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The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

To QE Infinity & Beyond!
March 25, 2020

“Guess what the Fed is doing? They’re buying it all. Does that support what we have said all along, that the Fed has peered into a financial abyss and has panicked? They are willing to support everything, including the purchase of ETFs that buy the aforementioned assets. We are talking, cumulative, 4-5 trillion dollars in these various commitments. Is that a way of them saying, ‘We’re all in’?

– David McAlvany


Kevin: David, last night when we were sitting and talking about the show we actually were reminiscing because we have some good friends who have been on this show. Ian McAvity was on the show and he talked to us about times like these coming. He didn’t get a chance to see them. Richard Russell wrote extensively through his lifetime, into his 90s, about what to expect when we come to a debt bubble collapse. And then I remember Howard Onstatt, who I used to call my free market mentor. Last May before he passed away I said, “Howard, do you have any words of wisdom?” He said, “Yes, the cycle prevails.” Well, surely, we are seeing that the cycle prevails, Dave.

David: So if the cycle prevails, it shouldn’t come as a surprise that not only have we seen a massive increase in the value of stocks and bonds and real estate in recent years, but here, frankly, the only thing surprising about it is how fast it has happened – 22-27 trillion dollars in global market value lost in a very short period of time, three to four weeks. The cycle does prevail.

As we have said, there is more than meets the eye. Certainly we have the challenges of Covid-19, but we’re afraid that the Fed is trying to use the same tools that they did from the last crisis, when in fact, if you wanted to look at it from the standpoint of public health infrastructure and a slowdown of the economy, because of what is happening with Covid-19, then I would suggest to you that the medicine that they are doling out is not exactly suitable to the issue, itself. This is a different kind of shock altogether. On the other hand, as we have pointed out, C-253 may, in fact, be the bigger issue. A burst bubble requires extreme measures, and when you look at the crisis from the standpoint of Credit-253 and the global credit pandemic, then perhaps their playbook makes a little bit more sense.

This week we have a rebound in equities. It begs the question. After having been through a couple of weeks of real challenge and stress and strain, do you now appreciate having risk controls applied to your portfolio? And if you’re asking, “Risk controls? What risk controls?” I think that is a conversation that you need to have with your broker or financial advisor. Do they even exist, or have you discovered yet again that it is sort of buy and hold, which is the only strategy your financial advisor understands?

What about deliberately positioning in cash? Is that something so anathema to someone who sees the world only from one perspective, and perhaps, as we suggested three to four weeks ago, this is the blindness of a particular personality – gifted, fantastic, important, but also blind to certain things, given a certain propensity to see the world a certain way. What about hedging with gold?

Kevin: Dave, this bubble is the largest bubble in world history, and actually, we were talking about the bubble coming apart starting in September, but a burst bubble really requires extreme measures, and we are seeing that. I’m wondering, like I asked last night, is this an Argentinian response, a Venezuelan response, and Zimbabwean response? What happens to our currency? This C-253, if you’re going to try to keep that bubble blown up, you’re going to ruin the currency in the process.

David: And that’s what our friend, Bill King, has suggested. If you want to call it Weimar light, referring to the sort of mild inflation of the 1919-1924 period in Germany. But you’re right, a bubble of this nature requires extreme measures. We do have that in place. It is because what you have in motion threatens the foundations of modern finance. We mentioned this last week because it is the slowing of economic growth which reveals how vulnerable asset prices are.

When the total debt in the system eclipses the global economy by 322%, central banks have to respond. The reality of the Fed providing everything and the kitchen sink is that you can have your growth, but you’re going to pay a price, ultimately. And this is where, connecting the dots, monetization has always held long-term implications. Today we are seeing the instantaneous credit and money creation in this fashion, and that is why, perhaps, it is appropriate to think of it as sort of Weimar light.

Kevin: The question that I have is, is monetizing assets going to deliver stability, because that is the goal right now, to change perception and to deliver stability.

