy of doom and gloom of dramatic proportions.
The intellectual capacity of most human beings doesn’t include these complex issues and longer term projections. Much simpler to talk about Brexit or Trump and his alleged Russia connection.
Clearly we hope that these cataclysmic events will not come to pass. But what we do know is that the risk is greater than ever in history. And just like the Dark Ages, we will only know about it after the event. The older generation living today would see the mere beginning of the fall but that can be dramatic enough. What is certain is that our children and grandchildren are very unlikely to have the prosperous and peaceful life that most of the world has enjoyed since 1945.
It is virtually impossible to prepare for a potential extended downfall but what we can do is to prepare for the short term and protect our investment assets.
CURRENCY DEBASEMENT IS A 2,000 YEAR OLD FRAUD
Governments have many tricks in their bag to steal the citizens’ money.
The easiest way is to debase the currency. And this all governments have done with superb skill throughout history. As the Roman Empire started to crumble the value of the currency, the silver Denarius, fell rapidly. In those days, money printing consisted of reducing the silver content of the coin. So from almost 90% silver in 180 AD, the rulers cheated their people by using less and less silver to coin the Denarius. By 270 AD, around 90 years later, the silver coin was both silver-less and worthless.
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Gradually, the Roman Empire started to crumble and Rome had all the expected problems of a state that was living above its means including major deficits and debts.
In 180 AD Cassius wrote:
“Our history now descends from a kingdom of gold to one of iron and rust as did the affairs of the Romans that day.”
Since the beginning of the 20th century, the world has experienced exactly the same thing as the Romans did 1,800 years earlier. The value of all currencies has declined by 97% to 99% and we will see all the major currencies reaching their intrinsic value of ZERO.
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In 1949 Ludwig von Mises wrote:
“There is no means of avoiding the final collapse of a boom brought about by credit expansion.
The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
Thus, history repeats itself and we are again at the point when “the final catastrophe” is very near. The chart of the Denarius almost 2,000 years ago and the statement of Cassius are almost identical to the currency chart of the 20th century and von Mises’ statement.
Plus ça change, plus c’est la même chose
The more it changes, the more it’s the same thing.
So this year we should clearly beware of the Ides of March even if they are late. But it is not enough to be aware. We must also take the necessary actions to avoid suffering from “the final catastrophe of the currency system involved.”
Physical gold is the best means to avoid that catastrophe.
Egon von Greyerz
Founder and Managing Partner
Matterhorn Asset Management
Zurich, Switzerland
Phone: +41 44 213 62 45
Matterhorn Asset Management’s global client base strategically stores an important part of their wealth in Switzerland in physical gold and silver outside the banking system. Matterhorn Asset Management is pleased to deliver a unique and exceptional service to our highly esteemed wealth preservation clientele in over 60 countries.
GoldSwitzerland.com
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Articles may be republished if full credits are given with a ink to GoldSwitzerland.com.
- Post #6,311
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- Mar 21, 2019 6:33am Mar 21, 2019 6:33am
- | Commercial Member | Joined Dec 2014 | 11,697 Posts
- Post #6,312
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- Edited 9:47am Mar 21, 2019 9:35am | Edited 9:47am
- | Commercial Member | Joined Dec 2014 | 11,697 Posts
Something is off.
Over the past decade, any time the Fed, BOJ or ECB surprised the market dovishly, risk assets surged. And yet, when the ECB did just that on March 9, when Draghi unveiled TLTRO prematurely, the Stoxx slumped. And, more concerningly, after a brief rally yesterday at 2pm in kneejerk response to a Fed that has now fully capitulated on normalizing monetary policy and announced it will end its balance sheet runoff by September, US markets not only faded all gains, but closed sharply lower.
When commenting on the Fed's decision, and the market's surprising reaction, we said that it was too early to draw conclusions from the S&P's reaction, where a blast of selling took place at precisely 3:30pm setting the dour mood into the last 30 minutes of trading. However, the overnight session which saw both European stocks struggle and U.S. equity futures slide despite some bullish sentiment in Asia, it appears that investors still have a some questions for Powell, among which the most important one: "What does the Fed know that nobody else does for it to capitulate so abruptly",and what might be lurking in the shadows.
So far that answer is missing, and it explains why US equity futures have continued to sink despite a Fed which is now all in on reflating if not the economy, which by now it is clear it has little control over, then at least capital markets. Meanwhile, as risk assets are shunned, investors are plowing into safe havens as the yield on 10-year Treasuries extended Wednesday’s drop, rates slumped across Europe and gold jumped.
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As European shares wilted and futures faltered, banks suffered the brunt of selling from the dovish doubling down, expressing traders' usual worries about low borrowing rates, and dragging the European STOXX 600 down 0.2%, though London’s FTSE edged up as its miners were lifted by higher copper and metals prices.
But the real action was in the bond markets, where the stampede into safety continued, with the 7Y inches away from inverting below the effective Fed Funds rate.
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With investors rushing to price in the prospect of US rate cuts later this year, which traditionally have been followed by a recession 3 months later, Treasury yields dived to their lowest since early 2018 and those on German Bunds - Europe’s benchmark - to the lowest since October 2016. Ten-year Bund were offering buyers virtually nothing again at just 0.048%. Alongside widespread ‘curve’ flattening - where shorter and longer-term borrowing costs converge - there were alarm bells ringing.
Rabobank strategist Philip Marey said the worry is that, having cut rates to the bone and already tried full-scale money printing, many central banks are now low on traditionally ammunition to fight recessions.
“The Fed has the most leeway because it has raised rates nine times so it could cuts rates nine times,” Marey said. “But it will be much more difficult for other central banks which haven’t even started to hike yet.”
Earlier in Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan was up 0.5%. Chinese blue-chips, which spent the morning swinging between small losses and gains, were up 0.4% in afternoon trade, while Seoul’s Kospi also added 0.4% as regulators announced plans to cut the stock transaction tax this year. Australian shares ended flat after see-sawing throughout the day. A drop in the jobless rate tempered market expectations of a rate cut. Markets in Japan were closed for a public holiday.
Meanwhile, in FX, after The Fed’s swerve sent the dollar sliding as far as 110.47 yen, with its 0.6 percent loss overnight the biggest drop since the flash crash of early January, the Bloomberg Dollar Spot Index rebounded sharply for the first time in five days as the greenback recovered some of the previous days losses as investors realized that if things are "this bad" in the US, they can only be far worse everywhere else, with the rest of the world only now starting to cut rates.
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Despite the dollar's rebound, it remains poised precariously on its 200-day moving average, and a sustained break would be taken as technically ‘bearish’, resulting in a slide that virtually every bank is expecting. “The downward pressure on U.S. yields continues to support our outlook for a weaker U.S. dollar this year,” said MUFG analysts in a note.
The pound saw the biggest decline as pressure built on Theresa May to gather a majority for her Brexit deal. The U.K. prime minister asked the European Union for a three-month extension to the March 29 deadline in a move that increases the risks of a no-deal departure. The Norwegian krone surged higher as Thursday’s top-performing G-10 currency after the Norges Bank followed the Federal Reserve in catching the market by surprise, but with a decision that was more hawkish than expected. The Norwegian krone rallied by the most since December versus the euro to touch a four-month high, after the Norges Bank hiked rates from 0.75% to 1.00%
The euro flew to a seven-week peak before things started to reverse in Europe. It was last trading at $1.1410, a world away from its recent low of $1.1177 while Brexit woes kept the pound down at $1.3175.
In other central bank news, also overnight, the Swiss National Bank kept rates on hold, cut its inflation forecast and said it will remain active in the currency market to curb any appreciation in the Swiss franc
Meanwhile, with the Fed now in the rearview mirror, trade concerns have returned, after President Trump on Wednesday warned that Washington may leave tariffs on Chinese goods for a “substantial period” to ensure Beijing’s compliance with any trade deal. China-U.S. trade talks are set to resume next week.
Global growth worries extended to commodity markets, where oil prices, which had jumped Wednesday on supply concerns, retreated.
Brent (-0.3%) and WTI (-0.3%) are softer, and trade within a $1/bbl range. WTI did surpass the USD 60.0/bbl level overnight on the back of a dovish FOMC, however the complex has since drifted somewhat with WTI now trading just below the key level as fears about the global economy are dominating. Gold (+0.4%) is firmer, although off of session highs of around USD 1320/oz, on the back of dollar weakness after yesterdays dovish Fed, base metals more broadly have garnered support from the weaker dollar with copper rising 0.9 percent to $6,517 a tonne, having touched a near three-week high earlier in the session.
Elsewhere, Barclays note that the risks surrounding iron ore have not dissipated following the reopening of Vale’s Brucutu mine as two others have been temporarily closed recently and there is a risk of further mine closures.
