Please, don’t blame capitalism

  • Gold finds support
  • Don’t let the numbers fool you
  • Don’t worry about gold
  • It’s all PR
  • No stamina for it

Your editor will confess to being easily amused…at times.

The easiest way to amuse us is to blame capitalism for something which is not capitalism’s fault.

Earlier this week, the name of the new UK prime minister, Theresa May, cropped up in conversation in these pages.

Well, Ms May has caused herself to become a target once more. We quote from the Financial Times:

In a speech steeped in rhetoric about the role of the government to bear down on irresponsible capitalism, the prime minister said she would tackle “unfairness” wherever she found it, from tax evasion to high household energy bills.

Our point on this is simple. There is no such thing as ‘irresponsible capitalism’. There is no such thing as ‘responsible capitalism’ either.

There is only capitalism. That’s it.

The thing that politicians, bureaucrats, and statists like to criticise isn’t capitalism. And no, this isn’t just a matter of semantics. It’s a matter of getting a crucial distinction right.

Tax evasion isn’t capitalism. And high household energy bills aren’t capitalism either.

Both of these issues are the result of government and bureaucratic interference. Big businesses are able to evade, avoid, or minimise taxes because the laws written by politicians allow them to do so.

Energy companies can charge high prices because governments grant them the gift of monopoly, create high barriers to entry, or because governments enter into price-setting arrangements with the energy companies.

Sure, high energy prices can occur under free market capitalism. But in a free market, the high price acts as a signal to the rest of the market. It says, ‘Hey, big profits over here.’ The result is an increase in competition, and consequently, a fall in prices.

Unfortunately, when the government gets involved, they insist on interfering with price signals. Take public transport in Victoria as an example.

For years, the trains and trams have been overcrowded. In a free market, a business would have two choices. It could either increase the number of services offered, or it would raise prices to limit demand.

But what did the government do? That’s right, it cut prices by eliminating the outer fare zone. A subsequent government went one step further by making tram travel in Melbourne’s CBD free.

In other words, the government did the opposite to what a free market would do. Now, public transport services are more crowded than ever before.

Anyway, we do wish politicians, the media, and others would stop blaming capitalism. It’s not capitalism that’s at fault. The fault is with government and the bureaucracy…

Markets

Overnight, the Dow Jones Industrial Average gained 112.58 points, or 0.62%.

The S&P 500 added 9.24 points, or 0.43%.

In Europe, the Euro Stoxx 50 index fell 3.22 points, or 0.11%. Meanwhile, the FTSE 100 fell 0.58%, and Germany’s DAX index fell 0.29%.

In Asian markets, Japan’s Nikkei 225 index is up 96.7 points, or 0.57%. China’s market remains closed for the national holiday.

In Australia, the S&P/ASX 200 is up 22.27 points, or 0.41%.

On the commodities markets, West Texas Intermediate crude oil is trading for US$49.49 per barrel. Brent crude is US$51.52 per barrel.

Gold is trading for US$1,265.88 (AU$1,633.25) per troy ounce. Silver is US$17.71 (AU$23.27) per troy ounce.

The Aussie dollar is worth 76.1 US cents.

Gold finds support

Just when it looked as though gold may bounce back after yesterday’s big fall, well, it didn’t.

If gold is down, that just has to be bad news for gold stocks, right?

Maybe not. As we’ve mentioned this week, we see the current fall in the gold price as an opportunity to buy both gold and gold stocks.

Turns out, we may not be alone. As Bloomberg reports:

Investors in exchange-traded funds that track gold producers are keeping the faith, even as the metal’s rally shows signs of fading.

On Tuesday, as gold sustained the biggest loss in almost three years, investors still poured into exchange-traded funds backed by the metal. About $350 mln went into the VanEck Vectors Gold Miners ETF, the third-largest daily investment this year. The fund, the biggest ETF tracking bullion producers, is forecast to boost its dividend by half to 17.4 cents a share in 2016, according to data compiled by Bloomberg.

Nice.

Will it last? We’ll see.

And what about the longer term prospects for gold, especially if the US Federal Reserve goes ahead and raises interest rates this year?

Well, who says that will happen? Sure, the market has factored in a 62.1% chance of a Fed rate rise, but there are plenty of folks who are sceptical about the Fed actually going through with it.

One of those sceptics happens to be a colleague. Jim Rickards, no less. Here’s what Jim writes in the first monthly issue of Gold Stock Trader, sent to subscribers today:

The Fed will not raise rates for the fun of it. The Fed wants to keep inflation under control, but what the organisation really wants is negative real rates. That’s where inflation is higher than nominal rates.

An environment of 2% inflation and a 1% Fed funds rate would be perfect from the Fed’s perspective. That gives you a negative 1% real rate (1 – 2 = -1), which is supposed to stimulate investment and spending. It does the Fed no good to raise rates unless inflation is going up even faster. Yet that’s exactly when gold does its job of preserving wealth.

The other problem with market logic is that it will take more than a “hint” of inflation to get the Fed to move. The Fed wants to see higher inflation on a sustained basis, not just from one report. The Fed also want to ensure that it doesn’t kill inflation as soon as it appears.

The return of disinflation – for example, through a stronger US dollar – would be just what it takes to put the Fed on hold again or maybe even cut rates. This counsel of patient observation is what Lael Brainard has been saying. She seems to be the most thoughtful voice in the Fed right now. Janet Yellen is listening.

Finally, we’re in political season. Janet Yellen does not want to be known 100 years from now as the person who helped elect Donald Trump. That’s exactly what might happen if the Fed raises rates prematurely and sends the stock market down 10% or more right before the election. That’s how the stock market reacted right after the last rate increase.

