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Authored by Jesse Felder via TheFelderReport.com,

Almost two years ago I wrote, “Why Warren Buffett Would Be Buying Precious Metals Again (If He Could).” In that piece, I referenced a quote from his 1997 Letter to Berkshire Hathaway Shareholders: 

“Last year, we purchased 111.2 million ounces. Marked to market, that position produced a pre-tax gain of $97.4 million for us in 1997. In a way, this is a return to the past for me: Thirty years ago, I bought silver because I anticipated its demonetization by the U.S. Government.” 

Last week, Berkshire Hathaway revealed a stake in Barrick Gold, one of the BANG stocks I have been writing about for the past couple of years.

And I believe this investment is once again related to “demonetization.”

However, in 1967 the word meant one thing; today it means something slightly different.

• 53 years ago, “demonetization” meant the breaking of the dollar’s official link to gold.

• Today, because there is no longer any official link, it means the dollar’s value relative to gold will deteriorate, and possibly to a significant degree, just not all at once like it did in 1971 as a result of the “Nixon Shock.”

The demonetization of the dollar today is less of a shock and more of a slow and steady burn which only makes it more insidious.

Just over a year ago, Charlie Munger, Warren’s parter at Berkshire, had to say in this regard,

“I am so afraid of a democracy getting the idea that you can just print money to solve all problems and eventually I know that will fail…

All the politicians in Europe and America have learned to print money…

Who knows when money printing runs out of control?

At the end, if you print too much you end up with something like Venezuela.”

Since then, the affinity for money printing has only grown in Washington and the Fed’s balance sheet has nearly doubled as a result.

In this light, it’s not hard to see why the recent actions by Congress and the Fed to generate the biggest fiscal deficit-to-GDP in history and monetize the entire amount would inspire the greatest investor of modern times to put on an inflation hedge.

As I wrote a while back, Berkshire is too big today to buy precious metals directly but an equity investment that may be a much more efficient inflation hedge than your average stock is right up their alley.

And it doesn’t hurt that Barrick has spent the past several years remaking itself in Berkshire’s image.

The similarities with the housing bubble boom-bust are growing by the day. Not only are stocks at all time highs, to which we can now add record low yields and an all time high gold price as the 10Y real yield has dropped to an unprecedented minus 1% all time low sparking rampant risk-on euphoria among the retail investing community, but over the past year there has also been a veritable explosion of “blank check” companies  which are shell companies that have no operations but plan to go public with the intention of acquiring or merging with a company with the proceeds of the SPAC’s initial public offering.

As we discussed three weeks ago, investment in SPACs usually surges near market peaks, when there is broad consensus among the professional investing community that equities are overvalued as there is now – as a reminder the August Fund Manager Survey from BofA found that a record 78% of Wall Street professionals believe that not only stocks but every other assets is the overvalued on record.

The last time we saw such a surge in SPACs? 2007, just before the housing/credit bubble crashed and Lehman defaulted.

And while the SPAC bubble burst in 2008 along with the rest of the housing/credit bubble, it has now completely recovered, and as Goldman’s David Kostin showed in a recent Weekly Kickstart, SPAC capital raising has soared YTD.

For those who missed it, some statistics: since the start of 2020 through the end of July, 51 SPAC offerings have been completed raising $21.5 billion, up 145% from the comparable year-ago period. In 2019, 51 SPAC IPOs were completed totaling $13.2 billion and 2018 witnessed 35 offerings for $9.3 billion. SPACs have accounted for one-third of all US IPO activity since the start of 2019. Completed SPAC offerings currently searching for acquisitions exceeds $38 billion.

Well, to this “blank check” frenzy we can now add the consummate smooth-talking politician and former vice-presidential candidate, Paul Ryan, who according to Dow Jones is also “jumping into the rush on Wall Street toward blank-check acquisition companies.”

According to the report, the former Republican House speaker will serve as chairman of a SPAC known as Executive Network Partnering which will seek to raise roughly $300 million in an initial public offering.

