The Killing Forests
NOV 17, 2014
The Killing Forests
The Abenomics Death Spiral
- The Abenomics experiment has failed.
- Keynesian analysts don't care.
- The Japanese people suffer.
As Japanese Prime Minster Shinzo Abe has turned his country into a petri dish of Keynesian ideas, the trajectory of Japan's economy has much to teach us about the wisdom of those policies. And although the warning sirens are blasting at the highest volumes imaginable, few economists can hear the alarm. (A longer version of this article can be found in Euro Pacific Capital's Global Investor Newsletter.)
Data out this week shows the Japanese economy returning to recession by contracting for the second straight quarter (and three out of the last four quarters). The conclusion reached by the Keynesian apologists is that the benefits of inflation caused by the monetary stimulus have been counteracted, temporarily, by the negative effects of inflation caused by taxes. This tortured logic should be a clear indication that the policies were flawed from the start.
Although the Japanese economy has been in paralysis for more than 20 years, things have gotten worse since December 2012 when Abe began his radical surgery.. From the start, his primary goal has been to weaken the yen and create inflation. On that front, he has been a success. The yen has fallen 23% against the dollar and core inflation, which was running slightly negative in 2012, has now been "successfully" pushed up to 3.1% according to the Statistics Bureau of Japan.
But there is no great mystery or difficulty in creating inflation or cheapening currency. All that is needed is the ability to debase coined currency, print paper money or, as is the case of our modern age, create credit electronically. These "successes" should not come as a surprise when one considers the relative size of Abe's QE program. For much of the past two years the Bank of Japan (BoJ) has purchased about 7 trillion yen per month of Japanese government bonds, which is the equivalent of about $65 billion U.S. [Forbes 9/24/14, Charles Sizemore] While this is smaller than the $85 billion per month that the Federal Reserve purchased during the 12-month peak of our QE program, it is much larger in relative terms.
The U.S. has roughly 2.5 times more people than Japan. Based on this multiplier, the Japanese QE program equates to $162.5 billion, or 91% larger than the Fed's program at its height. But, according to IMF estimates, the U.S. GDP is 3.3 times larger than Japan. Based on that multiplier, Japanese QE equates to $214.5 billion per month, or 152% larger. And unlike the Federal Reserve, the Bank of Japan hasn't even paid any lip service to the idea that its QE program will be scaled back any time soon, let alone wound down.
In fact, Abe's promises to do more were spectacularly realized in a surprise move on October 31 when the BoJ, claiming "a critical moment" in its fight against deflation, announced a major expansion of its stimulus campaign. (The fact that official inflation is currently north of 3% - a multi-year high, seems to not matter at all.)
At the same time the BoJ also announced its intention to roughly triple its pace of its equity and property purchases on Japan's stock market. According to Nikkei's Asian Review (9/23/14), the BoJ now holds an estimated 7 trillion yen portfolio of Japanese stock and real estate ETFs. Even Janet Yellen has yet to cross that Rubicon.
And what has this financial shock and awe actually achieved, other than 3% inflation, a weaker yen, a stock market rally, and continued international praise for Abe? Well, unfortunately nothing other than a bona fide recession and a growing threat of stagflation.
The weaker yen was supposed to help Japan's trade balance by boosting exports. That didn't happen.
In September, the country reported a trade deficit of 958 billion yen ($9 billion), the 27th consecutive month of trade deficits. The deterioration occurred despite the fact that import prices rose steeply, which should have reduced imports and boosted exports. And while some large Japanese exporters credited the weak yen for easier sales overseas, small and mid-sized Japanese businesses that primarily sell domestically have seen flat sales against rising fuel and material costs.
But price inflation is not pushing up wages as the Keynesians would have expected. In August, Japan reported real wages (adjusted for inflation) fell 2.6% from the year earlier, the 14th straight monthly decline. This simply means that Japanese consumers can buy far less than what they could have before Abenomics. This is not a recipe for happy citizens.
Japanese consumers must also deal with Abe's highly unpopular increase of the national consumption tax from 5% to 8% (with a planned increase to 10% next year). The sales tax was largely put in place to keep the government's debt from spiraling out of control as a result of the fiscal stimulus baked into Abenomics. And while economists agree nearly universally that the price increases that have resulted from the sales tax have caused a sharp drop in consumer spending, they fail to apply the same logic that price increases due to inflation will deliver the same result.
A bedrock Keynesian belief is that falling prices create recession by inspiring consumers to delay purchases until prices fall further. According to the theory, even a 1% annual drop in prices could be sufficient to decimate consumers' willingness to spend. Conversely, they believe rising prices, otherwise known as inflation, will spur spending, and growth, as it inspires people to buy now before prices rise further. But if consumers have clearly been put off by rising prices due to taxation, why would they be encouraged if they were to rise for monetary reasons? Don't look for an explanation, there isn't any. In reality, as any store owner will tell you, shoppers shop when prices are low and stay at home when prices are high.
