“The Bond Rally of a Lifetime”

John Mauldin

In 1981, as inflation and Treasury yields were screaming to new heights, good friend Gary Shilling had the audacity to announce, “We’re entering the bond rally of a lifetime.” He was right, as that bond rally is already 35 years old and I think it will see a few more birthdays. Gary’s with us today to assert that the rally is still underway – and to back up that assertion with a rather compelling case for Treasuries and for the “long bond” (the 30-year) in particular.

Gary recalls his famous public debate on stocks versus bonds with Professor Jeremy Siegel of Wharton, in 2006 – just before the Great Recession kicked in and sent Treasury prices sky-high. Siegel remarked to the audience of 500, “I don’t know why anyone in their right mind would tie up their money for 30 years for a 4.75% yield” (the then-yield on the 30-year Treasury). When it was Gary’s turn, he asked the audience, “What’s the maturity on stocks?”

He got no answer, but pointed out that unless a company merges or goes bankrupt, the maturity on its stock is infinity – it has no maturity. His follow-up question was, “What is the yield on stocks?” to which someone correctly replied, “It’s 2% on the S&P 500.”

Gary continued, “I don’t know why anyone would tie up money for infinity for a 2% yield. I’ve never, never, never bought Treasury bonds for yield, but for appreciation, the same reason that most people buy stocks. I couldn't care less what the yield is, as long as it’s going down since, then, Treasury prices are rising.”

Gary admits that “It's a lot more interesting at a cocktail party to talk about the unlimited potential of a new online retailer that sells dog food to Alaskan dogsledders than to discuss the different trading characteristics of a Treasury of 20- compared to 30-year maturity”; but in today’s OTB he gives us a whole list of excellent reasons to give Treasuries the respect they so richly deserve.

Be sure to note Gary’s special offer of his monthly INSIGHT, at the conclusion of the article.

I write to you from 32,000 feet, flying to Missoula, Montana, on my way to Flathead Lake and my friend Darrell Cain. Part research trip, part business meeting, some wonderful writing time, and of course a little vacation. You do have to take some time off when you get to special places. And Shane is with me and will force me to relax a bit and enjoy life.

I am really looking forward to visiting with the five young rocket scientists Darrell has assembled to talk about the future of space. (Is it just me, or do you experience the same mental thought insertion when you say the words future of space and then want to add the final frontier?) And what better place to talk about that than while gazing into the truly clear night sky, lit by so many hundreds of thousands of stars at Flathead Lake, and during what is expected to be the best Perseid meteor shower of the past 20 years? When I was there a few years ago we would sit out every night around a small campfire and watch the space station go by right over our heads as it whizzed around the globe.

I am simply overwhelmed by my immersion into this book-writing process. No other project in my life has so deeply afffected my thinking. Every other book I’ve written, I knew roughly where I was going. Thinking about the changes coming in the next 20 years and in over 30 different areas of life, all of which affect the others, is forcing me to rethink a great many propositions that I have held to be true and right. I knew the future of work would be the hardest chapter, but I didn’t expect it to be so emotion-charged.

Confession: Longtime readers know that I have glibly used the phrase, “I don’t know where the future jobs will come from, but they will.” Because that has been the case in the past. But when you begin to closely examine the data, you see reasons why that positive outcome for jobs may not repeat in our future. Now, maybe something will come along to change the jobs trajectory, and I am really looking for it. Trust me, I prefer the optimistic viewpoint. But rather than settling for a techno-optimist gratuitous happy ending, I much prefer to write what I think is realistic, whether it turns out to be right or wrong.

Ironically, the technology part of the book (roughly the first half) is going to be more optimistic with regard to the future than I believed it would be when I started this project a few years ago. Twenty years from now, none of us are going to want to go back to the good old days of 2016. But the societal upheaval that may come with the collapse of the biggest bubble in human history – that of government promises – is suggesting a tumultuous ending that will make Mr. Toad’s Wild Ride seem quite tame. I much prefer movies with happy endings where the good guy wins, but right now I am at the part of the movie where the good guy is in deep kimchi. I guess we have to wait and see how the writer finishes the movie.

Except that I’m the writer of this particular script, and I’m not at all comfortable with the direction our middle-class hero is heading. I can see a whole host of silver linings, but I can’t get rid of that damn dark cloud, at least so far. It’s probably because I haven’t gotten deep enough into the woods to begin to see out the other side and find the way through to rainbows and puppies. At least that’s what I’m telling myself. If I really thought there was no way the movie could end happily, I might just get up and walk out before I really got into it.

But I see an immediate happy ending in my life. When I get off the plane and go to Flathead Lake, Darrell will have ordered a cherry pie made by a local bakery staffed by Mennonite women. It turns out that Flathead Lake is in the middle of cherry tree world, and these pies are made with the freshest of cherries and a pie crust that is so light it practically flies off the plate. Yes, they have other pies, which are all out of this world, but cherry is my favorite and this is the greatest cherry pie in the history of the world. Not that I might be given to a little storytelling embellishment, you understand. But in my personal experience, that pie, enjoyed with a little homemade vanilla ice cream, while looking up at the night stars and the space station, not to mention 100 meteorites an hour, is about as good as it gets.

You have a great week. I certainly intend to, and I fully expect that you will see a letter for me this weekend. And now let’s think about deflation and the virtues of Treasuries.

Your living in the future analyst,

John Mauldin, Editor
Outside the Box

“The Bond Rally of a Lifetime”

By A. Gary Shilling
(excerpted from the August 2016 edition of A. Gary Shilling's INSIGHT)

We’ve been bulls on 30-year Treasury bonds since 1981 when we stated, “We’re entering the bond rally of a lifetime.” It’s still under way, in our opinion. Their yields back then were 15.2%, but our forecast called for huge declines in inflation and, with it, a gigantic fall in bond yields to our then-target of 3%.
The Cause of Inflation

We’ve argued that the root of inflation is excess demand, and historically it’s caused by huge government spending on top of a fully-employed economy.  That happens during wars, and so inflation and wars always go together, going back to the French and Indian War, the Revolutionary War, the War of 1812, the Mexican War of 1846, the Civil War, the Spanish American War of 1898, World Wars I and II and the Korean War.  In the late 1960s and 1970s, huge government spending, and the associated double-digit inflation (Chart 1), resulted from the Vietnam War on top's LBJ’s War on Poverty.

