No One Knows How Monetary Policy Works

Doug Nolan

My interest was piqued by a Friday Bloomberg article (Ben Holland), “The Era of Cheap Money Shows No One Knows How Monetary Policy Works.” “Monetary policy is supposed to work like this: cut interest rates, and you’ll encourage businesses and households to borrow, invest and spend. It’s not really playing out that way. In the cheap-money era, now into its second decade in most of the developed world (and third in Japan), there’s been plenty of borrowing. But it’s been governments doing it.”

I remember when the Fed didn’t even announce changes in rate policy. Our central bank would adjust interest rates by measured additions/subtractions of bank reserves that would impact the interbank lending market. Seventies inflation forced Paul Volcker to push short-term interest-rates as high as 20% in early-1980 to squeeze inflation out of the system.

Federal Reserve policymaking changed profoundly under the authority of Alan Greenspan.

Policy rates had already dropped down to 6.75% by the time Greenspan took charge in August 1987. Ending 1979 at 13.3%, y-o-y CPI inflation had dropped below 2% by the end of 1986. Treasury bond yields were as high as 13.8% in May 1984. But by August 1986 – yields were down to 6.9% - having dropped almost 700 bps in 27 months.

Lower market yields and economic recovery were absolute boon for equities. The S&P500 returned 22.6% in 1983, 5.2% in 1984, 31.5% in 1985, 22% in 1986 – and another 41.5% for 1987 through August 25th. Markets had evolved into a speculative bubble.

One could pinpointing the start of the great Credit Bubble back with the 70’s inflation. For my purposes, I date its inception at the 1987 stock market crash. At the time, many were drawing parallels between the 1987 and 1929 market crashes – including dire warnings of deflation risk – warnings that have continued off and on for more than three decades.

The Greenspan Fed made a bold post-crash pronouncement: “The Federal Reserve, consistent with its responsibilities as the Nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.” In hindsight, this was the beginning of central banking losing control.

The S&P500 returned 16.6% in 1988 and 31.7% in 1989 - the crash quickly forgotten. Not forgotten was the assurance that the Fed would be there as a market liquidity backdrop. GDP expanded at a blistering 7% pace in Q4 1987 – expanding 5.1% for the year. GDP accelerated to 6.9% in 1988. Instead of deflation and depression, the late-eighties saw one heck of a boom.

As silly as it sounds these days, the eighties used to be called the “decade of greed.”

The decade’s sinking rates, collapsing bond yields, booming securities markets and the Fed’s liquidity assurances all contributed to what evolved into a three-decade proliferation of non-bank financial intermediation – money market funds, bond funds, repurchase agreements, asset-backed securities, mortgage-backed securities, junk bonds, corporate credit, the government-sponsored enterprises and derivatives (to name the most obvious).

Eighties’ (especially late-decade) excess came back to haunt the financial system and economy in 1990/91. The Savings and Loan fiasco had morphed from a few billion dollars issue to a several hundred billion serious problem. And following the collapse of real estate bubbles on both coasts, the U.S. banking system was left severely impaired. And similar to the period after the ’87 crash, there were more dire warnings of deflation and depression.

Following up on his post-crash promise to keep markets liquid, Alan Greenspan took another giant policy leap - orchestrating a steep yield curve. By dropping short-term rates to an at the time incredible 3% - banks could borrow fed funds and invest in government debt yielding 8% - magically replenishing depleted capital.

This maneuver empowered the rebuilding of banking system capital outside of deficit-busting Washington bailouts. Importantly, this was also a godsend for the nascent hedge fund community that was overjoyed to borrow at 3% and leverage in higher-yielding credit instruments – confident that the Fed would be there to backstop system liquidity in the event of trouble. Ditto for Wall Street derivatives and prop-trading desks.

They surely didn’t realize it at the time, but our central bank had begun sliding down a most slippery slope: The Fed had created unprecedented incentives for leveraged speculation. And there was so much resulting demand for debt securities to lever that a shortage developed. Wall Street securitization and derivatives machines went into overdrive to meet demand. By 1993, debt markets had evolved into a dangerous speculative bubble.

On February 4th 1994, the Fed took a so-called baby-step, raising rates 25 bps to 3.25%. After beginning February at 5.6%, 10-year Treasury yields quickly traded to 6% after the rate increase – and were up to 7.5% in May and 8.0% by November. The wheels almost came off, as the leveraged speculators were forced to deleverage. To the great long-term benefit of leveraged speculation, it would be the last time in decades that the Fed would move forcefully to tighten financial conditions.

