One of the most ridiculous arguments in favour of a rising stock market is that there is a large amount of cash on the sidelines. Regardless of the stock market’s actual prospects, this argument will always be complete nonsense.

The reason is that all of the cash in the economy — every single dollar of it — is always effectively on the sidelines, because money must always be held by someone. Money never goes into any market; it just gets shuffled around between the bank accounts of buyers and sellers. For example, when Bill buys Microsoft shares from Bob, no money goes into Microsoft or into the stock market. What happens is that money gets transferred from Bill (the buyer) to Bob (the seller), with the total amount of money on the ‘sidelines’ and the total amount of money in the economy remaining unchanged. It’s the same story with every other transaction involving the use of money to buy something. It’s amazing that you can become the chief executive or the chief investment officer of a company with billions of dollars under management and not understand this basic monetary concept.

The fact is that the amount of cash on the sidelines at any time is simply a function of the preceding amount of monetary inflation. If the money supply has grown then the amount of “cash on the sidelines” will have grown by the same amount. A consequence is that the amount of cash on the sidelines grows almost every year, regardless of whether the stock market rises or falls. For example, the amount of cash on the sidelines in the US was a lot higher just prior to the 2008 market collapse than it was three year’s earlier and the amount of cash on the sidelines will almost certainly be at a new all-time high a year from now irrespective of what happens to the stock market in the meantime.

So, equity permabulls, stop insulting my intelligence by telling me that stock prices will be supported by the record amount of “cash on the sidelines”.

Gold is obviously not close to making a new all-time high in terms of the US$ or any of the other major currencies, but it has just made a new all-time high relative to the basket of commodities included in the Goldman Sachs Spot Commodity Index (GNX). This means that gold has never been more expensive relative to commodities in general than it is today.

Just imagine how expensive gold would be if it weren’t the victim of a never-ending price suppression scheme!*

*Just in case it isn’t obvious, I’m being sarcastic.

Both the proponents and the opponents of a government-imposed minimum wage tend to use data in an effort to make their respective cases. In particular, if they are in favour of a higher minimum wage they cite examples of increases in the minimum wage being followed by stable or lower unemployment to supposedly refute the argument that higher unemployment would result from a government-enforced wage hike for the lowest earners, while those on the opposite side of the fence cite examples where a higher rate of unemployment followed a minimum-wage increase. However, whether arguing for or against the minimum wage or a higher minimum wage, such arguments are misguided. The reality is that there are so many influences on the general level of employment that it isn’t possible to separate-out the effects of the minimum wage.

As is usually the case with questions regarding the effects of a policy on the overall economy, questions about the consequences of minimum wage legislation cannot be properly answered by referring to historical data. For one thing and as noted above, it will never be possible to identify what changes in the employment situation stemmed from the minimum-wage change and what changes were due to the myriad other influences. To put it another way, although economists like to use the term “ceteris paribus” (meaning: with all else being the same) in their writings, in the real world all else is never the same. In the real world there will always be countless differences between the same economy during different time periods and between different economies during the same time period. Furthermore, unlike the physical sciences it is not possible to do experiments in economics in which a single input is adjusted and the resultant change in the output observed/measured.

In economics, the overall effect of a policy must be deduced from first principles. In the case of the minimum wage, the principle of relevance is the law of supply and demand. To be more specific, the relevant principle is that, “ceteris paribus”, the quantity of a good demanded will fall as its price rises. The fact that all else is never the same in the real world means that it will never be possible to separately measure the effect on employment of increasing the minimum wage, but it is axiomatic that artificially raising the price of anything, including the price of labour, will result in the demand for that thing being lower than would otherwise be the case. That is, it is axiomatic that fixing the minimum price of labour significantly above where it would be in a free market will result in higher unemployment. No data are required.

As an aside, those in favour of hiking the minimum wage almost always word their arguments to make it seem as if the legislation only imposes restrictions on employers, but it’s important to appreciate that the legislation also restricts job-seekers. There are undoubtedly people who would gladly accept payment below the government-set “minimum wage” in order to gain the skills and experience that would make them more valuable to employers in the future, but minimum-wage laws prevent these people from offering their services for less than the limit set by the government. Do-gooders would prefer that these people were dependents of the State rather than be productive and get paid less than some arbitrary lower limit.