David: I think there is a variety of goals. When you look at the goals of the Fed, that is one thing, and I think, certainly, price stability is what they have in mind. They would rather not see the world turned inside-out and upside-down in sort of a financial Mad Max scenario. But there are other agendas afoot, and to quote the Majority Whip, James Clyburn, he said this over the weekend: “This is a tremendous opportunity to restructure things to fit our vision.”

I read articles throughout the weekend which were all about the need for big government, and the role of big government, and the necessity of big government. And I thought, this is absolutely fascinating. The virus means the big state is back. That is a headline from one of the articles from the Economist. So yes, there is a variety of things going on. The monetary intervention, I think, is more singular in purpose, but as Rahm Emanuel used to say, “Never let a crisis go to waste.”

Kevin: Well, of course not. No, this is perfect timing to bring in big government.

David: Yes, so whether monetizing assets delivers stability and growth remains to be seen. I doubt it. But with the buyer of last resort, that is the Federal Reserve, now in the fixed income markets on a grand scale, here is what we know for sure. What little price discovery was emerging over the last 30 days in the bond market is now gone. Bonds have been telling you that the system is cracking apart.

Again, this goes way beyond C-19. The price movements of the last ten days have revealed that the system cannot bear an uncertain future, that growth has become dependent on the constant drip feed of central bank money and credit. And when the signal in the bond market gets negative, as it has become very dramatically in the bond market in recent weeks, what we see from the Fed is, “Let’s turn the volume down. Let’s mute the signal. Let’s turn that off.”

So we see gold telling you that the price of asset stability in the stock and bond markets is a cost, and you find that in monetary integrity. So I frankly could care less where gold trades, up or down, over the next two months. The die is cast. Monetary policy has gone nuclear, and Modern Monetary Theory, fiscal policy on steroids, is right around the corner. Fiscal madness should re-ignite the concerns that we have seen in the bond market over the last several weeks, even if equity investors remain ignorant.

Kevin: One of the things that we have been trying to talk to clients about, and I just got off the phone with a client right before we came in to the studio, who called and said, “So, is this my signal now to go in completely to the stock market?” Because it had come down. And I just refreshed her plan because we’ve always talked about having a plan, and I went back through the Dow-gold ratio. I think it might be worth talking, Dave, just a little bit – what is the plan right now? Do we change the plan, or do we continue to go with the Dow-gold ratio, the gold-silver ratio, the platinum-palladium ratio? Those ratios have historically never let us down.

David: Yes, and I think it is really important to have some ideas of what is next, even if you have to massage the plan and adjust mid-course. To know how you respond under certain circumstances is absolutely critical, so that you don’t get lost in the weeds.

I’ll give you an example of getting lost in the weeds. One of the things that I read this weekend was an article entitled, “What would Roosevelt Do?” And it was basically an appeal to big government and a huge jobs program. But actually, you would have to know the author, and you would have to know the basis of her ideas, which are rooted in Modern Monetary Theory. So again, we are going back to how things are packaged and sold. What is your plan, as it relates to how you invest assets?

You have to be aware of the currents of culture, and the currents in public policy because I think they have a direct bearing on things like, not only the stock and bond markets, but also what gold does as a reaction to the things that are being promoted as the most sane option in this particular environment. And I will remind you that what seems sane in a particular stressed environment would have been considered insane in any other environment. So this is, again, where I think if you can step back from the noise of the moment, if you can step back from everyone’s agenda, whether it is a jobs work program, MMT, what have you, and have a plan, I think it will serve you well.

We do like the idea of the long-term moves in the marketplace where you go from extremes of fear on the one hand, greed on the other, and you see here not a particular bias, but just an observation that human beings operate on a spectrum of emotion that includes both of these things, and if you start aggregating individual choices, what you see in the marketplace is prices that move as a result. So you have stock prices which will move higher in the context of greed, and prices move lower in the context of fear, and we’re on this emotional continuum.

So to be able to play the price movement on this emotional continuum is really critical. Thus you’re capturing advantage in the marketplace from what is normal cyclicality.