While SPACs have been all the rage among Wall Street icons including Bill Ackman and Chamath Palihapitiya, Ryan is the first prominent politician to join a surge this year in the creation of blank-check companies.

And now that the fusion of Wall Street and K Street has been tapped, expect a flood of other US politicians hoping to capitalize on the biggest stock bubble in history which their total dysfunction made possible as it left the Fed in charge of virtually every aspect of the US economy.

Authored by Jonathan Turley,

When I testified on the violence in current protests in cities like Portland, most of the Democratic senators insisted that violence in Portland was due to the arrival of federal officers to protect the federal courthouse and that the violence subsided after the federal officers were withdrawn. 

As other witnesses pointed out, the violence had been raging for weeks and a riot was declared by the Portland police the very night before.  The violence has indeed continued though the coverage has been light, including the arson at a county government building yesterday.

One of the most shocking incidents involve the attack at a Black Lives Matter demonstration of a man who was beaten after people filmed and mocked him. Police say one of the chief attackers was Marquise Love, 25, and he is someone already familiar to police. In an interesting twist, Love is now reportedly raising funds while on the run from police.

The attack in Portland was vicious and various individuals attacked Adam Haner but Love is allegedly the individual who kicked him in the head. It was captured on video.

Love has seven arrests in Washington County, Oregon alone. This includes a 2017 arrest for domestic assault and domestic harassment. He also has two separate arrests in 2016 for providing false information in connection with the transfer of a firearm, and domestic assault and criminal trespass.

He has violated probation and has been forced to accept paternity over a child. In 2012, Love was arrested twice in 2012 for second-degree theft interfering with public transportation and criminal trespass.

Love goes by “Keese” and, according to Heavy, his Facebook page says that he is a “Dj for Portland Oregon clubs. Living life to the fullest. Keep lurking.”

Haner was the not only one attacked at the BLM protest. A transgender female was shown on videotape being attacked and robbed.

Love claims that he was merely fighting a racist and is now being hunted down by police.

In his recent alleged postings according to The Sun, Love states:

“Might go to jail for murder tonight for a racist when all I did was fight him look it up on twitter put money on my books and come see me.”

The fund campaign could be raised in any sentencing to show the court that Love evaded police while soliciting funds.  Moreover, his social media comments would be admissible at a trial.  The videotape does not show Haner resisting. These postings can be used to show a lack of remorse if Love pleads guilty. That is why this type of social media campaign is never recommended by criminal defense attorneys, particularly before you surrender.

Meanwhile, the victim of this crime, Adam Haner, has raised over $125,000 on his GoFundMe to pay for medical care and rehab.

While stocks have soared to new all time highs, there has been one aspect about this latest meltup that suggests the rally is built on nothing but hot air (and trillions in Fed liquidity injections of course): the complete lack of volume, prompting some to wonder if the Fed has finally succeeded in ‘killing’ the market. And sure enough, as Morgan Stanley’s Rob Cronin writes in an overnight note, “this is NOT a typical August lull in liquidity.”

The Market Has Died

The MS team points out that volumes across almost all products are way below historic seasonal averages. Which is bizarre because this is on the back of the highest volume Jan-to-July we have seen since 2010 (except single name options where volumes were the worst Jan-July since 2010). As the bank explains, the exaggerated August drop in liquidity (leading to higher impact costs) is driven by:

1. large amounts of trading behind us in 2020

2. spot level in equities ~65% recovered

3. in options, vol levels are still too high for many directional funds.

The exception is cash equities where volumes are only slightly below August norms, bid/offer spreads are not wide and data shows more intraday trading vs. closing auction use than normal – indicative of more active trading in single names, which in turn suggests that retail trading remains solid. The rest of August is likely to remain subdued as seasonally volumes are unlikely to pick up until the first week of September.

Below we republish key excerpts from the MS note:

We look at liquidity across 6 products and compare average volumes traded from Aug 1st to 18th from 2010 to now.

