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It Looks Normal But It Ain't

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Source: Rudi Fronk and Jim Anthony for Streetwise Reports   05/27/2019

Rudi Fronk and Jim Anthony, cofounders of Seabridge Gold, explain why they believe current economic trends favor gold.

Buy equities and sell gold because the economy is strong and the Fed is supportive? Really?

We think you should not be fooled by the reigning narrative. Consider the following:

  • In 2018, U.S. real GDP growth was the best in years. Nominal GDP rose more than 5% while the national debt grew by more than $1.2 trillion, about 6% of nominal GDP. Government spending counts in calculating GDP. So, if the national debt had not risen, economic growth in 2018 would have been negative. Strip out the annual deficit, which is borrowed, and the U.S. economy is actually shrinking.
  • The last three quarters, the U.S. economy registered real growth totaling $83 billion, which was celebrated. Strip out the inventory build of the past three quarters and you lose 83% of that growth. Inventories must be reduced and that means lower prices, lower margins, lower profits and reduced employment ahead as production slows.
  • When the Fed moved Quantitative Tightening to the maximum…$50 billion per month…in October 2018 after two rate hikes earlier that year, the market began to crash three days later. Coincidence? We think not. The economy has now been structured around ultra-low rates and excess liquidity. The Fed has no flexibility to take back its stimulus.
  • When $122 billion in GE debt began to trade like junk after its bonds were downgraded by Moody’s on Halloween, the junk bond market shut down 14 days later. We had a record 41 days with no issuance at all. No wonder the Fed abruptly panicked and changed course.
  • Half of all investment grade non-financial corporate debt …more than $3 trillion…is one step above junk. Corporate debt levels are at all-time highs. Downgrades and reluctance to roll this debt are major risks.

  • Money supply growth has been falling rapidly despite the immense increase in public and private debt. Why? Because the economy cannot profitably use new money so it is not being loaned into existence by the commercial banks. The velocity of money has slowed to a crawl because the economy can’t use it. The corporate sector is already choking on too much unproductive debt.

  • Capital investment is anemic at best. Zombie firms stay in business due to the availability and low cost of credit, reducing the incentive to invest and suppressing productivity gains as the most efficient producers do not invest in new plant and equipment.
  • Fed policy may help markets but NOT the economy. Lower interest rates have led to slower growth, the reverse of Fed and market expectations. Developed economies already have too much unproductive debt but convertible currencies attract capital anyway. Existing debt weighs on the economy, inhibiting real investment, so the best use of new debt is to buy back shares or rationalize via M&A.

    Will the Fed cut rates aggressively and reintroduce QE if the U.S. economy moves towards recession? Sure thing. Will it work? Probably not, in our view. Debt levels are already too high. Will this monetary stimulus help the stock market? Probably not. Aggressive Fed policy did not prevent the crashes of 2000/1 or 2008. And this time around, we know two things we did not know back then: Fed stimulus doesn’t work and it can’t be taken back. We can’t imagine a more favorable environment for gold.

    This article is the collaboration of Rudi Fronk and Jim Anthony, cofounders of Seabridge Gold, and reflects the thinking that has helped make them successful gold investors. Rudi is the current Chairman and CEO of Seabridge and Jim is one of its largest shareholders. Disclaimer: The authors are not registered or accredited as investment advisors. Information contained herein has been obtained from sources believed reliable but is not necessarily complete and accuracy is not guaranteed. Any securities mentioned on this site are not to be construed as investment or trading recommendations specifically for you. You must consult your own advisor for investment or trading advice. This article is for informational purposes only.

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    Disclosures:
    1) Statements and opinions expressed are the opinions of Rudi Fronk and Jim Anthony and not of Streetwise Reports or its officers. The authors are wholly responsible for the validity of the statements. Streetwise Reports was not involved in any aspect of the content preparation. The authors were not paid by Streetwise Reports for this article. Streetwise Reports was not paid by the authors to publish or syndicate this article. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security. Streetwise Reports requires contributing authors to disclose any shareholdings in, or economic relationships with, companies that they write about. Streetwise Reports relies upon the authors to accurately provide this information and Streetwise Reports has no means of verifying its accuracy.
    2) Rudi Fronk and Jim Anthony: we, or members of our immediate household or family, own shares of the following companies mentioned in this article: Seabridge Gold. We personally are, or members of our immediate household or family are, paid by the following companies mentioned in this article: Seabridge Gold.
    3) Seabridge Gold is a billboard sponsor of Streetwise Reports. Click here for important disclosures about sponsor fees.
    4) This article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.
    5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article until three business days after the publication of the interview or article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases.


  • Source: https://www.streetwisereports.com/article/2019/05/27/it-looks-normal-but-it-aint.html


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