Market Snapshot
- S&P 500 futures little changed at 2,826.75
- STOXX Europe 600 down 0.2% to 380.25
- MXAP up 0.5% to 161.13
- MXAPJ up 0.3% to 530.58
- Nikkei up 0.2% to 21,608.92
- Topix up 0.3% to 1,614.39
- Hang Seng Index down 0.9% to 29,071.56
- Shanghai Composite up 0.4% to 3,101.46
- Sensex up 0.06% to 38,386.75
- Australia S&P/ASX 200 up 0.03% to 6,167.17
- Kospi up 0.4% to 2,184.88
- German 10Y yield fell 4.2 bps to 0.042%
- Euro down 0.2% to $1.1395
- Italian 10Y yield rose 3.2 bps to 2.172%
- Spanish 10Y yield fell 4.9 bps to 1.115%
- Brent futures up 0.1% to $68.59/bbl
- Gold spot up 0.4% to $1,318.32
- U.S. Dollar Index up 0.3% to 96.06
Top Overnight News
- Federal Reserve Chairman Jerome Powell said interest rates could be on hold for “some time” as global risks weigh on the economic outlook and inflation remains muted. Officials also decided to slow the drawdown of the U.S. central bank’s bond holdings starting in May, then end them in September
- In a dramatic address to the nation from her 10 Downing Street office on Wednesday, Theresa May hinted that she could even resign rather than agree to a lengthy postponement that would keep the U.K. in the bloc beyond the middle of the year. An emergency summit has already been penciled in for next week when the EU could propose a long extension to the negotiations, but with conditions attached, potentially including ripping up May’s proposal, calling a British election and even a second referendum
- Bank of England policy makers face more paralysis amid turmoil over the date of Britain’s departure from the European Union. Officials are likely to vote unanimously to hold the benchmark interest rate at 0.75 percent when they announce their decision at noon in London Thursday
- President Donald Trump said he’ll keep tariffs on China until he’s sure Beijing is complying with any trade deal, refuting expectations that the two nations will agree to roll back duties as part of a lasting truce to their trade war
- Australian unemployment dropped to a decade-low in February, defying the worst housing slump in a generation that’s forced a sharp slowdown in economic growth
- Dutch Prime Minister Mark Rutte’s coalition government is set to lose its majority in the Senate, with anti-EU party Forum for Democracy making a strong debut, highlighting the challenge leaders face in tackling populism two months before key European Parliament elections
- New Zealand has banned military style semi-automatics and assault rifles and will establish a nationwide buyback of the weapons in the wake of a terrorist attack on two mosques that left 50 people dead
- Norway’s central bank raised its main interest rate for a second time since September and signaled there’s more tightening to come, as western Europe’s biggest oil exporter lets a rebound in crude prices steer monetary policy. The krone appreciated as much as 1.1 percent against the euro after the decision
- The Swiss National Bank kept rates on hold, cut its inflation forecast and said it will remain active in the currency market to curb any appreciation in the Swiss franc
Asian equity markets eventually traded mostly higher in the aftermath of a dovish FOMC, which immediately supported risk sentiment, although the gains in the major US indices were later pared due to underlying growth and trade concerns. ASX 200 (Unch) was subdued as financials tracked the underperformance of their US counterparts post-FOMC and with a broad subdued tone across most sectors aside from commodity-related names. Elsewhere, Hang Seng (-0.8%) and Shanghai Comp. (+0.4%) remained afloat with CITIC Securities suggesting increased possibility of a PBoC rate cut following the dovish Fed stance, although gains were capped amid lingering trade uncertainty as US President Trump recently suggested tariffs on China will be kept in place for a "substantial" amount of time after a trade agreement is struck to ensure Beijing holds up its end of the bargain. As a reminder, Japanese and Indian markets were shut for Vernal Equinox and Holi respectively.
Top Asian News
- China Closes in on Plane Order From Africa Amid Overseas Push
- Fed’s Longer Pause Opens Door for Asian Central Banks to Cut
- Philippines Holds Benchmark Rate as Inflation Eases Into Target
- China Mobile Slides to Biggest Loss Since October After Earnings
Major European indices are mixed, but are generally little changed [Euro Stoxx 50 U/C], following the dovish FOMC; which has led to underperformance in financial names with the sector significantly lagging its peers and the likes of Lloyds (-2.8%) and RBS (-5.3%) underperforming (RBS are trading ex-dividends). The FTSE 100 (+0.3%) has been supported from the open by a rebound in material names such as Fresnillo (+5.3%), Antofagasta (+2.6%) and Glencore (+2.2%); with the broader sector outperforming its peers in a turn around from the significant underperformance seen yesterday in the material sector which was attributed to Vale surpassing a key milestone in resuming production. Other notable movers include, Inmarsat (+2.1%) in the green after speculation surrounding a counterbid for the Co. after reports yesterday that investors made a bid valued at GBP 2.5bln. At the bottom of the Stoxx 600 are IG Group (-7.6%) after poor earnings figures and the Co. stating they expect FY revenue to be lower than the priors. Separately, Skanska (-2.6%) are lower as the Co. states that they are not likely to hit their 2019-20 construction margin target.
Top European News
- Feud Erupts at EssilorLuxottica After Del Vecchio Cries Foul
- Deutsche Bank Vows More Wealth Management Hires to Reverse Flows
- Ted Baker Falls After Meeting Lowered Full-Year Estimates
- Sweden Moves Closer to Divesting $7.5 Billion Telia Stake
In FX, In stark contrast to the dovish FOMC and steady SNB, the Norges Bank delivered the 25 bp hike flagged at the start of the year and signalled another ¼ point tightening for the 2nd half of 2019 before 2 more next year. The accompanying statement was also more upbeat/hawkish than most expected, with upgrades to growth forecasts and 2019 core CPI, while the Board added that the domestic economy may even expand faster than previously envisaged. Moreover, Governor Olsen went one step further by assigning better than even odds of a 25 bp hike in June, and Eur/Nok has slumped in response from around 9.6900 to just over 9.5900 at one stage.
- DXY - The broad Dollar and index have pared some post-Fed losses, albeit mainly due to several rival G10 currencies failing to build on gains at the expense of the Greenback. Indeed, Usd/majors are somewhat mixed as the DXY reclaims 96.000 status, just. To recap, the FOMC was more dovish than expected given no further policy normalisation this year vs 2 hikes previously and confirmation that QT will end sooner than planned, with a slower monthly run-off from May and end by September.
- NZD/AUD/JPY - The other big beneficiaries of Usd weakness, with the Kiwi reclaiming the 0.6900 handle and gleaning independent support to a mostly solid NZ Q4 GDP update, while the Aussie is firmly back above 0.7100 as sub-forecast jobs growth in February was countered by a near 8 year low unemployment rate. Elsewhere, Usd/Jpy has reversed sharply through 111.00 and to the lower end of a 110.75-30 range as US Treasury yields recoil in wake of the aforementioned Fed policy shift.
- CAD/CHF/EUR/GBP - All underperforming to varying degrees, as the Loonie failed to sustain momentum through 1.3300 and the Franc resists advances towards 0.9900 in wake of the SNB quarterly policy review that maintained a high value assessment of the Chf amidst still fragile FX market conditions and the ongoing need for NIRP alongside close monitoring and intervention if needed. Meanwhile, the single currency has faded ahead of 1.1450 having cleared a Fib level at 1.1420 temporarily, and now looks prone to hefty option expiries at 1.1400 in 2.8 bn, with further upside attempts potentially capped by similar size between 1.1415-30 (2.9 bn). Turning to the Pound, Brexit remains the overriding issue and currently a mainly negative factor given even more uncertainty surrounding the conclusion and whether the EU is willing to grant an A 50 extension. Indeed, Cable only got a knee-jerk lift from better than forecast UK retail sales data before extending losses from 1.3200+ to circa 1.3135.
In commodities, Brent (-0.3%) and WTI (-0.3%) are marginally softer, and remain affixed within a USD 1/bbl range. WTI did surpass the USD 60.0/bbl level overnight on the back of a dovish FOMC, however the complex has since drifted somewhat with WTI now trading just below the key level. Regarding the 9.6mln draw in EIA Crude Inventories reported yesterday, UBS note that this is bullish in respect to both the API’s 2.1mln draw and compared to the 5yr average for this period; of around +5.4mln. Gold (+0.4%) is firmer, although off of session highs of around USD 1320/oz, on the back of dollar weakness after yesterdays dovish Fed, base metals more broadly have garnered support from the weaker dollar with copper rising to around a 3-week high overnight. Elsewhere, Barclays note that the risks surrounding iron ore have not dissipated following the reopening of Vale’s Brucutu mine as two others have been temporarily closed recently and there is a risk of further mine closures.
US Event Calendar
- 8:30am: Philadelphia Fed Business Outlook, est. 4.8, prior -4.1
- 8:30am: Initial Jobless Claims, est. 225,000, prior 229,000
- 8:30am: Continuing Claims, est. 1.77m, prior 1.78m
- 9:45am: Bloomberg Consumer Comfort, prior 60.8
- 9:45am: Bloomberg Economic Expectations, prior 54.5
- 10am: Leading Index, est. 0.1%, prior -0.1%
DB's Jim Reid concludes the overnight wrap
This week’s serenity in markets was broken yesterday by a dovish FOMC outcome and the latest Brexit developments. It’s hard to call anything surprising in Brexit terms unless we discovered that Aliens had landed on top of the Houses of Parliament and had taken over proceedings. Anything other than this might raise an eyebrow or two but not have much shock value given all the surprises seen in recent months.
Anyway, first the Fed. They lowered their interest rate projections for this year and next, with the median forecast now calling for zero hikes in 2019 and one in 2020. That was below the consensus expectation, and two- and ten-year treasury yields fell -7.3bps and -9.0bps respectively. That pushed 10-year yields to their lowest level since January 2018, with yesterday’s fall the sharpest since last May. Also helping this move was growth and inflation being revised down and UST bullish news on the balance sheet (more below). The sharp rally didn’t stop the MOVE treasury volatility index reaching a new all-time low last night. The dollar weakened steeply, falling -0.42% and to its lowest level since February 4. Equities had been trading much weaker, mirroring the moves in Europe (more below), but rebounded sharply and into positive territory after the dovish outcome but then faded again into the close. The S&P 500 and DOW were -0.29% and -0.55% weaker, respectively, while the NASDAQ eked out a +0.07% gain. That leaves Mr Powell 8-1 down in terms of US equities on FOMC days under his leadership. 7-0 in 2018 and 1-1 in 2019. Elsewhere Emerging markets outperformed after the Fed though, with equities up +0.16% and currencies gaining +0.69%.
Apart from the headline change in the Fed’s interest rate projections, they also lowered their growth and headline inflation forecasts. The median expectation is now for growth of 2.1% and 1.9% for 2019 and 2020, down from 2.3% and 2.0%. Headline inflation projections are at 1.8% and 1.9%, from 1.9% and 2.1%. So overall a slightly less optimistic baseline to underlie the lower interest rate path. At the press conference, Chair Powell maintained his recent rhetoric, noting that “growth is slowing somewhat more than expected” and “financial conditions remain less supportive.” He also cited the persistent inflation undershoot and downside risks from Brexit and trade as reasons for the pause in rate hikes. In light of these dovish changes, our US economics team has updated their Fed call, and now think that the Fed will remain on hold through end-2020. However, their economic forecasts are still a bit more robust than the Fed’s, so they think the risks to their new view are still skewed toward the next move being another hike rather than a cut. Their full meeting review is available here .