• Over the last 10Y, SX5E futures would typically have traded an average ~$41bn a day so far in August. This year it’s just $29bn (-28% lower than normal August levels).

• SX5E index options traded an average of just 639k contracts/day so far in August, –48% below normal levels. 20d volumes this low were last seen in 2013.

• From 1st to 18th August 2019, SX5E dividend futures traded $380m/day – this year it’s just $84m (-62% vs. normal Aug levels).

Cash equities stands out as being more ‘normal’, registering volumes that are only slightly below historic norms for this time of year. SX5E traded on average $12bn/day in August (-10% below seasonal norms) and SXXP traded $39bn (-4% below seasonal norms).

Chart on the left breaks out SX5E futs vs. cash volumes (the cash volumes include data across all execution venues). We can see the drop in futures volumes is more pronounced as cash. Chart on the right shows the volume difference from Aug 1st to 18th of 2020 vs. the average of the same period of the last 10Y. The actual ADV for this year is marked on each bar. Again, you can see here the relatively better cash volumes vs. other products for this time of year.

With the exception of dividend futures (where notional traded is typically <0.5% of equity futs), the biggest seasonal drop in volumes has come in SX5E index options where 20d MA volumes just hit levels last seen in 2013 (left chart below). In the last 5 days, we traded $5bn of combined put/call delta per day vs. ~$12bn/day 5Y average. Over-writing programs appear as active as ever, but non-directional volatility selling strategies (var sellers) and directional option users are less active.

Single name options had the WORST Jan-July of volumes since 2010 – totally at odds with other asset classes. In March, the ratio of notional SX5E index option notional volume traded vs. notional traded in SX5E single names reached 37x – a 10Y high (we have adjusted the SX5E single name basket to allow for index rebals through time). The ratio has since fallen to 15x (right chart below) driven by the drop in index. Both SNO and index option volumes are <1st %-ile vs. 2010.

Separately, MS also notes that in Q1 2020, bid offer spreads in cash hit new highs. The average SX5E name traded ~12bps wide at their worst (vs. Jan 1st level of 3bps) while the Small Cap SCXP index names traded as high as 32bps wide (vs. Jan 1st level of 12bps). The good news is that spreads have tightened by ~80% since with the indices now trading 4bps and 15bps wide respectively, which is a “sign of normality in cash”, at least until the next time the market goes bidless.

Finally, at the SX5E/SXXP level, use of the closing auction has fallen sharply in the last month. It’s likely that those trading cash equities are more active/intraday players. This is supported further by the fact that key cyclical sectors are seeing the least use of the auction over the last week (Banks use is just 13%, 1st percentile vs. 2012).

Authored by James Rickards via The Daily Reckoning blog,

A lot of the policy response to the COVID-19 pandemic was based on the belief that it would be over quickly. We saw big, multi-trillion dollar spending bills from March into May. The Fed took their balance sheet from about $3.8 trillion to around $7 trillion. (By the way, I can easily envision some scenarios where it goes to $10 trillion).

But all that was done as a sort of bridge loan to get us from April to July. The expectation in April was that when we got to July, the pandemic would be under control, we could reopen the economy, it would be a V-shaped recovery, and it would all be good before the election. That hasn’t turned out to be the case.

Here we are in mid-August. The virus has surged in several states, which have increased their restrictions in many cases. But the relief packages have largely ended.

Congress is debating another bailout package, but there’s no consensus. It may happen. But as of now, there’s no middle ground between Democrats and Republicans. And that’s important because if you go back to the bridge loan analogy, we’re going to need another to keep the economy and stock market propped up if lockdowns continue.

Now we’re facing a second wave of layoffs. A lot of people who would have been laid off in April were kept on the payroll until, say, the end of July. But there’s no more Payroll Protection Plan. So all of the layoffs that would have happened in April are going to happen in August.

Come September, when we get the August employment report, we may see a real deterioration of employment based on what I’m describing.

We also need to be aware of the real possibility of a second wave of COVID-19 infections.

