Stephen Hawking, one of the world’s great physicists, has died

The groundbreaking physicist was 76

PREDESTINATION was not part of Stephen Hawking’s system of belief. It was mere coincidence that he was born 300 years to the day after Galileo Galilei died. But he did share something with him, other than being a great physicist; he became famous as much for his suffering as for his physics. His was caused not by ecclesiastical politicians who preferred obedience to free enquiry, but by muscle-wasting amyotrophic lateral sclerosis. It meant that he, too, had to fight to be heard.

In youth he never lacked confidence. He once interrupted the great astrophysicist Fred Hoyle in mid-lecture, at the Royal Society, to correct him on the masses of particles. But once he could no longer write down equations, theories had to be translated into geometry in his head; and after a tracheotomy in 1985, the ocean of his thinking had to be forced through a cumbersome and narrow technological aperture. His words necessarily became so few that he had to stare hard at the universe in order to define, and refine as far as possible, the new things he had to say about it. His theories of everything emerged in a voice that was both robotic, and curiously laden with emotion.

His books, too, made his case even to the man in the street. “A Brief History of Time”, published in 1988, sold in millions, though its difficulty meant that many copies languished on coffee tables. His “Briefer History” of 2005 was the same thing made plainer, at least to him. He hoped people would understand it, because it was important for scientists to explain what they were doing. His branch of science, cosmology, was now purporting to answer questions that were once asked of religion. In both books and several more he declared that the laws of science explained everything, without any need to bring God into it. If string theory and its 11 dimensions were understood, for example, it might show how the universe began.

In his day job, as Lucasian professor of mathematics at Cambridge University until he retired in 2009, it was black holes in particular that he worked on. He even proclaimed once that he was their master, added to his mystique. Black holes, which were predicted by maths before they were discovered in nature, are singularities—points where the familiar laws of physics cease to apply. They are surrounded, however, by surfaces known as event horizons. Anything crossing the event horizon is swallowed for ever.

This was a problem. The second law of thermodynamics, the strictest of nature’s constraints, says that entropy, a form of disorder, must always increase. But if high-entropy systems could be sucked into nothingness by black holes, that would not be the case. Dr Hawking solved this problem by showing that black holes themselves had entropy, and that the more they swallowed, the greater it got. This in turn implied that black holes had a temperature, and thus must give off radiation.

He gave his name to it, but “Hawking radiation” surprised him as much as anyone; he claimed to have just tripped over it, to his annoyance. (His voice-synthesising machine included a button for jokes.) The radiation was not observed in his lifetime, which was why he never won a Nobel prize. But the link it provided between the theory of relativity, quantum mechanics and thermodynamics was rich food for physicists’ imaginations.

Finite time, infinite space

His interest in singularities was not restricted to black holes. The universe itself can be viewed as a singularity, albeit one which human beings are seeing from the inside rather than the out. And he was intensely interested in its origin, coeval with that of time itself. To explain this concept, that before the Big Bang there was truly neither time nor space, he compared it to asking what lay south of the South Pole. He revelled in these unanswered, perhaps unanswerable, questions. When his disability left him behind in conversations, he happily drifted off to them again.

His work also encompassed large N cosmology, Yang-Mills instantons and the S matrix, anti de Sitter space, quantum entanglement, the Brans-Dicke and Hoyle-Narlikar theories of gravitation and Euclidean quantum gravity. His contribution to scientific journals continued throughout, but he wanted most keenly to outline for non-experts, baffled by the weirdness of scientific terms and the apparent contradictions of modern theories, humanity’s place in the universe.

The departure of scientific reality from what common sense suggests is going on (the sun going round the Earth, for example) no longer threatens political institutions, but it threatens the human psyche just as much as it did in Galileo’s day. Dr Hawking’s South Pole of time was 13.7 billion years in the past—three times as old as the Earth. His mathematics showed that the universe, though finite in time, might be infinite in space.

No philosophy that puts humanity anywhere near the centre of things can cope with facts like these. All that remains is to huddle together in the face of the overwhelmingness of reality. Yet the sight of one huddled man in a wheelchair constantly probing, boldly and even cheekily demonstrating the infinite reach of the human mind, gave people some hope to grasp, as he always wished it would.

