LONGWave - 05-07-25 - MAY – What is Gold, Black Gold, the Dollar and Bitcoin Telling Us?
SLIDE DECK
TRANSCRIPTION
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Thank you for joining me. I'm Gord Long.
A REMINDER BEFORE WE BEGIN: DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are COMMENTARY for educational and discussions purposes ONLY.
Always consult a professional financial advisor before making any investment decisions.
SLIDE 3 – COVER
There is an old investigative adage that the secret to solving a mystery is to “Follow the Money”!
The mystery today during the Fourth Turning is where are we headed and specifically how should I best prepare for this age of uncertainty?
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In this session I want to “Follow the Money” by exploring what Gold, The Dollar, Bitcoin and Oil (or what is often called Black Gold) TOGETHER are telling us. They are money!
As such I would like to cover the areas outlined here.
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| I don't recall such broad based:
OVERWHELMING UNCERTAINTY nor OVERWHELMING PESSIMISM
|
In 1957, US Navy Rear Admiral Hyman Rickover gave a speech explaining the importance of fossil fuels to the economy and to the military. He then explained that we could not expect fossil fuel extraction to last very long.
It is an unpleasant fact that according to our best estimates, total fossil fuel reserves recoverable at not over twice today’s unit cost are likely to run out at some time between the years 2000 and 2050, if present standards of living and population growth rates are taken into account.
Much modeling has been done since that time. Researchers at Massachusetts Institute of Technology did a series of analyses which they published in 1972 in the book, The Limits to Growth. The most recent update to this analysis shows the following summary exhibit.
Output of the recalibrated Limits to Growth model were published in 2023, with Gail Tverberg’s labels showing which lines are “Industrial Output” and which are “Population.”
The 1972 model and its update both look at the world economy from an engineering point of view. The analyses ignores the roles of governments, debt, and many other things important to the economy. The original authors of the 1972 Limits to Growth analysis said that they didn’t have much confidence in the accuracy of their forecasts after the decline had begun because of the many omitted factors.
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The disturbing thing from the 2023 analysis is that it shows industrial output dropping about now. This is what you would expect to happen if there is a big drop in world trade.
The world economy is at a major turning point, which is why we should brace for rapid changes in the economy. The world is moving from having enough goods and services to go around, to not having enough to go around. The dynamics of the economy are very different with not enough to go around.
The hoped-for solution of higher prices doesn’t fix the situation; after a point, adding more buying-power mostly produces inflation. Other solutions are needed.
The world economy is reaching what has been called “Limits to Growth.”
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We have concluded we are entering a Beta Drought Decade and …..
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…. are likely in the early stages of a major unfolding Bear Market.
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We are seeing growing Recession odds.
Risk sentiment appears to be holding firm even though news over the period suggests traders should position themselves for another drawdown.
The US economy shrank for the first time in three years during Q1. That is for a period before the White House unveiled its so-called reciprocal tariffs, which will surely have a further damaging impact.
Hours after the GDP print, the Bank of Japan slashed its growth forecast for the current fiscal year by half. Add that to news out of China earlier last week, where purchasing managers reported a dour set of numbers for economic activity in April.
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Meanwhile, oil prices keep sliding lower and lower.
Traders can point to abundant supply, but a 20% slump in crude since the start of the year is equally a sign that demand isn’t keeping up.
The upshot is loud and unequivocal: the global economy is weakening.
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Yet, look at how equities have bounced back. The S&P 500 Index fell less than net 1% in April — an incredible rebound after having slumped more than 20% from February’s market peak at the start of the month.
And for all the tariff upheaval, the Nasdaq 100 is close to re-taking 20,000, a level that would have seemed dizzyingly high just a couple of years ago.
April witnessed one of the best rebounds since the 50s (from a 14% drop to down just 1.5% month-to-date as of Friday's close). A foursome of positive 'tariff' news and stocks lifted for the sixth straight day - the best stretch of gains since March 2022.
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RECESSION IS IN THE WIND
President Donald Trump may have put many tariffs on hold, but with no signs of a trade deal with China, the prospect of empty shelves in the US, higher prices and an inevitable slowdown in the US economy is real. Former Treasury Secretary Janet Yellen is out warning that the chances of a recession are “way up” in the wake of tariffs. In turn, that points to shrinking earnings at Corporate America.
While the Fed focuses on the deeply flawed and highly gimmicked “official” economic data in the U.S., REAL WORLD signals are telling us the economy is rolling over in a big way.
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The earning season just just ending had:
- Discount airline Southwest’s CEO Bob Jordan noting that air travel is declining in a way not seen since the pandemic. Jordan commented “I don’t care if you call it a recession or not, in this industry that’s a recession. Southwest is not the only company noting a sharp decline in consumer spending and economic activity.
- PepsiCo cut its earnings per share forecast for the entire year amidst heightened “economic uncertainty.” The company’s CFO stated that,“we are probably not feeling as good about the consumer as we were a few months ago” and noted consumers were even pulling back on buying snacks!
