Gold, MMT, Fiat Money Inflation In France

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“Modern Monetary Theory (MMT) is a heterodox macroeconomic framework that says monetarily sovereign countries like the U.S., U.K., Japan and Canada are not operationally constrained by revenues when it comes to federal government spending. In other words, such governments do not need taxes or borrowing for spending since they can print as much as they need and are the monopoly issuers of the currency.”  Investopedia

Of course governments are not ‘constrained’ by revenues. They have always been able to “print as much as they need”.

Modern Monetary Theory is not ‘modern’. Far from it. 

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Stocks, Oil, Gold: Inflation-Adjusted Returns

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STOCKS, OIL, GOLD…

In late 1999, the hyper-bullish technology stock sector was nearing the end of its nearly decade-long run to unsupportable and overly optimistic highs. At the center of the hype and fascination were new companies, headed by twenty-something geniuses. They were referred to as startups.

The multiples of earnings that normally applied in order to assess value of these companies was thrown aside. That is because most of them did not have any earnings.

Nevertheless, they were attractive enough to garner huge crowds of support.  Just the hint of a revolutionary idea could boost an unknown small private company into the spotlight of the new issue market with over subscription being commonplace.

Technology stocks collapsed in 2000, and were eventually joined by the broader stock market which began a two-year descent that saw the S&P 500 lose fifty percent of its value.

Nearly smack in the middle of this two-year decline in stock prices came the 9/11 tragedy. Shortly after that the market bottomed, but before it could get untracked and head back up in earnest, there was a mutual fund “scandal”.

Then in 2006, real estate prices peaked – and cratered. Most of the damage was in residential real estate where it seemed to be the most extensive. It was definitely the most obvious.

Foreclosures were rampant and an entire cross-section of the population was in transit, moving from their recently acquired new homes and into rentals, if they could find one.

Economic fallout spread to major investment banks and the stock market. Financial institutions with household names like Lehman Brothers, Merrill Lynch, Washington Mutual, and AIG were skewered.

The stock market finally recognized how bad things were. Beginning in August 2007, and continuing for the next eighteen months, stock prices declined with a vengeance. The overall market, as reflected by the S&P 500, lost nearly two-thirds of its value.

In February 2009, a bottom was reached. The past ten years has seen the market surge to new all-time highs, seemingly much higher than could have possibly been anticipated just a few years ago.

The S&P 500 has increased in value four-fold from its low of 735 ten years ago to its most recent high of 2945.

It seems hard to believe, and it strengthens the argument for long-term investing in stocks and staying the course. But maybe things are not quite what they seem. Lets take a look.

Below is a chart (macrotrends.net) of the S&P 500 for the past twenty years. The data are inflation-adjusted using the headline CPI and plotted on a logarithmic scale…

 

From this chart we can see that, in real terms, stocks did not get back to their highs of 2000 until fifteen years later, in February 2015. Even without the adjustment for inflation, stocks did not reach and exceed their 2000 peak until thirteen years later, in March 2013.

Also, we see that six of the past ten years were spent in recovering lost ground. The new highs and additional growth has come only in the past four years.

Fifteen years seems like an inordinately long time to wait for the market to assert itself and return to any expected pattern of normal growth. And you would have had to endure pure hell to see it happen.

And while the six and one-quarter percent average annual real rate of return over the past ten years is not inconsistent with the stock market’s long-term average annual return of about seven percent on an inflation-adjusted basis, it is too convenient to describe it as a return to normal.

A clearer picture of the stock market’s performance is found in looking farther back on the time line. The stock market’s (S&P 500) total return for the nineteen years beginning in January 2000 and ending in December 2018 is about fourteen percent, on an inflation-adjusted basis.

This equates to an average annual real rate of return on stocks of slightly more than seven-tenths of one percent for the first two decades of this century. That is not even close to the seven percent average annual return on an inflation-adjusted basis that stock market proponents are fond of citing.

In other words, the stock market returns for the this century are ninety percent less than their long-term average. 

Below is a chart (macro trends.net) of crude oil for the past twenty years. As with stocks above, the price of crude oil is also adjusted for inflation and plotted on a logarithmic scale…

For eight years between 2000 and 2008, the price of crude oil quadrupled in real terms. After that, and in concert with stocks above, it lost two-thirds of its value, bottoming in January 2009, one month earlier than stocks.

