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Pater Tenebrarum

Interpretation of contemporary economic and social developments from an Austrian School of Economics' point of view.

Articles by Pater Tenebrarum

US Money Supply – The Pandemic Moonshot

June 15, 2020

Printing Until the Cows Come Home…
It started out with Jay Powell planting a happy little money tree in 2019 to keep the repo market from suffering a terminal seizure. This essentially led to a restoration of the status quo ante “QT” (the mythical beast known as “quantitative tightening” that was briefly glimpsed in 2018/19). Thus the roach motel theory of QE was confirmed: once a central bank resorts to QE, a return to “standard monetary policy” becomes impossible. You can check in, but you can never leave.

Phase 1: Jay Powell plants a happy little money tree to rescue the repo market from itself (from: “The Joy of Printing”).

It is easy to see why. Any attempt to seriously reduce outstanding central bank credit will bring about the

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In Gold We Trust, 2020 – The Dawning of a Golden Decade

June 1, 2020

The New In Gold We Trust Report is Here!
The In Gold We Trust 2020 report by our good friends Ronald Stoeferle and Mark Valek was released last week. It is the biggest and most comprehensive gold research report in the world. As always it contains a wealth of new material, as well as the traditional wide-ranging collection of charts and data that makes it such a valuable reference work for everything of interest to gold investors or indeed for anyone interested in precious metals (a download link to the report is provided below).

Left: casting gold bars. Right: using gold as a shield against assorted slings and arrows.

Here is a brief overview of the main subjects discussed in the report:

– A review of the most important events in the

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Investing in the Post-Corona World

May 5, 2020

Incrementum Advisory Board Discussion of April 8, 2020 with Special Guest Rick Rule
The Incrementum Fund’s Advisory Board held its quarterly meeting on April 8. This time renowned resource stock investor Rick Rule, the President and CEO of Sprott US Holdings Inc., joined the discussion as a special guest. As always, there is a download link to a transcript of the conference call in PDF format at the end of this post.

Rick Rule, CEO of Sprott US Holdings Inc., and renowned investor in the commodities sector.

Obviously,  the discussion focused on the suddenly rather dramatically altered investment landscape in the wake of the COVID-19 pandemic. After shutting down large parts of the economy, fiscal and monetary authorities in developed

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Gold Stocks – A Show of Strength

April 15, 2020

Gold Sector Outperforms Broad Market
The gold sector is in an uptrend since September 2018. The initially rather labored move accelerated after a secondary low was established in May 2019 and the 50-day and 200-day moving averages were breached for the second time. Last week the two moving averages were once again overcome in the course of the post-crash rebound. Here is a chart showing the entire move since 2018:

After a rather harrowing decline in sympathy with the February-March stock market crash, the HUI has swiftly moved back to its previous high for the move and is now trading above its 50- and 200-day moving averages again.

Since the September 2018 low, the gold sector is outperforming the broad market. As the HUI-SPX ratio

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Credit Markets – The Waiting Game

April 6, 2020

Everything and the Kitchen Sink
After the first inter-meeting rate cut in early March, we opined that further rate cuts were a near certainty and that “not-QE” would swiftly morph into “QE, next iteration” (see Rate Cutters Unanimous for the details). As it turned out, the monetary mandarins did not even wait for the official FOMC meeting before deciding to throw everything and the kitchen sink at the markets. Not only were rates insta-ZIRPed, but “not-QE” became “QE on steroids, plus”.

The federal debt monetization machinery goes into orbit. Moon landing next?

The “plus” stands for the alphabet soup of additional support programs for various slices of the credit markets, ranging from money markets to commercial paper to corporate

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Rate Cutters Unanimous

March 8, 2020

Easy Money Becomes Even Easier
Last week the FOMC surprised the markets with a rare inter-meeting rate cut. As the FOMC statement released on the occasion reveals, the decision to cut the  federal funds rate by a hefty 50 basis points was unanimous. The much-lamented “zero bound” is coming closer rather quickly.

A happy little money tree… from “The Joy of Printing”

As Mish notes here, Mr. Powell stated the following in remarks to the press after the announcement:

“We do recognize a rate cut will not reduce the rate of infection, it won’t fix a broken supply chain. We get that,” Mr. Powell said.