Kevin: One of the things that has been helpful to us – I mentioned a few of the names of people that we follow, but going back to the 1980s I remember reading Richard Russell. Russell carried with him experience going back into the 1950s and he wrote prolifically. But he also had a system. He had the Dow Theory system, and I loved that. So Richard Russell and some of these people who have been through multiple cycles actually are some of the better people to go back to even after death.

David: I spent years and years and years reading Russell and he was a good influence on me and he fed a lot of my curiosity. And of course, I like the idea of primary sources and secondary sources as a means of education. And so, for me, one of the keys as I’m reading someone is to know who their influences area, where those ideas came from and trace them back to the source. And so, moving from secondary to primary is very critical. That is Rhea, that’s Hamilton, that’s Dow, the original editor of the Wall Street Journal, and the creator of the indexes, the Dow-Jones Industrial and the Dow-Jones Transportation Average. That’s where he factors into the conversation.

Fast forward to today. Here is what QE, Quantitative Easing, debt monetization to infinity, looks like. Monday announced unlimited bond purchases. Not a bad start. Unlimited. It sounds a little bit like Mario Draghi just a few years ago. It doesn’t resolve the market concerns about a decline in economic activity to force change in consumer behavior. But it does support collapsing bond prices, which is really the critical issue for the Fed. Right now we have an unwind of the financial system and they have to do something. Let’s maybe back up. We have had ten of the most monumental days in financial market history, and I think we would do well to remember what has just happened to us, because it might very well be relevant to predicating what happens next in the financial markets, and how we get to implement the plan that we have in mind.

Kevin: Kevin: Then let’s go back to at least the time when the Fed cut the rates 100 basis points. It was a Sunday afternoon when that happened, and boy, everything started changing right after that.

David: If we march back ten days, March 15th, over the weekend the Fed cut rates 100 basis points to between 0 and 25 basis points, and promises, at that point, to use its balance sheet to absorb shock in the financial systems. What they implied was economic shock. But the application since then has had far more to do with the financial side of the equation – financial markets, asset price stabilization – than economic intervention. Because frankly, it is difficult to get very much bang for your buck. The Fed balance sheet doesn’t do much for economic activity.

Also announced at the same time, going back to March 15th, was the first big number. And I mean big number – 700 billion dollars of treasury and mortgage paper, mortgage-backed securities. What was fascinating, of course, was that market response was ugly. It didn’t resolve any of the market’s concerns, and so we did have it pretty ugly last week in terms of the equity markets.

Kevin: You were talking about a government bailout, actually, with treasuries. But then they had to come in a couple of days later and start actually undergirding big business.

David: Right. The Fed provided short-term funding for big business by stepping into the commercial paper market. Commercial paper is where your short-term liquidity comes for corporations. If you’re talking about paying payroll, or dealing with inventory purchases, or other short-term liabilities, commercial paper kind of keeps the gears turning within corporate America, and commercial paper needs to be available for corporations to have those immediate liquidity needs. Without it you have liquidity crisis.

So notice that the week’s pressure built through time on investment grade debt, and it accelerated. That pressure accelerated within the corporate sector to the downside from March 17th forward. And it is clear that corporations do not have enough capital for operating expenses. So again, this is back to commercial paper, the intervention on March 17th. And of course, you have to differentiate. Some companies do have sufficient capital for op-ex, operational expenses. Apple has enough cash on their balance sheet to support them for probably 5, 6, 7 years.

But there are other companies who don’t have enough capital to even deal with one week’s expenses. So this commercial paper market is really critical for corporate America to not come to a grinding halt. A key market to support, if you don’t want to see the domino effect that we did see in 2008 and 2009, where liquidity quickly turns to solvency issues, liquidity crisis to solvency crisis and bankruptcy. So last week we were swerving toward that outcome.

Kevin: You talked about 2008 and 2009. Remember the toxic debt and how you could really get any kind of cheap money thrown at you if you just gave them your junk, and they called it collateral, of course, but it was just junk.

