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Authored by Jared Dillian via MauldinEconomics.com,

I remember where I was the first time I heard about gold. I was in my 1995 Toyota Tercel in downtown San Francisco, listening to the radio. Usually I listened to the Razor and Mr. T on KNBR 680, but for some reason I had the news on. The announcer mentioned that gold was up that day, to $265 an ounce.

It wasn’t a white light moment. And gold didn’t seem exceptionally cheap to me. $265 an ounce seemed like a lot. But if I’d known anything at all about the price history, I might have had a different opinion.

I didn’t think about gold much when I got to Lehman Brothers in 2001, either. I was getting a job in equities. All the jobs were in equities or fixed income. I didn’t even know that Lehman Brothers had a commodities desk, and even if I did, nobody would have thought about getting a job there.

Around this time I was reading a lot of Ayn Rand stuff, and I kept coming back to Alan Greenspan’s 1966 essay titled “Gold and Economic Freedom.” I probably read it a hundred times and even memorized parts of it. The takeaway was that if the government had too much debt, it would be compelled to print money to buy the debt to keep interest rates down.

The year was 2005 – we were still three years away from quantitative easing, although it was already a twinkle in Bernanke’s eye.

That was about the first time that I thought of gold as an investment. And coincidentally, that was the time that some folks from State Street and the World Gold Council came by the office to sign us up as Authorized Participants for the new gold ETF, GLD.

To this day, GLD remains a very important financial innovation – subsequent attempts to securitize commodities have led issuers to create products in ETN form that tracked or held futures contracts, introducing basis and roll risk into the equation.

GLD is simple – it holds physical gold. A few years later, there would be some arguments about “paper gold” and unallocated versus allocated gold. But GLD is still trucking to this day, and it’s the most liquid and practical way to buy large quantities of gold.

Of course, when Bernanke actually did launch quantitative easing, gold got really popular, along with something called CMS caps, which was basically a structured call option on interest rates.  People thought there would be lots of inflation, and if you read Greenspan’s “Gold and Economic Freedom” essay, you might be led to believe that.

Gold worked, but the CMS caps didn’t, as bond yields actually went lower. Of course, the feared inflation never materialized. But as far as trades go, the gold trade was a pretty good one, and it worked based on the fear of inflation, not actual inflation.

After the last eight years in purgatory, gold is starting to work again. The technicians are saying that it broke out. This is where things get complicated. Why does one buy gold?

Is it as an inflation hedge?

Is it because of political risk or geopolitical risk?

Is it because of deficits?

Is it because of stupid monetary policy?

It is kind of a confluence of all these things:

• Inflation trades have started to work in the last month or so

• The election is going to be bananas, and now there is tension in the Middle East

• The deficit problem seems to be intractable, and people are talking about MMT

• Powell is widely seen as caving to Trump’s demands

Which means it should be a pretty good environment for gold.

You don’t need gold if you believe that the Federal Reserve will be a good steward of purchasing power. That looks less likely under this administration or any subsequent administration. The takeaway:

You don’t need inflation to skyrocket for gold to work-although we should have learned that from the 2009–2011 period.

Am I a gold bug? Maybe, but without the conspiracy theories. I’ve always been pessimistic about the Fed’s ability to control the currency. That pessimism has at times been unwarranted.

Bernie Sanders is essentially tied in Iowa and New Hampshire. The probability of him being president is not zero (in fact, it’s about eleven percent). Try to imagine what a Bernie Sanders Fed would look like, given what we know about his love for MMT. Something tells me that the Sanders Fed would be even less free from political influence than the Trump Fed.

I’m not here to tell scary stories. Some people say that gold outperforms stocks. Some people say that stocks outperform gold. It depends on where you pick your starting point, and people are very dishonest about that.

I will say this: It only takes a small amount of gold to dramatically change the risk characteristics of your portfolio—for the better.

And I don’t think that millennials own a single ounce.