By the late 1970s, however, the frustrations over military stalemate and loss of American lives in Vietnam as well as the failures of the War on Poverty and Great Society programs to propel lower-income folks led to a rejection of voters’ belief that government could aid Americans and solve major problems.  The first clear manifestation of this switch in conviction was Proposition 13 in California, which limited residential real estate taxes.  That was followed by the 1980 election of Ronald Reagan, who declared that government was the basic problem, not the solution to the nation’s woes.

This belief convinced us that Washington’s involvement in the economy would atrophy and so would inflation.  Given the close correlation between inflation and Treasury bond yields (Chart 1), we then forecast the unwinding of inflation—disinflation—and a related breathtaking decline in Treasury bond yields to 3%, as noted earlier.  At that time, virtually no one believed our forecast since most thought that double-digit inflation would last indefinitely. 
Lock Up For Infinity?

Despite the high initial yields on “the long bond,” as the most-recently issued 30-year Treasury is called, our focus has always been on price appreciation as yields drop, not on yields, per se. 
A vivid example of this strategy occurred in March 2006—before the 2007–2009 Great Recession promoted the nosedive in stocks and leap in Treasury bond prices. I was invited by Professor Jeremy Siegel of Wharton for a public debate on stocks versus bonds. He, of course, favored stocks and I advocated Treasury bonds.

At one point, he addressed the audience of about 500 and said, “I don’t know why anyone in their right mind would tie up their money for 30 years for a 4.75% yield [the then-yield on the 30-year Treasury].” When it came my turn to reply, I asked the audience, “What’s the maturity on stocks?” I got no answer, but pointed out that unless a company merges or goes bankrupt, the maturity on its stock is infinity—it has no maturity. My follow-up question was, “What is the yield on stocks?” to which someone correctly replied, “It’s 2% on the S&P 500 Index.” 

So I continued, “I don’t know why anyone would tie up money for infinity for a 2% yield.” I was putting the query, apples to apples, in the same framework as Professor Siegel’s rhetorical question. “I've never, never, never bought Treasury bonds for yield, but for appreciation, the same reason that most people buy stocks.  I couldn't care less what the yield is, as long as it's going down since, then, Treasury prices are rising.”

Of course, Siegel isn’t the only one who hates bonds in general and Treasuries in particular. And because of that, Treasurys, unlike stocks, are seldom the subject of irrational exuberance. Their leap in price in the dark days in late 2008 (Chart 2) is a rare exception to a market that seldom gets giddy, despite the declining trend in yields and related decline in prices for almost three decades.

Treasury Haters

Stockholders inherently hate Treasurys. They say they don’t understand them. But their quality is unquestioned, and Treasurys and the forces that move yields are well-defined—Fed policy and inflation or deflation (Chart 1) are among the few important factors. Stock prices, by contrast, depend on the business cycle, conditions in that particular industry, Congressional legislation, the quality of company management, merger and acquisition possibilities, corporate accounting, company pricing power, new and old product potentials, and myriad other variables.

Also, many others may see bonds—except for junk, which really are equities in disguise—as uniform and gray.  It's a lot more interesting at a cocktail party to talk about the unlimited potential of a new online retailer that sells dog food to Alaskan dogsledders than to discuss the different trading characteristics of a Treasury of 20- compared to 30-year maturity.  In addition, many brokers have traditionally refrained from recommending or even discussing bonds with clients.  Commissions are much lower and turnover tends to be much slower than with stocks. 

Stockholders also understand that Treasurys normally rally in weak economic conditions, which are negative for stock prices, so declining Treasury yields are a bad omen. It was only individual investors’ extreme distaste for stocks in 2009 after their bloodbath collapse that precipitated the rush into bond mutual funds that year. They plowed $69 billion into long-term municipal bond funds alone in 2009, up from only $8 billion in 2008 and $11 billion in 2007.

Another reason is that most of those promoting stocks prefer them to bonds is because they compare equities with short duration fixed-income securities that did not have long enough maturities to appreciate much as interest rates declined since the early 1980s.

Investment strategists cite numbers like a 6.7% annual return for Treasury bond mutual funds for the decade of the 1990s while the S&P 500 total annual return, including dividends, was 18.1%. But those government bond funds have average maturities and durations far shorter than on 30-year coupon and zero-coupon Treasurys that we favor and which have way, way outperformed equities since the early 1980s.
Media Bias

The media also hates Treasury bonds, as their extremely biased statements reveal.  The June 10 edition of The Wall Street Journal stated: “The frenzy of buying has sparked warnings about the potential of large losses if interest rates rise. The longer the maturity, the more sharply a bond’s price falls in response to a rise in rates. And with yields so low, buyers aren’t getting much income to compensate for that risk.”  Since then, the 30-year Treasury yield has dropped from 2.48% to 2.21% as the price has risen by 8.3%.

Then, the July 1 Journal wrote: “Analysts have warned that piling into government debt, especially long-term securities at these slim yields, leaves bondholders vulnerable to the potential of large capital losses if yields march higher.”  Since then, the price of the 30-year Treasury has climbed 1.7%. 

While soft-pedaling the tremendous appreciation in long-term sovereigns this year, Wall Street Journal columnist James MacKintosh worries about the reverse.  On July 28, he wrote, “Investors are taking a very big risk with these long-dated assets....Japan's 40-year bond would fall 15% in price if the yield rose by just half a percentage point, taking it back to where it stood in March.  If yields merely rise back to where they started the year, it would be catastrophic for those who have chased longer duration.  The 30-year Treasury would lose 14% of its value, while Japan's 40-year would lose a quarter of its value.” 

The July 11 edition of the Journal said, “Changes in monetary policy could also trigger potential losses across the sovereign bond world.  Even a small increase in interest rates could inflict hefty losses on investors.” 

But in response to Brexit, the Bank of England has already eased, not tightened, credit, with more likely to follow.  The European Central Bank is also likely to pump out more money as is the Bank of Japan as part of a new $268 billion stimulus package.  Meanwhile, even though Fed Chairwoman Yellen has talked about raising interest rates later this year, we continue to believe that the next Fed move will be to reduce them.

Major central banks have already driven their reference rates to essentially zero and now negative in Japan and Europe (Chart 3) while quantitative easing exploded their assets (Chart 4).  The Bank of England immediately after Brexit moved to increase the funds available for lending by U.K. banks by $200 billion.  Earlier, on June 30, BOE chief Mark Carney said that the central bank would need to cut rates “over the summer” and hinted at a revival of QE that the BOE ended in July 2012.

