Sive Morten
Special Consultant to the FPA
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Fundamentals
Today we prepare general report - the one that like to read most of all, without a lot of indicators, just interesting to read easy thoughts and general comments on situation, based on recent news. In fact the "heavy data' we have discussed yesterday in our FX report. We will consider few stages of any crisis/recession period, take a look how gold historically performed on every stage, identify at what stage we are now and discuss recent political events.
GOLD RECESSION PERFORMANCE
(based on Matterhorn Asset Management analysis)
It is considered the most anticipated recession of all time – the one looming in the US. And although countless indicators ranging from the yield curve, the Leading Economic Index (LEI) and PMIs to producer prices and international trade volumes have been pointing to a recession for months, it has not yet materialized in the USA. However, the labor market, which has been more than robust up to now, is now showing the first signs of a slowdown. A labor market which, due to demographic change, is structured completely differently than it was in the 1970s. Initial jobless claims have been on an upward trend since last fall.
Despite this increasingly widespread gloom, it is not too late to ask the question: Which asset classes are now proving to be good investments in a recession, and which are bad? To this end, we have conducted an in-depth analysis. The Incrementum analysis consider any recession with five different stages. Dividing a recession into different phases can help reduce the risk of losses and maximize gains. It helps investors develop a balanced investment strategy that takes into account the different phases of a recession. This is because, as will be seen, individual asset classes sometimes exhibit significant differences in performance across the five recession phases. After all, each of the five recession phases has unique characteristics.
Let’s now look at the performance of the S&P 500 as well as gold and the BCOM index, which tracks commodities, during the last eight recessions since 1970 and broken down into the five recession phases:
Based on the recession phase model, it is therefore advisable to reduce the share of equities in the portfolio at an early stage. Once the peak of the recession has been reached, an increase in the equity share then makes it possible to benefit from the subsequent recovery rally.
Unsurprisingly, gold has lived up to its reputation as a recession hedge, averaging an impressive 10.6% performance throughout the recession. Most notably, gold has averaged positive performance in all phases of the recession. Gold’s largest price increases are seen in Phases 1 and 2, likely due to the increased uncertainty in the markets during these phases. Another explanation for gold’s strong average performance in Phase 1 is the 120.1% price increase in the initial phase of the recession in 1980, which is an outlier.
In the first three phases of a recession, gold tends to be ahead of equities. It is interesting to note, however, that the tide turns as soon as the first signs of an economic recovery appear, and market uncertainty gradually subsides. In the terminal and recovery phases, equities can often outperform gold. Especially in the early stages of the model, gold manages to act as an ideal recession hedge. It provides excellent diversification, helping to stabilize portfolio performance in times of economic turbulence.
an increased weighting of commodities in the run-up to and recovery phase of a recession is beneficial. This finding is also supported by theoretical considerations suggesting that precious metals, especially gold, are a suitable hedge against uncertainty before the peak of a recession. In addition, energy and base metal commodities prove to be particularly beneficial due to the reflationary effect associated with picking up growth after the peak of a recession.
Finally, we also want to take a look at silver and the mining stocks.
Silver is not a reliable recession hedge, with an average performance of -9.0% throughout the recession. This is probably because silver is perceived much more as a cyclically sensitive industrial metal than as a monetary metal in the midst of the downturn.
Mining stocks also showed a positive performance over the entire recession, but this was only about half as high as that of gold. The significant decline in phase 3, the low point in the recessionary trough, is a major contributor to this.
All these theoretical points sounds good, but where we're now? Here I express only my view, which is arguable of course. But it seems that we're somewhere in 2nd half of Stage II. Big gold rally to 2000+$ area corresponds to analysis of Stage I. Official confirmation of recession has happened with recent Fed minutes and earlier we already have got nominal two negative GDP's in a row. The only thing that should happen is real confirmation of theoretical suggestions. Other words speaking - numbers should be confirmed by real life. Also - gold shows very shy pullback, less than 3/8 of the rally, despite we have outstanding interest rates pressure above 5% and more to come.
But you could ask - it doesn't correspond to S&P performance. It should falling while it is not. True. Still we have a lot of "but" objections. First is, outstanding liquidity pumped in system two years before. Second - market is growing narrowly, leading by FAANG and AI shares only. Major source of the growth is the same excess liquidity - corporate buybacks financed by debt, and households investments. Making adjustment on inflation the S&P growth will be significantly less. It just mean that S&P performance on Stage III might be much worse than usual, accumulating all negative effect that had have to happen on Stage I and II.