The Fed conveniently looked the other way in 1994 as GSE holdings surged an (at the time) unprecedented $150 billion, their buying accommodating hedge fund and Wall Street firm liquidations. The GSEs stealthily operating as quasi-central banks worked so well that they boosted buying to $305 billion during tumultuous 1998 and another $317 billion in 1999. I doubt we’ll ever have an answer: Did the Greenspan Fed simply not appreciate of the effects of this massive GSE credit creation – or did they clandestinely support it?

The Federal Reserve certainly promoted the Mexican bailout, an aggressive policy maneuver that stoked the Asian Tiger bubbles (devastating collapses coming in 1997). Then in the fall of 1998 – with the simultaneous collapses of Russia and the hedge fund Long-Term Capital Management (LTCM) bringing the global financial system to the precipice – the Fed helped orchestrate a bailout of LTCM. In the dozen years since Volcker, the Greenspan Fed had made incredible strides in “activist” policymaking. In 1987, the early-nineties, 1995 and again in 1998, the Fed was content to use new tools and assume new power in the name of fighting deflation and depression risk. Speculative finance turned more powerful at every turn.

With Wall Street finance booming, GSE liquidity bubbling and the Greenspan market backstopping, extraordinary tailwinds saw Nasdaq almost double in 1999. I thought the Bubble burst in 2000/2001, and I believe the Fed did as well. Then Fed and Washington establishment panicked with the U.S. corporate debt market in 2002 at the brink of serious dislocation. The prevailing theoretical expert on reflationary policymaking, Dr. Ben Bernanke, joined the Federal Reserve Board of Governors in 2002 - and replaced Greenspan in February 2006.

Greenspan had profoundly changed central banking. Bernanke, with his radical monetary views including the “government printing press” and “helicopter money,” took things to a whole new level. Greenspan was happy to manipulate rates, yield curves, market perceptions and incentives for leveraged speculation - all in the name of developing a powerful new monetary transmission mechanism. Dr. Bernanke was ready to add aggressive use of the Fed’s balance sheet to Greenspan’s toolkit. But in 2002, 3% short rates and just Bernanke’s talk of where the Fed was headed were sufficient to initiate a mortgage finance Bubble (that would see mortgage Credit more than double in six years).

I believe the Fed willfully used mortgage Credit and home price inflation to reflate system Credit. There were certainly vocal Wall Street analysts egging them on. This was a momentous error in analysis and judgement – with only bigger mistakes to come. The bursting of this Bubble in 2008 unleashed Bernanke and global central bankers’ experiment with directly inflating markets with central bank liquidity. The Bernanke Fed and others moved deliberately to force savers out of safety and into inflating risk markets. Low rates and central bank purchases unleashed governments to issue debt like never before.

Draghi’s 2012 “whatever it takes” battle cry ensured that increasingly speculative markets would envision “QE infinity” and decades of loose finance. Bernanke the next year further emboldened speculative market psychology with his proclamation that the Fed was ready to “push back against a tightening of financial conditions.” When markets faltered on China worries in early-2016, markets came to believe central banks and governments everywhere had adopted “whatever it takes” – certainly including Beijing (powerful monetary and fiscal stimulus), Europe (unprecedented ECB QE), Japan (unprecedented QE) and the Fed (postponement of policy normalization).

Global markets went to parabolic speculative excess. From February 2016 lows to 2018 highs, the Nasdaq Composite surged 93% and the small cap Russell 2000 jumped 85%. Over this period, the S&P500 gained 62%, Japan’s Nikkei 63% and Germany’s DAX 57%.

And while the notion that “deficits don’t matter” had been gaining adherents since QE commenced in 2008, by late-2016 it had essentially regressed to The Crowd convinced “deficits will never matter.” The election of Donald Trump ushered in a replay of “guns and butter” – tax cuts (huge cuts for corporations) and a boost of military spending to go with a steady upswing in entitlement spending. Infrastructure spending, why not?

What unfolded was a complete breakdown in discipline - in central banking, in Washington borrowing and spending, and throughout highly speculative markets. And I do believe the new Fed Chairman had hopes of normalizing Fed policymaking, letting the markets stand on their own, and commencing the long-delayed process of system normalization. Pressure – markets and otherwise – became too much to bear. Fed U-Turn, January 4, 2019 – soon transmitted globally.