David: Yes, the primary dealer facility was what they opened up on March 18th, and the primary dealer facility opens up loans to Wall Street securities dealers. So the Wall Street securities dealers get super cheap money, and they can bring virtually any collateral, as you say, the quality doesn’t matter. But they can bring virtually any collateral and that is accepted. So what you see happening is you dump the illiquid inventories, you reliquefy, and then you start warehousing additional inventories as stocks and bonds are liquidated.

Kevin: Another fascinating guest that we had was Richard Bookstaber. He talked about the Dodd-Frank bill and how it would affect the ability of having market-makers in the market. It basically took the impulse to go in and buy something completely away.

David: And that is the point. There has to be someone who buys stocks and bonds when you want to liquidate. Who is going to warehouse them? It is never a perfect match between an equal number of buyers and sellers. So that is the point that Bookstaber is making, that in creating solutions to the last financial crisis, many of those problems resolved by the Dodd-Frank legislation. What they drafted was also a change in the incentive structures within the market-maker universe. No one wants to inventory the products that they used to.

Wall Street is now a one-way street. Buying is always acceptable, but selling – the structure of the markets is not really designed to accommodate selling, and so that dynamic is reflected very well in the swiftness and the severity of the market decline up to this point. So no surprise there, March 18th the primary dealer facility is now to keep the possibility of liquidity open. You’re back-stopping the market-makers, or the inventory-takers, if you will.

Kevin: If you know that somebody has always got your back, that you can take any kind of risk that you want – we’ve talked about ETFs and indexes and this whole mentality of passive money management – there is just the assumption that there is going to be somebody to buy at any time.

David: And of course the ETF market is part of what has blown up in recent days. There are specific ETF products that are not matched for the underlying assets. So specifically, the underlying assets are not as liquid as the vehicle implies. Can you click a mouse and sell shares in an ETF? Yes. How easy is it to move the underlying product? And if there is no one who wants it, what happens next? That is what has been revealed over the last week or two, as well. Again, no one cares until the selling begins, and then you have structural strain which reveals itself. We’ve talked about this for 6, 12, 18 months on the program.

And of course, in high relief if you want to look at examples of where the pressure is, your high-yield bond funds, your investment-grade bond funds, HYG, LQD, J&K. Oh, they even will go so far as to call it junk. It is junk, just like the high-yield is junk. But what happens when the product blows up? Well, again, prices decline more than expected, yes. That’s a given. But then there is the policy response, and what we saw this week was, you step in, you provide price protection on the downside, and of course, the real issue going forward, in terms of having a healthy market, what you have done is, once again, just as you did in 2008-2009, you reinforce moral hazard. That’s what you do.

The implications of the credit market seizure really leave very few options for the Fed. The Fed has to step in and bail out those products and Wall Street then, in turn, stands ready knowing because of this reinforcement of moral hazard, that it is just a matter of time for investor memory to fade, and then they can get back to creating the same crappy products once again.

Kevin: Now we go to March 19th. You have taken us from the 15th to the 18th, but I think one of the illusions that we, as Americans, have is that we are trying to save the American system. When you open swap lines you’re really doing an international worldwide bailout, are you not?

David: Yes, and I think before we move on to the 19th, we also had the European Central Bank which was active. They opened a 750-billion euro purchase program also on the 18th. Then you also had the launch of the money-market mutual fund facility also on the 18th. Very fascinating, on that particular day you had gold and the dollar both moving higher, and you had LIBOR, the London Interbank Offer Rate, surging as well. So when the dollar is up, when gold is up, when LIBOR is up, it suggests to me that you have funding stress overseas and that stress is growing.

And on top of that – these are just absolutely fascinating days, to look at the interconnections for anyone who is interested in market history and market dynamics, the last ten days have been like a kid in a candy store, really. The 30-year bond over six sessions drops 10%? Then of course on the same day there on the 18th you had Trump invoking the Defense Production Act so you can start signing contracts with private contractors very quickly for medical supplies and he is moving hospital ships, 1,000 extra beds to move to New York City, HUD suspends its foreclosures and evictions until the end of April. And this stuff is happening rapid-fire, and it literally is the Fed doing everything they possibly can.

