Should The Fed Stay Or Should They Go - Big Daddy Trump About To Give Them The Message That If They Don't Cut There Will Be Trouble And If They Don't QE There Will Be Double

Trump won in a landslide and the US dollar (USD) went up, Wall Street stocks went up, gold went down and bonds went down and their yields have gone up. So called risk free bonds are getting more and more risky.

USD traders were buying the rumour that Trump would win well before election day, with the belief he will be good for the USD. Instead of selling the news that he won in a landslide, they bought the news too. Ignoring the age-old trading wisdom to buy the rumour and sell the news.

Traders don’t buy things because they see the fundamental value, they buy it because of the momentum induced madness of crowds. Case in point is the USD which has seen its purchasing power decimated since Nixon ended the last vestiges of the Gold Standard.

Just in the past couple years it has inflated away another 20 plus percent of its purchasing power. 

The only bullish argument that USD bulls have is that it is the least dirty shirt in the fiat currency pile of dirty shirts. Nobody forces people into buying dirty shirts, especially when the soundest money gold is available as a much better choice.

Wall Street stocks are very risky because as their stocks go up, the earnings are not going up at close to the same pace. So, the price of what people are buying, relative to what the company is earning, are stretched to historically high valuations. 

Warren Buffett is one of the greatest investors ever, he focuses on buying value when it is on sale and selling it when his holdings are trading at premiums. He has been selling his stock holdings trading at premiums to the point that his cash position is at a record level. He knows the purchasing power of fiat currencies are constantly being destroyed, so doesn’t like to be sitting on cash.

He is not selling stocks to sit on cash as a market timing call, he is doing it because he clearly sees that valuations are stretched into the danger zone. He could buy his own stock Berkshire Hathaway, but isn’t because he sees it as too expensive as well. He would rather sit on cash to be prepared for when stocks come down to reasonable valuations so he can deploy his cash.

I’ve been following Warren Buffett for decades and he has proven time and again that investors are smart to follow his moves and not ignore them. Usually, it doesn’t take long after he builds up cash for stocks to correct from premium valuations to bargains that offer him the fat pitches he likes to swing at.

Basically, what he has done for decades going back to the 1960s is buys things when there is high levels of fear in companies that are tremendous value propositions, then sells them when the crowd has driven them to premium valuations. By doing this, he builds up cash when the market is trading on euphoria so he can buy hand over fist when corrections happen.

A perfect example of his strategy was in Apple’s stock. He bought when it had a modest valuation and has recently been selling to lock in huge gains. Keep in mind that for years prior to buying Apple, he said he stayed away from tech stocks because he said that he didn’t understand them well enough to invest in them. But, when Apple was trading on the cheap, while also positioned to see its earnings grow rapidly, he went in with both feet.

Another group of companies he has steered clear of are gold stocks. But, now best in breed gold miners like Agnico Eagle and Alamos Gold are at levels that make them great opportunities for value players like Warren Buffett. They are making nothing but money with gold trading around  fifteen hundred dollars higher per ounce than their costs of producing ounces of gold. They are setting records in free cash flow at a rate that growth stocks would love to have, yet their valuations are at value play levels. 

Adding fuel to the bullish argument for best in breed gold miners, is that gold is in a tremendously bullish market due to the Death Spiral of Debt causing the world to return to the Gold Standard. In this kind of situation, the best in breed gold miners will be rapidly growing their free cash flow for many years as gold goes much higher.

Who knows if Warren Buffett will ever come around to investing in best in breed gold miners. That really isn’t the point I’m making. What I am saying is that in a market full of stocks trading at record high valuations, the best in breed gold miners are growing their free cash flow like few companies in any industry can say the same thing. Yet, their shares are trading more like value plays than companies that have high growth rates of free cash flow.

Gold is trading in a stealth bull market that most generalist investors are ignoring and gold bulls lack confidence that it is real. Meanwhile, the gold chart is going from the lower left to the upper right in its one-year chart. It is making a series of higher highs and higher lows with each new high a record high. After each rally, the ensuing basing is progressively getting shorter in duration and tighter in range. While basing it coils up then blasts off to its next record high.

