2016 Fearless Gold Sector Forecast : Stay The Hell Away

Build Your Gold Watch List – but keep your portfolio in other sectors :

This past year was one of the worst ever for large mining companies, which suffered because of falling commodity prices and high leverage. They needed cash badly, and the streaming companies were more than happy to provide it. Mining giants such as Barrick Gold Corp., Glencore Plc, Teck Resources Ltd. and Vale SA all sold streams in 2015.

For junior or producing gold companies and their investors, the range of forecasts and continued volatility suggest it’s wiser to ignore the crystal balls for now and instead focus on what companies can control, like ensuring a sound business plan, keeping their balance sheets strong, monitoring costs, and building value for their shareholders.

Trends are against gold:

1) no inflation can be detected

2) rising interest rates offer a money making alternative while we watch and wait

3) global unrest in the middle East, Africa and Ukraine continue unabated but don’t move the panic button to ” buy”

4) Peter Schiff continues to see gold at $5,000  ( our best contrarian indicator )

This is the time of year when analysts roll out their economic forecasts for the New Year. For those who keep a close eye on gold prices, this can be a painful process.

It’s been another tough 12 months for the yellow metal, with prices falling for the third consecutive year — down about 10 per cent in 2015 alone. Prices touched a high in the neighbourhood of $1,300 and, as the year drew to close, they neared six-year lows around $1050.

That’s a big dive from the heady days of 2011, when gold hit over $1,900 an ounce.

What made things even more difficult for the sector in 2015 was the price volatility. Just when it appeared prices might be on a firm trajectory upward, they would then fall, creating more uncertainty among everyone from investors to gold companies.

That volatility is making it harder for prognosticators to estimate 2016 prices with any certainty. It’s the proverbial attempt to nail Jell-O to a wall.

That doesn’t prevent them from trying. But the resounding lack of consensus suggests it is a fraught exercise. Some are breathlessly proclaiming we’re on the brink of a new gold bull market. On the flip side, Goldman Sachs and JP Morgan predict it will fall to the psychologically important $1,000 US-per-ounce level — or lower — in 2016. Bank of America Merrill Lynch believes it will average $950 an ounce in early 2016 before recovering. Slightly more optimistic forecasters, like HSBC, predict gold will average $1,205 next year.

Gold is different from other metals in that its prices are not driven largely by typical supply and demand. While the prices of other metals, like copper or silver, tend to rise and fall as economies grow and shrink, a lot of different forces affect gold’s price. It’s used as a store of wealth, unlike most other metals (you don’t store copper to get rich), and it’s considered a “safe haven” — used as a hedge against political and economic uncertainty.

Inflation and the U.S. dollar are two major forces behind gold’s prices. In 2015, they didn’t work in gold’s favour. The collapse of the price of oil has kept inflation in check, which is bad for gold because of its role as a hedge against rising prices. The U.S. dollar has been strong — another blow for gold, which performs contrary to the greenback. Some say one of the reasons for the strong dollar was ongoing speculation that the U.S. Federal Reserve would raise rates for the first time in almost a decade. The Fed did that on Dec. 16, but there was minimal impact on gold due to the central bank’s dovish approach of a gradual tightening of future rates.

 

The dark side of metal streaming deals: Strapped mining companies trade future value for cash ( Financial Post )

 

In September, Robert Quartermain did something highly unusual for a mining executive — he signed a streaming deal with an early exit strategy.

Precious metal streaming companies looking to team up to tackle bigger deals

Valerian Mazataud/Bloomberg

Overwhelmed by the sheer volume of opportunities available in volatile commodity markets, precious-metal “streaming” companies are looking to team up to take on large acquisitions that they might not be able to readily afford on their own.

Continue reading.
Quartermain, the CEO of Vancouver-based Pretium Resources Inc., was alarmed at how much value miners are giving away in gold and silver stream sales, in which future output is sold at below-market prices in exchange for an instant cash infusion.

So when he sold a US$150-million stream on Pretium’s Brucejack project in British Columbia, he insisted that the deal include buyback options for Pretium in 2018 and 2019, and that it cap the number of gold and silver ounces that can be sold.

“When you start putting in higher levels of streaming, and the stream lasts forever, then the potential upside starts going to streaming holders and (away from) your existing shareholders,” Quartermain said in an interview.