Unfortunately for crude oil, that was not the bottom. After recovering a major portion of its losses it began another extensive decline in price in mid-2014.  Then, after bottoming in early 2016, the price of crude oil doubled and then fell back to its recent low of close to $45.00 per barrel in December 2018.

After nineteen years of exclamatory volatility, crude oil at the end of last year was exactly where it was in February 2000 on an inflation-adjusted basis – $45.00 per barrel.

Now let’s look at gold. The chart below, as with stocks and oil above, shows prices for gold over the past twenty years and is inflation-adjusted, too, and plotted on a logarithmic scale…

It seems somewhat ironic, but gold appears to be much less volatile than either stocks or oil. For the first eleven years of this century, the price of gold was steadily increasing, as contrasted with the extreme action and counteraction in the prices of stocks and crude oil.

Also, in stark contrast to stocks and oil, the price of gold actually increased substantially over the past two decades. Even after a drop in price of almost one-third since its high in August 2011, the price of gold ended 2018 more than three times higher than where it started the century in January 2000.

The three-fold increase (two hundred percent total return) equates to an average annual increase of six percent, which is nine times greater than stocks for the same period. And it is infinitely greater than crude oil which ended the same nineteen year period unchanged.  

 

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

 

Silver’s Next Big Move

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SILVER’S NEXT BIG MOVE…

Eight years ago this month, silver started its “next big move”.  And that move continues today. It is awesome to behold. See the chart (ten-year history of silver prices) below…

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Is The Federal Reserve ‘Too Big To Fail’?

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The term “too big to fail” refers to certain businesses whose viability is considered critical to the survival and effective operation of our economic system. These very large businesses are designated as too big to fail because their failure or bankruptcy would have disastrous consequences on the overall economy.

The potential effects are considered to be severe enough, and the costs so unbelievably large, that these businesses are afforded special attention and consideration in the form of bailouts and protection from creditors.

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Fed Inflation Is Losing Its Intended Effect

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FED INFLATION HAS LESS IMPACT

The chart below shows the ratio of the gold price to the monetary base for the past one hundred years.

The monetary base used in the chart is calculated by the St. Louis Federal Reserve and the following definition is from their website:

“The Adjusted Monetary Base is the sum of currency (including coin) in circulation outside Federal Reserve Banks and the U.S. Treasury, plus deposits held by depository institutions at Federal Reserve Banks. These data are adjusted for the effects of changes in statutory reserve requirements on the quantity of base money held by depositories.” (source)

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Gold – US Dollar vs US Dollar Index

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When it comes to analysis of gold, the U.S. Dollar Index finds nearly universal acceptance. Or rather, when most analysts refer to comparison/correlation of the U.S. dollar to gold, they usually illustrate their point with a chart of the U.S. dollar index.

While they won’t say it straight out, most of them see the U.S. Dollar Index as a proxy for the U.S. dollar. But, is it?

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Peak Gold Not Bullish For Prices

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PEAK GOLD NOT BULLISH…

For over a year now, the South African mining industry has experienced a measurably significant decline in the amount of gold produced.  Statistics reported by South Africa last week show that the amount of gold produced by South African mines has declined for fifteen consecutive months. In December, gold output dropped thirty-one percent from the year before.

All mines, including gold, have a useful life which is determined by the ‘extraction period’ – the period of time during which recovery of the desired mineral deposit is procured. The output over time tends to grow at first, reach a peak, and then decline. 

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Gold Technical Perspective – Why So Bullish?

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Does technical analysis need to be so convoluted?  Here are a couple of definitions from different sources:

1) Convoluted: (especially of an argument, story, or sentence) extremely complex and difficult to follow. (source)

2) Convoluted sentences, explanations, arguments, etc. are unreasonably long and difficult to understand.

We are not talking about the accuracy or relevancy; or even the general length of an article centered around charts and graphs. But the convolution of most technical analysis does provoke some head scratching.
Another concern might be the nearly universal use of extrapolation. 

1) Extrapolation: the action of estimating or concluding something by assuming that existing trends will continue or a current method will remain applicable.

