Why Americans Want Socialism

By John Mauldin


As I write this, a self-proclaimed “democratic socialist” is leading the race for one of our major parties’ presidential nomination. The fact that so many Americans (especially young Americans) support Bernie Sanders ought to tell us something. A Quinnipiac poll out this week showed Senator Sanders with 54% support among Democrats age 18–34. Meanwhile, 50% of adults under 38 told the Harris Poll last year that they would “prefer living in a socialist country.”

I don’t believe they really want socialism. Few even understand what it is. What they want is change. They see little hope for improvement in their situations, no matter how hard they work and sacrifice. They don’t see anyone in authority trying to help them. So, when someone offers what sound like easy answers, they jump aboard. As Harvard professor Ed Glaeser says (my paraphrase), people think of socialism as “hyperredistribution.” They are not looking to control the means of production per se, just redistributing the fruits of that production.

In one regard, Sanders is similar to Trump in 2016—an outsider whose message activates previously neglected voters. Trump went on to win. If Sanders gets the nomination, it’s easy to imagine scenarios where he wins, too.

That the US could plausibly swing from someone like Trump to someone like Sanders in the space of four years says, to me at least, that something bigger is happening. Until we fix it, desperate people will keep making desperate choices.

This week’s letter will be a little bit different in that I want to focus on why so many of our fellow citizens find socialist ideas attractive. And why, even in the face of that, I am a long-term optimist. For those paying attention, there has never been a time so potentially dangerous but still offering so many incredible opportunities. But first…

Because of the frustrations of so many, both left and right, I think volatile swings between radically different political choices could become de rigeur for at least the next three election cycles, if not longer. The simple fact is that no political solution can deliver economic nirvana. But until something happens (like The Great Reset) to force unwelcome change, the cycle will continue. And that is a reality we as investors have to face.

That theme of “The Decade of Living Dangerously” is my focus for the 16th annual Strategic Investment Conference, May 11–14 in Scottsdale. It is a thinking investor’s conference. We will be looking at the entire investment landscape: technological, political, geo-political, private and public investments, from seemingly prosaic real estate to the latest new inventions, casting our eyes around the globe, looking for what the smartest investors in the world are doing to avoid danger and find opportunity.

Every year for the last 15 years, SIC attendees have walked away saying, “How could you ever top this?” And last year was special, with record-breaking attendance and over-the-top presentations. The closing day was amazing.

The SIC is my art form. I craft the experience to fit the needs of the time. Each SIC is different because we are looking at different overarching questions. I can honestly say it will be simply the best conference of the year for addressing the problems we face, along with the potential. The lineup of speakers, many of whom are provocative thought leaders, is designed to make us evaluate how our current portfolios will meet the challenges of the next few years and indeed the decade.

Among the already-confirmed faculty are investment legends Sam Zell, Leon Cooperman, and Felix Zulauf. Joining them are some of the smartest people I know… in market analytics, in investment strategy, geopolitics, fixed income, hard assets, evolving technologies, and more, including Ben Hunt of Epsilon Theory… political pollster Michael Barone… market analyst Jim Bianco… venture capitalist David Blumberg… Bain’s head of Macro Trends Karen Harris… DC insider Bruce Mehlman… economist Samuel Rines… longtime friend Barry Ritholtz… China expert Jonathan Ward… Technology wizard Cathie Wood plus heavyweight real estate analysts Ivy Zelman and Barry Habib.

Then there are SIC favorites Louis Gave of Gavekal, economist David Rosenberg, bond expert Lacy Hunt, geopolitical expert George Friedman, and the always popular money manager Mark Yusko.

As you may have heard, this year we are reducing the number of attendees by 40%, at the request of long-time attendees. Over half of our attendees have been to five SICs or more. We believe it will make for a more collegial and intimate conference experience, one you will not want to miss.

So please do yourself a favor and join us for one of the most exciting SICs ever. Don’t procrastinate. I am very sure we will sell out and you know you want to be there. So click the link and prepare to experience the most fulfilling three days of your investment life.

And now to our regular program…

What’s the Appeal?

To my generation, “socialism” is the second “S” in USSR. We grew up being taught the Soviet Union was a mortal foe bent on world domination. We didn’t have to wonder if this adversary had nuclear weapons; we knew it could drop them on us any time. Remember “duck and cover” drills?

Thankfully, the threat of imminent nuclear war receded, and attitudes changed in those who didn’t grow up with it. A 1974 poll showed 75% of Americans aged 25 to 34 thought the US had “moved dangerously close to socialism.” Now 50% of young Americans want to embrace what they think of as socialism.

Its meaning isn’t entirely clear to older generations, either. This Mises Institute article does a good job outlining the ideologies we call “socialism.” Broadly speaking, they involve various degrees of collectivizing property and redistributing wealth. Those can sound pretty attractive if you have no property or wealth, and threatening if you do.

This raises a question: If the US economy is performing so well, and the rising tide is lifting all boats, why is socialism getting any traction at all? Public opinion data says this shouldn’t be happening. Polls from Gallup and others find solid majorities saying their financial condition improved in recent years, or at least got no worse.

I see two answers to that. One is in the question itself. Your financial condition can be better than it was but still not where you think it should be. If you are no longer drowning and are instead treading water with no lifeboat in sight, then yes, your condition has “improved.” But you’re still looking for answers.

The broad “better or worse” responses are heavily weighted by political affiliation. Republicans say both their own condition and the economy are better. Democrats say both are worse. They can’t all be right.

Source: Quartz

Polls that ask more specific questions find a considerably less rosy scenario.

For instance, a December 2019 Bankrate.com survey found half of US workers didn’t get any kind of pay raise in the last year. Gains in average hourly earnings may have been heavily weighted toward a smaller number of workers who got much larger raises.