This will go down as the biggest year ever for metal streaming deals, and it’s not even close. Miners have raised US$4.2 billion from 11 stream sales in 2015, according to Financial Post data. That is nearly double the US$2.2 billion raised in 2013, which is the second biggest year on record.

For the most part, mining analysts and investors have cheered these deals. But their sheer number has caused alarm for some observers, who worry that miners are giving away vast amounts of future upside once metal prices improve.

The metal streaming business was created back in 2004. In these transactions, a streaming company like Silver Wheaton Corp. gives a mining company an upfront cash payment. In return, it gets the right to buy a fixed amount of precious metals production from the miner at a fixed price that is far below the market price. The streamer can then sell the metal for a profit. The biggest players in this business are Silver Wheaton, Franco-Nevada Corp. and Royal Gold Inc.

This past year was one of the worst ever for large mining companies, which suffered because of falling commodity prices and high leverage. They needed cash badly, and the streaming companies were more than happy to provide it. Mining giants such as Barrick Gold Corp., Glencore Plc, Teck Resources Ltd. and Vale SA all sold streams in 2015.
On the surface, these deals made a lot of sense for mining companies. Their stock prices are so depressed that they do not want to even think about issuing equity. And the last thing this sector needs is to take on more debt. So they sold future metal production instead.

“When companies are between a rock and a hard place, they often sell what’s good because they can’t sell what’s bad,” said John Tumazos, an independent analyst.

The problem is that streams destroy much of the future “option value” for mining companies. Since the streaming metal is typically sold at fixed prices far below the market price, the streamers get all the benefit when market prices go up.

To take an extreme example, Silver Wheaton was buying silver from some mining companies at less than US$4 a pound in 2011, when silver prices rose to almost US$50. It was a massive transfer of wealth from mining companies to a streaming company.

Another concern is that streams can eliminate the exploration upside from a mine. If a miner has agreed to sell a fixed percentage of gold or silver production from a mine to a streamer, it will have to sell more metal if it makes a new discovery on the property and boosts production.

When companies are between a rock and a hard place, they often sell what’s good because they can’t sell what’s bad
John Ing, president and gold analyst at Maison Placements Canada, said streaming is reminiscent of hedging, in which metal is sold in fixed-price contracts. Hedging was all the rage in the gold industry in the 1990s, when prices were low. But it became a massive liability once prices rose far above the value in the contracts. Barrick had to spend more than $5 billion to unwind its hedge book in 2009.

Eventually, hedging became a toxic word in the industry. It is almost nonexistent today.

“It wasn’t until the price of gold went up that everybody realized what Barrick was leaving on the table,” Ing said.

“The same thing is going to happen (to streaming) when the price of gold goes up again. Not until then will people focus on the dark side of the streams.”

For investors that don’t like streaming, the good news is that miners are starting to preserve more upside for themselves in these transactions.

For example, Barrick struck a US$610-million stream sale with Royal Gold last August that guarantees higher sale prices down the road. For the first 550,000 gold ounces and 23.1 million silver ounces that Barrick delivers to Royal Gold, it receives 30 per cent of the prevailing spot prices. For every ounce after that, it receives 60 per cent of the spot prices. So if silver prices go up, Barrick stands to benefit.
Pretium Resources Inc.

Pretium’s Brucejack project in British Columbia.
Pretium went even further by negotiating optional buybacks of its stream and capping the total amount of gold and silver to be sold. If Pretium discovers more metal at the Brucejack project, it won’t go into the stream.

Traditional streaming companies like Silver Wheaton and Royal Gold are looking to buy streams that will last for decades, so Pretium’s deal is not for them. Instead, Pretium sold the stream to two private equity firms, Orion Resource Partners and Blackstone Group.

These companies are just looking for a good return and are not bothered by the idea of having their stream re-purchased in a few years. That is a relatively new concept in streaming, and it could be a game-changer if more private equity firms and other players decide to compete with traditional streamers.

Quartermain said his deal is proof that miners have alternatives to conventional streaming. He hopes other companies will follow Pretium’s lead and try to maintain some upside in these deals.

“We’ve shown you can, even in challenging markets, finance good projects and achieve that upside for shareholders,” he said.

 

 

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Kinder Morgan ( KMI) / Shipping Sector/ Natural Gas – Why Chase Stocks Down ? – plenty of reasons to watch and wait

There was a recent video / interview of Jim Cramer saying his industry sector guru called $ 20.00 as the bottom but Cramer saw the stock in free fall and just did not know.