*  *  *

Your solution for intelligent ETF investing. Jared’s introductory service, helps investors use ETFs to make more money in the markets with less volatility. ETF 20/20 is a newsletter for every investor—order your subscription now

After the “bang” of a November jobs juggernaut, when the US economy added a whopping 256K jobs (revised lower from 266K) largely on the back of a surge in mfg jobs as GM workers returned from strike, the December jobs report was decidedly a whimper, with just 145K jobs added, a sharp 111K drop from the prior month and below the 160K consensus estimate.

What is more concerning than the headline payroll, was the parallel drop in average hourly earnings, which posted the lowest annual increase since July 2018.

Why the wage weakness? One look at the composition of job gains in December reveals the reason for the latest poor wage print: Of the 145K December job gains, 80% went to minimum-wage and low-paying industries, namely 41.2K new retail workers, 40K Leisure and Hospitality workers and another 36K Education and health workers, a total of 117 minimum wage, or close to it, job gains.

Indeed, as shown in the chart below, unlike November’s blockbuster gains in professional & business service and manufacturing jobs, December’s job gains were mostly across low-paying jobs.

Worse, on the other ends, December also revealed big drops in some of the best paying jobs, namely manufacturing, transportation and mining, all of which shrank in December. In fact, as we showed previously, manufacturing just suffered its second worst month in 4 years, and November’s huge drop was largely a function of the GM strike, so one can argue that the December manufacturing slump is the starkest consequence yet of the ongoing trade war with China.

Some other observations on who is hiring, and who isn’t:

• Retail trade added 41,000 jobs. Employment increased in clothing and accessories stores (+33,000) and in building material and garden supply stores (+7,000); both industries showed employment declines in the prior month. Employment in retail trade changed little, on net, in both 2019 and 2018 (+9,000 and +14,000, respectively).
• Health care employment increased by 28,000 in December. Ambulatory health care services and hospitals added jobs over the month (+23,000 and +9,000, respectively). Health care added 399,000 jobs in 2019, compared with an increase of 350,000 in 2018.
• Leisure and hospitality jobs continued to trend up in December (+40,000). The industry added 388,000 jobs in 2019, similar to the increase in 2018 (+359,000).
• Mining employment declined by 8,000 in December. In 2019, employment in mining declined by 24,000, after rising by 63,000 in 2018.
• Construction employment changed little in December (+20,000). Employment in the industry rose by 151,000 in 2019, about half of the 2018 gain of 307,000.
• Employment in professional and business services showed little change (+10,000). The industry added 397,000 jobs in 2019, down from an increase of 561,000 jobs in 2018.  
• Transportation and warehousing jobs were changed little in December (-10,000). Employment in the industry increased by 57,000 in 2019, about one-fourth of the 2018 gain of 216,000.
• Manufacturing employment dropped in December (-12,000). Employment in the industry changed little in 2019 (+46,000), after increasing in 2018 (+264,000).

Finally, courtesy of Bloomberg, here is a breakdown of the ten industries with the highest and lowest rates of employment growth for the most recent month; it shows that there was a renaissance in museum and actor jobs as we closed out 2019.

After vehemently denying that a misfiring of its missile defense system essentially shot UIA Flight 752 out of the sky, Tehran has decided that it will allow international investigators access to data from the plane’s ‘black box’ which could help shed some light on what caused the crash, WSJ reports.

Iran’s top transportation ministers initially said that they wouldn’t share the data, citing the escalating tensions with the US and the West as justification. However, an outpouring of criticism from alleged US intelligence sources, along with trained aerospace analysts, have suggested that “a shootdown scenario” most likely caused the deadly crash, has apparently changed their mind. Even President Trump has said that he doubts the Iranians’ explanation.

Courtesy of WSJ

So Tehran has invited representatives from Boeing, the US, Ukraine (where the plane’s operator, Ukraine International Airlines, is based), France and Canada to join in the probe.

Officials from Iran’s Civil Aviation Organization said Friday during a televised news conference that they would try and analyze the black box data, including the flight data recorder and cockpit voice recorder, in Iran, though experts in Russia, Ukraine, France and Canada are standing by to lend assistance.

