Large US Treasury Bond Auctions May Be Good Gold and Silver Dip Buying Opportunities

The market is starting to choke on the massive size of US Treasury auctions. Auctions sizes are particularly large currently as Treasury refills its coffer after emptying most of the surplus during the close to the wire negotiations on the US debt limit. We're talking $500-600 billion in debt being auctioned off every week to pay off the expiring bonds that fund the soon to be $34 trillion debt, as well as to cover the monthly deficits. And with the US running $100-200 billion monthly deficits, that's an additional $25 billion or more in debt that needs to be raised every week.

On Wednesday demand for the 20 year bonds being auctioned off was underwhelming. So, interest rates went up, the US dollar index (DXY) responded by going higher, and that led the alogos to sell off gold and silver futures. The Wednesday dip in the price of gold and silver futures was reversed the next day.

In a more rational world, weak bond auctions would be a sign of trouble for the US dollar, and the prescious metal futures would go higher. And eventually, that will be the case. But for now, don't be surprised by dips in the price of gold and silver after weak US bond auctions. 

While there are no long term bond auctions scheduled for the rest of 2023, there will be a heavy schedule next month. But with the enormous funding requirements, Treasury auctions can not be completely shut down for the rest of December. There will be 5 and 7 year note auctions next week (12/27 and 12/28), but these auctions are much less likely to lead to fireworks than long term bond auctions

Climate Science Deniers Have Uncovered 1,600 Scientists Who Signed A There Is No Climate Emergency Declaration. That is 0.02% of the 8 Million Scientists In The World

Most people know someone that is brilliant yet has no common sense. Thus, the fact that climate science deniers are making a big deal about finding 1,600 scientists from random fields that have signed a declaration that "there is no climate emergency" is little more than fodder for their echo chamber. I'm pretty certain with a sufficient effort I could find 1,600 scientists to sign a declaration stating that "God (or the devil) placed dinosuar bones in the ground to test Christians' faith".

To deny that there is a climate emergency, these 1,600 scientists (0.02% of the total) have to overlook the following:

1. Hurricanes and typhoons are growing in intensity at rates never experienced during the satellite era. They are becoming increasingly deadly (the climate science deniers talk about there not being a significant increase in the number of hurricanes, but there has never been a consensus among mainstream climate researchers in regard to frequency, only that intensity would increase).
2. Deadly flooding is becoming increasingly common. A warmer atmosphere holds more moisture—about 7 percent more per 1.8°F (1°C) of warming—and a significant increase in atmospheric moisture is present due to the air holding more moisture as it warms.This added moisture powers heavy rainstorms becoming flooding events.
3. Sea level is rising by 1/8th inch per year globally and by more in many locations. In the past 20 years, the rate of sunny-day flooding has doubled. Compared to 2000, it's increased 400% on the East Coast and 1,100% on the Gulf Coast. As an example, Charleston SC flooded about 1 out of every 5 days in 2019, and the sunny day flooding problem is worsening.
4. Some areas of the Middle East are too hot for human survival without the aid of air conditioning, fans or shade. The limit is somewhere between 104 and 122 degrees Fahrenheit if you're sitting perfectly still, according to a study conducted in the United Kingdom. Other research focuses on wet bulb temperatures.
5. The capability of the oceans to support seafood harvesting is diminishing. 

 A. Coral bleaching is occurring globally  For example, a recent paper shows that around 70% of reefs are now net erosional in the Florida Keys, meaning they are losing more habitat than they build. And the Great Barrier Reef has experienced mass bleaching events in 1998, 2002, 2016, 2017, 2020 and 2022. An estimated 25 percent of all marine life, including over 4,000 species of fish, are dependent on coral reefs at some point in their life cycle. The reefs provides essential food, shelter and the spawning grounds needed for their species’ survival. When their homes disappeared, the fishing industry becomes less productive. 

B. The acidity of the ocean has increased by 26% since the beginning of the industrial era. For oysters, scallops and other shellfish, lower pH means less carbonate, which they rely on to build their essential shells. As acidity increases, shells become thinner, growth slows down and death rates rise.The shellfish industry is experiencing higher mortality rates. Many shellfish farmers have had to add soda ash to their hatcheries to permit the seed clams, oysters and geoduck to thrive. 

