Submitted by Noble Group Research

Noble Group’s Cliffhanger

2010:  Harry Banga split… most of Noble problems start here.¹

2015:  Noble Group, one of the biggest traders of commodities from coal to iron ore is melting from its base.

Script writers have devised the solution of telling us a story but leaving it at a cliffhanger, thus forcing the market to postpone their execution to hear the rest of the tale.

A villain was designed and a lawsuit with an injunction was filed with the Hong Kong High Court asking to ban his research, hoping to ensure the audience will return to see how the characters would resolve the dilemma.

Behind the scenes, the legally aggressive stance of Noble Group Ltd is rapidly becoming known in the financial analysts’ community as analysts and media organizations are threatened one after another by the troubled SGX-listed trader.

The censorship and its lawyers used to claim full control of the situation with the hope that its critics and the market would be “reset”—akin to being lobotomized.

The company has left us with its cliffhanger: even the most egregious comments made by Iceberg on the trader happened to be entirely correct.

“The Hong Kong High Court has recently ordered that Noble pays a substantial amount of money to Iceberg after an unreasonable application made by Noble was once again rejected by the Court”.

The futility of Noble’s claims has been remarkable.

“For example, Noble has defended that Yancoal was not overstated (although it was valued 48 times its market value)  and that saying otherwise would be defamation.” ²

It has not paid off.

Plainly, it’s Iceberg who was right.

Noble Group, the SGX listed trader is insolvent based on liquidation value (a write-off of its commodity contracts or the asset value).

Noble recorded $465m negative OCF in full year 2015, stressing it generates positive cash flow in the second part of the year ($580m after interest) but has never given any detail on how the short hedges supporting this cash generation in Q3 and Q4…

Noble has never turned the page on 2015…

Its Management has a ludicrous coal forward projectio , pricing 60 to 70% above the current curve (and with a deteriorating coal market outlook).

Neither, Noble Group or its public relation firms have enjoyed huge credence or the control of the script lately, and one can fully expect them to be irrational until they either blow up or magically emerge unscathed…

We are prognosticating the likelihood of the former.

Using the same adjusted financials used by financial institutions and rating agencies, we can see who is without trunks as the sea ebbs. The time clock is running.

We are now entering May, with things becoming more loose: why is Noble so late in securing financing?

<sup>1. “Back with a Banga”, South China Morning Post
2. ICEBERG RESEARCH QUESTIONS TO NOBLE’S MANAGEMENT AHEAD OF ITS APRIL 14TH AGM</sup>

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Ahead of the Indiana primary on Tuesday, Donald Trump holds a 15 point lead in the polls according to the Wall Street Journal, and it is starting to become inevitable (at least for those not named Cruz and Kasich) that The Donald will be the Republican's choice to run against Hillary in the fall.

 

“After the Acela primary, there is an aura of inevitability surrounding the Trump and Clinton candidacies,” said Lee M. Miringoff, director of the Marist College Institute for Public Opinion.

The double digit lead in Indiana is significant, as it emphasizes just how badly the bizzare Cruz/Kasich alliance has imploded since its inception. The journal reports that 58% of likely Republican primary voters disapproved of the Cruz/Kasich deal, seeing it as "further proof that the Republicans are trying to rig the game against Trump." As evidence of just how much Cruz and Kasich overestimated the hastily put together deal, 63% of the GOP primary voters indicated that it wasn't a factor in deciding their votes, and that not all of Kasich's supporters would vote for Cruz if Kasich wasn't there.

Looking further down the road, and perhaps setting the stage for the pressure delegates will feel by their constituencies, nearly two-thirds of the Republican voters said that if no candidate wins a majority of delegates during primary season and a contested convention takes place, then the candidate with the most votes in the primaries should get the nomination.

Trump of course, believes that he's already going to be the nominee outright. In an interview with Fox News Sunday, he said if he wins in Indiana on Tuesday that the race would be over:

"It's over. I think it's over now, but it's over. Cruz can not win."

The interview is also worth the watch as Trump discusses a few other topics such as the Middle East, and how much time and money has been wasted there by the United States' insistence in being in the middle of everything.

"We have so many things to do with our country, we can't have this anymore. We are spending all of our money in the Middle East. If our presidents went to the beach for 365 days a year we'd be a lot better in the Middle East than we are now. Now we have a mess. Every move we've made in the Middle East was wrong."

It will be interesting to see how quickly the establishment's sentiment shifts if Trump in fact does win Indiana by a landslide on Tuesday. After months of increasingly desperate moves to try and stop him, the question will be will how quickly does the establishment pivot to all out support of Trump.

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Submitted by Lance Roberts via RealInvestmentAdvice.com,

Over the last couple of week’s, I have written extensively about the breakout of the market above the downtrend resistance line that traced back to the 2015 highs. To wit:

“With the breakout of the market yesterday, and given that ‘short-term buy signals’ are in place I began adding exposure back into portfolios. This is probably the most difficult ‘buy’ I can ever remember making.”

I also stated that it was probably a trap and that I will be stopped out in fairly short order. But that is the risk of managing money.

It was only a matter of time before the extreme short-term extension of the market begins to correct. Like stretching a rubber band to its limits, it must be relaxed before it is stretched again. The question is whether this is simply a “relaxation of the extension” OR is this a resumption of the ongoing topping and correction process?

Let’s take a look at a few charts to try and derive some clues as to what actions we should be taking next.