Since the debt ceiling deal, the US Treasury has added a staggering $851 billion to the national debt. It needed to replenish cash reserves and unwind the extraordinary measures it took to keep the government running while it couldn’t borrow any money. But the pace of borrowing even surprises me. WolfStreet called it “an amazing freakshow.”
Goldman Sachs analysts had projected that the US Treasury would have to sell up to $700 billion in T-bills within six to eight weeks of a debt ceiling deal just to replenish cash reserves spent down while the government was up against the borrowing limit. The Treasury blew through that number in just four weeks.
Even with the big borrowing spree, the Treasury Department has only partially refilled the Treasury General Account. (Basically, the federal government’s checking account.) The TGA cash balance increased from $23 billion on June 1 to $465 billion as of June 30. This fell short of the Treasury’s $550 billion goal and remains well below the nearly $600 billion balance “consistent with Treasury’s cash balance policy.”
Meanwhile, the Treasury must pile even more debt on top of that to cover massive monthly budget deficits. In order to cover current spending and finish replenishing the TGA, the Treasury estimates it will have to sell $733 billion in marketable securities during the third quarter. Who is going to buy all these bonds? With the Fed still engaged in the inflation fight, the Treasury can’t depend on the central bank to put its thumb on the bond market and create artificial demand through quantitative easing. (I think this is coming in the not-too-distant future.)
That means that the Treasury will have to sell bonds cheap enough with high enough yields to stimulate enough demand to absorb all the supply. But that means higher interest rates — not a good scenario for a government trying to borrow trillions of dollars. This is why the national debt is called a ticking time bomb.
WolfStreet pointed out another problem. The Treasury will soak up a lot of liquidity with its borrowing spree.
This will create upward pressure on other interest rates, including those on corporate bonds, mortgages, auto loans and other debt instruments. How this will play out remains unclear. But we can say this with confidence: the spending will continue. The debt will continue to rise. And if the Fed keeps rates elevated, paying the interest on the national debt will become a big problem.
MEANTIME IN OTHER WORLD...
China added to its gold reserves for an eighth consecutive month, with economic and geopolitical risks as well as a desire to move away from the US dollar driving the purchases. People’s Bank of China holdings of bullion rose by 680,000 troy ounces last month, according to official data released Friday. That’s equivalent to 23 tons. Total stockpiles now sit at 2,330 tons, with around 183 tons added in the run of buying from November. But this is just official numbers. In reality, it is an opinion, that China owns two times greater gold amount. While foreign reserves are counted for ~ $6 Trln - more than enough funds to make a global party! China’s shadow reserves are big. Bigger than the formal reserves of the world’s second largest holder of reserves (Japan). Bigger than the assets of the world’s largest sovereign wealth (Norway, though Singapore would be in close competition if its sovereign fund disclosed its true size).
The scale of these hidden reserves — foreign current currency assets that aren’t formally counted as “reserves” — also highlights an important fact that is often forgotten amid all the talk of China’s domestic debt problems. Globally China is still a massive creditor, and the weight of China’s massive accumulation of foreign exchange is still felt around the globe.
Russia has confirmed that it plans to launch a gold-backed BRICS currency. This issue will be on the agenda at the BRICS meeting in South Africa in August. Indeed, as P. Schiff recently said - Why own bitcoins and other assets if you can own a digital asset backed by gold and solve the problem of transportability of this gold to anywhere in the world in 3-5 seconds and the delivery price is less than $0.01?
Let's go further. With China imposing the export restrictions on two metals critical to the semiconductor, telecommunications and electric vehicle industries, in an escalation of the country's technology trade war with the US and Europe. Neon gas market is totally under Russian control. High-purity neon is used in laser installations used in the production of processors, controllers and other kinds of chips. They are used in all modern technology, including cars and smartphones.
The Ministry of Industry and Trade said in a statement that Russia will independently determine who will have access to inert gases. If any of the major players want to buy something, they can send a request to the government. This is not new event and has happened in winter, but in the shed of new China sanctions light on germanium and gallium takes quite different tune.
