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Trump Proposes Budget Cuts, but 2017 Deficit Would Still Be $500 Billion
Hemke Exclusive: Physical Metals Demand Plus Manipulation Suits Will Break Paper Market
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Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.
Coming up Craig Hemke of the TF Metals Report joins me. Craig speaks out on the technical situation for the metals, whether or not the economy his headed towards a recession and reveals something that could ultimately break the paper markets for gold and silver and get us back to free and fair pricing for the precious metals. Make sure you stick around for a tremendous interview with Craig Hemke, coming up after this week’s market update.
Precious metals markets got a boost following the Federal Reserve’s interest rate decision on Wednesday.
As expected, the Fed raised its benchmark rate by a quarter point. Fed chair Janet Yellen also recommitted to the idea of gradual rate hikes. That helped reassure investors who had feared an accelerated pace might be in store. Yellen’s statement suggested that two or three more hikes will be likely this year rather than four or five as some hawks have called for.
Investors breathed a sigh of relief on Wednesday as metals, stocks, and bonds all rallied strongly. The biggest standouts were the gold mining stocks. The GDXJ junior gold stocks ETF surged more than 11% on the day. Speculative money piling back into this high-risk space bodes well for the gold and silver markets.
Gold prices found support around the $1,200 level mid week and currently come in at $1,230 an ounce. That’s good for a 2.0% gain on the week. Turning to silver, the white metal shows a weekly gain of 1.8% to trade at $17.39 per ounce. Platinum and palladium are up 1.9% and 4.1% respectively this week. Be sure to stick around for some key technical levels that my guest this week is looking for.
So can precious metals investors look forward to a spring rally? Much will depend on whether public optimism toward the Donald Trump economy stays elevated. If it does, then metals markets will struggle to attract safe haven buying. However, the new President’s honeymoon period could be coming to end as federal judges, deep state bureaucrats, and a divided Congress threaten to thwart his policy agenda.
The stock market’s impressive rise since Trump’s election win has been premised on the hope that he would usher in major regulatory reforms, tax cuts, and the repeal of Obamacare. Corporations are getting some regulatory relief at the administrative level. But the prospects for a fundamentally new healthcare system and major tax cuts are diminishing.
Congressman Paul Ryan’s healthcare bill has been roundly criticized by conservatives for being little more than an Obamacare makeover. At the same time, President Trump’s budget proposal has been declared “dead on arrival” by Big Government Republicans including Senator Lindsey Graham.
Trump wants to boost military spending by more than $50 billion and offset it with cuts in domestic agencies and foreign aid. Lindsey Graham and John McCain are up in arms over the prospect of less funding for their foreign interventionist projects. Democrats, meanwhile, are screaming bloody murder over the National Endowment for the Arts being put on the budgetary chopping block.
Even if Trump could somehow use his powers of persuasion to push all his proposed cuts through a resistant Congress, the rest of his spending would still produce a near $500 billion budget deficit.
The last Republican president to propose significant budget cuts was Ronald Reagan. He talked a lot about downsizing Washington. But that never actually happened. Most of Reagan’s proposed agency cuts went nowhere in Congress. He got the ramped up defense spending he wanted. And to some extent he got the tax cuts he wanted. But President Reagan ended up presiding over growing federal budgets and expanding deficits. The same happened under George W. Bush’s watch – even during years when he had a Republican-controlled Congress by his side.
Could things be different this time around? Possibly, but it’s doubtful. Regardless of the partisan breakdown in Congress, there appears to be majority support for more overall spending and more borrowing. Congress will once again have to raise the debt ceiling. There could be a battle over that in the weeks ahead that could rattle markets.
But the real trouble will come when the economy dips into recession and federal revenues shrink. Trump inherited an unusual so-called recovery that is both one of the weakest and longest in U.S. history. It would be unprecedented if the economy got through Trump’s entire first term without turning down.
The response from the Federal Reserve to a recession would be to cut interest rates back to zero, or even below zero. And to reengage Quantitative Easing on a massive scale. At that point many investors who are now all-in on stocks will reacquaint themselves with gold as a safe haven.
Those who buy their gold and their silver now – before the next big rush into precious metals – won’t have to chase rising prices. Retail bullion demand has been soft in recent months, with premiums on popular gold and silver products low across the board, meaning for now, it’s a buyer’s market.
Well now, without further delay, let’s get right to this week’s exclusive interview.