What is up?/Inflation

By Peter Boockvar, Chief Investment Officer, Bleakley Advisory Group

February core retail sales (ex autos, gasoline and building materials) rose just .1% m/o/m after no change in January and a decline of one tenth in December. The estimate was for a gain of 4 tenths. Auto/parts sales fell for a 4th straight month and are up only 2.1% y/o/y (vehicle sales got a respite after the hurricanes but seem to be back in the decline that they were in mid last year). Building materials sales rebounded by 1.9% after the likely weather induced 1.7% drop in January. Elsewhere of note, sales of electronics, furniture, department stores and food/beverages fell while they rose for clothing, sporting goods, restaurant/bars and online retailing. On the latter, it was up 1% m/o/m after dropping by a like amount in January. Versus last year, they are still up a solid 10.5% and of course are the main growth story in retail.
Bottom line, core retail sales have gone nowhere over the past 3 months. They totaled $268.8b in November and was $268.2 in February. Maybe consumers are waiting for their tax refund check? Maybe they are saving the tax cuts and paying down the large credit binge they went on over the past 6 months? Maybe after seeing their savings rate fall to a 10 yr low they are deciding to replenish bank accounts? What is up?
Core Retail Sales

Source: Bloomberg
The producer price index rose .2% vs the estimate of up .1%. The core rate was up by .2% as expected but taking out food, energy and trade saw a 4 tenths jump, double the estimate and after a similar gain in January. On the latter, the y/o/y gain is now 2.7%, the highest in at least 4 years when they started to calculate this figure. Headline PPI was up 2.8% and is up 2%+ for 12 in the last 13 months. Inflation is clearly rising with it more pronounced at the wholesale level. If yesterday’s NFIB report is any indication, companies seem ready to start passing that on.
We’ve heard many stories and read articles of the problems with rising transportation costs due to the dearth of trucking capacity. Transportation and warehouse prices jumped 9 tenths m/o/m (in particular “traveler accommodation services jumped 3.7%”) and this drove a 3 tenths m/o/m rise in service costs. Goods pricing fell, weighted down by food and energy but rose 2 tenths ex this led by a 7.2% spike in chemical prices.
Bottom line, the higher inflation story is intact which comes after a 2.2% headline and 1.8% core CPI print yesterday (3 month annualized rate is running above 3%). Inflation breakevens are not moving though as PPI typically is not market moving. The 10 yr yield is not moving either but the 2 yr yield is at a fresh 9 ½ yr high at 2.28% and the 2s/10s spread is narrowing by 2 bps to the tightest since the last day of January.

The Foreign-Policy Implications of Aging

Patrick Cox

Dear Reader,

As Yogi Berra famously said, “It’s tough to make predictions, especially about the future.”

I’ve been thinking about this quote because I’m doing a panel at the Strategic Investment Conference this week with el jefe John Mauldin. Also on the panel is Karen Harris, managing director of Bain & Company's Macro Trends Group.

(By the way, if you sign up for the SIC Virtual Pass, you’ll get video and audio recordings of all the presentations, including this panel. From Tuesday to Friday, you will also be able to watch the sessions in real time. Looking at the lineup of 25 exceptional speakers, I definitely think it’s worth it. Click here to sign up for your Virtual Pass at a $400 discount.)

The panel has been described as a discussion among futurists, a term I have some trepidations about. Harris, who is also in the prediction business (and a reader of this letter), told me that she’s ambivalent about the label too. We do our best to make accurate predictions, but they come with the stipulation of uncertainty, ceteris paribus (Latin for “all other things being equal”).

The folk version of this disclaimer is something like, “Lord willing and the creek don’t rise.” Both phrases express the impossibility of accounting for the unexpected.

Trend Reversal: The American “Energy Miracle”

Many professions rely on mathematical models, extending current trends into the future to help make plans. However, trends may change in entirely unexpected ways. Too often, an exogenous variable, something not accounted for in the model, will completely ruin a prediction. It could be something that on the surface appears to be trivial, such as a surprising technological improvement.

Advances in fracking, for example, embarrassed numerous forecasters who confidently predicted sky-high petroleum prices and a rapid shift to alternative energies. The impact of technological innovation is not limited to prices and products, though. It has a way of expanding far beyond obvious and easily measurable consequences.