Lonely Bulls

We’ve been pretty lonely as Treasury bond bulls for 35 years, but we’re comfortable being in the minority and tend to make more money in that position than by running with the herd.
Incidentally, we continue to favor the 30-year bond over the 10-year note, which became the benchmark after the Treasury in 2001 stopped issuing the “long bond.”  At that time, the Treasury was retiring debt because of the short-lived federal government surpluses caused by the post–Cold War decline in defense spending and big capital gains and other tax collections associated with the Internet stock bubble.

But after the federal budget returned to deficits as usual, the Treasury resumed long bond issues in 2006. In addition, after stock losses in the 2000–2002 bear market, many pension funds wanted longer-maturity Treasurys to match against the pension benefit liability that stretched further into the future as people live longer, and they still do.
Maturity Matters

We also prefer the long bond because maturity matters to appreciation when rates decline.
Because of compound interest, a 30-year bond increases in value much more for each percentage point decline in interest rates than does a shorter maturity bond (Chart 5).

Note (Chart 6) that at recent interest rates, a one percentage point fall in rates increases the price of a 5-year Treasury note by about 4.8%, a 10-year note by around 9.5%, but a 30-year bond by around 24.2%. Unfortunately, this works both ways, so if interest rates go up, you’ll lose much more on the bond than the notes if rates rise the same for both.

If you really believe, as we have for 35 years, that interest rates are going down, you want to own the longest-maturity bond possible. This is true even if short-term rates were to fall twice as much as 30-year bond yields. Many investors don’t understand this and want only to buy a longer-maturity bond if its yield is higher.

Others only buy fixed-income securities that mature when they need the money back. Or they'll buy a ladder of bonds that mature in a series of future dates. This strikes us as odd, especially for Treasurys that trade hundreds of billions of dollars’ worth each day and can be easily bought and sold without disturbing the market price. Of course, when you need the cash, interest rates may have risen and you’ll sell at a loss, whereas if you hold a bond until it matures, you’ll get the full par value unless it defaults in the meanwhile. But what about stocks? They have no maturity so you’re never sure you’ll get back what you pay for them.

Three Sterling Qualities

We’ve also always liked Treasury coupon and zero-coupon bonds because of their three sterling qualities. First, they have gigantic liquidity with hundreds of billions of dollars’ worth trading each day, as noted earlier. So all but the few largest investors can buy or sell without disturbing the market.

Second, in most cases, they can’t be called before maturity.  This is an annoying feature of corporate and municipal bonds. When interest rates are declining and you’d like longer maturities to get more appreciation per given fall in yields, issuers can call the bonds at fixed prices, limiting your appreciation. Even if they aren’t called, callable bonds don’t often rise over the call price because of that threat. But when rates rise and you prefer shorter maturities, you’re stuck with the bonds until maturity because issuers have no interest in calling them. It’s a game of heads the issuer wins, tails the investor loses.

Third, Treasurys are generally considered the best-quality issues in the world. This was clear in 2008 when 30-year Treasurys returned 42%, but global corporate bonds fell 8%, emerging market bonds lost 10%, junk bonds dropped 27%, and even investment-grade municipal bonds fell 4% in price.

Slowing global economic growth and the growing prospects of deflation are favorable for lower Treasury yields.  So is the likelihood of further ease by central banks, including even a rate cut by the Fed, as noted earlier. 

Along with the dollar (Chart 7), Treasurys are at the top of the list of investment safe havens as domestic and foreign investors, who own about half of outstanding Treasurys, clamor for them.

Sovereign Shortages

Furthermore, the recent drop in the federal deficit has reduced government funding needs so the Treasury has reduced the issuance of bonds in recent years.  In addition, tighter regulators force U.S. financial institutions to hold more Treasurys. 

Also, central bank QE has vacuumed up highly-rated sovereigns, creating shortages among private institutional and individual buyers.  The Fed stopped buying securities in late 2014, but the European Central Bank and the Bank of Japan, which already owns 34% of outstanding Japanese government securities, are plunging ahead.  The resulting shortages of sovereigns abroad and the declining interest rates drive foreign investors to U.S. Treasurys.

Also, as we’ve pointed out repeatedly over the past two years, low as Treasury yields are, they’re higher than almost all other developed country sovereigns, some of which are negative (Chart 8).  So an overseas investor can get a better return in Treasurys than his own sovereigns.  And if the dollar continues to rise against his home country currency, he gets a currency translation gain to boot.

"The Bond Rally of a Lifetime"

We believe, then, that what we dubbed “the bond rally of a lifetime” 35 years ago in 1981 when 30-year Treasurys yielded 15.2% is still intact.  This rally has been tremendous, as shown in Chart 9, and we happily participated in it as forecasters, money managers and personal investors.

Chart 9 uses 25-year zero-coupon bonds because of data availability but the returns on 30-year zeros were even greater.  Even still, $100 invested in that 25-year zero-coupon Treasury in October 1981 at the height in yield and low in price and rolled over each year maintains its maturity or duration to avoid the declining interest rate sensitivity of a bond as its maturity shortens with the passing years.  It was worth $31,688 in June of this year, for an 18.1% annual gain.  In contrast, $100 invested in the S&P 500 index at its low in July 1982 is now worth $4,620 with reinvested dividends.  So the Treasurys have outperformed stocks by 7.0 times since the early 1980s.

So far this year, 30-year zero-coupon Treasurys have returned 26% compared to 3.8% for the S&P 500.  And we believe there’s more to go.  Over a year ago, we forecast a 2.0% yield for the 30-year bond and 1.0% for the 10-year note.  If yields fall to those levels by the end of the year from the current 2.21% and 1.5%, respectively, the total return on the 30-year coupon bond will be 5.7% and 5.6% on the 10-year note.  The returns on zero-coupon Treasurys with the same rate declines will be 6.4% and 5.1% (Chart 10).

Besides Treasurys, sovereign bonds of other major countries have been rallying this year as yields fell (Chart 11) and investors have stampeded into safe corrals after Brexit.

Finally Facing Reality

Interestingly, some in the media are finally facing the reality of this superior performance of Treasury bonds and backpedaling on their 35-year assertions that it can’t last.  The July 12 Wall Street Journal stated: “Bonds are churning out returns many equity investors would envy. Remarkably, more than 80% of returns on U.S., German, Japanese and U.K. bonds are attributable to gains in price, Barclays index data show. Bondholders are no longer patient coupon-clippers accruing steady income.”