We’ve heard a lot about the second wave. We’re seeing huge outbreaks in Los Angeles, for example. California has gone from about 4,000 fatalities to now over 10,000 fatalities. It’s passed Massachusetts, which was third on the list. Now Massachusetts is sixth, but Texas and Florida are coming up fast, 4th and 5th respectively.

But this isn’t a second wave. It’s just an extension of the first.

To see why, let’s get into the medical science a bit. The virus started in Wuhan, China. But it spread in two directions. It came east where there was an initial outbreak in California and Washington. But the virus also went west out of China to Italy. Why Italy?

It was Fashion Week in February and the Chinese essentially own the fashion industry. So there were tens of thousands of Chinese flying to Milan for Fashion Week. In Italy, the virus mutated and became more contagious. Not more lethal. The death rate didn’t go up, but the contagion rate went up. Deaths increased, but only because the number of infections increased. The Italian strain, let’s call it, then came to New York.

New York was the epicenter, the hotspot of the entire country, while California seemed to be doing pretty well. The assumption was that California Governor Gavin Newsom was doing everything right and Governor Andrew Cuomo must have been doing everything wrong.

Cuomo made a lot of mistakes, no question about it, but that wasn’t the difference. The difference was the initial strain in California was less contagious than the one that hit New York.

Now what has happened two months later is that the Italian strain, which hit New York, has spread to the rest of the country. This is not just a question of public policy, smart governors versus incompetent governors. It’s California getting hit with the Italian strain that hit New York in March.

That’s why the California rate is going up. But none of this is a true second wave as virologists and epidemiologists understand it. This is really the first wave with timing differences.

A real second wave is when you actually do get the virus under control and the caseload drops off everywhere. Then four, five or six months go by and it comes back more fatal, more contagious than before.

That’s what happened in the 1918 Spanish flu. There was a bad outbreak with a lot of fatalities in March 1918, but the most fatalities happened in October after the initial outbreak cooled down.

There was relative calm in May and June, but then it started coming back. By October it got so bad that bodies were piled up on the streets like cordwood. There were so many bodies they didn’t know what to do with them all.

That’s what a second wave could potentially look like. We could see a real second wave based on a mutation that could come this fall and winter.

The larger problem is there’s good evidence that lockdowns don’t work. Death rates in countries with severe lockdowns weren’t appreciably better than in some countries that didn’t fully lock down.

If you’re on an island and don’t let any ships or planes in, then maybe that works. But society would literally grind to a halt. You would literally destroy the world’s largest economy and the global economy. That’s not a viable option.

Some restrictions make sense. Maybe we don’t attend large gatherings for a while. But to go further and shut down every nail salon, barbershop, hair stylist, pizza parlor, dry cleaner, et cetera coast to coast is something else entirely.

Small and medium sized enterprises are 45% of GDP and almost 50% of jobs. When you start shutting that down, you’re shutting down the economy. And that was never necessary. It was never going to stop the problem. If we had done the common sense restrictions while leaving much of the economy open, we would have likely been in much better shape.

There’s the old 90/10 rule, where you can get 90% of the benefit at 10% of the cost. We didn’t do that. We tried to get a 100% benefit, but the cost was 100% of the economy, or close to it.

The reality is, the economy’s in very bad shape. The idea that we’re going to bounce back out of this with all this pent up demand is nonsense. The data is already indicating we’re in a recovery, yes. But if you fall into a 50 foot hole and climb 10 feet up, you’re still 40 feet in the hole.

We’re not going to see 2019 levels of output until 2023 at the earliest. We’re not going to see 2019 low levels of unemployment until probably 2025. We’re not getting back there for three or four or maybe five years. So we’re looking at a long, slow recovery.

And that’s if things don’t get worse from here. But they could, especially if we get a deadly second wave.

We’ve climbed 10 feet out of the hole. Unfortunately, we could find ourselves right back at the bottom before too long.

And digging our way back up to 2019 levels would take even longer.