Increased US and Canadian energy production has fundamentally changed the political dynamic between the West and the petrostates. Higher domestic production has not just reduced America’s vulnerability to foreign sources that are openly hostile to US interests—exports of North American oil and natural gas are reducing the influence of other energy-exporting nations as well.

Prior to the fracking revolution, US foreign policy had to consider the possibility that an international conflict would disrupt supply lines and increase the cost of energy imports. Energy is a component of every product’s cost, from agriculture to computers.

Critics of US foreign policy created the slogan, “No blood for oil,” to argue against US interventions meant to secure energy supplies. Certainly, the motivation for such interventions has been lessened.

You could even make the case that the US and Canada would benefit from disruptions in energy exports from Russia, Venezuela, and the Middle East. I don’t know if that encourages or discourages international conflict, but it’s an interesting point.

Nevertheless, I believe it’s important to consider that small technological changes may result in enormous geopolitical changes. This is especially true because the experts have missed so many important trends.

Demographic Trend Changes: No One Sees Them Coming

The best example, of course, is demographic change. From the 1970s until very recently, many people in positions of authority and influence predicted an overpopulation catastrophe. Only a few real demographers dug deeper and saw that birthrates would lead to depopulation, but they were either ignored or vilified.

As a result, most developed nations failed to plan for the day when the shrinking taxpayer base would no longer provide the funds to deliver on promises made to a growing population of retired dependents. Judging from current political attitudes, that lesson still hasn’t been learned—so, like Thelma and Louise in their Thunderbird convertible, most of the developed world is headed toward a fiscal cliff.

My concern is not just about the impact a debt crisis would have on the US and Canada directly. The unpredictable foreign-policy implications of aging may be even more serious. Whether we like it or not, we live in a globalized world. Economies are interconnected, and trouble on the other side of the world can have big impacts at home.

I’ve written a lot about Japan’s struggles to deal with an aging population that has too few young people to pay the bills. Japan accounts for almost 6% of the world economy. A severe contraction there would have serious consequences for the US, which makes up about 24% of the world economy. But perhaps we should be more worried about the nearly 15% of gross world product (GWP) that is Chinese.

China’s Dangerous Miscalculation

A lot of people were fooled by the overpopulation hysteria of the 1970s. The most important may have been officials of the Chinese government, which had the political power to enforce a one-child policy (OCP) on much of its population.

Though China hasn’t admitted it was a mistake, the policy was abandoned two years ago, and the government is beginning to implement policies aimed at pushing birthrates upward.
The biggest impact of the one-child policy, in my opinion, was the creation of a serious gender imbalance. Families favored male children and used strategies including abortion and infanticide to make their one child a boy. The result was the birth of about 117 boys for every 100 girls, which will have negative impacts on Chinese society for a generation. Societies with too many unmarried men often experience social unrest and political instability.

A recent Chinese state report acknowledged that ending the OPC has not resulted in a big enough increase in birthrates to solve the country’s economic problems. Further measures involving “taxation, child raising, education, social security and housing” are in the Works.

However, those policies would be extremely expensive, and China already faces enormous economic challenges as the Chinese labor force continues to shrink. According to a 2017 report by the National Bureau of Statistics of China (NBSC), 2018 will be the eighth consecutive year that the working-age population will contract.

You can read the report here but, full disclosure, I don’t believe the NBSC’s strong economic growth statistics. I think the Chinese economy is much worse off than the official numbers show.

Nor do I believe that Chinese proposals to increase birthrates will reverse the depopulation trend or fund programs for the aged. Similar efforts by the Russian government have not stopped the country’s depopulation.

Both countries will therefore continue to struggle with demographic and economic issues. Some might argue that a poorer China and Russia would be good for the US. I’m not so sure. I worry that economic problems could increase the probability of political instability, which, in turn, could increase the risk of international conflict.

Michael West, the scientist whose pluripotent stem cell therapy is now making history in spinal cord injury trials, will be at the Strategic Investment Conference to talk about a biotechnology that could solve the aging problem. I’ll report on that at a later date.

If you want to be privy to all the details of what I’m learning at the Strategic Investment Conference, you might want to give my premium service, TransTech Alert, a try. Aside from the monthly deep analysis of a new technology/company, my team and I also provide weekly updates on our portfolio stocks, and trade alerts when a new development requires fast action.