 

Kinder Morgan, Inc. (KMI)

Analysts have been split on whether Kinder Morgan’s dividends are sustainable as the pipeline industry’s ability to tap equity and debt markets to finance growth dimmed. The company’s stock has slumped 27 percent this week to $17.47 as of 12:34 p.m. in New York. Moody’s Investors Service warned on Tuesday that Kinder Morgan’s bonds were on the verge of tipping into junk.

“Dividend growth is unrealistic,” Vivek Pal, a managing director at Jefferies LLC in New York, said in a note to clients before the announcement. The company needs a 50 percent dividend cut to avoid being downgraded to junk, he said.

Prior to today’s announcement, Kinder Morgan had been expected to lift its 2016 dividend to $2.14, according to Bloomberg Dividend Forecasts. Companies across the oil and gas industry have been slashing or freezing dividends to conserve cash as plunging energy prices choked off money needed to drill wells, pay debts and purchase drilling rights.

Transocean Ltd., Chesapeake Energy Corp. and Linn Energy LLC are among those whose investors have seen payouts halted amid the crunch that began 18 months ago. Kinder Morgan’s $40 billion-plus debt burden exceeds the economic output of entire nations, including Bolivia and Bahrain.

We have no oil / gas stocks in the managed accounts.Braggin ‘ Rights – out of Chesapeake at $22

Chesapeake Energy Corporation (CHK)

We have no shipping stocks – Summary from Seeking Alpha

Dry bulk shipping unlikely to recover before 2017, consultant says
Dec 3 2015, 19:15 ET | By: Carl Surran, SA News Editor Contact this editor with comments or a news tip
Dry bulk shipping faces at least another year of pain, according to a new report from Drewry Shipping Consultants, which says companies in the industry will not return to profitability until at least 2017.Drewry says its dry bulk freight rate index fell 14.5% in September from August, and rates have fallen another 13.8% between September and November, although numbers for the full Q4 will not be available until early next year.”Demand has almost dried up,” Drewry’s lead analyst says. “China’s iron ore imports have stagnated, China’s coal imports have come down massively and India’s coal import growth has also slowed down.”Drewry forecasts demand for iron ore growing at 3%-4% over the next few years, but says demand for coal, especially in China, will not rebound any time soon.Related tickers: DRYS, SBLK, SALT, DSX, PRGN, EGLE, NM, NMM, SB, SINO, SHIP, FREE

Safe Bulkers Inc. (SB) – NYSE
$1.04-0.17(-13.64%)12:26 PM, 12/04 

Safe Bulkers Inc. stock chart
Today5d1m3m1y5y10y
52wk high:4.92
52wk low:1.03
EPS:-0.39
PE (ttm):N/A
Div Rate:0.04
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The key is to give yourself options. They may not love any of the scenarios, but providing choices usually leads clients to eventually embrace one.

Despite solid advice, some clients just spend too much. Others, like the married couple we’ll call Matthew and Elizabeth, diligently save but still run into retirement-planning problems.

Matthew and Elizabeth became clients of Jack A. Bass Managed Accounts a few years back, looking to manage their portfolio and put a retirement game plan in place. At 66, Matthew was considering retiring. Elizabeth could finally travel now that she was no longer the primary caregiver of her mother, who had passed the year prior. Together, we looked at their joint financial picture and analyzed the situation.

Then came some bad news: They wouldn’t be able to confidently cover living expenses if Matthew stopped working. They were shocked, because they’d done so much correctly—worked hard, lived within their means and consistently saved for retirement, putting away $2.3 million between retirement and non-qualified investments. Matthew even ran some preliminary retirement numbers online over the years to make sure they were on track.

Part of the problem was that Matthew’s planning assumptions were too rosy. He didn’t assume he’d have any variability on his portfolio returns, he didn’t assume he’d have health-care costs once Medicare kicked in, and he didn’t assume that retirement could last more than 20 years.

We projected that if Matthew retired at 66, the couple would only have about a 70 percent chance of being able to cover lifestyle expenses without having to make adjustments to spending over time; if either of them experienced a modest long-term care event that ate into their resources, they would achieve only a 65 percent success rate.

Their miscalculations aside, the other part of Matthew’s and Elizabeth’s retirement problem was that they, like many other people, put others’ needs before their own, in traditional “sandwich generation” style.

