Ainslie Bullion - Daily news, Weekly Radio and Discussions

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AinslieBullion
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Re: Ainslie Bullion - Daily news, Weekly Radio and Discussions

Postby AinslieBullion » Tue Oct 24, 2017

WHY THIS CRASH WILL BE FAST & FURIOUS

We’ve written a bit about the lack of volatility in the US sharemarket of late. The VIX hit single figures last week, just as it did before the GFC and now another new record…. It has now been 243 days since the US sharemarkets dipped more than 3% in a day. That is the longest streak in history. Everything is awesome.

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SovereignMan’s Simon Black is warning that this phenomenon is contributing to what he thinks will be a very big, but importantly, very fast crash when the next sizeable ‘dip’ happens.

But first the core reason why… This bull market we are witnessing on most valuations measures is ‘only’ the 3rd most overvalued in history (after 1929 and 2000). However this one is different in that everything is overvalued not just one or two sectors. History’s most overvalued market was the dot com bubble but blue chips were sold to get on the tech stock bullet train and that meant you had what’s called ‘dispersion’ in the market. That is not the case now, with everything being overvalued. Morgan Stanley recently noted:

“We say this not as hyperbole, but based on a quantitative perspective… Dispersions in valuations and growth rates are among the lowest in the last 40 years; stocks are at their most idiosyncratic since 2001.”

Black thinks a lot of this has to do with the proliferation of passive investment ETF’s and their outsized effect on markets. No less than $391 billion dollars poured into ETF’s to July 2017, up on the already record high $390b in 2016.

These passive ETF’s care little for valuations but just spread their buy across the whole index they are designed to track. The record inflows into these funds of course have the effect of pushing the valuations even higher.

Bank of America believes 37% of the S&P500 is now managed passively. The world’s largest are BlackRock and Vanguard who collectively have over $10 trillion in assets, $7.3 trillion of which are passive, and growing by $3.5b per day.

So what happens when (not if) the turn comes? Over to Mr Black:

Humans are emotional creatures. And when we do finally see that 3% (or even larger) down day, investors will rush for the exits.

And the computers will pile on the selling (every model based on historically low volatility will completely break when volatility spikes).

But when the wave of selling comes, who will be there to buy?

“As these passive funds dump the largest stocks in the world, we’ll see an air pocket… nobody will be there to hit the bid.

And when the drop comes, it will come faster than anyone expects.

So, while most investors are ignoring risk, I’d advise you to use this record-high stock market to your advantage…

Sell some expensive stocks to raise cash. Own some gold. And allocate capital to sectors of the market that haven’t been blown out of proportion thanks to the popularity of passive investing. That means looking at smaller stocks and stocks outside the US.

Even if stocks go up for another year, which they may, it’s simply not worth the risk to chase them higher… Because the downturn will be devastating.”

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Re: Ainslie Bullion - Daily news, Weekly Radio and Discussions

Postby AinslieBullion » Sun Oct 29, 2017

“EVERYTHING BUBBLE” INCLUDES US PROPERTY

Further evidence has emerged that the ‘everything’ in the now entrenched “Everything Bubble” descriptor for our current market goes well beyond traditional financial markets. Whilst Canada and Australia have recently taken the global headlines for our property bubbles, the US, whose property bubble in 2006 triggered the GFC, is now above even those per GFC levels too. The US has seen the double whammy of strong price growth and poor income growth meaning their median new home sale prices to median household income has hit an all-time high of 5.45.

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For perspective Australia’s median dwelling price for combined capitals sits at around $585,000 and against the 2016 census median household income of $74,776 gives us an even more concerning 7.8 ratio.

This, combined with the endless metrics of sky high US financials valuations, should reconfirm why gold and silver, whilst still firmly up on the November 2015 lows are, by any real measure ‘bouncing along the bottom’. Gold and silver are your ‘uncorrelated monetary asset’ and whilst financial and property assets are reaching all-time highs they are behaving as you should expect. That said there are plenty quietly loading up as can be seen from the following two graphs:

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Whilst that is happening steadily the price growth is subdued. When the masses head for that door however…..