First of all, it is worth noting that despite all of the recent excitement of the markets advance, it remains extremely confined in a sideways trading range. This can either be good or bad news.

The Good: Sideways consolidations during bullishly biased markets provides the ability to work off excesses built up during the previous advance to provide the “fuel” necessary for the next leg higher.

The Bad: However, sideways consolidations can also mark the end of the previous bullish advance and the beginning of a bearish decline.

How do we know the difference? Normally, fundamentals tell the story. When earnings are still rising, market consolidations tend to resume to the upside. However, declining earnings have historically marked market topping processes much as we see today.

Back to our first chart above, I have denoted the previous declining market trend and an adjusted downward trend line to account for the most recent peak. Both of these downward trending price lines will now act as resistance to the next attempt by the market to rally higher.

With the markets still extremely overbought from the previous advance, the easiest path for prices currently is lower. The clearest support for the markets short-term is where the 50 and 200-day moving averages are crossing. I currently have my stop losses set just below this level as a violation of this support leaves the markets vulnerable to a retest of February lows. 

On a short-term (daily) basis, the current correction is still within the confines of a simple “profit-taking” process and does not immediately suggests a reversal of previous actions. As shown in the chart below, support current resides at 2040 with the 50-day moving average now trading above the 200-day. 

It is worth noting the similarity (yellow highlights) between the current rally and peak versus the rally and peak during the October through December advance. 

---

Better Smelling Breadth

The good news is that the advance-decline line, currently remains a positive backdrop to the recent price action. My friend and colleague, Dana Lyons, picked up on this last week:

“Thus, we looked at all days since 1965 that saw at least 75% advancing issues on the NYSE, with a gain in the S&P 500 of less than 0.6%. As it turns out, there have been 15 such days, prior to yesterday. Again, 3 of those have occurred just since February.”

“Interestingly, all 16 days have taken place within secular bear markets (if you consider the market to still be in one, as we do). However, all but 1, or maybe 2, took place during cyclical bull markets. Whether or not that is instructive as to the market environment we are in, we won’t be able to say for awhile. But we did find it interesting.

 

What we can say is how the market fared following these days. Now, whether or not the historical results are relevant certainly may be up for debate. However, we did find the results interesting enough to present here.

 

Here is the S&P 500′s performance following the prior 15 occurrences.”

“Obviously, again, we’re dealing with a limited sample size – and with 1-day phenomenons. However, statistically significant or not, the trend has been for the S&P 500 to show consistent strength, from 2 days to 6 months out. 3 weeks (not shown) following these occurrences, the S&P 500 was higher 14 out of 14 times.

 

These are the kinds of results that we wondered if we would see following days like last Friday. Obviously, that was not the case. And considering the similarities between the 2 days, the conflicting results cause us to take these results with a grain of salt. However, at least this time, the results do heavily lean to the bullish side.”

---

Risk Still High

Given the fundamental and earnings backdrop, the longer-term market dynamics are still heavily weighted against the bulls. As shown in the next chart, despite the recent surge higher in prices, the technical backdrop still remains bearishly biased.

With the exception of the number of stocks trading above their 200-dma, which still remains well below levels when prices were last at these levels, every other indicator is at levels and behaving as if we are in a more protracted bear market decline. 

The question remains whether the markets will continue to “buy” the Federal Reserve’s “forward guidance” long enough for fundamentals to play catch up with the fantasy, or not. Historically speaking playing “leapfrog with a Unicorn” has tended to have painful outcomes.

---

A Note On Oil, The Dollar & Rates

Last week, I wrote a fairly extensive post on why I think oil prices are nearing their peak and made a case for trimming back on oil & energy related exposure. To wit:

“In a nutshell, the very easy near-term gains have likely already been seen. As I will explain below, the fundamental and technical backdrop suggests there will be plenty of opportunities for patient, long-term investors to pick up oil/energy exposure at cheaper levels in the months ahead.

 

With supply and demand imbalance likely to remain for years to come, it is very likely that we will once again return to a long period of volatile prices within a very confined range as seen during the 1980-1990’s. Therefore, for those wanting to invest in oil and energy related positions, the shorter-term price dynamics are going to be substantially more important.

 

If we take a look at the “Commitment Of Traders” report we see that exuberance over the recent surge in energy prices has pushed the number of oil contracts back to the second highest levels on record.”

“As with the past, these surges in contracts have typically denoted short-term peaks in oil prices. This time is likely going to be no different.”

A technical look at oil prices also suggests near-term profit taking in energy-related positions is likely a good idea. As shown, oil prices are not only trading at the top of a long-term downtrend channel but are also pushing 2-standard deviations above the mean.

With momentum and prices at extreme overbought conditions, a near-term reversion is very likely. I have noted each previous peak price in oil with vertical blue-dashed lines.

Of course, one of the main drivers of such a reversion would be a reversal of the recent weakness in the dollar. Like the advance in oil, the decline in the dollar has also been just as extreme. As shown below, denoted by yellow highlights, each previous downside extension of the current magnitude has resulted in a fairly sharp reversal.

With the Federal Reserve caught in their own “trap” of “strong employment and rising inflation” rhetoric, the markets may stay to worry about a rate hike in June. A perception of higher interest rates would likely reverse flows back into the dollar, and by default U.S. Treasuries, pushing the dollar higher and rates lower.