Another survey by Salary Finance of 2,700 US adults working at companies with 500+ employees found 32% saying they ran out of money between paychecks. That’s consistent with the Federal Reserve’s annual “SHED” survey, which last year found almost 40% of US adults would need to borrow money to cover a $400 emergency expense. It also found an additional 18% of Americans considered themselves “just getting by” and 7% “finding it difficult to get by.”

Perhaps not coincidentally, the Fed reported this month that household debt balances hit $14 trillion, an all-time high. This was actually low as a percentage of disposable income, but disposable income is again highly weighted toward the top. Many at the bottom are in debt up to their eyeballs. And we’re not even in recession yet. Hence the dark humor like this.

Source: Twitter

From what I see, it may be true that most Americans are in “better” financial condition. But I think Ray Dalio is right when he divides the country into a bottom 60% and top 40%. More than half the country is in various degrees of trouble, and they are open to anything they think might help them, including what they think of as socialism.

Affordability Crisis

Last week I quoted from an article by Annie Lowrey in The Atlantic, The Great Affordability Crisis Breaking America. We who watch macroeconomics tend to focus on aggregate numbers—unemployment rate, GDP growth, and so on. We can overlook the “micro” world hiding inside those numbers. Let me quote Ms. Lowrey at length because she says this well.

In the 2010s, the national unemployment rate dropped from a high of 9.9 percent to its current rate of just 3.5 percent. The economy expanded each and every year. Wages picked up for high-income workers as soon as the Great Recession ended, and picked up for lower-income workers in the second half of the decade. Americans’ confidence in the economy hit its highest point since 2000, right before the dot-com bubble burst. The headline economic numbers looked good, if not great.

But beyond the headline economic numbers, a multifarious and strangely invisible economic crisis metastasized: Let’s call it the Great Affordability Crisis. This crisis involved not just what families earned but the other half of the ledger, too—how they spent their earnings. In one of the best decades the American economy has ever recorded, families were bled dry by landlords, hospital administrators, university bursars, and child-care centers. For millions, a roaring economy felt precarious or downright terrible.

Viewing the economy through a cost-of-living paradigm helps explain why roughly two in five American adults would struggle to come up with $400 in an emergency so many years after the Great Recession ended. It helps explain why one in five adults is unable to pay the current month’s bills in full. It demonstrates why a surprise furnace-repair bill, parking ticket, court fee, or medical expense remains ruinous for so many American families, despite all the wealth this country has generated. Fully one in three households is classified as “financially fragile.”

Along with the rise of inequality, the slowdown in productivity growth, and the shrinking of the middle class, the spiraling cost of living has become a central facet of American economic life. It is a crisis amenable to policy solutions at the state, local, and federal levels—with all of the 2020 candidates, President Donald Trump included, teasing or pushing sweeping solutions for the problem. But absent those solutions, it looks certain to get worse for the foreseeable future—leaving households fragile, exacerbating the country’s inequality, slowing down growth, smothering productivity, and putting families’ dreams of security out of reach.

For many and maybe most Americans, life is a constant struggle to make ends meet. They see prices rising for the things they need to survive even as the president says there’s no inflation. The central bank that supposedly works for them actually wants more inflation, not less.

This hasn’t always been the case. Not so long ago, you could work your way through college with a part-time job, afford a small home or apartment in a city or suburb where jobs were available, see a doctor if you got sick, and send your kids to decent public schools. Those are now out of reach for millions. And while some certainly made poor choices, it is not entirely or even primarily their fault.

Many people perceive, with some justification, that the economy is rigged against them. Correct or not, that perception opened the door for Trump in 2016. We have seen significant improvement since then, but clearly not enough. The door is still open for anyone who can present a convincing argument their way is better. If “their way” is somewhere on the socialist spectrum, millions will be receptive to trying it.

There is a way to close that door, and it’s pretty simple: solve the problems that are making socialism seem attractive and capitalism seem evil. Unfortunately, I don’t see much interest from the people who would need to do it.

What I do see is a belief, not entirely wrong, that more economic growth will fix everything. The problem is it will take time and people are hurting now. And for reasons I have outlined in previous letters, our debt-burdened society has borrowed growth from the future. That Pied Piper of current growth is getting ready to be repaid.

Take healthcare. It is not the case that everything was fine before Obamacare. There were serious problems. For one, people under 65 with preexisting conditions were effectively uninsurable, unless they had employer coverage. Now health insurance is “available” to all but only at staggering cost.

Bernie Sanders, Elizabeth Warren, and others keep talking about a “wealth tax” to fund national health care, student loan forgiveness, and other benefits. Others talk about much higher income taxes. Or a return to higher corporate taxes. These are terrible ideas but I get why people want them.

It is gallows humor to note that the impulse to pay for the redistribution of income and wealth with higher taxes seemingly comes from the desire to balance the budget. We can pick death by higher taxes or bigger deficits. There are no other choices.

Humans may be social creatures but today’s societies didn’t come easy. It took millennia of precarious survival-of-the-fittest to arrive at the “social contract” that defines human relations. The norms of how we treat each other, and how the state treats people, are incredibly important. And they are breaking down.

That’s not a pleasant thought but it is growing harder to deny. The McKinsey Global Institute has a new report, The social contract in the 21st century: Outcomes so far for workers, consumers, and savers in advanced economies. It is bleak reading. McKinsey’s findings in summary:

… [W]hile opportunities for work have expanded and employment rates have risen to record levels in many countries, work polarization and income stagnation are real and widespread. The cost of many discretionary goods and services has fallen sharply, but basic necessities such as housing, healthcare, and education are absorbing an ever-larger proportion of incomes. Coupled with wage stagnation effects, this is eroding the welfare of the bottom three quintiles of the population by income level (roughly 500 million people in 22 countries). Public pensions are being scaled back—and roughly the same three quintiles of the population do not or cannot save enough to make up the difference.