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Re: Ainslie Bullion - Daily news, Weekly Radio and Discussions

Postby AinslieBullion » Mon Oct 30, 2017

$100B BITCOIN ON ITS 9TH BIRTHDAY

Bitcoin celebrates two milestones today. On this day 9 years ago its creator, the anonymous Satoshi Nakamoto, launched what he called Bitcoin, a “Peer-to-Peer Electronic Cash System”. Now 9 years later Bitcoin has just surpassed the $100b market capitalisation milestone and done so hitting all-time price highs, smashing through the US$6000 mark Sunday night, and up over 500% just this year to date.

However for us the $100b market cap figure is more alluring for how little it is, not how big. Sure, its rise has been meteoric of late, but as we point out is the case for both gold and silver as well, compared to the $300 trillion total global financial assets or $500 trillion total global assets, $100b is barely a blip. The number of active users, too, needs to be looked at in context. Of the 7.6b world population, it is estimated only 3.9m people have a bitcoin wallet with 0.01 bitcoins or more, that is 0.05% participation. Even reports of 15m total crypto wallets (across all currencies) in existence is 0.19% but many are lost, inactive or of very little value. When you consider we’ve seen +500% gains this year with such relatively low participation and noting you can’t simply increase supply, it begs the obvious question of what happens when demand doubles to just 0.1% of the world wanting it? Or even tenfold to just 0.5%??

For a little more context on this year’s rises lets also look at the challenges faced by the world’s largest crypto currency. In January this year China alone accounted for nearly all bitcoin trade as the Chinese piled in.

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Then Japan legalised it as a currency the next surge came along, along with a return of the US and famously took bitcoin past the price of an ounce of gold. More recently we saw China’s government crack down on ICO’s (initial coins offerings of new alternative coins) and then domestic exchanges, seeing a 30% drop in the price. However since then the Chinese have moved to other means to continue trading and we’ve seen more recently moves by the big Chinese exchanges to more friendly jurisdictions in Asia, notably Japan and Hong Kong, but with Singapore and South Korea coming too. Japan’s regulators approved 11 new exchanges in September alone.

This week the RBA joined a chorus of concern about how government can control this peer to peer network. They are clearly worried about a growing awareness of an alternative to their fiat currencies and their slow, centralised and expensive banking network.

What bitcoin has proven this year, reaching its 9th birthday in spectacular fashion, is that it is resilient, exhibits intrinsic value by virtue of constrained supply, has a fast growing acceptance as a medium exchange (including buying bullion from us!), and on any helicopter view of it in the context of the financial market it plays in, appears to be still very much in its formative stages.

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Re: Ainslie Bullion - Daily news, Weekly Radio and Discussions

Postby AinslieBullion » Tue Nov 14, 2017

WHEN BIG MONEY ENTERS

Two of Wall Street’s bigger players announced strategic moves into the monetary assets of gold and bitcoin over the weekend.

First, as we reported last month, Michael Novogratz has launched a crypto currency fund, Galaxy Investment Partners, investing largely in bitcoin, a “very big” holding of ethereum, and 30-35 other tokens and companies. The largely anticipated correction on bitcoin happened late last week and Novogratz was there at the bottom jumping in and purchasing $15-20m worth over the weekend as the price jumped back up $1000 from its bottom. He sees bitcoin hitting US$10,000 ($13,000) by March.

In an interview with Reuters he said he believes other large institutional investors are around 6-8 months away from adopting bitcoin. One (though unnamed) ‘big financial firm’ could launch what he called a ‘turning point product’ within 6 months.