Despite the bleak prospects for Japan, Abe continues to bask in the love of western economists and investors. In an October 6 interview with the The Daily Princetonian, Paul Krugman, who has emerged as Abe's chief champion and apologist, responded to a question about the European economic crisis by saying "Europe need something like Abenomics only Abenomics, I think, is falling short, so they need something really aggressive in Europe." A Bloomberg article ran on November 18 under the headline "Abe's $1 Trillion Gift to Stock Market Shields Recession Gloom."
So according to Bloomberg, Abenomics is not responsible for the country's fall back into recession, which hurts everyone, but it is responsible for the surging stock market, which primarily benefits the wealthy.
One wonders how much more bad news must come out of the Japanese experiment in mega-stimulus before the Keynesians reassess their assumptions? Oh wait...I'm sorry, for a second there I thought they were susceptible to logic. But those who are not blinded by left-wing dogma should take a good look at where the road of permanent stimulus ultimately leads.
ECB entering 'very dangerous territory' warns S&P
“The risk of a triple-dip recession have increased. The ECB has one last arrow and that is quantitative easing of €1 trillion," said the credit rating agency
By Ambrose Evans-Pritchard
5:55PM GMT 18 Nov 2014
The European Central Bank’s plans for €1 trillion of monetary stimulus is fraught with risk and is likely to fail without full-blown bond purchases, Standard & Poor’s has warned.
The agency said the ECB’s blitz of ultra-cheap loans to banks (TLTROs) cannot generate more than €40bn of net stimulus once old loans are repaid, given regulatory curbs imposed on lenders.
Jean-Michel Six, the agency’s chief European economist, said ‘doves’ on the ECB’s governing council know that the loan plan is unworkable but are going through the motions in order to persuade German-led ‘hawks’ that all conventional measures have been exhausted, even if this means a debilitating delay.
“Risks of a triple-dip recession have increased,” said Mr Six. "The ECB has one last arrow and that is quantitative easing of €1 trillion, needed to restore the M3 money supply to trend growth."
The ECB has suggested - with caveats - that it will boost its balance sheet by €1 trillion, saying this will be spread between TLTRO loans and asset purchases. The lower the share of TLTRO loans in this total, the more it will be forced to expand QE in the teeth of opppostion from Germany.
“The ECB is moving into very dangerous territory,” said Mr Six. "Their own credibility is at risk as they take on more risk, but it is necessary."
The agency also said the Bank of England has greatly under-estimated the degree of slack in the British economy and risks killing the recovery by tightening too soon.
“We don’t see any tangible signs of a housing bubble, except in a few streets in London,” said Mr Six. "The UK is cooling off. It is nothing to be alarmed about, but we think a premature rate rise could put the recovery in jeopardy. There is a long way to go before deciding the horse is going too fast and needs to be reined in."
Key officials at the ECB continue to fight out their differences in public. Jens Weidmann, the head of the Bundesbank, said there was nothing automatic about further stimulus and underlined that the €1 trillion rise in the balance sheet was an expectation rather than a target.
He also warned that it would encourage governments to relax fiscal austerity, an argument that most economists find baffling and not within the policy jurisdiction of a central bank official.
“The purchase of government bonds - independently of legal limits - would set significant, additional false incentives,” he said.
By contrast, the ECB’s president Mario Draghi has been nudging further towards full QE, stating explicitly that government bonds might be added to the mix of assets to be purchased.
Chief economist Peter Praet insisted in categorical terms that the ECB is not bluffing or playing with words. “We say we are confident, we are going to get the volume and, if it is not sufficient, we are ready to take additional measures and broaden the base of purchases immediately”, he said. Markets will surely now hold him to this sweeping pledge.
Standard & Poor’s said the ECB will have to launch radical stimulus to head off a deep deflationary slump in the end, whatever they say in Germany. It said the pool of assets that can be purchased will have to be broadened, including a €2.2 trillion pool of bank bonds, and ultimately sovereign bonds. Nothing can be done until the European Court has ruled on a former case involving its back-stop plan for Italian and Spanish debt (OMT). “That has to be behind us,” said Mr Six.
It is unclear whether the OMT case will in fact clear the air. Euroceptic groups and professors in Germany are already planning to file a fresh case against QE at the German Constitutional Court if the purchases escalate, arguing that the scale entails large liabilities for the German taxpayer and circumvents the budgetary sovereignty of the Bundestag.
They argue that QE is fiscal policy by stealth, conducted outside democratic control. Some experts say such a case would give the Bundesbank the legal excuse it wants to step aside from any ECB bond purchases, effectively rendering the ECB action null and void.
