It should come as no surprise that gold and its sibling, silver, have been pulling back recently. I have written several articles recently that built the case that for gold to move up two things need to happen. The stock market has to fall and the dollar has to fall. For a while, they both did, in unison, and gold and silver moved up nicely. But recently both the stock market and the dollar have been “goosed” up a bit and the result is some profit taking and a pull back for our favorite precious metals. Should we be concerned? I would say yes, IF things have fundamentally changed, but they have NOT. If the stock market’s strength is based primarily on a new trade deal with China, whose economy is a basket case, I expect this will fall apart. If you combine our slowing economy with the problems China is facing, there will be little to support further stock market growth. My feelings that the stock market and the dollar will turn down shortly remain intact. And when that happens, gold and silver will get back on track. You can pick them up now, at a discount, or not. Your call.
Kyle Bass, founder of Hayman Capital Management, recently spoke with Real Vision to reiterate his concerns about the Chinese economy.
Kyle Bass on China’s dwindling FX reserves:
“We think the number is closer to $2 trillion, instead of $3.2 trillion, which is dangerously below adequate levels. The broad measure of credit in China’s financial system is $48 trillion worth of RMB (Chinese Yuan). They only have $2 trillion of reserves… In their last banking crisis, which was between 1998 and 2002, the loss given defaults were 80% of loans that defaulted and at one point in time… 35% of their entire system was non-paying.”
“What brings this to a head is the current account. When the current account goes negative and the reserve balance is going the other way (going negative), the rubber meets the road there. As long as that balance is increasing annual along with GDP in RMB terms, they can keep going… Now their fiscal balance is… -9.5%. Their current account balance goes negative, and its a secular negativity, then they have more money leaving then coming in and they have to desperately borrow and now they’re changing their laws. They’re saying ‘You know what? Now Westerners can own more than half of our banks. Not a problem…’ Without Western capital flowing into China, China can’t hold this all together… (Chinese President Xi) has made the West think somehow his economic model is superior to that of Western capitalism and it’s all a facade. The whole thing is a mirage. The whole thing is made up with a printing press, keeping a closed capital account, and hoping the world doesn’t notice it…”
This 10:11 minute video clip is a short excerpt from a Real Vision interview. I found it interesting — and although Kyle is 100 percent correct in what he says, he is talking his book, as he’s massively short their equity market, the yuan, or both. It was posted on the soundingline.com Internet site on Monday — and I thank Brad Robertson for sending it along. Another link to it is here.
And then this…
Back in 2017, we explained why the “fate of the world economy is in the hands of China’s housing bubble.” The answer was simple: for the Chinese population, and growing middle class, to keep spending vibrant and borrowing elevated, it had to feel comfortable and confident that its wealth would keep rising. However, unlike the U.S. where the stock market is the ultimate barometer of the confidence boosting “wealth effect”, in China it has always been about housing as three quarters of Chinese household assets are parked in real estate, compared to only 28% in the U.S., with the remainder invested in financial assets.
“Property accounts for roughly 70 per cent of urban Chinese families’ total assets – a home is both wealth and status. People don’t want prices to increase too fast, but they don’t want them to fall too quickly either,” said Shao Yu, chief economist at Oriental Securities. “People are so used to rising prices that it never occurred to them that they can fall too. We shouldn’t add to this illusion,” Shao added, echoing Ben Bernanke circa 2005.
The bottom line is that just like true price discovery for U.S. capital markets is prohibited (and sees Fed intervention any time there is an even modest, 10-20% drop in asset prices) or else the risk of an all out panic is all too real, in China true price discovery is also not permitted, however when it comes to the country’s all important, and wealth effect boosting, real estate.
Which is a problem, because whereas China suddenly appears to be suffering from all the conventional signs of deflation in the auto retail sector, where as we noted previously, neither lower prices nor easier loans have managed to put a dent the ongoing demand plunge…
… the same ominous price cuts – which are clearly meant to boost flagging demand — are starting to emerge in China’s housing sector.