Speaking of rates, I suggested a couple of weeks ago as rates pushed 1.9% that it was time to once again add fixed income to portfolios. That call has been prescient and was even supported just recently by Jeffrey Gundlach at Doubleline.  However, a recent article by Kessler Companies picked up on a key reason why I continue to suggest rates will fall to 1% in the future.

“But, the labor market is a subset of the economy, and while its indicators are much more accessible and frequent than measurements on the entire economy, the comprehensive GDP output gap merits being part of the discussion on the economy. Even with the Congressional Budget Office (CBO) revising potential GDP lower each year, the GDP output gap (chart) continues to suggest a disinflationary economy, let alone a far away date when the Federal Reserve needs to raise rates to restrict growth. This analysis suggests a completely different path for the Fed funds rate than the day-to-day hysterics over which and how many meetings the Fed will raise rates this year. This analysis is the one that has worked, not the ‘aspirational’ economics that most practice.”

“In an asset management context, US Treasury interest rates tend to trend lower when there is an output gap and trend higher when there is an output surplus. This simple, yet overlooked rule has helped to guide us to stay correctly long US Treasuries over the last several years while the Wall Street community came up with any reason why they were a losing asset class. We continue to think that US Treasury interest rates have significant appreciation ahead of them. As we have stated before, we think the 10yr US Treasury yield will fall to 1.00% or below.”

I couldn’t agree more which is why I continue to buy bonds every time rates approach 2%.

Okay, enough for now.

Next week should give us more information about what to do next.

“A mariner does not become skilled by always sailing on a calm sea.” – Herber J. Grant

If we take a look at volume-by-price we also see a surge in volume at current levels which is suggestive of distribution by traders as markets reach primary inflection points.

These warning signs are worth paying attention to.

As I have repeatedly stated over the last couple of weeks the current market setup feels like a “trap.”  I remain cautious and already have an “inverse market” position loaded in our trading system to move portfolios quickly back to market neutral if markets break support. 

I suggest you prepare as well.

“If the weather forecast suggests it might rain, wouldn’t you carry an umbrella?”

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The New Normal: From $34.00 an hour to $2.65 plus tips.

By

Cognitive Dissonance

 

As is our custom, about once a month Mrs. Cog and I venture out from our homestead up here on the mountain and seek out civilization. While the Beverly Hillbillies considered this to be movie stars and swimming pools (‘ceement’ ponds actually) in our case, civilization is defined as more than two retail stores per square mile.

Normally we head south towards that North Carolina city with the Phallus Palace (aka The Wells Fargo Center) where they have 11,592 retail stores per square mile, more than enough to quell the withdrawal symptoms from our shopping addiction.

But Saturday morning was different. Normally at the end of our mile long dirt road, where tires first hit pavement, we turn left and head down the mountain towards thicker air and warmer climate. This time we turned right towards a new destination, a place we had repeatedly heard mentioned by the locals, but had not yet visited.

Because we had not made the alternative destination decision until that very moment, I briefly pulled over so Mrs. Cog could plug our objective into the Satellite Navigation system (the nanny state [Ford] won’t let us do so while traveling to protect us from our idiot selves) then promptly reversed my direction when we discovered the shortest route was the other way…though not down the mountain. Northwest is where we will find adventure and Hobby Lobby. After all, Mrs. Cog does have crafts to create and sell.

From our high perch in Southwestern Virginia, heading northwest sends us into coal mining country, West Virginia to be exact. While not exactly a shopping Mecca, our destination on the VA/WVA border contained enough big box stores to satisfy our need to re-supply as inexpensively as possible while also offering a few interesting diversions.

Knowing only a fool ventures into any store that sells food while famished, since it was noon when we arrived we located a casual dining restaurant and settled into our seats ready to be pleasantly poisoned. We were not disappointed. Thank God they do not publish an ingredients list next to the flowery descriptions or we would have fled the establishment post haste. Ignorance truly is bliss when feasting on semi fast food.

Our waiter was a tall drink of water with a pleasant demeanor and attentive manner; clearly tip worthy from our point of view. Mrs. Cog and I both worked in food service when we were (much) younger and understand the value of good service and generous tips. So we do not spare the fiat when rewarding the server for a job well done.

I will leave the discussion of how restaurant prices are kept artificially suppressed because wait staff compensation has been effectively shifted from the employer to the customer for another time. Instead I wish to relate the gist of the conversation we had with our waiter as I paid the bill with plastic and handed him his tip in paper.

Henry (not his real name) is 27 years old, clearly a Millennial per Howe and Strauss defined as those born between 1982 and 2004. While one may certainly quibble about the start and end dates of this range, there was no doubt in my mind Henry was eminently qualified.

While happily handing over his compensation I praised him on his waiting prowess. He blushed slightly and then rather proudly declared himself an ex coal miner who had been waiting tables for about four months now. Something in his word choice and tonal quality informed me he was committed to his new profession, a quality I found quite interesting. I rapidly followed up with several more questions.

 

Old school West Virginia coal miners.

 

It turns out Henry was laid off from the coal mine two years ago. When he mentioned additional layoffs and mine closings since then, I got the impression Henry had decided his chance of returning to the mines was slim to none and had decided to change ‘careers’. During most of his layoff he’d worked as a roofer, informing us he had re-roofed many houses in a specific area of town. Anyone who has worked re-roofing knows it isn’t a pleasant profession.