Mr Six said QE is a necessary condition for recovery in Europe, but is not sufficient in itself. “The question is where does this bridge take us,” he said. "The eurozone can survive a couple more years of miserable growth but it can’t go on forever like this before people lose hope. There is political risk almost everywhere."
On Britain, the agency said the “output gap” used to measure how far the economy is falling short of its potential is still 4.5pc of GDP. This is much higher than the 1pc estimate used by the Bank of England to justify talk of early rate rises.
Mr Six said the UK capital stock has been less damaged than widely assumed by the economic crisis, while abundant immigration has created a pool of cheap labour that is holding down wages.
Economists are deeply split over the size of the output gap: a soft indicator that is very hard to measure, but has nevertheless acquired totemic status. The International Monetary Fund and the OECD club of rich states both have estimates close to 1pc, while the Office for Budget Responsibility is at 1.4pc.
Yet a number of private analysts agree with Standard & Poor’s. Andrew Goodwin from Oxford Economics said the gap is 4.4pc based on weak productivity trends and historic evidence that financial crises do not destroy much existing plant.
“There is still a lot of spare capacity in the UK economy. The fact that wage growth has stayed so low for so long is evidence of this. We don’t think there should be any rate rises until the end of the next year at the earliest, and we don’t think there will be any either,” he said.
Standard & Poor’s praised the Bank of England for doing a“very smart job” in its response to the financial crisis by allowing inflation to overshoot its target at crucial phases, effectively eroding the debt burden by boosting nominal GDP. “This has improved Britain’s debt ratios,” Mr Six said.
The contrast with much of the eurozone is striking. The ratio of public debt to GDP has been rising fast in the most heavily indebted EMU economies, overwhelming any gains from austerity cuts.
Congress Must Act on War Authority
Military Action in Syria Requires a New A.U.M.F.
By THE EDITORIAL BOARD
NOV. 18, 2014
The United States has been carrying out airstrikes in Syria for weeks now, yet Congress still hasn't taken a stand and voted on war authorization. Credit Gokhan Sahin/Getty Images
The United States is fighting a new and costly war in Iraq and Syria. Yet, for months, members of Congress have ducked their constitutional responsibility for warmaking. They have neither initiated a meaningful debate on the use of American force against the Islamic State, which is known as ISIS, nor shown any inclination to vote on whether to endorse or modify the mission.
With the midterm elections over, we had hoped this would change. But, increasingly, it seems as if the current lame-duck Congress will leave the issue to the next one.
Republicans will control both the Senate and the House come January. There are signs that some want a broad war authorization that could be exploited to justify military action against terrorist groups geographically beyond Iraq and Syria, just as the 2001 Authorization for Use of Military Force, or A.U.M.F., against Al Qaeda was used by the Bush and Obama administrations to expand operations against other “associated forces.”
Some Democrats, including Senate leader Harry Reid, seem oddly passive, saying they are open to an authorization vote but doing little to advance it now. At the start of the campaign against ISIS in September, Mr. Obama insisted he had all the legal authority he needed to attack. After Election Day, he said he would ask Congress to authorize the military campaign specifically against ISIS.
Yet now it seems clear that he has no problem waiting until next year for Congress to act. The vacillation is not reassuring. Senator Robert Menendez of New Jersey, the chairman of the Senate Foreign Relations Committee that has jurisdiction over a use-of-force resolution, has called for quick action, along with a few other Democrats like Senator Tim Kaine of Virginia and Representative Adam Schiff of California.
What Mr. Menendez needs to put forward is a resolution that focuses on the war on ISIS, not on any far-flung terrorist group, and limits the fighting to Iraq and Syria.
A bill filed by Mr. Schiff would have this authorization expire 18 months after being enacted; Mr. Kaine’s bill limits the period to one year. Mr. Obama, however, has said that the campaign against ISIS would take years. The important point is that presidents should be required to go back to Congress to explain why a military conflict deserves continued support.
Although Mr. Obama has said he will not put American ground forces in Iraq or Syria, Mr. Schiff’s bill creates a loophole that would allow trainers, advisers, intelligence officers and special operations forces to be there. Mr. Kaine’s bill would allow ground forces to rescue American personnel or attack high-value targets.
While it is important for Congress to repeal the 2002 authorization for the Iraq War and terminate the 2001 authorization against Al Qaeda, the priority in the lame-duck session should be to pass a new and separate authorization for the war against ISIS.
If the Senate Foreign Relations Committee is unable to get such an authorization approved, Mr. Kaine and others should try to attach it as an amendment to other related legislation. It’s past time for Congress to exhibit some courage and take a stand.
