Pro-Growth Occurrences

An endearing quality of a late stage bull market is that it expands the universe of what’s possible.  Somehow, rising stock prices make the impossible, possible.  They also push the limits of the normal into the paranormal.

 

This happens almost every time Bigfoot is in front of a camera. [PT]

Cartoon by Gary Larson

 

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Il n’y a rien à défendre – by Vidocq

 

Dr. Marc Faber, author of the Gloom, Boom and Doom Report

Photo credit: Michael Wildi / RDB

 

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Discounting the Present Value of Future Income

Last week, we discussed the ongoing fall of dividend, and especially earnings, yields. This Report is not a stock letter, and we make no stock market predictions. We talk about this phenomenon to make a different point. The discount rate has fallen to a very low level indeed.

 

We add this chart to provide a slightly different perspective to the discussion that follows below (and the question raised at the end of the article). This is a very simple ratio chart, which focuses on non-financial corporate debt in particular, as neither consumer debt nor government debt can be considered “productive” by their very nature – the latter types of debt are used for consumption, which they “pull forward” (as an aside, we don’t believe there is anything wrong with consumer debt per se, but it is not “productive”). As the recommendations of Keynesians on combating economic downturns indicate, they have a slight problem with the sequencing of production and consumption. They favor measures aimed at boosting demand, i.e., they want to encourage consumption, which is tantamount to putting the cart before the horse. The chart above shows the ratio of GDP to total non-financial corporate debt – and obviously, GDP is not really an ideal measure for this purpose, as Keith also mentions below (GDP has many flaws, and its greatest flaw is the underlying idea that “spending” is what drives economic growth; not to mention that it seems not to matter what the spending actually entails – even Keynesian ditch digging or pyramid building would “add to GDP”, but would it represent economic growth? That seems a rather audacious assumption – in fact, it should be obvious that such activities would diminish rather than enhance society-wide prosperity). In that sense it would actually be more useful to compare corporate debt to gross industrial output (for the sake of completeness we add the chart in the addendum). We noticed though that it doesn’t make much of a difference in terms of the general trend, and we don’t have pre-2005 data for gross output, so we decided to go with GDP. This allows us to depict a very long-term chart of “debt productivity”. We should add that we believe this is quite a legitimate way of presenting it – Keith compares growth ratios, which seems to be very useful in highlighting business cycle fluctuations, but slighgtly less useful in showing the long term trend in the relationship between debt accumulation and economic output. [PT] – click to enlarge.

 

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A Big Reference Chart Collection

Our friends at Incrementum have created a special treat for gold aficionados, based on the 2017 “In Gold We Trust Report”. Not everybody has the time to read a 160 page report, even if it would be quite worthwhile to do so. As we always mention when it is published, it is a highly useful reference work, even if one doesn’t get around to reading all of it (and selective reading is always possible, aided by the table of contents at the beginning).

 

The performance of major asset classes since gold bottomed in July of 1999. Despite the stock market outperforming gold handily since 2011, it is still lagging behind quite a bit over the past two decades. So it is clear what one should rather have owned. As far as we are concerned, for a variety of reasons we do not believe that gold’s secular bull market is over just yet, despite the steep correction from 2011 – 2015 (or 2013 in terms of most non-dollar currencies). The beginning of the new uptrend (gold is already up about 25% from its low) is in many ways reminiscent of the beginning of the bull market, as it is a halting affair with many short term setbacks, accompanied by great skepticism. The current year is particularly remarkable, because gold had every reason to decline, but up until recently had actually outperformed every other major asset class (the stock market only managed to catch up with it very recently). Gold has begun to strengthen ever since the Fed’s rate hike campaign began – regular readers may recall that we expected this to happen and asked them to “bring it on”. This is counter-intuitive and the consensus certainly expected the exact opposite outcome. In reality it is both logical and telling. As an aside: if we had added the CRB to this chart, you would see that it has actually lost 3.2% since July of 1999. We refrained from adding it because the CRB does not properly depict the price performance of commodities. Its performance includes the futures roll-over effect, which leads to huge distortions over time. A spot price index looks completely different and would show a respectable gain in commodity prices since 1999 (and it should be obvious that with crude oil trading at $50 instead of $10 and copper nearly at $3 instead of 40 cents, etc., that commodities are generally definitely not cheaper than in 1999/2000). Unfortunately we couldn’t find such an index at stockcharts, so we decided to rather leave commodities out – click to enlarge.

 

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Fundamental Developments

The prices of the metals shot up last week, by $28 and $0.57.