Case in point, according to China’s Paper, Hui Ka Yan, the Chairman of Evergrande, China’s biggest property developer, and China’s second richest person announced it must ramp up home sales and to do that it would sell all its properties at a 10% discount after its home sales tumbled in January amid a cooling market.
Now that Evergrande is rushing to slash prices, it appears that runaway home prices are no longer a concern for Beijing, and in fact, a far greater concern is how Beijing may intervene to prevent what could soon be a price plunge spiral; many have already speculated that Beijing will have no choice but to bar Evergrande’s sales. If it doesn’t, or if homeowners have already figured out that their home prices are floating in the sky on a bubbly foundation that has now burst, the knock on effect could be devastating as instead of an asset, China’s most popular and aspirational “wealth effect” product could turn into a liability overnight.
If that happens, no amount of intervention by Beijing could stop the avalanche of selling that would ensue, not to mention the deflationary shock wave that a hard landing – i.e. crash – in China’s housing market would launch across the entire world…
No surprises here. This long but worthwhile chart-filled news story was posted on the Zero Hedge website at 6:56 p.m. EST yesterday evening — and another link to it is here. Another ZH article about China showed up on their website at 10:35 p.m. last night — and it’s headlined “Deflationary Red Alert: Chinese Car Dealers Are Slashing Prices, and It’s Not Helping“.
China’s auto industry remains in collapse but what is even more concerning is that new incentives and lower rates are failing to bring rural buyers into showrooms.
As usual, Ed Steer sheds light on the daily manipulation of all the market.
It was the second day in a row where the powers-that-be were very active in the Dow — and the precious metals. The Dow was turned higher around 1:10 p.m. EST — and the precious metals ran into more of Ted’s “night moves” in the thinly-traded afternoon trading session in the Far East. It was all down hill for them from there going into the afternoon gold fix in London…with the exception being palladium, where it ran into ‘something’ a few minutes before noon in New York.
Quoting Bill King from his King Report for today…”stocks tanked on Monday despite the WSJ story that many operators believe was another leak from Team Mnuchin. Perhaps, enough is enough with the U.S.-China trade deal hope and hype stories. They not only appear regularly, but seem to be released quite often on Sunday night near the time when the equity futures begin trading. Please note that over the past few weeks, when stocks are down sharply in the morning, someone appeared at midday or the early afternoon and forced ESHs higher.”
And as reader Mark Barooshian said in an e-mail to me yesterday…”Is this orchestrated sell-off over in the metals?… Why is it always baby steps up — and freight train on the way down?” The answer to the first question is…I don’t know, nor does anyone else. The answer to the second is that it’s what ‘da boyz’ do to maximize their profits…trapping as many Managed Money longs on the losing side as possible.
“There are no markets anymore…only interventions.”
And here are reasons why I believe the recent dollar strength is about to come to an end. A little political pressure goes a long way.
President Donald Trump said Saturday that the U.S. dollar is too strong and took a swipe at Federal Reserve Chairman Jerome Powell as someone who “likes raising interest rates.”
The dollar was quoted lower against the euro and the yen in early Asia-Pacific trading hours on Monday after Trump’s comments.
The U.S. economy is doing well despite the actions of the central bank, Trump said during a wide-ranging speech at the Conservative Political Action Conference in National Harbor, Maryland.
“I want a strong dollar but I want a dollar that does great for our country, not a dollar that’s so strong that it makes it prohibitive for us to do business with other nations and take their business,” Trump said Saturday.
He didn’t mention Powell by name, but referenced “a gentleman that likes raising interest rates in the Fed, we have a gentleman that loves quantitative tightening in the Fed, we have a gentleman that likes a very strong dollar in the Fed.”
This Bloomberg story was posted on their Internet site on Saturday morning Pacific Standard Time — and updated about twenty-six hours later. I found it embedded in a GATA dispatch — and another link to it is here.
And this too… Dollar death by a thousand cuts.
BRICS Is Creating A Common Payment System
The BRICS states (Brazil, Russia, India, China and South Africa) are working on a common payment system BRICS Pay.
The Russian Direct Investment Fund, which coordinates Moscow’s working group on financial services of the BRICS Business Council, has shared the news with Izvestia.
