Welcome back to What’s Happening Now, featured each Monday by the Critical Signals Report.

As we approach the end of Q2 2019, there’s much you need to know going into Q3 to both protect and grow your portfolio, especially as deteriorating global conditions gain windspeed.

The big (and entirely unsurprising) news this week is that global central banks continue to lean towards lowering interest rates to avert a freefall in global growth and markets. Keep an eye out for a U.S. rate cut in July. Meanwhile, gold is up on this news, as faith in the credibility of central banks slowly turns the corner.

After more than a decade of “faking it” at the Fed, investors are increasingly realizing that our central bank is slowly running out of runway and support from the ground.

Meanwhile, problems with German banks, Aussie real estate bubbles, and heightening unrest in the Middle East will give us much to watch as financial, geopolitical, and yes, portfolio risk rise in tandem.

In coming reports, we’ll give special attention to Deutsche Bank’s woes, the derivatives market and warning signs from the oft-ignored Australian economy – each a potential trigger for the inevitable (yet delayed) market meltdown.

But where there is risk, there is also opportunity…

Doves Flock Together

It’s beyond obvious that central bankers worldwide are speaking in louder voices than we’ve heard for some time.

Not since 2010 have we seen this much desperate talk of further “stimulus” (i.e. rate cuts) required of our central banks to keep (buy) investor faith. Never mind that interest rates are already negative across Europe and Japan.

This, however, could be bullish news for U.S. markets in the near-term, as we expect continued flows out of the no-yield and distressed markets of Europe and Asia into U.S. markets. Again, we are still the best horse in the international glue factory, as previously discussed

Despite such relative strength, the U.S. Fed remains desperate. And folks are finally catching on to the great con of what are effectively central bank (and debt) driven markets. In 2010, the Fed said they’d stop with QE1. Remember that fiction?

Investors have seen over a decade of “emergency measures,” yet have been told “all is rosy” for years. Now, with even more desperate measures back in full swing, folks are catching on that things are not so “rosy” at all, despite the double-speak coming from truth-challenged central bankers.

No Longer “Patient” – Jerome Powell, U.S. Fed

The U.S. Fed scrapped the magic word “patient” from its monthly statement recently, suggesting that the “spoiled Wall Street nephews” of “Uncle Fed” will get their much-demanded low rates in July. The cry (excuse) from the bond and stock pits is that the trade war will sap growth momentum.

The real truth, however, is far simpler. Wall Street wants to continue its low rate keg party. Let the debt beer flow!

As I’ve suggested elsewhere, tariffs are not the real issue; debt is. And Wall Street needs more low rates (and debt) to live well past its bullish expiration date.

The Fed will accommodate the market, solving its debt problem with more low-rate debt – officially our new, and entirely rigged, normal. This is just plain crazy.

“Whatever It Takes” – Mario Draghi, European Central Bank (ECB)

Mario Draghi, head of the European Central Bank (ECB), is no less crazy than Powell and is back to signaling more stimulus for the European Economy.

Draghi said last week that he would use all the flexibility within the ECB’s mandate to keep the European economy (which he, too, has confused with the stock markets) afloat, referring to more rate cuts and more asset purchases that would take borrowing costs even further below zero…

England, Japan, and Others

But hold on, the craziness just continues. In the UK, Brexit uncertainty promises subpar GDP growth which means low rates/yields there as well.

In Crazy Japan, where the trade deficit in May was the widest since 2015 on weaker demand throughout Asia, the benchmark bond yield is approaching the bottom of its range.

Australia, Russia, India, and Chile are already loosening as well, with rates racing to the floor and breaking records of desperate levels.

Hard to Imagine

It’s hard to imagine, folks, but this is where we are today – squarely STILL in a crisis mode, after 10+ years of stimulus and a drunken, bogus, yet rip-roaring “recovery.”

Sure, everyone’s on board with the “whatever it takes” meme, but here’s the rub: Words (and more debt) don’t save debt-addicted economies, they just buy record highs, time (and more debt) until the overdose kills the addict.