Iran will start the process of trying to examine the black boxes at Mehrabad International Airport in Tehran Friday to see if the data is recoverable

“If we can do it ourselves, we will,” Ali Abedzadeh, head of Iran’s Civil Aviation Organization, said during a press conference in Tehran. “If not, we will definitely ask for assistance from other countries.”

But in an early sign that Tehran might be plotting some kind of cover-up, CBS News reported that when its crew visited the crash site west of Tehran on Friday, virtually all pieces of the plane had been removed…

CBS crew just visited the #Ukrainian airlines crash site west of Tehran. Nine am local time. Virtually all pieces of the plane were removed yesterday – say locals. Scavengers now picking site clean. No security. Not cordoned off. No sign of any investigators. pic.twitter.com/hhNJyokhjq

— Elizabeth Palmer (@elizapalmer) January 10, 2020

…though they later clarified, after speaking with Iranian officials, that the site had been cleared and the pieces moved to a different location.

To clarify – Iran clearing wreckage of #Ukrainian Airlines flight #PS752 from crash site within 48 hours is not against any international rules or protocols. Investigators prefer to see where and how wreckage landed before moving, but it is not essential.

— Elizabeth Palmer (@elizapalmer) January 10, 2020

#Iran cleared the wreckage of flight PS752 away from the site within 48 hours – but it has been collected at another location and is being examined by Ukrainian investigators.

— Elizabeth Palmer (@elizapalmer) January 10, 2020

If the world’s suspicions are accurate, and Flight 752 was really brought down by a short-range missile-defense system, officials would then need to determine whether the firing was an accident or deliberate – though most have suggested that an accident is the most likely scenario.

Iranian officials again denied that Flight 752 was brought down by a missile on Friday after Ukrainian officials told the press that they believed a missile strike or terrorist bombing were two of the four likely scenarios behind the crash that they were exploring.

The Dow Jones Industrial Average just topped 29,000 for the first time…

…with Dow futures up 900 points from Tuesday night lows…

Apple has led the Dow’s most recent surge …

On fundamentals…

Source: Bloomberg

The weekly RSI is now signaling The Dow is at its most overbought since right before Feb 2018’s Volmageddon and September 2018’s start of a collapse…

Source: Bloomberg

And if you’re still deluded enough to believe this is about fundamentals in any way, there’s this…

Source: Bloomberg

President Trump says “the best is yet to come”…

“11,000 points gained in the Dow in the 3 years since the Election of President Trump. Today it may hit 29,000. That has NEVER happened before in that time frame. That has added 12.8 Trillion Dollars to the VALUE of American Business.” @Varneyco @FoxNews The best is yet to come!

— Donald J. Trump (@realDonaldTrump) January 10, 2020

Trade accordingly.

Authored by Mohamed El-Erian via Project Syndicate,

After committing to monetary-policy normalization in 2018, the US Federal Reserve and the European Central Bank spent the past year reversing course with further interest-rate cuts and liquidity injections. Yet, given mounting medium-term uncertainties, central bankers cannot assume calm conditions in 2020.

After a year that involved one of the biggest U-turns in recent monetary-policy history, central banks are now hoping for peace and quiet in 2020. This is particularly true for the European Central Bank and the US Federal Reserve, the world’s two most powerful monetary institutions. But the realization of peace and quiet is increasingly out of their direct control; and their hopes would easily be dashed if markets were to succumb to any number of medium-term uncertainties, many of which extend well beyond economics and finance to the realms of geopolitics, institutions, and domestic social and political conditions.

Just over a year ago, the ECB and the Fed were on the path of gradually reducing their massively expanded balance sheets, and the Fed was increasing interest rates from levels first adopted in the midst of the global financial crisis. Both institutions were attempting to normalize their monetary policies after years of relying on ultra-low or negative interest rates and large-scale asset purchases. The Fed had raised interest rates four times in 2018, signaled further hikes for 2019, and set the unwinding of its balance sheet on “autopilot.” And the ECB had ended its balance-sheet expansion and begun to steer away from further stimulus.