Kevin: So let’s go back to the 19th, because when you open swap lines – we saw this back during the crisis in 2008 and 2009 – we’re not just dealing with an American problem.

David: I think what we saw throughout the week was an acceleration of the trend starting the previous Thursday where things started to really deteriorate across the board in every asset class. And then we have seen an acceleration of trends since then. Thursday March 19th the Fed set up its 30-60 billion dollars in swap lines. That was with nine different central banks.

This is interesting. They had already had swap lines open with four to five other banks to begin with. But here you have an extension to nine others, and I don’t think it was any accident seeing gold go up the day before, gold and the dollar rising at the same time, LIBOR moving higher, and then opening the swap lines that night. Opening the swap lines was further confirmation of the LIBOR dollar-gold move the day before.

You mentioned Richard Russell earlier. He has often referred to this idea, when he was alive, of a synthetic dollar short built up in the debt markets via the foreign issued debt denominated in dollars. And so there is this routine demand for dollars that is necessary when it is time to make interest payments or principle payments. And so I like the Richard Russell idea of a synthetic dollar short.

Kevin: What you’re saying is, since other countries borrow in dollars, the last thing they want to see is the dollar rise. That is that synthetic short that is built in to the system. But now we are seeing the dollar and gold rise together, so there is that signal – here is your sign, let’s say.

David: Exactly. So with an absence of dollars in the marketplace, high demand for dollars in order to keep this edifice of dollar-denominated debt in motion and safe, solvent and what not, there is the necessity that we open up these swap lines. Trillions in principle and billions in interest payment are required in U.S. dollar terms to keep the flow of international credit healthy and the markets well supplied. So the Fed keeps the lines open and on this day it was open to nine central banks in Asia and South America and Europe.

This is fascinating, again, because there is an acceleration of trend here. This was a weekly initiative. The next day you have swap lines that now move from weekly to daily. Before we forget, on the 19th, last Thursday, you also had the Bank of England step in with an extra 200 billion pounds to sort of top off their bond-buying QE program, so now they are in dollar terms, at about 752-billion dollar commitment to step in and buy sterling bonds. And then we’re at March 20th. This is such a fascinating week.

Kevin: So not only had they opened up the swap lines, but there was an increase. It went from weekly to daily.

David: Right. So Friday is extra fascinating. The pace of the swap line cooperations have increased, the weekly stays in place, they are just adding a daily function to the swap lines, and then you might remember from our comments last week on the Commentary that the C-253, this credit, not corona, but credit virus 253, and the issues emerging. Where did that start? That was the repo markets in September of 2019, long before the coronavirus. So also on the 20th, March 20th, last Friday, the Fed announced its overnight lending to the financial markets (laughs) – this is almost laughable – of 1 trillion dollars daily, 500 billion twice daily. Again, this is just amazing!

Kevin: And why announce any limit, Dave, because the next day the limits went off. They just said, okay, unlimited buying. So at this point, that is Modern Monetary Theory on steroids.

David: Well, not precisely. Modern Monetary Theory is more on the fiscal side and this is monetary madness. The only thing they share in common is that one middle word. But I think when you look at Friday, not only the announcement of overnight lending to the financial markets of a trillion dollars on a daily basis, but on top of that we also saw the largest single-day monetization in history – 75 billion dollars of treasuries, 32 billion dollars of mortgage-backed securities, mortgage paper, a total of 107 billion dollars monetized. And that was before noon on Friday. The Fed is then promising, right around noon, that they will also begin monetizing highly rated municipal bonds. Wow!

Kevin: Yes, and it’s unlimited. The purchase of bonds is unlimited at this point, is it not?