So, returning to the Bloomberg article in my opening paragraph: No one has a clue how monetary policy works anymore – transmission mechanisms, financial and economic system reactions and long-term consequences. The world is in complete uncharted territory.

We saw in December how abruptly markets can turn illiquid and approach dislocation. And we have witnessed beginning in January just how quickly speculation can be resuscitated and excess reignited. Those that believed central bankers would quickly cave have been emboldened – as have the believers that Beijing has things well under control with as many levers to pull as needed.

The Bank of Japan has doubled its balance sheet to $5 TN in four years – with no end in sight.

The ECB wound down its $2.6 TN QE program in December, and just last week announced that it would begin implementing additional stimulus measures. Understandably, markets believe Fed balance sheet “normalization” will end soon – with “balloonization” commencing at any point the markets demand it.

March 12 – CNBC (Yun Li): “After a stellar rebound, Jeffrey Gundlach still thinks stocks are in a bear market. ‘The stock market was and still is in a bear market,’ the founder and chief executive officer of Doubleline Capital said… He also said stocks could go negative again in 2019.”

I struggle somewhat with the traditional “bear” and “bull” market terminology in the current backdrop. It looked like a “bear” in December, while the market has performed rather bullishly in the initial months of 2019. But I still believe the global Bubble was pierced in 2018.

But we’re dealing with a unique – I would suggest deviant – global market structure. There’s this massive pool of speculative, trend-following finance. Hedge funds, ETFs and such. There is, as well, a colossal derivatives complex – for speculating, leveraging and hedging. When markets begin turning risk averse, De-Risking/Deleveraging Dynamics can quickly push increasingly illiquid markets to the breaking-point.

But this structure also creates the potential for destabilizing short squeezes and the unwind of hedges to spark powerful rallies. And these rallies can in short order entice the mammoth pool of trend-following finance to jump aboard. Who, these days, can afford to miss a rally?

I would furthermore argue that more than ever before, the Financial Sphere is driving the Real Economy Sphere. As we’ve seen over the past couple of months, risk market rallies can spur a rather dramatic loosening of financial conditions. There has been a recovery in household perceived wealth and an attendant resurgence in consumer confidence and spending.

The bulls see Goldilocks as far as the eye can see. Sure nice to have the once-in-a-lifetime crisis out of the way back in 2008. And good to have this cycle’s correction wrapped up in December. Central banks got our backs. “Deficits don’t matter,” and recessions and crisis are a thing of the past. An election year coming up is good. China has too much to lose not to keep their boom going.

At least from the perspective of my analytical framework – things continue to follow the worst-case scenario. What started with Greenspan, expanded dramatically with Bernanke, spread globally through the entire central bank community, further escalated by Draghi’s “whatever it takes” and Kuroda’s “it takes everything”, to yet further emboldened by Powell’s U-Turn and the accompanying flock of dovish central banks worldwide.

The heart of the issue is that monetary policy has come to chiefly function through a massive global infrastructure of speculative finance. Over the past three decades, things evolved from monetary policy operating subtly to encourage/discourage bank lending at the margin - to central banks expressly working to ensure that Trillions of levered holdings and perhaps tens of Trillions of speculative positions don’t face risk aversion and liquidation.

Speculative finance became the marginal source of liquidity for markets and economies generally. This all appears almost magical when the markets are rising, but in reality this is a highly unstable situation. We’re at the stage of the cycle where there is an incredible excess of finance that is speculative in character, while speculative market psychology has become deeply emboldened. The upshot is a bipolar world: too much risk-embracing finance chasing inflating markets, ensuring excessively loose financial conditions; or, when risk aversion hits, intense de-risking/deleveraging quickly leading to illiquidity, faltering markets and an abrupt tightening of financial conditions. There’s little middle-ground.

The entire notion of some so-called “neutral rate” is delusion. With markets so highly speculative and market-based finance dictating financial conditions, what policy rate would today equate with stable markets and economic conditions? Good luck with that.

It’s similar to the issue faced in 2007, although today’s global backdrop has closer parallels to 1929. Speculative finance and asset Bubbles run amok, while economic prospects dim. And nowhere are such dynamics more at play than in China.