Putin Demonized for Thwarting Neocon Plan for Global Domination
By Neil Clark
November 15, 2014
For it is a rule which invariably holds true – if the Western elites praise the leader of a foreign country it means he is doing something which is good for those elites and bad for his country. If he’s demonized, as Putin is, it’s the other way round.
The latest attack has come from Martin E. Dempsey, the chairman of the Joint Chiefs of Staff. The US Army general said that Russia was “pushing on the limits of international order.” Dempsey talked of the need to “deter Russian aggression against our NATO allies” – and said that Russia had “kind of lit a fire of nationalism.”
“Once you light that fire, it’s not controllable,” the General said. “I am worried about Europe.” It’s worth reflecting on Dempsey’s words as they provide a classic example of what psychologists call ‘projection’. The US General was accusing Russia of what his own country has been guilty of.
‘Pushing on the limits of international order’? Was it Russia which launched an illegal invasion of Iraq in 2003 – claiming the country possessed WMDs which threatened the world? Was it Russia which led the illegal bombing of Yugoslavia in 1999? The US hasn’t just pushed the ‘limits of international order’ it has been the number one international law breaker over the past twenty years.
‘Russian aggression against our NATO allies’? Not one NATO country has been attacked by Russia – or threatened with attack. The aggression has been from the US against Russian allies. Over the last twenty or so years we have seen the US target a series of countries which had friendly links to Russia, including Yugoslavia, Iraq, Libya and Syria. It’s the US and its NATO allies who clearly need to be deterred, not Russia.
Russia has ‘kind of lit a fire of nationalism’? Well, it was the US and their EU allies who did this in Yugoslavia in the 1990s – sponsoring separatists in order to break up the country – and it was the US and its EU allies who have been sponsoring and supporting extreme nationalists (some would say fascists and neo-Nazis) in Ukraine. Dempsey says he is worried about Europe, but it’s Russia which has cause to be worried about the US and Europe. Just take a look at the map on how NATO, since the fall of communism in Eastern Europe twenty-five years ago – has expanded eastwards, despite promises made by the west that NATO would not expand. When figures from the Western elite talk of ‘Russian aggression’ what they really mean is that Russia is checking Western aggression. When Putin is compared to Hitler – it is because he is standing in the way of the real heirs of Adolf Hitler, the war lobby in the West, who like the mustachioed one, have an insatiable appetite for attacking and threatening to attack independent sovereign states. By any objective assessment, it’s the Western elites – and in particular the neocon faction within that elite – who are the biggest dangers to world peace, not Putin. Look at the havoc their policy of endless war, whether waged directly or through terrorist proxies, has caused in Iraq, Libya and Syria.
These serial warmongers are particularly angry that Russian foreign policy has thwarted their plans for ‘regime change’ in Syria, a key strategic objective. They’re also angry that Putin clamped down on oligarchs whose role was to help Western plutocrats get control of Russia’s natural resources. Back in 2000, when he was first elected President, Western elites hoped that Putin would continue the path set by his predecessor Boris Yeltsin, a man whose rule was disastrous for ordinary Russians, who saw their living standards plummet and the value of their life savings destroyed, but very good for the Western elites. Yeltsin privatized vast swathes of the economy and acquiesced while NATO destroyed Yugoslavia. Yeltsin was bad news for Russia – but he was hailed as a great ‘democrat’ by the West – and eulogized on his death – which tells us everything we need to know about who benefited most from his rule.
Putin himself had no great desire to fall out with the West when he became President – quite the contrary. He was the first international leader to offer his condolences to President George W. Bush after the 9/11 terrorist attacks on New York. “In the name of Russia, I want to say to the American people – we are with you,” he said. Putin co-operated with West over Afghanistan and the so-called ‘war on terror’. “Russia will continue to provide intelligence information we have collected on the infrastructure, location and training of international terrorists,” he declared. A CNN article on how 9/11 was a ‘turning point’ for Putin makes interesting reading today.
It shows how much Putin was willing to co-operate with the US and gives lie to the assertion that it was he who provoked the ‘new’ Cold War. The truth is that it was the aggressive neocon faction within the Western elite which did that. They’ve been calling for sanctions on Russia for over a decade now – way before Russia’s non-existent ‘invasion’ of Ukraine. The current ‘cold war’ against Russia can be traced back to 2003. Rebuilding the economy and improving living standards for ordinary Russians inevitably meant action being taken against certain oligarchs who had made vast fortunes in the Yeltsin years. These oligarchs, such as Boris Berezovksy and Mikhail Khodorkovsky had some powerful supporters, in the West. As I detailed in an article for the New Statesman in November 2003 – influential neocons in Washington who had links to Russian oligarchs, used the arrest of Khodorkovsky for fraud and tax evasion to push for a hardening of US policy towards Moscow.