Wise words, chair-person, wise words. Why cut rates then, if none of these objectives can be achieved? The explanation according to Mr.

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The Corona Virus Epidemic – Going Global

March 3, 2020

Containment Fail
We want to share a few observations about the growing COVID-19 epidemic, based on what we have seen so far. It has been obvious for a while now that the attempt to contain the spread of the virus has essentially failed. Ever since case numbers started to soar in South Korea, Italy and Iran, it was clear that hopes that the outbreak would remain confined to China were misplaced.
 
Doubleplus-ungood micro-organism COVID-19 looking for cells to infect

While it appears that the draconian measures taken by China’s government have managed to slow the spread of the infection in the country substantially (the caveat is that it is hard to say how reliable the data released by China are), the outbreak is accelerating everywhere

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US Stock Market  – Sentiment and Positioning

February 4, 2020

Market Drivers
The recent outbreak of a dangerous respiratory illness caused by a new Corona virus in China was widely blamed for the stock market sell-off on Monday last week. It is undoubtedly true that the epidemic has the potential to severely disrupt economic activity, although it is too early to come to a definitive conclusion about that. Be that as it may, the event actually serves as an excellent example illustrating that the news of the day are incidental to market action rather than causing it.

S&P 500 Index, 10-minute chart. A fairly strong sell-off on Monday last week, a vigorous rebound on Tuesday.

Consider the vigorous market rebound on Tuesday depicted above. Did news about the epidemic get better? Quite the contrary,

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Opportunities in the Gold Exploration Sector

January 29, 2020

An Unloved Sector
We rarely discuss individual stocks in these pages, but we make an exception now and then when we spot exceptional opportunities. This time the reason is actually more mundane: the vast majority of gold exploration stocks failed to benefit from the rally in precious metals prices last year. As a result many of them came under even greater pressure in the tax loss selling season at the end of the year. We made a list of such stocks late last year – a download link to the PDF document is provided below this post. Here is an example of such a stock:

ATAC (ATADF), one of many exploration stocks that came under selling pressure in last year’s tax loss selling period.
 

ATAC is actually a fairly solid company as exploration

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Spitting in Uber’s Soup

December 23, 2019

Disrupted Disruptor – Legal Setback Sweepstakes
It seems Uber just can’t catch a break these days. First its license to operate in London was revoked. At issue was apparently that 43 unlicensed drivers were able to take an estimated 14,000 “unauthorized trips” due to a flaw in the Uber app (note that 45,000 licensed Uber drivers are working in London) .

Uber’s service has become an important part of London’s transport infrastructure – and a thorn in the side of established taxi services. [PT]
Photo credit: uber.com

How did the regulatory agency Transport for London (TfL) even learn about this? Uber itself informed the regulator about the mishap. It also told TfL that it has immediately fixed the problem to prevent a recurrence (this is

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The Credit Market Powder Keg

December 4, 2019

Credit Market Bifurcation
By all accounts, credit markets remain on fire. 2019 is already a record year for corporate bond issuance, beating the previous record set in 2017 by a sizable margin. Demand for the debt of governments and government-related issuers remains extremely strong as well, despite non-existent and often even negative issuance yields. Even now, with economic activity clearly slowing and numerous  threats to the post-GFC recovery looming on the horizon, the occasional rise in credit spreads is routinely reversed. And yet, under the placid surface problems are beginning to percolate. Consider exhibit A:

The chart shows option-adjusted credit spreads on three rating categories – while spreads on ‘BB’ rated (best junk bond

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Repo Market, QE4 (a.k.a. Not QE), the Fed and Gold

November 22, 2019

Incrementum Advisory Board Discussion of 23 Oct 2019
In late October the Advisory Board of the Incrementum Fund held its quarterly meeting (a transcript is available for download at the end of this post). This time the board was joined by special guest Dan Oliver, the manager of Myrmikan Capital and president of the Committee for Monetary Research & Education.  Myrmikan inter alia publishes excellent and quite original research on gold which we hereby highly recommend.