These shifts point to an evolution in the “social contract”: the arrangements and expectations, often implicit, that govern the exchanges between individuals and institutions. Broadly, individuals have had to assume greater responsibility for their economic outcomes. While many have benefited from this evolution, for a significant number of individuals the changes are spurring uncertainty, pessimism, and a general loss of trust in institutions.

This isn’t imaginary and it is not solely about individual responsibility.
Society really has changed in important, structural ways. Achieving stability, much less success, is far more difficult for younger generations than it was for me and my Boomer peers.

We can and should discuss how to ease those challenges without causing even greater harm in the process. But pretending they don’t exist, or telling people to pull themselves up by bootstraps they don’t have, isn’t the answer.

Urging people who live paycheck to paycheck to save more is not realistic. They have no money left after those fast-growing expenses. Almost all saving occurs in the top 20% and certainly in the top 40%. The lowest quintiles have negative savings, i.e., are going into debt.

Source: WSJ

If you work for minimum wage, or even $20 an hour with a family to support, and someone comes along and promises you $1000 a month, or to cover your student debt or medical services or child care? That solves a problem you have right now. The fact that giving even 40 million people $1000 a month would be a $480 billion additional tax-and-spend which would significantly impact the economy is just not in your personal equation.

For many, it’s already an easy choice. After a recession? And deeper economic malaise?

Rigged System

The “financialization” of the American economy has led to increasing income and wealth disparity. As much as it pains me to say it, the “system” really is rigged. Whatever the good intentions of the Federal Reserve in particular and the US government in general have been, it has distorted the economic feedback loops that balance a true market-based economic system.

The fact is we already have “socialism” today. It’s not the socialism we feared in 1974. We have socialized the risks of capitalism, to the benefit of a small portion of the country, while a larger portion struggles.

That’s why Bernie Sanders may be on your ballot this November, and why he could win if the economy worsens. And there’s a chance it will. I long ago said Japan was a bug in search of a windshield. Maybe I should have said China. In either case, it’s beginning to look like virus COVID-19 could be the windshield against which the global economy meets its maker.

I am not being gloom-and-doom. I really believe the world is getting better and I see opportunity everywhere. However, if there is a recession, and thus more people in pain… if we haven’t given people better answers, they may choose socialism by default.

Coupled with socialism by central banking and bureaucracy?

It’s late and time to hit the send button. Let me close quickly by saying that these questions will be on the SIC agenda. Have a great week!

Your swear I am an optimist analyst,

John Mauldin
Co-Founder, Mauldin Economics

Pension funds and private equity: a puzzling romance

Investors are supposed to be paid extra for lack of liquidity in investments. Not any more

Jonathan Ford

CA's Gov't Pension Fund To Report Loss Of One Quarter Of Its Holdings...SACRAMENTO, CA - JULY 21: The California Public Employees' Retirement System building in Sacramento, California July 21, 2009. CalPERS, the state's public employees retirement fund, reported a loss of 23.4%, its largest annual loss. (Photo by Max Whittaker/Getty Images)
Calpers is seeking to raise the proportion of its giant fund in private equity by a third © Getty

It is a guiding principle of finance that there is a premium to pay for tying up investors’ money in illiquid investments. The tighter those knots are, and the longer holders are bound in for, the higher the price.

Take private equity, where investors commit their cash for up to a decade in unsaleable investments.

You might think at first glance that this rule goes without saying. After all, don’t most buyout industry handouts show private equity investments returning much more than public market alternatives?

Returns data from the British Private Equity and Venture Capital Association’s 2018 performance measurement survey provide an example. These show that over the previous decade, UK private equity generated returns of 13.7 per cent a year, net of fees, far outpacing the 9.1 per cent on the FTSE All-Share index.

They suggest that when pension schemes fling their cash at buyouts, they can expect some reward for their patience. That is schemes such as Calpers, which is seeking to raise the proportion of its giant fund in private equity by a third, or Britain’s Universities Superannuation Scheme, which has roughly 21 per cent of its assets tied up in “private markets”.

So all’s well with the world then? Not so fast.

Look more carefully at that data and you start questioning the existence of the so-called “illiquidity premium”. Doubts centre on the numbers, and whether they present a realistic picture of the relative performance of buyouts.

Academics have long questioned whether the internal rate of return (IRR) calculations favoured by buyout firms overstate their performance against quoted stocks.

Consequently, most recent studies favour the so-called “Public Market Equivalent” measure, which takes all the cash flows between the investors and a buyout fund, net of fees, and discounts them at the rate of return on the relevant benchmark (for example the stock market). On this basis, the outperformance vanishes.

A large study conducted in 2015 by three academics looked at nearly 800 US buyout funds between 1984 and 2014. They found that before 2006, these funds delivered an excess return of about 3 per cent per annum, net of fees, relative to the S&P 500 index. In subsequent years though, returns have been about the same as on the stock markets. A study of European markets produced similar results.

So why are pension fund investors continuing to pump huge allocations at private equity? Last year $301bn was poured into US buyout funds, a quarter more than the previous record set in 2017.

One intriguing explanation is that offered by the well-known hedge fund manager, Cliff Asness, in a recent article. He argues that pricing opacity and illiquidity are not actually bugs in the private equity model, but features that investors willingly pay for.

The reasoning runs as follows. Most pension funds know that they need to boost returns if they are to redeem the costly promises they have made to investors. The only way they can do this is to take more risk — a.k.a more leverage.