When I asked if that area had many old houses, he nodded in the affirmative. Earlier, as we drove through town, I had pointed out to Mrs. Cog many of the old homes and buildings. Old housing stock in poor repair indicates tough economic times. Henry said things have become progressively worse over the last five years. Our walk thru the mall after lunch seemed to confirm this. Lots of people milling about, but very few with loaded shopping bags in hand….not to mention many dark and empty store fronts, clearly closed and abandoned.

Of particular interest to me was his response to my question whether working as a waiter had hurt him financially. Quickly signally agreement, he said he dropped from $34.00 an hour toiling in the coal mine to $2.65 plus tips serving up perfectly prepared poison. While his actual language wasn’t nearly as expressive as mine, his disappointment was stark and evident.

I was a bit shocked by both ends of that pay scale. Essentially his income plummeted from $70,720 per year (plus overtime and benefits), exceptionally good pay for a then 25 year old man, to $5,512 (assuming 40 hours a week) plus tips based solely upon his excellent service and the local economy, which was not good based upon Henry’s own assessment as a local of 17 years.

Both of us were surprised he was only ‘paid’ $2.65 per hour by the restaurant. While my memory is increasingly faulty, I am certain I was paid as much or more per hour as my ‘base’ while working in food service 40 years ago. And Mrs. Cog agreed when reflecting upon her stint waiting tables nearly 30 years back.

I’m not sure if this means tips are better than back then (they most likely are since they are usually a percentage of the price of the meal) or if the restaurant has almost completely removed the waiter/waitress from the cost structure of the restaurant (yes). Either way, this is not compensation one can live on other than when combined with other income in the same household.

Mrs. Cog rightfully pointed out that working in a coal mine most likely would shave many years off your expected lifetime, so the $34 an hour received wasn’t nearly as good as it sounded. I just as correctly mentioned that to a twenty five year old, a higher wage in exchange for the possibility of an earlier death is a no brainer since the shortened lifespan is still decades away and the rent and car payments are due today.

Our seat next to a window just inside the entrance to the mall appeared to confirm the degrading economic conditions of the community, revealing many obviously low income, overweight (obese actually), heavily tattooed, poorly dressed individuals and families. This isn’t a judgment, but rather an observation of a particular social ‘class’. Walk into a mall in and around Washington, DC and you will observe another social class. The point is, those very same ‘less affluent’ people were seated next to us and were the source of Henry’s tip income, therefore the majority of his income.

Most surprising to me, within sight of our seats was the ultimate in mall store cognitive dissonance. Two doors down from American Eagle, solidly middle to upper middle class income focused, was a Dollar General, just as solidly focused much lower down the income scale. Considering all the empty stores, obviously mall management was more concerned with rental income than retail store dichotomy. Just another sign of the growing desperation in Middle America.

 

Coming to a mall near you.

 

To Henry’s credit, he wasn’t just punching a time clock while he waited for the mines to re-open or Greyhound to whisk him away to nirvana. In response to my praise for a job well done, he said he took pride in doing a job well and giving it all he had. This is not the first time I’ve talked with a Millennial and walked away thoroughly impressed. He was upbeat, pleasant, professional and obviously committed, all while living in a decaying West Virginia coal mining town facing a bleak future long before the rest of America has truly felt the escalating birth pains of a cascading depression.

As Mrs. Cog likes to say (in response to my ‘crumble’ theory) while to some it may be a crumble, to others it’s a collapse when it hits you squarely in the face. Henry was battered and bruised, but still possessed the intestinal fortitude to bounce back up off the canvass and play the cards dealt him to the best of his ability. Quite frankly I have not seen that degree of spirit and drive since the late 70’s and early 80’s when I lived in New England and the ravages of inflation and unemployment were tearing through our lives.

To be perfectly frank I have no idea what the new normal is since I do not trust the mainstream media to accurately report what’s actually going on in Middle America. All I know is what I see and hear first hand with no buffer in-between. Living in Southwestern Virginia, the poorest and least upwardly mobile area of Virginia, brings its own flavor of poor and downtrodden into view on a daily basis. Venturing into Southeastern West Virginia has revealed another slice of the same pie. I suspect I would find similar portions wherever I went in this vastly diverse country.

For the first time in a long time I have walked away from an encounter feeling heightened hope for America. In fact, the last time I felt this way was back in the summer of ‘78 when I embarked on a three month long bicycle ride through New England. While I had my outsized share of misadventures and disasters, ultimately I came away from that trip with a deep seated understanding of the strength and compassion of the average American.

Does this mean I feel things will turn around soon? Not in the least. In fact I fully expect conditions to get much worse before they get appreciably better. Much rancid and corrupting excess must be wrung from the system first, not just in the universe of bloated government and corporations, but in the minds and around the belly of Middle America. We have miles to go before we reform.

There is no doubt America, along with all First World (and many Second World) Nations, is infested with greed, corruption and avarice beginning at the top with the sociopathic leadership and filtering on down through the food chain. What is rarely spoken about, other than to point fingers outward in order to absolve ourselves from blame, is glaringly obvious. Just as we willingly and consciously consume prepared food of questionable source and quality (just as Mrs. Cog and I did Saturday) so to do we ‘consume’ our poisonous political and business leadership.

As far as I can tell, aliens don’t beam them down from orbiting spaceships to subvert and corrupt us into self immolation. ‘They’ are ours and spring from our loins. Since ‘they’ will not restrain themselves, either we do so or (at the very least) we restrain ourselves.  