“The arrest of one man has sent us a signal that our well-intentioned Russian policy has failed. We must now recognize that there has been a massive suppression of human rights and the imposition of a de facto Cold War-type administration in Moscow” wrote Bruce P. Jackson of the Project on Transitional Democracies and the Project for the New American Century’
Jackson called for sanctions to be imposed on Russia by Congress. Sounds familiar? In 2003, Putin also angered hawks in Washington by opposing the war against Iraq – not only that he openly ridiculed the claims about Iraq’s WMDs. “Earlier this year, Russia’s stubborn holding of its line on Iraq infuriated the neoconservatives and increased their determination to work towards regime change at the next presidential elections in 2004 and to accelerate their plans to secure Russia’s energy resources”, I wrote in the New Statesman. The neocon propaganda stepped up again with the mysterious death of M16 agent Alexander Litvinenko, in London in late 2006.
Inevitably the death was blamed on Moscow – despite the absence of proof. As I highlighted in the Guardian in an article entitled ‘In Bed with Russophobes,
The incident was used in their campaign against Putin’s national revival. “These rightwing hawks are gunning for Putin not because of concern for human rights but because an independent Russia stands in the way of their plans for global hegemony,” I wrote, adding that “those on the center-left who have joined the current wave of Putin-bashing ought to consider whose cause they are serving.” In 2008, Putin, now firmly established as a NeoCon hate figure, angered the endless war lobby still further by standing up to aggression by the US client state of Georgia against the people of South Ossetia. The importance of what happened in Georgia in 2008 cannot be understated. It was as Seumas Milne notes in his book The Revenge of History “one of two events in 2008 which signalled the end of the New World Order of unchallenged US global and economic power” ( the other was the banking crash).“The former Soviet Republic (Georgia) was a particular favorite of Washington’s neoconservatives” says Milne. “Its forces, armed and trained by the US and Israel, made up the third-largest contingent in the occupation of Iraq…..The short-lived Russian-Georgian conflict marked an international turning point….. Russia had called a halt to a relentless process of US expansion.”
The newly-elected US President Barack Obama promised a ‘reset’ of relations with Russia, but with the neocons still in town and peddling their anti-Putin and anti-Russian propaganda there was never any hope of that succeeding. The current wave of Russophobia can be linked to events in the Middle East- and Russia’s refusal to back ‘regime change’ in Syria. They desperately wanted Bashar al-Assad removed- so as to break the alliance between Syria, Hezbollah and Iran, but Russia has got in the way. Ukraine was where the neocons thought they would get their revenge. The US sponsored regime change in Kiev, an enterprise in which the State Department’s Victoria Nuland the wife of the Project for a New American Century co-founder Robert Kagan played a prominent role, finally enabled the hawks to get what they been dreaming of for over ten years – the sanctioning of Russia.
The ‘get tough with Russia’ stance they’ve long been calling for has finally become the official policy of the US and leading EU countries. The demonization of President Putin in the West has become ‘mainstream’. The neocon plan is for the Russian economy to be weakened by sanctions, which they hope will lead to a reduction in support for Putin and make it easier for them to destabilize the country and bring about a ‘regime change’ in Moscow. They want a compliant stooge in the Kremlin who will surrender all of Russia’s natural resources, and allow them to get rid of President Assad and the Baathists in Syria – an essential prerequisite before any attack on Iran. At the moment one man is getting in the way of those war plans.
To repeat: “those on the centre-left who have joined the current wave of Putin-bashing ought to consider whose cause they are serving.”
Because Putin is not the problem – it’s the people attacking him who are.
Reprinted with permission from Russia Today.
Gold Stock Apocalypse Is Epic Buying Opportunity
- The recent apocalyptic gold-stock capitulation left this sector as cheap as it’s ever been relative to gold! Nearly everyone wrongly believes the gold miners are doomed.
- With these stocks now trading at levels last seen when gold was around $350, the upside potential in this left-for-dead sector is truly vast.
- Gold-stock price levels today are fundamentally absurd, and overdue to mean revert sharply and radically higher in the coming months.
This latest capitulation by gold-stock investors has left this hated sector at truly apocalyptic lows. Bearish consensus is so extreme that pretty much everyone believes the gold miners are doomed to spiral lower forever. But today's horrendous gold-stock price levels aren't righteous, they're a temporary emotional fiction conjured by epic fear. Trading at fundamentally-absurd levels, gold stocks are due to mean revert far higher.
For 15 full-time years now, I've been deeply immersed in the financial markets as a speculator, investor, researcher, and newsletter writer. During that long fascinating and challenging span, I've had to weather every imaginable market storm. They're never easy, with the temptations to succumb to popular extremes of greed and fear always great. The critical anchor necessary to avoid being swayed by these emotions is perspective.