The July 14 Journal said, “Ultra low interest rates are here to stay,” and credited not only central bank buying of sovereigns but also slow global growth.  Another Journal article from that same day noted that central banks can make interest rates even more negative and, if so, “even bonds bought at today’s low rates could go up in price.”  And in the July 16 Journal, columnist Jason Zweig wrote, “The generation-long bull market in bonds is probably drawing to a close.  But high quality bonds are still the safest way to counteract the risk of holding stocks, as this year’s returns for both assets has shown.  Even at today’s emaciated yields, bonds still are worth owning.”  What a diametric change from earlier pessimism on bonds!

The July 11 Journal said, “Recently, the extra yield investors demand to hold the 10-year relative to the two-year Treasury note hit its lowest level since November 2007 (Chart 12). In the past, investors have taken this narrowing spread as a warning sign that growth momentum may soon slow because the Fed is about to raise interest rates—a move that would cause shorter-dated bond yields to rise faster than longer-dated ones.  Now, like much else, it is largely being blamed on investors’ quest for yield.”  Note (Chart 12) that when the spread went negative, with 2-year yields exceeding those on 10-year Treasury notes, a recession always followed.  But that was because the Fed's attempts to cool off what it saw as an overheating economy with higher rates was overdone, precipitating a business downturn.  That's not li kely in today's continuing weak global economy.

Persistent Stock Bulls

Nevertheless, many stock bulls haven’t given up their persistent love of equities compared to Treasurys.  Their new argument is that Treasury bonds may be providing superior appreciation, but stocks should be owned for dividend yield. 

That, of course, is the exact opposite of the historical view, but in line with recent results.  The 2.1% dividend yield on the S&P 500 exceeds the 1.50% yield on the 10-year Treasury note and is close to the 2.21% yield on the 30-year bond.  Recently, the stocks that have performed the best have included those with above average dividend yields such as telecom, utilities and consumer staples (Chart 13).

Then there is the contention by stock bulls that low interest rates make stocks cheap even through the S&P 500 price-to-earnings ratio, averaged over the last 10 years to iron out cyclical fluctuations, now is 26 compared to the long-term average of 16.7(Chart 14).  This makes stocks 36% overvalued, assuming that the long run P/E average is still valid.  And note that since the P/E has run above the long-term average for over a decade, it will fall below it for a number of future years—if the statistical mean is still relevant.

Instead, stock bulls points to the high earnings yield, the inverse of the P/E, in relation to the 10-year Treasury note yield.  They believe that low interest rates make stocks cheap.  Maybe so, and we’re not at all sure what low and negative nominal interest rates are telling us.

We’ll know for sure in a year or two.  It may turn out to be the result of aggressive central banks and investors hungry for yield with few alternatives.  Or low rates may foretell global economic weakness, chronic deflation and even more aggressive central bank largess in response.  We’re guessing the latter is the more likely explanation.

Hesitant Longs, Fearful Shorts, And What Friday's Move Means For The Gold Market

by: Hebba Investments

- The latest COT report showed speculative gold longs selling while shorts slightly increased their own positions.

- Friday's move should remind gold investors that algorithms are firmly entrenched in the gold markets.

- While we like the long-term fundamentals of gold, we still expect a major pullback in the gold price to below $1,300.

In the latest COT report, we saw a decline in the gold long speculative positions and a rise in short positions in both gold and silver. Interestingly enough, gold commercials closed a significant number of short contracts for the week, which in the past has been a more bullish indicator. Looking back over the past few weeks, this was the fourth week out of the past five weeks where we saw a significant decline in speculative gold longs which may suggest a little bit of steam has been taken out of the market. While shorts have not taken advantage of this to boost their own positions by significant amounts, it is something to be wary of.
We will give our view and will get a little more into some of these details, but before that let us give investors a quick overview into the COT report for those who are not familiar with it.
About the COT Report
The COT report is issued by the CFTC every Friday to provide market participants a breakdown of each Tuesday's open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. In plain English, this is a report that shows what positions major traders are taking in a number of financial and commodity markets.
Though there is never one report or tool that can give you certainty about where prices are headed in the future, the COT report does allow the small investors a way to see what larger traders are doing and to possibly position their positions accordingly. For example, if there is a large managed money short interest in gold, that is often an indicator that a rally may be coming because the market is overly pessimistic and saturated with shorts - so you may want to take a long position.

The big disadvantage to the COT report is that it is issued on Friday but only contains Tuesday's data - so there is a three-day lag between the report and the actual positioning of traders. This is an eternity by short-term investing standards, and by the time the new report is issued, it has already missed a large amount of trading activity.
There are many different ways to read the COT report, and there are many analysts that focus specifically on this report (we are not one of them) so we won't claim to be the experts on it.

What we focus on in this report is the "Managed Money" positions and total open interest as it gives us an idea of how much interest there is in the gold market and how the short-term players are positioned.
This Week's Gold COT Report 

This week's report showed speculative gold longs reversing last week's rise and declining for the fourth week out of the past five weeks with a 9,934 contract decline. While shorts slightly increased their own speculative positions, they have had very little courage over the past few months, and this week was no different as they increased their positions by a mere 1,582 contracts despite the larger decline in longs. That's a far cry from the 10-20 thousand increase in short contracts we used to see in 2015.
While that can be interpreted as a positive by the gold bulls as shorts have little in the way of conviction, we think it is something to be wary of as it also means many shorts that we have seen in the past are currently sidelined and there's plenty of dry powder left to jump in. That, paired with declining longs, could lead to a significant down week for gold similar to what we saw in May (specifically the week of 5/24) - and that was at net levels less extreme in terms of their bullishness than what we see now.

Moving on, the net position of all gold traders can be seen below:
The red line represents the net speculative gold positions of money managers (the biggest category of speculative trader), and as investors can see, speculative traders have slightly pulled back from all-time high positions and are now only net long by around 256,000 contracts.
Interestingly enough for the gold bulls, producer/merchant positions increased to a slightly more bullish level for the week as they covered short positions, but we are still a far cry from what we would term "bullish commercial positions".
As for silver, the week's action looked like the following:
The red line, which represents the net speculative positions of money managers, saw a slight pullback as shorts increased their positions by a little more than 2,500 contracts while longs decreased their own positions by a little over 750 contracts. Not much interesting action here as silver pretty much followed the trajectory of gold for the week.
Our Take and What This Means for Investors
We would not be doing our jobs properly if we didn't mention Friday's up and down session in gold as it rose significantly only to fall back after the European close.
While some blogs are throwing out the conspiracy theory card, we think that this is simply an example of how traders play in the gold market and take advantage of opportune times to cause massive spikes or drops in the gold and "run the stops". Right or wrong that's simply the nature of markets in 2016 so investors shouldn't be surprised to see these kinds of moves, especially considering most of this trading is done by HFTs and not fundamental based traders.