In theory they could do this without private equity. A pension scheme could assemble a leveraged portfolio of quoted stocks. True, it would sacrifice both control and the superior management skills private equity allegedly brings. But there’s a silver lining to this modest sized cloud: the fund would save private equity fees, presently running at 6 per cent a year.

One reason pension funds don’t do this, Mr Asness suggests, is not that it is beyond them. Rather it is the unwelcome freedom that transparently-priced liquid equity brings. A bad downturn, or a spell of fierce volatility, might persuade them, or their trustees, to crack and sell out at a disadvantageous moment.

“Liquid, accurately priced investments let you know how volatile they are and smack your face with it,” he says.

Opaquely-priced and illiquid private equity, by contrast, obliterates the temptation. Just as Odysseus stuffed beeswax in his crew’s ears and had them lash him to a mast to resist the call of the sirens, pension funds use the manacles of a private equity contract to resist liquidity’s lure.

Of course, there are ways they could avoid paying up for the privilege, such as trimming that average 6 per cent fee charged by private equity.

But that presumes it is a conscious decision, not something they have slipped into almost out of habit.

Odysseus may have understood what he was doing when he had himself trussed up. But how many of the pension funds accepting private equity’s “illiquidity discount” are doing so knowingly?

Illiquidity is not costless. That is why it is supposed to be compensated. Those costs have been suppressed in recent years, when bear markets have tended to be short and sharp. But consider the impact of a prolonged 1970s style downturn. Then investors might rue the shackles they paid to don.

Has Davos Man Changed?

The discussion at Davos this year may be part of a move in the right direction toward a more sustainable capitalism. But we need to see some proof: corporations paying taxes and livable wages, for a start, and respecting – and even advocating – government regulations to protect our health, safety, workers, and the environment.

Joseph E. Stiglitz

stiglitz268_FABRICE COFFRINIAFP via Getty Images_trump davos

DAVOS – This year marked the 50th anniversary of the World Economic Forum’s flagship meeting of the world’s business and political elites in Davos, Switzerland. Much has changed since my first Davos in 1995. Back then, there was euphoria over globalization, hope for ex-communist countries’ transition to the market, and confidence that new technologies would open up new vistas from which all would benefit. Businesses, working with government, would lead the way.

Today, with the world facing climate, environmental, and inequality crises, the mood is very different. Facebook, willing to provide a platform for mis-/disinformation and political manipulation, regardless of the consequences for democracy, has shown the dangers of a privately controlled monopolistic surveillance economy. Corporate leaders, and not just in the financial sector, have displayed remarkable moral turpitude.

Moreover, multilateralism is under attack. Its strongest defender historically, the United States, now has an administration committed to “America First,” and to undermining global cooperation, even as the need for cooperation in a host of areas – including peace, health, and the environment – becomes increasingly apparent.

This year’s meeting highlighted disenchantment with the increasingly dominant American model of shareholder-first, profit-maximizing firms. More than 50 years ago, WEF founder and head Klaus Schwab argued for stakeholder capitalism: enterprises should be accountable for the interests of their customers, workers, communities, and the environment, as well as their shareholders.

Some 45 years ago, with Sandy Grossman, I showed in a standard economic framework that maximizing shareholder value would not maximize societal welfare. In speech after speech this year, business leaders and academics explained how Milton Friedman’s successful advocacy of shareholder capitalism led directly to the crises we face today – including, in the US, opioid addiction, childhood diabetes, declining life expectancy amid soaring “deaths of despair” – and the political divisions they have fueled.

To be sure, recognition that there is a problem is necessary if we are to change course. But we also have to understand that the causes of societal maladies go beyond maximizing shareholder value. At the root of the problem is neoliberalism’s excessive faith in markets and skepticism of government, which underpins a policy agenda focused on deregulation and tax cuts. After a 40-year experiment, we can declare it a failure. Growth has been lower, and most of the gains went to the top. While this should be obvious, there is no consensus among our business leaders.

Even though the applause for US President Donald Trump, who delivered one of the opening addresses, was the most anemic I have seen for a global leader, almost no one openly criticized him. Perhaps audience members feared a critical tweet or felt gratitude for a tax cut that benefited billionaires and large corporations at the expense of nearly everyone else (indeed, tax rates in the US will rise for some 70% of those in the middle).

Cognitive dissonance – or dishonesty – was on full display. Attendees could highlight the importance of climate change and tout their corporations’ response to it, and yet welcome Trump’s deregulation, which will allow the US, already the leader in per capita greenhouse-gas emissions, to pollute even more.

Moreover, despite much talk about stakeholder capitalism, there was no discussion of reducing CEO and managerial pay to ameliorate growing pay disparities, or of the first element of corporate social responsibility: paying your fair share of taxes by curbing multinational tax avoidance, and ensuring that developing countries get a fair share of tax revenues.

This led Rob Cox, global editor of Reuters Breakingviews, to suggest that stakeholder capitalism might be a strategy to unfetter CEOs even more: If they fail to meet profit goals, they could waffle and say they were meeting broader environmental, social, and governance objectives.

Nor were reforms that might increase workers’ bargaining power, through the strengthening of unions and collective bargaining, at the center of the discussion, even though in Europe such reforms are at the top of the new European Commission’s agenda. To their credit, a few US firms, such as PayPal, explained their commitment to paying livable wages, going well beyond the minimum wage mandated by law.

And yet some of the business leaders at Davos this year, especially those from Europe, seemed to have grasped the urgency of responding to climate change and the scope of what is needed. And some have actually taken giant strides. There might still be some “greenwashing” – banks that talk about energy-efficient light bulbs as they lend money to coal-fired power plants – but the tide has turned.