In conclusion, advocating for a higher government-mandated minimum wage and including as part of your case the assertion that employment will not be adversely affected is equivalent to holding up a sign that reads: “I am clueless about the most basic principle of economics”.

I’ve seen articles explaining that rising interest rates are bearish for gold and I’ve seen articles explaining that rising interest rates are bullish for gold, so which is it? Are rising interest rates bullish or bearish for gold? The short answer is no — rising interest rates are neither bullish nor bearish for gold. Read on for the much longer answer.

I’ll begin by noting what happened to nominal interest rates during the long-term gold bull markets of the past 100 years. Interest rates generally trended downward during the gold bull market of the 1930s, upward during the gold bull market of the 1960s and 1970s, and downward during the gold bull market of 2001-2011. Therefore, history’s message is that the trend in the nominal interest rate does not determine gold’s long-term price trend.

History tells us that gold bull markets can unfold in parallel with rising or falling nominal interest rates, but this shouldn’t be interpreted as meaning that interest rates don’t affect whether gold is in a bullish or bearish trend. The nominal interest rate is not important, but the REAL interest rate definitely is. Specifically, low/falling real interest rates are bullish for gold and high/rising real interest rates are bearish. For example, when gold was making huge gains during the 1970s in parallel with high/rising nominal interest rates, real interest rates were generally low. This is because gains in inflation expectations were matching, or exceeding, gains in nominal interest rates (the real interest rate is the nominal interest rate minus the EXPECTED rate of currency depreciation). Also, the 2001-2011 bull market occurred in parallel with generally low real interest rates.

Very low real interest rates are artifacts of central banks. In the US, for example, the Fed’s actions ensured that the real short-term interest rate on “risk free” (meaning: no direct default risk) debt spent a lot of time in negative territory during the 1970s and during 2001-2011. In effect, “very low real interest rates” means “excessively loose monetary policy”.

Something else that affects gold’s price trend is the DIFFERENCE between long-term and short-term interest rates (the yield-spread, or yield curve), with a rising yield-spread (steepening yield curve) being bullish for gold and a falling yield-spread (flattening yield curve) being bearish. It works this way because a rising trend in long-term interest rates relative to short-term interest rates generally indicates either falling market liquidity (associated with increasing risk aversion and a flight to safety) or rising inflation expectations, both of which are bullish for gold.

As is the case with the real interest rate, under the current monetary system the yield-spread tends to be a symptom of what central banks are doing. If money were sound and free of central bank manipulation, then the yield-spread would spend most of its time near zero (the yield curve would be almost horizontal) and would experience only minor fluctuations, but thanks to the attempts by central banks to ‘stabilise’ the markets the yield-spread experiences huge swings. For example, the following chart shows the huge swings in the US 10yr-2yr yield-spread since 1990. The periodic up-swings in this chart were generally due to the Fed exerting irresistible downward pressure at the short end of the curve while the discounting by the market of currency depreciation risk caused interest rates at the long end to be ‘sticky’.

Last but not least, gold is influenced by the economy-wide trend in credit spreads (the differences between interest rates on high-quality and low-quality debt securities). Gold, a traditional haven in times of trouble, tends to do relatively well when credit spreads are widening and relatively poorly when credit spreads are contracting. This is because widening credit spreads typically indicate declining economic confidence.

If the three main interest-rate drivers (the real interest rate, the yield-spread and credit spreads) are gold-bullish then there’s a high probability that gold will be in a strong upward trend in terms of all currencies and most commodities. By the same token, if the three main interest-rate drivers are gold-bearish then there’s a high probability that gold will be in a strong downward trend in both nominal and real terms. However, it’s not uncommon for the interest-rate conditions to be mixed. The past year is a good example of a mixed interest-rate backdrop for gold in that during this period the credit-spread situation was generally gold-bullish (credit spreads were widening) while the real interest rate and yield-spread trends were generally gold-bearish. The net effect of this interest-rate backdrop was slightly bearish for gold.