Mike Gleason: It is my privilege now to welcome in Craig Hemke of the TF Metals Report. Craig runs one of the most highly respected and well known blogs in the industry and has been covering the precious metals for close to a decade now, and he puts out some of the best analysis on banking schemes, the flaws of Keynesian economics and evidence of manipulation in the gold and silver markets.
Craig, it's great to have you back and thanks for joining us again today and how are you?
Craig Hemke: Mike, I'm fine thank you. It's always a pleasure and I appreciate the invitation.
Mike Gleason: Well, I know time is short here so we'll get right into it. First off, we've been seeing a decent little correction in the metals over the last few weeks although they're rallying a bit here today and now that the Fed decision is out, as we're talking on Wednesday afternoon. Gold and silver were probably due for a pullback after a very strong first eight or nine weeks of the year. So how do things look technically speaking here, Craig, after this recent pause and the uptrend? Do you think we're still in the midst of a bull run and has this just been a healthy correction? How do you see things here?
Craig Hemke: Well, I guess the biggest picture possible we pulled back these couple last weeks, once it became obvious that the Fed was going to hike rates again, and we pulled back in a manner, very similar to what we saw in November of 2015 and November of 2016 before the previous two rate hikes, and now here we are in the hours immediately following the hike, we're rallying. Now, the last two rate hikes that came in December of '15 and December of '16, gold bottomed the very next day and began to rally quite strongly. Now, here we apparently bottomed earlier today, and are rallying quite strongly this afternoon as Mother (Fed Chair Janet Yellen) is just slaughtering the dollar bulls with all of her press conference and everything else.
Well, I guess the biggest picture possible we pulled back these couple last weeks, once it became obvious that the Fed was going to hike rates again, and we pulled back in a manner, very similar to what we saw in November of 2015 and November of 2016 before the previous two rate hikes, and now here we are in the hours immediately following the hike, we're rallying. Now, the last two rate hikes that came in December of '15 and December of '16, gold bottomed the very next day and began to rally quite strongly. Now, here we apparently bottomed earlier today, and are rallying quite strongly this afternoon as Mother (Fed Chair Janet Yellen) is just slaughtering the dollar bulls with all of her press conference and everything else.
From a technical standpoint, both gold and silver have recently seen a bullish cross of moving their 50-day moving averages up through their 100-day moving averages, so that's pretty important. And if price can now get above that 50-day – and we're making a run at it here on Wednesday – if we can get above there and close there on Friday, there's going to be a lot of folks who will start getting very interested in the metals from a technical standpoint.
Mike Gleason: Craig, you regularly discuss just how manipulated and phony the gold and silver future markets are. You've been doing that for years, people called you out as a conspiracy theorist for it. For some reason, lots of folks couldn't accept the notion that banks employ a combination of crooked traders and high frequency trading machines to dominate these exchanges. Now, in recent months however we've seen smoking gun evidence in the form of documents and recordings from Deutsche Bank where traders working at various banks colluded with one another to rig markets and cheat their own clients. WikiLeaks published a memo sent to the Treasury Department for the future exchanges were launched in the early '70s.
Officials were clear regarding their intent for those exchanges. They sought to create enormous price volatility and to discourage physical ownership of the metal and they’ve succeeded. We can be pretty sure that the bought and paid for regulators will manage somehow to ignore the evidence and fail once again to hold any bank to account, but Deutsche Bank has agreed to pay roughly 100 million dollars in damages and other banks involved could be in even bigger trouble. So, my question is whether you have gotten any apologies from the people who labeled you as crazy for talking about manipulation? And then give us your thoughts on these revelations… can the civil courts help us get to more honest markets and is there any fixing this broken and rigged system, Craig?
Craig Hemke: Yeah I tell you, no I haven't gotten any apologies, Mike. I guess we should start there and I'm not expecting any, but that doesn't matter. Most of those folks that always claim that the gold and silver paper markets were free and fair were just simply trolls for the establishment. I remember one guy in particular was a particularly virulent troll and he admitted to be a former Deutsche Bank trader. Okay, well you can connect the dots there, right? Look, none of this is surprising and obviously it's nice to know as we've always said, it's conspiracy fact, historical fact, not some kind of whacked out conspiracy theory.
