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Interest Rates Eye Negative Territory as Capital Prepares for Slow Death
Greg Weldon: Gold Will Soar Soon; World Now Faces 'Monetary Armageddon'
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Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.
Coming up Greg Weldon of Weldon Financial and Gold-Guru joins me for an incredible interview on a range of topics including why he sees gold soaring later this year and why we need to look outside the U.S. for important clues about the economy. Greg also shares his thoughts on what will likely happen to many small businesses if we see a new round of stay home orders enacted later this year. So, don’t miss a must-hear interview with Greg Weldon, one of our favorite guests, coming up after this week’s market update.
Precious metals markets appear to be gearing up for another leg higher. On Thursday, the metals complex rose sharply across the board. Gold gained about 2.5% while silver packed on nearly 4%.
Both of the monetary metals showed signs of breaking out of the sideways trading ranges they’ve been stuck in over the past four weeks. Silver closed solidly above its 50-day moving average for the first time since late February.
Bulls will be looking for confirmation with strong weekly closes today and then follow-through early next week.
As of this Friday morning recording gold is putting together a 0.6% advance for the week to bring spot prices to $1,725 per ounce. Silver, meanwhile, shows a weekly uptick of 3.4% to trade at $15.69 an ounce.
Turning to platinum, prices are up essentially unchanged for the week to trade at $779. And finally, palladium continues to slump, down 2.1% for the week to trade at $1,929 an ounce.
Metals markets – the white metals especially – stand to benefit from gradually improving economic conditions. Although the economy remains largely locked down with tens of millions out of work, dozens of states will be lifting restrictions over the next week, unleashing pent up demand for commodities.
The Federal Reserve will also continue to run the largest monetary easing and asset buying programs in the nation’s history. And Congress may roll out another round of massive fiscal stimulus paid for with money it doesn’t have.
Senator Rand Paul appeared on Fox News earlier this week to offer his take on the situation:
Fox News Anchor: Are we going to see a fourth stimulus, or do you think they're going to wait, and see how the first three are working?
Rand Paul: To people who ask me, I remind them that we have no money. We have no rainy-day account. We have no savings account. The three trillion that we've already passed out is imaginary money. It's being borrowed basically from China, so the irony is we got the virus from China, and now we're going to be more dependent by borrowing more money from China. The only thing that recovers our economy is opening the economy. It's not a lack of money. It's a lack of commerce. If you let people have commerce, if you let them trade, if you take them out from forcible home arrest, our economy will recover, but if you keep everybody under home arrest, and say you cannot practice your business, you cannot sell your goods, there will continue to be economic calamity. And all these blue state governors who don't want to open their state they all are clamoring for federal to bail them out because no state revenue's coming in. We don't have any money.
Of course, the Federal Reserve’s novel policies of unlimited Quantitative Easing render the issue of budget deficits almost irrelevant – at least politically.
Deficit hawks are a dying breed in Washington. The pressures to spend during this time of crisis are overwhelming regardless of party affiliation. And politicians experience virtually no negative direct consequences for spending money they don’t have.
The consequences will be felt over time, though, by all holders of U.S. dollars and dollar-denominated IOUs. They stand to lose purchasing power in real terms and perhaps even in nominal terms as well.
In a year of unprecedented events in financial markets, the next previously unthinkable development for the history books could be U.S. interest rates going negative. On Thursday, futures markets began pricing in a negative U.S. rate environment for the first time ever.
Fed officials including Chairman Jerome Powell have repeatedly said they have no intention of pursuing negative rates, although they have admitted to studying the technical feasibility of adopting a Negative Interest Rate Policy.
But the markets may ultimately force the Fed’s hand. If market expectations increasingly reflect below-zero Treasury bill yields, and across the entire yield curve even negative-yielding longer-term Treasury bonds, then central bankers would effectively be tightening if they refused to let their benchmark funds rate fall below zero.