March 14 – Financial Times (Hudson Lockett): “The cost of new housing in China's major cities rose more quickly in February… Prices for new housing across 70 large cities rose 10.4% year on year in January… That marked the equal-quickest gain in 21 months. Every city saw average home prices rise compared to a year ago except Xiamen, where they stood unchanged… The latest reading marks a nine-month run of quickening price gains across major cities. That is good news for top officials gathering in Beijing this week for the National People's Congress, as China’s property sector is estimated to account for 15% of the country's gross domestic product, or closer to 30% if related industries are included.”

March 10 – Bloomberg: “China’s credit growth slowed in February after a seasonal surge the previous month, with the net development in the first two months of the year signaling continued recovery in credit supply. Aggregate financing was 703 billion yuan ($105bn) in February…, compared with an estimated 1.3 trillion yuan in a Bloomberg survey. Broad M2 money supply gained 8.0%, matching its slowest-ever expansion… Financial institutions offered 885.8 billion yuan of new loans in February, versus a projected 950 billion yuan.”

Combining a booming January and a less-than-expected February, China Aggregate Financing increased $794 billion – 25% greater than the comparable 2018 expansion. Total Aggregate Financing jumped $3.025 TN over the past year (10.1%), with growth down somewhat from the comparable year ago period. And while “shadow bank” instruments continue to stagnate, bank loans grow like gangbusters.

China New Loans were up $2.46 TN over the past year, or 13.4%. Over the past three months, New Loans expanded $773 billion, or 15.5% annualized. Consumer Loans actually suffered a small contraction in February (after a record January), the first decline since February 2016. For the past year, Consumer Loans expanded $1.06 TN, or 17.1%. Consumer Loans expanded 42% over two years, 77% over three years and 139% in five years. What a Bubble.

A country in chaos

Oh **UK! What next for Brexit?

Britain’s political crisis has reached new depths. Parliament must seize the initiative

WHEN HISTORIANS come to write the tale of Britain’s attempts to leave the European Union, this week may be seen as the moment the country finally grasped the mess it was in. In the campaign, Leavers had promised voters that Brexit would be easy because Britain “holds all the cards”. This week Parliament was so scornful of the exit deal that Theresa May had spent two years negotiating and renegotiating in Brussels that MPs threw it out for a second time, by 149 votes—the fourth-biggest government defeat in modern parliamentary history.

The next day MPs rejected what had once been her back-up plan of simply walking out without a deal. The prime minister has lost control. On Wednesday four cabinet ministers failed to back her in a crucial vote. Both main parties, long divided over Brexit, are seeing their factions splintering into ever-angrier sub-factions. And all this just two weeks before exit day.

Even by the chaotic standards of the three years since the referendum, the country is lost. Mrs May boasted this week of “send[ing] a message to the whole world about the sort of country the United Kingdom will be”. She is not wrong: it is a laughing-stock. An unflappable place supposedly built on compromise and a stiff upper lip is consumed by accusations of treachery and betrayal. Yet the demolition of her plan offers Britain a chance to rethink its misguided approach to leaving the EU. Mrs May has made the worst of a bad job. This week’s chaos gives the country a shot at coming up with something better.

The immediate consequence of the rebellion in Westminster is that Brexit must be delayed. As we went to press, Parliament was to vote for an extension of the March 29th deadline. For its own sake the EU should agree. A no-deal Brexit would hurt Britain grievously, but it would also hurt the EU—and Ireland as grievously as Britain.  

Mrs May’s plan is to hold yet another vote on her deal and to cudgel Brexiteers into supporting it by threatening them with a long extension that she says risks the cancellation of Brexit altogether. At the same time she will twist the arms of moderates by pointing out that a no-deal Brexit could still happen, because avoiding it depends on the agreement of the EU, which is losing patience. It is a desperate tactic from a prime minister who has lost her authority. It forces MPs to choose between options they find wretched when they are convinced that better alternatives are available. Even if it succeeds, it would deprive Britain of the stable, truly consenting majority that would serve as the foundation for the daunting series of votes needed to enact Brexit and for the even harder talks on the future relationship with the EU. 
To overcome the impasse created by today’s divisions, Britain needs a long extension. The question is how to use it to forge that stable, consenting majority in Parliament and the country.