Extending healthspans would solve the financial problems posed by demographic aging all over the world, and that will reduce domestic instability everywhere. When that will actually happen is another question, though. At this point, it’s impossible to predict with any accuracy.

Hidden inside biotech laboratories, breakthroughs are happening right now that could allow it to happen very soon. My concern is that political forces, including international conflict, will interfere with the deployment of these revolutionary biotechnologies—but that’s not a prediction.

Trade War and the Correlation of Forces

By George Friedman

During the 1970s, the Soviets developed a model for analyzing military conflict through measuring the correlation of forces. This measured the military force each side would bring to bear in an engagement, from nuclear war to small unit combat. It did not address the question of whether the battle or war was wise, whether victory was worth the price, or the long-term consequences. It focused on a single, partial, yet indispensable question: Who would win? This is a question that should be applied to the current debate over steel and aluminum tariffs: Who would win a trade war?

It would not answer the question of the wisdom of the war, or the cost. It would simply measure the likely winner, however damaged that party might be by the war.

The first question to be asked is simple, as all first questions should be: How important is trade, particularly exports, to the major players? According to 2016 World Bank figures, global exports make up 29 percent of global gross domestic product. For high-income countries, exports make up 30 percent of GDP. Exports account for roughly 20 percent of China’s GDP, 26 percent of Russia’s, 42 percent of South Korea’s, 31 percent of Canada’s and 38 percent of Mexico’s.

By comparison, exports make up 12 percent of U.S. GDP. This means that the decline in exports has less impact on the United States than on most other countries. Put another way, the United States’ economy maintains higher domestic demand than other countries relative to production, and therefore is less dependent on exports. This is connected to the sheer size of the American economy. It dwarfs others, including China.

The United States is also the largest importing country in the world. (The European Union as a whole is larger, but the EU is not a country. It is a treaty organization, and a dysfunctional one at that when it comes to economic issues.) China’s exports to the U.S. in 2016 were worth $386 billion, while it’s imports from the U.S. were worth only $135 billion. In a trade war, this trade surplus would become a Chinese weakness. China derives about 3 percent of its GDP from exports to the United States; the United States derives around 0.5 percent of its GDP from exports to China. Similar or greater imbalances can be found in other countries mentioned.

What Happens in a Trade War?

The United States currently runs a large trade deficit. That actually makes the U.S. the stronger party in a potential trade war. The U.S. is less dependent on exports than the countries that export to the U.S. market. As a result, the “correlation of forces” is such that the cost of a trade war is greater to U.S. trading partners than to the U.S. If the U.S. does institute the steel and aluminum tariffs (and it appears that it will), U.S. consumers will have to worry about an increase in the price of goods, and U.S. companies that are disproportionately exposed to exports will face significant problems. But the countries that depend on the U.S. to buy their goods have a much bigger problem. There is simply no other market in the world that compares to the U.S. in size and demand. The U.S. would not emerge from a trade war unscathed – but it would fare better than U.S. trade partners who depend on access to the U.S. market. This puts it in a powerful position against smaller economies that are efficient exporters and therefore much more vulnerable in a trade war.

It follows that the risks from an escalating trade war would be substantially greater on China, South Korea or Canada than they would be on the United States. Each countermove costs the United States less than it does its counterpart. So even if other countries hurt the United States in a countermove to President Donald Trump’s threatened tariffs, the reaction from the United States can hurt them far more. The percentage of GDP at risk in a trade war for U.S. counterparts is much greater than for the United States, which means, on the surface, that the United States will win such a war. More to the point, it makes it unlikely that opponents will risk a trade war.

I want to emphasize that this is a simplistic analysis, as it is meant to be. Evaluating the correlation of forces necessarily excludes evaluation of other key elements to the battle – in this case, elements like supply chain disruption, the threat to ruling political coalitions and so on.

War is a complex thing, and the correlation of forces tells you only about the exchange of fire. But talking about trade wars without starting with the simplistic is dangerous. The core reality of a war is, after all, the exchange of fire and a summation of the net consequence of that exchange. Leaping to more sophisticated models that exclude the correlation of forces risks putting the cart before the horse.

What the simplistic model says is that U.S. partners can bluff a trade war, but not wage that war, because with each move, the damage to them will be greater than the damage they can inflict. Efficiency in exports creates pyramiding vulnerabilities in a trade war. But of course, this does not take into account sectoral damage, strategic relationships outside of trade or unequal domestic consequences. Having stated the obvious, these are the questions we will turn to next.