While there is no doubt the vast majority of us wish things were not the way they are, neither do the vast majority of us do much of anything to fundamentally change the way we live in order to make our lives, and by extension the lives of others……better. I know I cannot fundamentally change America. I also know I can fundamentally change myself. To bitch about the state of America without lifting a finger to change myself is, in my opinion, the ultimate in hubris and hypocrisy.

{This, by the way, was (and remains) the principal reason behind our relocation to the mountains of Southwestern Virginia.}

This social apathy and paralysis will change…eventually. But it appears the metamorphosis will only begin when we are forced to do so. While we correctly declare those who most directly benefit from the growing global chaos to be infected with the seven deadly sins (pride, envy, wrath, gluttony, lust, sloth and greed) rare is the individual who will admit a similar affliction unless compelled by outside forces to face facts squarely in the face.

I experienced a similar social dichotomy during my trip through NE in 1978. I saw the best and worst of society and rode away feeling we had further to fall, but the strength and capacity to reform and recover. I feel much the same way today, only this time the fall will be much further, more violent and much more devastating. But the re-birth, whether years or decades away, will be just as vigorous in its rebound.

Thank you, Henry, for your contribution to our eventual re-birth.

 

05-01-2016

Cognitive Dissonance

 

Remember LIFE magazine? This was one of their covers.

Copyright LIFE

via http://ift.tt/24gn15s Cognitive Dissonance

It's D-Day in Puerto Rico. As Bloomberg reports, investors are finding little comfort in the Puerto Rico Government Development Bank’s efforts to strike a last-ditch agreement with creditors to soften the blow of a default this weekend. The bonds that mature today (May 1st) have crashed to just 20c (disastrously below the 36-cent recovery rate the commonwealth proposed in March).
 

It appears investors are not buying what Puerto Rico is selling and prefer to dump the bonds than hold out in hope of a 'deal'…

A default on the $422 million due today is "virtually certain," S&P Global Ratings said April 11.

No matter which route Puerto Rico takes, credit-rating companies see a default as inevitable. Moody’s Investors Service analysts said last week that any non-payment, even if it’s agreed to by creditors, constitutes a default in their eyes. S&P Global Ratings said a distressed-debt exchange or temporarily withholding interest is synonymous to default.

But as Bloomberg reports, Puerto Rico said its Government Development Bank, which is operating in a state of emergency to preserve its dwindling cash, reached an agreement with some credit unions to delay $33 million of bond payments as the commonwealth rushes toward a potential historic default.

The pact only affects a portion of the $422 million that the bank owes on May 1. The GDB will exchange the $33 million in bonds for new debt that will mature May 1, 2017, Governor Alejandro Garcia Padilla’s administration said in a statement Friday. The terms of the agreement are available to other credit unions, called cooperativas, and investors, according to the statement.

 

“Apart from this private exchange, GDB continues to negotiate a potential transaction related to an exchange of all of GDB’s bond indebtedness, which would require the participation of all creditors of GDB (including the cooperativas),” the administration said in the statement. “The private exchange does not affect, or take the place of, those ongoing negotiations.”

The bank is still negotiating a possible debt exchange on all of its bonds, which would require the participation of all its creditors, according a the statement. The GDB, which structured the island’s debt sales, has $5.1 billion of debt. The governor’s office said Garcia Padilla will speak to the commonwealth in a televised address Sunday at 5 p.m. New York time.

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Via CaseyResearch.com,

Gold isn’t an investment. Gold is money.

In this succinct interview with Casey Research Director Brian Hunt reveals some of the biggest misconceptions about gold… and why you should own it.

Casey Research: Brian, as you recall, we probably get more questions and reader feedback on gold than on any other subject here at Casey Research… And we've noticed there are quite a few myths and misconceptions about gold out there. Can you go over some of the big ones for us?

Brian Hunt: Sure. Probably the biggest misconception investors have about gold is that it's an investment.

They'll listen to people on CNBC pick apart and analyze every $30 move in the metal, just as they would talk about a move in crude oil or stocks or bonds. They'll check the price quote every day… to see how their "investment" in gold is performing.

That just isn't a useful way to view gold.

Gold isn't an investment. A thousand shares of Coca-Cola is an investment. An income-producing rental property is an investment.

Coke is a business that stands a good chance of growing its cash flows… which will allow it to pay increasing dividends to its shareholders. Bought at the right price, a rental property will return all of your original capital in the form of rent checks… and the rest is gravy.

Gold isn't like those two examples at all. Gold is money.

Gold has been used for money for thousands of years because it's easily di­visible, it's easily transportable, it has intrinsic value, it's durable, and its form is consistent around the world. And, as Doug Casey reminds us, it's a good form of money because governments can't print it up on a whim. It’s the only form of money that is not someone else’s liability.

Gold doesn't pay interest or a dividend. It doesn't have profit margins. Your gold holdings amount to lumps of metal held in storage.

The sooner investors realize that gold is money… and not a con­ventional investment, the better off they'll be. It's just a timeless form of money. That's it.

Casey Research: People can also view it as insurance, right?

Hunt: Right. Since gold is real wealth you can hold in your hand, it's also "crisis insurance"… or "wealth insurance."

Like regular insurance, you buy gold and hope you don't have to use it.

Gold is insurance against governments doing foolish things with their finances. It holds its value, while paper money does not. The value of every paper currency plummets over time. Gold doesn’t.

A currency is sort of like the share price of a country. Over time, if a country produces more than it consumes, saves money, and maintains a modest amount of debt, its cur­rency will rise.