A year later, all of these measures have been reversed. Rather than hiking rates further, the Fed cut them three times in 2019. Instead of reducing its balance sheet, the Fed expanded it by a greater magnitude during the last four months of the year than at any comparable period since the crisis. And far from signaling an eventual normalization of its rate structure, the Fed moved forcefully into a “lower-for-longer” paradigm. The ECB, too, pushed its interest-rate structure further into negative territory and restarted its asset-purchase program. As a result, the Fed and the ECB cleared a path for many interest-rate cuts around the world, producing some of the most accommodative global monetary conditions on record.

This dramatic policy turnaround was particularly curious in two ways.

First, it materialized despite growing discomfort – both within and outside central banks – about the collateral damage and unintended consequences of prolonged reliance on ultra-loose monetary policy. If anything, this discomfort had grown throughout the year, owing to the negative impact of ultra-low and negative rates on economic dynamism and financial stability.

Second, the dramatic reversal was not a response to a collapse in global growth, let alone a recession. By most estimates, growth in 2019 was around 3% – compared to 3.6% the previous year – and many observers are expecting a quick rebound in 2020.

Rather than acting on clear economic signals, the major central banks once again succumbed to pressure from financial markets. Examples include the fourth quarter of 2018, when the Fed reacted to a sharp stock-market selloff that seemed to threaten the functioning of some markets around the world. Another occurred in September 2019, when the Fed responded to a sudden, unanticipated disruption in the wholesale funding (repo) market – a sophisticated and highly specialized market segment that involves close interaction between the Fed and the banking system.

This is not to suggest that central banks’ objectives weren’t at risk on each occasion. In both cases, generalized financial-market dislocations could have undermined economic growth and stable inflation, creating the conditions for an even more acute monetary-policy intervention down the road. That is why the Fed, in particular, couched its policy U-turn in terms of “insurance.”

But the challenges facing central bankers do not stop there. By allowing financial markets again to dictate monetary-policy changes, both the ECB and the Fed poured more fuel on a fire that has been raging for years. Financial markets have been driven from one record high to another, regardless of the underlying economic fundamentals, because traders and investors have been conditioned to believe that central banks are their BFFs (“best friends forever”). Time and again, central banks have proved willing and able to step in to suppress volatility and keep prices of both stocks and bonds elevated. As a result, the right approach for investors has been to buy whenever the market dips, and to do so more and more rapidly.

Yet, given mounting medium-term uncertainties, central bankers cannot assume tranquil conditions in 2020. While ample and predictable liquidity can help calm markets, it does not remove existing barriers to sustained and inclusive growth. The eurozone economy in particular is currently saddled with structural impediments that are eroding productivity growth. And there are deep long-term structural uncertainties stemming from climate change, technological disruptions, and demographic trends.

Moreover, around the world, there has been a generalized loss of trust in institutions and expert opinion, as well as a deep sense of marginalization and alienation among significant segments of society. Political polarization is more intense, and many democracies are undergoing uncertain transitions. Also, although the trade tensions between the United States and China have been temporarily alleviated by a “phase one” deal, the underlying sources of conflict have hardly been resolved. And the world is suddenly on tenterhooks as tensions between the US and Iran have escalated, with Iran vowing further retaliation for America’s targeted killing of Iran’s top military leader.

For long-term economic wellbeing and financial stability, this litany of uncertainties demands a policy response that extends well beyond central banks’ traditional remit. It calls for comprehensive multiyear engagement using structural, fiscal, and cross-border tools. Without that, financial markets will continue to expect central-bank interventions that a growing body of evidence indicates are not just increasingly ineffective for the economy but also potentially counterproductive. Whether or not central banks avoid the spotlight in 2020, they are likely to face even greater challenges to the political autonomy and policy credibility that are so crucial to their effectiveness.

Iraqi Prime Minister Adel Abdul-Mahdi, who is still serving in a ‘caretaker’ capacity, has informed Secretary of State Mike Pompeo that the US must establish a mechanism for the full withdrawal of remaining US troops in Iraq, which according to most estimates numbers around 5,000. Toward that end the Iraqi PM requested a US delegation be sent to work out such a plan.