Gold Is A Giant Ouija Board


We have been promising to get back to the topic of capital destruction, which we put on hiatus for the last several weeks to make our case that the interest rate remains in a falling trend.

Today, we have a different way of looking at capital destruction.

Socialism is the system of seeking out and destroying capital. Redistribution means taking someone’s capital and handing it over as income to someone else. The rightful owner would steward and compound it, not consume it. But the recipient of unearned free goodies happily and uncaringly eats it up. Socialism is not sustainable. It inherits seed corn from a prior, happier system, and it lasts only as long as the seed corn.

Totalitarian Socialism

There are different flavors of socialism. The 20th century witnessed an aggressive totalitarian form.

Both communism and Naziism feature military occupation of domestic territory and conquest of foreign lands. Few people willingly feed whatever they have into the sausage grinder of State sacrificial collectivism. And so totalitarian socialism has armed thugs all over the streets, both open military and secret police. There are frequent killings, of those suspected of disloyalty or holding back small scraps. In their constant fear of uprising, they use disappearances, interrogations, and torture to root out the names of traitors to their bloody revolution.

Thankfully, the major totalitarian socialist regimes were defeated militarily like the Nazis, collapsed after they depleted all available capital like the Soviets, or reformed like China.

Soft Socialism

Another flavor of socialism is based on so-called soft power. It taxes and regulates every private productive activity, owns and monopolizes some sectors, and promises a minimum level of subsistence to all citizens including food, shelter, and medical care. Unlike the totalitarian forms, this kinder, gentler socialism allows vigorous debate whether the government should criminalize cigarettes, allow people to hail a taxi using an app on their phone, and whether the government should include gender reassignment surgery in the list of medical services to be provided for free.

However, as the citizens have mostly gone through government schools, there is almost no debate about whether or not government should take over medical care in the first place.

This kind of socialism is not stable. It is either moving towards freer markets, as for example New Zealand famously did starting in the 1980’s. Or it is moving towards government control as the United States infamously did with Obamacare.

It’s not stable, because it is rife with contradictions. For example, if I cannot afford my healthcare, and you cannot afford your healthcare, and John and Susie cannot afford their healthcare, then of course we as a collective cannot afford our collective healthcare plus a bureaucracy to manage it (not even counting the waste and corruption). No one with basic economic literacy would believe that. An 8th grader wouldn’t believe it!

What makes it popular is the next contradiction. Most people expect to get free health care paid for by someone else. The thought of “free” is so enticing, that people overlook the obvious failings, such as the declining availability and spotty quality.

In this flavor of socialism, the destruction of capital is obvious. You can see it in the overworked staff of the National Health Service unable to care for every patient and forced to ration health care and cancel surgeries. You can observe the shabby government projects which house huge and permanent underclasses. You can witness the stagnant economies, which provide little opportunity for business owners to accumulate wealth, fewer good jobs for workers, or hope for the future.

Central Bank Socialism

There is a third flavor of socialism, which was unfortunately popularized by Milton Friedman.

He did not see it as socialism, but as we shall show it certainly is.

This type of socialism lacks the totalitarian flavor’s military officers, strutting about and demanding to see your papers. It also lacks the boundless welfare programs and endless Ministries of Micromanagement of Human Life of the softer flavor.

I refer, of course, to central banking.

Friedman advocated a steady expansion of the quantity of dollars, what he called the K percent Rule. Friedman’s followers today favor other rules, for example to expand the quantity in order to grow GDP by what they feel to be the “right” amount. The man most people think to be Friedman’s diametric opposite, John Maynard Keynes, advocated expansion in response to whatever economic problem may come along. Former Fed Chair Janet Yellen, a diehard New Keynesian, wrote a paper in which she argued for printing more dollars—to enable employers to hire more workers.

Whether the central bank is to expand the quantity of dollars at a steady rate, to achieve an economic goal, or purely at the discretion of philosopher-kings, the principle is the same. We consider them to be sub-flavors of the same flavor of socialism. The central bank can nudge us for our own good, if not the good of politically connected cronies.