With interest rates already negative in Europe, taking them progressively lower may not make the difference intended. Global Central Banks are running out of bullets; a race to the bottom in interest rates saps commercial bank profitability.

And as you’ll soon see in our coming report, Germany is facing a “Lehman Moment” with its failing Deutsche Bank… Ah, how history does indeed rhyme

Currency Wars Too – Spillover Effect

Here’s something else to consider as we head toward Q3 – currency wars are starting to flare again. As I’ve written elsewhere, the U.S. Dollar is the globe’s international currency bully.

If we take interest rates down, this will weaken other currencies (which are debt-tied to our dollar). Smaller nations will have no choice but to further devalue local currencies to make their markets more competitive.

And with everyone simultaneously taking rates down in a currency race to the bottom, patient (oft-ridiculed) investors who were wise enough to hold gold as a long-term play (10% portfolio allocation) will be richly rewarded.

Silver Lining to All of This

Rates are going lower, folks, whether by two, three, or four cuts this year and next. But there is a silver lining (and a useful trade idea here)… namely being long all manner of bond-like ETFs, across the yield curve, because bond prices go up as yields/rates go down.

 

To take advantage of this trend, consider long positions in the Vanguard Total Bond Market ETF (BND), its international counterpart (BNDX), and other yield curve picks, like the iShares 7-10 Year Treasury Bond ETF (IEF) or iShares 20+ Year ETF (TLT).

These interest rate-oriented ETFs are all up in 2019 thus far, as prices have climbed as yields/rates have tumbled along the curve.

Downside Risks Are Mounting

Risk of recession is closing in, and the Central Banks know it, which is why they are stepping up the rhetoric and actions necessary to ease interest rates. We’ve been tracking deteriorating conditions in manufacturing surveys, industrial metals prices, and economic reports, to cite a few examples.

All in, optimism on economic (as opposed to stock market) growth is waning as economists see more downside than upside as of June 2019.

Storm Tracker

Meanwhile, our far superior Storm Tracker is holding at 45 Knots, with some wiggling and shifting within.

As we noted last week, that’s a whole lot of wind to stand up against. While lower interest rates may usher in a near-term melt-up, which will exhaust itself when reality kicks in, it pays to be wary and nimble. Stick with us, and we’ll be telling you what to do… buy gold, for example.

Gold – Flight to Safety

At the start of this weekly note, we mentioned opportunity, so here’s another trading idea. If life seems good and interest rates are dropping, consider the bond ETFs as mentioned earlier.

But if, like us, you also think things will eventually get really bad, join the gold bugs responsible for the soaring prices this June.

Here’s the setup… the U.S. Fed’s increasing willingness to bail out the markets with lower interest rates is driving the U.S. dollar down, which, coupled with recessionary fears, has caused gold to rise above the $1,350/ounce ceiling/range that has been in place for nearly six years.

Elsewhere, I’ve shown how gold can even rise alongside a strengthening dollar (relative to other currencies). In sum, gold eventually works regardless of the dollar’s direction. But again, this is a longer-term play. Gyrating price action in gold is to be expected.

Think of that $1,350 ceiling as the next floor for the yellow metal. Gold climbed as high as $1,400 last week, the most elevated since September 2013.

Should the Fed ease by some 50-75 basis points this year, that also should be good for gold, beyond just gloom and doom, as an alternative to the dollar.

Gold has posted four straight weekly gains, partly on bets that the Fed will trim rates amid signs (i.e. excuses) that escalating trade disputes are hurting the U.S. economy.

Here’s a Trade Idea

Look to put on a gold position. For this, you could turn to Exchange-Traded Funds (ETFs). There’s quite a variety of ETFs that trade and track a variety of gold indexes, offered by Proshares, Rafferty Asset Management, Direxion, and many others, including some well-known banks.

When purchasing a gold ETF, consider the vendor, expense ratios, ETF size (asset levels) and, as importantly, the average daily trading volume (“ADV” in industry jargon) because liquidity matters. For pure gold plays, consider GLD or PHYS.

Our pick for gold would also include any of the below ETFs, which come at various levels of leverage, subject to your wealth level and risk tolerance.