Finally, the Fed also announced updates to their balance sheet policy, with a gradual taper in the runoff now planned. The caps on Treasury runoff will fall from $30bn to $15bn in May, which will entail more reinvestments each month. The MBS portfolio will be rolled into Treasuries as they mature, which will provide a further boost to the Fed’s Treasury purchases. New purchases will match the existing maturity structure of the Treasury’s outstanding debt stock, so it should be neutral for the curve. The balance sheet will thefore stabilize starting in October, though the Fed will re-examine the policy again over the course of this year. At some point, they will resume asset purchases as well, to accommodate increased demand for currency while maintaining the same level of excess reserves.
Overnight, sentiment has improved in Asia with markets making modest advances after the dovish tilt from the Fed. The Hang Seng (+0.18%), Shanghai Comp (+0.61%) and Kospi (+0.28%) are all up. China’s onshore yuan is up +0.18% at 6.6825, marking the strongest level since July 2018. Elsewhere, futures on the S&P 500 are also up +0.08%. Japanese markets are closed for a holiday.
After the FOMC and press conference was over, all of us in the U.K. crowded round our TVs and stopped what we were doing as she made a planned televised address to the nation. To be fair there wasn’t much she hadn’t said before and she continues to double, triple and quadruple down on her strategy. She has asked the EU to extend the Brexit deadline until June 30, but was pretty insistent that she would not be willing to go beyond that date. It’s therefore hard to see her continuing in office beyond that date, if her deal can’t pass before then. Election risks must have risen in recent days.
Before this, PM May sent the EU a letter formally asking for an extension of the Brexit deadline to June 30th. European Council President Tusk said in a press conference that a short extension would be possible, conditional on the UK Parliament passing a deal. If the UK does not pass a deal, it appears that Parliament will face a choice of either a long extension, or a no-deal exit. Reuters also reported that a Commission document stated that the EU only wanted to offer one extension (as opposed to an extension of the extension situation). We’ll find out more after the EU council meeting today and tomorrow. EU officials confirmed that May’s request came too late to make a full decision on it at today’s EU council meeting which makes it likely that it won’t be approved by the EU today.
It’s likely that the option is left open until at an emergency Council meeting next week with the duration of any extension contingent on whether or not May passes the MV next week. A reminder that the U.K. is currently still on course to leave a week tomorrow 1001 days after the original vote.
Sterling weakened as much as -0.91% as the various developments took place yesterday, but ultimately ended the session -0.59% weaker at $1.3190 partly as the FOMC weakened the dollar. Oliver Harvey published his latest update yesterday (available here ), where he turned neutral on the pound. He thinks the odds of a no-deal Brexit have risen to 20%, and now views a long extension of Article 50 as a net negative for the currency. Such an extension would alleviate the near-term risks around Brexit, but would raise the odds of a new election and would therefore inject new political and policy uncertainty into the UK.
Elsewhere yesterday, Brent crude oil prices rose +1.85% to a new four-month high at $59.83 per barrel after US inventories fell by 9.59million barrels. That takes the cumulative decline in US stockpiles this year to -1.9mn barrels, which is the biggest drop since 2003. Usually, inventories rise in the winter, with the 25-year average for this point in the calendar at +16mn. The move helped US energy stocks advance +0.89%.
Markets in Europe yesterday were broadly lower on the back of a number of stock specific stories. The CEO of UBS (-2.41%) called Q1 “one of the worst” in recent history, BMW (-4.94%) warned that earnings will decline “well below” last year’s level, and Bayer (-9.61%) lost a ruling over a weed killer case. A big slump for FedEx (-3.51%) following a profit warning Tuesday evening also contributed to the early weakness yesterday morning. The STOXX 600 eventually ended -0.90% while the DAX ended -1.57%, both with their biggest one-day declines since February 7th. In rates, Bunds nudged down another -1.3bps also.
Before we wrap up, the only data that was out yesterday of any note came in the UK where core CPI in February printed slightly below expectations at +1.8% yoy (vs. +1.9% expected), and down one-tenth from January. Headline CPI has a touch higher than expected but at 1.9% YOY its still below 2%. The March CBI total orders data was also slightly on the softer side having fallen 5pts to +1 (vs. +5 expected).
Looking at the day ahead, this morning in the UK we’ve got February retail sales and public-sector net borrowing due out. That comes before the BoE meeting where no policy change is expected and given all the Brexit developments it’s hard to imagine being much of a game changer. This afternoon we’ve also got the March consumer confidence reading for the Euro Area while in the US we’ve get the March Philly Fed business outlook print, latest weekly initial jobless claims reading and February leading index. In all likelihood, the biggest event for markets today will be the EU Council meeting.
COMMENTS FROM BENJAMIN: Trading in any of the financial instruments whether stocks or bonds or equities or commodities is not a video game.
It is a full time business unlike any other because things can CHANGE in the business model within seconds as we see at the moment with the FED and BREXIT and in Canada with the Liberal Government now in meltdown.
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- Edited 6:38pm Mar 21, 2019 10:55am | Edited 6:38pm
- | Commercial Member | Joined Dec 2014 | 11,697 Posts
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Now even the Federal Reserve is publicly admitting that the U.S. economy is slowing down. And that is quite remarkable, because usually the Federal Reserve is extremely hesitant to say that an economic slowdown is taking place. As I pointed out the other day, in 2008 former Fed Chair Ben Bernanke kept insisting that a recession was not coming, but we found out later that a recession had already begun when he was making those statements. Normally the Federal Reserve tries very hard to paint a rosy picture of our economic future, and one of the big reasons for that is because they want us to believe that they are doing a good job and that they have everything under control. So it was quite stunning to hear Fed Chair Jerome Powell use the term “slowdown” to describe what is coming for the U.S. economy on Wednesday…
Citing a more modest outlook for the economy, the Federal Reserve on Wednesday held interest rates steady and signaled it did not plan to raise rates at all this year and would bump them up just once in 2020, providing a road map for a sustained period of easy-money policy.
“The U.S. economy is in a good place,” Fed Chairman Jerome Powell said at a news conference, adding policymakers foresee “a modest slowdown, with overall conditions remaining favorable. We see no need to rush to judgment (by lifting or cutting rates).”
Admittedly, he did only say that it would be a “modest slowdown”, and so to most people that won’t sound that bad.
But this is the very first time that Powell has talked like this, and the truth is that the Atlanta Fed’s GDP Now model is currently forecasting that U.S. growth in the first quarter will be less than half a percent. Fed officials are hoping that growth will be better in the second quarter, but there is also a very strong possibility that the economy will continue to decelerate.
Because the economy is entering a “slowdown”, the Federal Reserve announced on Wednesday that it does not anticipate any more interest rate hikes for the rest of the year.
Normally Wall Street would experience a huge surge of euphoria upon hearing such news, but stocks were actually down on Wednesday…
The Dow Jones Industrial Average and S&P 500 closed lower on Wednesday after the Federal Reserve’s latest monetary-policy announcement dragged Treasury yields lower, pushing bank shares down.
Goldman Sachs led the 30-stock Dow to end the day down 141.71 points at 25,745.67. The S&P 500 closed 0.3 percent lower at 2,824.23. The Nasdaq Composite eked out a gain, closing 0.1 percent higher at 7,728.97.
This certainly could not have been the reaction that the Federal Reserve was hoping for.
Could it be possible that bad news for the U.S. economy is no longer good news for Wall Street?
Without a doubt, we are witnessing a huge wave of pessimism in the business community right now. Yesterday, I noted that Federal Express is talking as if a global recession had already started, and other corporate leaders are making similar statements.
For example, just consider what the CEO of banking giant UBS just said…
The head of UBS was among the latest to blame the world’s backdrop for weaker-than-expected results. CEO Ermotti told a conference in London on Wednesday that it “one of the worst first-quarter environments in recent history,” Reuters reported. The Swiss bank slashed another $300 million from 2019 costs after revenue at its investment bank plunged. Investment banking conditions are among the toughest seen in years, especially outside the U.S., he said.
And the CFO of BMW told investors on Wednesday that BMW’s earnings may be exposed to “additional risks” from the global economy in the months ahead…
“Depending on how conditions develop, our guidance may be subject to additional risks; in particular, the risk of a no-deal Brexit and ongoing developments in international trade policy,” CFO Nicolas Peter said in BMW’s quarterly earnings report Wednesday.
Last, but certainly not least, the co-CEO of Samsung just said that his company is anticipating “slowing growth in major economies” for the remainder of 2019…
“We are expecting many difficulties this year such as slowing growth in major economies and risks over global trade conflicts,” Samsung Co-Chief Executive Kinam Kim said.
Here in the United States, whoever is in the White House at the time usually gets most of the credit or most of the blame for how the economy is performing.
But the truth is that President Trump did not create the financial bubble that caused the boom on Wall Street.
The Federal Reserve did.
And President Trump is not going to be responsible when that bubble bursts either.
The Federal Reserve has far, far more control over the performance of the U.S. economy than either the president or Congress does. And since the Federal Reserve was initially created in 1913, there have been 18 distinct recessions and/or depressions, and now we are heading into the 19th one.
If we want to finally get off this economic roller coaster ride permanently, we need to abolish the Federal Reserve. But this isn’t even part of the national political discussion at this point.
However, that could soon change. In the aftermath of the financial crisis of 2008, we witnessed a huge backlash against the Federal Reserve system.
Eventually that backlash subsided, but now that we are entering a new crisis, perhaps it is time to start dusting off all of those old “End the Fed” signs.