What is this nudging? They have found a very clever way to induce people to do as the central planners wish, without the machine guns or bloated bureaucracies. Keynes, citing Lenin, referred to “engaging all of the hidden forces of economic law”. In the same breath, he admitted that it was “on the side of destruction,” but that does not seem to have deterred anyone.

What economic law induces people to act? It’s that people act according to incentives. The central bank can change certain incentives. We will leave off the falling interest rate for now, but let’s look at something else the central bank can do.

It can make it so that credit is available to companies who don’t even produce enough revenue to cover their interest expense. Normally, such zombies (as they are called) would not be able to obtain credit. Who lends money to a company that will have to borrow more money just to cover the interest? But we are not in a normal world. We are in the third flavor of socialism.

And the Fed has made it so that the zombies, who ought not to be able to get credit at all, have gotten mass quantities of it. And this brings us back to our theme of destruction of capital.

It should be obvious that it’s destructive to feed credit to a company which cannot pay its cost of credit (and this is in a world of suppressed cost of credit, at that). Zombies wear out machinery that they cannot replace, and pay workers’ wages with borrowed funds that they cannot afford. When the end inevitably arrives, those who lent to the zombie lose their principal.

It should also be obvious that zombies add to GDP, at least while they exist. So the GDP targeting crowd sees this as a good thing. And zombies produce goods, thus increasing supply and thus pushing down prices. So the inflation targeters justify even more of the policy that feeds credit to zombies. And zombies employ people, so the unemployment optimizers see the policy as good. Stock prices are also rising, so investors see it as good, not to mention Wall Street.

By every conventional macroeconomic aggregate measure, feeding credit to zombies is a Good Thing. This is not an argument in favor of lending to zombies. It is an argument against using conventional macroeconomic aggregate measures. They are misleading.


However, they’re used for a reason. They provide cover to this third flavor of socialism, for the central planners who nudge us down the socialist road to the destruction of capital.

So how does this nudging work? What is the form of the incentive? They make it profitable to fork over your capital to zombies. People like to make a profit. Who would have known?

Here is a chart of an ETF which owns high yield corporate bonds, presumably zombies among them.

(Click to enlarge)

If you bought in the lows after the last crisis, you could have made capital gains of over 50 percent in four years (not counting the yield). After that, well it’s not looking so good. However, there is another trade that is still making money. At least for now. Here is a graph of the spread between junk and Treasury bonds (the BofAML US High Yield Master II Option-Adjusted Spread).

(Click to enlarge)

There is currently only a 3.5 percent difference in yield between junk bonds and Treasury bonds.

The way to have played this was to buy junk and short Treasurys. The more this spread narrowed, the more you won. It performed brilliantly until mid-2014. Then you wanted to be out of it until 2016. After that, you had another good run until a month ago.

We think this trade won’t be so good going forward. Not because it’s within a point of the all-time bottom. Though it is, and one would have to be worried about that. But because zombies are time bombs waiting to go off. With each passing day, they get closer to blowing up. Don’t forget that they are destroying investor capital, and piling up more debt every day. And also, they get closer to blowing up with each uptick in the interest rate. It looks to us like junk bond yields have been in a rising trend for about half a year. LIBOR has been in a rising trend for three years, steepening considerably since September.

Lured by profits, investors are feeding capital to zombies, who destroy it. They do it because the Federal Reserve has made it profitable to do so Related: U.S. And China To Face Off Over Aramco IPO

Keep in mind that employees of zombies buy houses, remodel kitchens, buy cars with 0 percent financing for 72 months, eat at restaurants, buy Swiss watches, etc. One could look at the major creditors of the zombies and their biggest vendors, and predict the impact to those entities. But beyond that, it is impossible to determine the full impact. The problem has grown very big.

Contrary to Milton Friedman, we argue that a central bank brings a flavor of socialism. The means may be different, but like the other flavors, the central banking flavor seeks out and destroys capital. The capital destruction is less obvious, especially if you look only at conventional macroeconomic measures such as GDP and unemployment. You must look at falling marginal productivity, or the rising number of people who are neither employed nor unemployed.

We need to evolve away from central banks, socialism, and a policy of capital destruction. We need to move forward towards the gold standard, the monetary system of a free market. The monetary system where capital is accumulated, not consumed.

