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When Will the Fed Taper?

Source: Adrian Day for Streetwise Reports   10/08/2021

In this review of the quarter, Adrian Day, founder of Adrian Day Asset Management, discusses…

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This article was originally published by Streetwise Reports

Source: Adrian Day for Streetwise Reports   10/08/2021

In this review of the quarter, Adrian Day, founder of Adrian Day Asset Management, discusses the Federal Reserve’s asset purchases, its talk of tapering them, and what that could mean for the broader markets.

To taper or not to taper, that is the question. So far, the Federal Reserve’s constant talk and threats of an impending taper have performed the job better than actually doing anything. Stocks are flat, gold is down, as are bonds. But markets are beginning to grow weary of the constant threats with no action. When the Fed actually starts to taper, we may see markets turn. It was a poor quarter in most major markets and assets.

Key question: When will the Fed taper?

So, it was not a happy quarter. There are many negative influences weighing on the markets, from stubborn COVID virus to China’s credit problems. But the most important fact, we believe, is the constant threat of Federal Reserve to taper (reduce asset purchases). This is, per se, negative for bonds, while the stock market has thrown a tantrum at previous tapers, and the mere thought of tightening is deemed negative for gold. But it is not quite as simple as that, as we explain below.

“It is going be a while—I think at least 2023—before the Fed increases rates, and even then, it will lag inflation.” 

The Fed has been talking about tapering for months now, but has been constantly pushing back on actually doing anything. The story changes day by day, but two things are clear. First, it will have to cut back new purchases at some point; and second, it is extremely hesitant to actually do anything meaningful. Even after Fed  Jerome Powell said a couple of weeks ago, after the Fed’s last meeting, that they would commence tapering in December—itself not fulfilling expectations that it would begin in September—he has started walking it back, talking of “supply-side constraints holding back the economy…not getting better…the outlook is highly uncertain.”

That does not sound like a Fed chairman determined to start the tapering process soon. The Fed also fired (allowed to retire) two regional Fed chairman caught conducting personal trades. By coincidence (?), these were the two most hawkish—or rather “least dovish”—of Fed officials and can now be replaced by accommodative Biden appointees.

It won’t be sufficient

Let’s be clear about a couple of things. First, tapering is only reducing the pace of new purchases; it is not selling anything. So the Fed’s balance sheet, which has continued to grow at an accelerating pace the last couple of months (24% in the last three months compared with 19% in the last 12 months) even as they discuss tapering, will still be larger a year from now than it is today. Second, as Powell himself made very clear in his Jackson Hole speech at the end of August, the Fed is separating tapering from raising interest rates. The Fed won’t be raising any time soon.

Of course, since there was no net Treasury issuance in June, July and August—the Fed bought it all—a reduction in buying from that source will of itself see market rates rise. Private investors demand more than the tiny yields on offer; the latest Treasury auctions in September all went fairly poorly. The 30-year now yields 1.91%, up over the past month, but still meaningfully below current inflation. So it carries a negative real yield. Even the most speculative-grade bonds, five out of every six, carry a negative real yield, with the average yield under 4%.

“Just four stocks—Microsoft, Apple, Google, and Tesla— accounted for about half the performance of the S&P over the past three months.”

Any cut back in buying of Treasuries from the Fed, however, will have an impact. If there is a $2 trillion to $3 trillion fiscal deal, then, according to Larry Lindsay, bonds equivalent to 9% of the U.S. GDP will have to be issued next year. Who is going to buy them at today’s yields? Foreign flows turned negative last year, after years of foreign buyers cutting back new buying. Meanwhile, other traditional safe havens, like Germany and Japan, saw net foreign inflows.

Fed’s bark is worse than its bite

It is going be a while—I think at least 2023—before the Fed increases rates, and even then, it will lag inflation. This is why Fed jawboning has more effect than action. The Fed threatening tightening makes investors nervous. Any cut back is, per se, a negative for the bond market.