This is all still speculation at this point, but it’s not wild speculation – not in the least. When policymakers vow to keep rates near zero as they are now, the inherent risk of such a policy is that the rates are only one tiny move away from going negative. And there is no reason to think the odds are necessarily greater for the next move in rates to be up rather than down.
A move to negative rates would give bondholders one last hurrah to experience capital appreciation. But soon thereafter the entire debt market would become a place where capital goes to suffer the slow death of negative returns. It could become a more rapid death in real terms if the Federal Reserve note’s rate of depreciation accelerates.
For now, the U.S. Dollar Index isn’t reflecting much fear of loss versus other fiat currencies. It has traded in a range of around 99 to 101 the past few weeks and remains up overall for the year.
But it is at risk of suffering a major break down in terms of gold. The gold price has already hit new highs versus other major currencies. It is up over 13% this year in U.S. dollars and could potentially make a new all-time USD high before the summer.
That would surely accelerate public interest in precious metals as a viable and necessary hedge against an unlimited Fed.
Well now, for more on gold, some of the other commodities and a range of other economic topics, let’s get right to this week’s exclusive interview.
Mike Gleason: It is my privilege now to welcome back our good friend, Greg Weldon, CEO and President of Weldon Financial. Greg has decades of market research and trading experience specializing in the metals and commodity markets and he even authored a book back in 2006 titled Gold Trading Boot Camp where we accurately predicted the implosion of the U.S. credit market and urged people to buy gold when it was only $550 an ounce. He's made some fantastic calls over the last few years here on our podcast and it's great to have him back with us.
Greg, thanks, as always, for your time and welcome. How are you?
Greg Weldon: Thanks. I'm doing well. How about yourself?
Mike Gleason: Very good and it's a delight to have you back on. It's been too long. We did speak to you back at the end of February before all this madness started. At the time, COVID-19 had begun seriously impacting economic activity in global markets, maybe not so much in the U.S. Now, just two months later, more than 30 million people have filed for unemployment, GDP was deeply negative in the first quarter and figures to be even worse here in Q2. But the equity markets are acting as if the worst is behind us. We got a major correction followed by an almost relentless rally. Our take is that equity markets are completely disconnected from reality. They are hitched, instead, to the Fed's magic money machine. What is your take on how stock markets are behaving here, Greg?
Greg Weldon: Well, I think you make probably the most singular point that needs to be made right here, which is the disconnect between Main Street and Wall Street, if you will. I think that the great Jim Grant said it as beautifully, as eloquently and as he is prone to do, as simply as possible when he said, "The stock market is mistaking liquidity for solvency." And that is dead on; exactly what's happening. You have all this liquidity. It finds a home in the stock market. That's what the liquidity is intended to do is to find its way to risk assets that supports the campaign against a debt deflation because that's what you're fighting. And so far so good.
But the questions are just so many. I mean, the field is littered with land mines. Thinking we're going to get through this field without stepping on one, if not several, is really naïve to me. And I think if I would make two points specific to the economy and the economic side of it… number one, when you look at retail sales, when you look at personal consumption expenditures – let’s take personal consumption expenditures. You just dumped 1.12 trillion dollars in a single month. You have another big month coming because April was the bulk of the closures. You weren't even closed in Florida in March. So, you're looking at two trillion dollar decline in personal consumption expenditures.
In terms of retail sales, eating and drinking establishments is always the margin of the discretionary dollar. If you're spending more for gas and food, which you will be... let's not forget that, because food has gone up because demand is up and supply is down. It's pretty simple. As we were talking off air, why has food prices gone up? More buyers than sellers. Pretty simple. And gasoline is at such a low level with such disinvestment in the infrastructure that there's no doubt in my mind, anyway, that gasoline is a steal at 75 cents a gallon in the spot market. We were recommending Valero and gosh, they've already broken on me. Valero's up 30% from where we bought it three weeks ago.