David: You’re jumping forward to Monday the 23rd, because what happened on Monday – this is like the guy selling Ginsu knives or something on one of those shopping networks. “But wait! There’s more!” The biggest deals were announced on Monday the 23rd. And as you mentioned, this is the unlimited purchase of bonds. So everything is building. Unlimited purchase of bonds. We’re talking about treasuries, we’re talking about mortgage-backed securities. We’re talking about commercial mortgage debt. The problem here is it is agencies only, so there are still some people in the commercial mortgage market who are really at risk. I don’t have any sympathy for them, frankly, but (laughs) treasuries, mortgage-backed securities, commercial mortgage debt, agency only is in that category.

So you still have a few walking dead in the commercial mortgage space. Add to the list, munies. Municipal ETFs were cratering. The exchange-traded funds that invest in municipal bonds are cratering. Add to the list money-market funds. If it is fixed income, if it is credit-related, if it relates at all to C-253, guess what the Fed is doing? They are buying it. They’re buying it all. Does that support what we have said all along, that the Fed has peered into a financial abyss and is panicked? They are willing to support everything, including the purchase of ETFs that buy the aforementioned assets. We are talking, cumulative, 4-5 trillion dollars in these various commitments. Is that a way of them saying, “We’re all in”?

Kevin: So are we really just seeing, again, in a massive way this time around, the Fed really just trying to manipulate perception? It’s all psychology and perception. It has been for a decade now since the last financial crisis. Are they actually changing perception and working at changing sentiment?

David: Yes, there is a part of me that takes very seriously the lives at risk, and what is taking place with the coronavirus, but there is a part of me that wants to say this is also the convenience virus. The convenience virus that allows for us to go back to James Clyburn’s comments. “This is a tremendous opportunity to restructure things to fit our vision.”

Vision of what? What policies could potentially fit a recast vision of America? There is a part of me that says, “Yes, I see a problem in the debt markets. Yes, I see a problem in that monetary policy is not going to create a cure, but it might solve, or alleviate, ameliorate, some of the long-term impacts for small businesses and what not.” We’ll have to see.

Reuters reports you have 4 trillion dollars in liquidity for the Fed, not including the coronavirus aid bill. That may be up to $3000 per family. We’ll have to see. The details have yet to be worked out. But we have C-253, we have C-19, and it is very difficult for me to not spell this out as the convenience virus. Who gets taken care of in this context? Certainly, politicians will not miss this opportunity, but neither will some of your big Wall Street firms.

Kevin: I remember decades ago, Dave, that Franklin Funds had to start tapping other of their funds to keep their money-market at $1 a share, and it scared people. People were like, “Well, why wouldn’t they be able to stabilize it?” Goldman-Sachs had to intervene during this period of time, as well, right before the government came in and said they would do it for them.

David: I know. Again, kind of a convenience virus thing. On the basis of what is happening with C-19 and the bailout of not only mortgage-backed securities, commercial mortgage debt, but also money-market funds, Goldman-Sachs may not have to stretch quite as far as they thought they would have to. Earlier in the week, Goldman had infused a billion dollars of its own money into one of its money-market funds. And then you had Bank of New York Mellon doing the same thing, infusing 2.1 billion dollars into one of its money-market funds.

This is mind boggling to me. How is it that a money-market with liquid assets can drop below a 30% liquidity threshold? And here is the reality. Maybe the assets are not that liquid after all. You remember Warren Buffet’s phrase – we’ve said it before many times – “The tide goes out and you see who has been swimming naked.” It really is no surprise whatsoever that Goldman was taking a few extra risks in its cash-equivalent position. But is it also any surprise that we have the MMLF, the money market liquidity fund, what have you, that has announced earlier in the week? Not a surprise at all.

Kevin: Yes, you assume you have liquidity in something until you find out, dramatically, that you don’t. Doug Noland has been writing and talking about the moneyness of credit. Because credit is the new money. It is the ability to borrow and the ability to sell what you borrow to somebody else. We are finding right now that the moneyness of credit isn’t necessarily money at all.

