[The following is an excerpt from a commentary posted at TSI last week]

The US economic expansion that began in mid-2009 has been much weaker than average, but, as indicated by the chart displayed below, it is also much longer than average. In fact, it is simultaneously the weakest and the second-longest expansion on record. Due to the advanced age of the expansion and the signs of weakness that have appeared over the past three months in economic statistics and the stock market, recession warnings are becoming more common. However, when we take an impartial look at the most reliable leading indicators of recession we arrive at the conclusion that these warnings are premature.

Chart source: http://realinvestmentadvice.com/bull-markets-actually-do-die-of-old-age/

The three leading indicators of US recession that we care about are the ISM New Orders Index (NOI), Real Gross Private Domestic Investment (RGPDI) and the yield curve. Not one of these indicators is close to giving a recession warning, which is why we say that the increasingly-common warnings of recession are premature.

The NOI, for instance, has declined each month since making a 13-year high in December-2017, but it remains far above the level that it would have to drop below (the red line on the following chart) to warn of a recession.

Also, there are not even tentative signs of major trend reversals in either RGPDI or the yield curve. That’s because last month the US yield curve became its flattest in more than 10 years (a recession is signaled by a major shift from flattening to steepening) and because the data published at the end of last week revealed that RGPDI hit a new all-time high in Q1-2018. RGPDI’s trend generally reverses downward at least two quarters prior to the start of a recession.

Note that the vertical red lines on the following chart mark the starting points of the last two recessions.

Based on the latest data, we roughly estimate the recession start-time probabilities as follows:
– Q2-2018: 0%
– Q3-2018: 10%
– Q4-2018: 30%
– Some time in 2019: >80%

The main reason for our high 2019 recession probability estimate is the decline in the G2 (US plus euro-zone) monetary inflation rate illustrated by the following chart. The inflation rate bounced in March, but it’s likely that the preceding decline was large enough to bring the artificial boom to an end.

I update gold’s true fundamentals* every week in commentaries and charts at the TSI web site, but my most recent blog post on the topic was on 20th March. At that time the fundamental backdrop was gold-bearish. What’s the current situation?

The fundamental backdrop (from gold’s perspective) is little changed since 20th March. In fact, it has not changed much since early this year. My Gold True Fundamentals Model (GTFM), a weekly chart of which is displayed below, turned bearish during the first half of January and was still bearish at the end of last week. There have been fluctuations along the way, but at no time over the past 3.5 months has the fundamental backdrop been supportive of the gold price.

It’s possible for a tradable rally in the US$ gold price to get underway at a time when the fundamental backdrop is not gold-bullish, but for this to happen the sentiment situation as indicated by the Commitments of Traders data would have to be very supportive or the US$ would have to be very weak. Currently, the fundamental backdrop is bearish, the sentiment situation is neutral and the Dollar Index has just broken out to the upside. Therefore, as things stand today there is no good reason to expect that a substantial gold rally will get underway in the near future.

Based on how I expect the fundamentals to shift over the weeks ahead my guess is that a substantial gold rally will begin from a May-June low. However, there is more to be lost than gained by ‘jumping the gun’ and buying a short-term trading position now in anticipation of such a rally.

*Note that I use the word “true” to distinguish the actual fundamental drivers of the gold price from the drivers that are regularly cited by gold-market analysts and commentators. According to many pontificators on the gold market, gold’s fundamentals include the volume of metal flowing into the inventories of gold ETFs, China’s gold imports, the volume of gold being transferred out of the Shanghai Futures Exchange inventory, the amount of “registered” gold at the COMEX, India’s monsoon and wedding seasons, jewellery demand, the amount of gold being bought/sold by various central banks, changes in mine production and scrap supply, and wild guesses regarding JP Morgan’s exposure to gold. These aren’t true fundamental price drivers. At best, they are distractions.

Most people support a political party in the same way they support a sports team. The support is through thick and thin, regardless of the policies that are being proposed/enacted. And criticism of their team is not tolerated, because, well, it’s their team. People love to be part of a team.