A few business leaders also recognized that our economic and social maladies will not cure themselves – that even if most businesses were socially motivated, a single-minded focus on profits entails a race to the bottom. A soft-drink company that doesn’t want to produce addictive sugar-rich drinks that can contribute to childhood diabetes risks losing out to a less scrupulous enterprise.

In short, unfettered capitalism has played a central role in creating the multiple crises confronting our societies today. If capitalism is to work – if it is to address these crises and serve society – it can’t do so in its current form.

There must be a new kind of capitalism – what I have elsewhere called progressive capitalism, entailing a better balance of government, markets, and civil society.

The discussion at Davos this year may be part of a move in the right direction, but if leaders truly mean what they say, we need to see some proof: corporations paying taxes and livable wages, for a start, and respecting – and even advocating – government regulations to protect our health, safety, workers, and the environment.

Joseph E. Stiglitz, a Nobel laureate in economics, is University Professor at Columbia University and Chief Economist at the Roosevelt Institute. His most recent book is People, Power, and Profits: Progressive Capitalism for an Age of Discontent.

Gold Rallies As Fear Take Center Stage

Chris Vermeulen

Gold has rallied extensively from the lows near $1560 over the past 2 weeks.  At first, this rally didn’t catch too much attention with traders, but now the rally has reached new highs above $1613 and may attempt a move above $1750 as metals continue to reflect the fear in the global markets.

We’ve been warning our friends and followers of the real potential in precious metals for many months – actually since early 2018.  Our predictive modeling system suggests Gold will rally above $1650 very quickly, then possibly stall a bit before continuing higher to target the $1750 range.

The one thing all skilled traders must consider is the longer-term fear that is building in the markets. 

Many traders are concerned about the global economy with the Coronavirus spreading economic worries throughout Asia, Japan, and Europe.  We believe this fear will push precious metals continually higher over the next 24+ months with a real upside target above $2100 eventually.

Right now, skilled traders need to understand that wave after wave of higher price rotation will continue to happen in Gold and Silver.  If you missed the $1450 level and missed the $1550 level, this is your time to attempt to find your entry point near $1650 or below that level.  Ultimately, real fear has yet to result in a parabolic rally in Gold and Silver – but it is likely going to happen within the next 24+ months.

As skilled traders, our Fibonacci price modeling system is suggesting that any price rotation below $1550 would be an excellent buying opportunity.  These levels really depend on where the current rally ends and what happens in the global markets over the next 60+ days.

Less than 7 days ago, we published this research article suggesting that our ADL predictive modeling system was telling us that Gold would rally above $1650 within 15 to 30 days.  It is very likely this rally will start a multiple-leg upside price advance in precious metals where Silver will finally breach the $20 to $21 level as Gold advances higher.


Once fear really enters the markets, we’ll see huge sector rotation and a massive price reversion event take place. 

Historically, Gold and Silver will react to this move, but the parabolic price move in precious metals will come 4 to 6+ months after the reversion event in the global markets. 

So, from a historical standpoint, any entry-level near current price levels is exceptional.

Trust us, you really don’t want to miss this next move in precious metals. 

Our Fibonacci price modeling system and Adaptive Dynamic Learning modeling system are suggesting price levels above $2400 as an ultimate upside price target for Gold.

Red Gold: China's Stealth Plan to Use Gold for World Domination

by Marin Katusa

Gold used to be important.

During and after World War II, every major developed country amassed as much physical gold as they could. It stabilized currencies and signaled independence.

But with the end of the gold standard in 1971, most countries began to sell off their reserves.

So much so that in 1999, an agreement was formed to limit the amount of gold that central banks could sell. Fast forward to today, and Canada’s central bank owns ZERO gold.

Despite the agreement, most countries continued to shed their gold reserves as fast as possible.

That is until a few years ago, when a handful of countries reversed course.

Central Banks started buying gold with fury, and they haven’t let up since.

In the final quarter of 2018, central banks purchased more gold than in any other quarter on record.

By the end of the year, central banks collectively held around 1.064 billion ounces of gold (equivalent to 33,200 tons).

That’s about one-fifth of all the gold ever mined.

In the first half of 2019, central banks purchased 11.97 million ounces of gold (374 tons).

Once again, that was far more than ever before. And it’s equivalent to one-sixth of total gold demand in that period. And total central bank gold purchases for 2019 were the second highest they’ve been in the last 50 years (2018 being the first).

The Unusual Suspects in Central Bank Gold Purchases

And the Keyser Söze of gold is Vladimir Putin.

I’ve been very quiet about Russia and Putin the last few years as I’ve been swamped with media requests following the success of my NY Times Bestseller The Colder War.

Don’t underestimate what the Russians are doing, as others are starting to follow…

While the world focuses on China, Russia has positioned itself at the center of the global political chessboard.

Here’s what’s interesting about the recent central bank gold purchases: the vast majority of that unprecedented purchasing came from just four countries. These are places you’d never expect.

• One of those countries is Kazakhstan, whose GDP is smaller than Kansas’s. Kazakhstan grew their reserves from 2.4 million ounces (75 tons) in 2011 to 12 million ounces (375 tons) in 2020 — A 400% increase.

• Turkey moved far faster. In 2017, they had 3.71 million ounces (116 tons). Now, they have 12.32 million ounces (385 tons) of gold. That’s a 232% increase in just the last two years.

• In 2018 alone, Russia bought 8.78 million ounces (274.3 tons). That’s the most it’s ever purchased in one year, and its fourth year above 6.4 million (200 tons) ounces of gold. For reference, that’s $15.7 billion worth of gold.