Supply is tight due to years of neglect in funding the pipeline from the ground floor up. Exploration from grassroots to advanced stages have gone underloved for a couple decades. The result is that there are not enough new mines under development that can help the miners replace their old mines with new ones. Which is why most gold miners are struggling to increase production and replace what they mine, while gold is at record levels.

The demand side of the argument is even more compelling. Central bankers in the BRICS nations have been selling their US debt and USD to buy gold at a rate that gold is now the second highest reserve currency held by worldwide central bankers that has surpassed the Euro and has the USD in its crosshairs.

Chinese and Indian consumers are the ultimate buyers that hold on for dear life so they have taken tons of physical gold off the market. Western investors have joined the party in the past few months as they transitioned from sellers of gold ETFs to buyers. These are smart money moves.

While these various buyers are loading up on physical gold, they haven’t joined the gold stock party…yet. The gold stock bulls have been long suffering, walking around wondering why gold is trading in a powerful gold bull market, yet their stocks are reluctant to join the party and are trading at record lows against all the important historical valuation metrics. 

The key to gold stocks joining the gold bull market is when the generalist investors start getting bullish on gold stocks. I saw this movie before during the 2001 to 2011 gold bull market. Gold stocks had gone through years of being left for dead. Then as gold started going up dramatically, the generalist investors joined the party and drove the gold stocks in parabolic ways. 

The key reason that gold is so bullish is because there is a Death Spiral of Debt that is causing the world to return to the Gold Standard. This will drive gold multiples higher than its current price. 

When it comes to gold bulls, they watch how it is being priced against the USD. It is currently trading at record levels in USD terms and the same can be said for its value against every fiat currency.

Since Powell cut interest rates, instead of the USD going down like it always does, it has been rallying. Likely because USD traders believe either the Fed won’t keep cutting rates, or that Trump will be bullish for the USD.

If the Fed stops cutting rates, then they have to admit that they were wrong to cut by a half-point at their September meeting. A half-point cut is considered an emergency cut, but when they did it, they also came out to say there is a Goldilocks economy.

Nothing could be further from the truth which is why the voters gave Trump a landslide victory. The answer that many voters gave when asked by the media of why they voted fro Trump, including lifelong Democrat party voters, was they were better off during the previous Trump administration than during the Biden-Harrris one term in office.

Which means that there is no Goldilocks economy. In fact, it is heading toward a recession if it isn’t already in one. Sure the government statistics aren’t coming clean on the economy, but voters voted like the economy is already in a recession.

The last thing that Trump wants is to take office in January while the economy has gone from a soft landing to a hard landing. This week the Fed is meeting and I have a feeling that Trump has shown up with pink slips in hand warning the Fed that they better cut by another half-point and then keep doing that at future meetings until they get interest rates back down to near zero.

The dilemma for the Fed is that the yields in the bonds are not cooperating with their plans to go into a rate cutting cycle that they already started. The bond buyers are on strike, so the only way for the Fed to get the yields to cooperate with their rate cutting cycle is for them to get in and buy, buy, buy. They have to get back into the QE business and expand their balance sheet from its current position around $7 trillion.

They are about to revise their role as the buyer of last resort before they become the only buyer.

They knew they were selling a false narrative when they cut rates and then said yeah but it’s a Goldilocks economy. The voters just showed up at the polls to say no it’s not.

The elephant in the room is the size of the debt and the cost of servicing it. These issues have the Death Spiral of Debt on cruise control. Elon Musk may think he can slash spending, but that is not how things work in Washington. He will figure that out quickly, then the romance between Elon and Trump will end in divorce. 

Trump is the record holder for having the highest spending for a one-term president. Will he get religious on spending, I don’t think so, in fact I think he will continue in his overspending ways. To make that happen, he will need Powell and the Fed to slash interest rates back to near zero and rapidly increase its balance sheet.

As I think about the Fed’s dilemma, it makes me think of the running joke that my stepdaughter and I bring up whenever she asks me to buy her something. She says my choices are yes or yes.

When it comes to the choices of slashing interest rates back to near zero and getting back into QE mode, their answer will be yes and yes.

Especially with Big Daddy Trump in front of them with pink slips in hand. They may say they aren’t political, but with Trump controlling if they stay or if they go, they are about to get a lot more political.

All the best,

Allan Barry Laboucan