China Is Buying Gas Like There’s Still an Energy Crisis.The nation is on track to be the world’s top importer of liquefied natural gas in 2023. And for the third straight year, Chinese companies are agreeing to buy more of it on a long-term basis than any single nation, according to data compiled by Bloomberg News. China is looking well into the future to avoid a repeat of energy shortages, while also seeking to fuel economic growth.
And now recall how stubborn EU was with no wish to sign long-term contracts with Qatar.
Ex-CIA advisor predicts date when U.S. dollar hegemony will collapse. Former CIA and Department of Defense advisor and investment banker James Rickards predicted that August 22 will be the day the U.S. dollar’s status, as the world reserve currency and medium for exchange will formally collapse. Many factors are worth considering, including the weaponization of the dollar against Russia’s economy amid the conflict in Ukraine, the U.S.’ own national debt of $31 trillion, and recent talks on the part of the BRICS+ group to create an alternative trade and reserve currency that would rival the dollar.
What is interesting to note is that on that same day in 1971, August 22 was also the day the U.S. dropped the gold standard. “It involves the rollout of a major new currency that could weaken the role of the dollar in global payments and ultimately displace the U.S. dollar as the leading payment currency and reserve currency,” Rickards added, noting that the shift could span over a period of “just a few years.”
Ballooning debt in the coming years will force the Federal Reserve to buy massive amounts of bonds again, according to Michael Howell, managing director at Crossborder Capital. Writing in The Financial Times on Wednesday, he predicted that the central bank will have to abandon its quantitative tightening plan, which would roll back prior stimulus by shrinking the Fed's balance sheet. Instead, the Fed will return to its quantitative easing scheme, lifting stocks in the process, he added.
According to Congressional Budget Office estimates cited by Howell, the Fed's Treasury holdings would have to rise to $7.5 trillion by 2033 from nearly $5 trillion today. But he thinks that forecast is too low.
Conclusion is below...
Today we prepare general report - the one that like to read most of all, without a lot of indicators, just interesting to read easy thoughts and general comments on situation, based on recent news. In fact the "heavy data' we have discussed yesterday in our FX report. We will consider few stages of any crisis/recession period, take a look how gold historically performed on every stage, identify at what stage we are now and discuss recent political events.
GOLD RECESSION PERFORMANCE
(based on Matterhorn Asset Management analysis)
It is considered the most anticipated recession of all time – the one looming in the US. And although countless indicators ranging from the yield curve, the Leading Economic Index (LEI) and PMIs to producer prices and international trade volumes have been pointing to a recession for months, it has not yet materialized in the USA. However, the labor market, which has been more than robust up to now, is now showing the first signs of a slowdown. A labor market which, due to demographic change, is structured completely differently than it was in the 1970s. Initial jobless claims have been on an upward trend since last fall.
Despite this increasingly widespread gloom, it is not too late to ask the question: Which asset classes are now proving to be good investments in a recession, and which are bad? To this end, we have conducted an in-depth analysis. The Incrementum analysis consider any recession with five different stages. Dividing a recession into different phases can help reduce the risk of losses and maximize gains. It helps investors develop a balanced investment strategy that takes into account the different phases of a recession. This is because, as will be seen, individual asset classes sometimes exhibit significant differences in performance across the five recession phases. After all, each of the five recession phases has unique characteristics.
- The run-up phase (phase 1) of a recession is characterized by burgeoning volatility on the financial markets. In this phase, the market increasingly starts to price in an impending recession;
- In phase 2, the so-called initial phase, there is a transition between increased uncertainty and the peak of the economic slowdown. In this phase, the slowdown in economic momentum can also be documented for the first time with negative macroeconomic data;
- In the middle phase (phase 3), the negative economic data manifest themselves. It also marks the low and turning point of the recession;
- In phase 4, the final phase, a stabilization of the economy gradually occurs, resulting in a return of optimism on the markets;
- In the fifth and final phase of the recession model, the recovery phase, the economy returns to positive growth figures.
Let’s now look at the performance of the S&P 500 as well as gold and the BCOM index, which tracks commodities, during the last eight recessions since 1970 and broken down into the five recession phases:
Based on the recession phase model, it is therefore advisable to reduce the share of equities in the portfolio at an early stage. Once the peak of the recession has been reached, an increase in the equity share then makes it possible to benefit from the subsequent recovery rally.