Putin is undertaking what’s called a "de-dollarization." Aware of sanctions from the United States, Russia is positioning itself to not be dependent on U.S. Dollar holdings.

So, the central bank in Russia has sold nearly all of their U.S. Treasury notes. And it’s used the proceeds to buy gold.

Like I said, the Keyser Söze of gold is Vladimir Putin. Pay attention to the world’s master strategist.

This is very bullish for gold.

You might be wondering why Russia doesn’t buy a yielding investment with the cash. The problem is that other reserve currencies, like the euro or the yen, are extraordinarily weak against the dollar and Putin knows this will continue.

Russia bought $100 billion worth of euros, yuan, and yen in 2018… the Keyser Söze of gold won’t make that mistake again.

And over eleven trillion U.S. dollars’ worth of global investment opportunities have a negative yield.

So Russia would end up paying money to hold them.

Gold, on the other hand, has paid off handsomely for Putin.

In 2019, the value of Russian-held gold has increased from $86 billion to more than $112 billion.

The rising gold price has generated a windfall for the Russians of nearly $20 billion that the Russians can leverage.

That’s providing plenty of incentive to keep Russia buying in the long run, stoking further demand.

The problem is that Russia’s buying is fairly well-known. Unless it continues to step up gold purchases, its effect on gold prices has mostly already been taken into account.

China’s New Golden Rule

With WuFlu (the Coronavirus) now having infected more people than SARS did in 2003, will China continue their gold purchases?

China stockpiled huge amounts of gold every single month last year.

You’re probably wondering why… Well, you’ve probably heard the saying, "He who has the gold, makes the rules." Xi Jinping, President of China, agrees with Putin’s strategy.

WuFlu no doubt has sidetracked China here in the near term, but it’s been proven that the gold insurance strategy is a very wise one. The Chinese elite are aware of their aging demographics and high debt loads. The gold will be valuable to potentially backstop any shortfalls without being overly dependent on their foreign exchange reserves.

China is diversifying its foreign exchange reserves away from the USD and towards gold. This will take many years, but it’s a sound strategy.

The major Western countries hold upwards of 60 percent of their foreign exchange reserves in gold. China is currently at just 2.9%. Russia is currently at 20%.

China knows it has to pick up its gold to reserves ratio and WuFlu will accelerate this belief.

The chart below shows where Russia and China will want to be at—with the western superpowers.

They will get there.

And the price of gold will be positively impacted as a result.

Of course, China has much larger foreign exchange reserves than most other countries. So its gold holdings represent a lower percentage of its total reserves.

But even when looking at actual gold holdings, you can see that China and Russia have long lagged behind the west. Only now are they catching up.

If – and it’s a big if – China were to shoot for the same gold-to-forex reserve ratio as the United States, that would take 1.98 billion ounces of gold (62,000 tons) of gold off the market—or fourteen years’ worth of 100% of the world’s gold demand.
The subsequent rise in the price of gold would be unlike anything the world has ever seen. But it seems impossible… right?

Here’s the thing: Russia’s own gold-to-forex reserve ratio fell below 2.5 percent in 2007.

Now it’s at 20 percent—and climbing. Not only that, but China has a much longer-term vision in mind with their gold purchases.

According to one of my favorite people to debate on stage at conferences, Euro Pacific Capital CEO Peter Schiff, Russia and China are "preparing for the world where the dollar is no longer the reserve currency." China can’t do this, and they know it. Peter knows it too, until China’s reserves grow 10-fold.

In short, China and Russia want a world where the U.S. dollar is no longer the reserve currency.

To do that, both Russia and China (specifically China) have a lot of gold buying to do before they can realistically back up their currency.

It won’t be a return to the gold standard, certainly. It will be more of a "gold support."

The Angry Dragon

So here are the trillion-dollar questions: exactly how much gold is China planning to buy? And what will it do to the price of gold?

The problem with China is that it doesn’t update its gold reserve numbers very often. When the numbers are updated, their accuracy is impossible to verify.

Few believe the official WuFlu numbers, never mind gold numbers. China lacks global trust. Real gold reserves are one step towards building that trust.

China buys its gold extremely quietly via back channels to avoid running up the price via its purchases. (Remember Kazakhstan’s huge gold buys? Guess who they share a border with…)

From 2009 to 2015, the Chinese government didn’t provide any updates about its gold holdings.

Then it suddenly announced a massive 57 percent jump in its reserves. What we do know is that China purchased nearly 3.2 million ounces (100 tons) of gold in the past year.

But, they need to buy 1.9 billion ounces to be on par with America. 3.2 million ounces is a lot of gold, but relative to where they need to be—it’s not.

Moving forward, that’s set to rise—dramatically.

Zhang Bingnan, vice president of the China Gold Association, forecasted the optimal gold reserve capacity for China for the next two decades…

He found that in 2020, China’s optimal gold reserves should be between 185.6 million ounces and 217.6 million ounces (5,800 and 6,800 tons) of gold.

Remember, China’s gold reserves currently sit around 58.94 million ounces (1,842 tons).

That means it would need to buy 128 million ounces (4,000 tons) at a minimum, this year, to meet Zhang Bingnan’s optimal rate.

But even that would be short by 1.77 billion ounces to meet the ratio that U.S. reserves are at.

Another way to look at it is, even if China doubles their gold reserves, they’re still short of meeting the same ratio as the United States by 93%.

A Dragon’s Appetite for Gold

According to a precious metals analyst at Standard Chartered Bank…

Just to achieve the diversification it’s looking for, China would need to buy two years of global gold production.

In short, when China really starts buying, it’s not going to be able to disguise it any longer. And that could cause a run on gold like the world has never seen before.