But nonetheless, it's the market that we have to deal with for now, where this trading of these paper derivatives is somehow allowed to discover a physical price. I mean, it's nonsense. It's a fraud, it's a sham, and until those paper markets break because they don't have the physical to deliver into the demand, it's pretty much what we're stuck with. Where this all goes from here in terms of the manipulation is – we have to let the process play out. When this news first broke, heck, it's almost a whole year ago, Mike. This was back in what? April or May last year when we learned that Deutsche Bank was being pressured by the German regulators to settle. A lot of folks thought that was going to change things overnight.
No, it's not going to change things overnight but it is a huge change because in all of the history of class action lawsuits, alleging price manipulation and seeking damages, they've all been thrown out by the courts before we could ever get to the process of legal discovery. Well, not only are we moving forward on legal discovery for the first time, Mike, there are now going to be countless new lawsuits to join as information comes out. The emails and the text messages that you referenced came out through the discovery process. That's going to bring even more lawsuits, and then additionally we've got a bank at one of the major players in the manipulation, Deutsche Bank, who has essentially turned state's evidence, that is singing like a mafia songbird, a mafia informant, providing information.
So, people have to let this play out, these legal processes never move too quickly, but this is some serious blood in the water and if nothing else, if the physical demand doesn't break the paper markets, I'm pretty confident that this whole legal process eventually will.
Mike Gleason: Speaking of manipulators, the FOMC just made their announcement, we had a bit of a respite as markets stopped obsessing quite so much about Fed policy for a few months following Trump's election, but Janet Yellen and the FOMC are back in the news today. We may see some renewed focus on what to expect from our central planners going forward. Now, Trump and some of his surrogates have been critical of the strong dollar, but the Fed is hiking rates and pushing the dollar even higher, this despite the fact that the economic growth estimates keep being revised lower. Is there a conflict brewing between the president and the Fed? Are Janet Yellen and other bankers working to undermine Trump perhaps, by withdrawing stimulus and throwing a wrench into the equity and bond markets, or is this simply just to preserve what little credibility they have left by delivering some hikes instead of just jawboning? Give us your thoughts there, and do you have any guesses about where the Fed Funds rate might be say a year from now?
Craig Hemke: Well, it makes you wonder doesn't it? The latest first quarter of this year guess that's been put out by the Atlanta Fed… which is always about the most accurate in trying to predict where GDP is... the latest guess came out earlier today and it's actually under 1%. It's only 0.9%, if you want to call that growth. That gentleman that does that model actually had it 3.4% just six weeks ago, so you can see the trend here. After all of last year came in at just 1.6%, we're going to begin this year at .9, and into that environment, Mother Fellen (Janet Yellen) has now hiked twice in 90 days and these three rate hikes are the first ones we've seen in almost 10 years. Doesn't make any sense, and it kind of underlies what is really going on there. People think that the Federal Reserve is part of the federal government, and it's not.
People think that the Federal Reserve is some altruistic, benevolent organization that's trying to help the American people, it's not. Their primary people is to help their banks. Hiking rates into a flat economy does nothing for the average American, but it does help the banks which is why they're doing it. Going forward, Mother said today, and all of the FOMC said today that they think GDP for all of 2017 is going to be 3%. Well, here's the problem with that, Mike. If we do come in at quarter one at just 1% and again, the latest guess is .9, that means the next three quarters of this year are going to have to average 3.7%, average 3.7%, just to get Mother's 3% target. I mean, you think that's going to happen, my friend? No.
I'll give you one more problem that this is happening. We've always maintained that the Fed cannot raise rates because of what it would do to the American fiscal situation, the debt and the deficit. Well, Mother is raising the short end, but what isn't happening and this is what we've always contended, is you can't move the long end up because of what it'll do to blow out the deficit and the debt. That's exactly what we're seeing, the yield curve is flattening. The spread between the 2-year note and the 10-year note is under 120 basis points. This is a terrible sign for the U.S. economy. So yeah, where is this going to go? Mother's going to be cutting rates in 2018, if not by the end of this year, and not hiking them, simply because they are inducing recession that may have already begun.
So, this is going to be quite a wild ride as we go through this year, not the easy, predictable rising interest rates and stronger dollar that so many predicted just three months ago.
Mike Gleason: If we do get that about face and when it comes to interest rates, you've got to think that's going to be very bullish for gold, and negative real interest rates, of course, would be a fantastic thing for the yellow metal, would you agree?