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About the author: Michael Snyder is a nationally-syndicated writer, media personality and political activist. He is the author of four books including Get Prepared Now, The Beginning Of The Endand Living A Life That Really Matters. His articles are originally published on The Economic Collapse Blog, End Of The American Dream and The Most Important News. From there, his articles are republished on dozens of other prominent websites. If you would like to republish his articles, please feel free to do so. The more people that see this information the better, and we need to wake more people up while there is still time.
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- Edited 6:45pm Mar 21, 2019 10:56am | Edited 6:45pm
- | Commercial Member | Joined Dec 2014 | 11,697 Posts
Monarch Gold targets multiple projects in Quebec
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A worker handles a glowing-hot gold bar from Monarch Gold’s Beaufor gold mine, 20 km northeast of Val-d’Or, Quebec. Credit: Monarch Gold.
POSTED BY: TRISH SAYWELL MARCH 18, 2019
Since the Prospectors and Developers Association of Canada conference wrapped up in early March, Monarch Gold (TSX: MQR; US-OTC: MRQRF) has fielded calls from three mining companies about possible joint-ventures to further explore its Croinor gold project, 55 km east of Val-d’Or in Quebec.
The project has a fully permitted past-producing mine that is open at depth and the junior has already found new zones of mineralization to the northeast of the main deposit on the 151-sq.-km property.
“We hold all of it and are seeking partnerships because it’s too vast for us,” Jean-Marc Lacoste, Monarch Gold’s president and CEO, says. “We have had three serious enquiries — two majors and a mid-tier. They knocked on our door because of the potential of the Croinor deposit.”
Currently, the deposit contains 236,000 oz. gold in the measured and indicated category (804,600 tonnes grading 9.12 grams gold per tonne) and 38,400 oz. gold in the inferred category (160,800 tonnes averaging 7.42 grams gold), but the known resource has been chased down only to a depth of 350 to 400 metres, Lacoste says, and is open at depth.
“It needs a lot of exploration to potentially double or triple the resource by drilling much deeper and following different vein systems,” he says. “We also discovered some very interesting potential within the vicinity of the main deposit in January 2017, when we found a 25-metre zone of 8-gram material sitting about 500 metres from the current deposit.”
That discovery to the northeast was named Gold Bug, and Lacoste is confident that further exploration will find more mineralization on other parts of the property.
“We have hit several targets within 2-3 km of the deposit so, with a property of this size, which is roughly 15-20 km long by 4-5 km wide, it gives you an idea of how big this property could be.”
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Monarch Gold’s Quebec land package. Credit: Monarch Gold.
Lacoste also notes that mining entrepreneur Rob McEwen invested in the company in May 2016, largely on the upside he saw at Croinor and holds about 5% of the junior.
“He came in with a cheque and said he really liked the property and there was so much to explore,” Lacoste says. “He’s a big fan, a big shareholder and is very active. I had a one-hour meeting with him at his office during PDAC to give him an update on what Monarch has been doing.”
Lacoste notes that Monarch completed an updated prefeasibility study on the Croinor deposit in January 2018 that did not include any drill results after November 2015, which now totals over 30,000 metres of drilling.
The study outlined a mine life of just over three and a half years including pre-production of 602,994 tonnes at a grade of 6.66 grams gold per tonne. The PFS estimated total production of 125,889 ounces of gold at a total cost per ounce of US$902 per oz. based on a gold price of US$1,280 per oz.
The company says there’s a lot more work to be done and expects to sign a joint-venture deal before the end of the year.
After completing an initial drill program of 20,000 metres (89 drill holes) at Croinor last year, the company announced in October it would drill an additional 8,300 metres to test undrilled areas between planned stopes to increase the tonnage of the deposit. The supplementary program will also include drilling around the periphery of the deposit to follow up on positive assay results and extend the resource to the west, where it remains open.
Near-mine exploration drilling has returned intercepts such as 22 grams gold over 1.1 metres in hole CR-18-653, which was drilled 41 metres up plunge from the nearest planned stope. Hole CR-18-649, a down-dip hole drilled into the host diorite to test the deposit at depth returned 9.59 grams gold over 1.0 metre, indicating the deposit is still open to depth.
Other holes testing two areas targeted for bulk sampling on the 125-foot level and the 250-foot level returned positive results. On the 125-foot level hole CR-18-636 cut 43.25 grams gold over 2.1 metres including 88.60 grams gold over 1 metre. In the 250-foot level hole CR-18-647 intersected 25.92 grams gold over 3.4 metres. The two levels are accessed by ramps from two open-pits.
The Cronior gold deposit, which was discovered in 1940, is hosted by the synvolcanic Croinor Sill, which is 60 to 120 metres thick and hosted within volcanic rocks of the Assup Domain.
The deposit is characterized by gold-rich lenses consisting of quartz-carbonate-tourmaline-pyrite veins, altered pyritic host rock material, and tectonic breecia (pyritic host fragments within a quartz-carbonate-tourmaline-pyrite vein).
Known showings at Croinor include Gold Bug, Cronior-Trench 2, Bug Lake, Pershon, Rocheleau-3, Rocheleau-5, T13, Kenda Pershing, Ansley, Onyx-Tavernier, Jolin and Brett-Tretheway.
The Croinor property lies in the Haig, Pershing, Tavernier, Tiblemont and Vauquelin townships, about 27 km east of the nearest town of Louvicourt, in the municipality of Senneterre.
Its location in the eastern part of the Archean Abitibi Greenstone Belt in the southern Superior Province of the Canadian shield makes it even more attractive, Lacoste says.
Elsewhere in the Abitibi, Monarch is also exploring its McKenzie Break property, 35 km north of Val-d’Or and 20 km from the company’s fully permitted, 750-tonne-per day Beacon mill.
The property is also close to Monarch’s Camflo mill, which has a capacity of 1,600 tonnes per day. Camflo was producing mineralized material from Monarch’s Beaufor mine, 20 km northeast of Val’d’Or, until the mine was temporarily put on care and maintenance in August 2018.
In mid-March, Monarch released the second set of assay results from its 2018 drill program at McKenzie Break, which was designed to explore the known lenses and the periphery of the multi-vein Green and Orange zones, which are within a 500-metre radius of each other.
Highlights of the second set of drill results include 24.40 grams gold over 2 metres, with 93.80 grams over 0.5 metre from 140 metres downhole in MK-18-216; 20.12 grams gold over 2.6 metres, including 32.20 grams gold over 0.5 metre from 360 metres below surface in MK-18-205; 12.60 grams gold over 2 metres, including 25.20 grams gold over 1 metre, 165 metres downhole in MK-18-213.
Most of the campaign was to follow the Green and Orange zones deeper, and of the 61 holes drilled (13,945 metres) 17 holes reported visible gold.
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Monarques Gold’s Beaufor mine, 20 km northeast of Val-d’Or, Quebec. Credit: Monarques Gold.
“The good news is that we started hitting good grades at 300 and 350 metres below surface, which is very shallow when you consider the upside potential of drilling at 400 and 500 metres depth,” Lacoste says. “We like the fact that it’s shallow from zero to 350 metres. A lot of the deposits in the Abitibi go down to 1.5 to 2.0 km deep, so we like the idea of the potential at depth.”
Last June Monarch completed a resource for the project with a pit-constrained indicated resource of 48,133 ounces (939,860 tonnes grading 1.59 grams gold) and inferred resources of 14,897 ounces (304,677 tonnes averaging 1.52 grams gold).
It also outlined an underground indicated resource of 53,448 ounces (281,739 tonnes grading 5.90 grams gold) and an underground inferred resource of 49,130 ounces (270,103 tonnes grading 5.66 grams gold).
Lacoste notes that Monarch has made the discovery a bit bigger — a couple of hundred metres on each side — and has hit some interesting and deep extensions to the current known zone.
“We were able to extend the radius of the known resource by about 100 metres to the north, to the east and to the south, so this is basically an extension of the resource by 100 metres and that is big news for us. We’re growing laterally and we feel that nothing has been done at depth to this date, so we believe the known resource could very well be a lot bigger than we anticipated.”
Monarch purchased the McKenzie Break property from Agnico Eagle Mines (TSX: AEM; NYSE: AEM) in 2017. Agnico had acquired it several years earlier from Red Kite Financial but hadn’t done much if any work on the property, Lacoste says.
“We had had our eyes on that property for more than four years because we looked at acquiring it from Red Kite at the time,” he says. “But Agnico came in and bought it because it was close to the open pit at Malartic. The reason we were so interested in it is because it’s only 20-30 km from our Beacon mill, where we could send most of the material too.”
The 3.3-sq.-km McKenzie Break property consisting of nine mineral claims is accessible year-round via Route 397 and a gravel road, and is just 9 km south of the rail link between Senneterre and Barraute.
As part of its acquisition of McKenzie Break, Monarch also picked up the Swanson property from Agnico. Swanson, about 65 km from Monarch’s Beacon mill, consists of one mineral lease and 129 claims covering a total area of 51 square kilometres. It also has a 500-metre ramp down to a depth of 80 metres.
While it is open-pittable, it would need a higher gold price, Lacoste says.
“There’s a big pit at 2 gram material and if the price of gold goes up significantly this pit will become very valuable to us because it could easily bring in 25,000 ounces of gold a year for three or four years,” he says. “We had a 43-101 resource completed last summer and we got a recommendation of work to be done on the property, so we believe we could go ahead on these recommendations in a more robust market.”
If and when they decide to advance Swanson, Lacoste says, the work would be broken down into two phases. “We’d first do a 20,000-tonne bulk sample so we could do more metallurgical testing and understand the resource block model in phase one, and phase two would be a preliminary economic assessment.
Currently, Swanson has a combined pit-constrained and underground resource of 1.75 million indicated tonnes grading 1.85 grams gold for 104,100 oz. gold, and inferred pit constrained and underground resources of 74,000 tonnes of 2.96 grams gold for 7,100 oz. contained gold.
Monarch’s flagship asset, however, is its Wasamac project, a 7.6 sq. km. property about 15 km west of Rouyn-Noranda with measured and indicated resources of 2.6 million oz. contained gold (29.86 million tonnes grading 2.70 grams gold) and inferred resources of 293,900 oz. gold (4.16 million tonnes of 2.20 grams gold).