Central reserve banks are already snatching gold up at record levels… when prices are at record levels. These central banks themselves anticipate prices going much, much higher.

When central reserve banks begin to see gold both as diversification, insurance and leverage there will never be enough of it to go around. I wouldn’t want to bet against them.

I’d never bet against the Keyser Söze of gold, Vladimir Putin.

Because gold still matters—a lot.

And with any shakiness in the global economy, it’s going to matter a lot more.

Editor’s Note: In this shaky economic environment, big buyers like China and Russia, are accumulating as much gold as possible.

And it's no question that negative interest rates and the devaluation of currencies will only put fuel on the fire.

How Long Can Chinese Property Developers Go Without Sales?

A slowdown in sales will strain an increasingly important part of the funding model for real-estate giants

By Mike Bird

The disruption to travel and work, following the coronavirus outbreak, will slow China’s property sales. Photo: nicolas asfouri/Agence France-Presse/Getty Images

China’s major real-estate companies have shut sales centers across several cities as the number of reported coronavirus cases grows. Disruption to travel and work will slow property sales nationally, halting them fully in some of the most heavily affected areas.

Exactly how big an impact the sudden halt in much economic activity will have on developers remains to be seen, but a prolonged freeze will hit a funding mechanism that has become much more important in recent years.

Deposits and advance payments now make up the greatest portion of funding for real-estate developers. Almost all sales in China are made before construction is finished.

The inability to build or sell properties at a normal pace will eventually put a strain on this risky funding model. A 20% decline in advance payments to developers this year—an extreme scenario based on about 10 weeks of lost activity—would reduce the sector’s funding by about 1.2 trillion yuan ($173.04 billion), which represents 7% of the total payments received last year.

The risk for global investors is that developers aren’t able to meet their obligations in the offshore bond market, where companies raise U.S. dollars to finance activity. The good news is that there isn’t an immediate refinancing crunch. The biggest wave of debts comes due in the first half of 2021, when developers will need to refinance $45.1 billion.

Real estate seems like an industry that would be primed for a V-shaped recovery. Home sales are unlike retail sales or industrial output, where a significant chunk of foregone consumption and production is gone forever. Someone who wanted to buy a house in December will still want one in May.

On the other hand, the developers have business models that rely on growing far faster than the wider economy. Any knock to general economic activity could be deleterious, especially if it isn’t followed by the sort of no-holds-barred stimulus that sent the sector roaring back to life in 2016.

Companies with particular exposure to virus-affected areas bear watching a little more closely.

Sino-Ocean and Longfor have larger-than-average land banks in Wuhan, and saw year-over-year sales declines of 28% and 33% respectively during January, according to analysts at Nomura.

Likewise, the most heavily indebted firms should be on any credit investor’s radar. China Evergrande and Sunac have the largest offshore repayment schedules this year.

The Chinese government demonstrated a commanding grip on the country’s financial system—which centers around real estate—following the 2015 downturn. But it cannot conjure greenbacks out of thin air, and offshore investors are the least of Beijing’s political priorities.

That should give any would-be buyers pause for thought.

Tech Wars Are Complicated and Hard to Win

By: Phillip Orchard

The U.S. campaign to isolate Huawei isn’t quite going according to plan.

Last week, the U.K. and the EU both defied U.S. pressure by sparing the Chinese telecom giant and its state-owned counterpart, ZTE, from a blanket ban on “high-risk suppliers” of 5G gear.

A week earlier, the Pentagon reportedly blocked a plan by the Commerce Department to expand a ban on sales of critical components to Chinese high-tech sectors, citing the potential costs to the United States’ own tech sector.

The gradual decoupling of the U.S. and Chinese tech spheres isn’t petering out; escalation on a number of fronts – scrutiny of Chinese investment, restrictions on R&D collaboration and Chinese immigration, and U.S. diplomatic efforts to isolate China – is still likely.

But January’s developments underscore the inherent difficulty of eliminating the risks of U.S.-Chinese interdependence without doing more harm than good to U.S. interests, not to mention the interests of the friends and allies the U.S. is urging to follow suit.

Containing Huawei vs. Killing Huawei

Next-generation cellular and satellite communications technologies will have the potential to unleash a vast new ecosystem of interconnected devices that can reliably transfer deeper oceans of data between them at incredible speeds. Achieving its potential will require a massive and costly expansion of network infrastructure such as base stations, towers and antennas.

The potential economic rewards are sky high, but so too are the potential cybersecurity vulnerabilities, the benefits of being able to exploit them and the rewards of becoming a dominant supplier of network gear.

In other words, if Huawei or ZTE were to insert near-undetectable backdoors into a network’s source code, Chinese state-backed hackers could have easy access to incalculably valuable flows of data – and, potentially, a capability to shut down critical networks altogether. If the world becomes overly dependent on Chinese vendors, Beijing would have an awful lot of bargaining power.

The scale and nature of the risks and rewards won’t become clear for years, and both could fall far short of the hype. But given how much time and how many resources it will take for these systems to be built, along with the potential economic risks of falling behind, governments are having to make critical decisions now to leverage the benefits and protect against worst-case scenarios, including how to manage risks associated with doing business with Huawei.

The U.S. has effectively banned U.S. operators from using Huawei and ZTE equipment in their next-generation cellular networks. But U.S. interests are global. Washington shares intelligence with myriad partners. U.S. troop deployments and military logistics networks cover hundreds of countries.

U.S. multinational corporations move lucrative intellectual property around supply chains throughout the world. Washington thus isn’t content merely to keep Huawei gear away from U.S. shores; it also wants to keep Huawei away from anywhere U.S. interests would be at risk if dependent on Chinese information and communication technology infrastructure.