One consequence of the team-spirit aspect of politics is that the average person doesn’t decide the appropriateness and efficacy of a policy by objective analysis, but rather by who is proposing/implementing the policy. If the policy is put forward by Party A then the supporters of Party A will claim it is a good idea and the supporters of Party B will be critical, whereas if the identical policy is put forward by Party B then the Party B supporters will be in favour of it and the Party A supporters will be critical. In some cases a policy put forward by a particular party will be so obviously bad that the more rational supporters of that party will be unable to come out openly in favour of it, in which case they usually will remain silent. They are like the one-eyed sports fans who shout abuse when the referee makes a bad decision in the opposing team’s favour but turn a blind eye when the referee makes a bad decision in their team’s favour.

Another consequence of the tendency towards blind support of a political team and the associated unwillingness to objectively analyse the merits of policies is that people tend to embrace a set of beliefs covering many different socioeconomic issues, even if the beliefs are not consistent. This is because the set of beliefs is associated with their team and advocated by the leaders of their team. A knock-on effect is that if you know where someone stands on one hot-button issue, examples of which are climate change, gun control, immigration and abortion, in most cases you will know where they stand on all hot-button issues. That’s even though it doesn’t logically follow that a particular belief on, for example, gun control should be linked to a particular belief on, for example, climate change or abortion.

One of the most curious aspects of the strong identification with a particular political team and the animosity that members of one team often feel for members of the opposing team is that in practice the teams are very similar. At each election a sizable proportion of the population will vote for what they believe is a change of direction, but regardless of the outcome of the election nothing will really change. The leaders of the different teams will spew forth different rhetoric and there will be some differences in the policy details, but regardless of the election result there will be no meaningful change in the overall governmental approach. The main reason is that in a typical modern-day two (or more) party democracy, each of the major parties will be in favour of a powerful, intrusive government. In effect, when people vote to remove the team that’s currently in power they are voting for a change in the facade, not a change in the structure.

It would be great if the average person, instead of labeling himself/herself as a member of a particular political team (Republican, Democrat, Conservative, Liberal, Labour, etc.) and blindly supporting that team’s policies, either impartially assessed each policy proposal and railed against bad policy regardless of its origin or simply admitted to not being well-enough informed to have an opinion. Unfortunately, that’s never going to happen.

[Here is an excerpt from a commentary posted at TSI about a week ago]

In February of this year the year-over-year rate of growth in the US True Money Supply, a.k.a. the US monetary inflation rate, was only 2.4%. This was its lowest level since March of 2007 and not far from a multi-decade low. In March of this year, however, the monetary inflation rate almost doubled — to around 4.6%. Refer to the following chart for more detail. What caused the reversal and what effect will it have on the economy and the financial markets?

The Fed has been slowly removing money from the economy via its QT program, so March’s money-supply surge wasn’t caused by the central bank. The main cause also wasn’t the commercial banking industry, because although there has been an up-tick in the rate of bank credit expansion over the past month it is nowhere near enough to explain the increase in TMS.

We can’t be certain, but by a process of elimination we conclude that the sharp upward reversal in the US monetary inflation rate was due to money coming into the US from overseas. If so, the most likely driver would be the repatriation of corporate profits due to the tax changes approved near the end of last year.

In other words, it’s likely that March’s TMS surge was due more to the way that the banking system accounts for existing US dollars than an increase in the total supply of US dollars.

If the monetary inflation reversal has more to do with a change in the way existing US dollars are accounted for than a sudden large increase in the pace of new dollar creation, then the effects on the economy and the financial markets will be minimal. In any case, after the monetary inflation rate has moved high enough for long enough to set in motion an artificial boom, a drop to a relatively low inflation level will inevitably lead to a bust (an economic recession and a large decline in the stock market, often accompanied by a banking crisis). For example, the pronounced rebound in the TMS growth rate from Q4-2006 to Q3-2007 did not stop the recession, the equity bear market and the banking crisis of 2007-2009.

This means that as a result of the 2017 decline in the monetary inflation rate to near a 20-year low, the die has been cast.

The big unknown right now is the timing of the bust that will occur in response to last year’s precipitous decline in the monetary inflation rate. Will it get underway during the second half of this year or will it wait until next year?