Which brings us to an important point and why investors should be really cautious in these precious metals markets. We know that there are algorithmic traders out there with massive amounts of cash just looking for an opportunity to move markets to the point where it causes short-covering or longs jumping ship - which gives these algorithmic traders an opportunity to cash in on the move by buying/selling to these panicked shorts/longs.
Based on the latest COT reports, we are still extremely overbought in the gold and silver markets and this makes us concerned that we could see a big spike downwards as these algorithmic traders take advantage of where the most opportunity is to panic position holders.

In this case, we believe it's the longs that are most exposed and ready to panic as they are significantly above historical norms and still very close to record-breaking levels.
The thing that can prevent something like this is if we saw fundamental based buyers step in and take advantage of price drops. In this case, that would be physical buyers, who have been mostly absent from the gold market over the past few months and investment funds pushed the price of gold higher and higher. In fact, physical demand is extremely week and recently Bloomberg highlighted that gold demand in places like the Middle East is the lowest on record.
Thus, the "path of panic" for algorithmic traders to cause the most havoc (and personal profits) is down and, with weak physical demand, any unloading of gold by gold ETFs may be met with little interest in the physical market - driving the price down further. Thus, we maintain our position that we expect a significant sub-$1,300 pullback in the gold market and think investors should wait to purchase gold positions in ETFs such as the SPDR Gold Trust ETF (NYSEARCA:GLD), the ETFS Physical Swiss Gold Trust ETF (NYSEARCA:SGOL), and miners such as Randgold (GOLD) and Barrick Gold (NYSE:ABX).

We want to emphasize, though, that we think that drop will be a very good buying opportunity as we believe a new paradigm in economic policy is about to take hold of markets.

Markets Insight

I’m from the central bank and I’m here to help

Quantitative easing has prevented deflation and the policy is now ordinary
Among Ronald Reagan’s many laurels as a president, one achievement as a candidate is perhaps overlooked: he popularised the idea that, in the hands of a central bank, a printing press can be dangerous.

Running against incumbent Jimmy Carter, he told a meeting of the International Business Council: “We must first recognise that the problem with the US economy is swollen, inefficient government, needless regulation, too much taxation, too much printing-press money.”

The message was designed to highlight the effect on American families of what he dubbed “Carter’s inflation”. It may be that Reagan is better remembered for a claimed dislike of taxes and spending thanks to the Federal Reserve’s eventual success in taming consumer price rises, under a chairman appointed by his predecessor.

Still, with few references in newsprint archives before 1980, Mr Reagan’s was a succinct metaphor for a school of economics obsessed with the changes to the amount of money in the system, less than a decade after the US abandoned the gold standard.

It has lived on in the background hum of anxiety about power wielded by policymakers. In the last decade a whirring of printing machines is shorthand for the innovations of monetary policy, buying government debt and other securities in programmes of so-called quantitative easing.

Yet a good slogan can always be repurposed. The shift has been slow, but appreciable, as official bond buying in the US, Europe and Japan has failed to return inflation to targeted levels, much less spark destabilising price rises.

Large holdings of sovereign debt within central banks has prompted consideration of the nature of money, and what it means for the part of government which provides goods and services to owe money to the part of government which oversees the financial and monetary system.

For instance four years ago the bond investor Jim Leaviss, of M&G, asked who would be unhappy if the Bank of England simply cancelled the £350bn of gilts it had acquired. It could do so in a letter to the Treasury, and had it done so then it would have cut national debt as a proportion of economic output from 63 per cent to 41 per cent, and the UK’s annual interest bill from £50bn to £32bn.

More recently attention has returned to the experience of Japan in the 1930s, whose economy rebounded while much of the world was caught in the mire of the Great Depression. Helped by the boost to trade from a collapse in the value of the Yen after abandoning the gold standard, veteran finance minister Korekiyo Takahashi also told the Bank of Japan to underwrite sales of public debt in order to help fund a dramatic expansion of government spending.

Japan did end up with an inflation problem, among other results of a rapid militarisation, but there is debate about whether the monetary consequences might have been avoided were Mr Takahashi not assassinated in 1936 after he tried to slow spending.

A country not in thrall to its army, with respected monetary institutions, should be able to turn the printing machines off. Note too the question is no longer academic with the Bank of Japan set to buy up the entire stock of debt early next decade, if open ended bond buying continues.

Employed in much of the discussion though is a different metaphor, of money dropped from helicopters. Putting aside technical distinctions of the various approaches to airborne scattering, it might be better to embrace the idea of the printing press. Even if not yet rehabilitated as a concept, fear of machines spinning out notes — or computers magicking money into accounts — could be put to good use due to the way it tends to cause spluttering about hyperinflation in the Weimar Republic and Zimbabwe.

The reason is that to shift expectations about inflation, and change the behaviour of consumers and businesses, the threat from rising prices and policymaker actions must be credible.

Quantitative easing has been successful in preventing deflation, but market interest rates have already collapsed, and the policy is now ordinary. Stasis and conservatism are becoming default assumptions.

Turning on the presses, however, could be a useful jolt. To recast a more famous saying of the Gipper: I’m from the central bank, and I’m here to help.

Trump Revealed Something That May Be Huge For The Gold Market, But Investors Are Not Paying Attention

by: Hebba Investments

- Donald Trump recently revealed plans to outdo Hillary Clinton with plans for a massive $500 billion dollar infrastructure plan.

 -Based on his background as a real estate developer that heavily used debt financing, we think its very likely this is more than just campaign talk.

- Unfortunately, investors have two very different scenarios on how this can play out and how best to take advantage of this shift in US spending policy.

We are not going to wade into the politics of the upcoming November US elections as it is extremely emotional, but we feel that the gold market is ignoring a major issue that was recently discussed in the campaign talk. In a phone interview last week, Donald Trump emphasized that he believed it is necessary that the US government will need to stimulate via more borrowing and spending. That would help lift economic growth, which is a significant departure from traditional Republican economics.

