Get ready…here it comes

Thursday, 15 February 2018
Melbourne, Australia
By Bernd Struben

  • Stick with the leaders
  • Speaking of stellar opportunities…

This year the shortfall of inflation from 2%…is more of a mystery. I will not say that the committee clearly understands what the causes of that are.’

Former US Fed Chairwoman, Janet Yellen, September 2017

It’s not often you hear a central banker admit they’re stumped. Especially not the head of the world’s most influential central bank…the US Federal Reserve.

But in September last year, that’s just what Janet Yellen did.

After almost a decade of near-zero interest rates and US$4.5 trillion of government bond buying, inflation remained elusive. And she had no idea why.

The graph below shows the federal funds rate going back to 1954.



chart image

Source: MacroTrends
Click to enlarge

You can see that the lengthy run of near-zero rates instituted at the end of 2008 is unprecedented.

Low rates were intended to help pull the US economy out of the hole left by the GFC. And alongside a lot of government bond buying, that largely worked…eventually.

The idea was that the record low rates would also stoke inflation. That part didn’t work so well. Which is what had Yellen scratching her head.

Like the Reserve Bank of Australia (RBA), the US Fed has a 2–3% inflation target.

You’ll hear numerous reasons cited to support this ‘ideal’ level of inflation. Among them, we’re told, if inflation were zero, businesses would be less likely to invest. And consumers might not be motivated to run out and spend the money in their pockets.

Or if it were -1% — the dreaded deflation — we wouldn’t buy any nonessentials at all. Instead we’d happily wait a year until our dollar was worth $1.01 before replacing that wonky toaster.

That’s all nonsense, of course.

The real reason governments around the world want to slowly erode the value of money is all about debt. Huge mountains of debt.

According to the US Debt Clock, the US national debt stands at US$26 trillion. In Australia, total government debt — state and federal — is $774 billion.

Inflation serves to quietly nibble away at the real amount owed. And 2–3% is low enough that it won’t cause too much angst about the diminishing value of your cash on a year-to-year basis.

Yet over time, it’s a far different picture.

With 3% annual inflation, the real value of money, and government debt, is cut in half every 24 years. That’s the power of compounding interest at work for you. Albeit in reverse.

It’s a neat trick. If you can engineer it. And more importantly, control it.

The question investors should be concerned about is, can they control it?

From The Australian Financial Review (AFR):

Rising inflation expectations are underpinned by a robust US economy and unemployment that is at a 17-year low of 4.1 per cent.

Economic data watchers are raising concerns that loose fiscal policy in Washington, via $US1.5 trillion in tax cuts over a decade and a two-year $US320 billion budget spending deal last week, could overheat an economy running at close to capacity…

Wells Fargo economist Sarah House noted that over the last three months, core CPI had increased at a 2.9 percent annualised rate, “suggesting the year-over-year rates will be picking up in the coming months”.

“Reflation is upon us,” she said.’

Let’s just hope it’s not ‘hyper-reflation’.

I’m not trying to be alarmist here. But only a few months ago the (then) head of the US Fed was baffled by the Reserve Bank’s inability to stoke inflation. Now, as the AFR notes:

Headline CPI jumped 0.5 per cent for the month of January. The price figures were higher than consensus forecasts by Wall Street economists, who had expected a temporary dip in inflation.’

The Fed wasn’t able to create inflation over the course of years of near-zero interest rates. Now that it shows signs of picking up speed, will they be able to contain it? And if so, at what cost?

I’ll let you ponder that as we look to the markets, where investors have broadly dismissed these concerns. At least for now.

Markets

Overnight, the Dow Jones Industrial Average closed up 253.04 points, or 1.03%.

The S&P 500 gained 35.69 points, or 1.34%.

In Europe, the Euro Stoxx 50 index finished up 28.90 points, or 0.87%. Meanwhile, the FTSE 100 gained 0.64%, and Germany’s DAX rose 142.66 points, or 1.17%.

In Asian markets, Japan’s Nikkei 225 is up 341.02 points, or 1.61%. China’s CSI 300 is up 0.80%.

In Australia, the S&P/ASX 200 is up 67.46 points, or 1.15%.

On the commodities markets, West Texas Intermediate crude oil is US$60.80 per barrel. Brent crude is US$64.36 per barrel.

