Investing in Gold and Silver - The Long Game?

The Biden administration is bragging that this year will have the largest annual deficit decrease in US history. It's hard not to agree that this is brilliant spin given the annual deficit for fiscal 2021-22 will be around a trillion dollars. The market's acceptance of the spin that an annual deficit of "only" a trillion US dollars is positive news is a factor in the decline in price of gold and silver.

Fiscal-year-to-date the deficit is $726 billion, a record year-over-year decrease of $1.814 trillion (71%), for the first ten months of the fiscal year. Fiscal-year-to-date Receipts were $787 billion (24%) higher, while Outlays were lower by $1.027 trillion (18%). Source: https://www.fiscal.treasury.gov/files/reports-statements/mts/mts0722.pdf

Given that Japan has demonstrated that a government that controls their own currency can run up an enormous debt that has yet to cause their currency to collapse, it becomes challenging to predict when the US debt will become so overwhelming that it leads to debasement of the US dolar with a result of the price of silver exploding higher. But with an annual deficit run rate of a trillion dollars or more, US dollar debasement is only a matter of time. But this result may be a matter of years not months. (and the value of the yen is down 18% versus the US dollar year to-date, so the long predicted collapase of the Japanese Yen may already have started).

As of July 2022 the annual US borrowing costs was $589.5 billion to fund the debt, which is 12.20% of total federal spending. Given the increases in interest rates this year, that percentage is going to go higher. And as the debt increases, the cost funding the debt will eat up an unsustainable ever increasing percentage of US revenue.

While there are numerous factors that could lead to a massive increase in the price of gold and silver in the short term, I'm not counting on this happening in in the next few months.  But it is inevitable that the price of gold and silver will be substantially higher at some point in the future.

Will The Stock Price of Tesla Get Cut In Half If The Company Is An Also Ran In The Robotaxi Business?

According to Cathie Wood, the price of Tesla stock will hit $2,600 per share in 2026. It's currently a little over $700 per share. “Tesla’s prospective robotaxi business line is a key driver, contributing 60% of expected value and more than half of expected Ebitda in 2026,” wrote ARK analyst Tasha Keeney in a  post on ARK’s website.

However, given the current state of the robotaxi business, assuming that Tesla will be a leading player by 2026 seems like an optimistic viewpoint. Waymo and Cruise both have a huge lead in developing a robotaxis. 

General Motors-backed Cruise received approval from California regulators last week to operate a commercial robotaxi service in San Francisco, marking a watershed moment in the autonomous vehicle rollout.

Alphabet's Waymo has been running a robotaxi service in suburban neighborhoods outside Phoenix for a year and a half. It is also pursuing a robotaxi license in San Francisco.

Tesla's robotaxi venture may or may not be vaporware. During the Q1 2022 earnings call, Elon Musk talked  about the timeline for Tesla's Robotaxi. Tesla plans to announce the vehicle in 2023 and begin mass production in 2024. But given Tesla's track record of missing Musk's target dates, it would not be surprising if this launch projection turns out to be optimistic. And given the huge lead Cruise and Waymo hold, there is certainly no guarantee that Tesla's robotaxi's service will be nationally competitive with these well funded competitors. Building out a national or international robotaxi is likely a multi year project. 

The announcement today that Uber is teaming up with Wayno on autonomous tracking may be another challenge for Tesla. In addition to Cruise and Waymo (and Zoox), Tesla will be competing against Uber and Lyft and possible combinations among these 5 firms.

Tesla currently sports a very rich P/E of 97. Given the challenges the company faces in launching a robotaxi business, it may be more likely that the 2026 stock price is $350 rather that $2,600.

Full discloure - I am short Tesla bearish call spreads and short SARK puts (the inverse ARKK ETF). Thus, I profit if the price of Tesla and ARKK stays flat or declines. 

Fed Rate Hikes Are A Short Term Headwind For Silver and Gold, But Ultimately Will Speed Up US Dollar Debasement and Higher Precious Metals Prices

I think it likely that investors may be continue to be able purchase gold and silver at prices near current levels for the next few months. As the Fed rate increases push interest rates up, as well as the DXY (dollar index versus a basket of foreign currencies), this will put pressure on the price of precious metals. But the increase in interest rates also leads to higher cost to the US Treasury to fund the debt. The ever growing US debt is debasing the value of the US dollar.

