When It Comes To Free Cash Flow Growth All Roads Lead To Gold Miners
Last year, when I first started reporting on stagflation it was based on my belief that economic numbers were overstating economic growth and understating inflation. Confirmation that this assessment was accurate came out after the summer of 2024.
This was when the Fed indicated that their polling of members were seeing slower growth and that in their words they felt their models on inflation had “fallen apart.”
Then in November, voters went to the polls and showed that they weren’t happy with the economy, jobs market and inflation. They gave Trump and the GOP a stunning victory, primarily due to their angst about the economy, jobs and inflation.
Initially, there was a jump to the upside on Wall Street and confidence on Wall Street that things were going to change for the better. That honeymoon has faded very rapidly since Trump and the GOP took control of the government, with Trump’s poll numbers in free fall. He has lost the confidence of consumers and corporate leaders very quickly due mainly to his tariffs (a.k.a taxes on consumers) and fighting a trade war against every trading partner.
Although Bessent is constantly trying to promote how well the negotiations are going with trading partners, and Trump saying they are lining up to kiss his ass, reality is much different.
There will not be quick conclusions to the trade negotiations, one reason is that Trump’s tariffs are punitive not reciprocal. He wants trading partners to enter into win-lose agreements that make them buy more from America and also pay damages for past trade imbalances. Asking small economies like Vietnam and others to buy as much from America as America buys from them is not economically possible. Neither is it possible for them to pay penalties for past trade imbalances.
The most obvious reason that few, if any, trade deals can be concluded in the 90-day pause is the sheer number of countries that need to be negotiated with and the complexity of trade deals. Combined with the big ask that Trump is asking for from trading partners.
Just look at the USMCA trade agreement (yes the one Trump called the greatest trade deal ever, but now says Canada and Mexico have been using to abuse America on trade) which was with America’s two neighbours who have long-term intertwined trade relationships. It took over a year to negotiate and sign. Trade deals with trading partners in far away countries will not be harder to negotiate and sign.
The most contentious trade deal will be between America and China. Although Trump is trying to convince everyone that negotiations and meetings are happening, the Chinese are adamant that this is not true. Considering how high the tariffs are between the two countries, and who you believe as to whether or not talks are happening, it surely doesn’t look like there will be a quick resolution to the trade war between America and China.
It is fair to say that trade negotiations between America and China are frosty at best. The reality is probably closer to there are no negotiations happening between the two rivals. And that both are digging in their heels and neither wants to make the first move.
While things are moving at a snail's pace between America and China, shipping of products from China to America is dropping off a cliff. Which means within a few weeks consumers and companies will see less products on the shelves. This supply chain shock will also be seen in the trucking industry that takes products from the ports to the companies.
In a very short period of time, the shock to the supply chain is ramping up towards where it was during the Covid crisis. Before long, not only will companies struggle to make plans for their businesses, they will also have trouble putting products on the shelves for consumers to buy. Those that do make it to the shelves, will have a higher price tag from tariffs and also supply and demand factors.
So far, consumers and corporate leaders are nervous about the economy and inflation which suggests they are fearful of stagflation. Which is about to ramp up over the next few weeks.
Another factor affecting negotiations between America and China concerning the trade war is that Trump and many of his advisors are convinced that they have all the cards and China has none.
Some of China’s cards are that they own a lot of US debt and US dollars. Nothing is stopping them from selling those assets to buy gold and put more of their chips into Europe. There is a very real possibility that Trump’s efforts to make America great again (MAGA) will make Europe great again (MEGA) and prove to be an economic misstep that could be one of the worst ever.
Trump, his advisors and supporters believe that America is the golden goose that holds all of China’s golden eggs. If China sells all of its US debt and US dollars, then sends some of it to European debt and the Euro, they can fund MEGA and replace everything they lose from America due to the trade war.
One of the things that many on Trump’s team fail to come to terms with is that in the past China would send products to America to receive US dollars and then send that back to America by buying US debt and other assets. In reality, China has been supporting the ability for America to benefit from the world reserve currency and to build the economy on debt.
Now Trump is forcing their hand in a not so gentle way by denigrating China and blaming them for the trade imbalance. This is a very risky gambit that very well could end up with MEGA instead of MAGA.
Mass deportations, tariffs and a trade war are a recipe for an economic slowdown that could easily dip into recession while inflation picks up to 3-5% or more. This would be the worst kind of stagflation, a recession and alarmingly high inflation.
What is an investor to do?
US bonds look very risky, there is massive supply in the bond market and it is only going to get much bigger. The GOP led government is keeping spending where it was with Biden. And they want to increase the debt ceiling by $4-5 trillion.
Plus, there is $9.2 trillion that needs to be rolled over in 2025 from low rates to much higher rates. Around $6.5 trillion of it needs to be rolled over by the end of June. Then another $2.7 trillion by the end of the year.
It doesn't get better over the next few years. Obama put $8 trillion onto the debt during two terms. Trump 1.0 added almost as much in one term. Biden surpassed Trump to set a new record for a one-term presidency. So, of the $37 trillion debt, Obama, Trump and Biden created around $24 trillion (at nearly zero interest rates) of it and all of that needs to be rolled over in the next few years.
Wall Street doesn’t look like a very good alternative as valuations are very stretched (priced for perfection when perfection doesn’t look to be coming) meanwhile many companies are unable to give guidance going forward. This is an alarm bell that few are paying attention to when they should.
The lack of guidance reminds me of back in the Dot-com era when I would look at their PE ratios and it said not applicable (NA) meaning they had no earnings. It hasn’t gotten that bad, but with the prospect of stagflation and so many companies unable to give guidance on their top and bottom lines, it is very applicable.
Which means that the chances of an earnings recession on Wall Street while stock prices are high with historically high valuations has increased the risk dramatically.
Tesla is a perfect example of a company in a bubble with an insanely high valuation with a triple digit PE ratio and declining sales. Elon Musk's venture into politics with a pretty far right wing posture has broken the love for the brand in all its big markets. Doing this while ignoring that many of their key customers in America and Europe are left leaning, not the MAGA crowd.
Having a valuation that is priced for perfection when sales are dropping, is very risky. But, Tesla is not the only high-profile company in this situation, in fact, the S&P 500 is in a similar scenario as the valuation on a PE ratio basis is much too high, when fears of stagflation and inability to give guidance are the new normal. The earnings are dropping and likely to take the stock prices down with them.
Which means that both the US bond market and Wall Street stocks are much riskier than many think. If they have issues, it also means that the US dollar has issues because foreign investors don’t need to buy it to then purchase US debt and Wall Street stocks.
These various factors are why gold is at record highs against the US dollar and every fiat currency. The debt and fiat currency system is broken worldwide and a fantastic place for investors to seek refuge from the storm is in gold.
With gold at record highs against every fiat currency, the gold miners are free cash flow machines. Whether they are high-cost or low-cost gold miners, they are making money hand over fist and growing cash on their balance sheets at a remarkable pace.
Looking across every industry, few can say that they are free cash flow machines growing cash on their balance sheets at a rapid pace like the gold miners. Yet, the gold miners are not pricing in the current price of gold and nowhere near pricing in that gold is on its way to $4000 in 2025.
All the best,
Allan Barry Laboucan