Perspective is keeping the bigger picture in focus, and comes from both trading experience and studying market history. Perspective effectively combats the tyranny of greed and fear over trading decisions, by deescalating the overwhelming emotional dominance of the present. Most traders only consider recent price action when making their trading decisions, which is dominated by prevailing and misleading emotions.
And that's why epic fear has smothered gold stocks. Their technical price action over recent weeks and months has been an unmitigated disaster. As they get hammered ever lower day after day, it seems like the gold-stock Apocalypse is upon us. A terrible bearish vicious circle has formed, with falling prices leading to rampant selling which hammers prices even lower. It sure feels like gold stocks are forever broken.
But healthy perspective far transcends the feelings that lead traders to make wealth-killing decisions like buying high and selling low. Like all stock sectors, gold mining is simply another business that generates cashflows, profits, and dividends. Ultimately these underlying fundamentals will determine the righteous gold-stock price levels over the long term. Fundamentals eventually trump short-lived greed and fear extremes.
Gold-mining profitability, and hence ultimate stock-price levels, is driven almost exclusively by the price of gold. Gold miners invest hundreds of millions to billions of dollars in developing deposits into operating mines. And in each individual one, the costs for wresting that precious metal from the bowels of the earth are largely fixed in the pre-construction mine-engineering phase. So all that really matters is the gold price.
And gold has certainly weakened in the past couple months, falling on extreme gold-futures shorting by American speculators. But year-to-date, gold is only down a modest 3.9%. Yet the flagship gold-stock index known by its trading symbol HUI has plummeted 18.8%. Gold stocks are collapsing far faster than the lower gold prices warrant, which is not rational or justified fundamentally. Their operating profitability is still good.
Like all low-price extremes, gold stocks' recent lows were driven solely by an emotional capitulation. Many long-suffering gold-stock investors and speculators finally gave up, surrendering to sell low.
The fear in their own hearts grew so suffocating that they could no longer withstand the crushing pressure of being in this losing trade. So they dumped gold stocks not because profits collapsed, but because fear beat them.
This extreme emotional selling has left gold stocks at truly fundamentally-absurd levels. The word absurd means "ridiculously incongruous or unreasonable". And that's where gold-stock prices are today when compared to any conceivable valuation metric. They are far too cheap, trapped in an emotional fiction conjured by epic fear that will soon dissipate. When that happens, gold stocks will soar in a huge mean reversion.
This first chart restores critical perspective with a secular view of gold stocks and gold. I had to use the venerable HUI gold-stock index here because the popular GDX gold-stock ETF's (NYSEARCA:GDX) history doesn't extend back far enough. GDX was born in May 2006, but to see the last time gold stocks traded at today's levels we have to travel years farther back beyond that. But GDX perfectly tracks the HUI, so this analysis applies to it too.
Just last week, extreme fear-driven selling hammered the HUI to 147. Investors and speculators alike fled gold stocks in droves, losing the battle in their own hearts against the overwhelming popular fear. They couldn't stand the pain anymore and wanted out at any price, so they sold low. That's really unfortunate, as buying high and selling low is the surest path to financial ruin. Capitulations are never rational events.
Since their all-time record high in September 2011, gold stocks as measured by the HUI yardstick have lost a gut-wrenching 76.9% in 3.2 years. They had bottomed decisively in mid-2012, but then the US Federal Reserve started levitating general stock markets with its wildly-unprecedented third quantitative-easing campaign. So capital started to migrate out of alternative investments, a realm long dominated by gold.
Gold drifted lower, fell, and even plunged. The epicenter of this mass exodus was the second quarter of 2013, the worst quarter for gold in an astounding 93 years! Stock investors fled gold by dumping shares in the flagship GLD gold ETF at epic record rates. As gold spiraled lower, the gold miners were naturally sucked into the maelstrom. Their whole fundamental outlook and future profitability totally depends on gold's price.
While gold stocks indeed should've been sold with gold weaker, the magnitude of selling they suffered was far beyond anything justifiable fundamentally. This ultimately culminated in the latest gold-stock capitulation where the HUI plunged to 11.3-year lows! Think about that a second. Gold stocks were just trading at prices not seen since July 2003. Pretty much the entire secular gold-stock bull had been fully erased.
That's pretty crazy to contemplate. Between November 2000 and September 2011, the HUI rocketed an astounding 1664% higher during a period where the benchmark S&P 500 drifted 14% lower. Gold stocks were the best-performing sector in the world during their secular bull, earning fortunes for their investors and speculators including me and our newsletter subscribers. It was one of the greatest stealth bulls in history.
But as of last week, over 4/5ths of that bull run had vanished. And that entire not-widely-followed gold-stock bull was based on the massive fundamental boost to gold-mining profits that gold's own secular bull created. So if the recent gold-stock price levels were righteous, gold too should have been pounded back down towards its mid-2003 levels. Where was gold trading back then? Merely right around $350!