According to the AP, Abdul-Mahdi made the request during a phone call with Pompeo on Thursday night. Specifically, the statement urged the administration to “send delegates to Iraq to prepare a mechanism to carry out the parliament’s resolution regarding the withdrawal of foreign troops from Iraq.”

Despite what appears a temporary de-escalation following Iran’s ballistic missile ‘counter-attack’ avenging the death of Qasem Soleimani, Abdul-Mahdi appears to have maintained his stance that the Americans should depart: “The prime minister said American forces had entered Iraq and drones are flying in its airspace without permission from Iraqi authorities and this was a violation of the bilateral agreements,” the statement continued.

Since the summer there’s been a growing political movement in Iraqi parliament to vote to formally expel the US military presence following the demise of ISIS, but most importantly after a series of unauthorized airstrikes on Iraqi soil targeting Shiite paramilitaries carried out by the United States and Israel. 

At the start of this week, Iraq’s parliament did hold a largely symbolic vote to expel American forces which passed; however, despite international headlines suggesting it was a ‘done deal’, the reality is that it was merely a ‘non-binding’ though significant first step that could ultimately prove slow in realizing. 

Despite the earlier confusion over a potentially leaked Pentagon letter which claimed to initiate immediate US troops withdrawal with the Iraqis, resulting in denials and confusion running through the chain of command, Secretary of Defense Mark Esper has since underscored that US troops will not be leaving Iraq. 

And according to Axios, US officials attempted to halt the weekend Iraq parliament vote to expel American forces. “It’s our concern that Iraq would take a short-term decision that would have catastrophic long-term implications for the country and its security,” one unnamed Trump administration official was quoted as saying. 

“But it’s also, what would happen to them financially,” the official told Axios. “If they allowed Iran to take advantage of their economy to such an extent that they would fall under the sanctions that are on Iran?”

Surprisingly, the administration has of late invoked the threat of sanctions on its ally the Iraqi government, despite for years propping up the post-Saddam political system and military. 

Authored by Richard Breslow via Bloomberg,

One take away from the earliest days of this new year is that the global central banks are intending to stick with dovish policies, come what may.

Whether it was Richard Clarida, Mark Carney or Stephen Poloz, among others, they have made it clear that official rates aren’t going higher anytime soon. Regardless of the numbers. That’s what they mean by forward guidance.

And it’s likely to prove an effective tool. It will define the trading environment for the foreseeable future.

Source: Bloomberg

One investor’s asset bubble is another one’s anti-recession insurance policy.

Source: Bloomberg

We keep hearing that the economy is in a good place. That things are moving in the right direction. That global headwinds, recent Middle East events notwithstanding, are easing. Or at least in abeyance. There is cautious optimism about the European economy and positive excitement about Asia. All of that is true. Or, at least, a valid operating assumption. But it will not translate into changing the odds of rate hikes.

In the last few days, much has been made of the massive volume of investment-grade debt issuance. Credit spreads are minuscule, rates low and investor appetite, domestic and international, strong as a bull. Don’t think of this as borrowers trying to tap some perceived limited window of opportunity before it closes. It’s just a wonderful environment to issue debt. Money is pouring into IG funds. Undeterred by new-issue concessions that are barely noticeable. Lipper reported that in the U.S., inflows for the week ended January 8 was the largest ever reported. The interesting side of this equation is the investor appetite even more so than on the grateful issuers. Investors are buying, literally, into the notion of low rates forever.

One additional consequence of all this is that asset price volatility is likely to stay low. Expectations for a lot of things starting to whip around may be disappointed. That’s exactly what central banks want and they very much might be rewarded. This could end up being an investor’s paradise and a trader’s frustration. Outside influences can always interfere with the best laid plans. I can’t help wondering if it will be politics rather than economics that drives matters.