Food and gasoline prices going up. Consumptions come down. And when you talk about the level of retail sales… if you're going to take eating and drinking establishments, the monthly billions of dollars spent doing that, back to levels seen in 2006. You are wiping out 14 years of growth in discretionary spending, eating and drinking establishments. Retail sales, not quite the same degree of decline but you're looking at something like 2011/2012 levels. Even there, you're wiping out eight years of growth in retail sales in terms of billions of dollars per month. But what you're not doing is decreasing the debt that was created to facilitate all that buying because it's been a credit frenzy. That's number one.
Number two is if you look at the Feds regional surveys, which are a treasure trove of information and usually have a special questions segment at the end. The most recent batch of them from last week, of course, special questions around COVID and specifically employment. And what we learned is 37.4% of firms do not plan on hiring back all their workers. Maybe not a surprise there. What's a surprise is 24.9%, one tenth less of a quarter, of those job losses are going to be permanent. You're talking, what? 30 million people? Now you're talking nine million people permanently unemployed in one fell swoop that are not coming back, not going to get their jobs.
Again, and when you go back to the first quarter Fed survey on household finances, it very specifically showed that consumers were pretty much to the levels were they start to feel stress in having to create more debt. They can't do it. They can't afford it. They don't want to do it. They are either unwilling or unable to do it. And when you're talking about the debt obligations ... Credit cards, specifically, but all debt obligations on a monthly basis, $375 billion dollars now. Retail sales now just fell to about $475 billion. Those numbers can't cross. You can't have growth without credit. Credit is the lifeblood of this economy and has been. The time to do the right thing, academically, was 1990. We're 30 years passed that.
The reality is they do what they do, which is print money. The problem is, are they going to save every business, every industry, every person, every household, and every country in the world? I think that's highly unlikely. So, the stock market is very much living on borrowed time, very much running on fumes and we're looking at selling it short again. We got short, we got long at the bottom and we rode it almost all the way up to here. Maybe we got out a little early on the long side but if this is a bear market, which I think it is, you're going to want to be more nimble on the counter trend trades, in this case the long position.
Now we're setting up for the next big short. And we see it in a lot of places. We see it in Canada. I see it specifically in some of the Asian markets. I think there is a reality check coming and the liquidity ... If this liquidity goes in the stock market, the stock market comes down, all that liquidity goes poof! Then what? Nine million people unemployed, retail sales down with no real credit dynamic to get them back up. It's a potential worse case scenario.
Mike Gleason: Yeah, it does definitely seem like a fool's rally here. Switching the metals, gold and silver prices also seem disconnected from reality. Gold is performing well but we think prices should be higher given the demand we see in the futures markets as well as the huge number of investors standing for delivery in the futures markets. The disconnect is even bigger when it comes to silver where prices are actually lower today than they were three months ago. The Fed adds four trillion dollars in stimulus. The federal deficit is projected to be three trillion dollars. The economic data is awful and should be driving demand for metals as a safe haven and in fact, demand for physical metal is unprecedented yet the paper price for the metal isn't reflecting any of this. What gives here, Greg?
Greg Weldon: Well, you said it. The paper price. And if you take a step back and be less U.S.-centric, gold is screaming, man, in so many different currencies it's not even funny! Because we do the charts every day. And again, this is where it's at the margin. This is so devastating, what's happening, because you just don't understand. You have such a U.S.-centric view of this ... And I don't mean you, I mean us, collectively ... That you just don't realize this is every country.
Angola. 1.6 million barrels a day of oil. They're a secondary, but semi-major oil-producing nation. Nigeria, same situation. You have places like Uzbekistan and Kazakhstan in Eastern Europe. You certainly have the situation going on right now with Malaysia, Indonesia. You can actually even through India and Korea vying to lose some of their status as having been developing over these years. And then South America's a mess. South America is a mess. There are several currencies at record lows, the least of which isn't the Argentinian peso, which is getting crushed. When you look at gold, in those currencies gold is screaming. Gold is up multiples just in the one year, three year, five years. This is ongoing, secular bull market in gold.