Three-hundred-and-fifty-dollar gold, that's incredible. I was trading gold stocks and writing newsletters back then too, building fortunes for contrarian investors brave enough to buy low. Believe me, this has never been an easy sector to own. It's not only super-volatile and emotional, but gold and therefore gold stocks will always be hated by Wall Street because they compete with general stocks for scarce investment capital.
Do gold stocks deserve to trade today as if gold was at just $350? Heck no! Last week when gold stocks' latest capitulation low was carved, the gold price was up near $1150. That was 3.3x higher than the last time the gold stocks traded at recent levels! It makes no fundamental sense whatsoever for gold stocks to trade as if gold was at $350 when it was actually $1150. Their core fundamentals are now vastly better.
At my company Zeal, we've done and continue to do extensive and deep studies on gold miners as a sector. We are constantly looking at their profitability, cost profiles, operating cashflows, and a wide array of hard financial metrics. And despite major write-offs of gold projects forced by the past couple years' extreme once-in-a-century gold-price anomaly, gold miners' underlying fundamentals remain rock-solid.
This whole sector is truly in infinitely better financial shape than it was 11 years ago the last time the HUI traded at recent levels. And as gold inevitably mean reverts higher out of its own recent extreme lows, the current and future profitability for mining gold will soar. So it is extremely illogical, fundamentally absurd, for gold stocks to be priced as if gold was at $350 when it is actually $1150. This is confirmed the other way.
The recent extreme gold-futures selling hammered gold to a 4.5-year low, a far-shorter span than the 11.3-year HUI gulf. The last time gold traded in the $1140s in April 2010, the HUI was between 425 and 450. Without today's unbridled explosion of fear, I strongly suspect that's exactly where gold stocks would be trading again. HUI 400 or maybe even 350 could easily be considered righteous and rational, but 150? No way.
The awesome thing is such temporary emotional fictions created by extreme greed or fear soon pass. The collective herd emotions in the markets are finite, with extremes short-lived. Once everyone susceptible to being scared into selling low is already out, there are no more sellers. So soon the great sentiment pendulum starts slowly swinging back through its greed-fear arc towards the opposite end.
Thus gold stocks soar.
The only comparable episode to today's gold-stock extremes came back in late 2008's stock panic. That too was a once-in-a-century fear super-storm, the first stock panic since 1907. Back then, like recently, gold-stock investors and speculators universally capitulated and sold low. They believed that because gold stocks had plummeted and shattered all technical support, there was no hope and this sector was doomed.
But nothing could've been farther from the truth! Coming out of those 5.3-year stock-panic lows, also the worst HUI levels since July 2003, gold stocks skyrocketed. Over the next several years, the HUI more than quadrupled with a gigantic 319% gain! And that was over a span where the S&P 500 merely rallied 40%, again the gold stocks were one of the world's best-performing sectors. Extreme lows portend huge upside afterwards!
And fundamentally, the recent HUI lows were even crazier than this straight-up HUI-and-gold comparison indicates. This next chart looks at the best gold-stock valuation metric, the HUI/Gold Ratio. This HGR distills the key fundamental relationship between gold-stock prices and the metal that drives their profits. And amazingly, apocalyptically, gold stocks have actually never been cheaper relative to gold prices!
When the HGR is rising, gold stocks are outperforming gold. That is normal during periods of rising gold prices all throughout history. Conversely when the HGR is falling, gold is outperforming gold stocks. This typically happens when gold is weakening, as the gold stocks with profits leveraged to the gold price fall faster. Incredibly, this latest capitulation has crushed gold stocks to an all-time low in HGR terms!
The NYSE Arca Gold BUGS (Basket of Unhedged Gold Stocks) Index or HUI was born in March 1996. In the entire 18.7 years since, this leading gold-stock metric has never been as cheap relative to gold as it was last week. And this includes those final dark years of gold's last secular bear in the late 1990s! So I strongly suspect this is an all-time record low of gold-stock prices relative to gold, their most extreme fear ever.
Last week the HGR actually slumped to 0.128x. In other words, the price level of the HUI was trading at just over 1/8th the gold price. This secular HGR chart really highlights just how anomalous and extreme that is. Even during 2008's once-in-a-century stock panic, the biggest fear event most of us will ever witness in our lifetimes, the HGR merely plunged to 0.207x. Today's gold-stock bearishness even exceeds that.
To gain that critical perspective showing how fundamentally-absurd today's apocalyptic gold-stock prices are, consider some long-term comparisons. Before the Fed launched its hyper-manipulative QE3 to wildly distort global financial markets, the normal years in the post-panic era were 2009 to 2012. During that span, the HGR averaged 0.346x. Merely to mean revert to there, the HUI would have to soar 169% higher!