A probable outcome of the project is creation of an online wallet that would combine the payment systems of all BRICS members.
The common wallet will work in the same way as the existing payment services such as Apple Pay or Samsung Pay. A cloud platform created specifically for this project will connect the national payment systems of BRICS countries.
Payment itself is expected to be made via a mobile application regardless of the national currency of the buyer. Countries without membership in BRICS will also be able to use the platform. The pilot project kicks off in South Africa in early April.
This year is the first time in more than 50 years that Susan and I didn’t leave Minneapolis for at least a week or two over the winter. Our 15-year old dog can no longer travel, does not do well when left at a kennel and is way too much of a handful for our kids to manage. We feel a deep responsibility to her and it has marooned us in this unbelievable winter of snow and cold. February logged the most snow on record. Ever! We got over three feet in 28 days. And we are supposed to get more snow starting at the end of this week – five days in a row is possible. Our handyman is coming by tomorrow to shovel snow off of our flat roof. It is nearly two feet high now, before the new snow arrives. In addition to all that snow, it was accompanied by record cold, and countless days below zero. We can survive it, but what happens is that it forces you stay indoors most of the time.
I have to keep reminding myself that warmer weather is just around the corner – and so are higher prices for gold and silver. One really needs to take a longer view of both the weather and precious metals in order to survive the nasties that both can offer up.
I would like to believe that this recent pullback in gold and silver is the final “managed correction” before the big takeoff. The fundamentals that were so kind to the metals have not changed. As usual, it’s the buying and selling of future contracts by the big banks and hedge funds on Comex that move the markets in the short-term. If nothing fundamental has changed, then, like the lousy February in Minneapolis, things will soon get back to normal.
All of this harsh weather got me to thinking. How did the Indians endure Minnesota’s extreme weather? According to a recent article I read, meteorological studies suggest that from 1600 to 1850 the climate generally was colder and wetter than now. How did the half a dozen tribes that populated this area survive? They lived in houses made out of birch bark, which never molds. They would build a pit in the middle of the floor with rocks buried underneath the floor. When the rocks were heated, it would radiate the warmth throughout the house.
There were variations of houses on the reservations. The typical lodge style dwelling would be constructed with trees natural to their regions. Sharpened logs were thrust into the ground and then bent and tied similar to an upside-down basket. The framework was covered with bark, and animal skins were used to cover the door and chimney hole.
Pole wigwams in the form of teepees were also constructed. People greased themselves in oil and animal fat to protect against the sun and cold.
Native people also prepared for harsh storms by forecasting them. My wife uses the six o’clock weather report on Fox News. But for the Indians, if the wind brought clouds from the north, it meant a blizzard. Woodpeckers sharing a tree or nest meant a harsh winter was coming.
I have trouble surviving a 100-yard trek up our driveway every morning to get the paper – even dressed to the hilt in a winter parka and boots and gloves. It’s the mental part of surviving the winter that is the most difficult, just like it’s the mental part of surviving the constant take down of gold and silver. One begins to wonder, will it ever end? Yes, sunny days and warm weather will be here in a month and the gold and silver prices will rebound shortly as well. But when you are freezing your ass off, or wake up to see that gold is down $20 it is depressing.
As it so happens, I will have some extra money coming my way in a week. Like you, I ask myself, what should I do with it? That is a question that has different answers, depending on one’s age, finances and portfolio. In my case, I know this much – even though I have a large precious metals portfolio, I would still rather add to it, especially after a pull back like this one, than put it into a stretched-to-the-hilt stock market. Cash is good, but how much can you keep in cash? I think I’ll do the silver, gold and cash thing. I’ll spread it around a bit.
The five years Susan and I spent in Miami in the winter was great, at least weather wise, and I fully expect to bask in the sun of a precious metals bull market soon too. Everything cycles and the metals up-cycle is close at hand. All it will take is a dollar pullback and/or a stock market plunge, and I expect that both are coming. I wish it were here now – that would make this uncommonly harsh winter much easier to take.
My car in front of a snowdrift!