Chart Update
Market Drivers
The recent outbreak of a dangerous respiratory illness caused by a new Corona virus in China was widely blamed for the stock market sell-off on Monday last week. It is undoubtedly true that the epidemic has the potential to severely disrupt economic activity, although it is too early to come to a definitive conclusion about that. Be that as it may, the event actually serves as an excellent example illustrating that the news of the day are incidental to market action rather than causing it.
S&P 500 Index, 10-minute chart. A fairly strong sell-off on Monday last week, a vigorous rebound on Tuesday.
An Unloved Sector
We rarely discuss individual stocks in these pages, but we make an exception now and then when we spot exceptional opportunities. This time the reason is actually more mundane: the vast majority of gold exploration stocks failed to benefit from the rally in precious metals prices last year. As a result many of them came under even greater pressure in the tax loss selling season at the end of the year. We made a list of such stocks late last year – a download link to the PDF document is provided below this post. Here is an example of such a stock:
ATAC (ATADF), one of many exploration stocks that came under selling pressure in last year’s tax loss selling period.
GDP – A Poor Measure of “Growth”
Last week the prices of the metals rose $35 and $0.82. But, then, the price of a basket of the 500 biggest stocks rose 62. The price of a barrel of oil rose $1.63. Even the euro went up a smidgen. One thing that did not go up was bitcoin. Another was the much-hated asset in the longest bull market. We refer to the US Treasury.
BofA Merrill Lynch high yield master II option-adjusted spread: on Dec. 23 it tightened to the lowest level of 2019, fairly close to its post-crisis low established in 2018. This seemingly signals that risk is very small – in reality, risk is probably extremely high. [PT]
Plans and Consequences
You are probably already getting into the holiday spirit, perhaps you are even under a little stress. But the turn of the year will soon be here – an occasion to review the past year and make plans for the new one. Many people are doing just that – and their behavior is creating the strongest seasonal rally in the precious metals markets.
Anonymous industrial stackers showing off their freshly purchased silver hoard. [PT]
A Critical Appraisal of a Hero of Central Monetary Planning
We apologize for publishing this Report late. We have been very busy developing the business. Last week the price of gold moved up $16, and that of silver $0.39. Almost two groceries leaked out of that store of value par excellence, bitcoin. But hey, stocks are up!
We admit to having a soft spot for the politically incorrect Paul Volcker. He frequently expressed bemusement at the newfangled obsessions of his successors at the Fed (as an example, at a conference in 2006 he remarked on the increasing emphasis on “core” inflation: “A great mantra of central bankers these days is ‘inflation targeting.’ I don’t understand that nomenclature. I didn’t think central bankers were in the business of targeting inflation. I thought we were supposed to be targeting stability.” h/t Grant’s). Nevertheless, we are on board with the criticism voiced below. Volcker was indeed instrumental (along with Milton Friedman, otherwise a champion of free markets, but oddly blind to the insidious nature of a monetary central planning agency) in persuading Nixon to abandon the last remnant of the gold standard, the Bretton Woods “gold exchange standard” that permitted foreign central banks to exchange their US dollar reserves for gold at a fixed exchange rate. Not only did this decision unleash a decade of economic and currency market chaos, it ultimately paved the way for the unbridled expansion in money and credit in train since the early 1980s. In the meantime we have arrived at a juncture where central banks are “forced” to adopt ever more insane policies as they rush from trying to prevent one potential systemic collapse after another. [PT]
Re-Purposing of Tractor Parts in South Dakota
The price of gold was all but unchanged, but the price of silver dropped another 46 copper pennies last week.
We came across an article showing pictures of something we have previously described: sculptures made from parts taken from farm tractors.