- Chipotle, which is usually one of the strongest fast casual restaurant chains in the U.S., just reported its first decline in same-store sales since 2020. Management noted that consumers are cutting spending amidst economic “uncertainty” (read: a recession is coming if not already here).
- Walmart’s CEO has noted what he calls “budget-pressured” consumers were exhibiting “stressed behaviors” due to money running out “before the month is done.”This is WALMART we’re talking about, noting consumers are tapped out.
If airlines, snacks, restaurants, and even discount retailers are all noting a sharp pullback in consumer spending, what do you think this means for the economy The answer is simple: the economy is rolling over into a recession, if it’s not already in one (see Economics section in this report).
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This is going to POTENTIALLY panic the Fed into a truly insane amount of money printing … and the markets knows it!
A Tsunami of liquidity/ money printing may be about to hit the financial system likely by Q3.
As I wrote in last week’s newsletter:
- Bernanke printed $2–3 trillion in three or four years.
- Powell? $5 trillion in 18 months.
- This time — it’s going to be a $7 to $10 trillion growth in the Federal Reserve balance sheet.
Even a mild 5% contraction in earnings from 2024 would leave the aggregate earnings per share of the S&P 500 basket at $225, which would be roughly commensurate with a value of 3,874 on the index. The S&P 500 is almost 2,000 points higher than that level.
The markets may well live in denial for a little while, but the longer they do so, the more pain is storing up for the future
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Who do you believe?
Bonds and commodities are yelling 'recession' while stocks are shrugging off any weakness...
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Treasury Secretary Bessent mentioned that he thinks rates should be lower and brought up the fact that 2Y yields were well below Fed Funds (and as Gundlach constantly reiterates, the 2Y leads The Fed... not the other way around)...
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In our latest Market Lab we laid out a raft of supporting charts that a recession is increasingly a strong possibility. Here are just four of them which we encourage you to study.
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There is a reason the greatest investor of all times is sitting on cash now approaching $350B. His famous Buffett Indicator (shown in the insert) supports this positioning. His cash holding could buy over 475 of the S&P 500.
If he is right he may very well own it by the end of this decade – or sooner!
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Veteran emerging-markets investor Mark Mobius says, "Cash is king" as he waits for the trade war storm and mounting macroeconomic headwinds to blow over.
"At this stage, cash is king. So 95% of my money in the funds are in cash, Right now, we've got to keep the cash and be ready to move when the time is right.“
"If the market comes down further, of course we will put more money in."
Mobius owns "a little bit with S&P 500 funds" to track the market and expects higher prices by the end of the year.
"Trump doesn't want to see a big market crash, so he will be making adjustments and announcements, which will give a little bit more confidence for people in the market," the legendary investor said.
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Eventually, the Global Liquidity Proxy will take control back from market traders and speculators.
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We have been operating in a Uni-Polar world since the end of WWII and the Bretton Woods’ construction of the new post war World Order.
It established the US Dollar as the Global Reserve Currency which in turn established the US Treasury Note as the Risk Free benchmark.
It has worked amazingly and almost unquestioned for close to 70 years.
That period is over as we quickly move to a Multi-Polar world with other strong global military and economic economies besides the US
That expected transition is well underway.
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Analysts have found that valuation is actually not a catalyst for movements in the Dollar. However, it is still helpful to think about fair value when trying to understand how far the US dollar can adjust if economic or market conditions change.
Recently the US Dollar’s strong valuation has been driven by elevated global allocations chasing superior return prospects in the US. With those returns now eroding currency analysts expect the Dollar’s misalignment to erode gradually as well.
This chart shows that the US Dollar is Overvalued Relative to the Goldman Sachs "DEER" Model, but the Gap is Closing!
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HOW OVERVALUED IS THE USD?
The question is "how overvalued is the USD?"
Fair Value for DXY has remained relatively stable over the past 15 years. In the year since the Dollar’s rally in 2021/22, it has since sustained a overvaluation around +20% - though the year-to-date Dollar softening trend has cut that valuation gap in half.
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Current Fair value estimates imply that the Dollar after recently falling is:
~9% overvalued on a DXY basis, and
~13% on a Trade-Weighted basis.
The "DEER" model has been the primary model for assessing foreign exchange “fair value” at Goldman Sachs for almost 30 years. FX fair value is hard to pin down because there is no underlying cash flow, but this model assumes that Real Exchange rates mean-revert over time, but:
- Differences in Productivity and
- Terms of Trade will influence the underlying trend.
This is basically a PPP model in FX lingo, with some twists. The model has 4 parts
- The Long Run Average, a
- Relative Rates of Inflation,
- Productivity and
- Terms of Trade.
In practice, for a currency like EUR/USD or GBP/USD, the long-run average is the dominant driver, with inflation differentials providing a supporting role. For currencies like the Australian Dollar, terms of trade (commodity prices) will play a bigger role. Productivity will have a bigger impact in emerging markets.