It can try to do this in two basic ways: by using its diplomatic power to shrink Huawei’s market access and/or by crippling Huawei directly.

Toward the first, the U.S. has been urging friends and allies to ban Huawei from their own 5G build outs – and threatening to withhold intelligence and military cooperation if they don’t. But this campaign has borne little fruit, primarily because of Huawei’s cost advantages, the fear of retaliation from Beijing and the inherent difficulty of proving that Chinese vendors are really so much more threatening than any others. (The biggest cybersecurity challenges facing 5G have little to do with any specific vendor.)

As a result, only Australia and a handful of other countries have imposed formal or de facto bans on Chinese vendors. Most governments are looking for ways to split the difference, welcoming Huawei but also limiting where and how much of its gear can be used. That the U.K. – America’s closest ally and a fellow Five Eyes member – defied Washington in this way will likely embolden others, to varying degrees, to do the same.

The U.S. has therefore also been looking for ways to take aim at Huawei unilaterally. In early 2019, the White House reportedly considered cutting off Huawei’s access to the U.S banking system, making it effectively impossible for the firm to complete transactions in U.S. dollars.

But it decided against it out of fear that it would grind the global financial system to a halt. So instead, the Trump administration started taking steps to starve Huawei of critical components sourced overwhelmingly from U.S. firms, particularly semiconductors, software and chip design.

But this too sparked a backlash – this time from inside the U.S. For example, U.S. chipmakers, who rely on sales to China for an estimated 10-30 percent of their revenue, warned that the loss of sales would cripple their R&D programs and capacity to innovate. A ban could also lead to an irrecoverable loss of market share for foreign chipmakers or, worse, accelerate China's well-funded drive to build a competitive semiconductor industry of its own.

After all, the main reason Chinese firms have struggled to make the leap in sectors like semiconductors is that it simply made more sense to keep buying from the U.S. and focus their resources on what they’re actually good at (or on serving Beijing’s political and diplomatic goals).

U.S. multinational firms, moreover, immediately began exploiting loopholes in the soft ban on sales to Huawei and made clear the overwhelming incentives to find ways to continue selling to China – even if it requires moving operations overseas.

Still, the Commerce Department was reportedly poised to expand the ban on sales until the Pentagon stepped in, arguing that the hit to U.S. tech sector R&D would undermine the U.S. military’s technological edge over China. The Pentagon could still be overruled, and the export ban allowed to go forward.

But it’s clear that the U.S. is having to decide between two largely divergent paths forward: one focused mainly on impeding China’s growth and one that trusts in the U.S.’ ability to simply out-compete China.

Flying Blind

This illustrates just how messy and fraught with unintentional consequences the U.S.-China tech war will be even for Washington, to say nothing of countries caught in the middle.

Consider all the factors at play: On the one hand, there's the theoretical intelligence, commercial and sabotage risks that come with potentially handing Beijing the keys to the castle, the strategic risks of empowering China’s technological rise and fostering global dependence on its goods and goodwill, and the potential loss of vital military or intel support from the U.S.

On the other are immediate cost considerations. For 5G to reach its potential, it will require a staggering amount of capital expenditures. There are only five major end-to-end 5G vendors (none of them American).

Banning Chinese firms would eliminate the two cheapest options and give the remaining three (Finland's Nokia, Sweden’s Ericsson, and South Korea’s Samsung) excessive pricing power. (As it happens, including multiple vendors in network infrastructure is also key to ensuring network resiliency.)

For countries, like the U.K., that would have to rip out Huawei gear from their existing 4G networks, the bill would be even steeper. Higher costs inevitably mean slower implementation, potentially depriving local industries of the chance to reap first-mover advantages and putting them at a disadvantage against foreign competition.

It would also risk provoking Chinese retaliation; Beijing’s threat to cut off market access to German automakers is at the center of the debate in Berlin, for example. (This is all in addition to the aforementioned hit to local companies that supply Huawei and ZTE.)

Each country’s cost-benefit formula will be different. It’s not surprising that Japan, Vietnam and Australia, which see the People’s Liberation Army just over the horizon, are acting more forcefully against Huawei than countries like the U.K. and Germany, whose concerns and hopes regarding China are primarily commercial.

In a great power competition, the interests of third parties rarely align neatly with one side or the other, so there are incentives to play both off each other where possible, keep their options open and otherwise stay out of the cross-fire.

Notably, the U.K. has provided something of a template for how to split the difference between China and the U.S. In short, the U.K. is limiting “high-risk suppliers” of 5G (read: Huawei and ZTE) to what’s known as the edge of the network – think towers and antennas – while barring them from “the core,” where critical functions like authentication and encryption take place.

The U.K. is also capping their market share and barring their gear from networks around military bases and other sensitive installations.

This has not satisfied the U.S., where the Senate is debating legislation that would formally ban intelligence-sharing with countries that use Huawei. (Notably, though, U.S. Secretary of State Mike Pompeo moved quickly to downplay the impact of London’s decision on the U.K.-U.S. “special relationship.”)

Critics of the partial ban (on both sides of the Atlantic) argue that the distinction between the core and the edge will erode over time, since 5G won’t live up to its potential unless core functions are pushed out the edge.

The U.K. makes a strong case that the system can be designed in a way to preserve the distinction – and that its system includes enough protections to allow the U.S. to conclude that breaking off intelligence-sharing over it would be counterproductive.

The debate won’t be resolved anytime soon because the rapid evolution of the risks and rewards of 5G technology and applications won’t stop anytime soon. And that’s the crux of the issue: The U.S., its friends and its foes are all scrambling to secure their interests through pivotal policy decisions based on best guesses and worst fears about how the world might look more than a decade from now.

Given the pace of technological change these days, that’s an eternity.