However in terms of legendary status on Wall St, they don’t come any bigger than Ray Dalio, head of the world’s biggest hedge fund, Bridgewater. For context, back in August he had this to say:

“When it comes to assessing political matters (especially global geopolitics like the North Korea matter), we are very humble. We know that we don't have a unique insight that we'd choose to bet on. We can also say that if the above things go badly, it would seem that gold (more than other safe haven assets like the dollar, yen and treasuries) would benefit, so if you don't have 5-10% of your assets in gold as a hedge, we'd suggest you relook at this. Don't let traditional biases, rather than an excellent analysis, stand in the way of you doing this.”

We’ve just learned that he walked the talk and the latest disclosures show his fund increased its gold exposure via the GLD ETF by 575% to $473m and likewise iShares Gold Trust (IAU) up 266% to $138m. Their GLD holdings now make Bridgewater the 8th largest holder of GLD. For context however, the world’s biggest asset manager ($5.7 trillion), Blackrock, dwarfs all comers with a holding (18.6m shares) nearly 5 times that of Bridgewater and over double the second biggest of Bank of America’s 7.1m shares. We are firmly on record on our views of ETF’s, but keep in mind when you are big players like this, you can supposedly demand the metal not the money. That is not a luxury afforded to every day investors…

Yesterday the World Gold Council released their latest Gold-backed ETFs update for October. ETF holdings increased just 3.3 tonne, up to 2,347.6t globally. That came about from Europe adding 11.2t, North America losing 8t, and Asia (who generally prefer the real thing) up 0.8t. This is in line with the trend we outlined last week here of the US going ‘all in’ to the ‘everything’s awesome’ financial markets. That said, year to date, inflows to gold backed ETF’s is up a solid 8%, 182.2t or $7.8b so far.

Let us leave you with one of our favourite quotes from Ray Dalio…

“If you don’t own gold there is no sensible reason other than you don’t know history or you don’t know the economics of it”

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Re: Ainslie Bullion - Daily news, Weekly Radio and Discussions

Postby AinslieBullion » Wed Nov 15, 2017

YIELD CURVE SENDS A WARNING

It was a rough night on Wall Street last night on the back of a raft of ‘everything is awesome’ shattering economic data. Another stronger than expected inflation print (CPI up 1.8%) saw gold and silver stronger and raised concerns of a December rate hike, but then we saw a post hurricane crash back to reality in retail sales (just 0.2%), the biggest drop in the Empire Fed survey in 7 months, and the 3rd straight month of declining real wages (a first in 5 years).

The S&P500 lost 0.55% which broke its 52 year record of the longest streak of sub 0.5% falls. We also saw the US Treasuries yield curve (explained here, and last discussed here) flatten to its lowest since the onset of the GFC in November 2007…

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….and continuing the post ‘this time is different’ post Trump election anomaly:

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Deutsche Bank has released their view on this and it highlights the absolutely precarious nature of the position the Fed (in particular, but central banks more generally) have put the market in and how very difficult it will be to manage us out without triggering a crash of epic proportions.

“The largest, and possibly, the only risk capable of resetting the vol higher is the tail risk associated with bear steepening of the curve and disorderly unwind of the bond trade. This is the risk that would be probably impossible to control, its trigger being either excessive deficit spending or inflation.

It is precisely the severity of this problem that prevents return of volatility. Current monetary policy is focused on the management of the underlying tail risk and the Fed transparency and gradual hikes are all about the reduced manoeuvring space that has remained after almost a decade of stimulus. Fed has an uncomfortable (and complicated) task in this context: Fed needs to raise rates in order to prevent rates rise. What must not be, cannot be: Inflation cannot be allowed to develop because it would be no way of avoiding dramatic rise in rates. If the Fed embarks on aggressive hikes in order to fight inflation, rates would rise. If the Fed stays behind the curve, the market would bear steepen the curve. Either way, the long rates go up.”

So watch these signs like we saw last night carefully around inflation, market ‘health’, and that all important yield curve’s response.

Below is an interesting (in that history is not always an accurate predictor of the future…) comparison of the current set up for the Russell 2000 (the small cap index, topical after our article this week) which shows how quickly that curve can steepen (noting it is an INVERSE of the curve illustrated) and the effects on financial markets…

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