January was a month of extremes. The broader market managed a strong advance for the first month of 2019. The Dow Jones Industrial Average, Nasdaq and S&P 500 surged last month to notch their best monthly gains for January, in years – if not decades. On the other side of the spectrum, extreme weather patterns brought a blast of Arctic air that caused temperatures to plummet across the central and eastern U.S.
It was politics as usual and the partial U.S. government shutdown came to an end after 35 uncertain days. The January Federal Reserve meeting came and went with no change in rates but a notably dovish shift that emphasized the FOMC’s intention. The Fed stated that it would be “patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.”
There was some resolve at the end of January but plenty of questions still hung in the air.
The final month of 2018 had been a dismal one for Wall Street. The major stock indexes posted annual losses that were the worst since the deep tumble of 2008. Yet the turnaround that came after the year-end slump of 2018 saw the S&P 500 tack on 7.87% in January. The performance marked the index’s best advance since 1987.
BUBBLE READY TO BURST
David A. Stockman, former congressman and budget director for President Ronald Reagan, remembers 1987 very well. It was the year that Greenspan kicked off the “era of bubble finance.” This era simply kicked the can, or what Stockman calls “the day of reckoning,” down the road. Indeed, the balance sheet has gone from $200 billion to topping the trillion-dollar mark.
Stockman spent his early days in Washington D.C., engaging with several administrations of the White House and changes in Chairmanship at the Federal Reserve. He is quick to point out that the current “dysfunction in government” is worrisome and that there is “nothing but bad stuff ahead.”
Some things change while other things stay the same. In the case of borrowing by the federal government there have been no signs of a slowdown since Stockman first warned Americans about deficits during the Reagan years. While the debt-to-GDP ratio of the U.S. may not be at the very top of the list of worst offenders, it has cleared the 100% mark.
Stockman joined me at the NASDAQ MarketSite in New York to discuss his top concerns for the U.S. economy. He says that it’s not the trade deals or funding for a U.S.-Mexico border wall that are the most worrisome of issues. Instead, he remarks that Americans are living on borrowed time and the root of the problem lies in “bad” money.
Sept. 20, 2018, is indicated as an important date. He delves further into the significance of that day in another interview and in his latest book, Peak Trump. In case you’re wondering about Stockman’s prediction for the next stock market correction – listen closely to his answer and learn how he is planning for his grandchild’s financial future:
Interview segment with David Stockman on January 24, 2019: CLICK HERE.
THE BIG FREEZE
Winter usually brings colder and shorter days and plenty of inclement weather. While most of the country is thawing out from the recent bout of wintry weather, forecasts for slower economic growth continue to be issued by global institutions and investment houses.
The 2019 State of the Union did not address specific policy solutions to the problems that Trump says would endanger the national economy. Yet the immediate potential crises on the horizon include: the short-term government funding measure set to expire on Feb. 15 and the clock is ticking for the debt ceiling reinstatement on March 2.
In addition, the expiration of the U.S.-China trade tariff truce is March 1. U.S. officials will be heading to Beijing on Feb. 14-15 with the delegation comprised of Robert Lighthizer, Steven Mnuchin and David Malpass.
Whether March welcomes a balmy environment for market sentiment – time will deliver the outcome of the negotiations.
Stockman wonders how the nation will fare in the aftermath of these risk events and remarks that Americans will “reap the consequences of the money-printing spree … and massive borrowing by the public and private sectors.” Even cautious optimism isn’t convincing enough to drag gold lower.
As the equity markets recovered in January the bond market did not reflect risk-on behavior. At the same time spot gold extended gains last month and held above the $1,300 per ounce level. Gold has managed to hold onto multi-month highs as the Fed rate outlook hit the “pause” button.
In the short-term, the precious metal is caught in a tug-of-war between a stronger dollar and fundamental risks. At the very least the dovish Federal Reserve should provide support for gold prices.
According to the World Gold Council, holdings of gold ETFs last month marked their highest level since March 2013. The spotlight was shining on inflows into global gold ETFs that increased 72 tonnes in January. The WGC pointed out that net longs are below historical averages. In the beginning of February, the outflows of global gold ETFs were notable.
Amid rising gold prices and increased M&A activity among the mining majors, the outlook for the yellow metal may be brighter.
Sprott U.S. Media, Inc. is a wholly owned subsidiary of Sprott Inc., which is a public company listed on the Toronto Stock Exchange and operates through its wholly-owned direct and indirect subsidiaries: Sprott Asset Management LP, an adviser registered with the Ontario Securities Commission; Sprott Private Wealth LP, an investment dealer and member of the Investment Industry Regulatory Organization of Canada; Sprott Global Resource Investments Ltd., a US full service broker-dealer and member FINRA/SIPC; Sprott Asset Management USA Inc., an SEC Registered Investment Advisor; and Resource Capital Investment Corp., also an SEC Registered Investment Advisor. We refer to the above entities collectively as “Sprott”. The information contained herein does not constitute an offer or solicitation by anyone in any jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Forward-Looking Statement This report contains forward-looking statements which reflect the current expectations of management regarding future growth, results of operations, performance and business prospects and opportunities. Wherever possible, words such as “may”, “would”, “could”, “will”, “anticipate”, “believe”, “plan”, “expect”, “intend”, “estimate”, and similar expressions have been used to identify these forward-looking statements. These statements reflect management’s current beliefs with respect to future events and are based on information currently available to management. Forward-looking statements involve significant known and unknown risks, uncertainties and assumptions. Many factors could cause actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results, performance or achievements could vary materially from those expressed or implied by the forward-looking statements contained in this document. These factors should be considered carefully and undue reliance should not be placed on these forward-looking statements. Although the forward-looking statements contained in this document are based upon what management currently believes to be reasonable assumptions, there is no assurance that actual results, performance or achievements will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this presentation and Sprott does not assume any obligation to update or revise. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any fund or account managed by Sprott. Any reference to a particular company is for illustrative purposes only and should not to be considered as investment advice or a recommendation to buy or sell nor should it be considered as an indication of how the portfolio of any fund or account managed by Sprott will be invested. Past performance does not guarantee future results. The views and opinions expressed herein are those of the author’s as of the date of this commentary, and are subject to change without notice. This information is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination by Sprott Global Resource Investments Ltd. that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. The products discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a possible loss of the principal amount invested. Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment. Because of significant volatility, large dealer spreads and very limited market liquidity, typically you will not be able to sell a low priced security immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Past performance is no guarantee of future returns. Sprott Global, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.