2) Extrapolate: to infer or estimate by extending or projecting known information. 
Judicious use of extrapolation is warranted. However, the inference of trend continuation can lead to predictions and expectations of little foundation or merit.
In this article we will look at three charts (one-year, five-year, and ten-year) of GLD, the SPDR Gold Shares ETF. (source for all charts)
In order to emphasize simplicity and consistency, I have drawn only two lines on each chart – a rising uptrend line of support; and a descending overhead line of resistance. All three charts are updated as of Friday, February 15th, 2019.
Immediately below is the first chart, a one-year history of daily GLD prices…
From this chart we can see that GLD has worked its way higher since its recent low last August. And it appears that it soon may intersect/test overhead resistance at 126. If it does break through and move higher, most observers would probably think that doing so would signal much higher prices.
That seems reasonable, but how high? And what about the downside risk? If it doesn’t break through soon, it could fall back to its rising uptrend line of support. Currently, that is a drop of about eight percent to 114.
Is there enough upside potential to offset the downside risk by an acceptable margin?
While there is nothing overtly negative in the chart pattern, there is also nothing obviously positive, either; at least to a degree that would warrant excessive bullish optimism.
So, lets look at the next chart, a five-year weekly history of prices for GLD…
On this chart we see that there is a descending line of overhead resistance dating back to at
least February 2014.  And the rising uptrend line of support dates back to December 2015.
The longer time periods in both cases are indications of strength. This means that the overhead line of resistance we talked about before will probably not be broken too easily. And maybe not right away. It has turned back at least three previous attempts in the past three years.
But it also means that the uptrend in place for the past five years cannot be taken lightly, and could provide strong support on any pullback.
So where does that leave us? Is there sufficient technical justification to support wildly bullish claims for new highs in gold prices this year? Next year?
Our final chart just below is a ten-year history of monthly prices for GLD…
From this chart we get an entirely different perspective about gold prices. The rising line of support which has been in place for three years is seen within the context of declining line of overhead resistance which goes back almost six years.
In addition, it is apparent that the two lines will soon intersect; and that the price of GLD will eventually cross at least one of those lines. But which one?
If it is the line of overhead resistance, then that would seem to indicate that recent strength in the price of GLD is the foundation for considerably higher prices.
But the risk on the downside is still significant. Possibly much more than most recognize.
It took twenty-eight years for gold to finally surpass its 1980 price peak of $850.00 per ounce. We are now in the eighth year of declining prices for gold. Can you wait twenty more years to see $1900.00 gold again?
Why so bullish?  (also see Gold Under $1000 Is A Very Real Possibility)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

 

 

Are Gold Bulls Naively Optimistic?

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Are gold bulls naively optimistic? They are certainly optimistic; at least as regards their expectation for higher gold prices. But is that all that is needed to make them happy?

If gold marches higher from here, does that signify that all is well?  Would the gurus and wanna-be millionaires be proven correct if gold were priced at $10,000.00 per ounce?

We could ask when. But if those who expect big things for gold are correct, then when might not matter. 

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Fantasy Prices For Real Estate

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(author note: If you have not read the original article (link below), I suggest you do so before reading this one)

From “How Much Is Your House Worth Today? Another Crisis Brewing?” …

"Maybe it is time to sell the ‘investment’. After all, it has been more than ten years since our investor broke ground on his personal gold mine. But, after speaking with the realtor, our investor is even more discouraged.

Apparently, a reasonable asking price is somewhere in the neighborhood of $690,000.00 – $700,000.00.  That is considerably less than the purchase price of $1.1 million. And it is also less than what is still owed – $850,000.00. Which means it will have to be a short sale – if the bank will agree.

After some negotiation, the bank agrees to a conditional listing at $749,900.00.

Exactly two months later, the asking price is reduced to $699,000.00. And a short two weeks after that, it is reduced again – to $649,000.00.

Ten long weeks later, an offer is tendered. The offered price is $550,000.00. It is quickly turned down by the bank. The listing is removed."

Now for an update. Five months after removing the listing, our investor decided to try again. The house was relisted in July 2018. The listing price of $749,900.00 was identical to the original listing price in August 2017. 

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