But the paper is the angle and the paper links you back to the dollar. All these things, you think they pop out four trillion that the dollar would be lower. But you have to remember, everyone's doing the same thing. Printing money. I would say the yield differentials in the bond market have really started to narrow. And I thought this would break the back of the dollar. You need to get below 98 in the dollar index. You have failed to do that repeatedly here. And most recently, just in the last four, five, six trading sessions, same thing. You got there, you broke the first level of support and you couldn't get through the real key support levels and the dollar snapped back.
Why is that? It's because all these other currencies are getting mauled, man. I mean, seriously, South African rand, Brazilian real. The list is so long. Turkish lira at a new low against the dollar and the euro. Now, that opens a bigger door and I don't know how far we want to go with our conversation, but Turkey opens the door to Europe. It does so because Spanish banks are on the hook for 100 billion+ euro in bad loans to Turkish banks and Turkish companies. France is number two on the hit parade with about 85 billion. So, between them it's almost a quarter of a trillion euro that those two countries are on the hook for. You know the situation in Spain. You know that the Dutch and Germans are blocking union-wide, union-paid for support to the southern states; Italy, Portugal and Spain. Spain, last year, for the socialists to ratchet power from Rajoy they had to include the Bask and the Catalonian parties, two separatist parties!
I think Europe is a powder keg. I think these are some of the reasons why you don't really see gold screaming because the dollar's not getting crushed because all these other places, as bad as the U.S. is, all these other places are worse and the currencies reflect that. Gold is rallying in those currencies. Will the dollar go? I think it will. When it does, gold will be above $2,000 and it probably happens this year. It's going to take patience and how this plays out, and how we get from here to there, I don't know. I just know we'll get there.
Mike Gleason: Switching back to the Fed here. Since the Fed has assumed an even more massive role in the markets for itself, here. We should talk about what the central planners will be up to in the months ahead. They have certainly been able to goose the equity markets, at least for now, with the stimulus they've already announced. Is that "Mission Accomplished" for the Fed? Or will they be likely back with trillions more in future months?
Greg Weldon: Well, that's a good question. I think the answer is yes and no. And no and yes. Let me explain. Yes, they think they're done. Yes, they want to be done. No, they're absolutely not done. And on the flip side, in terms of how we get to from point A to point B is more pain. This is kind of where the stock market plays in because the failure here would be the catalyst for the Fed to do more. I think there is pressure on the Fed to do more, anyway. What this does, though, is it actually opens the door for the political dynamic to get back in the way, so to speak, because you have the issue over buying state municipal date.
What state are you going to buy? The states that are in the worst position, like California, Illinois, New York? The ones run by the Democrats who pushed this through? Pelosi already wants another trillion dollars just spent on the states. That's not fair. You had Ted Cruz on TV today ... And I hate to get political, but this is going to be a bit of a brouhaha over this. And it's ridiculous that the democrats are basically saying, "We're going to try and use this opportunity," like in the first package. In this case, they want to use it to help pay down California, New York and Illinois debt that is not related to the outbreak. You really thought that this wasn't going to come with a moral dilemma because it wasn't banks. No, it comes with a huge moral dilemma. Bigger than any banker's moral dilemma is a politician's moral dilemma and you are staring it right in the face.
That opens the door for uncertainty to return, in-fighting in the political scene. You get Nancy Pelosi on TV and it's just a nightmare. How does this woman even still hold political office? I don't even want to go any further with my thoughts on that but seriously. The policies and the ideas that come from this sector of the political universe are insane. It's just like, print, print, print, spend, spend, spend.
I'll tell you, Mike, this is where you're going to need to really pay attention to bond markets because bond markets will tell the tale, here. Every countries printing money, essentially, for all intents and purposes. Look at what Japan is doing. The BOJ just announced a 28 trillion-yen purchase program for household debt. We think the Fed can't do that? The Fed can absolutely do that. That's probably where this goes. So, when we say, "Wow, how deep can the Fed go?" The Fed is in the rabbit hole. There's no coming out.
