This is too unpredictable to predict…

  • Plan for a November surprise
  • No Brexit
  • Better than gold?

For most of the past eight years, analysts, commentators and experts have spent a great deal of their time looking for the next ‘Black Swan’ event.

If you’re not familiar with the term, a ‘Black Swan’ event is an unpredictable event, which happens without warning.

By definition, then, because a ‘Black Swan’ event is unpredictable, you can’t predict it. That hasn’t stopped folks trying to do so, though.

However, just because a ‘Black Swan’ event is unpredictable, it doesn’t mean you shouldn’t try to predict rare and uncommon events.

We argue that even if your predictions are wrong or poorly timed, the fact that you’re looking for rare events means that you should be prepared for adverse conditions.

Of course, we deal mainly with matters concerning financial markets. But the same applies in life in general.

Getting run over by a bus is a rare event. It may not be so rare if folks didn’t look before they crossed the road.

This is an important point. It can be argued that looking for a rare event may in fact help prevent a rare event from happening.

You look before crossing the road — therefore you don’t step in front of the bus.

You recognise stock prices are high — therefore you don’t buy them, perpetuating an existing stock market boom.

When you stop looking before you cross, and when you stop recognising that stock prices are high…that’s when trouble strikes.

With all that said — even though we’ve said that ‘Black Swan’ events are unpredictable — do you think that’s going to stop us predicting an event that few (if any) appear to be expecting?

No. Details below…


Overnight, the Dow Jones Industrial Average fell 28.97 points, or 0.16%.

The S&P 500 fell 9.28 points, or 0.44%.

In Europe, the Euro Stoxx 50 index closed down 6.68 points, for a 0.22% fall. Meanwhile, the FTSE 100 fell 0.8%, and Germany’s DAX index fell 0.43%.

In Asian markets, Japan’s Nikkei 225 index is down 245.9 points, or 1.44%. China’s CSI 300 is down 0.03%.

In Australia, the S&P/ASX 200 is down 41.35 points, or 0.79%.

On the commodities markets, West Texas Intermediate crude oil is trading for US$44.76 per barrel. Brent crude is US$46.46 per barrel.

Gold is US$1,299.38 (AU$1,692.20) per troy ounce. Silver is US$18.25 (AU$23.77) per troy ounce.

The Aussie dollar is worth 76.8 US cents.

Plan for a November surprise

Allow us to take a step back.

For years, some commentators and analysts have claimed that the US dollar is broken.

They’ve claimed that it will collapse and herald the end of the fiat (paper money) experiment.

One day, that will likely be true. After all, paper currencies have a poor history of survival. Their mortality ‘at birth’ is no more than 50 or so years.

The US dollar, in its current form, is nearing its 50th birthday. If it gets that far, it may not be a cause for celebration.

In spite of the doom and gloom over the US dollar’s future (and its fortunes), it has survived. So far.

In 2008, when the world’s financial markets collapsed — an event triggered by a financial crisis in the US — where did the money flow?

Did it flow out of the US and into safer, foreign hands? Did investors deal a deathblow to the US dollar, US government bonds, and US stocks?

Did they vow to never buy another US denominated asset ever again?

They may have vowed to, but, if so, they soon dropped that vow. Because, as the world’s financial markets collapsed, the darnedest thing happened.

Investors didn’t abandon the US dollar. They didn’t crush it into the ground, or exchange it for a ‘safer’ foreign currency. And they didn’t abandon US government debt, which was already at an astronomical high of US$13 trillion.

Investors did the opposite.

Looking at the collapse of Bear Stearns, Lehman Brothers, AIG, General Motors, Washington Mutual, and Merrill Lynch — all iconic American brands — investors flocked to the US dollar and US government bonds in their droves.

What, as they say, was the deal with that?

In hindsight, it wasn’t such an odd reaction. After all, what were the alternatives? The US is the biggest capital market in the world. Most of the world’s biggest financial companies are American.

In order for there to be a run on the US dollar, those big financial companies would have to be satisfied that their capital was safer elsewhere.

But where?

There wasn’t much choice. Banks had gone bust in the UK, so the British pound was out. Even in Germany, which hadn’t sustained a housing bubble, its banking sector was in trouble — mainly because it had invested in high-growth American assets, rather than low-growth German assets.

China? No.

Japan? That could have been an option. But given that Japan was nearly 20 years into its own money-printing experiment, it was hardly a natural choice.