My take is that the Fed is nowhere near a rate rise. When markets wake up to this, they will reprice bonds, stocks and gold according to the “new” reality.

That will be news to markets, but not us. We, obviously, see it coming. When that happens, gold should resume its march to higher price levels, which it began almost a year ago.

In our view, the talk of a US rate rise is simply following the same pattern as before — convincing the market that a rate rise is imminent, and then backing down when the numbers show the economy isn’t as strong as they thought.

Don’t let the numbers fool you

Also, remember to not let statistical or economic releases fool you into think a rate rise is a certainty.

Economic releases (such as manufacturing activity or service sector activity) are backward looking. That means the data only tells you how businesses and consumers were behaving during the previous weeks, months, or quarter.

They don’t necessarily give you a good indication about what businesses and consumers will do in the future.

Yes, the market may today have factored in a December rate rise, but as recently as July, the chances of a December rate rise were only 7.9%. Is it possible that consumers and businesses may have committed to spending and investing in August and even September, because they thought interest rates would stay low?

It’s possible.

It could explain why the September US Services index climbed to 52.3 from 51.9 in the month prior.

But now that talk is of a rate rise being a near certainty, what impact will that have on spending and investment decisions?

Our bet is that it will have a major impact, to such an extent that the data the Fed watches so closely in order to make its rate decisions will force it to change course.

Like Jim, we don’t see interest rates rising at all this year.

Don’t worry about gold

We’re not convinced that an interest rate rise would be bad news for gold. As we showed you yesterday, based on the past 26 years of data, gold and interest rates aren’t always inversely correlated.

But regardless of what happens to the gold price, we still believe that the recent sell-off has created a great opportunity to buy gold stocks at a beaten-down price.

Our mystery gold stock picker agrees. He should know. He’s selected three of what he says are among the best speculative gold mining stocks trading on the ASX.

For details, go here.

It’s all PR

There’s no doubt he’s a genius. We’re referring to Elon Musk, founder and chairman of Tesla Motors Inc [NASDAQ:TSLA].

Tesla is the world’s biggest electric car company.

Musk and Tesla managed to do for electric cars what nobody before had — make electric cars that look good.

But that’s not all. Musk and Tesla have become a PR machine.

In the past, whenever the Tesla share price was on the ropes, Musk and the company would make a grand announcement. They did that earlier this year.

When the stock price tanked from US$240 to below US$150 between December 2015 and February 2016, the company did what it does best — announce it would double production.

In the months that followed, the share price soared to more than US$260 per share.

Since then, the share price has stagnated again. The company has increased production this year, churning out just over 25,000 vehicles during the last quarter. For the year, Tesla will be lucky if it produces 90,000 cars.

As a point of comparison, German carmaker, BMW produced 2.17 mln vehicles in 2014.

Yet, despite the big difference in production numbers, (not to mention that Tesla is a perennial loss maker, while Bayerische Moteren Werke AG [ETR:BMW] makes good profits) Tesla’s market cap is only half BMW’s.

But, with a moribund share price, and a company that posted a loss of US$888 mln in 2015, it was time for the PR machine to whir into action again.

What would the distraction be this time? Bloomberg reported last week:

Billionaire founder of Tesla and SpaceX Elon Musk has unveiled a plan to colonise Mars and make humans a “multiplanetary species”.

Enough said. If we were a Tesla shareholder, we may be inclined to ask Mr Musk to concentrate on finding a way to make Tesla a profitable company, rather than thinking about colonising Mars.

It’s only a small request. And (we think) not too much to ask.

No stamina for it

The Tesla story came to mind as we saw the latest developments at Twitter Inc [NASDAQ:TWTR]. We’ve tried getting the hang of Twitter, with little success.

Once or twice your editor has ‘hijacked’ the Money Morning Twitter account to offer our [cough] well-considered thoughts on issues of the day.

But, while we’re enthusiastic about it to begin with, we can’t sustain it. Without a day, or even a few hours, we’ve had enough.

Besides, as far as we can see, Twitter’s only real importance is for tabloid newspapers and trashy media outlets. Barely a day passes without an actor or sportsman saying something dumb and getting themselves in trouble.

As for it being an advertising medium, we’ve tried that too. With little or no success. Based on Twitter’s history of financial results, we’ll guess that many other businesses have come to the same conclusion.

Twitter’s revenue has quadrupled over the past four years, from US$664.9 mln to US$2.5 billion. Unfortunately, the company doesn’t appear to be any nearer to making a profit.

Losses for 2015 totalled US$521 mln. And what’s more, if the company was hoping for a cashed-up buyer to take it over, that doesn’t look too promising either.

As Bloomberg reported this morning:

Twitter Inc. fell as much as 11 percent in extended trading following a report that Alphabet Inc.’s Google isn’t interested in buying the social-networking service.

The Twitter stock price traded as high as US$73 after listing in 2013. Today, it traded for less than US$23 in after-hours trading.

If Twitter continues to turn south, it won’t be the first (or last) flash-in-the-pan social stock. You may remember Groupon Inc [NASDAQ:GRPN]. It too soared after its initial listing, topping out above US$26 in 2011.

Today, it trades for US$5.31, after falling below US$3 this year. And while Groupon did eke out a small US$20.7 mln profit in 2015, the past 12 months haven’t been so kind.

Based on the latest numbers, Groupon investors can expect a loss this year of somewhere around US$150 mln.

To us, that doesn’t seem like the kind of company you want to invest in anytime soon.

Cheers,
Kris