An increasingly popular answer is: get rid of Mrs May. The prime minister’s deal has flopped and her authority is shot. A growing number of Tories believe that a new leader with a new mandate could break the logjam. Yet there is a high risk that Conservative Party members would install a replacement who takes the country towards an ultra-hard Brexit. What’s more, replacing Mrs May would do little to solve the riddle of how to put together a deal. The parties are fundamentally split. To believe that a new tenant in Downing Street could put them back together again and engineer a majority is to believe the Brexiteers’ fantasy that theirs is a brilliant project that is merely being badly executed.

Calls for a general election are equally misguided. The country is as divided as the parties. Britain could go through its fourth poll in as many years only to end up where it started. Tory MPs might fall into line if they had been elected on a manifesto promising to enact the deal. But would the Conservatives really go into an election based on Mrs May’s scheme, which has twice been given a drubbing by MPs and was described this week even by one supportive Tory MP as “the best turd that we have”? It does not have the ring of a successful campaign.

To break the logjam, Mrs May needs to do two things. The first is to consult Parliament, in a series of indicative votes that will reveal what form of Brexit can command a majority. The second is to call a referendum to make that choice legitimate. Today every faction sticks to its red lines, claiming to be speaking for the people. Only this combination can put those arguments to rest.

Take these steps in turn. Despite the gridlock, the outlines of a parliamentary compromise are visible. Labour wants permanent membership of the EU’s customs union, which is a bit closer to the EU than Mrs May’s deal. Alternatively, MPs may favour a Norway-style set-up—which this newspaper has argued for and would keep Britain in the single market. The EU is open to both. Only if Mrs May cannot establish a consensus should she return to her own much-criticised plan.

Getting votes for these or any other approach would require thinking beyond party lines. That does not come naturally in Britain’s adversarial, majoritarian politics. But the whipping system is breaking down. Party structures are fraying. Breakaway groups and parties-within-parties are forming on both sides of the Commons, and across it. Offering MPs free votes could foster cross-party support for a new approach.

The second step is a confirmatory referendum. Brexit requires Britain to trade off going its own way with maintaining profitable ties with the EU. Any new Brexit plan that Parliament concocts will inevitably demand compromises that disappoint many, perhaps most, voters. Mrs May and other critics argue that holding another referendum would be undemocratic (never mind that Mrs May is prepared to ask MPs to vote on her deal a third or even fourth time). But the original referendum campaign utterly failed to capture the complexities of Brexit. The truly undemocratic course would be to deny voters the chance to vouch that, yes, they are content with how it has turned out.

And so any deal that Parliament approves must be put to the public for a final say. It will be decried by hardline Brexiteers as treasonous and by hardline Remainers as an act of self-harm.

Forget them. It is for the public to decide whether they are in favour of the new relationship with the EU—or whether, on reflection, they would rather stick with the one they already have.

European banks wield axe after bleak fourth quarter

Clients pulled money as markets were roiled by trade wars, growth concerns and Brexit

Stephen Morris and David Crow in London

One of the most brutal trading quarters in memory has sparked another round of soul-searching at Europe’s few remaining investment banks, with some concluding the only option is to wield the axe again.

The seven largest traders in the region reported sharp declines in markets revenues in the final period of 2018, falling an average 19 per cent, three times more than the aggregate 6 per cent drop at US rivals, according to data from Citigroup. The results were also marred by eye-watering one-off losses from deals and trades gone bad.

While Barclays again stood out from the crowd by reporting the least-bad results on Thursday — giving chief executive Jes Staley a vital boost in his battle with an activist investor — the German and French national champions were particularly badly hit, forcing new rounds of cost and job cuts.

Executives blamed a variety of reasons, particularly “extreme” decade-low levels of activity as clients pulled their money to the sidelines while markets were roiled by President Donald Trump’s trade wars and government shutdown, widespread economic growth concerns and Brexit. But the performance underlined their dwindling ability to compete with a resurgent Wall Street.

“The original sin for European banks is that their home market is small and fragmented compared to the US,” said Ronit Ghose, an analyst at Citi. They have “failed to consistently compete in US capital markets and most shareholders are no longer willing to support strategies that prioritise growth”.

France’s two largest banks, BNP Paribas and Société Générale, slashed their financial targets and promised to cut a combined €850m of costs from their investment banks.

Just a year ago, both were talking about becoming “top players” in global markets and taking market share back from the Americans.