I actually did a piece recently and it's a debt black hole is what it is. We've crossed event horizon. If you know anything about it, a black hole, once you enter the black hole, you're crossing the event horizon, you can't get out. You're trapped. There's not even enough energy to withdraw light out of a black hole. The situation here is, the worst case scenario for central bankers is a debt deflation. That's a debt black hole where everything's consumed and prices of everything go down and it's a complete inward collapse, if you will. In that sense, have we crossed over the event horizon and we just don't know it yet? That's what I think. Can they print enough money to repair what's going on? They've always done this. They always papered over the issues. I don't know that they have the willpower to potentially print as much as is going to be needed. Can we stomach a Fed balance sheet of $20 trillion?
I'm not saying that's where they're going to go right away or that's the plan. Next stop, 11 to 12, it's almost by definition what they already outlined. But if you do the math and you look at the numbers. Are they going to start buying Zimbabwe and Angolan debt, too? Where does it stop? You're in the rabbit hole. You are not coming out. You are in the black hole. You're not coming out and you're going to use as much energy as you can to try and get out but if it doesn't work, again, that's the worst-case scenario. Ultimately, that will cause them to do whatever it takes to move the dollar.
I wrote about this in the book, which seems like I need to write another book. It seems so long ago, now, but 2006… I called it Monetary Armageddon. It's like in the movies. I think I've said this on your show before. It's like in the movies. You have two guys in the bunker in the mountain, in the complex, with the things ... They lift the little protectors to put their keys in and they have to turn the keys simultaneously and press the button and when they do that, they basically vaporize ever piece of paper of U.S. treasury debt that's ever been printed and just print more money to replace it. That's probably where this is headed, longer term, and that's the day you're going to want to own gold. Big time. By then, you're probably already talking about being close to $3,000 an ounce anyway, if not higher.
Mike Gleason: Yeah, certainly that's where hard assets comes in and it does seem like the inflationary bubble is going to be upon us some time soon. Well lastly, Greg, as we close here, any final comments you want to share with our listeners today? Maybe you want to make another call about one of the commodities or precious metals you think people ought to be paying most closely attention to here? Or anything else you want to comment on as we begin to wrap up today?
Greg Weldon: You know what? I'm not a crypto currency guy. I think the whole name is fraudulent in the sense that these are not currencies. They're not legal tender, so on and so on and so on. But they're commodities and they're ... It's mined like gold and to whatever degree, there's supply/demand and there's all these little nuances to each individual little inner commodity within this commodity and I call it crypto tokens because that's what it is. I like Bitcoin right here. I really do. And I think it's interesting to note that Bitcoin versus gold, the ratio is kind of bumping into the down trend line, it goes all the way back to the peak in Bitcoin.
We actually bought it yesterday and today for ourselves; for my managed accounts. So, that's one idea I throw out there. I talked gasoline on your show before. That finally busted out yesterday and we bought it at 75 cents and it's trading 90 already. I think it goes back to $1.35. If this is redundant, pardon me, but again, you have disinvestment in this sector as a whole. You don't build new refineries. It's just not something that's done very frequently. There's a lot of regulatory houses you got to go through and it takes a lot of money to maintain these things. You got to turn around from heating oil. It's not quite as bad as it used to be, but it is still capital-intensive.
And the degree to which you have a lack of investment because of green energy, let's not even get into that whole discussion. But when you discuss that, it's not like everyone's going to stop driving gasoline-powered cars all at once. First of all, that's all been kind of pushed back on the back burner; electric vehicles. Let alone, the main component of the battery is nickel sulfate… mining nickel, mostly in Australia, that's not a clean, green business. So, this whole thing's kind of ludicrous in my opinion.
Having said all that, the point is, it's not like just because people want to go green they're going to stop driving their cars. And you are in a situation now where any disruption will cause a major spike in prices. And once you come out of this and you work down the inventory overhang, which you have. And you have one and it's sizable in gasoline, but it's not going to last because you're not refining gasoline right now, either. So, production is way down. It's down like 25% over the year. Some of that's a factor, people can't work.