Gold is trading for US$1,352.37 (AU$1,707.75) per troy ounce. Silver is US$16.88 (AU$21.32) per troy ounce.

One bitcoin is worth US$9,648.82. Will it crack US$10,000? Get the inside scoop here.

The Aussie dollar is worth 79.19 US cents.

Stick with the leaders

Following the latest economic data from the US, the 10-year Treasury yield topped 2.9%, its highest rate in four years. As the US dollar slipped, gold rallied.

I surveyed Port Phillip Publishing’s editors on their outlook for gold. Most are optimistic on the yellow metal’s outlook. And as gold rises, the best gold stocks should rocket.

Over at Money Morning Trader, charting guru Terence Duffy has been writing about gold — and gold stocks — all week.

As you may know, Money Morning Trader is a daily advisory service with a focus on technical analysis. Every day Terence looks for stocks about to break higher, so you can get on board for the run up.

(Find out more here.)

Below is an edited extract of what he wrote to subscribers earlier today:

There are leaders and laggards in the Australian gold sector.

Among the leaders is St Barbara Ltd [ASX:SBM]. The company’s assets include the Leonora operations in Western Australia and the Simberi operation in Papua New Guinea. It has extensive land holdings and tenements near existing operations for further exploration.

Here’s the weekly chart for SBM:



chart image

Source: Optuma
Click to enlarge

The stock has outperformed the gold price. The higher low in December 2016 came in at much higher levels than earlier lows. Since then, the share price has more than doubled, outpacing the percentage move in gold prices by a factor of more than five to one.

After a slight break above the high in July 2016, SBM has been consolidating in a relatively tight price range. It’s showing strength by holding up in the face of recent volatility in the broader market.’

Terence went on to profile three of the other leaders in the Aussie gold sector. Then he turned his attention to some of the laggards:

Some of the stocks in the Australian gold sector are not performing quite as well. One of the laggards is Newcrest Mining Ltd [ASX:NCM]. It’s one of the world’s largest gold producers and operates mines in four countries.

Here’s the weekly chart for NCM over the same period as our earlier studies:



chart image

Source: Optuma
Click to enlarge

Support has been coming in at higher levels via a series of higher lows, but NCM is currently a fair distance below the high in July 2016. There has also been a series of lower highs. This shows relative weakness…

Having found a strong sector, I prefer to stick with the leaders.’

Jason Stevenson, the editor of Gold & Commodities Stock Trader, is more bullish on gold than he’s been in years.

He’s currently taking a few days off to visit Tasmania. But he’s spent the past few weeks busily unearthing the next batch of commodity superstars. I’ll share his take on gold with you next week. And when he’s ready to release his next round of recommendations in the sector, you’ll be the first to know.

In the meantime, if you haven’t checked out Terence’s work over the Money Morning Trader, you can do so here.

Speaking of stellar opportunities…

One of the perks of my job is that I get to peak behind the curtains.

Today I had a peak at the brand new report Sam Volkering has been working on for his premium service, Revolutionary Tech Investor.

And it’s a cracker!

Sam not only writes about the world of breaking technology — and the stocks leading the way — he lives and breathes in that world.

In his new report he details the ongoing multi-billion-dollar race in Silicon Valley to solve what he calls the ‘Black Box’ equation. Some of the Valley’s tech giants could be within months of solving this equation. And when they do it could literally change the world we live in.

I can’t give you any more details today. You’ll find all that in Sam’s new report. In it, he’ll explain precisely why the Black Box equation is so important. And he profiles three stocks that could see 10-bagger gains when that equation is solved.

Stay tuned for all of that — and more — early next week.

And lastly, this, from The Australian Tribune:

Religious Schools Fight for Right to Discriminate

The legalisation of same-sex marriage has brought the discriminatory policies of faith-based schools into the spotlight.

Christian schools are happy enough to take taxpayer money to pay their staff’s salaries and fund their buildings. And they do not care a whit whether those taxpayers are gay…or Jewish.

No worries. They’ll take anyone’s tax money.

But when it comes to the staff they’ll hire with that money, they do care…a lot…

If you’re fed up with sanitised, politically correct dogma cut and pasted from one mainstream source to another then The Australian Tribune is for you.

Sign up here to get The Australian Tribune delivered free to your inbox five days per week.

You can visit our website at https://www.theaustraliantribune.com.au/ to read the complete article above now.

Cheers,
Bernd