Just yesterday, Mr. Trump elaborated a bit more to Bloomberg as the plan evidently is massive. Trump wants to spend over $500 billion dollars to rebuild U.S. infrastructure, and that is at least double the amount that Hillary Clinton has floated.

We are not concerned about the benefits of the plan, but rather (1) if these are meaningless campaign promises and (2) what would be the implications of the policy. In terms of answering the question whether this is simply campaign talk, we think it is clear knowing Trump's history as a real estate developer that he isn't afraid to use debt to finance infrastructure. That's how he operates and we have no doubt he would be very comfortable financing infrastructure spending via US debt issuance. Throw in the fact that interest rates are at historic lows, and we clearly think this is a no-brainer for either candidate -- especially Trump.

The Implications

The obvious implications for this are that we will see some major increases in US deficit spending.

As investors can clearly see above, deficit spending has plateaued at around 2.8% of GDP, which is a far cry from the 10% seen during the depths of the GFC and subsequent recovery.

There's plenty of room from a historical and academic point-of-view to increase debt further.

So the obvious consequence of increased deficit spending to the tune of $500+ billion will be an increase in total US debt outstanding and total public debt to GDP.

  Source: St Louis Federal Reserve

Quietly US debt has increased despite the drop in deficit spending, and if Trump does enjoy victory come November, we can expect debt to go much higher and the ratio of debt-to-GDP to also increase. Not only that, Hillary Clinton has also pledged to increase infrastructure spending, and even though it isn't as much as Trump, we think that US politics are clearly changing from focusing on responsible spending and budget control to policies geared towards stimulus via direct government spending. It doesn't matter who wins as both candidates are going to open the floodgates to US government infrastructure spending -- is this what commodities have been sniffing over the past few months?

Conclusion for Investors

Increasing the issuance of US treasuries and significantly speeding up the growth of the US National debt should refocus the financial discussion on the sustainability of this debt, which is something that has really been forgotten over the past few years. Maybe this will occur in the run-up to the November US elections or after the elections as infrastructure spending bills are being discussed by the new president and Congress -- it is a matter of when, not if.

The real question is what will investors decide to focus on first -- the inflationary impact of massive infrastructure spending or its impact on the sustainability of debt. If investors focus on the first scenario, then expect a positive impact to stocks as infrastructure companies such as Astec Industries (NASDAQ:ASTE) and United Rentals (NYSE:URI) to have further gains.

Additionally, expect consumer discretionary stocks to also do well as these types of stimulus directly benefit the middle-class and blue-collar workers versus the Fed's current QE programs which primarily benefit Wall Street and those involved in the markets. Additionally, everyday commodities such as copper, steel, and aluminum would clearly benefit further.

For gold and silver, we think the inflationary focus will benefit them, but maybe less than other commodities as gold and silver do best during financially stressful events (inflationary or deflationary). Their protection versus inflation will be beneficial, but excluding hyperinflation, other commodities would offer a similar benefit, and thus they may make better plays in this scenario. Though we would make an argument that silver would be a much better bet than gold because of its industrial nature and the fact that most of annual silver production goes to satisfy industry.

In the secondary scenario where major US infrastructure planning diverts attention back to the sustainability (or unsustainability) of US debt, it's a much different picture for gold and silver.

In this case, we would expect the US dollar to face pressure as treasuries are sold off and the bond vigilantes return and demand higher interest rates. Of course, the Fed will be buying hand-over-fist to maintain current rates, but the additional debt issuance paired with markets focusing back on US debt will make it very difficult for the Fed to control interest rates. This would be extremely positive for precious metals and investors should aggressively accumulate physical gold and the gold ETFs (SPDR Gold Shares (NYSEARCA:GLD), PHYS, CEF) and avoid stocks and commodities.

So which scenario do we think is more likely?

We are still debating which way to go here, but currently we are favoring the first scenario (investor focus on inflation) occurring followed by the second scenario (investor focus on US debt sustainability). That means we are looking for fairly priced infrastructure companies (hard to find) and commodities that have failed to benefit from the recent run-up (think agricultural) and the associated companies. This is not a done deal yet and we will be closely monitoring the market's sentiment for clues on which direction we believe investors will go.

China’s Chance to Lead on Development

Justin Yifu Lin
. Newsart for China’s Chance to Lead on Development

BEIJING – In September, China will host the G20 meeting of world leaders for the first time. It could not have chosen a more opportune moment to assume a leadership role. Chinese President Xi Jinping should seize the occasion to push China’s ambitious development agenda globally. Specifically, Xi should make the case that development done right benefits everyone, and he should launch discussions on a multilateral investment agreement to be developed in the next year.
This is an achievable goal for the summit: the G20 has a record of relative success in coordinating multilateral efforts, such as in its response to the 2008 global financial crisis.

Moreover, the ingredients of successful development are very well known. They include constant technological improvement, which is critical for sustained growth and employment; a focus on maximizing human and physical capital; and infrastructure investments geared toward reducing transaction costs and increasing efficiency.
We also know the current gaps that exist in development. Developing countries today are constrained by low levels of human and financial capital, and by low reserves of or access to foreign exchange, which limits their ability to import the raw materials and equipment needed to ascend global value chains.
The best way to close the gaps in human and financial capital, and to increase access to foreign exchange, is through foreign direct investment. FDI should not be difficult to attract, because the potential returns should be higher in developing countries, where capital is scarce relative to labor.
But as Nobel laureate Robert Lucas noted, capital has been flowing in the wrong direction, from low- to high-income countries. This trend is depleting developing countries’ available capital, limiting development, and widening the global income gap.
As Laura Alfaro, Sebnem Kalemli-Ozcan, and Vadym Volosovych pointed out in a 2008 study for the Review of Economics and Statistics, poorer countries are deprived of capital flows partly because they lack the institutions that are needed to receive and facilitate investments. In a sense, these countries are trapped, because they need capital to develop these necessary institutions in the first place.
A multilateral investment agreement could fix this problem by making it easier to invest in developing countries. It could also strengthen the economic foundation for growth in developing countries by establishing investment protections and incentives, dispute-resolution procedures, corporate social responsibility benchmarks, and regulatory frameworks for investments made by state-owned enterprises and sovereign funds.
The World Trade Organization (WTO) is the natural place to negotiate this agreement, but past efforts have failed partly because negotiations were seen as heavily favoring developed countries over developing ones. With the global investment environment having changed dramatically in the past decade, negotiations should be restarted. As the figure below shows, developing countries now account for a growing share of global outward direct investment (ODI). This means that some emerging market economies themselves are becoming a source of capital and thus have a role to play in any future investment framework.
Outward Direct Investment from Developing Economies

