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An Economic Update

Commentaries & Views

In my yearly December 29th article Looking Forward 2018 I projected...

The first and foremost concern facing us (in 2018) is the prospect of a trade war. We are challenging China, Canada, and Mexico -- our three biggest trade partners -- to substantially change the terms of trade between them and us. If they don't comply, we are threatening to impose tariffs and/or quotas on those countries’ goods. This, in effect, would impose a tax on all of us.

I think it's a bluff - a negotiating position. I think it is an attempt to get a better trade deal. But even if it is an error in judgement and we actually go the trade war route, I seriously doubt that it would last long. As soon as the Trump Administration saw the results of tariffs on the economy, I think they would reverse course. After all, Trump is first and foremost a pragmatic businessman and has a very low tolerance for economic failure. The goals of the Trump Administration are higher growth, lower unemployment rates, and a strong stock market. A trade war would lead to exactly the reverse.

But to the degree we ever move in that direction, expect a major market reaction. The mere threat of a trade war will lead to at least a thousand points shaved off the DOW. [We got that and more.]

Selective tariffs may be imposed as a shot across the bow of our trading partners in an attempt to get a better deal, but that's where it should end.

Also upcoming - and also an event that bears watching - is the future of the money supply. For the first time in history, we could see trillions of dollars pouring back into this country from abroad in a very short period of time. Where this money goes could be a good thing or a bad thing. If the money goes into investments, it could be good. But if a lot of it begins chasing goods and services, expect a burst of inflation. [End of excerpt]

To my astonishment, nothing of the kind has occurred yet. In fact...just the opposite.

The yearly money supply figures as defined by M2 NSA, show a flat money supply. In every year except this one we see a gently up-sloping trend of increasing money supply, which is just what one would want to see. In 2018, a year when trillions of dollars of repatriated money held abroad was supposed to flood our economy, we see instead a flat money supply, which is falling after adjusted for inflation. This is a mystery.

What makes this money supply phenomenon even more mysterious is that the stock market has been falling, and you'd expect to see the money raised go into the banking system, at least to some extent. But…nothing! We'll continue to monitor this unusual situation...but it isn't good. The exact opposite of what markets were expecting is happening. I think someone needs to whisper this into the ear of the Fed Governors.

The reason I bring this monetary situation up is that it is a red flag of potential stagnation. Low or falling money supplies are associated in many cases with recessions and potential deflation. I think the falling stock market has had as much to do with slowing growth concerns as trade concerns. The expectation of the Fed raising the fed funds rates into this threat of this potential is unnerving.

Also, the velocity of money has not moved off of all-time lows. That is another mystery in what is supposed to be a "great" economy. Another red flag. When contradictions exist, "check your premises". There's something wrong.

My third concern in that article was geo-political events that could get away from us. I mentioned Iran, Russia, Syria, and North Korea as hot spots. Also, the dangers of cyber-hacking continue to mount. All of those are hanging over us today. However, we are beginning to see the first signs, that these frictions may lessen. Let's hope so.

We live in a dangerous world, and the volatility we see is testimony to that fact. I remain aggressively positioned in the metals market and moderately bullish on the longer term direction of the economy. My main holdings consists of young exploration resource companies that have lowered costs, accumulated new properties, and are exploring and developing new resources.

I'm not wedded to resource stocks and am willing to sell out on a dime if the market goes against me. But so far, so good.

For more information, check out my Market Update at

Here is a sample of a recent letter:

Market Update

April 27, 2018

Wall Street is finally catching up to the thinking expressed in my Market Update letter over the last many months. There are concerns about rising interest rates that were expressed here long ago. There are fears about rising inflation. Ditto. And now there are fears of slowing growth in the future. That was red flagged months ago along with peaking earnings and stock price overvaluation.

This week we have seen stellar earnings and massive sell-offs in the face of them by some of the bluest of blue chip stocks. The reason is guidance. Costs are going up, putting pressure on the bottom line. As explained here recently, a higher PPI with the inability to pass costs on to consumers leads to reduced profits. The word "stagflation" is now being bantered about by the financial talking heads. ( Welcome to the real world.)

So given this knowledge, why not invest in TBT and TZA? Good question. I invested in both in the past, but have not re-entered them. Two reasons: I think I can get a better return on metal stocks, plus the risks are higher in the volatile stock market. I'm more likely to get shaken out of the stock market than holding long term exploration miners which are expanding production and whose products are stable and whose costs are falling.

Don't get me wrong, there's nothing wrong with playing TBT and TZA, I just think the odds are better to make big money in the miners than in the ETF's. TBT has not yet broken to a new high and is selling today for less than what I sold it for in the past. And TZA is very volatile. If I'm proven wrong and gold falls hard from here, I can always move to the sidelines or switch my investments. (My first move if gold falls would be to deleverage from a very aggressive long position, then raise cash if gold falls further.)

But here's my present thinking. I want to pose a scenario for long term investors to consider. Let's assume that the 3% quarters of GDP we have been experiencing have ended and that approximately 2.5% quarters are in front of us. If growth remains stable we may see the stock market also stabilize in a range. This means that trying to trade the broad market becomes more dangerous and less profitable. However, individual stocks within the market could crash or soar, depending on their own fundamentals. (We're seeing that now.)

I submit the same would be true for the metals markets. Let's assume that gold trades within a range of 1280 -1390 for the rest of the year. This may be a less profitable path than a path of progressively higher gold prices, but cost cutting by expanding miners could lead to substantially higher profits even if the price of gold averaged $1350 an ounce.

So, under this assumption, it is not the price of gold that is important -- it is the profitability of mining companies. In a constantly rising gold market, all boats tend to rise together.  In a stable gold market, only those companies that raise profit levels through cost cutting, expansion of production, and/or new ore discoveries will rise substantially.

The idea that some stocks can rise even though the general market does not, is not confined to the stock market. It holds true for all markets including the metal markets. I believe that most of the stocks I am holding have the potential to double or triple even with a stagnant price of gold. Company-specific-good-news is enough to push these stocks higher if they succeed in their plans.

The CRB failed to break resistance last week, and that could be a signal that a near term top has been reached. The same may be true of interest rates at 3.03 on the ten year, the stock market at its old highs, as well as the metals market. GDP fell back to 2.3% level in the 1st quarter, down from around 3% the previous three quarters. We may be in for an extended pause. My portfolio is about the same value as it was 60 days ago, and the stock market is basically unchanged as we close out this month, but on the defensive.

There continues to be cross-currents in markets with a lot of concern and confusion over the future path of the economy. The same is happening abroad. No one can predict the future with certainty. We can only try to get the direction right and the odds on our side as investors.

You know my views on the subject, now let’s see what the markets views are starting next week. Will we break through resistance, breakdown and test previous support levels, or trade in an establish range? Here are my present holdings, and I will immediately alert you to any new data, news events, or trades made if and when necessary.

Portfolio by weight:
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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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