 

Heavy metals became pricier last week, but we should point out that the stocks of gold and silver miners barely responded to this rally in the metals, which very often (not always, but a very large percentage of the time) is a sign that the rally is unlikely to continue or hold in the short term. [PT]

 

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Divine Powers

The Dow’s march onward and upward toward 30,000 continues without a pause.  New all-time highs are notched practically every day.  Despite Thursday’s 31-point pullback, the Dow is up over 15.5 percent year-to-date.  What a remarkable time to be alive.

 

The DJIA keeps surging… but it is running on fumes (US money supply growth is disappearing rapidly). The president loves this and has decided to “own” the market by gushing about its record run. During his campaign he professed to worry about the “giant bubble”. We happen to think that it is probably best for a president not to talk about the stock market at all, but the Donald evidently couldn’t resist. One thing that continues to be quite satisfying is this quote by Paul Krugman on election night, when stock market futures plunged after it became clear that the Donald would beat Hillary: It really does now look like President Donald J. Trump, and markets are plunging. […]  I guess people want an answer: If the question is when markets will recover, a first-pass answer is never.” Krugman’s predictions are often devastatingly wrong, but rarely this fast. [PT] – click to enlarge.

 

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Bad Reputation

Years ending in 7, such as the current year 2017, have a bad reputation among stock market participants. Large price declines tend to occur quite frequently in these years.

 

Sliding down the steep slope of the cursed year. [PT]

 

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Where the Good Things Go

Many gold bugs make an implicit assumption. Gold is good, therefore it will go up. This is tempting but wrong (ignoring that gold does not go anywhere, it’s the dollar that goes down). One error is in thinking that now you have discovered a truth, everyone else will see it quickly. And there is a subtler error. The error is to think good things must go up. Sometimes they do, but why?

 

Since putting in a secular low at the turn of the millennium, gold is still the by far best performing major asset class, despite suffering a big correction from its 2011 peak. There is good reason to expect that the secular bull market isn’t over yet, regardless of the fact that the market is testing the patience of bulls. This is probably a case of “it will go wherever it needs to go, just not when you think it should”. [PT] – click to enlarge.

 

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Cryptic Pronouncements

If a world conflagration, God forbid, should break out during the Trump Administration, its genesis will not be too hard to discover: the thin-skinned, immature, shallow, doofus who currently resides in the Oval Office!

 

The commander-in-chief – a potential source of radiation?

 

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The True Believer

How is it that seemingly intelligent people, of apparent sound mind and rational thought, can stray so far off the beam?  How come there are certain professions that reward their practitioners for their failures? The central banking and monetary policy vocation rings the bell on both accounts.  Today we offer a brief case study in this regard.

 

Minneapolis Fed president Neel Kashkari attacking a block of wood with great zeal. [PT]

Photo credit: Linda Davidson / The Washington Post

 

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A Vulnerable System

Parliamentary democracy is vulnerable to the extremely dangerous possibility that someone with very little voter support can rise to the top layer of government. All one apparently has to do is to be enough of a populist to get elected by ghetto dwellers.

 

Economist and philosopher Hans-Hermann Hoppe dissects democracy in his book Democracy, the God that Failed, which shines a light on the system’s grave deficiencies with respect to guarding liberty. As Hoppe puts it: “Democracy has nothing to do with freedom. Democracy is a soft variant of communism, and rarely in the history of ideas has it been taken for anything else.” At first glance this may strike many people as an exaggeration, but considering the trends that have emerged over the past several decades, it seems difficult to refute this assertion. Particularly since the beginning of the so-called “war on terrorism”, individual liberty has suffered numerous setbacks in Western democracies, while the power of the State has grown to almost unheard of proportions. In a democracy everybody is in theory free to join the psychopathic competition for power (in contrast to the largely rigid power structures prevailing in feudal societies), but all things considered, that is a highly questionable advantage. In fact, in many ways it isn’t an advantage at all. [PT]

 

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Too Big to Fail?

 

Dear Mr. Butler, in your article of 2 October, entitled Thoughtful Disagreement, you say:

 

“Someone will come up with the thoughtful disagreement that makes the body of my premise invalid or the price of silver will validate the premise by exploding.”

 

Ted Butler – we first became aware of Mr. Butler in 1998, and as far as we know, he has been making the bullish case for silver ever since. Back in the late 90s this was actually a fairly well-timed case, as silver eventually rose from a low of around $4 in 2000/2001 to a high of almost $50 in 2011, but we neither bought into the “shortage” story (note: one of the reasons why gold and silver are monetary metals is precisely that their above-ground stock is so large that shortages are extremely unlikely to ever develop), nor the idea that nefarious forces kept prices from rising. This is not to say that nefarious forces as such don’t exist, only that they probably have better (and more profitable) things to do. Also, since silver was the best-performing commodity from 2000-2011, they would have to be considered pretty inept. [PT]

 

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