And back in the secular span from mid-2003 to mid-2008 before that stock panic, the HGR averaged a far-higher 0.511x. To return to that pre-panic normalcy measure, the HUI would have to quadruple from here even if gold did absolutely nothing. It is just mind-boggling how ludicrously low today's gold-stock price levels are compared to all precedent. It's supremely irrational, reflecting the radically-illogical fear out there.
This epic anomaly can't and won't last for long. Capitulations, by their very nature, force all weak-handed investors and speculators out of a bottoming market. Fear has already peaked, and burned itself out. The traders who remain in gold stocks are the hardcore contrarians who maintain long-term perspectives and understand gold stocks' dazzlingly-bullish fundamentals. They are not going to be suckered into selling low.
Peak fear means a sharp mean reversion higher is imminent, both in absolute HUI and HGR terms. The gold-stock behavior in 2009 coming out of their last extreme fear event shows what to expect. As traders start to bargain hunt in this beaten-to-a-pulp sector, gold-stock prices accelerate higher. These big gains entice in new investors, forming a virtuous circle. More buying drives gold stocks higher, begetting more buying.
The inevitability of this mean reversion is sealed by the perpetually cyclical nature of the markets. Gold stocks have actually been losing ground on balance relative to gold since early 2006, a very long 8.6-year secular span. Nothing in all the markets, including the ratio of gold-stock prices to gold, moves in one direction forever. Cyclicality guarantees gold stocks are overdue for a long period of outperformance again.
And the upside in this left-for-dead sector when the cycles shift is utterly massive. There is absolutely no doubt the HGR will return to its post-panic average of 0.346x, once again a 169% gain from here. But the upside potential of gold stocks is far greater than that. After emotionally-driven extremes, prices nearly always overshoot dramatically in their mean reversions. Think of that great greed-fear pendulum again.
Gold stocks were dragged so far to the fear side of that arc that the pendulum was practically ripped from its mounting. It's never been higher, had more potential energy to convert into kinetic energy as it swings back the other way. Pulled so high, there's no way the pendulum is going to magically stop in the middle with greed and fear balanced. Its kinetic energy is going to swing it deep into the greed side once again.
So the HGR is ultimately headed a lot higher as gold stocks mean revert. 0.40x seems like an easy bet, but it could very well swing to 0.50x or even 0.60x if gold stocks regain favor in a big way again. On top of that, gold itself is due to mean revert far higher as well. Especially when these artificial Fed-levitated stock markets decisively roll over and investors scramble to reestablish prudent positions in alternative investments.
To get back to where it was before last year's QE3-driven once-in-a-century anomaly, gold would have to rally nearly 50% to $1675 or so. Plug a 0.40x HGR into that, and you get a conservative (not dependent on popular greed) HUI target of 670. That's a 350%+ upleg from the HUI's recent capitulation lows! And it is right in line with the past two massive multi-year gold-stock uplegs of 350% and 319%, certainly nothing special.
The Greek word behind the English Apocalypse means doom, but also revelation. And the latter sure fits gold stocks today. Far from being doomed as is universally believed, gold stocks are on the verge of a gigantic mean-reversion upleg that will unveil them to a whole new generation of gold-stock investors. This will include large professional investors like hedge funds, eager to buy a small and despised sector dirt-cheap.
It's never easy buying deeply-out-of-favor stocks, and even harder holding them if they fall even farther out of favor after you deploy capital. But if you've ever liked gold stocks in the past, you've got to just love them today trading at such extreme lows. They've literally never been cheaper relative to gold, an epic buying opportunity for contrarians tough enough to fight the herd and buy low when few others are willing to.
The bottom line is the recent apocalyptic gold-stock capitulation left this sector as cheap as it's ever been relative to gold. Nearly everyone believes the gold miners are doomed, but nothing could be farther from the truth. With these stocks now trading at levels last seen when gold was around $350, the upside potential in this left-for-dead sector is vast. Gold-stock prices are fundamentally absurd and overdue to mean revert.
Contrarians tough enough to fight the herd and buy low are going to multiply their fortunes, again. After the last time gold stocks traded at remotely-comparable lows in 2008's stock panic, they were destined to more than quadruple over the next several years. No sector moves in one direction forever, or remains disconnected from its underlying fundamentals forever. And this certainly includes the despised gold stocks.
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Las convicciones son mas peligrosos enemigos de la verdad que las mentiras.
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
No soy alguien que sabe, sino alguien que busca.
Only Gold is money. Everything else is debt.
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Quien no lo ha dado todo no ha dado nada.
History repeats itself, first as tragedy, second as farce.
We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.
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