A feasibility study completed in December 2018 outlined a mine life of eleven years producing 142,000 oz. gold annually. Cash costs were estimated at US$550 per oz. and all-in sustaining costs of US$630 per ounce.
Initial capex was pegged at $464 million, including about $230 million for a mill and tailings facility.
Wasamac is ready to start the permitting process.
The project also has strong exploration potential, Lacoste says, as the deposit has only been explored down to a depth of 800 metres and there is potential to add ounces.
“Since most of the zones are wide from 30 to 70 metres in thickness and the material is disseminated in the intrusion, any discovery below by a few meters can mean big size ounce potential,” he says. “Because the Wasamac project is a bulk mining system, contrary to the typical narrow vein mining with high grade in the Abitibi with a width closer to 1 to 3 metres, any extensions we may encounter at 100 metres below the current structures could add 10% to 20 % to the current 2.6 million ounces, providing of course that the grade and width are similar.”
Alamos Gold (TSX: AGI) owns 19%; other partners 23%; Quebec Funds 10%; Nemaska Lithium 7%, Oxbridge Group (Greg Chamandy) 5%, McEwen (Evanachan) 5%; and management 2%.
At press time in Toronto, Monarch was trading at 25¢ per share within a 52-week trading range of 14.5¢ and 38.5¢.
The junior has 239 million common shares outstanding for a market cap of around $60 million.
Monarch Gold changed its name from Monarques Gold in January.
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- Mar 21, 2019 11:35pm Mar 21, 2019 11:35pm
- | Commercial Member | Joined Dec 2014 | 11,697 Posts
Our dollar is going to fall
webbotreader (47) in investing • 14 hours ago
Great and Wonderful Thursday Morning Folks,
Gold is higher in the early morning trade report with the price now at $1,315.20, up $13.50 from the Comex close which happened before yesterday’s FOMC report with the high so far at $1,320.20 and the low at $1,312.50. Silver is up as well (not sure who is leading here Ag or Au) with the trade at $15.555, up 23.7 cents with the high at $15.65 and the low at $15.48. The US Dollar took a hit after the data release but has recovered (against Trumps weaker dollar demand) with the trade at 95.675, up 47.4 points inside a trading range between 95.705 and 95.295.
Of course, all of this was done while we’re not trading and before the Comex sleepy time open. As expected, when Gold rises in the US Dollar, it rises even more in the secondary’s (emerging markets) with the Venezuelan Bolivar price at 13,135.56, gaining 99.87 Bolivar in a 24 hour period. Silver’s price gained 2.248 cents (HUGE!!!) with its price at 155.356 Bolivar. In Argentina, another country going into massive convulsions because of the exchange rate, Gold’s price before the FOMC was 53,322.03, now it’s priced at 53,730.56 gaining 408.53 Argentinian Pesos over night with Silver gaining 9.192 Argentinian Pesos at 635.484. These are very big gains brought on because of the swings caused by a major currency and not their own, wait till this hits under the US Dollar. No one’s seen anything yet!
The March Silver deliveries had a major jump in demand BEFORE yesterday’s FOMC data release with the count now at 101 Demands for Physical as buyers came in with needs proving a gain of only 17 contracts. However, yesterday’s Volume in March Silver totaled 94 swaps with the last purchase made at 8:57 am pst. Did someone jump in and get their requirements ahead of those already in cue? Watch Harvey’s count here because there may be some EFPS being passed over to the city in chaos or the purchases got stopped here draining more from COMEX, as less is getting pulled out of the ground globally. The Overall Open Interest in Silver is still gaining with the count now at 190,624 Overnighters proving 1,314 more shorts had to be placed in trade to stay the price from the buyers but not stopping the demands for physical at all.
The world’s (leading) economy hit a snag (more like stopped in its tracks) and the FOMC numbers being looked at proved it with the real shock showing no further hikes this year and only one hike in 2020 with the Fed balance sheet unwind starting in May and be completed by the end of September…. Giving us more reasons to hold precious metals by adding … “the Fed doubled down on patience and a strong desire to allow inflation to run "hot" and above the 2.0% target (it remains unclear just which inflation the Fed is targeting as tuition, medical, rent and food inflation, not to mention assets of all shapes and sizes, are already increasing at a far greater pace than 2% annually). Ultimately, as Powell said in his opening remarks, the Fed's overarching goal is to sustain the economic expansion.” I’m curious how much lower housing prices will drop, once we get the MBS held under the Fed, swapped around? Here’s some reasons why I ask.
- End the securities portfolio unwind at end Sept '19.
- Taper the Treasury unwind by reducing the cap on monthly redemptions from the current level of $30 billion to $15 billion beginning in May '19.
- Reinvest maturing MBS across the UST curve, not towards the front end as we expected.
- Cap MBS redemptions at $20 bn/month; Prepayments above this amount would be reinvested into MBS.
- Hold their aggregate securities holdings constant for a time and allow for a continued shrinking of reserves via non-reserve liability growth (i.e. currency in circulation).
- In October, the Fed will purchase enough Treasuries to offset the reduction in MBS holdings. The aggregate portfolio will be unchanged starting in October
While all this is going on here, Gold is being moved around to offset the “not mentioned” default loses with Citigroup planning to sell several tons of gold placed as collateral by Venezuela’s central bank on a $1.6 billion loan after the deadline for repurchasing them expired this month.
We need to slice thru the day’s commotions and wait to see what else is happening. But for now, there should be an upward trend for precious metals as the debt crisis has proven itself, with everything in shipping either being slowed or stopped. This can only happen when the public is no longer purchasing. People stop buying when they have overreaching debt and not enough income. That my friends, is the old school inflation, pure and simple. People are now tapped out and the numbers, even those that the Fed looks at, can no longer hide the point, our dollar is going to fall! So keep your metals close, have a positive attitude no matter what, and as always …
Stay Strong!
J. Johnson
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- Mar 21, 2019 11:39pm Mar 21, 2019 11:39pm
- | Commercial Member | Joined Dec 2014 | 11,697 Posts
A Major Bank Capitulates: "This May Be The Time For Helicopter Money Drops"
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by Tyler Durden
Thu, 03/21/2019 - 22:20
Long before the Fed was humiliated into reversing its hawkish rate hike policy in January and then again in March, we published - back in June 2015 - "The Blindingly Simple Reason Why The Fed Is About To Engage In Policy Error", in which we predicted, correctly, that the neutral rate of interest is far too low to allow a lengthy tightening campaign by the Federal Reserve, as the real Fed Funds rate would promptly rise above the neutral rate, further depressing demand, resulting in a policy error.
More importantly, instead of some arcane calculation of the infamous, convoluted r-star (or neutral rate of interest) we said that one might argue for low “implied” equilibrium short rates via debt ratios. For example, if nominal growth is 3 percent and the debt GDP ratio is 300 percent, the implied equilibrium nominal rates is around 1 percent. This is because at 1% rates, 100% of GDP growth is necessary to service interest costs.
So to help the Fed and pundits calculate just where r star is in an economy where total debt/GDP is 350% and rising, and where GDP is 2% and falling, we presented - all the way back in 2015 - a sensitivity table which looks at just two simple variables: nominal growth, or GDP, and total debt/GDP. Assuming the current leverage of the US and assuming 2% in nominal growth, the short-run equilibrium real interest rate is just about 0.57%, something which the Fed now appears to have discovered on its own.
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As an aside, we also said that such a policy error could reinforce itself by causing structural damage that puts additional downward pressure on the equilibrium real rate adding that "in this case the yield curve would flatten meaningfully, at least until the Fed actually reversed course by cutting rates." This is precisely what happened.
Now, nearly four years later, some of the brightest minds in the business have reached the same conclusion which this tinfoil blog came to long before the Fed had even started its hiking process. Case in point - Citi's special economic advisor, Willem Buiter published a report on Tuesday titled "The neutral real interest rate is going nowhere" in which, using a far more convoluted methodology, the career academic concluded that today's real neutral policy rate for the US is roughly 0.52%, or more generally, between 0.5 and 1.0%.
https://zh-prod-1cc738ca-7d3b-4a72-b...20star%201.jpgSource: @NickatFP
We could have told him that four years ago.
Of course, none of this is news either to us, or to our readers - although it certainly appears to be news to Fed Chair Powell who less than 6 months ago stated that there is a "long way" to the neutral rate, when in reality the real Fed Funds rate was already on top of it, as the Fed found out the very hard way in November and December.
https://zh-prod-1cc738ca-7d3b-4a72-b...s%20nomura.jpg
What was news, however, is what conclusion Buiter derived from this simple observation. And, in a time when MMT, which as we discussed previously is merely the political camouflage for enacting helicopter money or direct debt monetization by the government, the respected Citi strategist comes to the conclusion that just because the economy now appears to be structurally depressed, it is as good a reason as any to proceed with, drumroll, helicopter money, i.e., MMT. Here is what he "found":
Most estimates of today’s neutral real policy rate for the US hover between 0.5% and 1%. For the euro area and Japan many estimates are negative. That represents a dramatic decline from the levels seen before 2000. This situation is unlikely to be reversed any time soon. Despite the fourth industrial revolution lurking in the wings, economy-wide productivity growth is stagnant at best. Ageing populations boost private saving rates and weaken the incentives to invest. Fiscal dissaving and enhanced public sector capital formation can raise the neutral real rate but are constrained, especially in the US, by already excessive general government deficits and a rising public debt burden. A lower real interest rate does, of course, make public debt servicing easier, other things being equal. If the lower neural real interest rate is the reflection of a lower underlying growth rate of potential output, fiscal space may not be enhanced significantly once both drivers of fiscal sustainability are allowed for.