  • 1x Flavor: Consider the Vaneck Vectors Gold Miners ETF, that tracks the performance of the NYSE Arca Gold Miners Index, which invests in materials stocks of all cap sizes across the globe, with a market cap of $10 billion. Miners are more volatile, but shoot up higher than the underlying metal when winds are favorable.

Looking for more juice? Consider these…

  • 2x Flavor: Consider the Proshares Ultra Gold ETF (UGL), a 2x levered exchange-traded fund that tracks the daily investment results that correspond to twice (200%) of the daily performance, whether positive or negative, of its corresponding benchmark, the Bloomberg Gold Sub index, or;
  • 3x Flavor: Consider Direxion’s Daily Junior Gold Miners ETF (JNUG), a 3x exchange-traded fund that tracks investment results that correspond to three times (300%) of the daily performance, whether positive or negative, of its corresponding benchmark, the Daily Junior Gold Miners Index.

Caution: Leveraged ETFs deliver results that are just that – leveraged, both to the upside should gold prices rise, AND more importantly, to the downside should gold prices fall. Buyer beware. Traders need to have stop-losses/exit plans.

We’ll be doing a report on Deutsche Bank soon. This bank could require a bailout, costing the EU a “whatever it takes” measure that could cost hundreds of billions in printed money, a bailout that could pacify or rattle investors, impacting gold in either direction. Keep this in mind as well.

We ultimately look at gold as a key long-term insurance play, not a quick trade. Be prepared for volatility in price moves.

Q&A: Your Questions Answered

Lastly, we want you to know that we read and appreciate all of your comments. We’ve addressed other queries here, here, here, and here. But let me address the more recent ones now.

Cannabis Queries. Steve R. asked how the cannabis sector will be affected by the downtrend, noting that the sector has been falling, with some companies truly tanking by greater than 20%. Cannabis is a massive and new market, but like any breakout industry (cars, trains, tech, tobacco, and beverages), stock prices will go through painful consolidation periods to wean the winners from the losers, which is what we are seeing now. Steve, I will endeavor to do a special report on this sector/space.

Silver vs. Gold. Phillip J. asked if silver will return to a more balanced relationship to gold? Say 50 to 1 instead of the present 88 to 1, and if so, why? The short answer, Phillip, is that silver’s price action has been dramatically distorted/manipulated by heavy fingers on the “sell button” at major banks (i.e. JP Morgan). Thus, silver has been unfairly priced for years, but could see higher percentage moves than gold as precious metals eventually get the last laugh over these many years of fiat currency stimulus. As for your question regarding my thoughts for a peak in gold over the next year or two, I think conditions (at least for now) are conducive to see percentage moves like we saw in late 2010 – i.e. solid and strong. For other thoughts on gold, I’ve more here and here.

What to do? T. Cassidy asked how can one prepare as money becomes increasingly diluted by central banks and subject to eventual inflation? Do you pull everything out of the bank and put it into metals? Well T.C., we will be publishing a five-part Portfolio Series very shortly to show you exactly how to prepare for such things. For now, we don’t recommend piling/concentrating into any singular asset. Precious metals are an insurance investment, and anywhere from 10-15% allocations are common. But again, we’ll give you very specific guidance when we publish our portfolio series. I’ve written a report as well that broadly introduces nine strategies you can take now. Also, in my coming report on Deutsche Bank, I’ll explain in greater detail why we have not seen inflation despite all this printed money. It will shock you…

Will MMT Postpone the Pain Ahead? R. Beth asked if MMT could delay the next recession beyond 2021. This is difficult to say, as the central banks will undoubtedly roll out as much “emergency measure crazy” as they can to keep this sinking ship afloat for as long as they can. For the Fed, they have only two hammers in their toolbox: 1) money printing and 2) rate cutting. To them, every problem looks like a nail, and their hammers are 500 pounds each. The Fed will certainly try to buy more time, likely into 2020. The real issue is how long will faith in this rigged system last? We track the signals which measure this, in part, via market action. As the Fed gets more desperate, time is bought, but faith slowly wanes as the “hammers” stop working.