The only option was to stay in US dollars, and buy US government bonds.

The result was a soaring US dollar, and what were at the time record low yields on bonds.

The dollar did, excuse the cliché, live to see another day.

But now, we have one word for you: Trump.

Next week, Americans vote for a new president. It will be either Donald J Trump or Hillary R Clinton.

The markets seem to believe (rightly or wrongly) that Clinton is the safer pair of hands. As Clinton moved ahead in the polls, the markets rose. As Trump regained ground, the markets fell.

By markets, I don’t just mean the stock market. That’s where most people focus their attention. But the more interesting play is in the currency and bond markets.

In 2008, when fear really started to feed into the market, bond yields were volatile, but yields fell as investors ditched risky stocks and cash, piling into government bonds. You can see this highlighted on the left of the chart below:

chart image

Source: Bloomberg
Click to enlarge

But now check out the highlighted section on the right-hand-side of the chart. Bond yields are rising, which means bond prices are falling.

In other words, the demand for US government bonds is waning, at precisely the same time that Trump’s chances of becoming president are improving.

Granted, bond yields have been trending higher since the middle of this year. But even though the ‘risk’ of a Trump presidency has increased, so far, there doesn’t appear to be an increased demand for perceived safety.

It’s a similar story if we look at the US dollar against the euro. Instead of the US dollar gaining with the perception of greater market risk, the US dollar has fallen:

chart image

Source: Bloomberg
Click to enlarge

The peak in the one-month chart above is around 24 October. Remember that Trump’s opinion poll ratings were already improving prior to the FBI’s ‘October Surprise’.

Now, it’s a fair comment to say that this could be a short-term move, where investors are simply selling some US dollars as an insurance policy, and that if things turn out really badly, they’ll flood back into the ‘safety’ of US dollars.

That’s possible. Further, we’re not saying that a Donald Trump win next week is the equivalent of the 2008 financial meltdown.

But we are saying that if Trump wins, it will potentially be a traumatic event for the markets. Global strategist Jim Rickards told us last week that stocks could fall 10% on news of a Trump win.

Looking at the way the markets have reacted to Trump’s rise in the polls, a 10% drop doesn’t seem unrealistic at all.

The difference between today and 2008 is that markets just don’t know how Trump will react. In 2008, there was an ‘insider’ in the White House. There was no way George W Bust would let the markets completely collapse.

The markets also had an entrenched ‘insider’ in Dr Ben Bernanke, over at the US Federal Reserve.

There was no way Bernanke would let financial markets completely collapse, either.

But with Donald J Trump, do the markets really know what, or whom, they’ll have in the White House?

As for the Fed, and current chair Janet Yellen, Trump has already openly said that he doesn’t think much of what she has done.

Trump may not be able to fire her before her term ends, but he could make things uncomfortable. Doubtless, given the love affair that the markets currently have with the Fed, that wouldn’t be the kind of stoush they would like.

So, out of all that, what do we make of it?

We see a big possibility of a ‘November Surprise’ hitting the markets next week. The surprise being the election of Donald Trump as US president.

If that happens, we expect to see a triple drop: falling stocks, falling bonds (rising yields), and a falling US dollar.

In that case, we figure there’s only one place that the smart money will go. You’ve guessed it — gold.

Don’t take your eye off the market. As Donald Trump may say, this is going to be huge.

No Brexit

Read this from today’s Financial Times:

Theresa May’s Brexit plans were thrown into turmoil on Thursday, after she suffered a High Court defeat that could trigger months of parliamentary warfare at Westminster over the terms of Britain’s departure from the EU.

Ah, this was no surprise to us, nor to you, we’d wager. On 22 February this year, your editor wrote this in Port Phillip Insider:

The press has been full of stories over the weekend about the UK referendum.

However, they all seem to have overlooked an important point.

The result of the referendum isn’t so much about whether the British will vote to leave the EU; more to the point, it’s whether the EU, the British political establishment, and the cabal of bankers will allow Britain to leave if it votes to do so.

In subsequent issues of Port Phillip Insider, we explained how, constitutionally, the Brexit referendum wasn’t binding. In the UK, referenda are merely advisory.

The MPs and courts can take the advice from the voters, and, it seems, duly ignore it…

No wonder Trump is doing so well in the polls.

Better than gold?

If we’re right about the direction of the gold price, this strategy could provide even bigger returns than just investing in gold.

For details, go here.