If a country consumes more than it produces… if it spends lots of money and borrows a lot in order to do all of that spending, its currency will fall in value. While currencies fluctuate for all sorts of reasons in the short term, over the long term, countries that manage their checkbooks will enjoy strong currencies. Countries that mismanage their checkbooks see their currencies plummet.

I wish I lived in a country that produces more than it consumes… that values personal responsibility and saving money. I wish our government valued fiscal responsibility. But it doesn’t.

About half the U.S. is on the government dole in some form or an­other. More than 45 million people are on food stamps. People are being paid by the government not to work. The people employed by the govern­ment enjoy huge, outsized salaries for what they do. There are more tax recipients now than tax payers. There is no political will to rein in spending and borrowing.

This situation could easily result in a crisis. That's why I own gold… and recommend people keep at least 5% or 10% of their wealth in gold.

But here's where I differ from the average gold owner: I'd love to see gold fall down to $300 or $400 per ounce. I'd love to see the value of my crisis insurance fall, rather than skyrocket… just like I don't want my family's house to burn down… or like I don't want someone to T-bone my car in an intersection.

But when I look at the gang of clueless college professors and career politicians that occupy the White House and Congress, I’m not very optimistic.

Casey Research: We all need insurance from those people. Do you think at least large institutional investors, like mutual-fund companies, understand gold?

Hunt: Absolutely not. They are just as ignorant about gold as the average Joe on the street. They might even be worse.

From the early 1980s to 2000, nobody worried about insurance. Stocks and the economy boomed for nearly 20 years. Gold languished for a long time.

Its importance as real money – as a crisis hedge – was forgotten by most people… even by the supposedly smart folks who run big investment funds.

They learned their trade during a period of rising stock prices and falling gold prices, so they think gold is something right-wing nuts stockpile alongside canned food in a bomb shelter. It's amazing how a few decades of smooth sailing will make folks forget gold's importance as insurance against disasters.

I've heard lots of supposedly smart institutional investors pooh-pooh gold because it didn't perform well during the 1980s and 1990s. They'll post charts showing how it lagged behind stocks and real estate.

It's a silly comparison, because gold isn't an investment like stocks and real estate can be. Gold is just gold. Like I said, you own it and hope to never have to use it. You don't get it confused with a stock like Johnson & Johnson.

Casey Research: We think you've made your point. Any parting shots?

Hunt: It's tempting to make comparisons to other wild periods like the 1970s or the 1930s. But those historical comparisons aren't worth anything. And I'm going to catch hell for saying this, but they aren't worth anything because this time is different.

I know "this time is different" is a dirty phrase in the investment business – but given the global debt situation, our runaway entitlement spending, and the emergence of Asia as a large gold accumulator – this is a different gold market than any market we've ever seen.

For those reasons, I don't place any value on forecasts based on gold’s past price action. I don’t place any value on attempts to value gold.

I just own a lot of it. I hope I never have to use it. For me, it’s that simple.

Casey Research: Thanks for your time.

Hunt: My pleasure.

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We have written extensively on the topic of Forex and even published an in-depth book about key points “Splitting Pennies – Understanding Forex” – and in the process we’ve learned what investors don’t know about Forex and how it fuels market fears.  So now we’d like to elaborate on the MOST IMPORTANT FACT INVESTORS NEED TO KNOW ABOUT FOREX, and to a lesser extent the markets in general.

America has in its possession A BIG RED FOREX BUTTON that can shut down US Dollar connected payment systems with one press.  This button can halt stock markets, futures exchanges, money markets, all with one simple push.  Probably, it looks something like this:  STOP

This button will probably never be used, it was developed in case of financial emergency.  But it’s there – and the fact that it exists, makes a few bank managers and government workers sleep well at night.  Such systems are developed ‘just in case’ – just like the missile defense system, a complete waste of taxpayer dollars, built to ensure that if nuclear missiles are launched on America, America can save 10% of cities and wipe out the majority of the attacker based on the neo-con ‘mutually assured destruction’ MAD policy.  This button serves the same purpose, although financial.  Pressing this button would bring all economic activity in economies that utilize the US Dollar to a complete standstill.  

Lazy government workers

To understand why and how this button was built, we must first understand a little about how the US Government works.  The US Government is the largest employer of any kind in the world.  We need to understand the differences between private employment, and government employment (because this big red button was built by government workers in collaboration with private workers).  Private employment operates on a simple market based approach – good workers are rewarded usually with higher pay, more job security, and more benefits.  If a worker for a private company makes his company a fortune, he’ll be rewarded with a big bonus, big desk with accompanying window, and an office plant, maybe a fern.  If the worker in a private company is a bad worker, lazy, incompetent, or just difficult – he will be fired.  Government is the opposite.  There’s a mantra in government work – what do you do with a problem employee?  Promote them!  Because then they are out of your hair, and if you fire them, well you may end up in front of a senate hearing explaining why, or you may end up being sued, or you may end up with a number of special interest groups heckling you about the rights of people with Narcolepsy.  