Conclusion

The social conservative echo chamber is very effective at amplifying climate disinformation. They cherry pick data, utilize obscure data sources, and make a big deal of the wildest faulty predictions made by individual climate researchers which never obtained widescale acceptance. The amount of coverage of a declaration by 0.02% of scientists from an assortment of fields is a good example of how effective the social conserative echo chamber is at promoting their denial of climate science.

Will Climate Change Suppress The Price of Tech Stocks Due to Crop Failures Keeping Food Costs and Inflation High?

In the financial markets, it seems stunning how nonchalant the vast majority of investors and commentators are to the risks to stocks and bonds from climate impacts. However the world's largest  investor, Norway's sovereign wealth fund, is cutting their tech exposure due to global warning.

For reference, Norway's sovereign wealth fund, the world's largest stock market investor with $1.4 trillion in assets under management,made a stunning profit of $143 billion for the first half of 2023, due to the growth of U.S tech companies (the AI craze).

But they are cutting back on tech exposure. Their CEO stated that global warming is lowering food harvests, and thus increasing food prices. The fund expects it will be difficult to reduce inflation worldwide due to high food prices. And high inflation leads to high interest rates. High interest rates produce a poor risk reward for owners of pricey tech stocks versus earning substantial interest fees from bonds. This makes tech investments signifiantly less attractive and far less likely to increase in price.

While food shortages may be the first climate impact to hit the financial markets, the markets seem oblivious to the multitude of long term impacts that are likely to wreck economies worldwide (along with potentially causing mass starvation and making large swathes of the globe unlivable).

Got A Climate Change Denial Opinion Piece For The WSJ? No Need To Worry About Editor Fact Checking - Global Temperature

Climate change deniers have a couple of go-to websites; temperature.global and UAH Global Temperature. The deniers cherry pick data from these two websites and ignore the fact that the information these two sources provides is at odds with all other credible global temperatures, land air temperatures, marine air temperatures, sea surface temperature, sub-surface ocean temperatures, lower atmospheric temperatures, sub-surface land temperatures, and sea level rise as a metric of a warming climate system. A sampling of the more credible sources are NOAA, NASA, the UK Met Office, and the Japan Meteorological Agency.

In a July 8 Opinion article published in the Wall Street Journal, the author claims "Hottest Days Ever? Don't Believe It". Steve Milloy's data source supporting his claim is the obscure weather.global website. Milloy suggests that the University of Maine's Climate Reanalyzer report that July 3 and 4 were the hottest days on record is not believeble because it is not comfirmed by temperature.global. However, Milloy conveniently fails to mention that NOAA also confirmed this factoid (The National Oceanic and Atmospheric Administration is a scientific  agency within the United States Department of Commerce), And given that killer heatwaves are scorching the US Southwest and Louisiana, Mexico, China, India, and the Middle East, it's challenging to give credence to a data source that has failed to measure a July temperature spike.

The WSJ's editors seemingly failed to catch this bit of hypocracy. Milloy argues that temperature stations utilize corrupted data. But guess what the temperature.global site utilizes to compile it's reports? Yup, surface temperature measurement versus the satelite data utilized by Climate Reanalyzer. And NOAA's methodology is provided on the following webpage: https://www.ncei.noaa.gov/products/land-based-station/noaa-global-temp

It's long past time for the WSJ to stop allowing their "Opinion" section to be filled with misleading climate change editorials featuring manipulated data and cherry picked data sources.

Fed Chair Powell's Attempt At Stand-Up Comedy

Guest post by OtareMilclub, a frequent contributor to Reddit.

At his May FOMC press conference, Mr. Powell tried his hand at stand-up comedy by saying "banking conditions have broadly improved since March." Could it really be possible that he can be so blind to what is actually happening within the banking system?

A banking system can only function properly when certain parameters are in place. Banks need to pay depositors a rate that is close to what they can receive from short-term Treasuries and that interest rate should also be above the rate of inflation. Most importantly, the rate paid on banks' liabilities (deposits) needs to be below the rate it receives on its assets (loans). A steep yield curve, where short-term rates are several hundred basis points below long-term rates, is conducive for a healthy banking system to exist.

