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It's Getting Interesting Out There

Things are getting interesting.

The ten largest markets in the world are all turning bear. US markets were down 11% before bouncing some in recent days. China is off 40%. Japan is down 13% since August. London has lost 11% since April. Euronext is down similarly in the same time period. Toronto is down almost 12%. Germany’s loss is nearing 20%. Among the next ten largest markets: Australia is down almost 14%, Brazil is off 17%, and India and Russia are both down 9%.

Technical analysts are busy debating whether yesterday’s bounce defined a double bottom for US markets and what that might mean. I agree it looks like a double bottom…but I have no confidence that a real rally is at hand.

As I’ve written before, the US economy just doesn’t support a big bull market.

The latest bullet in that gun came out on Friday, with a jobs report that was just terrible. Not just a bit off – terrible.

The addition of 142,000 jobs last month fell far short of the 200,000 expected. To boot, wages were stagnant and hours worked declined to 34.5 from 34.6, while the labour participation rate declined to sit at levels not seen since 1977. Job growth estimates for July and August were also revised down, by 59,000 jobs combined, against expectation.

In a separate release the same day we learned that US factory orders fell 1.7% in August year-over-year. That may not seem like a big number, but the strength of the US manufacturing sector is fundamental to the health of the US economy and that decline was the largest in nine months.

Like I said: terrible.

Steep, violent crashes stand out in our memories, but bear markets usually start gently. Signs of slowing become talk of a top, a small correction gains momentum, and then negative data and sentiment pile up and drive everything down.

We are in the early stages of that process now. Data is increasingly negative. US transportation stocks are plummeting. Market breadth is terrible. Q2 earnings were weak and Q3 earnings will be worse. An earnings recession (two quarters of falling corporate profits) is a leading indicator of stock market crashes, and even the ever-optimistic buy-side analysts who generate earnings estimates are predicting negative numbers: Reuters data shows analysts expect a 3.9% year-over-year decline in S&P 500 earnings in Q3.

Things are turning slowly now, but they could accelerate at any moment. It in last stages of a bull market, companies do everything they can to postpone the inevitable. I have talked about all the financial engineering that has been going on with stock buybacks – but I think it goes deeper than that. I think companies have been waving magic wands over their books, moving expenses, putting off spending, labeling spending in the most favorable light, and the like. None of it criminal, but none of it sustainable either. When the turn starts accelerating, these options are already spent and there’s no covering up the ugly.

And things are absolutely turning.

Corporate America still thinks that GDP growth for Q3 will come in right around 2.5%. GDPNow, which is the Atlanta Fed’s real time estimate of GDP growth, was close to that…until last week, when the terrible trade balance and jobs numbers came out. Now it’s sitting at 0.9%.

Numbers are important. So is sentiment. The market is getting worried: about valuations, earnings, growth potential, wages, productivity, and debt. Bond traders no longer expect rates to rise this year and the yield curve only prices in one measly 25-point raise next year.

In short, we have weakening global growth and a US Federal Reserve that missed its chance to raise rates (last September).

In that context, over the next few months I expect stocks will be volatile but trend down, corporate bond defaults will rise, commodities will remain weak, and gold will rally.

Is there another round of QE on the horizon? Perhaps. Talk about it is certainly ramping up. I think it’s too soon to say. If three rounds of QE failed to lift America out of the slump, I think the Fed will be aware that a fourth round ain’t likely to work either.

It is possible, though. And if the US starts easing, other nations will follow suit. Fiat currency concerns will rear up. Debt concerns, already very significant, will grow.

And gold would shine brighter.

It turns out, though, that gold is already doing pretty darn well.

Gold is not far off its multi-year highs in Canadian dollars, Australian dollars, Japanese yen, and even Euros.

We all focus on the gold price in US dollars, but the strength of that currency has been masking gold’s performance.

Moreover, the US dollar has been range-bound since May. With odds of a rate increase declining by the day and the US economy looking flatter and flatter, the USD rally is out of juice.

That is important. A weaker USD helps commodities. It helps emerging markets, where weak local currencies have hurt revenues but many companies are burdened by big US dollar debts. And it helps gold by boosting the most famous price point – its US dollar value.

It’s great when things start to line up. The US dollar looks topped out. Gold is gaining ground in other currencies and keeps trying to break past resistance at US$1,160 per oz. in greenbacks. And waning confidence in the US economy and US markets has put gold back on people’s radars as a good ol’ reliable hedge against uncertainty.

As evidence: gold again seems to be moving in opposition to the S&P. If this inverse relationship holds and I’m right that darker days are ahead for US markets, gold is set to trend upwards. Of course the markets will not decline consistently so gold will swing around, but the bottom may be past.

And gold equities are getting a little traction too. On Monday the HUI-gold ratio closed above its 40-day moving average for the first time in six months. It has gotten above this line several times in the last two years; each time saw gold rally notably before falling again.

A few gold mine developers have been able to capitalize on this momentum. September saw equity financings for Dalradian Resources ($35 million), Pretium Resources (US$40 million), Endeavour Mining ($99 million), and Kaminak Gold ($22.5 million), plus two debt deals (Pretium and Alacer Gold). I like that two of those – Kaminak and Dalradian – are Maven holdings.

Today every Maven equity is up. It feels good to see green on the screen. I don’t know if it will persist tomorrow, but negative economic news is flowing pretty consistently these days and that’s good for gold.

I spent last week meeting companies and visiting a project in Yellowknife. A report on that trip is pending, as is talk about some equities I think are pretty interesting right now.

Best of all, though, is that everything feels more interesting right now than it has for a while. We’ve been in a holding pattern, waiting for US markets to slow and stop stealing every available investment dollar, for the greenback to top and turn, and for US economic weakness to show that QE achieved little in the long term. These things are now all happening.

Base metals will still have to wait for their turn. Gold’s day, however, is getting close.

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-RR (September 2019)

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All the best

-G (Netherlands) (Jan 2018)