Author Archives: Keith Weiner

     

 

 

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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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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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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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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Fat-Boy Waves

The prices of the metals dropped $17 and $0.35, and the gold-silver ratio rose to 77.  A look at the chart of either metal shows that a downtrend in prices (i.e. uptrend in the dollar) that began in mid-April reversed in mid-July. Then the prices began rising (i.e. dollar began falling). But that move ended September 8.

 

Stars of the most popular global market sitcoms, widely suspected of being “gold wave-makers”. From left to right: Auntie Janet “Transitory” Yellen, Mario “Smaug” Draghi, and last but not least, the healthiest leader in history, Jong-un “Fat-Boy” Kim, as always positively radiating good vibes. [PT] – click to enlarge.

 

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Precious Metals Supply and Demand Report

The price of gold dropped $24, and that of silver 60 cents this week. This is a far cry from Sep 8, when the price of silver hit $18.21. Since then, it’s been almost all downhill. What happened? Since the beginning of last month, the price of silver had been rising and at the basis along with it.

 

Spot silver, daily. The rally was quite sizable, but at the peak a divergence with the gold price emerged (gold exceeded its April high, while silver failed to do so). That is not always meaningful, but it is always a “heads-up”, particularly when prices have already trended for a while. Silver obviously remains stuck in a medium term trading range for now. The longer this continues, the more meaningful an eventual breakout in prices will be. [PT] – click to enlarge.

 

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Back to the Happy Place Amid a Falling Dollar

The prices of the metals dropped this week, $24 and $0.38. This could be because the asset markets have returned to their happy, happy place where every day the stock market ticks up relentlessly.

 

Sometimes, happiness is fleeting… – click to enlarge.

 

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The Instability Problem

Bitcoin is often promoted as the antidote to the madness of fiat irredeemable currencies. It is also promoted as their replacement. Bitcoin is promoted not only as money, but the future money, and our monetary future.

In fact, it is not.

 

A tragedy… get the hankies out! :) [PT]

 

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Fundamental Developments

There were big moves in the metals markets this week. The price of gold was up an additional $21 and that of silver $0.30.

Will the dollar fall further?As always, we are interested in the fundamentals of supply and demand as measured by the basis. But first, here are the charts of the prices of gold and silver, and the gold-silver ratio.

 

Gold and silver prices in USD terms (as of last week Friday) – click to enlarge.

 

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Forking Incentives

A month ago, we wrote about the bitcoin fork. We described the fork:

 

Picture a bank, the old-fashioned kind. Call it Acme (sorry, we watched too much Coyote and Road Runner growing up). A group of disgruntled employees leave. They take a copy of the book of accounts. They set up a new bank across the street, Wile E Bank. To win customers, they say if you had an account at Acme Bank, you now have an account at Wile, with the same balance!

 

BCH, son of Bitcoin, born by forking – down quite a bit from its highs, but still up 130% in the past month, and sporting the third-largest market cap in crypto-currency land. [PT] – click to enlarge.

 

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Fundamental Developments

The price of gold dropped two bucks, and silver two cents. However, it was a pretty wild ride around the time when some information came out from our monetary masters at their annual boondoggle at Jackson Hole. We will show some charts of Friday’s intraday action, below.

 

The overseers of the developed world’s major currency printing presses at Jackson Hole. It almost looks as if they have been literally put out to pasture, alas, that is not the case. [PT]

Photo credit: Reuters

 

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Waiting for the Flood

We have noticed a proliferation of pundits, newsletter hawkers, and even mainstream market analysts focusing on one aspect of the bitcoin market. Big money, institutional money, public markets money, is soon to flood into bitcoin. Or so they say.

 

A weekly chart of bitcoin – it actually looks pretty “flooded” to us already. [PT] – click to enlarge.

 

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