Valuation gaps take roughly five years to close with a ~20% per annum convergence rate. Further out, spot tends to hover around fair value before overshooting at the eight-to-ten-year horizon. The empirical evidence suggests investors should not be surprised if currencies continue to appreciate or depreciate once they reach fair value, although there may be too much uncertainty to explicitly forecast this sort of overshoot long into the future. It depends on the currency pair, but in general when comparing FX to other asset classes, fair value isn’t as strong of an anchor or stopping point.
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In the current environment it’s likely corporate and pensions to really watch to see if a big trend is kicking in?
This is because they own assets and assume liabilities denominated in a range of currencies and then choose whether to hedge their exchange rate risk.
They got way overexposed to dollars believing the EU would continue to struggle economically, Ukraine, etc.
Trump mistakenly threw everything he had at Canada with his talk of 51st state. The US dollar couldn’t hold above the 1.44 level. In markets, what cannot go up, soon comes down. We are at 1.38 with every Canadian pension and corporate caught off side, desperate to sell every rally -- which is why they haven’t gotten one.
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- How many times in our careers have we seen gold up but stocks down, bonds, down and the dollar down?
- It signals people have way too many dollars!
- Trump can’t afford a recession if he’s going to get his tax cuts passed
- The US budget deficit remains ~7% of GDP. A recession would push it into the teens.
- Trump faces the risk of a former UK PM “Lizz Truss” moment.
- She too ignored experts and went all in on something that made no sense.
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WILL INSTITUTIONS SOON BE FORCED TO PANIC INTO GOLD
AS A DOLLAR HEDGE?
AS AN ASSET CLASS IT IS COMPLETELY UNDER OWNED!
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The current buyers of Gold are Gold Bullion by Central Bankers and Retail through ETF’s.
Institutional buyers are still noticeably missing!
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Bitcoin is also under owned but that is likely to change in the not too distant future.
We believe that for a number of reasons.
One is that Capital has begun to flee out of China as economic conditions worsen and other countries as investors look increasingly for Safe Havens and “Flight to Safety”.
Many corporate CEO’s are stating that getting their profits and capital out of China is becoming increasingly more difficult. Chinese citizens are also nervous.
Bitcoin is currently almost the only easy solution.
Many investors like us see Capital Controls coming with the next Financial Crisis.
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As the FLOWS chart on right illustrates Bitcoin is beginning to separate itself from Gold. As Standard Charter recently reported: “BITCOIN is a superior "financial system hedge" compared to gold because of its decentralized nature”
Also:
First: Strategic asset reallocation out of US assets may drive Bitcoin to a fresh all-time high.
Secondly: Several indicators support this thesis:
- Term premium,
- BTC time-of-day analysis,
- Accumulation by BTC ‘whales’,
- ETF flows from gold into BTC.
Thirdly: Timing the upswing is tricky, but we think it is imminent; we expect a fresh all-time high in Q2
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As a result as the chart on the left illustrates, US investors have been buying BTC since the 90 day tariff announcement.
The chart on the right shows whales are back.
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As we recently showed in our weekly Technical Lab we suspect when Bitcoin breaks the prior highs it could explode higher as we saw when it went from $200 to $20,00o. Time will tell but certainly worth watching.
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What can we conclude?
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In the longer term the trend is clear based on what we know now.
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However, this is the Fourth Turning and you can expect the unexpected of major Policy pivots and announcements.
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What we focused on is risk adjusted investing. Like Buffet and Mobius we are in cash. Our equity holdings are primarily limited to precious metals and defense plays.
When we say cash we are talking currency hedged Treasuries and bonds in the 1-5 year duration range.
We will wait for the equities to offer better risk adjusted returns.
We will watch closely to see if our multi-fractal Elliott Wave pattern of WXYXZ continues to offer us guidance.
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Taking it to smaller degrees we are at another proof point.
Can’t wait to see how it plays out!
But like Warren Buffett we follow his three proven rules of investing:
- Never Lose Money
- Never Lose Money
- Never forget Rule #1 & #2!
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As I always remind you in these videos, remember politicians and Central Banks will print the money to solve any and all problems, until such time as no one will take the money or it is of no value.
That day is still in the future so take advantage of the opportunities as they currently exist.
Investing is always easier when you know with relative certainty how the powers to be will react. Your chances of success go up dramatically.
The powers to be are now effectively trapped by policies of fiat currencies, unsound money, political polarization and global policy paralysis.
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I would like take a moment as a reminder
DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are for educational and discussions purposes ONLY.
As negative as these comments often are, there has seldom been a better time for investing. However, it requires careful analysis and not following what have traditionally been the true and tried approaches.
Do your reading and make sure you have a knowledgeable and well informed financial advisor.
So until we talk again, may 2024 turn out to be an outstanding investment year for you and your family?
I sincerely thank you for listening!