Supply And Demand

The prices of the metals fell, $22 and $0.24 respectively. It’s an odd thing, isn’t it? Each group of traders knows how gold “should” react to a particular type of news. But they all want the same thing—they want gold to go up. And when it doesn’t, many hesitate to buy. Or even sell.

This is why speculation cannot set a stable price (I’m talking to you, bitcoiners).

So long as gold’s sole purpose is to bet on its price to make real money—we’re talking dollars here, baby!—then the trading action is like a giant Ouija Board, with each group having a thumb on it. You have the Indian jewelry buyers, the inscrutable central banks like China, the Wall Street firms, the gold bugs, the hedge funds, etc. When enough of those thumbs desire to push gold in the up direction, it goes up.

Of course this isn’t gold’s purpose, but that’s what is commonly believed.

It is endlessly fascinating as it is endlessly moving around, if not in the directions and for the reasons that gold analysts think. This is the dynamic we study, the interplay between buys and sellers of real metal, buyers and sellers of futures, and market makers. Many gold analysts see only the short futures position of the market makers, and conclude that they are pushing the price down. The long metal (or gold receivable, e.g. from a miner) is not reported in the Commitment of Traders report). So they misread the market. Plus, a quantity approach to position size (as with quantity of dollars or anything else) does not tell you much.

Let’s take a look at the only true picture of the supply and demand fundamentals for the metals. But first, here is the chart of the prices of gold and silver.

(Click to enlarge)

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio (see here for an explanation of bid and offer prices for the ratio). The ratio fell slightly.

(Click to enlarge)

Here is the gold graph showing gold basis, cobasis and the price of the dollar in terms of gold Price.

(Click to enlarge)

Note that tiny rise in scarcity (i.e. cobasis, the red line) as the price of the dollar rose (inverse of the falling price of gold, in dollar terms). That is the typical pattern.

The Monetary Metals Gold Fundamental Price fell this week, to $1,387. Now let’s look at silver.

The same occurred in silver. The Monetary Metals Silver Fundamental Price fell 7 cents to $17.12.

Interestingly, the Monetary Metals Gold Silver Fundamental Ratio fell in a week when the fundamental prices of both metals fell. It is now 81.05.

Why the U.S. Trade Deficit Is Worse Than It Seems

Oil production is booming in the U.S., masking the deterioration of the U.S. trade picture

By Spencer Jakab

A pump jack bringing up oil in Texas. The boom in U.S. energy production has dramatically reduced the need for oil imports. Photo: Steve Gonzales/Associated Press  

You don’t have to know David Ricardo from Ricky Ricardo to understand the problems with President Trump’s approach to fixing America’s trade woes.

But a seemingly unrelated news item on Monday shows what is being ignored in the debate over Mr. Trump’s tariffs: The U.S. trade balance may be much worse than it looks.

The reason is the boom in U.S. energy production has dramatically reduced the need for oil imports. The U.S. trade deficit in goods and services was $566 billion last year, and in December widened to its highest since 2008. The annual deficit with China alone climbed to $375.2 billion.

Shift in U.S. trade balance, 2007 vs. 2017
billions of dollars

It would have been much worse without energy. Since 2007 net trade in three major categories of petroleum and related products plus natural gas has improved by $233 billion. If anything, that improvement understates the impact of the collapse in natural gas prices since 2008, which has given a boost to industries such as petrochemicals and fertilizers that were then in steep decline.

On Monday, the International Energy Agency predicted that the U.S. would continue to benefit over the next five years from rising oil production, which will cover more than half of the growth in global demand over that time. Total production of oil and related liquids is seen growing from last year’s record 13.2 million barrels a day to 17 million by 2023, led by prolific shale deposits like the Permian Basin.

While energy might seem like a saving grace, the flip side is that the balance of trade in all manner of value-added products has deteriorated more than headline trade numbers indicate. Although a dollar of exported crude has the same impact on national accounts as a dollar of microprocessors or machinery, it is arguably a lower-quality export. 
A commodity’s price is dictated by market vagaries. There are fewer positive effects in terms of related products, jobs or intellectual know-how. Those countries most reliant on commodity exports often tend to have low standards of living while those most dependent on imports tend to be the most dynamic and scientifically advanced. Think Japan, South Korea, Western Europe and, until recently the top crude importer, the United States.

That distinction of top importer was recently claimed by rapidly developing China.