In this benign environment it’s possible that emerging markets can do well regardless of whether the dollar stays strong or not. And it is, indeed, hard to see it getting hit against the majors. If everyone is on hold, the dollar has a lot of appeal. The Dollar Index is just above its one-year average price and that seems about right. Many analysts posit that the world would benefit from a lower U.S. currency. And in normal circumstances that would be the case. This could be an exception. Developed markets would welcome soft currencies and it doesn’t hurt emerging ones? That’s a win-win.

The yield curve is a tougher call. And economic numbers will have some influence. But if Treasuries end up staying in the range we’ve experienced in the last several months, which looks like a distinct possibility, we could be going nowhere fast.

As for equities, at the moment, there seems little, barring an exogenous shock, that will shake the longs from their bullish resolve. It’s a strange place to be that everyone can be complacently comfortable with their positions and it’s hard to argue with them. That may end up being the biggest threat out there.

Like in airplanes, Teslas are equipped with “black boxes” that log critical information in the seconds and minutes leading up to accidents and crashes. They record details like braking, airbag deployment and other measurements. 

While conventional vehicles can have their Black Boxes accessed widely, cars with automated driving technologies can only have their information accessed by the manufacturer. This means that any potential investigation hinges on information that would need to be handed over by the company that’s being investigated. 

And so Bloomberg’s Dana Hull asks a good question: should we be worried that the only people that have access to this information are the manufacturers themselves?

And we’ll ask another question: isn’t this even more true when, say, that company perhaps doesn’t have the best track record for unbridled honesty?

Sam Abuelsamid, principal analyst for Navigant Research in Detroit said: “We should not ever have to rely on the manufacturer to translate this sort of data, because they are potentially liable for product defects and they have an inherent conflict of interest.”

“As we deploy more vehicles with these partial automation systems, it should be mandatory to record information about the state of automation and the driver,” he continued. 

After one 2016 crash in Florida, the NTSB came out and called for the Transportation Department to define what data should be collected. 

In the 2016 crash report, the NTSB commented: “As more manufacturers deploy automated systems on their vehicles, to improve system safety, it will be necessary to develop detailed information about how the active safety systems performed during, and how drivers responded to, a crash sequence. Manufacturers, regulators, and crash investigators all need specific data in the event of a system malfunction or crash.”

Meanwhile, the NHTSA says it is reviewing a crash in California involving a Tesla that took place this weekend. They have not commented on whether or not Autopilot was engaged at the time of the accident. 

Raul Arbelaez, vice president of the Insurance Institute for Highway Safety’s Vehicle Research Center, said: “The the inability to readily access that data impedes the ability of researchers to understand how automated driver-aids are performing in the field, especially in less-severe crashes that account for the vast majority of traffic collisions.”

He continued: “How do people interact with these technologies? What conditions do they tend to work in? Do they work really poorly at night with snow and rain, or are they excellent under those conditions? I’m sure it is very useful for the auto manufacturers to help them improve their products down the line, but in terms of understanding how the current fleet is performing, we really don’t have access to that in these crashes that are happening very quickly without working with the manufacturers.”

In the case of the 2016 Florida crash, the Tesla didn’t have an event data recorded that could be read by widely available tools. Instead, the company had to turn over the information that revealed the driver was using Autopilot. 

The last rule to govern these devices, made in 2006, requires 15 parameters that the NTSB says  “are inadequate to comprehend even the simplest questions of who/what controlled an automated vehicle at the time of a crash”.

The NTSB continues to investigate several crashes involving Teslas and Autopilot:

The NTSB is investigating other Tesla vehicles crashes that occurred while Autopilot was in use, including a March 2018 fatal collision in Mountain View, California. The NHTSA, meanwhile, has launched probes into 13 crashes that it believes may have occurred while drivers were using Autopilot, including a Dec. 7 crash in Connecticut in which a Tesla driver rear-ended a parked police cruiser.

The agency is taking interest in how the new technology is being used, the article claims. However, we can’t help but believe the NTSB and the NHTSA have been dragging their feet at taking what we believe to be an extremely dangerous “feature” off the roads.

We have often asked how many more people need to wind up decapitated, like the 2016 driver, whose Tesla drove itself under a semi-truck while trying to change lanes, for regulators to act.