The government approaches work in an entirely different way than in private enterprise.  Healthcare.gov – the world’s first billion dollar website, is another great example.  Now imagine the task the Department of Defense is given; protect America from external threats.  Their first step, to identify threats.  In the military, this is done by agencies such as the CIA and the NRO.  Actually if the CIA operated according to its public mission, it would be an analyst agency not much different than those seen on Wall St. – providing information to their DOD bosses who act on it.  Since 911, the potential for financial terrorism has been considered a national security issue.  It’s in the laws, it’s in the regulations, it’s serious.  What if the Saudis flood the market with US Dollars?  What if the Chinese dump treasuries crashing the US Dollar?  What if hackers take control of the NYSE and flood the market with sell orders, causing a crash?  These are all extremely improbably events, so rare there is a higher chance of a giant meteor striking Manhatten this year.  The probability is so low it’s difficult to calculate.  But just like the false threat of Russian’s launching nukes, billions of dollars have been spent building a Big Red Button to press in case it happens.  

It’s because government workers have one thing in mind; protect themselves.  Avoid a potential disaster.  The last thing any government worker wants is to be in charge of security on a day like 911, even if the threat is financial.  Although the debate rages about TARP and government actions during the weekend of the Bear Stearns collapse – the financial system was saved.  They pressed the button.  But this wasn’t the Forex button.

Although the Federal Reserve is a private bank, the US Dollar exists because of the US Government.  Like with many government projects, they outsource.  More than 60% of CIA operations are currently outsourced.  It’s good business – America has always been like that.  The only role the US Government plays in the US Dollar, is providing regulations & oversight with the OCC (Office of the Comptroller of the Currency), and printing physical currency with the US Mint.  But the US Mint is just a printing service, if you look on US bills you’ll see “Federal Reserve Note.”

The Big Red Forex Button

We’ve known for a long time about the infamous “Plunge Protection Team” designed to prop stock markets in the event of a 1987 style crash.  They even have entities in the Caymans funded by the Fed ready and waiting – they’ll start with buying futures on the S&P, then options, then if that fails, they’ll just go into the market directly.  Anyway, technically speaking, DTCC owns 99% of US securities being the only custodian for investors.  Why should it be surprising that the Fed operates a Cayman based hedge fund specifically designed to prop the markets in the event of a crash?

And you know it’s really ironic, it’s PEAK HYPOCRISY – on the one hand, these right wing flag waving jingoists love the idea that we have a system in place to prevent a market crash by 100%, but on the other hand, they love to talk about how America has ‘freedom’ and ‘free markets’ and markets are not manipulated!  Well we can’t have our protection and free markets together.  But probably, stock investors would agree, in the event of a big market crash it’s probably best to have such systems in place, like we do for the military, and other critical infrastructure.  

Does the PPT intervene in the markets on a daily, or regular basis?  That’s another question, probably, they do.. but we can say for sure they are there to soften the blow of a deep fall.  Maybe they’ve done it more than once in the last 10 years, which is why the market is continually at nose bleed levels even though the real economy is in the toilet.

The Big Red Forex Button is more simple than the PPT, and similar organizations.  That’s because ALL US DOLLARS IN THE WORLD are created and processed by the Federal Reserve Bank!  Except if you withdraw and deal with physical cash, the Fed has electronic tags and knows where each US Dollar in the world is.  That’s just how the system is setup, by design, by coincidence, it’s just like that.  The reason for the war on cash, it’s really the only part of the US Dollar system that isn’t 100% completely controlled and manipulated.  But at the end of the day, with less than $1 Trillion in physical US Dollars in the world, it’s not really significant.  The Fed processes wire payments, ACH payments, clears checks, and provides US Dollars to central banks in the form of swaps.  The Fed can press the Big Red Forex Button and halt all US Dollar transactions – period.  So with a halt on all US Dollar transactions, how would China destroy the value of the US Dollar, as some have proposed?  How would US Dollar debt holders repay their debt, without access to US Dollars?  Everyone would default?  The financial system would implode?  No, they would just wait, for a Fed action.  The Fed controls 100% of US Dollar transactions, globally.  There’s no where on this small planet Earth to ‘hide’ US Dollars.  

The US Treasury has a similar tool, the US Treasury has a big red tbill button.  They can immediately recall or issue trillions of US debt in one click.  As far as the external threat supposedly posed by foreign holders of US debt, if this really was a threat, the treasury can call their friends at the Fed, and in one click – the Fed can pay off all US debt.  The Fed would be happy to do so, thus gaining free interest from US taxpayers (which is a HUGE percent of the Federal Budget) and it wouldn’t cost the Fed anything to create the $100 Trillion or whatever necessary to do it.  

Practically, there is no competition for America, and there will not likely be any in the forseeable future.  Just imagine if 10% of US Dollar assets were sold, and transferred to another currency, or another system.  What would that currency be?  It is a real problem.  In order to entertain real scenarios of a ‘US Dollar Collapse’ we would need to see an alternative system, one which operates globally and completely without the US Dollar and it’s institutions, such as the BIS, IMF, the Fed, ECB, SWIFT, such as Bitcoin.  

But just to keep the size of the US Dollar in perspective, let’s look at a real alternative – the New Zealand Dollar.  Anyone with a Forex account can trade NZD/USD (when you trade a Forex pair, you’re really betting on a rate change, not sending money to New Zealand, so trading Forex is a derivative).  The GDP of New Zealand is about $185 Billion.  There simply aren’t enough investment options in New Zealand NZD based assets to facilitate any significant move into NZD from USD.  In fact, NZD has been inflated by US and Chinese interests in the last 10 years, to the point that their GDP has nearly quadrupled since 2000.  

Also remember that most currencies are backed by the US Dollar, so the only ‘real’ alternative to the US Dollar is not other currencies, but alternative systems such as Bitcoin.