Powell talks about supply-side constraints, but if he is looking for a reason (or excuse) to postpone tapering again, there is no shortage of those: the looming “ESG recession” in Europe; the pending Evergrande default in China; another (unexpected?) jump in new unemployment claims, as well as an economy losing some steam rapidly.

Economic recovery rapidly slowing

The strong economic rebound is tapering off, because of the new COVID variant and supply chain issues, as well as a natural decline from earlier quarters “base” effect. The massive government stimulus programs are also having a negative effect. The private sector in aggregate lost just 7% of income last year, yet government handouts amounted to 15%. This may help some individuals (and it has enabled many less-than-well-travelled people to take trips to Mexico, Miami Beach and Puerto Rico), but it does not generate a sustained economic recovery.

This may be one of the shortest economic recoveries ever. Economic indicators are pointing down even as inflation is moving up, not only U.S. but around world. Job growth, for example, has spluttered, with new unemployment claims rising for three weeks in a row. There are currently more than 10 million job openings posted, now higher than number of people unemployed. Over half of restaurants in the U.S. were unable to pay their rent in September as higher costs offset the impact of more patrons. This spells stagflation.

Prices continue to move up

The other part of stagflation may take a while to build, given the significant deflationary trends extant at the same time. But inflation (as measured by PPI [producer price index] and CPI [consumer price index]) has been steadily moving up since last August. The market—not only gold, but stocks and bonds as well—still seem to believe the Fed’s “transitory” narrative. But the Fed has a poor record of predicting the economy, and more and more people can see for themselves that prices are going up. The Fed will lose much credibility over this.

Costco’s comments in a conference call last week are worth quoting. “Inflationary factors abound: higher labor costs, higher freight costs, higher transportation demand, along with container shortages and port delays, increased demand in certain product categories, various shortages of everything from computer chips to oils and chemicals, higher commodities prices. It’s a lot of fun right now.”

Apartment rents are shooting up. Notwithstanding new supply from now-allowed evictions on non-paying tenants (allowed in some states, anyway), landlords have to make up for lost income and repairs, as well as making up for the inflation over the past 18 months.

Even the Fed’s favorite gauge—which underestimates inflation—is up 3.6% ex food and energy, its highest in 30 years. The Fed under Powell emphasizes data, so by its nature is backward looking. They will inevitably be behind inflation.

Overvalued U.S. equities heading for fall?

U.S. stocks are losing their momentum, both relatively and in absolute terms, with the market down in September on a mini-temper tantrum. Valuations are at extreme levels, higher than at the height of the dotcom mania in 2000 by some metrics. Then, a few stocks were far more expensive, but today the median valuations are higher. The median p/e on the S&P now stands at 34 times, while in 2000 it was “only” 22 times. Only by comparison with bonds do equities look good value, but bonds are in a bubble because of central bank buying.

Yet the market remains complacent and indications of speculative excess abound. Short interest, for example, stands at 1.5%, the lowest in 30 years (the same as in 2000 on the eve of the dotcom bust) and down from over 3.5% a decade ago. Margin levels remain elevated.

There are signs of a looming tumble, however. The market is seeing lower volume on up days (whereas strong bull markets have had high volume on up days). Market breadth is deteriorating, as the number of stocks above their 200-day moving averages is dropping even as indices were moving up; half of the S&P 500 are already down 10% or more, and just four stocks—Microsoft, Apple, Google, and Tesla— accounted for about half the performance of the S&P over the past three months.

U.S. assets have been a very crowded investment for many years, and they are overvalued relative to other markets. Smart money has been shifting to both value and cyclicals, and especially in foreign markets. Unfortunately, with the slowdown in Europe, stocks there now appear expensive as well.