In summary, gold benefits from low/falling real interest rates, an increasing yield-spread (a steepening yield curve), and widening credit spreads, each of which can occur when nominal interest rates are rising or falling. You can therefore ignore the “rising interest rates are bearish for gold” and the “rising interest rates are bullish for gold” arguments. The relationship between gold and interest rates is not that simple.

The following charts are discussed in an email sent to TSI subscribers.

1) The US$ Gold Price

2) Gold versus the relative strength of the banking sector (as indicated by the SPX/BKX ratio)

3) The HUI

4) The Dollar Index

5) The US$/Yuan Exchange Rate

6) The S&P500 Index

7) The Europe 600 Banks Index (FX7)

The following charts are discussed in an email sent to TSI subscribers on 27th December.

1) The HUI/gold ratio

2) The Gold Miners ETF (GDX) — down by 22% year-to-date (YTD)

3) Junior Gold Miners ETF (GDXJ) — down by 16% YTD

4) Almaden Minerals (AAU) — down by about 30% YTD but up by about 30% over the past 4 weeks

5) Endeavour Mining (EDV.TO) — up by about 90% YTD and at a 12-month high

6) Evolution Mining (EVN.AX) — up by 125% YTD

7) McEwen Mining (MUX) — roughly flat YTD in US$ terms, but up by almost 20% in C$ terms

8) Premier Gold (PG.TO) — up by about 40% YTD

9) Royal Gold (RGLD) — down by 37% YTD. The early-November plunge to the mid-$30s caused RGLD to offer reasonable value — and caused us to become interested in having exposure to this stock — for the first time in several years.

10) Ramelius Resources (RMS.AX) — up 300% YTD

11) Sabina Gold and Silver (SBB.TO) — up by about 110% YTD

12) Emerging Markets Equity ETF (EEM) with 12-week moving average — intermediate-term ‘oversold’ and at an 11-year low relative to the S&P500, but very high relative to commodities and potentially ‘on the edge of a cliff’.

The decline in house prices that began in 2006 wasn’t the cause of the 2007-2009 economic bust. The cause was widespread mal-investment resulting from monetary inflation and the Fed’s interest-rate manipulation. However, the 2006 reversal in house prices set off a series of falling economic dominoes due to the fact that the housing market was where a disproportionately large amount of the mal-investment and associated debt happened to be. The reason for mentioning this is that the 2014 downward price reversal in the oil market might have played the same role as the 2006 downward reversal in the housing market, because this time around a disproportionately large amount of the mal-investment and associated debt happened to be linked directly or indirectly to the booming oil industry.

A lot of high-yield debt was linked both directly and indirectly to the booming US oil industry, which is why proxies for the US high-yield bond market reversed downward at almost the same time as the oil price in mid-2014. With ETFs such as JNK (the Barclays High Yield Bond Fund) and HYG (the iShares High Yield Bond Fund) having made new 6-year daily-closing lows on Monday 14th December there is little doubt that the US high-yield corporate bond market is immersed in a cyclical bearish trend. In effect, the falling of the oil domino knocked down the high-yield bond-market domino.

Another of the dominoes to fall in reaction to the oil reversal is the railroad industry. The railroad business boomed due to a large increase in the demand for rail cars to carry oil from the oil-fields and supplies to the oil-fields. In this case the reaction was delayed, as it wasn’t until late last year that investors began to connect the dots. Last week the Dow Jones US Railroad Index (DJUSRR) made a new 2-year low and is clearly immersed in a cyclical bear market.

The following chart provides a visual representation of the falling dominoes discussed above. Notice that HYG (the blue line), an ETF proxy for high-yield bonds, began to fall almost immediately after the oil price (the black line) turned down, whereas DJUSRR (the green line) trended upward for an additional 5 months before toppling over.

There’s a high risk that economic dominoes will continue to fall until there are none left standing, but be warned that it could be a very drawn-out process. During the preceding cycle there was a 2-year gap from the reversal in the housing market to a general capitulation, and this time around the monetary backdrop is more bullish.

This post is an excerpt from a commentary posted at TSI about two months ago.

Whenever the government intervenes in the economy in order to bring about what it deems to be a more beneficial outcome than would have occurred in the absence of intervention, there will be winners and losers but the overall economy will invariably end up being worse off. Moreover, it is not uncommon for one of the long-term results of the intervention to be the diametric opposite of the intended result.