Dan Oliver of Myrmikan Capital

A few weeks before the Advisory Board meeting, the repo market quake had struck and the Fed had already formulated and announced its response. Obviously this was one of the topics that came up for discussion. The Fed has now become a major

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Maurice Jackson Interviews Brien Lundin and Jayant Bhandari

November 7, 2019

Two Interesting Recent P&P Interviews
Our friend Maurice Jackson of Proven and Probable has recently conducted two interviews which we believe will be of interest to our readers. The first interview  is with Brien Lundin, the president of Jefferson Financial, host of the famed New Orleans Investment Conference and publisher & editor of the Gold Newsletter – an investment newsletter that has been around for almost five decades, which actually makes it the longest-running US-based investment newsletter focused on precious metals. Its staying power speaks for itself.

Brien Lundin speaking at the 2012 New Orleans Investment Conference.

Brien Lundin inter alia provides his view on the macroeconomic backdrop driving recent strength in the

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Incrementum 2019 Gold Chart Book

October 29, 2019

The Most Comprehensive Collection of Gold Charts
Our friends at Incrementum have just published their newest Gold Chart Book, a complement to the annual “In Gold We Trust” report. A download link to the chart book is provided below.

As of late 2019 an ounce of gold will get you 115 liters of beer at the Munich October Fest – a 7-year high. Cheers!

The Incrementum Gold Chart Book is easily the most comprehensive collection of charts related to or relevant to gold available anywhere. It contains everything  from a wealth of economic to monetary data, to charts detailing sources of gold demand, to mining shares-related data, etc.
Included are of course also perennial favorites such as an update of the “gold-beer ratio” that measures how

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US Money Supply Growth – Bouncing From a 12-Year Low

October 14, 2019

True Money Supply Growth Rebounds in September
In August 2019 year-on-year growth of the broad true US money supply (TMS-2) fell to a fresh 12-year low of 1.87%. The 12-month moving average of the growth rate hit a new low for the move as well. The main driver of the slowdown in money supply growth over the past year was the Fed’s decision to decrease its holdings of MBS and treasuries purchased in previous “QE” operations. This was partly offset by bank credit growth in recent months, which has moved to 6.6% y/y after being stuck below 4% y/y throughout 2018.

US broad true money supply TMS-2, year-on-year growth w. 12-month moving average. After establishing a new 12-year low at  1.87% in August, TMS-2 growth has rebounded to 3.09% in

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Repo Quake – A Primer

October 2, 2019

Chaos in Overnight Funding Markets
Most of our readers are probably aware that there were recently quite large spikes in repo rates. The events were inter alia chronicled at Zerohedge here and here. The issue is fairly complex, as there are many different drivers at play, but we will try to provide a brief explanation.

There have been two spikes in the overnight general collateral rate – one at the end of 2018, which was a first warning shot, and the one of last week, which was the biggest such spike on record, exceeding even that seen in the 2008 crisis.

The funding stresses in overnight repo markets were the culmination of a problem that has been simmering in the background for quite some time. It was partly the result of new banking

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The Weird Obsessions of Central Bankers, Part 3

September 18, 2019

Inflation and “Price Stability”
We still remember when sometime in the mid 1980s, the German Bundesbank proudly pointed to the fact that Germany’s y/y consumer price inflation rate had declined to zero. It was considered a “mission accomplished” moment. No-one mentioned that economic nirvana would remain out of sight unless price inflation was pushed to 2% per year.

CPI, annual rate of change. During the “stagflation” period of the 1970s, Congress enacted the Federal Reserve Reform Act and the Humphrey-Hawkins Act, which specified a list of miracles the Fed was supposed to perform.

The Federal Reserve Reform Act of 1977, which established the famous dual mandate, inter alia tasked the Fed with maintaining “stable prices”. It did not

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The Weird Obsessions of Central Bankers, Part 2

September 18, 2019

The Negative Interest Rates Abomination
Our readers are probably aware that assorted central bankers and the economic advisors orbiting them occasionally mention the “natural interest rate” (a.k.a. “originary interest rate”) in speeches and papers. It is generally assumed that it has declined, which is to say, time preferences are assumed to have decreased.