In this scenario, deposits are sticky because there is no motivation to leave the banking system for the relative safety of T-bills; and banks can easily turn a profit due to the positive-sloping yield curve. The situation we have today is the exact opposite. Banks are now paying depositors far below what they can receive from a risk-free, short-term Treasury Bill, and that rate is nowhere near the increase in the Consumer Price Index. The risk of bank runs increases when the deposit rate cannot compete with that of inflation and the rate offered on T-bills. It just does not make any financial sense at all to keep your money in a place where the risk is greater, and the reward is far less.

Case in point, the FDIC placed First Republic Bank (FRB) on Receivership last Friday. It is the 4th such bank since early March to fail. The list so far is Silvegate Bank, First Republic Bank, Silicon Valley Bank, and Signature Bank. These are not all insignificant financial institutions. Excluding Silvergate, they were the 2nd, 3rd, and 4th largest bank failures in history. The deposits and assets of the erstwhile FRB bank were sold to none other than Jamie Dimon's JP Morgan (JPM). Of course, the shareholders get wiped out; but JPM gets their assets for dimes on the dollar, and the deal comes with a government backstop on potential losses as an added incentive.

I'm sure there's nothing to see here, though; these collapses are just aberrations. So, just buy, buy, buy stocks. But please indulge me while I inject some reality into the evaluation. Do you want to know what is really plaguing the entire banking system? It is actually very easy to understand once you open your mind to the simple truth. A plethora of high-risk loans were made when money was virtually free during 10 of the last 14 years. This secular system of free money led to a 40-year-high rate of inflation. CPI at over 4x the Fed's target compelled Mr. Powell to jack up interest rates by over 500 bps in just over one year. Hence, bank assets, and the income stream they provide, are worth far less than T-bills.

For example, one of a bank's largest assets is mortgages. The Fed pushed the overnight interbank lending rate to the floor and bought $2.6 trillion in mortgage-backed securities to push the cost of buying a home to a record low. In fact, the 30-year fixed mortgage rate was below 3% from July of 2020 thru March of 2021. Rates even plunged to a record low of 2.65% by early 2021. And, 30-year Fixed rate mortgages have been below the current Effective Fed Funds Rate (EFFR), which is now just over 5%, since May of 2010. This was not an issue for banks as long as inflation remained quiescent, and both the EFFR and T-bill rates were near zero percent. But that all changed when the CPI soared to 9% by the summer of 2022, and the risk-free rate on short-term government debt climbed to match that of the Fed Fund's target rate of 5-5.25%.

The problem is banks cannot pay depositors anything close to what they can now receive from a risk-free T-bill yield. Otherwise, they would be paying depositors more than they are currently receiving from a good percentage of their assets, and their profit margins would disappear. However, if banks don't begin offering much better rates to their customers' liquid deposits, it will lead to more money fleeing the banking system, which is a drain on reserves and curbs banks' ability to lend. This exacerbates the drain on reserves already occurring from the Fed's ongoing QT program. Banks are then forced to sell assets to meet liquidity requirements, which then puts further downward price pressure on these same assets and attenuates banking reserves further. Thus, expediting and intensifying the recession that is already in progress. In the end, the size of the bank is irrelevant. All banks suffer under this same dynamic—even the bigger ones—just to different degrees. Banks have already significantly tightened lending standards. And now, they will be forced to tighten lending practices even further due to the escalating deposit flight and increased regulatory oversight. Of course, mortgages are not the only loans made to consumers and businesses during the Fed's ZIRP regime that would face margin pressure if banks deigned to pay depositors a rate that is even close to what they can receive from T-bills. Net interest margins would shrink across the board.

The deep state of Wall Street is desperately trying to convince investors that the current array of banking failures is idiosyncratic and isolated. That is the new definition of insanity. Think about it…what do you think will happen to banks' assets when the unemployment rate begins to rise? Or, how much damage will be done to the commercial mortgage-backed securities market when the $2.5 trillion worth of "vacant" commercial real estate loans have to be refinanced? How about the Trillion-dollars' worth of collateralized loan obligations that will falter as the economy begins to contract?