When their kids asked for help with down payments on houses, they obliged. When Elizabeth’s mom needed in-home help for a few years prior to her moving in with them, they covered it. Consequently, these unforeseen events ultimately put their retirement in jeopardy.

Working toward a solution

Matthew and Elizabeth weren’t happy to hear they weren’t on track to retire, but they appreciated having a framework from which to choose their solution.

Ultimately, Matthew chose to work 30 hours per week so that his company could continue to pick up their health-care costs (saving them about $1,000 a month in Medicare-related costs). The part-time work allowed him to take off every Friday, and that gave him the added benefit of “test driving” retirement.

He and Elizabeth also decided to downsize their home and buy long-term care coverage. The LTC insurance assured that their children wouldn’t be faced with the possibility of someday having to assist them financially.

As with all best-laid plans and good intentions, sometimes things go awry with retirement planning. However, by exploring alternative saving tactics, you can still achieve your goal.

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Gold price falls due to stronger dollar and rates speculation

Industry analysts predict further drops in the run-up to next month’s meeting of the Federal Reserve

Half of Gold Output May Not Be ‘Viable’ as Price Sags: Randgold

UPDATE FRIDAY

Gold

INDEX UNITS PRICE CHANGE %CHANGE CONTRACT TIME ET 2 DAY
USD/t oz. 1,056.40 -13.30 -1.24% FEB 16 11:20:11
JPY/g 4,148.00

Gold prices fell yesterday in response to the dollar’s bounce after healthy US economic data raised expectations of an interest rate rise next month.

Prices hovered just above their lowest level in nearly six years, as spot gold fell 0.4 per cent to $1,070.46 an ounce, perilously close to the near-six-year low of $1,064.95 it hit last week.

The latest drop came after it was announced that manufacturing output rose well above economists’ expectations last month. A gauge of business investment plans in America also painted an optimistic picture.

“The orders number is surprisingly positive and that’s what’s weighing on the market,” Rob Haworth, the senior investment strategist for US Bank Wealth Management in Seattle, told Reuters.

Gold has been put under pressure by increasing speculation that the Federal Reserve will raise US rates next month for the first time in nearly a decade. Such a move would increase the cost of holding non-yielding bullion, having a knock-on effect on prices.

But Commerzbank analyst Daniel Briesemann said geo-political issues had played a part and predicted further falls for the precious metal. “The Turkey-Russia tension has only had a limited impact and now gold is back on its downward trend mainly due to the dollar and rate hike expectations,” he said.

“Uncertainty before the next Fed meeting will remain high and prices could head even lower in the next couple of weeks.”

Traders said dealings were relatively quiet ahead of America’s Thanksgiving holiday today.

Gold price resumes downward trend

23 November

With speculation mounting over a possible Federal Reserve interest rate rise over the next few weeks, the gold price has resumed its downward trend after a brief rally at the end of last week.

Having fallen as low as $1,062 an ounce during trading last Wednesday, gold rallied on Thursday and was at one point a few dollars above $1,080. But after a dip back to below this level on Friday, the precious metal dropped again to below $1,070 in Asia overnight, where it remains rooted this morning.

Gold has fallen for 13 consecutive trading days out of 16 in Asia, while for each of the last five weeks in both London and New York it has closed lower than it started. The precious metal’s short-lived recovery last week now appears to be little more than a relief rally in a bear market.

The latest fall follows comments on Saturday from San Francisco Federal Reserve chief John Williams, who the Wall Street Journal reckons is a good barometer of wider monetary policy opinion. Williams says that if nothing happens to derail current economic trends, “there’s a strong case to be made in December to raise rates”.

Rate rises hurt gold and other non-yielding commodities relative to income-generating assets. More importantly, Williams’s statement has boosted the dollar – against which gold is typically held as a hedge – to a seven-month high.

Where is the gold price likely to go from here? OCBC Bank analyst Barnabas Gan has told Reuters that the current price ­– in fact any price around $1,080 – indicates that investors are “sitting on the fence as they await the [Fed] meeting in December”. As a result, he believes the downward trend in the price of gold is likely to persist over the next couple of weeks.

Almost all traders appear to be united in their view that the gold price will fall further if the Fed does decide to raise rates in the forthcoming weeks. Even Jason Hamlin, a self-designated “gold stock bull” who reckons that gold is currently “oversold”, writes on Seeking Alpha, the financial website, that the recent price drop is a sign that the metal “will test $1,000 in the near future”.

