Let Your Faith Be Bigger Than Your Fear

Investors are putting their faith in gold because they fear what’s coming for stocks. At least, per an article I just read.

Now, we can verify that their faith in gold has helped prices rise more than 7% this year.

Even while the S&P 500 has risen roughly 5%.

But despite the ongoing strength in stocks — the resilience of investors’ appetite for risk — gold investors fear that the happy times are about to change.

Think about everything that everyone is thinking about the state of economics and markets in the U.S. …

  Consumer Price Inflation (CPI) is on the rise

  The 5-year/5-year Breakeven (the Fed’s favored inflation gauge) is north of 2%

  Fiscal infrastructure spending

  Personal and corporate tax cuts are “coming”

But …

  GDP growth seems lacking and forecasts are being revised lower

  Industrial production is iffy

  Retailers are contending with border-tax proposals

  Margin debt at the NYSE continues rising

  Some indicators and analysts see weakness in corporate profits and margins, which have been a huge driver of returns in the last five years

  The Federal Reserve is still jawboning about the need for more interest-rate hikes

Surely, these are only some of the things investors are thinking about.

But clearly the more-favorable items are taking precedence over the growing risks.

The S&P 500 is on the up-and-up.

And if Wave V (at the top of the chart) looks anything like Wave I …

The S&P 500 has another 7% or so to rise, from current levels, until this bull market tops out.

But if gold investors have a beat on what’s going on behind the scenes of this stock-market rally … then a stock-market correction is in order soon.

For triggers, watch how the dialogue plays out on tax reform. Some say that any real reform that cuts the corporate tax rate must coincide with a border-adjustment tax (BAT). And this potential BAT threatens to hit U.S. retailers hard.

Also, watch the developments in Federal Reserve rate-hike expectations. The major factors will probably be the resilience of GDP growth forecasts and the outlook for inflation, which could change if the price of oil cannot resurrect the bulls.

Finally, fiscal spending tends not to be the buoy to economic activity and corporate earnings … despite what many think. See the chart below from a blog called Variant Perception. In it, expenditures are inverted. So, the correlation suggests that the CAPE falls when fiscal spending goes up.

Remember, CAPE is the cyclically adjusted price-to-earnings ratio. Consider it a P/E that spans 10 years and offers a glimpse into longer-term equity valuations.

And let’s not forget what the debt burden might mean for the efficacy of such an infrastructure-spending plan. (It means the impact on economic activity will be muted even if the expenditures get approved.)

With that, I leave you with comments from a very concerning Bloomberg article by Danielle DiMartino Booth:

“… Combine the dynamic of tightening financial conditions with the Congressional Budget Office’s year-old calculations that the deficit … would more than double to 4.9 percent by 2026. The CBO projects debt held by the public will swell to 86 percent, twice the historic average and the highest since 1947.

“In terms of borrowing costs, the CBO assumes that the rate on three-month Treasury bills rises … while that of 10-year Treasuries increases … Just think of what that would do to Uncle Sam’s interest expense … with the national debt at the cusp of crossing the $20 trillion line. That’s on top of the $18.2 trillion in household debt.

So, add rising deficits and higher rates together with a shrinking balance sheet that will slash Fed remittances back to the Treasury. Then factor in Trump’s proposed tax cuts, and just for proper measure, the looming reality that an aging population presents to entitlement spending. What do you get? Even worse debt-to-GDP levels than what the CBO assumes.”

I am not indicting President Trump when I ask: Should markets really be putting their faith in Trumponomics?

I fear the markets are nearing an end to the glory days.

Buy gold?

Do right,
JR Crooks

“JR” specializes in trading commodities, currencies and options. He has spent nearly 10 years analyzing financial markets and writing about global economics. JR honed his trading techniques and global-macro worldview alongside his father, Jack Crooks, at Black Swan Capital. JR also…