One implication for monetary policy is that this may be the time for helicopter money drops, a temporary fiscal stimulus funded by a permanent increase in the stock of central bank money. This makes even more sense when inflation continues to undershoot the inflation target, as is the case in the US and even more so in the euro area and Japan. - Source
And just like that the first official endorsement of helicopter money, pardon, MMT has arrived. It won't be the last. As Alan Ruskin, chief international strategist at Deutsche Bank AG said during a Bloomberg interview on Wednesday, "don’t count on the hubbub over modern monetary theory dying down soon" adding that "it could get a lot bigger."
Here's why: "What happens if the economy slows down, what happens if we go down to zero interest rates again? The Fed is going to be back in there again responding in essence to what’s gone on on the fiscal side. You get sort of an MMT-lite- type situation."
Or, alternatively, scratch the lite part and get full blown helicopter money as one government after next throw in the towel on fiscal conservatism and unleashes the biggest debt-funded spending spree in history, which as so many tragic examples in the past have shown, ends in tears.
As Ruskin concluded, "The natural constraints are inflation. The question is, what point do you hit inflation?" Well, when it comes to traditional risk assets, we already have runaway inflation. When it comes to conventional inflation as measured by the flawed CPI or PCE baskets, by the time it does register, it will be too late to reverse it, and the consequence will be the end of the monetary system as we know it.
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Public debt — questions and answers
21 March, 2019 at 18:02 | Posted in Economics | 2 Comments
Can a government go bankrupt?
No. You cannot be indebted to yourself.
Can a central bank go bankrupt?
No. A central bank can in principle always ‘print’ more money.
Do taxpayers have to repay government debts?
No, at least not as long the debt is incurred in a country’s own currency.
Do increased public debts burden future generations?
No, not necessarily. It depends on what the debt is used for.
Does maintaining full employment mean the government has to increase its debt?
No.
https://larspsyll.files.wordpress.co...pg?w=293&h=434First, full employment can be maintained by printing the money needed for it, and this does not increase the debt at all. It is probably advisable, however, to allow debt and money to increase together in a certain balance, as long as one or the other has to increase.
Second, since one of the greatest deterrents to private investment is the fear that the depression will come before the investment has paid for itself, the guarantee of permanent full employment will make private investment much more attractive, once investors have gotten over their suspicion of the new procedure. The greater private investment will diminish the need for deficit spending.
Third, as the national debt increases, and with it the sum of private wealth, there will be an increasingly yield from taxes on higher incomes and inheritances, even if the tax rates are unchanged. These higher tax payments do not represent reductions of spending by the taxpayers. Therefore the government does not have to use these proceeds to maintain the requisite rate of spending, and can devote them to paying the interest on the national debt.
Fourth, as the national debt increases it acts as a self-equilibrating force, gradually diminishing the further need for its growth and finally reaching an equilibrium level where its tendency to grow comes completely to an end. The greater the national debt the greater is the quantity of private wealth. The reason for this is simply that for every dollar of debt owed by the government there is a private creditor who owns the government obligations (possibly through a corporation in which he has shares), and who regards these obligations as part of his private fortune. The greater the private fortunes the less is the incentive to add to them by saving out of current income …
Fifth, if for any reason the government does not wish to see private property grow too much … it can check this by taxing the rich instead of borrowing from them, in its program of financing government spending to maintain full employment. The rich will not reduce their spending significantly, and thus the effects on the economy, apart from the smaller debt, will be the same as if Money had been borrowed from them.
COMMENTS FROM BENJAMIN:
The above article just goes to show you that articles such as these very misguided is not the way things are. However if you did not know you would read it as it is.
I will add more comments tomorrow. Now it is finally time to sleep for 5 hours or so.
https://goldswitzerland.com/only-gol...l-catastrophe/
ONLY GOLD STANDS AGAINST THE FINAL CATASTROPHE
March 21, 2019
by Egon von Greyerz
Have the Ides of March been delayed in 2019? Normally the Ides of March just means the date March 15th. Shakespeare made the expression ominous as it was the day that Julius Caesar was murdered. Today in 2019, the 29th of March seems more significant than the 15th. Because on the 29th, we first have the conclusion of Brexit. Or maybe we don’t! Brexit has been a tortuous process that after 3 years has got nowhere. All it has done is to reveal the EU elite’s megalomania as well as their intransigence. It has also revealed the complete incompetence of the UK government as well as Mrs May’s total indecisiveness and her inability to distinguish between activity and achievement.
VALUE OF CASH NO LONGER DOUBLE THE VALUE OF GOLD
March 29th is also very important in the banking world since it is the date when gold is recognized as a Tier 1 asset and thus equal to cash. Until now, gold was only a Tier 3 asset and its value was taken at 50% for the purpose of a bank’s solvency. It is of course totally ridiculous that cash or fiat currencies which we know always go to zero over time, should have been taken at twice the value of gold.
There are people speculating that gold becoming a Tier 1 asset will have major significance for the gold price. Also, some market observers even think that this is the beginning of a new era with gold again resuming the mantle of backing currencies or SDRs (Special Drawing Rights). Obviously this would require a substantial revaluation of gold in relation to the dollar in order to achieve sufficient cover for the debt outstanding.
http://goldswitzerland.com/wp-conten...019/03/ppl.jpg
So shall we beware of the Ides of March as Shakespeare said and will they be delayed to March 29th in 2019? I doubt that Brexit, which is a mess that won’t end well, will be resolved by March 29. Also, the global debt situation will necessitate a restructuring of the currency system. And sadly, there are no SDRs or no new government crypto currencies that will make the debt just disappear. As the story goes: “All the king’s horses and all the kings men couldn’t put Humpty back together again.”
But even if the Ides of March are not delayed and March 29th 2019 does not have a major influence on the world, it will serve as a warning of things that are likely to happen in the world financial system. Desperate debt laden governments will take desperate decisions. We could easily see a time when the US devalues the dollar significantly or introduces a crypto dollar and backs it with gold at a massively higher price.
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Authored by Alasdair Macleod via GoldMoney.com,
Note: this article is not and must not be construed as investment advice. It is analysis based purely on economic theory and empirical evidence.
The global economic outlook is deteriorating. Government borrowing in the deficit countries will therefore escalate. US Treasury TIC data confirms foreigners have already begun to liquidate dollar assets, adding to the US Government’s future funding difficulties. The next wave of monetary inflation, required to fund budget deficits and keep banks solvent, will not prevent financial assets suffering a severe bear market, because the scale of monetary dilution will be so large that the purchasing power of the dollar and other currencies will be undermined. Failing fiat currencies suggest the dollar-based financial order is coming to an end. But with few exceptions, investors own nothing but fiat-currency dependent investments. The only portfolio protection from these potential dangers is to embrace sound money - gold.
https://zh-prod-1cc738ca-7d3b-4a72-b...ages/nextt.jpg
The global economy is at a cross-road, with international trade stalling and undermining domestic economies. Some central banks, notably the European Central Bank, the Bank of Japan and the Bank of England were still reflating their economies by suppressing interest rates, and the ECB had only stopped quantitative easing in December. The Fed and the Peoples’ Bank of China had been tightening in 2018. The PBOC quickly went into stimulation mode in November, and the Fed has put monetary tightening and interest rates on hold, pending further developments.
It is very likely this new downturn will be substantial. The coincidence of the top of the credit cycle with trade protectionism last occurred in 1929, and the subsequent depression was devastating.The reason we should be worried today is stalling trade disrupts the capital flows that fund budget deficits, particularly in America where savers do not have the free capital to invest in government bonds. Worse still, foreigners are now not only no longer investing in dollars and dollar-denominated debt, but they are suddenly withdrawing funds. According to the most recent US Treasury TIC data, in December and January these outflows totalled $257.2bn. At this rate, not only will the US Treasury need to fund a deficit likely to exceed a trillion dollars in fiscal 2019, but the US markets will need to absorb substantial sales from foreigners as well.
In short, America is going to face a funding crisis. To have this funding problem coinciding with the ending of credit expansion at the top of the credit cycle is a lethal combination, as yet unrecognized as the most important factor behind both American and global economic prospects. The problem is bound to emerge in coming months.
While today’s trade protectionism is less vicious than the Smoot-Hawley Tariff Act, America’s drawn-out trade threats today are similarly destabilizing. The top of the credit cycle in 1929 was orthodox; its principal effect had been to fuel a speculative stock market frenzy in 1927-29.
This time, the credit bubble is proportionately far larger, and its implosion threatens to be even more violent. Governments everywhere are up to their necks in debt, as are consumers. Personal savings in America, the UK and in some EU nations are practically non-existent. The potential for a credit, economic and systemic crisis is therefore considerably greater today than it was ninety years ago.
Bearing in mind the Dow fell just under 90% from its 1929 peak, the comparison with these empirical facts suggests we might experience no less than a virtual collapse in financial asset values. However, there is an important difference between then and now: during the Wall Street crash, the dollar was on a gold standard. In other words, the price-effect of the depression was reflected in the rising purchasing power of gold. This time, no fiat currency is gold-backed, so a major credit, economic and systemic crisis will be reflected in a falling purchasing power of fiat currencies.
The finances of any government whose unbacked currency is the national pricing medium are central to determining future general price levels. Just taking the US dollar for example, the government’s debt to GDP ratio is over 100% (in 1929 it was less than 40%). At the peak of the cycle, the government should have a revenue surplus reflecting underlying full employment and the peak of tax revenues. In 1929, the surplus was 0.7% of estimated GDP; today it is a deficit of 5.5% of GDP. In 1929, the government had minimal legislated welfare commitments, the net present value of which was therefore trivial. The deficits that arose in the 1930s were due to falling tax revenues and voluntary government schemes enacted by Presidents Hoover and Roosevelt. Today, the present value of future welfare commitments is staggering, and estimates for the US alone range up to $220 trillion, before adjusting for future currency debasement.
Other countries are in a potentially worse position, particularly in Europe. A global economic slump on any scale, let alone that approaching the 1930s depression, will have a drastic impact on all national finances. Tax revenues will collapse while welfare obligations escalate. Some governments are more exposed than others, but the US, UK, Japan and EU governments will see their finances spin out of control. Furthermore, their ability to cut spending is limited to that not mandated by law. Even assuming responsible stewardship by politicians, the expansion of budget deficits can only be financed through monetary inflation.