Due to interest rates rising by more than projected, the US Treausury had interest costs in 2021 that were around $20 billion higher than the Congressional Budgt Office (CBO) estimated. And that was before the Fed had even started raising rates.

The increasing US debt will be funded by an ever increasing percentage of US federal revenues. The value of the US dollar is going to plunge and the price of gold and silver will rocket higher. And as you read the following, please keep in mind that the CBO projections are often optimistic

As the Peter G. Petrsen Institute reported

"The growth in interest costs presents a significant challenge in the long-term as well. According to CBO’s latest projections, interest payments would total around $60 trillion over the next 30 years and would take up nearly one-half of all federal revenues by 2050. Interest costs would also become the largest “program” over the next few decades — surpassing all discretionary spending in 2043, Medicare in 2043, and Social Security in 2045."

https://www.pgpf.org/analysis/2022/05/higher-interest-rates-will-raise-interest-costs-on-the-national-debt

Thus, while record high gold prices and triple digit silver may not be in the cards in the short term, it will most likely arrive many years (decades?) before 2050.

Is Silver Price About To Provide Us With A Real World Example of the Veblen Effect?

 A Veblen effect is when the demand for a good increases as the price increases, in apparent (but not actual) contradiction of the law of demand, resulting in an upward-sloping demand curve.

My guess is the we are about to witness the Veblen effect impact the price of silver. The price is rising and an increase in demand seems likely. And given that some sources indicate that the silver market is expected to record a supply shortfall of 20 million ounces in 2022. (source - The Silver Institute), it would not require too many whales to drain silver from the market by adding to their portfolios for the supply to go into a significant deficit. Thus, a short squeeze could be in the offing. (Further, the abysmal failure of crypto to move higher in response to the Ukraine invasion crisis theoretically should lead to a reallocation from crypto to precious metals)

Investment demand for silver has been in the doldrums the past few months as the paper price has been sinking. The Comex warehouse inventory of registered silver is marginally higher than it was at the close of 2021. The Sprott PSLV inventory of physical ounces of silver is only up be 100,000 troy oz since the close of 2021. 

Conclusion

Time will tell whether investment demand and/or the  price of silver moves higher. But my guess is that we are about to experience a real world example of the Veblen effect. 

Will The Fed Crush The Housing Market Again? Will 2022 Rhyme With 2007 Due To Interest Rate Increases

One of the dumbest things I've heard is the statement that "no one saw the 2008 financial crisis coming". Typical is Paul Krugman's comment  that the crisis “came as a shock to me as to almost everyone”. Well, if you've seen the movie "The Big Short", it's obvious that a coterie of smart investors forecast the crisis and profitted off it. Further, lots of folks in the real estate, housing, and mortgage businesses saw it coming. Personally, during the 12 consecutive times in 2005 and 2006 that Greenspan and Bernake's Federal Reserve raised the Fed Funds rate, I cursed them for their stupidity. It should not have been a surprise that they crashed the housing market.

There are certainly some significant differences between 2007 and 2022. 

1) Currently, the Fed Funds rate is only 0.25%. During 2005-2006, the Federal Reserve raised the Fed Funds rate from 2.5% to 5.25%. 

2) In 2007, if someone could fog up a mirror, they could get a mortgage. Lending standards have tightened up since then. A decline in housing prices will be unlikely to generate as many loan defaults. During the financial crisis, loan default foreclosures became a vicious cycle in exacerbating housing price declines 

3) The speculative buying of homes has moved from individuals to corporations. Hopefully, the corporations buying up homes in today's market will be better able to manage a drop in housing prices and won't be forced to sell into a declining market. 

In 2006, home builders realized that too high a percentage of the homes in their housing developments were being bought by individual investors as rental properties. In addition to the financial risk of mortgage defaults, too many rental properties in a neighborhood of single-family homes can cause property prices to stagnate or drop. That's because tenants don't maintain homes to the level that owners who actually live in the property do. Unfortunately for home builders, most were a bit late to realize the risks of selling too many homes to retail investors utilizing mortgages to borrow money.

Thus, there are too many differences in today's conditions for history to repeat itself (but it may rhyme, to paraphrase Mark Twain). And if we get another Fed driven steep increase in interest rates, it will bleed into the cost of new mortgages. At the nosebleed level of the residential housing market, it won't take too significant an increase to mortgage rates to crush the housing market.