This is actually an understatement…

Although interest is generally associated with money, the originary interest rate would exist even if there were no money and regardless of the type of economic system that is in place. It is the manifestation of time preference, i.e., it simply is the discount of future goods against present goods – and that is all it is. As long as time passes

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The Weird Obsessions of Central Bankers, Part 1

September 18, 2019

How to Hang on to Greenland
Jim Bianco, head of the eponymous research firm, handily won the internet last Thursday with the following tweet:

Jim Bianco has an excellent idea as to how Denmark might after all be able to hang on to Greenland, a territory coveted by His Eminence, POTUS GEESG Donald Trump (GEESG= God Emperor & Exceedingly Stable Genius).
Evidently the mad Danes running the central bank of this Northern European socialist paradise were reacting to the ECB Council’s decision earlier that day to carpet-bomb the euro zone economy with another dose of monetary napalm.
The sad spectacle was the outcome of the penultimate ECB meeting chaired by Mario Draghi, who will undoubtedly enter the history books in the “what not to do”

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A Bubble in Complacency – Incrementum Advisory Board Discussion

August 23, 2019

Incrementum Advisory Board Meeting of 31 July 2019
At the end of July the Advisory Board of the Incrementum Fund held its quarterly meeting (a full transcript is available for download at the end of this post). The board was joined by special guest Simon Mikhailovich, a financial market veteran who inter alia co-founded the Toqueville Bullion Reserve. The title of the transcript and this post was inspired by his remarks.

Special guest Simon Mikhailovich

We believe he is definitely on to something. By now most of our readers are probably well aware of terms such as “the everything bubble”, used to describe the post-GFC world in which asset prices have been driven to absurd levels on the back of the most massive central bank interventions

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Rising Stock Market Volatility – Another Warning Sign

August 15, 2019

Bad Hair Days Are Back
We recently discussed the many divergences between major US indexes, which led us to expect that a downturn in the stock market was close (see The Calm Before the Storm for details). Here is an update of the comparison chart we showed at the time:

The divergences between various indexes seem to be resolving as expected.

The next chart shows analogous divergences between the S&P 500 Index and two major foreign stock markets:

US stocks have diverged from European and Japanese stocks as well.

Sometimes an increase in market volatility does not mean much – but when it happens at a time when the market is trading at extremely high valuations, money supply growth has been low for quite some time and leading

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Bitcoin – From Greed to Fear

August 15, 2019

A Noteworthy Sentiment Change
Bitcoin and other cryptocurrencies have declined quite sharply in recent days. Here is an overnight snapshot of the daily chart:

Bitcoin corrects again…

It is difficult to gauge sentiment on BTC objectively, but there is a service that tries to do just that. According to its greed & fear barometer, the recent decline seems to have triggered quite a bit of apprehension:

The BTC sentiment measure of alternative.me has flipped all the way from “greed” to “extreme fear” in just one week.   

Here is an overlay chart that shows the history of the indicator compared to the Bitcoin price:

Greed and Fear barometer vs. the Bitcoin price over time

Obviously, low readings have to be interpreted differently in

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Interest Rate Watch and Bond Market Curiosities

August 15, 2019

Things To Keep An Eye On
Below is an overview of important US interest rates and yield curve spreads. In view of the sharp increase in stock market volatility, yields on government debt have continued to decline in a hurry. However, the flat to inverted yield curve has not yet begun to steep – which usually happens shortly before recessions and the associated bear markets begin.

2-year note yield, 3-month t-bill yield, 10-year note yield, 10-year/2-year yield spread, 10-year/3-month yield spread. As indicated in the chart annotation, the signal that normally indicates that a boom has definitely ended is a reversal in these spreads from inversion to rapid steepening. This has yet to happen.

The above-mentioned reversal which sees the

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Sovereign Bonds – Stretched to the Limit

August 12, 2019

Anti-Vigilantes
We dimly remember when Japanese government debt traded at a negative yield to maturity for the very first time. This happened at some point in the late 1990s or early 2000ds in secondary market trading (it was probably a shorter maturity than the 10-year JGB) and was considered quite a curiosity. If memory serves, it happened on just one brief occasion and it was widely held at the time that the absurd situation of a bond buyer accepting a certain loss if the bonds were held to maturity was an outlier, never to be seen again. And this is what the world of bonds looks like today:

Sovereign debt with negative yields to maturity rises to a new record high of $15 trillion

As the chart indicates, a trillion isn’t what it used

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The Calm Before the Storm

July 19, 2019

Intra-Market Divergences Galore 
US big cap stocks have rallied to new highs in recent months, but just as in the rally from the low of the February 2018 mini-panic to the September/October 2018 peak, sizable divergences between different indexes have emerged in the process. New highs in the big cap indexes (DJIA, SPX, NDX) are once again not confirmed by small caps (RUT), the broad market (NYA) and a number of sub-sectors (such as the DJTA which is included in the chart below; according to Dow Theory, the DJTA must confirm moves in the DJIA to validate its trend).