The scale of the problems at BNP’s global markets division shocked the market. It posted a €225m loss in the quarter after revenue fell 40 per cent. The headline was a 70 per cent plunge in equity trading, a traditional strength of the bank, and it made an $80m loss on a single derivative trade linked to the S&P 500 index. It is also shutting its shortlived proprietary trading division.´

“It’s not a question of waiting on the cycle in Europe, it’s more about the structural changes in the business model,” SocGen chief executive Frédéric Oudéa said after the results.

Germany’s Deutsche Bank also had another bleak quarter. Bond trading revenue slid 23 per cent, which combined with a 47 per cent decline in debt origination resulted in a €303m pre-tax loss for the investment bank. Several of its biggest shareholders subsequently called for deeper cuts to its perennially lossmaking US unit, the Financial Times reported last week.

A top Swiss bank executive commented that: “European banks long-ago lost their foothold in the US, which has always been the core investment banking market, and without that scale business they will always struggle to be profitable.”

Barclays, the last bank holding the line in investment banking, fared better. Revenues at its fixed-income trading operation fell 6 per cent compared with double-digit declines at European and US rivals. Its equities trading unit posted a 3.4 per cent increase, the only one in the region to record a positive result.

Jefferies banks analyst Joseph Dickerson said Barclays appeared to be managing risk more prudently than in the past, avoiding some of the “blow ups” that hurt its rivals.

However, Barclays’ equities performance paled when compared with double-digit increases at Citigroup, JPMorgan, Goldman Sachs and Bank of America. Investors were not impressed. The shares were flat on the day and it still trades at 60 per cent of the book value of its assets.

Still, the chief executive said the quarter was more evidence his turnround was working, helping him fend off activist Edward Bramson, who is trying to muscle his way on to the board and force the group to scale back its securities unit.

“If you’re a trader at BlackRock and you want to do a three-year interest rate swap, you’re going to write it with someone you’re pretty sure is going to be here three years from now,” Mr Staley said in an interview. “Our commitment to investment banking, perhaps the strongest of any European bank, is beginning to resonate.”

“The capital market is very thin in Europe . . . [but] in the US it’s grown,” he added. “We happen to have one of the largest US investment banks. And that is a competitive advantage we want to preserve.”

Switzerland’s UBS and Credit Suisse suffered the worst drops in investment banking revenue — 12 per cent and 21 per cent respectively — but both have drastically shrunk their trading divisions in favour of wealth management, insulating earnings.

Credit Suisse lost $60m after it hung on too long to shares it had underwritten for Canada Goose, which plunged after the down-jacket maker got caught up in a trade dispute with China. Separately, its Asian fixed-income revenues fell 91 per cent.

“We are not making excuses here, it was a tough quarter . . . not exactly a fun moment,” Credit Suisse chief executive Tidjane Thiam said. However, “the primary story about our trading business is to reduce the potential losses in bad markets.”

“Nobody any more debates that the sales and trading revenue pool, globally, is in structural decline,” he added. “If you try to grow in this shrinking industry, your total revenue will go down.”

After another humbling quarter, European banks appear to be in another period of retrenchment, said Nick Watts, an analyst at Redburn who used to work for Barclays.

“However, they have a tendency to dip their toes back in the water as soon as market conditions look better and therein lies the problem: their inconsistent strategy around investment banking.”

Countdown to The Precious Metals Breakout Rally

Chris Vermeulen
Technical Traders Ltd.

If you have been following our research over the past few months, you already know that we’ve called just about every major move in Gold over the past 14+ months. Recently, we called for Gold to rally to $1300 area, establish a minor peak, stall and retrace back to setup a momentum base pattern. We predicted this move to take place back in January 2019 – nearly 30+ days before it happened.

Now, we are publishing this research post to alert you that we are about 15~30 days away from the momentum base setup in Gold which will likely mirror in Silver. Thus, we have about 20+ days to look for and target entry opportunities in both Gold and Silver before this momentum bottom/base sets up.

This Monthly Gold chart, below, shows you the historic peaks that make up a current resistance level near 1370. This level is critical in understanding how the momentum base and following breakout will occur. This resistance level must be broken before the upside rally can continue above $1400, then $1500. Ultimately, the momentum base we are expecting for form before April 21 is the “last base” to setup before a much bigger upside price move takes place. 

In other words, pay attention over the next 30 days before this move happens.