Unsurprisingly, gold has lived up to its reputation as a recession hedge, averaging an impressive 10.6% performance throughout the recession. Most notably, gold has averaged positive performance in all phases of the recession. Gold’s largest price increases are seen in Phases 1 and 2, likely due to the increased uncertainty in the markets during these phases. Another explanation for gold’s strong average performance in Phase 1 is the 120.1% price increase in the initial phase of the recession in 1980, which is an outlier.
In the first three phases of a recession, gold tends to be ahead of equities. It is interesting to note, however, that the tide turns as soon as the first signs of an economic recovery appear, and market uncertainty gradually subsides. In the terminal and recovery phases, equities can often outperform gold. Especially in the early stages of the model, gold manages to act as an ideal recession hedge. It provides excellent diversification, helping to stabilize portfolio performance in times of economic turbulence.
an increased weighting of commodities in the run-up to and recovery phase of a recession is beneficial. This finding is also supported by theoretical considerations suggesting that precious metals, especially gold, are a suitable hedge against uncertainty before the peak of a recession. In addition, energy and base metal commodities prove to be particularly beneficial due to the reflationary effect associated with picking up growth after the peak of a recession.
Finally, we also want to take a look at silver and the mining stocks.
Silver is not a reliable recession hedge, with an average performance of -9.0% throughout the recession. This is probably because silver is perceived much more as a cyclically sensitive industrial metal than as a monetary metal in the midst of the downturn.
Mining stocks also showed a positive performance over the entire recession, but this was only about half as high as that of gold. The significant decline in phase 3, the low point in the recessionary trough, is a major contributor to this.
All these theoretical points sounds good, but where we're now? Here I express only my view, which is arguable of course. But it seems that we're somewhere in 2nd half of Stage II. Big gold rally to 2000+$ area corresponds to analysis of Stage I. Official confirmation of recession has happened with recent Fed minutes and earlier we already have got nominal two negative GDP's in a row. The only thing that should happen is real confirmation of theoretical suggestions. Other words speaking - numbers should be confirmed by real life. Also - gold shows very shy pullback, less than 3/8 of the rally, despite we have outstanding interest rates pressure above 5% and more to come.
But you could ask - it doesn't correspond to S&P performance. It should falling while it is not. True. Still we have a lot of "but" objections. First is, outstanding liquidity pumped in system two years before. Second - market is growing narrowly, leading by FAANG and AI shares only. Major source of the growth is the same excess liquidity - corporate buybacks financed by debt, and households investments. Making adjustment on inflation the S&P growth will be significantly less. It just mean that S&P performance on Stage III might be much worse than usual, accumulating all negative effect that had have to happen on Stage I and II.
Since the debt ceiling deal, the US Treasury has added a staggering $851 billion to the national debt. It needed to replenish cash reserves and unwind the extraordinary measures it took to keep the government running while it couldn’t borrow any money. But the pace of borrowing even surprises me. WolfStreet called it “an amazing freakshow.”
Goldman Sachs analysts had projected that the US Treasury would have to sell up to $700 billion in T-bills within six to eight weeks of a debt ceiling deal just to replenish cash reserves spent down while the government was up against the borrowing limit. The Treasury blew through that number in just four weeks.
Even with the big borrowing spree, the Treasury Department has only partially refilled the Treasury General Account. (Basically, the federal government’s checking account.) The TGA cash balance increased from $23 billion on June 1 to $465 billion as of June 30. This fell short of the Treasury’s $550 billion goal and remains well below the nearly $600 billion balance “consistent with Treasury’s cash balance policy.”
Meanwhile, the Treasury must pile even more debt on top of that to cover massive monthly budget deficits. In order to cover current spending and finish replenishing the TGA, the Treasury estimates it will have to sell $733 billion in marketable securities during the third quarter. Who is going to buy all these bonds? With the Fed still engaged in the inflation fight, the Treasury can’t depend on the central bank to put its thumb on the bond market and create artificial demand through quantitative easing. (I think this is coming in the not-too-distant future.)
That means that the Treasury will have to sell bonds cheap enough with high enough yields to stimulate enough demand to absorb all the supply. But that means higher interest rates — not a good scenario for a government trying to borrow trillions of dollars. This is why the national debt is called a ticking time bomb.
WolfStreet pointed out another problem. The Treasury will soak up a lot of liquidity with its borrowing spree.