A great example of the actual result of government intervention being the opposite of the intended result is contained in a chart that formed part of a recent article at ZeroHedge.com. The chart, which is displayed below, shows the home ownership rate in the US.

Here, in brief, is the story behind the above chart.

During the Clinton (1993-2000) and Bush (2001-2008) administrations the US Federal Government decided that it would be beneficial if a larger number and a broader range of people were home-owners. The government therefore began making a concerted effort to not only increase the US home-ownership rate, but also to make home loans easier to obtain for less-qualified buyers.

This was achieved in part by the more aggressive implementation, beginning in 1993, of the Community Reinvestment Act (CRA) of 1977. Under the cover of the CRA, banks were forced to reduce their lending standards for lower-income groups in general and ‘minorities’ in particular. For example, government regulations created during the 1990s set bank loan-approval criteria and quotas with the aim of increasing loan quantities, and even went so far as to require the use of “innovative or flexible” lending practices to address the credit needs of low-and-moderate-income (LMI) borrowers. Of course, banks that are forced by the government to lower their standards when assessing the loan applications of less-qualified borrowers must also lower their standards for other borrowers, because they can’t reasonably approve an application from one customer and then reject an application from a better-qualified customer.

An increase in the home-ownership rate was also achieved by assigning an “affordable housing mission” to the government-sponsored enterprises (Fannie Mae and Freddie Mac). To make it possible for Fannie and Freddie to achieve this mission their automated underwriting systems were modified to accept loans with characteristics that would previously have been rejected. In addition, Fannie and Freddie cited the new “mission” as a reason that their mortgage portfolios should not be constrained.

At this point we would be remiss not to mention the helping hand provided by the Fed. Without the Fed’s aggressive money-pumping and lowering of interest rates during 2001-2003 there would have been less credit and less money available to the buyers of homes. The Fed’s actions ensured that there would be a credit bubble, while the government’s actions ensured that the residential housing market would be the focal point of the bubble.

The above chart shows that the government was initially — and predictably — successful in its endeavours. The home-ownership rate sky-rocketed as it became possible for almost anyone to borrow money to buy a house. The chart also shows that the home-ownership rate has since collapsed to its lowest level since the 1960s. This collapse was a natural consequence of the credit bubble, in that household balance-sheets were drastically weakened by the taking-on of debt-based leverage during the bubble and the post-bubble plunge in asset prices.

The bottom line is that the interventions designed to increase home ownership ultimately contributed to the home-ownership rate falling to the point where it is now at a multi-generational low. Not just an unintended consequence, but the opposite of the intended consequence.

I’ve often been impressed by the ability of gold-focused bloggers, newsletter writers and journalists to turn a blind eye to the gold market’s genuine fundamentals and to fixate on factors that either have no bearing on the gold price or amount to unadulterated hogwash. Depending on how they are presented, the stories that are regularly told about the COMEX gold inventory and its relationship to the gold price can fall into either the irrelevant category or the hogwash category.

I’ve mentioned numerous times in the past, including in an 18th August blog post, that the amount of gold in COMEX warehouses and the inventories of gold ETFs follow the major price trend, meaning that changes in these high-profile inventories are effects, not causes, of major changes in the gold price. That’s the long-term relationship. On a short-term basis there is no consistent relationship between inventory levels and the gold price.

There is therefore nothing strange about the fact that the post-2011 bear market in gold has been accompanied by an overall decline in COMEX and gold ETF inventories, just as there was nothing strange about the overall rise in COMEX and gold ETF inventories during the preceding bull market.

I’ve also briefly pointed out in the past that the large rise in the ratio of COMEX “registered” gold to COMEX gold open interest in no way indicates a shortage of physical gold or that a COMEX delivery problem is brewing.

Various sites have been presenting the aforementioned ratio for years as if it were a dramatic, price-impacting development. A recent example is the ZeroHedge article posted HERE, which contains the following chart. This chart certainly creates the impression that something is horribly wrong. A more distant example is the JSMineset article posted HERE, which is from July-2013 and forecasts a COMEX crisis within 90 days due to the critical shortage of deliverable gold.