Craig Hemke: Always has been in the past, Mike. That's always been something. More importantly, what I watch on a daily basis is the Dollar-Yen, which is the Forex pair trade of the value of the U.S. dollar in Yen or vice versa. That seems to be the key driver of the HFT trading machines that dominate the COMEX paper market. The Dollar-Yen clearly peaked out with a double top back in December and into early January, and has been a downtrend since. That's what has helped to drive algo demand for paper gold so far this year. That thing rolls back over and heads back down to, oh, currently it's around 113 and a half. If it heads back down to 100, which is where it was last July, then you're going to see COMEX gold go back to near $1,400 where it was last July. They may not be able to contain it at that point.
Again, for me, I've been preaching to people on my site not to buy this what we call the "generally accepted narrative for 2017." There's so many people talking about how the bond bubble's about to burst, the 35 year bond bubble's finally going to burst, and it was supposedly a fait accompli. In fact, I saw a chart just last weekend that showed there was record net short position of hedge funds in the treasury market. Man, it never works. When everybody's on the same side of the trade, it never goes that direction. Again, that's what we're seeing right now. The long end, the 10-year note and the 30-year long bond are actually lower in yield than they were 90 days ago, while the fed has jacked up the short end.
Again, that's a flatting of the yield curve. Anybody that's ever taken Econ 101 in college knows that a flat yield curve is a precursor of recession and I just have very little doubt at this point that that's where we're headed.
Mike Gleason: Again, that's a flatting of the yield curve. Anybody that's ever taken Econ 101 in college knows that a flat yield curve is a precursor of recession and I just have very little doubt at this point that that's where we're headed.
Craig Hemke: Well, most folks at TFMR are general, aggressive stackers of physical metal, whether it's gold or silver. Buying on a regular basis and just simply adding to their stack in preparation for this great economic financial reset that's eventually going to come, because the debt just can't simply going parabolically higher without either having to be reset or debt jubilee or whatever. We all stack metal and take advantage of the lower prices when they come. A lot of folks are trading the miners as well for leverage, and so folks have been very concerned, I can tell you that, over the way the miners have performed in the last few weeks. But they're up today, too, and they have very well have put in their own higher low on the chart, and so folks are excited about that.
Eventually, we're really watching, we're going to be paying very close attention to what Theresa May does over the next couple of weeks in England, regarding Brexit and moving it forward. And that French election coming up, I think it's on May the 7th, is going to be a really big event. Even if it's not France, if it's Italy, if it's Greece, there are major, major problems with the euro currency, that being the second largest, second most heavily used currency in the world. If you factor in that currency may very well be going the way of the dodo bird, and negative interest rates across the continent of Europe, that's a double whammy, extremely positive fundamental for physical gold ownership. And it is that physical gold ownership that eventually breaks the paper system.
So, we're keeping a real close eye on events in Europe in the, let's just call it the months ahead, because again some of those things might actually hold the key to finally breaking the shackle hold that the paper derivatives market has on the physical price. Because that's what we're all waiting for, is the day that the paper market fails and it's probably not going to happen tomorrow, but events sure seem to still be trending that direction.
Mike Gleason: Well, wonderful insights as usual, Craig. We always enjoy hearing from you and before we say goodbye for today, please tell people how they can learn more about the TF Metals Report and what it is they'll find when they visit your site?
Craig Hemke: Well, they're going to find a vibrant community of people that are... all here to help each other out. I provide content on a daily basis and there's a subscription component there that's I don't know, about $3 a week I guess. It's not very expensive. But there's also free content, too, and the great value comes not just from my input but from the input of all the subscribers and the members who are constantly discussing the metals, the global economy, politics, everything else, finding links, providing information to everybody else. It's like a recognition that we're all in it together like I said, in a community trying to help each other out. If anybody's listening to this and they think, "Hey, sounds like me," stop by and join us, TFMetalsReport.com.
Mike Gleason: Outstanding stuff. Hope you have a great weekend and look forward to speaking with you again soon, Craig.
Craig Hemke: Mike, thanks so much. All the best.
Mike Gleason: Well that will do it for this week. Thanks again to Craig Hemke. The site is TFMetalsReport.com, definitely a fantastic source for all things precious metals and a whole lot more. We urge everyone to check that out and you'll want to check it out regularly for some of the best commentary on the metals markets that you will find anywhere.
And be sure to check back here next Friday for our next Weekly Market Wrap Podcast. Until then, this has been Mike Gleason with Money Metals Exchange. Thanks for listening and have a great weekend, everybody.