Overall, we are increasingly concerned about the possibility of a near-term pullback in global equities markets, particularly given the overvaluation, as the Federal Reserve and other major central banks move, hesitatingly, towards some form of tightening. The global economy and debt situation are not secure enough to withstand too much tightening. This is temporary, and we are confident that they, and particularly the Fed, will start easing again within a year or so, favoring combatting economic weakness over fighting inflation.

Adrian Day, London-born and a graduate of the London School of Economics, is the founder of Adrian Day Asset Management. His latest book is “Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks.”

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Precious Metals

Gold Mining Stocks Are Surging…and Have a Lot To Prove

After being left for dead, companies who mine the barbarous relic have made a comeback. Gold mining stocks are showing a thrust in medium-term trends, but longer-term trends remain poor. That has preceded mostly negative returns for the HUI Gold Bugs I…

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After being left for dead, companies who mine the barbarous relic have made a comeback. Gold mining stocks are showing a thrust in medium-term trends, but longer-term trends remain poor. That has preceded mostly negative returns for the HUI Gold Bugs Index.

Less than a month ago, fewer than 5% of gold mining stocks traded above their 50-day moving averages. With a surge in gold prices in recent weeks, miners got bid, and several days recorded more than 85% of the stocks trading above their averages.

When these stocks have cycled like this, from few to most of them trading above their 50-day averages within 30 days, the sector showed mediocre returns. It rallied most of the time over the next 1-2 months but then often saw those gains peter out. Over the next 6 months, the average return was a woeful -4.4%.

We also looked at medium-term breadth thrusts when few stocks traded above their 200-day moving averages. And times when most of the stocks were emerging out of bear markets. Forward returns were not encouraging.


What else we’re looking at

  • Full results after breadth thrusts in gold miners
  • What happens when miners end a long streak with more than 75% of stocks mired in bear markets
  • The S&P 500 is about to enter a “power period”
  • What momentum in the S&P equal-weight index means for future returns

Stat box

The S&P 500 Equal-Weight Index, which gives equal weight to each of the 505 stocks in the index, just ended a streak of 10 consecutive positive days for only the 2nd time in a decade (October 5, 2017, was the other).


Etcetera

Transportation stocks are really moving. Over the past week, the Optimism Index for the IYT fund has averaged more than 83%, among the highest in 5 years. There is often a burst of optimism like this after emerging from a prolonged downtrend.

Optimism is high on transportation stocks

Brazil waxed. Sentiment on Brazilian stocks is morbid and getting even worse. Over the past 100 sessions, the Optimism Index on EWZ has dropped near 40%, among the lowest levels in a decade.

Long term sentiment on brazil is very low

Around the globe. Our Optimism Index Geo-Map shows that Brazil is one of the few countries where investors show low optimism (green color).

Sentiment around the world


Author: Jason Goepfert

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Precious Metals

Gold price outlook with November Fed meeting in focus

Gold price is still below $1,800 after dropping below this crucial level in the previous session. Investors’ focus is on Fed’s meeting in the coming…

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Gold price is still below $1,800 after dropping below this crucial level in the previous session. Investors’ focus is on Fed’s meeting in the coming week.

November’s Fed meeting

In the ensuing sessions, gold price will likely record subtle movements as investors avoid huge bets ahead of the FOMC meeting scheduled for the first week of November. Fed officials are set to taper the $120 billion monthly asset purchases as inflationary pressures persist. November’s meeting will be the beginning of a path to end the bond-buying program by mid- next year.

Since the beginning of the year, the US central bank has downplayed concerns of the economy overheating by indicating that the rise in prices would be temporary. However, the officials appear more concerned about the persistent rise in inflation.

During a virtual conference held in the past week, the Fed Chair, Jerome Powell acknowledged that supply constraints have worsened. As a result, there are “more-persistent bottlenecks” that are pointing to higher inflation. Subsequently, Powell noted that the Fed needs to be flexible in coming months in order to position its policy to suit the various possible scenarios.