Hamlin says that if support for gold holds up in the event that the Fed decides to keep rates as they are – or makes it clear that the rates rise is a “one and done” increase (i.e. a modest rise that will be the last for some time) – then it is not unthinkable that a rally could push gold towards a substantially higher price of $1,200 an ounce.

Rangold Update

The more we continue to produce unprofitable gold, the more pressure we put on the gold price,” said Randgold Resources Ltd. Chief Executive Officer Mark Bristow. “In the medium term, it’s a very bullish outlook for the gold industry. The question is, how long are we going to supply it with unprofitable gold?”

Gold fell to a five-year low on Friday as a rising dollar and speculation that U.S. policy makers will boost interest rates next month curbed the appeal of bullion as a store of value. While industrial metal producers have promised output cuts, “we don’t have that psyche in the gold industry, we just send it off our mine and somebody buys it,” Bristow said in an interview in Toronto.

Gold miners buffeted by the drop in prices are shortening the life of mines by focusing only on the best quality ore, a practice known as high grading, which will restrict future output and support higher prices, according to Bristow. He said in a presentation to bankers in Toronto that the industry life span is down to about five years because companies have been aggressively high grading at the expense of future production.

“The industry has moved away from looking at optimal life of mines because everyone is trying to demonstrate short-term delivery,” he said. “Where is all this value that people promised in the gold industry? It’s not there.”

Traditionally, the industry would address this through “survival consolidation and mergers,” Bristow said.

He said earlier this month that Randgold continues to look for projects to buy, but has been frustrated by companies excessively pricing assets.

London-listed Randgold’s 10-year annualized return of 19 percent is the best performance among major producers tracked by Bloomberg.

Gold futures for February delivery declined 1.2 percent to $1,056.60 at 10:12 a.m. on the Comex in New York. Earlier, the price fell to $1,051.60 an ounce, the lowest since February 2010.

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China Calm Shattered: Probe Sparks Selloff in Stocks

  • Citic Securities leads losses after revealing investigation
  • Industrial profits drop 4.6% in October as slowdown deepens

 

  • China’s stocks tumbled the most since the depths of a $5 trillion plunge in August as some of the nation’s largest brokerages disclosed regulatory probes, industrial profits fell and two more companies said they’re struggling to repay bonds.

    The Shanghai Composite Index sank 5.5 percent, with a gauge of volatility surging from the lowest level since March. Citic Securities Co. and Guosen Securities Co. plunged by the daily limit in Shanghai after saying they were under investigation for alleged rule violations. Haitong Securities Co., whose shares were suspended from trading, is also being probed. Industrial profits slid 4.6 percent last month, data showed Friday, compared with a 0.1 percent drop in September.

The probe into the finance industry comes as the government widens an anti-corruption campaign and seeks to assign blame for the selloff earlier this year. Authorities are testing the strength of a nascent bull market by lifting a freeze on initial public offerings and scrapping a rule requiring brokerages to hold net-long positions, just as the earliest indicators for November signal a deterioration in economic growth. A Chinese fertilizer maker and a pig iron producer became the latest companies to flag debt troubles after at least six defaults this year.

Brokerages Plunge

“The sharp decline will raise questions whether the authorities’ confidence that we are seeing stability in the Chinese markets may be a tad premature,” said Bernard Aw, a strategist at IG Asia Pte. in Singapore. “The rally since the August collapse was not fundamentally supported. The removal of restrictions for large brokers to sell and the IPO resumptions may not have been announced at an opportune time.”

Friday’s losses pared the Shanghai Composite’s gain since its Aug. 26 low to 17 percent. The Hang Seng China Enterprises Index slid 2.5 percent in Hong Kong. The Hang Seng Index retreated 1.9 percent.

A gauge of financial shares on the CSI 300 slumped 5 percent. Citic Securities and Guosen Securities both dropped 10 percent. Haitong International Securities Group Ltd. slid 7.5 percent for the biggest decline since Aug. 24 in Hong Kong.

The finance crackdown has intensified in recent weeks and ensnared a prominent hedge-fund manager and a CSRC vice chairman. Citic Securities President Cheng Boming is among seven of the company’s executives named by Xinhua News Agency as being under investigation. Brokerage Guotai Junan International Holdings Ltd. said Monday it had lost contact with its chairman, spurring a 12 percent slump in the firm’s shares.