In other words, we have yet to see the recession become manifest, which is so very clearly predicted by the National Federation of Independent Business' small business survey, the Index of Leading Economic Indicators, plunging money supply growth rates, the soaring net percentage of banks that are tightening lending standards, and inverted yield curves. The Fed's additional 25bp rate hike after the May FOMC meeting will serve to exacerbate and expedite the coming recession. And, once that economic contraction finally does arrive, we can expect the stress in the banking system to greatly intensify. The mainstream financial media is ignorant of this fact, but the regional banking index is not. The KRE regional bank ETF is down over 40% since February 7th of this year.

Sorry, Mr. Powell, the trouble in the banking system has only just begun. Investors would be wise to stay extremely defensive with their asset allocations until the Fed and Treasury are able to adequately re-liquify the financial system. But let’s see them try doing that without causing inflation to run intractable.

Magical Growth In US Construction Employment According To BLS

Here is a number that does not pass the sniff test. 

According to a US Bureau of Labor Statistics, "Construction employment grew by 24,000 in February, in line with the average monthly growth of 20,000 over the prior 6 months".  

The question becomes how much of the overstated number is due to: 1) crappy survey methodolgy; 2) a flawed seasonal adjustment factor; or 3) a ridiculous assumption about the "birth" of new constuction firms.

Does it seem likely that construction employment is growing when office construction is in a death spiral due to work from home, retail constuction is stunted by Internet shopping, and new home construction is being blunted by lack of affordability due to 7% mortgage rates. It seems instructive to review construction job openings. Construction job opening plummeted by a shocking 240,000 in January (the most recent report) according to an Associated Builders and Contractors analysis of data from the U.S. Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey.  

And I'm not the only one that questions the BLS employment numbers. On December 12 the Philadelphia Fed’s new experimental algo predicted that the BLS had overreported tolal jobs growth by 1.1 million.

Time will tell whether the BLS releases more magical employment numbers in the upcoming months.

More US Dollar Debasement. The US Government Ran Up A $262 Billion Deficit In February. Up from $217 Billion Year Ago

The US debt continues to explode higher. February deficit was $45 billion dollars higher than the year ago February deficit. Receipts were down and outflows were up

February receipts - $262 billion vs $290 billion previous year

February outflows - $525 billion vs $506 billion previous year

Deficits by month so far this fiscal year

October - $88 billion vs $165 billion previous year (only month with a bigger deficit last year)

November - $248 billion vs $191 billion previous year

December - $85 billion vs $21billion previous year

January - $39 billion deficit vs $119 billion surplus previous year

February - $262 billion vs $217 billion previous year

Fiscal 2023 Year To Date Deficit After 5 Months - $723 billion

So that makes 5 consecutive months in which the deficit has been $45 billion or more larger that it was in the previous year (fiscal 2022). And in both this month and in November, the outlays were essentially double the receipts. 

Would you be surprised if the US hits the debt ceiling even earlier that Janet Yellon is projecting?

Will The Massive Monthly US Trade Deficit Reports Be Reflected In The Price of Silver?

There has been a lot of recent attention focused upon the US debt, deficit, and debt limit. And while the US debt is a critical source of US dollar debasement, surprisingly little attention is being paid to the US trade deficit. This is in large part due to many economists argueing that the US trade deficit doesn't matter.

Here's the current situation according to the Council On Foreign Affairs, "The US dollar’s role as the global reserve currency and primary tool for global transactions means that many other countries rely on holding dollar reserves, creating massive demand for U.S. financial assets. This means that the U.S. pays little for its foreign borrowing, allowing it to finance its high consumption at low cost."

But since the BRIC countries and even Saudi Arabia have indicated a desire to reduce their dependence on the US dollar, the DXY (US dollar index) has been declining. And since the DXY does not include the currencies of any of the BRIC countries or Saudi Arabia, the actual decline of the US dollar may not be adequately reflected by this index (The U.S. Dollar Index contains six component currencies: the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc**).**

So in this enviroment of de-dollarization being bandied about and support for the petroyuan, I suspect that the era of the US trade deficit not mattering may be coming to an end. If China and other export oriented economies lose interest in recycling the dollars they obtain by supplying the US with goods into US treasuries, the trade deficit will matter.