Notably, investors are evaluating the prospects of interest rate hikes. Based on the CME Group-tracked futures market prices, the likelihood of at least two rate hikes by the end of 2022 surged to 75% in the past week. The figure is a considerable rise from 20% after September’s FOMC meeting.

Ahead of November’s Fed interest rate decision, $1,800 will remain a crucial level for gold price. Typically, precious metals have an inverse correlation with the value of the US dollar. The dollar index has held steady above the major resistance-turn-support zone of $93.50 since the beginning of October. The index tracks the value of the greenback against a basket of six currencies.

With a steady dollar, the precious metal will likely have its gains curbed at October’s high of $1,814.13. Besides, eased stimulus and rise in interest rates is bound to boost Treasury yields. This would further exert pressure on the non-yielding bullion.

However, gold price downward movements may be limited. With the ongoing economic risks, its safe-haven appeal and status as a hedge against inflation will probably boost it above September’s low of $1,720.      

The post Gold price outlook with November Fed meeting in focus appeared first on Invezz.











Author: Faith Maina

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Articles

REZ levels up with maiden Granny Venn gold pour

Special Report: Richard Poole-led REZ has joined the ranks of producers with the maiden gold pour completed from its Granny … Read More
The post REZ…

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Richard Poole-led REZ has joined the ranks of producers with the maiden gold pour completed from its Granny Venn deposit.

Sydney-based Resources & Energy Group (ASX:REZ) has showed off the very first gold bullion produced from its Granny Venn mine, part of the Menzies project in Western Australia.

https://twitter.com/REZ_GOLD/status/1452785965076926468

The first toll treatment for the Granny Venn cut back has reached the midway mark, which resulted in the first gold pours for the project yesterday morning at the Lakewood mill.

A total of 22.84kg of gold doré was produced from the pour and is now being dispatched to the Perth Gold Mint for determination of assay for out-turn certification.

Resources and Energy Group
Plate 2 gold pour and CIL leach bar 14.88kg

Before REZ and BM Mining restarted mining at Granny Venn in early July this year, no mining activity had taken place in 23 years.

Around 17,000 tonnes of Granny Venn ore has been processed since the toll milling campaign began in mid-August.

REZ and BM Mining partnered up under a profit-sharing agreement back in March to exploit the economically recoverable remnant resources at the Menzies project.

BM Mining is part of the BM Geological Services (BMGS) group of companies that have been active in the mining industry in the Goldfields of Western Australia since 2003.

Executive Director Richard Poole said the maiden gold pour represented a pivotal moment in REZ’s growth as it transitioned from exploration to production.

“We would like to congratulate BM Mining, which has done an exceptional job in assisting us in reaching this production milestone and completing the maiden gold pour at the Lakewood mill.” – Executive Director Richard Poole  

“Since acquiring ground in the East Menzies Goldfield, the company has moved rapidly to identify and commercialise resources, whilst maintaining a vigorous exploration strategy which has delivered some outstanding results for gold at Gigante Grande, and for nickel at Springfield.”

REZ’s near-term goal is to mine 120,000 tonnes of ore at an average grade of 2.3 grams per tonne (g/t) to produce 8,800oz of gold.

At today’s high Aussie dollar gold price, that would fetch roughly $21.1m, nicely boosting REZ’s coffers to help fund its continued exploration.

The original Granny Venn open pit, which was developed by Money Mining and Paddington Gold in 1997-1998, was based on a pit design optimised at a gold price of $454/oz. The gold price is now 5x that.

And making it even more lucrative for REZ is the fact that under the profit-sharing deal with BM Mining, REZ didn’t have to shell out a dime to get Granny Venn back in operation, with BM Mining covering the $3m capital outlay required.

The initial production campaign is scheduled to be completed in late December.

 


 

 

This article was developed in collaboration with Resources & Energy Group, a Stockhead advertiser at the time of publishing.

 

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.

The post REZ levels up with maiden Granny Venn gold pour appeared first on Stockhead.


Author: Special Report

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