This next Monthly Silver chart is the real gem of the precious metals world. The upside potential for Silver is actually much bigger than Gold currently. Any breakout move will likely see Silver push well above $30 per ounce and we just need to watch the $18.90 level for signs the breakout is beginning. Silver will follow a similar basing patter as Gold. We expect only about 30 days of buying opportunity left before this basing pattern is completed. Again, watch the April 21 date as the key date for the breakout move to begin.

Palladium has reached our initial Fibonacci upside price targets. We expect price to consolidated and potentially rotate near the $1500 price level. Ideally, price could fall below the $1300 price level and target the $1100 area before finding any real support. As long as industrial demand continues for Palladium, we expect to see continued upside price activity over the long run. Right now, we are expecting a price contraction as global industrial demand may falter a bit.

Please consider the research we are presenting to you today. Our predictive modeling systems have been calling the metals markets quite accurately over the past 14+ months. If our prediction of a momentum base on or near April 21 is correct, then we should begin to see an incredible upside price swing in Gold and Silver shortly after this date. You won’t want to miss this one – trust us. There will be time to catch this move when it starts – it could be an extended upside move. Pay attention and put April 21 on your calendar now. 

Are Stocks Worth Their Price?

Warren Buffett has struggled to find companies to buy. Value-minded investors looking at the stock market can relate.

By Justin Lahart

In his annual letter to shareholders, published on Saturday, the chief executive of Berkshire Hathaway said his quest for a large acquisition has continued to come up short. “Prices are sky-high for businesses possessing decent long-term prospects,” he complained.

Mr. Buffett is hamstrung in part because he has more than $100 billion in cash to put to work. Unable to find what he called an elephant-sized acquisition, he said Berkshire would likely be expanding its portfolio of stocks instead. Considering where valuations are, even that hunt for smaller game could be trying.

Start with how stocks stack up against expected earnings. A year ago, the S&P 500 traded at 17.1 times what analysts thought its underlying companies would earn over the next 12 months, according to FactSet. Now, that forward price/earnings ratio is about 16.2. That is right around the average of 16 for the 23 years for which FactSet has data.

But 23 years doesn’t count as a lot of history. And since it is for is a period that includes both the nose-bleed valuations of the dot-com bubble and the deep discounts that came after the financial crisis, it is hard to say what the right forward P/E should be.

Warren Buffett’s Berkshire Hathaway is hamstrung in part because it has more than $100 billion in cash to put to work.
Warren Buffett’s Berkshire Hathaway is hamstrung in part because it has more than $100 billion in cash to put to work. Photo: rick wilking/Reuters

Investors also can look backwards using trailing P/Es—what stocks fetch relative to earnings already in the books rather than what analysts were projecting. One popular way of doing that is the “cyclically adjusted price-earnings,” or CAPE ratio, that economists Robert Shiller and John Campbell came up with in the late 1990s. This looks at stock prices versus the past 10 years of earnings, smoothing out the effects of economic booms and busts and adjusting for inflation. 

Today the CAPE is at around 30, which compares to with an average of about 20 over the past half century—in other words, quite expensive. But the CAPE may overstate how pricey stocks are. First, it still reflects (but soon won’t) large write-downs from the financial crisis a decade ago. Second, it reflects a different tax regime. Through the first three quarters of last year, the corporate tax cut boosted the earnings measure the CAPE relies on by about 11%, according to Zion Research Group. If last year’s tax cut had prevailed over the past decade, the CAPE would be about three points lower.

To avoid the impact of the tax cut, and also the question of whether tax laws will be changed again, investors could look at a valuation measure Mr. Buffett has pointed to: The market capitalization of U.S. stocks as a percentage of gross national product. Right now, that measure stands at about 159% which isn’t far from the 171% it hit during the dot-com bubble.

Of course no single measure can really capture how under or overvalued the stock market might be—there are too many moving parts. But looking across a variety of them suggests the market is hardly a bargain. Some individual stocks almost certainly are, but for both Mr. Buffett and regular investors, identifying them is no easy task.

Kashmir: A History of Violence

The region has been a source of conflict between India and Pakistan for decades.

By GPF Staff

India and Pakistan have fought over Muslim-majority Kashmir ever since India took control of the region following the partition of British India in 1947. Over the past seven decades, the two countries have fought three wars, two over Kashmir, and engaged in numerous cross-border skirmishes.

