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IS OUR U.S. DEBT OUT OF CONTROL?
David Stockman, who was the Director of the Office of Management and Budget under President Regan is warning, “We are heading into a massive monetary fiscal collision that will cause a yield shock that will turn the market up side down. We are drifting to a ‘Debt Berg’….15 trillion of new debt over the next 10 years.”
STOCKMAN’S TOP CONCERNS:
- MARKET INFLECTION POINT
- MARKET TRADING 26 X EARNINGS
- 15 TRILLION NEW DEBT
- QUANTITATIVE TIGHTENING
- STALLED EARNINGS
“ The market is whistling past the graveyard.” Stockman warns, comparing the November 2007 market crash of 60% with a further drop down to 70% a year later, and he added, “These things reach an inflection point, I think we’re there now. I think the market is trading at 26 times earnings at the top of the business cycle…we are 10 years in… almost a record.”
Stockman also thinks the idea that earnings have rebounded and will go even higher is an illusion. “We just finished 2017. Fourth quarter earnings came in at $26.54 a share on a gap basis, which is the only honest way to look at them. In the fourth quarter of 2013 earnings were $26.48 a share. In other words, four years, 6 cents – that’s all. That’s not growth.”
He further explains, “We will be borrowing 1.2 trillion in the coming fiscal year because we started with 700 billion, then added 300 billion. And we have had appropriation caps that have been blown – 1.2 trillion (6% of GDP) at this late stage of the cycle.
Over against that, the Fed is now full bore QT (Quantitative Tightening), shrinking its balance sheet for the FIRST time in 10 to 15 years. Now that’s the issue. It’s not the 4 rate hikes, it’s that they are going to be dumping 600 billion at an annual rate into the bond market beginning in October.”
And Stockman notes: “If you do the math, it’s 1.8 trillion of supplies between the treasury and the fed into the bond pits. It’s not going to clear the market at 2.9. I think it will go to the high 3’s to 4 or beyond. But here’s the point; at 3.75% on the 10 year, which is not that far away, and it is easily conceivable given what I’ve described about the fundamentals, the point is, the S&P 500 expense for interest jumped from $16 a share last year to $36 a share with interest rates 120 basis points higher. Now that is $20 of increased Interest expense per share.”
Stockman added: “We are in a totally new ballgame paradigm shift, the fed is pivoting to QT (quantitative tightening), and they are actually draining cash and will be at a 600 billion dollar rate, out of the bond market. The ECB will be done with QE by the fall. All around the world central banks will have to go to neutral or actual QT. That will create a different pricing environment for the bond market because once the smart people see that the Fed is basically selling down it’s portfolio, they will do what the Fed is doing and sell the bond too. That is not factored into the picture. “
Regarding future problems he also explains, “The market is just priced for perfection and accidents are going to happen. This market is going to way over shoot as it faces this massive fiscal crunch. I think the dye is cast…we are drifting to a massive ‘Debt Berg’. That’s what we have in front of us. There is no relief on the horizon, because it’s built in now; 15 trillion of new debt over the next 10 years, it’s pretty bad. The everything bubble is just waiting for the pin.”
RATE HIKES – A GOLDEN BUYING OPPORTUNITY?
Ole Hansen, head of commodity strategy at Saxo Bank, a Danish investment bank, says “The five rate hikes seen so far in this current cycle all resulted in the same behavior with gold selling off ahead, only to rally strongly once the announcement was made. The last couple of weeks ahead US rates hikes have proven in the past to be a good buying opportunity.”
Hansen also said economic data and the growing threat of global trade war may signal less aggressive action by the Fed, which could be positive for gold prices.
Meanwhile, Ivan Bebek, Executive Chairman of Auryn Resources says “The gold market is getting really seriously overlooked as one of the cheapest markets in the entire world right now. It seems like investors are looking for every reason but the gold price to buy into other commodities such as battery metals. Once the retail public sees $1400 dollar gold or more, you’ll see an onslaught of investors coming back into the space, and from there on a pretty big spring board that’s been pushed down in the last 6 years. It’s overdue, it’s pent up.”
Rick Rule, CEO of Sprott U.S. Holdings, reminds us of one of the most important reasons why smart investors should have gold in their portfolios. Recently when asked what he thinks about the current gold market he said, “Has gold done what I wanted it to do for me, which is preserve my purchasing power?…Yes.”
Commenting on when to buy into market, Rule gives wise advice and says investors need to dampen their expectation in regard to current gold price movement while adding, “Many investors hate bargains, they want to pay too much money, they are attracted to narrative.”
For example, he further explains, “The zinc space is something we liked a lot 2 years ago. Zink was cheap; it was really, truly cheap. It was on sale. The good zinc stocks are uniformly up 80% or 90%, which is to say they are 80% or 90% less attractive than they were. I love momentum buyers. I love somebody who will come and take me off a position that I had the good fortune to buy on sale. The truth is, that the beautiful thing is, there is always something which is hot, which is what you sell, and there something which is not, which you buy.” Wise words.
Gold is the timeless safe haven asset and ultimate store of wealth. Preserve your capital. Be prepared. Don’t wait to by gold, buy gold and wait!
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