An industrial explosives maker will become the first IPO to be priced since the regulator lifted a five-month freeze on new share sales imposed during the height of the rout. Ten companies will market new shares next week. The final 28 IPOs under the existing online lottery system will probably tie up 3.4 trillion yuan ($532 billion), according to the median of six analyst estimates compiled by Bloomberg.

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Gold Plunges : Peter Schiff “It’s going to be a ‘horrible Christmas’ “

Well , a horrible Christmas for the folks who followed Peter Shiff’s constant refrain to buy gold.

( as opposed to AMP advice to sell at $1800 .

Gold

INDEX UNITS PRICE CHANGE %CHANGE CONTRACT TIME ET 2 DAY
USD/t oz. 1,086.30 -17.90 -1.62% DEC 15 11:24:10
JPY/g 4,286.00 -38.00 -0.88% OCT 16 11:23:43
USD/t oz. 1,089.56 -14.36 -1.30% NA 11:49:12
EUR/t oz. 1,014.24 -0.04 0.00% NA 11:49:50
GBP/t oz. 730.31 +4.41 +0.61% NA 08:28:35
JPY/t oz. 134,191.44 -210.72 -0.16% NA 11:48:54
INR/t oz. 72,028.75 -709.10 -0.97% NA 11:49:20

 

The Grinch has nothing on Peter Shciff .

On CNBC’s “ Futures Now ” Thursday, thecontrarian investor said that while Americans are wrapping presents this holiday season, they should instead brace themselves for “a horrible Christmas” and possible recession.

“I expect [job] layoffs to start picking up by the end of the year,” Schiff said, pointing to retailers as the first victim. “Retailers have overestimated the ability of their customers to buy their products. Americans are broke. They are loaded up with debt,” he said. “We’re teetering on the edge of an official recession,” and “the labor market is softening.”

For Schiff, there is no one else to blame but theFederal Reserve . As he sees it, the central bank’s easy money policies have created a bubble so big that any prick could send the U.S. economy spiraling out of control. And that makes the possibility of hiking interest rates slim to none.

Read More Oil driving markets, not Fed: Cashin

“The Fed has to talk about raising rates to pretend the whole recovery is real, but they can’t actually raise them,” said the CEO of Euro Pacific Capital. “[Fed Chair Janet Yellen ] can’t admit that she can’t raise them because then she’s admitting the whole recovery is a sham and that the policy was a failure.”

Related Quotes

According to Schiff, the recent rally in the dollar (Intercontinental Exchange US: .DXY) is “the biggest bubble that the Fed has ever inflated” and “it’s the only thing keeping the economy afloat.” The greenback hit a three-month high this week after Yellen said a December rate hike was a “live” possibility.

Read More Sorting out the influence of the strong dollar on revenues

“[The inflated dollar] is keeping the cost of living from rising rapidly and it’s keeping interest rates artificially low. It’s allowing the Fed to pretend everything is great,” Schiff said. “Eventually the bottom is going to drop out of the dollar and we are going to have to deal with reality,” he added. “That reality is we are staring at a financial crisis much worse than the one we saw in 2008.”

Schiff, a longtime Fed foe, has been doubting a rate hike for some time. And while his predictions for a stock market and dollar crash have yet to pan out, he has maintained his stance that the Fed’s hands are tied.

Correction: This article has been revised to reflect Schiff said the bottom will drop out of the dollar.

Get your tax haven planning in gear for 2016 Read more at http://www.youroffshoremoney.com

 

 

 

Fed inaction: Economic Risks

 

A lot of investors breathed a sigh of relief on Thursday after the Fed decided to hold interest rates steady. While it will happen eventually, a number of financial experts say an increase in rates could derail global markets.

With our world more intertwined than ever before, what happens in America could impact the rest of the world. Conversely, a further slowdown in China or political upheaval in Europe could impact the U.S. and other international markets.

While the global economy is still projected to expand by about 3.3 percent this year, according to the IMF, there are several risks that could impact the global economy and its stock markets.

If anyone’s been paying attention to the news lately, they’ll know that China has been in a heap of trouble. Its stock market is wobbly, people aren’t sure whether its growth projections are accurate, corporations are carrying loads of debt, and the list of issues goes on.

To Eric Lascelles, chief economist at RBC Global Asset Management, what’s happening in China presents the biggest risk to world markets and, more specifically, its debt issues.