From the top: weekly charts of DJIA, SPX, NDX, RUT, NYA and DJTA. The recent new highs in the three large cap indexes have not been confirmed by small caps and the broad

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Rick Rule on Investing in Junior Resource Stocks

June 27, 2019

Maurice Jackson Interviews Rick Rule
Rick Rule is a renowned investor in junior resource stocks. He is currently working for Sprott USA. Recently Maurice Jackson of Proven and Probable sat down with him for an extensive interview which you can watch below.

Rick Rule, legendary resource stock investor

We found this interview quite enlightening and it is probably useful to anyone investing in the junior mining space. Since gold prices have recently broken out above a long term resistance level (fulfilling our expectations, see A Surprise Move in Gold), this is quite timely, particularly as many junior and exploration stocks have not really moved much yet.
We should mention that Rick Rule apparently shares our assessment of political risk,

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Paul Tudor Jones Likes Gold

June 12, 2019

Gold is Paul Tudor Jones’ Favorite Trade Over the Coming 12-24 Months
In a recent Bloomberg interview, legendary trader and hedge fund manager Paul Tudor Jones was asked what areas of the markets currently offer the best opportunities in his opinion. His reply: “As a macro trader I think the best trade is going to be gold”. The relevant excerpt from the interview can be viewed below (in case the embedded video doesn’t work for you, here is a link to the video on Bloomberg).

Paul Tudor Jones really likes gold (and treasuries)

This is worth mentioning for the simple reason that Paul Tudor Jones has an outstanding track record as a macro trader. His long term annualized return is close to 20%, although the results of his flagship fund

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A Surprise Move in Gold

June 7, 2019

Traders and Analysts Caught Wrong-Footed
Over the past week gold and gold stocks have been on a tear. It is probably fair to say that most market participants were surprised by this development. Although sentiment on gold was not extremely bearish and several observers expected a bounce, to our knowledge no-one expected this:

Gold stocks (HUI Index) and gold, daily. As noted in the annotation above, a Wells Fargo gold analyst turned bearish at the worst possible moment – exactly one day before gold took off like a scalded cat. We mention this mainly because it demonstrates that markets often defy widespread expectations.

Back in April the so-called “managed money” category in the disaggregated commitments of traders report went net

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May Away

June 6, 2019

May Gone in June…
Yes, now that June is here, it is indeed the end of May. Theresa May, to be precise, the henceforth former British Prime Minister. After delivering her unparalleled masterclass in “how to completely botch Brexit”, British cartoonists are giving her a well-deserved send-off, which we are documenting below.
But first, in case you don’t know anything about Ms. May’s heroic “Brexit”-related efforts, here is an explanation of how she tried to finagle the best possible deal out of the Juncker Empire (instead of just waving good-bye and leaving). A visit at a Burger Kind is used to great effect to illustrate the situation:


Theresa May’s “Brexit” in a nutshell, by Alistair Williams

Now that you are up to speed, here is

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US Money Supply Growth and the Production Structure – Signs of an Aging Boom

May 30, 2019

Money Supply Growth Continues to Decelerate
Here is a brief update of recent developments in US true money supply growth as well as the trend in the ratio of industrial production of capital goods versus consumer goods (we use the latter as a proxy for the effects of credit expansion on the economy’s production structure). First, a chart of the y/y growth rate of the broad US money supply TMS-2 vs. y/y growth in industrial & commercial loans extended by US banks.

At the end of April, growth in US TMS-2 (black line) stood at a measly 2% y/y, which is well below the threshold traditionally required to maintain bubble conditions. The red line depicts y/y growth in C&I loans – and the recent slowdown may be significant.
 

Interestingly, we

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