Fortunately, early this week a logical and well-informed article on the topic was posted HERE. You should read the full article as long as you are willing to let facts get in the way of a good story, but two of the key points are:

1) The amount of “registered” gold is NOT the total amount of gold available for delivery.

2) Although it’s unlikely to give you any meaningful information, if you really want to spend time comparing open interest and physical gold inventory then it’s only the open interest in the current delivery month that matters.

It’s hard enough to figure-out the gold market when considering only the true fundamentals. There’s no need to further muddy the waters by introducing spurious information, unless the goal is to draw readers with exciting stories rather than to be accurate.

If something very strange happens and continues over an extended period, people get accustomed to it and come to view it as normal. That’s especially so when the strange set of circumstances is the result of a policy that, as a result of devotion to a wrong theory or strategy, is widely considered to be a reasonable response to a problem.

A good example is the “Patriot Act”, which was introduced in the wake of the 911 attacks. This act dramatically increased the legal ability of the US government to violate individual property rights in the name of greater security and was widely viewed as extraordinary when it was first proposed, but in 2011 there was barely a mention in the mainstream media when President Obama signed a 4-year extension for some of the most controversial parts of the act. With some modifications forced upon the government by the revelations of Edward Snowden, another 4-year extension was approved with minimal public protest in 2015 under the Orwellian name “USA Freedom Act”. My point is, whereas 20 years ago most people would have been horrified by the provisions of the Patriot Act, today most people couldn’t care less. Today, the powers granted by the Patriot Act are generally accepted as normal.

Another good example is the downward drift into negative territory of government bond yields in Europe. As recently as two years ago it was believed by almost everyone that zero was the lower bound for a bond’s nominal yield. At that time, the idea that nominal bond yields would fall to zero was almost unthinkable, and anyone who predicted that a sizable percentage of the bonds issued by European governments would soon trade at negative nominal yields would have been perceived as a lunatic. Today, however, about one-third of the euro-zone’s sovereign debt is trading with a negative yield-to-maturity and people are becoming accustomed to this new reality. Also, the ECB just reduced its official deposit rate from negative 0.20% to negative 0.30%, which only surprised the financial markets because most traders were expecting it to be pushed even further into negative territory.

A point that deserves to be emphasised is that even though the financial world is becoming inured to the situation, it is completely absurd for interest rates and nominal bond yields to be negative. The reason is that regardless of whether the economy is experiencing inflation or deflation, having money in the present should always be worth more than having a promise to pay the same quantity of money in the future. To put it another way, it should never make sense for people throughout the economy to choose to incur a cost for temporarily relinquishing ownership of money.

But obviously it does make sense, because it’s happening! The question is why.

A number of factors had to come together to make negative interest rates possible, including persistently-low inflation expectations in the face of rapid monetary inflation. However, the overarching cause is unswerving devotion to bad economic theory. Persistently-low inflation expectations only enabled the application of bad theory to be taken to a far greater extreme than it had ever been taken before.

The bad theory is that the economy can be made stronger by artificially lowering the rate of interest. If you have the power to manipulate interest rates and you are totally committed to this theory, then a failure of the economy to strengthen following a lowering of the interest rate will cause you to bring about a further interest-rate decline. As long as you remain steadfast in your belief that a lower interest rate should help and as long as rising inflation expectations don’t get in the way, continuing economic weakness will lead you further and further down the interest-rate suppression path.

The Fed currently looks less radical than the ECB, because, while the ECB has pushed its targeted interest rate into negative territory and shows no sign of changing course, the Fed is probably about to take a small step into positive territory with its own targeted interest rate. However, the senior members of the Fed and the ECB are guided by the same bad theories, so it is certainly possible that the next time the US economy slides into recession the US will end up with a negative Fed Funds Rate. In fact, if the US economy slides into recession in 2016 then a negative Fed Funds Rate will become a good bet.

In conclusion, today’s negative interest rate situation would have been viewed as nonsensical as recently as a few years ago and will be viewed as nonsensical by the historians who write about the 2010s in decades to come. However, the financial world is not only becoming accustomed to this absurd situation, it is now common to view negative interest rates as appropriate.