This year the country’s corporate debt levels hit 160 percent of GDP, which is twice as high as America’s corporate debt levels, while Standard & Poor’s estimates that China’s corporate debt will climb by 77 percent, to $28.8 trillion, over the next five years.

Much of that debt has been concentrated in the country’s booming housing market, said Lascelles, and while the government is helping out local governments and companies, non-performing loans on Chinese banks have grown by 57 percent over the last year, he said.

It’s still a low base—only 1.5 percent of loans aren’t being paid, he said—but those growth rates are rising. If this does become a larger problem, then economic growth could slow even further, which, with China being the second-largest economy in the world representing about 16 percent of global GDP, would have an impact on all of us, Lascelles explained.

While most people expect the Federal Reserve to raise rates before the end of the year, a move in the overnight rate could still create volatility on a global stage, said Lisa Emsbo-Mattingly, Fidelity’s director of research for global asset allocation.

A lot of people think that the base rate will simply be increased by about 25 basis points and that everything will look like it does now. However, bond rates bounce around and aren’t as stable as people may think, and that could cause uncertainty.

As well, the U.S. government balance sheet is “extremely large,” she said, and any rise in rates will impact the bonds it holds.

“The technicalities of this may be more complex than what we’ve seen in the past,” she said. “We’ll see how the market reacts to a little more uncertainty in the Fed funds rate and short-term rates.”

One of the consequences of a rising Fed rate could be an illiquid global bond market . Why? Because when rates rise, bond prices fall, and who wants to buy a security that’s falling in price?

That’s one of Jeff Mortimer’s concerns. The director of investment strategy for BNY Mellon Wealth Management is worried that when people try to sell their bonds into a rising rate environment, there won’t be any takers.

 

Regulation, he said, has already pushed traders out of the bond market, so there aren’t as many people buying and selling fixed-income instruments as it is.

“We know that there are less people taking the other sides of trades, so how will the bond market handle selling pressure?” he questioned.

An illiquid market could impact global markets in two ways. First, bond prices will fall even farther than they should. And second, if people can’t sell their bonds, they may start selling other assets.

“If you can’t sell bonds, then what are you going to sell?” he asked. “You’ll sell equity—that’s a lot of what transpired in 2008.”

Over the last year, the greenback’s value has steadily climbed. It’s up 20 percent against the Canadian dollar, 14 percent against the euro, 10 percent against the yen and so on.

There are multiple sides to the U.S. dollar story, said Lascelles. Some countries, like Canada, Europe and Japan, like having a weaker currency as it helps exports, but emerging markets countries do not.

Many of them use American dollars to fund day-to-day operations, and if buying those dollars gets pricier, then they could find themselves strapped for cash.

As well, a too-strong dollar is bad for the U.S. It reduces its global competitiveness, and that ultimately limits economic expansion.

It’s also bad for multinationals who make money in other countries and have to convert those dollars back to American bucks.

“There’s no debating that a stronger dollar is negative for growth,” said Lascelles.

Politics is always a risk, but Lascelles has been seeing greater shift to far right and far left politics than he has in the past.

Some of it may be just rhetoric, such as Rand Paul’s “audit the Fed” bill, but with Greece’s rebuff of the IMF and more right- and left-leaning parties getting into power, people have to wonder if the right economic policies will ultimately be put in place.

While he can understand why more populous ideas are being bandied about—rising unemployment and continued economic challenges is causing citizens and governments to think differently—rejecting sound economic policies will slow growth and make it difficult to ultimately reform, he said.

“A healthy does of skepticism is appropriate,” he added, “but in the end these are mostly unwelcome and can jeopardize an economy.”

The Bear Market Has Just Begun

 

Today the narrow-minded canyons of Wall Street are littered almost entirely of trend-following bulls and cheerleaders who don’t realize how little there is to actually cheer about. Stock values are far less attractive than they were on that day back in 2009 and this selloff has a lot longer to run. There are hordes of perma-bulls calling for a V-shaped recovery in stocks, even after multiple years of nary a downtick.

Here are six reasons why I believe the bear market in the major averages has only just begun:

1) Stocks are overvalued by almost every metric.One of my favorite metrics is the price-to-sales ratio, which shows stock prices in relation to the company’s revenue per share and omits the financial engineering associated with borrowing money to buy back shares for the purpose of boosting EPS growth. For the S&P 500 (INDEX: .SPX), this ratio is currently 1.7, which is far above the mean value of 1.4. The benchmark index is also near record high valuations when measured as a percentage of GDP and in relation to the replacement costs of its companies.