David: (laughs) It’s also this idea that we treat assets as if they have money-like qualities, including liquidity. But not everyone has been working off of what Noland describes as the moneyness of credit. In this case, the credit doesn’t have the moneyness that everyone assumed it had. Money markets are considered same as cash by most investors and had those firms not infused capital – we’re talking about Goldman-Sachs and Bank of New York Mellon – had they not infused capital, 1 and 2.1 billion dollars respectively, into their money-market funds, they would have had to go to the SEC and check the boxes.

The SEC has already created provisions that allow for money-markets to be gated, number one. And then in times of huge redemptions where people want liquidity, you can add a 2% redemption fee. And they did not want to go there. I understand why, pretty bad credibility for Goldman-Sachs to have a failing money equivalent. But this is all happening before the Federal Reserve launched its quantitative easing to infinity inclusive of the money-market funds. But again, there is this reminder that fixed income can often trade by appointment. You think its liquid – it’s really not.

So this is what Goldman and Bank of New York Mellon were facing. Do you break the buck? Do you allow money-markets to trade below a dollar per share? Like you were saying, Kevin, this brings back memories of the reserve primary fund back in 2008. They held Lehman Brothers debt as a part of their portfolio and it meant that it wasn’t really worth much. And so as they saw an increase in liquidations and redemptions there was a drift in the value of the fund and it “broke the buck.” So this is an interesting period, is it not? The last ten days – absolutely amazing.

Kevin: Dave, when we talk about moneyness of various products, one of the reasons gold drops initially when there is a rush to liquidity is the moneyness of gold. It is so liquid that a lot of times that is the only thing a person can sell to pay their debts.

David: Right. And we had that on display multiple times in the last week to ten days, where, given margin calls, given pressure within the paper markets for gold, given the liquidity of the asset, in order to keep other bets in play you can sell off a quality asset, or liquid asset, like gold, to keep those other bets in play. Fascinating to me – if fiat money and credit doesn’t reach every credit victim in this credit pandemic, then you still have the weak links within the financial system, and that may implicate all of us within the system, and lead to a crash of the system.

So what the Fed is really supporting here is sentiment. They need fiat money and credit to trickle into every potential area so that everyone who might have been credit infected can be supported. So what they are doing is creating support for sentiment. They are creating a floor in the market price by influencing market psychology. And up to this week, they have failed to move the needle. Even the response on Monday of this week, a 3% sell-off in equities, was, I think, very disappointing to the folks at Maiden Lane, the address there in New York City for the New York Fed.

But the effort is to stem the tide of sellers by putting enough liquidity into the system. In fact, what they are facilitating is the liquidations and the broad-based rebalancing amongst those who need to do it, and at the same time they are removing any accurate mark-to-market function in the marketplace. To sum it up, the prices of assets are going to be higher, regardless of the quantity of liquidations.

That is the signal the Fed wants to send. That is what they want you to know. Prices are going higher. We’re buying everything. I don’t care if you’re a seller, we’re a buyer, and we will buy more than you can possibly sell. The prices of assets, they will tell you, will be higher regardless of the quantity of liquidations because they have stepped in, they have assumed the role of buyer of last resort. It helps get those liquid that need it, it stops the sellers by implying that the worst is over. What they are telling you to do is stop selling. Stop selling!

Kevin: Not only is the Covid-19 a worldwide crisis, but this debt bubble bailout is a worldwide crisis. There are nearly as many commitments of the European Central Bank and the Bank of England over the past ten days as the Federal Reserve has been stepping in and offering the U.S. markets.

David: Yes, so we take a walk down Memory Lane to September 2019. It wasn’t that long ago, and yet there is a lot that has happened, even in the last few days, and Bloomberg informs us exactly what happened in the repo markets. As you said, the ECB is involved, the Bank of England is involved, the Bank of Japan is involved. They are all involved because this is a global credit pandemic and they have to be involved. But when we look back to the repo markets just a few months ago, September 2019, Bloomberg tells us this. Who was in the treasury repo market? It was leveraged hedge funds working a bet called the basis trade.