In regard to how little the markets seem to judge that the US trade deficit matters, it may be illuminating to look at what has happened to the Comex price of silver on the days when the US monthly trade deficit has been reported. And given that the price of silver has been driven largely by moves in the DXY index, it would seem logical that if the trade deficit mattered to the markets, then the DXY would be down on days when the massive US trade deficit was in focus and that would lead to the Comex price of silver being up. But as shown below, this has not been the case:

US Trade Deficit Report by U.S. Bureau of Economic Analysis (Initial Report)

Report Date - 1/5/23 - November deficit - $61.5 billion - Comex price of silver - Open $23.94 - Close $23.37 Change - Down $0.57, -2.25%

Notably, this report was spun as being good news as the deficit declined from the previous month. Yikes, but I have trouble wrapping my mind around how a trade deficit of $61.5 can be good news

Report Date - 12/6/22 - October deficit - $77.8 billion - Comex price of silver - Open $22.43 - Close $22.34 Change - Down $0.10, 0.37%

Report Date - 11/3/22 - September deficit - $73.3 billion - Comex price of silver - Open $19.23 - Close $19.43 Change - Down $0.20, -0.84%

Report Date - 10/5/22 - August deficit - $67.4 billion - Comex price of silver - Open $21.13 - Close $20.68 Change - Down $0.58, -2.63%

Report Date - 9/2/22 - July deficit - $70.6 billion - Comex price of silver - Open $20.34 - Close $20.14 Change - Down $0.20, -1.1%

The fact that the daily price of silver has been down during the last 5 times when the US trade deficit has been reported seems to support a conclusion that at the very least the folks trading silver don't seem to think the US trade deficit matters. (you have to go all the way back to June '22 to find a month in which the price of silver went up on the day BEA reported the US trade deficit)

For reference, the December US trade deficit will be released on February 7, 2023. (please see update for more recent reports at bottom of post)

Regardless of whether the US trade deficit matters, the combination of the trade deficit, the US Government deficit, and de-dollarization will likely lead to further debasement of the US dollar.

It makes it understandable as to why US precious metal investors are protecting themselves from dollar debasement by acquiring gold and silver. My guess is that we will see record high gold and silver prices in the not too distant future.

4/7/23 Update

Report Date - 4/5/23 - February deficit - $70.5 billion - Comex price of silver - Open $25.18 - Close $25.04 Change - Down $0.14

Report Date - 3/8/23 - January deficit - $68.3 billion - Comex price of silver - Open $20.165 - Close $20.15 Change - Down $0.015

Report Date - 2/7/23 - December deficit - $67.4 billion - Comex price of silver - Open $22.50 - Close $22.38 Change - Down $0.12

How Long Until The Massive US Trade Deficit Crushes US Dollar And Becomes A Gold and Silver Tailwind?

The monthly US trade deficit will be reported tomorrow (1/5/23). And based on past results, as long as it comes in reasonably close to the forecast, it probably will not have much immediate impact on the price of silver. The median forecast is for it to be US$63 billion, down from the previous trade deficit of $78 billion. And of course this decrease can be spun as great news. But to paraphrase Everett Dirksen, $63 billion here, $63 billion there, and pretty soon you're talking about real money".

As long as the US dollar remains the world's "trusted" reserve currency, the trade deficit does not seem to be a concern of the markets. But if the US dollar starts getting dumped, the massive trade deficit is going to be ever harder to sustain. And the dual deficits of trade and US goverment spending are leading to ever greater dollar debasement

Thus, while based on recent results, it does not seem like the trade deficit is going to have much of a short term impact on the price of gold and silver, on a long term basis, it seems likely to be supportive of higher prices..

Trade Deficit By Year - 2017 thru 2020

• U.S. trade balance for 2020 was $651B, a 9.21% increase from 2019.

• U.S. trade balance for 2019 was $596B, a 0.01% increase from 2018.

• U.S. trade balance for 2018 was $596B, a 10.42% increase from 2017.

• U.S. trade balance for 2017 was $540B, a 6.65% increase from 2016.

Source - Macrotrends.net