The most recent bout of unrest came on Feb. 14, when a car bomb exploded near a police convoy in Kashmir, killing 40 Indian military personnel. The jihadist group Jaish-e-Mohammed claimed responsibility, but India put the blame firmly on Pakistan, which New Delhi accuses of aiding the group despite its formal ban in the country. India demanded that Pakistan stop supporting terrorists and promised retaliation through commercial and diplomatic measures. Indian Prime Minister Narendra Modi also said Indian forces were given “full freedom” to respond. Just four days later, nine people, including four Indian military personnel, were killed in clashes with militants in Kashmir. According to Indian officials, Jaish-e-Mohammad was responsible for the attack. The region’s tumultuous history makes the recent escalation of tensions particularly dangerous.

The new aristocrats of power

Executives rules their companies. Why not countries?

THIS AUTUMN “Downton Abbey”, a film based on the British television series, will be released and audiences will once more be transported back to the days when a powerful elite was surrounded by subservient staff who catered to their every need. But the modern versions of Lord and Lady Grantham are in the headlines every day. Chief executives are today’s aristocracy. Chauffeurs ferry them around and private jets whisk them overseas. The best chefs provide the meals in their corporate dining rooms.

Corporate headquarters are the modern equivalent of country estates, spreading over prime acreage in Silicon Valley or dominating the skylines of New York and London. Walls are decorated with fashionable art, rather as the aristocracy used to hang a Canaletto or Rembrandt in the drawing room.

There is even a social “season” for executives which kicks off every January at the Davos forum in Switzerland. And executives will be seen in the best seats at sporting events like the Superbowl or Wimbledon. A few will buy their own sports teams, as a marker of their status.

Executives have joined celebrities as the subject of public fascination. In recent weeks the British press has been filled with allegations about the way Sir Philip Green, a retailer, has treated his staff. On the other side of the Atlantic the headlines have been dominated by the divorce of Amazon’s founder, Jeff Bezos, and his feud with the National Enquirer, an American scandal sheet.

Of course, there are some differences between CEOs and the landed gentry. Executives work a lot harder than the aristocrats ever did and, with the exception of family firms, their positions are not hereditary. But like the landowning blue-bloods before them, bosses have been tempted to display their talents on a wider stage: the government. In America this tradition is long-standing. Robert McNamara took his organisational and number-crunching talents from the Ford Motor Company to the Vietnam war, albeit with unhappy results.

A more recent development has been executives trying their hands at elected politics. The trend began with Silvio Berlusconi whom voters hoped would bring his business skills to the Italian economy. A businessman now occupies the White House and two other executives, Howard Schultz of Starbucks and Michael Bloomberg of the eponymous data firm, may become candidates for president in 2020.

Businesspeople have the wealth to fund their campaigns. Many enjoy some name recognition and they tend to have close allies in the media who can support their cause (Mr Berlusconi had direct ownership of a media group). Entrepreneurs can also promote themselves as apolitical outsiders, above the partisan fray, a role once played by generals like Charles de Gaulle or Dwight Eisenhower.

The business elite may not be confined to a single party. In 18th-century Britain, the aristocrats divided into Tories and Whigs, depending on their attitude towards issues such as constitutional monarchy and the established church. You can still divide business elites into Tories who emphasise low taxes and reduced regulation and Whigs who focus on social liberalism and the environment. The next few decades may see them battle for electoral favour.

The problem is that running a country and a company involve quite different skills. Italy’s recent record of dire economic growth began during Mr Berlusconi’s tenure. His time at the top of ExxonMobil did not make Rex Tillerson an effective secretary of state. A chief executive has financial targets to meet and a few board members and important shareholders to keep happy. Politicians are judged on a wider set of goals, many of which may be beyond their control. Those coming from business also have conflicts of interest, which blind trusts do not entirely eliminate.

Nor is it likely that a dalliance with electoral politics will improve the image of an executive’s own company, or of business in general. Entrepreneurs have always been able to claim that they were above petty politics and focused on creating wealth and jobs. Now they will get the blame for all that goes wrong, toxifying their brands in the process. As wits are already pointing out, nobody who has been in a Starbucks toilet will assume that Mr Schultz is qualified to clean up the country. If you think there is a lot of anti-elitist sentiment now, just wait until the voters are asked to choose between two billionaires.