China is the prime example. As the following graph shows, China has benefited so much from FDI that it is now increasing its own ODI.
Outward and Inward Direct Investment for China
According to the UN Conference on Trade and Development, in 2013 China became the third largest source of other countries’ FDI and is expected to become a net capital exporter for the first time in 2016. This trend can only continue, considering the combined impact of China’s “Go Out Policy” of prodding domestic companies to make investments abroad, and it’s “One Belt, One Road” framework to build continent-wide trade infrastructure.
In time, China will likely be the world’s largest source of FDI. Having gone from being a recipient of FDI to a net contributor in recent decades, China is perfectly positioned to lead G20 discussions on global development.
It should do so by setting a concrete goal for a workable development framework with a clear timeline for reaching specific milestones. An early milestone should be to establish a non-binding investment facilitation framework for developing countries. And, more generally, the agreement should emphasize inclusiveness and honest dealing to foster economic growth for developing and developed countries alike.

Why These Huge Bank Stocks Could Go to Zero

Justin Spittler

Europe’s banking system looks like it’s about to implode.

As you probably know, Europe has serious problems right now. Its economy is growing at its slowest pace in decades. Policymakers are now more desperate than ever and are on the verge of introducing more "stimulus" measures. And Great Britain just voted to leave the European Union (EU).

These are all major concerns. But Europe’s biggest problem is its banking system.

Over the past year, the Euro STOXX Banks Index, which tracks Europe’s biggest banks, has plummeted 46%. Deutsche Bank (DB) and Credit Suisse (CS), two of Europe’s most important banks, are down 63%. Both are trading at all-time lows.

We've warned you to stay away from these stocks. As we explained two weeks ago, Europe’s banking system is a complete disaster. And it’s only getting worse by the day…

European bank stocks have crashed over the past couple days. Yesterday, every major European bank stock ended the day down. Several fell more than 5%. A few plunged more than 10%.

These are giant declines. Remember, these banks are the pillars of Europe’s financial system.

Today, we’ll explain why this banking crisis could reach you even if you don’t live in Europe. But first, let’s look at why European bank stocks are crashing.

• Europe’s banking system has major problems…

Europe’s economy is barely growing. And negative interest rates are killing European banks.

Regular readers know negative rates are a radical government policy. The European Central Bank (ECB) introduced them in 2014, thinking they would “stimulate” Europe’s economy.

You see, negative rates basically turn your bank account upside down. Instead of earning interest on your money in the bank, you pay the bank to hold your money. The geniuses at the ECB thought they could force people to spend more money by “taxing” their savings.

But Europeans aren’t spending more money right now. They’re pulling cash out of the banking system and sticking it under their mattresses…where negative rates can’t get to it.

• Negative rates are also eating into European bank profits…

Today, the ECB’s key interest rate is at -0.4%. This means European banks must pay €4 for every €1,000 they keep with the ECB.

That might not sound like much. But it’s a big problem for European banks that oversee trillions of euros. According to Bank of America (BAC), European banks could lose as much as €20 billion per year by 2018 if the ECB keeps rates where they are.

• The Euro STOXX Banks Index plunged 2.8% on Monday…

Yesterday, it fell another 4.9%. The selloff hit everywhere from Frankfurt to Milan.

Spanish banking giant Santander closed the day down 5%. The Bank of Ireland fell 8%. And Commerzbank AG, one of Germany’s biggest lenders, fell 9% to a record low. Commerzbank’s stock plunged after it said negative rates were eating into its profits.

Meanwhile, Deutsche Bank and Credit Suisse fell 3.7% and 4.7%, respectively. Investors dumped these stocks after learning that both are going to be dropped from the Euro STOXX 50 index, Europe’s version of the Dow Jones Industrial Average.

• Italian stocks fell even harder yesterday…

UniCredit, Italy’s largest bank, fell 7% before trading on its stock was halted. Regulators stopped the stock from trading due to “concerns about its bad loan portfolio.” The stock has plunged 72% over the past year.

Bank Popolare di Milano, another large Italian bank, fell 10%. And Banca Monte dei Paschi di Siena, Italy’s third biggest bank, plummeted 16%. Monte Paschi plunged after a banking watchdog said it was in the worst shape of all European banks. It’s down 85% over the past year.

• Italy is ground zero of Europe’s banking crisis…

Right now, Italy’s banks are sitting on about €360 billion in “bad” loans, or loans that trade for less than book value. That’s almost twice as many bad loans as Italian banks had in 2010.

According to the Financial Times, bad loans now account for 18% of all of Italy’s loans. That’s more than four times as many bad loans as U.S. banks had during the worst of the 2008–2009 financial crisis.

• Policymakers are scrambling to contain the crisis…

Last month, the Italian government said it may pump €40 billion into its banking system to keep it from collapsing. A couple weeks later, Mario Draghi, who runs the ECB, said he would support a public bailout of Italy’s banking system. That’s when the government gives troubled banks money and makes taxpayers pay for it.

We said these emergency measures wouldn’t fix any of Italy’s problems. At best, they’ll buy the government time.

Unfortunately, policymakers will almost certainly “do something” if Europe’s banking system continues to unravel.

The ECB could cut rates again, which would only make it harder for European banks to make money. It could also launch more quantitative easing (QE). That’s when a central bank creates money from nothing and pumps it into the financial system.

Right now, the ECB is already “printing” €80 billion each month. But again, this hasn’t helped Europe’s stagnant economy one bit.

• Whatever the ECB does next, you can bet it will only make things worse…

As we've shown you many times, governments don’t fix problems. They only create them or make problems worse.

If you understand this, you can make a lot of money betting that governments will do the wrong thing. Casey Research founder Doug Casey explains:

The bad news is that governments act chaotically, spastically.

The beast jerks to the tugs on its strings held by various puppeteers. But while it’s often hard to predict price movements in the short-term, the long-term is a near certainty. You can bet confidently on the end results of chronic government monetary stupidity.

• According to Doug, gold is the #1 way to protect yourself from government stupidity…

That’s because gold is real money. It’s protected wealth for centuries because it’s unlike any other asset. It’s durable, easily divisible, and easy to transport.