 

2) There is currently a lack of revenue and earnings growth for S&P 500 companies. Second-quarter earnings shrank 0.7 percent, while revenues declined by 3.4 percent from a year earlier, according to FactSet. The Q2 revenue contraction marks the first time the benchmark index’s revenue shrank two quarters in a row since 2009.

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  • Virtually the entire global economy is either in, or teetering on, a recession. In 2009, China stepped further into a huge stimulus cycle that would eventually lead to the largest misallocation of capital in the history of the modern world. Empty cities don’t build themselves: They require enormous spurious demand of natural resources, which, in turn, leads to excess capacity from resource-producing countries such as Brazil, Australia, Russia, Canada, et al. Now those economies are in recession because China has become debt disabled and is painfully working down that misallocation of capital. And now Japan and the entire European Union appear poised to follow the same fate.

This is causing the rate of inflation to fall according to the Core PCE index. And the CRB Index, which is at the panic lows of early 2009, is corroborating the decreasing rate of inflation.

 

But the bulls on Wall Street would have you believe the cratering price of oil is a good thing because the “gas tax cut” will drive consumer spending – never mind the fact that energy prices are crashing due to crumbling global demand. Nevertheless, there will be no such boost to consumer spending from lower oil prices because consumers are being hurt by a lack of real income growth, huge health-care spending increases and soaring shelter costs.

4) U.S. manufacturing and GDP is headed south. The Dallas Fed’s manufacturing report showed its general activity index fell to -15.8 in August, from an already weak -4.6 reading in July. The oil-fracking industry had been one of the sole bright spots for the US economy since the Great Recession and has been the lead impetus of job creation. However, many Wall Street charlatans contend the United States is immune from deflation and a global slowdown and remain blindly optimistic about a strong second half.

Unfortunately, we are already two-thirds of the way into the third quarter and the Atlanta Fed is predicting GDP will grow at an unimpressive rate of 1.3 percent. Furthermore, the August ISM manufacturing index fell to 51.1, from 52.7, its weakest read in over two years. And while gross domestic product in the second quarter came in at a 3.7 percent annual rate, due in large part to a huge inventory build, gross domestic income increased at an annual rate of only 0.6 percent.

GDP tracks all expenditures on final goods and services produced in the United States and GDI tracks all income received by those who produced that output. These two metrics should be equal because every dollar spent on a good or service flows as income to a household, a firm, or the government. The two numbers will, at times, differ in practice due to measurement errors. However this is a fairly large measurement error and it leads one to wonder if that 0.6 percent GDI number should get a bit more attention.

5) Global trade is currently in freefall. Reuters reported that exports from South Korea dropped nearly 15 percent in August from a year earlier, with shipments to China, the United States and Europe all weaker. U.S. exports of goods and general merchandise are at the lowest level since September of 2011. The latest measurement of $370 billion is down from $408 billion, or -9.46 percent from Q4 2014. And CNBC reported this week that the volume of exports from the Port of Long Beach to China dropped by 10 percent YOY. The metastasizing global slowdown will only continue to exacerbate the plummeting value of U.S. trade.

 

6) The Fed is promising to no longer support the stock market. Back in 2009, our central bank was willing to provide all the wind for the market’s sail. And despite a lackluster 2 percent average annual GDP print since 2010, the stock market doubled in value on the back of zero interest rates and the Federal Reserve ‘s $3.7 trillion money-printing spree. Thus, for the past several years, there has been a huge disparity building between economic fundamentals and the value of stocks.

But now, the end of all monetary accommodations may soon occur, while markets have become massively over-leveraged and overvalued. The end of quantitative easing and a zero interest-rate policy will also coincide with slowing U.S. and global GDP, falling inflation and negative earnings growth. And the Fed will be raising rates and putting more upward pressure on the U.S. dollar while the manufacturing and export sectors are already rolling over.

I am glad Ms. Yellen and Co. appear to have finally assented to removing the safety net from underneath the stock market. Nevertheless, Wall Street may soon learn the baneful lesson that the artificial supports of QE and ZIRP were the only things preventing the unfolding of the greatest bear market in history.

Michael Pento produces the weekly podcast “The Mid-week Reality Check,” is the president and founder of Pento Portfolio Strategies and author of the book “The Coming Bond Market Collapse.”