And I'm actually going to swing this all the way back around. I'm going to give you another quick point just because it's so important I make this point. I forgot to make it earlier. On the economics, on the U.S. consumer, on small businesses in the U.S., unemployment, these kinds of things. Even the businesses that come out of this, the Fed surveys, again, showed the percentage of firm small businesses and self-employed people that took advantage of the PPP and whatever the fancy names were for the programs the government rolled out, but more small businesses tapped lines in credit and took out new loans from the bank or tapped cash reserves. That was the highest one; like 38% tapped cash reserves.
The point here is, the virus is not over, number one. Second wave coming for sure, depending on how irresponsible people are about going back out there. But the bigger picture thing is the cushion, the safety net, is gone. If you have another event, you have some kind of bank issue, you have some kind of sovereign debt issue in Europe, you have Japan blows up... you have any of these things. Emerging markets, commodities, whatever. Any of those other landmines get touched off, small businesses, self-employed, the majority of people, and a lot of bigger businesses have used their cushion to cushion the blow from this viral outbreak. They don't have a cushion for a second event. You get a one-two body blow here, the second blow would potentially be even more devastating. And it won't take much because this boxer here, the U.S. economy, is fatigued, man, and sucking for air. Sucking, gasping for air. Really sucking wind. And you take another really hard shot to the ribs from some other event, nobody out there is positioned to dig out of another hole.
Mike Gleason: Yeah, very well put. It is a very tenuous situation here and look forward to continuing to follow it with people like yourself.
Great stuff, as usual, Greg. We really appreciate the time. Before we sign off, though, please tell people about Weldon Financial, The Gold Guru and then how they can follow you more closely.
Greg Weldon: Yep. Thanks. We run a couple of businesses. It's really just me and my very fantastic, wonderful COO Katelyn Ellis. But just the two of us. I manage money, so we're CTA, so we do have managed accounts. I have an institutional research product called Weldon Live and that's daily and a higher price goes out to the institutions. It covers everything. Everything. Foreign exchange, fixed income, all the things we talked about today, and has positions and recommendations and ETFs in the futures markets and the cash markets in all of those sectors… ags, energy, metals, stock indexes, global E bonds, currencies; the whole nine yards.
And then there's The Gold Guru and it is Gold-Guru and we're actually offering a special to your listeners. All they have to do is type in the world MIKE for Michael Gleason, the great orator here of Money and Metals Exchange. And I highly recommend him to all my friends. You know, Mike, that I send my friends to you. That's how highly I think of you guys and the job you do. Yeah, just type in Mike and we're going to give 50% off your first month subscription and it's pretty inexpensive compared to our institutional product, which is five figures and up. The $60 a month for Gold Guru is a steal. It really is. That's Gold-Guru.
Mike Gleason: Yeah, that's fantastic. Right back at you. We really appreciate the work you do and everything that you've contributed to the podcast over the years. Gosh, I'm just thinking about the amount of money that people could be making just listening to your advice here on our podcast. And obviously, you go a whole lot deeper with your services. So, urge people to check that out. It is fantastic stuff for sure.
Well, glad we were able to get you back on here, Greg. And it was wonderfully speaking to you. I hope you have a great weekend and can't wait to catch up with you again before long. And there's going to be no shortage of things to talk about for the foreseeable future. Until then, take care, my friend.
Greg Weldon: Yes. You, too. And again, MIKE is the bonus code. That's capital M-I-K-E. All caps. Mike.
Mike Gleason: Great stuff. That will do it for this week. Thanks again to Greg Weldon of Weldon Financial. For more information, simply go to Weldon Online where you can sign up for a free trial there. And then be sure to check out Gold-Guru. And you heard it right there from Greg. Promo code MIKE and you'll get half off your first month there. That's a fantastic thing to be checking out. Do it right now.
And check back here next Friday for our next weekly Weekly Market Wrap Podcast. Until then, this has been Mike Gleason with Money Metals Exchange, thanks for listening and have a great weekend everybody.