According to this January 10th CNBC article "The current jump in rates will cost potential homebuyers dearly. For a median-priced home, currently about $350,000, buyers putting down 20% will now see a monthly payment $125 higher than they would have just three weeks ago. For those using low down payment loans, the monthly increase will be even larger. Higher interest rates could throw some cold water on high home prices, as buyers hit an affordability wall." And the $125 figure is already badly out of date as mortgate rates have gone up about half a percent since then.

The Federal Reserve hasn't even started the upcoming series of interest rate hikes, and the 30 mortgage rate has already increased from under 3% to over 4%. If the Federal Reserve actually does increase the Fed Funds rate 7 times, as some are predicting, it was crush the housing market again.

If we do get a Fed Funds induced sharp drop in housing prices, beware of the impact upon the economy and the stock market. Dropping housing pricing adversely affects consumer confidence and perception of personal wealth. It also leads to a decrease in  construction employment. Thus, lower economic growth becomes likely and a declining housing market can be a major contributor to an economic recession. 

Does Bitcoin's Price Decline on a Day When The Drums of War Were Beating Invalidate The Bull Case for Crypto

Up until recently, I've been a Bitcoin bull. And in the long term, my guess is that it remains a good hedge against debasement of the U.S. dollar. But on a near term basis, I'm having trouble finding justification for owning Bitcoin. 

On a day when the drums of war were beating loudly, and most commodities increased in value, Bitcoin fell in price. The price of Bitcoin dropped from $US43,571 to $US42,355 (-2.8 %) on 2/11/22 according to CoinMarketCap.

Given the following, at the moment it seems easier to make the case that Bitcoin is a Ponzi scheme than a good investment vehicle.

1) Bitcoin was not a crisis hedge when a Russian invasion of Ukraine was announced as being immenent

2) Bitcoin has not been an inflation hedge during the past few months

3) Over the short term, Bitcoin's  price has been correlated with the Nasdaq, thus it is not currently acting as a stock market hedge

4) It is not a very practical transaction vehicle

5) There is significant regulatory risk

However, given the long term upward price momentum of Bitcoin and the crypto's Phoenix like rise from past dips, I not ready to give up on it. But unlike past dips, I'm not buying this one.

Focus on Core Inflation Is Misguided. Increased Food And Energy Costs Will Drive Ongoing Inflation

Is the current rate of "core inflation" transitory? Maybe. But not including food and energy in inflation calculations is misguided. Food and energy are excluded from core inflation because they are volatile. But excluding food and energy due to volatility only makes sense if the prices are bouncing up and down. Both food and energy costs are on a long term upward trend. So even if Jerome Powell hits his target of two percent core inflation, the cost of living coming out of consumers pockets is going to be greater than two percent. 

It seems ridiculous that after today's Consumer Price Index (CPI) report (9/14/2021), so much attention was given to that fact the Core CPI was only up 0.1% and below consensus expectations. Headline CPI rose 0.3% month-over-month, boosted by a 2.0% surge in energy prices and a 0.4% rise in food. While the headline CPI percentage year-over-year edged down to 5.3% from 5.4% it's hard to see how anyone can continue to claim inflation is transitory.

Climate change (or more accurately "global weather weirdness") is going to continue to play havoc with food production. Food shortages are a real threat in the near term, and highly likely in the future. As decribed in this article, "A world of hurt: 2021 climate disasters raise alarm over food security, human-driven climate change is fueling weather extremes — from record drought to massive floods — that are hammering key agricultural regions around the world. And has Jerome Powell been grocery store shopping lately? Grocery product prices are increasing and package sizes are shrinking. (Google shows 189,000 results for "shrinkflation")

Energy costs are also going to continue rising. The combination of reduced exploration spending and environmental regulations are curtailing oil and gas production much faster than clean energy is able to serve as a replacement. While oil is up to over $70 a barrel, natural gas prices are spiking even faster, particularly in Europe. According to the Wall Street Journal, "at their peak, U.K. electricity prices had more than doubled in September and were almost seven times as high as at the same point in 2020. Power markets also jumped in France, the Netherlands and Germany."

And as far as consumers perception of inflation goes: 1) prices at the grocery store, 2) the cost of filling a tank with gasoline, and 3) heating bills, are all extremely high visibility items. Consumers may not notice a 2% increase in core inflation, but they sure as hell notice increases in food and energy cost.

Thus, anyone that pretends that inflation is transitory based on "core inflation" is either wrong or knowingly attempting to put a spin the data. Keep your focus on the rise in headline inflation.