This will create upward pressure on other interest rates, including those on corporate bonds, mortgages, auto loans and other debt instruments. How this will play out remains unclear. But we can say this with confidence: the spending will continue. The debt will continue to rise. And if the Fed keeps rates elevated, paying the interest on the national debt will become a big problem.
MEANTIME IN OTHER WORLD...
China added to its gold reserves for an eighth consecutive month, with economic and geopolitical risks as well as a desire to move away from the US dollar driving the purchases. People’s Bank of China holdings of bullion rose by 680,000 troy ounces last month, according to official data released Friday. That’s equivalent to 23 tons. Total stockpiles now sit at 2,330 tons, with around 183 tons added in the run of buying from November. But this is just official numbers. In reality, it is an opinion, that China owns two times greater gold amount. While foreign reserves are counted for ~ $6 Trln - more than enough funds to make a global party! China’s shadow reserves are big. Bigger than the formal reserves of the world’s second largest holder of reserves (Japan). Bigger than the assets of the world’s largest sovereign wealth (Norway, though Singapore would be in close competition if its sovereign fund disclosed its true size).
The scale of these hidden reserves — foreign current currency assets that aren’t formally counted as “reserves” — also highlights an important fact that is often forgotten amid all the talk of China’s domestic debt problems. Globally China is still a massive creditor, and the weight of China’s massive accumulation of foreign exchange is still felt around the globe.
Russia has confirmed that it plans to launch a gold-backed BRICS currency. This issue will be on the agenda at the BRICS meeting in South Africa in August. Indeed, as P. Schiff recently said - Why own bitcoins and other assets if you can own a digital asset backed by gold and solve the problem of transportability of this gold to anywhere in the world in 3-5 seconds and the delivery price is less than $0.01?
Let's go further. With China imposing the export restrictions on two metals critical to the semiconductor, telecommunications and electric vehicle industries, in an escalation of the country's technology trade war with the US and Europe. Neon gas market is totally under Russian control. High-purity neon is used in laser installations used in the production of processors, controllers and other kinds of chips. They are used in all modern technology, including cars and smartphones.
The Ministry of Industry and Trade said in a statement that Russia will independently determine who will have access to inert gases. If any of the major players want to buy something, they can send a request to the government. This is not new event and has happened in winter, but in the shed of new China sanctions light on germanium and gallium takes quite different tune.
China Is Buying Gas Like There’s Still an Energy Crisis.The nation is on track to be the world’s top importer of liquefied natural gas in 2023. And for the third straight year, Chinese companies are agreeing to buy more of it on a long-term basis than any single nation, according to data compiled by Bloomberg News. China is looking well into the future to avoid a repeat of energy shortages, while also seeking to fuel economic growth.
And now recall how stubborn EU was with no wish to sign long-term contracts with Qatar.
Ex-CIA advisor predicts date when U.S. dollar hegemony will collapse. Former CIA and Department of Defense advisor and investment banker James Rickards predicted that August 22 will be the day the U.S. dollar’s status, as the world reserve currency and medium for exchange will formally collapse. Many factors are worth considering, including the weaponization of the dollar against Russia’s economy amid the conflict in Ukraine, the U.S.’ own national debt of $31 trillion, and recent talks on the part of the BRICS+ group to create an alternative trade and reserve currency that would rival the dollar.
What is interesting to note is that on that same day in 1971, August 22 was also the day the U.S. dropped the gold standard. “It involves the rollout of a major new currency that could weaken the role of the dollar in global payments and ultimately displace the U.S. dollar as the leading payment currency and reserve currency,” Rickards added, noting that the shift could span over a period of “just a few years.”
Ballooning debt in the coming years will force the Federal Reserve to buy massive amounts of bonds again, according to Michael Howell, managing director at Crossborder Capital. Writing in The Financial Times on Wednesday, he predicted that the central bank will have to abandon its quantitative tightening plan, which would roll back prior stimulus by shrinking the Fed's balance sheet. Instead, the Fed will return to its quantitative easing scheme, lifting stocks in the process, he added.
According to Congressional Budget Office estimates cited by Howell, the Fed's Treasury holdings would have to rise to $7.5 trillion by 2033 from nearly $5 trillion today. But he thinks that forecast is too low.
Conclusion is below...