That is the debt trap, and it has already sprung shut on minimal interest rates. For a temporary solution, governments can only turn to central banks to fund runaway government deficits by inflationary means. The inflation of money and credit is the central banker’s cure-all for everything. Inflation is not only used to finance governments but to provide the commercial banks with the wherewithal to stimulate an economy. An acceleration of monetary inflation is therefore guaranteed by a global economic slowdown, so the purchasing power of fiat currencies will take another lurch downwards as the dilution is absorbed. That is the message we must take on board when debating physical gold, which is the only form of money free of all liabilities.
Gold can only give an approximation of the loss of purchasing power in a fiat currency during a slump, because gold’s own purchasing power will be rising at the same time. Between 1930 and 1933 the wholesale price index in America fell 31.6% and consumer prices by 17.8%. These price changes reflected the increasing purchasing power of gold, because of its fixed convertibility with the dollar at that time.
Therefore, the change in purchasing power of a fiat currency is only part of the story. However, the comparison between purchasing powers for gold and fiat currency is the most practical expression of the change in purchasing power of a fiat currency, because the choice for economic actors for whom gold has a monetary role is to prefer one over the other.
It is an ongoing process, about to accelerate. Chart 1 shows how four major currencies have declined measured in gold over the last fifty years. The yen has lost 92.4%, the dollar 97.42%, sterling 98.5%, and the euro 98.2% (prior to 2001 the euro price is calculated on the basis of its constituents).
https://zh-prod-1cc738ca-7d3b-4a72-b...ges/next_1.png
The ultimate bankruptcy of currency-issuing governments, likely to be exposed by the forthcoming slump, will be reflected in another lurch downwards in currency purchasing powers.
Technical and market analysis of gold’s position
It should become apparent as time progresses that the price of gold in fiat currencies will continue to rise. The reasons are not yet clear to the consensus of portfolio investors and speculators, but it is likely that the more prescient among them will begin to realize that in the event of a significant recession, slump or depression, the dollar price of gold will rise substantially.
For the moment, they are likely to concentrate on timing, using technical analysis, rather than thinking through economic concepts. Chart 2 illustrates the current technical position.
https://zh-prod-1cc738ca-7d3b-4a72-b...ges/Next_2.png
Following its peak in September 2011, gold found a bottom at $1047 in December 2015. That was followed by a 31% rally to $1375 in July 2016, since when gold has established a triangular consolidation pattern. Last August, the price sold off to $1160, becoming oversold to record levels. That established the second point of a rising trend, marked by the lower solid line.
In February the gold price mounted a challenge to the upper parameter of the consolidation range before retreating to test established support at $1280-$1305, shown by the pecked lines.
There is a good chance that another attempt to break through the $1350 level will take place soon, and that it will succeed. The following bullet points sum up this positive case:
- The current rally commenced from a record oversold condition on Comex. The selloff was consistent with extreme selling exhaustion, indicating a major turning point.
- The net managed-money position on Comex indicates the gold contract is still moderately oversold. However, the April contract is running off the board, which means that some 200,000 expiring contracts are still to be sold, stand for delivery or rolled forward by the end of this month (March). This suggests a little more consolidation may be needed before gold advances to attempt a challenge on the $1350 level.
- The 55-day and 200-day moving averages recently completed a bullish golden cross, with the price above both signalling a bullish trend. A retest of the 55-day MA occurred at the beginning of this month and is normal.
- If, as the chart suggests, a triangle pattern is emerging, it is an ascending triangle, which is bullish. An ascending triangle has a flat top and a rising base. Admittedly, the top line declines slightly but not enough to put it in the class of symmetrical triangles, where the eventual break-out direction is less certain.
- It is possible for the gold price to trade another down leg within the confines of the triangle before making its final breakout to the upside. In which case, the gold price might decline towards the low $1200s before making its upwards break.
The possibility that the ascending triangle might need longer to play out leads to the common technical recommendation to wait until gold breaks through the $1350-$1365 level before buying for the next leg of the bull market.
Chart 3 gives a longer-term perspective of gold’s valuation. It is of the gold price adjusted by mine supply and for changes in the fiat money quantity. Simply put, FMQ is the sum of cash, bank deposits and savings accounts, and also bank reserves held at the Fed. It is the total amount of fiat money both in circulation and available for circulation.
https://zh-prod-1cc738ca-7d3b-4a72-b...ges/Next_3.png
In 1934-dollars, deflated by the increase in the fiat money quantity, gold has returned to the extreme lows seen on only two previous occasions. The first was when the London gold pool failed in the 1960s followed by the collapse of the Bretton Woods Agreement in 1971. At that time the decline in the FMQ-adjusted price of gold since 1934 was fueled by monetary expansion until a point was reached which could go no further. This led to an explosive recovery taking the price of gold in adjusted terms back to 1934 levels.
The realization that the dollar faced the prospect of uncontrolled price inflation forced the Fed to raise interest rates so that the banks’ prime rate exceeded 21% in December 1980. This was sufficient to prevent the gold price from further rises, and physical gold then became the collateral of choice for a developing carry trade. Central bank sales were designed to signal the demonetization of gold and deter buyers. They leased significant quantities of bullion for the carry trade, which increased supply synthetically and drove the gold price back to the same extreme valuation lows seen in the 1960s. This was 2000-2002.
After rallying from these extreme lows to a nominal high in September 2011, an increase in derivative supply coupled with the banking and investment establishment retaining an increasingly rosy view of fiat currencies have been instrumental in returning gold to the valuation lows of the 1960s and 2000 – 2002.
It is in this context that the outcome predicted in Chart 2 should be considered. If, as argued earlier in this article, America and the rest of the world faces a global slump, a premium for physical gold is likely to arise relative to the systemic risks of holding gold substitutes, such as derivatives and even physically-backed ETFs. In that event, a return to the 1934 price level for gold in FMQ-adjusted terms before any further monetary dilution implies a nominal gold price of about $24,000.
This conclusion does no more than indicate an upper target for the price of gold adjusted for historic monetary inflation. If, as seems likely, a developing credit crisis occurs as a consequence of today’s events, the quantity of fiat money in issue will rise significantly from current levels as government debt is monetized. Therefore, given the extreme undervaluation of gold suggested by Chart 3, it is hard to see how the price of gold, measured in dollars, can go much lower.
Defining the gold market and vanishing liquidity
The gold market has three basic elements to it.
There is an underlying stock of approximately 170,000 tonnes, increasing at about 3,000 tonnes a year. It is impossible to define how much of the total above-ground stock is monetary gold, not least because jewelry in Asia is bought as a store of monetary wealth and is used as collateral against loans.
However, if we are to classify Asian jewelry as non-monetary gold, then monetary gold in the form of bars and coin is thought by many experts to represent between thirty and forty per cent of the total. Assuming a median estimate of 35%, this is 60,000 tonnes, of which 33,760 tonnes is stated to be in national reserves. This leaves an estimated 26,240 tonnes of investment gold in public hands, worth $1.1 trillion. Much of this can be regarded as being in long-term storage. For market purposes, the physical market on its own is relatively illiquid.
Secondly, there are regulated futures and options markets, the most important of which is America’s Comex. Currently, there are about 520,000 Comex contracts of 100 oz each outstanding, which are worth a total of $68bn. Options on futures total a further 220,000 contracts, which are impossible to notionally value, being puts and calls at varying strike prices.
Third, there are unregulated OTC derivatives, mostly forward contracts in London. The last Bank of International Settlements statistics estimated total gold forwards and swaps were valued at $419bn, over six times the size of Comex. In addition, there were $149bn of OTC options.
The liquidity is broadly confined to Comex, London forwards and other OTC media. These are all derivatives, with minimal physical settlement taking place. Consequently, the price of physical gold is not determined by the marginal supply and demand for bullion, but almost entirely reflects financial factors in the banking system. If financial market conditions return to an approximation of the 1929-32 period for the reasons described earlier in this article, there is likely to be a banking crisis, or at the very least a serious dislocation of financial markets. Therefore, it is possible that at the same time investment funds and private individuals seek to gain portfolio exposure to the gold price, they will be doing so while the means of doing so are contracting, or even disappearing altogether.
An outcome of this sort hinges on the depth and pace of economic deterioration. Time will tell as to whether the current rapid deterioration in the economic outlook goes on to replicate the 1929-32 precedent, but it is getting increasingly difficult to argue against it happening. In which case, the gold price could rise rapidly due to its current undervaluation, a shortage of monetary gold outside central bank reserves, systemic disruption of paper markets and a renewed pace of monetary inflation before the fiat-money investment community realizes what is happening.
Portfolio switching from fiat to gold
If the combination of both a developing credit and trade crises leads to a modern version of the 1929-32 global economic slump, financial asset values will fall heavily. But this time, there is the additional factor of a renewed acceleration of monetary inflation, which at some point might offer some support to stock prices, at least in nominal currency terms. In every hyperinflation, an index of stock prices can perform well on this basis, but adjusted for the currency’s loss of purchasing power, stock prices actually suffer substantial losses.
That assumes, of course, the rest of the world’s economy is broadly stable, which is almost certainly not going to be the case in our scenario.
Additionally, the inflationary conditions of a fiat currency’s twilight moments involve the market imposing increasing levels of time-preference on everything, including bond prices. Therefore, the discount between market prices and final redemption values widens dramatically. Governments and other borrowers face a near-impossible funding task, unless they are prepared to pay increasingly higher interest coupons. Unlike the experience of the great depression when interest rates reflected those of gold, this time bond yields paid in fiat currencies will rise and continue rising.