Here is a picture I took:
The good old Predator made of tractor parts – looks almost like the real thing! Here is background information on the artist and more pictures of his work. [PT]
Credit Market Bifurcation
By all accounts, credit markets remain on fire. 2019 is already a record year for corporate bond issuance, beating the previous record set in 2017 by a sizable margin. Demand for the debt of governments and government-related issuers remains extremely strong as well, despite non-existent and often even negative issuance yields. Even now, with economic activity clearly slowing and numerous threats to the post-GFC recovery looming on the horizon, the occasional rise in credit spreads is routinely reversed. And yet, under the placid surface problems are beginning to percolate. Consider exhibit A:
The chart shows option-adjusted credit spreads on three rating categories – while spreads on ‘BB’ rated (best junk bond grade) and ‘BBB’ rated (weakest investment grade) bonds remain close to their lows, spreads on ‘CCC’ rated bonds continue to break higher – considerably so. An increase by 473 basis points from their late 2018 low indicates there is quite a bit of concern.
Poland’s Gold and the Conspiracy Theorists
The price of gold was up enough to buy a bottle of Two Buck Chuck wine, and the price of silver was up enough to buy a wooden nickel (well, not enough to buy a real nickel nickel).
Poland’s gold bars are packaged by employees of G4S International Logistics to be transported from London to Poland. Poland’s gold was originally transferred to London at the beginning of WW II, when Stalin and Hitler invaded and partitioned the country in the late 1930s. For some reason Poland’s post-war communist government left it there – presumably because it was easier to sell in London. [PT]
Photo credit: G4SI
Misguided Incentives
The price of gold subsided a few bucks, and the price of silver blipped a few pennies. Not much action last week, groceries neither pumped into nor drained out of this asset class. Those who look to exchange capital goods for groceries need to find a different asset.
The best-laid plans… [PT]
Yields and the “Everything Bubble”
Last week the price of gold was up $9, and the price of silver was up $0.18.
This week, our thought turns to a cherished old saw. Gold bugs often tell us that the purchasing power of gold is constant. An ounce of gold could have purchased, they say, a fine toga in Roman times. Just as it could buy a fine suit today.
This magnificent toga will set you back an ounce, pilgrim. Just think of the impression you’ll make. [PT]
Fun and Regret Ex Nihilo
The price of gold dropped last week, but not calamitously. From $1514 to $1459, or -$55. The price of silver dropped. Calamitously. From $18.08 to $16.75, or -$1.33. -3.6% vs -7.4%. Once again, silver proves to be volatile relative to gold.
Silver jumped off a cliff again last week – the chart formation nevertheless continues to look corrective. [PT]
Everybody Has a Plan
Not too long ago, we wrote about the so called Modern Monetary so called Theory (MMT). It is not modern, and it is not a theory. We called it a cargo cult. You’d think that everyone would know that donning fake headphones made of coconut shells, and waving tiki torches will not summon airplanes loaded with cargo. At least the people who believe in this have the excuse of being illiterate.
A few images documenting cargo cults on the island of Vanuatu. Left: a wooden plane made by the John Frum cargo cult, which is going strong to this day and has actually become a political party. In the middle is a ceremonial cross erected by the John Frum cargo cult. According to one of the cult’s leaders, its members consider John Frum their Jesus whom they expect to return one day (with a big load of cargo). Even funnier are the guys to the right, who belong to a different Vanuatu-based cargo cult, the Prince Philip Movement, which worships the Duke of Edinburgh whom it considers a divine being. Apparently members of the Yaohnanen tribe in Tanna saw how much respect was paid to Queen Elizabeth during her visits to the island and concluded that her consort had to be a being from their legends, the son of a mountain spirit and a “brother to John Frum”, who is also widely expected to return one day (with cargo). Prince Philip was long unaware that he is revered as a god, but since he has learned about it, he frequently exchanges gifts with the movement (he usually sends them signed photographs of himself, and they send things like traditional pig-killing clubs and other useful implements in return). What the members of the John Frum and Prince Philip cults don’t know: they clearly have what it takes to become modern-day mainstream economists. A second career path is open to them. Your cargo awaits, brothers! [PT]
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