And this is what Bloomberg reports. “Basis traders were borrowing as much as 50 times their wagers. The firms used borrowed money from the repurchase market for the popular basis trade. It is the trade, the difference, between cash treasuries and futures. The basis strategy could be as much as 650 billion dollars. Investors seeking safety rushed into the treasury futures as a hedge and those funds got hammered. There is a difficulty in these trades that ensued and it was a contributing factor to the Federal Reserve’s decision to pledge 5 trillion dollars to keep the markets running smoothly.”

That’s what Bloomberg was talking about. If we trace it back, if you’re looking for patient zero (laughs), it may well have been those playing the basis trade. Leveraged speculators. The Fed bails out leveraged hedge funds, and we’re still convinced that C-19 is the main event. To me it reminds me of a circus where you have three different things going on. What’s the main event and who is on the side circle? Every circus has a sideshow.

But we need to get clear on what the real factors are in the market. Because this is where we do see they needed an excuse, they needed a reason, something convenient, for them to be able to get involved. Non-financial firms in the United States, according to the Economist, this year, have 394 billion dollars in investment-grade debt that needs to be refinanced. There is an additional 87 billion dollars in junk just here in the U.S. markets which comes due this year. You need a reason to be in the markets? You need a reason for corporate bailouts? You can’t do it in the context of an election year?

Next year is not any better. You have investment-grade requirements, 461 billion dollars, according to the Economist, which comes due in 2021, 195 billion in junk, which comes due next year. We are in the process as a company of dealing with the new requirements of Covid-19 and what that means for our work force, how we take calls, where we take calls from, how trades are booked. And everything has operated very seamlessly over the last two weeks as we have made that transition.

So we take that very seriously. But it is difficult for us to not take just as seriously, or more, what seems to be the bigger issue, the bigger contagion, the bigger motivating factor which has driven, and continues to drive, monetary policy and drive us toward monetary madness. And what we see in response to, not only what we have announced on the monetary side, but what is prospective on the fiscal side, we see very sane decision-making when it comes to the purchase of precious metals.

I can say over the last two weeks we might have had ten liquidation trades in total compared to, I can’t count the number of buy trades. But now, we face another reality, that in a period of constraints, whether it is our ability to move from office to office or from home to store, a new constraint, which is a supply constraint, a totally different kind of supply chain concern as it relates to the gold market. And it does factor into what we think we can expect for prices moving forward.

Kevin: David, about ten years ago you and I had dinner with some people from a refinery in Switzerland. Actually, they were coming up from Northern Italy. That’s ground zero right now for the Covid-19. Just mention a little bit with some of these refiners that are staying home. You don’t have much new gold coming into the market.

David: Because of the strain in the financial markets, we have seen a significant increase in demand for gold, but unlike 2008 and 2009 where demand was fairly well met by available supply, and new supply which was coming from the mines and from the mines through the refiners into the primary market, we now are limited to just the secondary market of supply for precious metals because you are seeing mines shut down. You’re seeing a number of the big miners all of a sudden go silent on their prospects for full-year production. They are not going to be mining gold as long as Covid-19 is a threat to their workforce. They are taking the necessary precautions to prevent infection and a wider spread of the coronavirus.

So there is lack of supply coming into the refineries. Refineries are shutting down for the same reason. So there is no fresh supply coming into the market right now and that is adding to the price dynamics that we see in both gold and silver, where at present premiums on small product are going through the roof. Still, if you want to own a 1,000-ounce silver bar, if you want a kilo bar, if you want something of a larger scale, you still have the positive economics in your favor. But anything that is fractional in size is already trading at exorbitant premiums, because again, you have a growing audience on the demand side and a shrinking available supply. This is really quite a fascinating time to be in the metals market.

Kevin: I would encourage listeners to give us a call because we still do have supply, but I’m going to go back to what you said last week, Dave. You really do, especially right now, want to own, right now, what you want to own in the future.

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