This leads towards a different progression of notable developments compared with 1929-32. An approximate sequence of how these might evolve is described as follows:
1. Evidence of a looming recession becomes increasingly apparent. Central banks respond in their time-honored way, by easing monetary policy and replacing stalling credit creation with extra base money. Government bond prices rise as they are seen to be the least risky investment in an uncertain economic outlook, and equities rally after an initial sell-off. At the same time, lending bankers observe increasing risk in commercial lending and respond by quietly withdrawing loan facilities from all but the largest manufacturers of goods and producers of services. This appears to approximate to the current situation.
2. With unsold inventory increasing, industrial production is reduced, and rising numbers of workers are laid off. Analysts revise their forecasts for corporate profits downwards, and the number of corporate failures increases. Bond dealers adjust their expectations of government borrowing, and quantitative easing is reintroduced by central banks to ensure government bonds can be issued at suppressed interest rates. At this stage, investors face a worrying combination of falling equity prices reflecting a deteriorating economic outlook, combined with unexpected monetary inflation in the form of QE.
3. Foreigners liquidate US investments in order to sell dollars (the reserve currency – this appears to have started early) and repatriate funds to support their base operations. Bond dealers facing a glut of government bond issues expect bond yields to continue to rise. Stock markets slide, and with it is a growing realization that the recession is turning into a wealth-destroying slump.
4. As the markets’ demands for increased time-preference undermine all debtors’ finances, investors increasingly avoid bonds and equities, abandoning hope of any recovery in financial asset prices. Hedging into gold mines and gold ETFs gathers pace, and the purchasing power of gold continues to rise measured against both fiat currencies and against the commodity and energy complex.
5. Having fallen behind the time-preference demanded by markets, central banks are reluctantly forced to raise overnight interest rates to protect the currency and bring price inflation under control. They have no choice, but this is seen as capitulation by investors. Residential mortgage costs increase sharply, driving consumers into negative equity as property prices suffer from forced selling. In countries where the home has become the middle class’s principal asset, the effect on consumer spending is devastating. Governments end up bailing-out or bailing-in lenders while trying to moderate mortgage interest costs.
6. By now, the gold price measured in unbacked currency is beginning to discount a continuing acceleration in monetary inflation. The gold price will be at multiples of current levels in all currencies, including the dollar.
7. The sense of crisis escalates and mounting bad debts at the banks raise the prospect of a systemic banking crisis. Despite depositor protection schemes, depositors begin to take steps to reduce their bank balances. With the facility to encash bank deposits being strictly limited, alternatives to deposits in insolvent banks will be in high demand. These will be gold, silver and other perceived stores of value. Cryptocurrencies could come into their own as an escape route from holding deposits in the banking system.
8. Those who attempt to escape systemic risk by exchanging bank balances for alternatives are simply passing bank deposits to the vendors. This is fine, so long as vendors are happy to accept the systemic risk. If not, then prices of alternative stores of value must rise to compensate. A classic flight out of money into anything else develops and is made more urgent by the lack of a cash alternative.
9. The currency rapidly loses purchasing power, and it will be moving into its end-of-life. Government bonds will have lost nearly all their value, measured in gold, and governments will still be accelerating inflationary financing, because bond financing without the central bank buying them will not be possible.
During this process, with few exceptions financial assets will face annihilation. A further problem is failing banks are the custodians of stock entitlements, with few being directly registered in the beneficial owners’ names. At best, this leads to a temporary loss of ownership. At worst, it provides the means for confiscation.
An intense bear market destroys wealth. At some stage, investors will begin to realize their portfolios are almost totally exposed to fiat currency risk. The belief that inflation hedges, such as overweight equities and underweight bonds, offer protection against extreme monetary inflation will be disproved. Investors will need a radical new approach, using sound money as their performance criteria. This is cannot be an inflation index, which is likely to become increasingly manipulated by statistical method. It has to be gold, instead of rapidly depreciating fiat currency.
The problem investors will then face is mathematical. There are probably less than 30,000 tonnes of monetary gold, excluding Asian jewelry, in private hands, today worth about $1.1 trillion.According to The Boston Consulting Group, in 2015 there were $71.4 trillion of portfolio assets, of which $36.1 trillion were in US dollars. With the monetary gold held outside government reserves being about 1.5% of portfolio assets, how do you replace non-performing fiat-currency dependent assets with a portfolio designed with sound money in mind?
This is why the return to sound money will destroy the West’s financial system, driving the purchasing power of gold higher, measured against commodities, goods and services, while that of paper fiat moves towards worthlessness. The destruction of financial wealth could easily compare with 1929-32, and if it wipes out fiat currencies will be even worse.
The removal of cash as an effective escape route for investors fleeing systemic risk turns systemic risk directly into a collapsing preference for money relative to goods, gold, cryptocurrencies and the rest. Once it starts, it could happen quite quickly.
Comments from Benjamin: As of April 1, 2019 Basel III will allow GOLD to be held on the balance sheets of all corporate and Government entities as 100% collateral. Prior to April 1, 2019 it was only at 50%. It is a Tier 1 Asset. This will be a major change and as the Comex which is only a leveraged paper market finds itself caught in a short squeeze then the price of GOLD will find it's proper value based on Supply and Demand.
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- Mar 22, 2019 8:23am Mar 22, 2019 8:23am
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- Mar 22, 2019 9:23am Mar 22, 2019 9:23am
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https://zh-prod-1cc738ca-7d3b-4a72-b...?itok=LY4e264-
by Tyler Durden
Fri, 03/22/2019 - 08:25
Authored by Jeffrey Snider via Alhambra Investment Partners,
The Real End of The Bond Market
These things are actually quite related, though I understand how it might not appear to be that way at first. As noted earlier today, the Fed (yet again) proves it has no idea how global money markets work. They can’t even get federal funds right after two technical adjustments to IOER (the joke).
But as esoteric as all that may be, recent corporate statements leave much less doubt at least as to the primary effect. Before the FOMC gave up on the boom, company bellwethers like FedEx beat them to it.
Corporate giants doing business abroad are painting a dreary picture of the world’s economy…This week, top executives at FedEx, BMW, UBS and others described bleak global business conditions while discussing quarterly results. Fitch Ratings also “aggressively” cut its forecast for the year.
The head of UBS was among the latest to blame the world’s backdrop for weaker-than-expected results. CEO Ermotti told a conference in London on Wednesday that it “one of the worst first-quarter environments in recent history,” Reuters reported.
Economists would do well if they would ever learn to curve (stop it with the ridiculous one-year forwards and term premiums nonsense). The bond markets have been saying all along that this was the way it was going to turn out. The reason: liquidity risks. These are high, unusually high because of that one thing. The Federal Reserve has no idea what it takes to fix the broken monetary system (they can’t even get the simplest part right).
QE’s and bank reserves didn’t accomplish a thing. In light of recent EFF and repo events, officials are turning to more bank reserves.
Brilliant.
https://zh-prod-1cc738ca-7d3b-4a72-b...LIDE-102_0.jpg
If you thought that was bad enough, things are still taking a turn for the worse. Having more and more considered a downside scenario and the growing probability for it, attention is now focused on depth and duration.
https://zh-prod-1cc738ca-7d3b-4a72-b...-UST-Curve.png
There are a couple things worth noting along those lines, in addition to the yield or eurodollar futures curves. TIPS yields, for example, are a composite of inflation perceptions balanced against the nominal environment. In other words, the 5-year TIPS yield is the 5-year UST nominal minus what the market assumes is average inflation over the duration of the instrument (since you get compensated by the US Treasury for the CPI).
That remainder can be thought of as “real” growth expectations. My interests tend toward the monetary and therefore inflationary side of TIPS. My colleague Joe Calhoun (correctly, as usual) takes the broader approach when assessing those “real” yields, too. Guess what they’ve been doing all during this Fed “pause.”
https://zh-prod-1cc738ca-7d3b-4a72-b...evens-TIPS.png
Growth expectations in the bond market have been collapsing, pretty much what the CEO of UBS as well as the earnings report from FedEx have been talking about. Inflation expectations must therefore rise to offset them; because nominal UST yields have run into a roadblock of sorts:
https://zh-prod-1cc738ca-7d3b-4a72-b...10s-1s-EFF.png
As noted before, I believe UST rates would be falling faster and farther (like in Germany or Japan) if Jay Powell had been more honest (or capable, really) in reading the economic situation. The short end is in the way, to put it mildly. More and more, however, that is proving to be less of a problem.
https://zh-prod-1cc738ca-7d3b-4a72-b...-5s-1s-EFF.png
With the belly of the UST curve now regularly falling below EFF, the market is becoming comfortable, for lack of a better term, with this upside down situation. Risks, in other words, are being perceived as still rising and therefore overwhelming the natural tension/shape of the yield curve keeping it from whole-hearted collapse.
If, rather when UST yields push through the ST “boundary” then you’ll likely see both inflation breakevens as well as “real” TIPS yields decline in concert. For now, the short end is holding up the nominal topside, leaving inflation breakevens to follow along with oil.
https://zh-prod-1cc738ca-7d3b-4a72-b...ns-IRS-30s.png
This view is corroborated by indications like swap spreads. The Fed pause never once registered in them, only the falling growth expectations. Swap spreads are, essentially, an indirect measure of balance sheet capacity especially when they are negative. The 10s are right on the boundary from falling below zero again (even the 5s were edging closer to the netherworld this week).
https://zh-prod-1cc738ca-7d3b-4a72-b...ns-IRS-10s.png
Economists and central bankers the world over misinterpreted Reflation #3; they really did, and a lot on purpose. They specifically talked up “globally synchronized growth” trying more so to make it happen rather than out of an honest assessment of the shape of the global economy as it really was. If this was a game of poker, the flat curve in 2017 was the bond market calling their bluff.
The FOMC meeting this week was Jay Powell showing his weak hand (again, he can’t even get EFF right). What comes next is markets assessing what it means with the Fed totally out of the game. The initial inclination, falling real yields, obviously isn’t a good one. And as recent corporate news projects, it’s not limited to being a market-driven curiosity.
https://zh-prod-1cc738ca-7d3b-4a72-b...1-UST-1s5s.png
Monetary breakdown to financial chaos to economic downturn.