Will Foreign Money Flows Help the U.S.? Dale recently asked if the introduction of foreign capital into our economy might sway the winds on our storm tracker. This is a good question, and indeed, yes, we do track foreign flows and see the impact this can have. I wrote a report that addresses this specific question right here – take a read. In short, we are currently the best horse in the international glue factory, and foreign inflows will likely buy us more time as Europe and Asia “rot first.” Some are suggesting the Dow could reach 30,000 based just on inflows alone. In the end, however, the U.S. markets will rot as well.

Tackling the Deficit? D. F. Yamarino noted that as long as the economy is progressing at a rapid pace, should we not be able to come up with viable paths to take care of the deficit? My thoughts on this are mixed. The current 10-year budget spend calls for $1 trillion a year in spending, but assumes 3% growth during that entire period. This is extremely unlikely, and in fact, we are likely to see GDP get hit hard next quarter. To assume 10 years out at 3% growth is borderline fantasy. Even with all the rigged stimulus we’ve seen in the last decade, GDP annualized at only 2%. Can we really expect the next ten years to be better? No way.

If growth slows, tax receipts also slow, and hence our annual forecast of $1 trillion in spending will likely increase by hundreds of billions due to declining revenues. Finally, given the murky news from the Office of the Inspector General as to un-confirmed spending at the Department of Defense and HUD, our debt levels could be much higher than reported. Who knows what’s happening in the swamp? In any event, the reported/projected debt is already too big to manage naturally. Given the foregoing, tackling our deficit will be a major (and likely delayed/ignored) challenge today and tomorrow.

Don’t Fight the Fed? E. Mack recently made a fair point – namely that the Fed can keep this rigged game going for a lot longer than “I believe” and thus folks can miss out if they listen to so much negativity about the Fed. In fact, I totally agree with Mr. Mack’s concerns, and have been outperforming these doped markets despite my disgust with the macros. The Fed, as I’ve said elsewhere, may be a “dirty cop,” but that doesn’t mean one should fight it. That’s why we’ve written many, many times about ways to make money in a Fed-rigged market here, here, and here. Indeed, we see opportunities to play this rigged game in a Fed-driven melt-up scenario (now and in the past), despite the inevitability of a debt-driven meltdown, however delayed by Central Bank Fantasy. Our Storm Tracker recommends larger cash allocations now because most folks can’t afford losses (or misunderstand risk management) when the mathematical and historical probabilities (and signals) for risk ahead far outweigh reward. We think you’ll see this more clearly when we release our five-part series on building a portfolio that doesn’t fight the Fed, but beats them at their own rigged game.

That’s it for this week’s report on What’s Happening Now. For more clues, take note that there’s going to be a lot more Fed Speak tomorrow (Tuesday) as Jerome Powell and other Fed presidents address various venues.

In the meantime, be safe out there, and keep an eye on your inbox for more blunt-speak this week from the Critical Signals Report.

Matt Piepenburg


Comments

5 responses to “What You Need to Know and Why…”

  1. Enjoy your reports , Thank You. Noticed commercial banks are increasing their short positions on silver & gold at a very alarming rate. I have used 2016 as a guide and silver past 160K & gold past 470 K a tipping point is reached and the metals start to collapse, since the commercials always seem to get it right how alarmed would you be if these levels should be reached?

  2. Why should I buy Gold and Silver now?
    I currently have an IRA Annuity. Is it safe and will it make any reasonable amount of return?
    ELD

  3. When we hear French president Macron praising ECB’s Mario Draghi as one of the greatest European statesmen, then we feel bad. The indifference of European Citizens about what ECB is doing with its unlimited QE is because there is no transparency in what they’re doing making more and more debt, destroying the future of our children’s generations.

    Draghi’s words “whatever it takes” brings us closer to our economy’s death.

  4. I believe technology and innovation will keep the american economy growing as we progress into a new normal in this ever changing world. The trick is to know when to scale in and out of positions to achieve your goals. I would like to thank you for answering my previous questions. Looking forward to your updates. Thanks again.

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