Unlike paper money, gold doesn’t lose value when the government prints money or uses negative interest rates. These stupid and reckless actions push investors into gold. They can cause the price of gold to soar.

This year, gold is up 27%. It’s trading at the highest level since 2014. But Doug says it could go much higher in the coming years.

If Europe’s banking system continues to unravel, investors will panic. Fear could spread across the world like a wildfire. And gold, the ultimate safe haven, could shoot to the moon.

If you do one thing to protect yourself, own physical gold.

• We also encourage you to watch this short video presentation.

It talks about a crisis that’s been brewing since the last financial crisis—one that's currently being fueled by government stupidity.

The bad news is that we’re already in the early stages. The good news is that you still have time to seek shelter.

Chart of the Day

Deutsche Bank’s stock is in free fall.

You can see in today’s chart that Deutsche Bank has plummeted 75% since 2014. Yesterday, it hit a new all-time low.

If Deutsche Bank keeps falling, investors could lose faith in the financial system. And a panic could follow. At least, that’s what Jeffrey Gundlach thinks.

Regular readers know Gundlach is one of the world’s top investors. His firm, DoubleLine Capital, manages about $100 billion. Many investors call him the “Bond King,” a title that PIMCO founder Bill Gross held for years.

Like us, Gundlach thinks Europe’s banking system is in serious trouble. And like us, he thinks European policymakers will spring into action if things start to get ugly. Reuters reported last month:

"Banks are dying and policymakers don’t know what to do," Gundlach said. "Watch Deutsche Bank shares go to single digits and people will start to panic… you'll see someone say, 'Someone is going to have to do something'."

Right now, Deutsche Bank is trading under $13. Less than three years ago, it traded close to $50. If Europe’s bank stocks continue to plunge, the ECB will likely “double down” on its easy money policies. This won’t repair Europe’s economy… It will destroy the euro, the currency that the ECB is supposed to defend.

Health Secrets of the Amish

Contributing Op-Ed Writer

By MOISES VELASQUEZ-MANOFF                                             

Credit Emiliano Ponzi       

In recent decades, the prevalence of asthma and allergies has increased between two- and threefold in the United States. These days, one in 12 kids has asthma. More are allergic.

The uptick is often said to have started in the late 20th century. But the first hint of a population-wide affliction — the sneezing masses — came earlier, in the late 19th century, among the American and British upper classes. Hay fever so closely hewed to class lines, in fact, it was seen as a mark of civilization and refinement. Observers noted that farmers — the people who most often came in contact with pollens and animal dander — were the ones least likely to sneeze and wheeze.

This phenomenon was rediscovered in the 1990s in Switzerland. Children who grew up on small farms were between one-half and one-third less likely to have hay fever and asthma, compared with non-farming children living in the same rural areas. European scientists identified livestock, particularly dairy cows, fermented feed and raw milk consumption as protective in what they eventually called the “farm effect.” Many scientists argued that the abundant microbes of the cowshed stimulated children’s immune systems in a way that prevented allergic disease.

Then, a few years ago, researchers found an American example of the phenomenon: the Amish. Children from an Amish community in Indiana had an even lower prevalence of allergies than European farmers, making them among the least allergic subgroup ever measured in the developed world.

Why doesn’t farming protect the Hutterites?
A likely reason is that while the Amish have small farms, with cowsheds located right next to their homes, the communal-living Hutterites house their livestock miles away. The Amish probably bring more microbes into their homes — and some may waft in directly — resulting in a microbial load nearly six times higher than that found in Hutterite houses, the scientists discovered.

In addition, primarily adult men work with the cows in Hutterite communities, while Amish children play in the cowsheds, and Amish women, including pregnant ones, presumably have frequent contact with the cowshed microbes. In Europe, women exposed to these microbes while pregnant have been found to have the least allergic kids of all. Microbial stimulation of the maternal immune system may preprogram the unborn child against allergy — an effect that’s reproducible in rodents. So while both communities farm, the Hutterites seem to lack the right exposures at the right time.

About 5 percent of the Amish children in the study have asthma, while 21 percent of the Hutterites do. And the immune systems of these two genetically similar communities look remarkably different. Hutterite children have more white blood cells involved in allergy, called eosinophils, while another cell type, called neutrophils — which specializes in repelling microbes — predominates in Amish children. Perhaps more important, Amish white blood cells have a different profile of gene expression than Hutterite, one that signals restraint rather than aggression. This ability to not overreact to pollens and danders is, scientists think, important for avoiding asthma and allergies.

The scientists also sought to reproduce these immunological profiles in animals by treating mice with microbe-laden dust from both Amish and Hutterite homes. The two dusts had drastically different effects when the mice inhaled them through their noses every few days for over a month. Amish dust prevented symptoms of asthma; Hutterite dust encouraged them.

Broadly speaking, the immune system has two arms: the adaptive immune system, which learns and remembers; and the innate immune system, which operates like a sensory organ, recognizing ancient patterns in the microbial world. When the scientists genetically hobbled the animals’ innate immune systems, the Amish dust lost its protective effect, and the animals began to have trouble breathing. The implication is that stimulation of the innate immune system is critical to preventing asthma.

The study has some shortcomings. It’s small — just 30 children from each community. The scientists didn’t identify the specific microbes that might be important. Nor do they know if those microbes take up residence in the gut microbiome or elsewhere in the body. Martin Blaser, director of the Human Microbiome Program at New York University, also points out that the scientists didn’t control for antibiotic use or C-section rate, both of which may, by disturbing the gut microbiota, alter asthma risk.

But the fact that they could so faithfully reproduce in mice what they saw in people using only dust suggests that they’ve identified an important component of the farm effect. And the simplicity of the mechanism — microbes that stimulate the innate immune system — is heartening. “That is precisely why we’re so excited,” Donata Vercelli, a researcher at the University of Arizona in Tucson and a senior author on the study, told me. “This seems to be a manageable situation,” she said, one that could lead to a plausible intervention, like a preventive medication based on Amish microbes.

The findings also reiterate the theme that genes aren’t destiny. Disease emerges from the dance between genes and environment. The asthma epidemic may stem, at least in part, from the decline of what Graham Rook, an immunologist at University College London, years ago called our “old friends” — the organisms our immune systems expect to be present in the environment. The newly sneezing upper classes in the 19th century may have been the first to find themselves without these old friends. Now most of the developed world has lost them. The task at hand is to figure out how to get them back. One answer may come from the Amish cowshed.