One last correction about China – recently China has implemented a Gold fix denominated in Yuan.  Also Hungary has issued $154 Million in Yuan bonds.  These are both wonderful baby steps toward realizing the final goal of being a modern, dynamic, free market based economy.  The Yuan IS NOT BACKED BY GOLD.  China implemented a YUAN BASED GOLD MARKET, copied and pasted from the Rothschild-London dominated system for the last hundreds of years.  The Gold price is set in Yuan, as it used to be in Great British Pounds.  Separately, China is hoarding physical gold.  These 3 facts do not mean that the Yuan is backed by Gold.  Capital Controls are in place, the Yuan is manipulated by the central bank.  It’s not possible to do business with China via the Yuan like it is with G8 countries.  Americans can visit and do business in hundreds of countries with ease, China is not one of them.  China employs internet police, who will literally arrest you potentially for life if you are found violating their firewall policies.  This is not a country which will soon compete with America, England, Switzerland, and the rest of the G8.  India, possibly another story, but they have no plans to improve their Forex system or to be a global reserve currency.

Conclusion

The Federal Reserve controls all US Dollars created and transacted in the world, in collaboration with the US Government.  The value of the US Dollar will fluctuate as interest rates change, and real money flows around the world affect supply and demand of the USD, but within a trading range.  Forex markets are 100% controlled.  At any point, Central Banks can intervene in Forex markets.  We’ve never seen a collaborated intervention, but that’s a possibility too.  Because they all rely on each other, it’s in their interest to see boring, non-volatile markets.  They are all part of the same system, which is supported by America and the US Dollar.  

If the Fiat central bank system would be to collapse, there would have to be an alternative system for the world’s business to transition to.  Currently, there is no alternative system in place.  Many alternative systems are in the works, but they are decades from being complete.  But in the meantime, there’s a number of ways to profit in the Forex market, or protect yourself from market risks.  To learn more, checkout Splitting Pennies – Understanding Forex.

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With "safety" stocks at all-time record high valuations and the energy sector trading at over 100x forward earnings expectations, it should apready be clear that a Christmas miracle is what equity bulls are hoping. However, as the following two charts expose all too well, the voyage to the hoped-for hockey-stick in earnings – you know the one that is predicted to occur every time mother's milk dries up – is rapidly falling down and to the right… This will not end well.

Expectations for 2016 S&P 500earnings started off at around $124 per share.. and are now at $117 (and the S&P is up on the year)

 

And the rolling 12-month consensus earnings expectations is reverting down once again as Q1 outlooks suggest anything but all-time highs for stocks…

h/t @Not_Jim_Cramer

So do you feel lucky?

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While perhaps not quite as dramatic (or confusing) as last week’s announcement by Scottrade that the discount online broker would no longer allow Canadian citizens to hold accounts, in a new surprising development, online broker Schwab has started informing some of its clients, mostly corporate and institutional, that “between June and October 2016, Schwab will update the cash feature on your account(s) from the current retail prime or municipal money market fund sweep to the Schwab Government Money Fund” or the SWGXX, which “will invest at least 99.5% of its total assets in cash, U.S. government securities and/or repurchase agreements that are collateralized fully by cash and/or U.S. government securities; under normal circumstances, at least 80% of the fund’s net assets will be invested solely in U.S. government securities including repurchase agreements. “

In other words Schwab is telegraphing that brokerages have begun permanently unwinding hundreds of billions if not trillions in money market-funds, and rotating it almost entirely into government securities.

The stated reason for this quiet unwind is the following:

“the U.S. Securities and Exchange Commission (SEC) has made changes to the regulations that govern money market funds. These new rules are intended to increase fund liquidity and to protect investors. The changes include new restrictions related to who will be permitted to invest in “retail” money market funds, which are non-government money market funds that are allowed to maintain a constant net asset value (CNAV). As a result, beginning later this year Schwab Prime Money Market Funds and Municipal Money Market Funds will be required to limit shareholders to natural persons (i.e., individuals, as opposed to businesses, defined benefit plans, or endowments).”

 

According to our records, the account(s) noted at the end of this letter is invested in a retail money market fund as defined by the SEC and the beneficial owner(s) of the account(s) is not a natural person(s). Therefore, you will not be able to maintain the position(s) in the account(s).

The unstated, if real reason may be different.

Recall that according to the punditry, one of the biggest hindrances to NIRP in the US is the trillions of dollars held in money market accounts. Well, one way of overcoming this “problem” is to preemptive begin a mandatory sweep pushing all money market-parked cash into government-linked securities. In other words, instead of roughly $2 trillion of inert cash held at money market funds (as per the latest H.6 statement), not only will a substantial portion of that cash “rotate” into Treasury holdings in the coming months (resulting in yet another key driver of demand for Treasury paper) but will also eliminate the money market overhang risk if and when the Fed decided to join the global negative interest rate scramble, and unleash NIRP.

Schwab automatically assumes that all clients affected by this change will accept: “if you are in agreement with this change in your cash feature, no response is required from you. Schwab will consider a non-response to this notice as your authorization and instruction to change your cash feature.” Those who disagree have the “option” of either sweeping their cash into th corporate bank (thus being exposed to Schwab corporate counterparty risk), or, as Schwab conveniently adds, “you also have the right to close your brokerage account(s) without penalty at any time.”

Here is the notification letter Schwab has been sending out.

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