1. Democrats and Republicans Go Hog Wild on New Pork Barrel Spending

    It’s no secret that deficit spending is out of control and the U.S. national debt is heading for nosebleed levels. When Ronald Reagan was sworn in as president in January 1981, the U.S. debt-to-GDP ratio was 32%. When Donald Trump was sworn in as president in January 2017, that ratio had grown to 105%, the second highest level in U.S. history, second only to the level at the end of the Second World War.

    At least the Second World War was an existential crisis and we not only won, but we emerged as the most powerful military and economic power in the history of the world. Over the 25-year period following the war, from 1946 to 1971, we managed the debt back down to a comfortable 30% ratio. It remained there until 1981 when it began to soar again.

    This continued through Republican (Reagan, Bush 41, Bush 43) and Democratic (Clinton, Obama) administrations. It was a bipartisan disaster. Unlike 1945, we don’t have much to show for all of this debt. We are now a declining economic and military power relative to China.

    Congress did try to deal with the deficit by imposing a “sequester” on military and domestic spending above certain levels, and by eliminating “earmarks,” which is a fancy name for pork barrel spending that does not meet any national priority, but is targeted to a particular congressional district to get votes for a member.

    Guess what? As this article shows, in the face of a government shutdown and conflicts over spending for healthcare and the military, Congress has decided to bust the sequester and to bring back earmarks! This is not a partisan exercise. Democrats and Republican alike are in full agreement on spending more of your money and running up bigger deficits.

    America is heading toward a global crisis of confidence in the dollar as it becomes clear that inflation is the only way out of this mess. Meanwhile, the mood in Washington is spend, spend, spend. What you should do to protect your wealth is buy gold, gold, gold.

  2. Biggest Chinese Telecom Gets Iced By CFUIS. The U.S.-China Trade War Begins

    CFIUS (pronounced SIF-eus) is one of the more obscure corners of the U.S. national security apparatus. CFIUS stands for the Committee on Foreign Investment in the United States. Even most Washington insiders have never heard of it. When you say “CFIUS” in Washington most people ask you if there’s a cure.

    CFIUS is a Cabinet level working group that reports to the President. Their job by statute is to consider whether foreign acquisitions of U.S. companies pose a threat to U.S. national security. If so, the White House has the authority to block or unwind those takeovers even if they are otherwise permissible. The officials on the committee include the Secretary of the Treasury, Secretary of Defense, Secretary of State and other Cabinet officials from Commerce, Energy, Homeland Security and other key departments.

    CFIUS outsources the national security review to the intelligence community including the CIA and FBI. I worked on CFIUS cases for years from inside the CIA under the direction of the Director of National Intelligence, so I have a good working knowledge of how these cases are usually handled.

    Most transactions are routinely approved. Some pose no security threat at all. If a friendly Canadian buyer wants to purchase a Vermont ice cream company, that’s fine; no national security threat there. Even when the deals are more sensitive, there’s usually a “mitigation agreement” signed that lets the deal go through with some caveats such as the foreign owners not being allowed to have seats on the board of directors or have access to sensitive projects.

    But, as this article shows, CFIUS is now playing hardball with China. One of biggest conglomerates in China, HNA, has been told flat-out that they are barred from U.S. acquisitions until they provide more transparency about their owners, (which may include elements of the Peoples’ Liberation Army and the Communist Party of China). HNA has been one of the biggest buyers of U.S. target companies over the past two years. China is likely to retaliate for this black ball of HNA deals.

    Get ready for a nasty financial war with China involving currencies, trade, and foreign direct investment.

  3. This Gold Rally Has Far to Run. China’s All In; Americans Are Last to Know

    Gold has entered the third bull market of my lifetime. The first bull market was 1971-1980 when gold gained 2,190%. The second bull market was 1999-2011 when gold gained 655%. The third bull market started in December 2015 and gold is up almost 30% already.

    The new bull market should have many years to run and should produce gains of 700% or higher as the price of gold makes its way to $10,000 per ounce. Still, that will take some years and there will be rallies and drawdowns along the way.

    For investors focused more on short-term technical factors rather than long-term secular trends, there is also good news. This article reports that January-February are typically good months for gold partly because of strong Chinese demand associated with the lunar new year. This was certainly true in 2016 and 2017, and it’s proving true so far in 2018.

    Personally, I put more weight on Fed rate hikes in December 2015, 2016 and 2017 that slowed the economy and pointed toward future Fed ease and lower real rates. In fact, the Fed did not hike rates in March 2015 or March 2016 (the first press conference FOMC meetings following the last two December rate hikes), and that ease relative to expectations did validate those gold rallies early each year.

    We’ll see what happens in March 2018. My estimate is the Fed will hike rates this March, but that will just make ease in June all the more likely, so gold still has the forward forecast right. Whether you follow the Fed or the moon, the news is good for gold either way!

  4. This Is Bitcoin’s Worst Nightmare. Big Banks Are Taming the Blockchain

    Remember the days (about six months ago) when bitcoin was going to revolutionize banking and disintermediate the mean nasty “banksters?” Well, a funny thing happened on the way to the revolution.

    Bitcoin itself has hit an air pocket with a 50% price drop last week. Meanwhile the banks are taking over the blockchain as this article reveals. This is not surprising.

    Disruptive technology does come along from time to time, but established franchises have a way of either fighting back or co-opting the new technology just by buying it. Uber is disruptive, but London taxi drivers (the best in the world, by the way) have organized to get Uber’s license there revoked.

    In the same spirit, it was naïve to expect that banks would just sit there and let blockchain technology eat their lunch. All of the major banks have blockchain research and development projects underway. Japan is the first major economy to declare bitcoin “legal tender” in payment for goods and services.

    This does not fix a value for bitcoin, and it does not force anyone to use bitcoin, it just keeps bitcoin transactions safe from counterfeiting charges. The Japanese banks are taking that opening and driving an armored car through it. This article reports that Japan’s largest bank is creating its own crypto-currency.

    Valuation won’t be an issue because each coin will be worth exactly one yen. It’s really just an alternative payment system like PayPal. What it does is allow bank customers to make and receive payments on the blockchain with a yen equivalent, but with much lower costs. Also, because this is a “permissioned” system (customers only may participate with bank approval) verification does not require the clunky proof-of-work of the original bitcoin blockchain.

    Distributed ledgers and blockchain are here to stay, but bitcoin is not. The banks will see to that.

  5. More Evidence That a New Bull Market in Gold Has Begun

    While all the media hype lately has been about bitcoin, a sleeping giant in the monetary space has awakened. The sleeping giant is gold.

    The dollar price of gold per ounce was up 8.6% in 2016, 13.1% in 2017 and 2.7% so far in 2018. Overall, gold has rallied 27.3% from its low of $1,051 on Dec. 15, 2015. That December 2015 low marked a 50% retracement from the $1,900 high of September 2011 (using the August 1999 interim low price of $253 as a baseline).

    Turning points in bull and bear markets are rarely seen in real time. Any low can go lower and any high can go higher. Volatility in the dollar price of gold is the norm. It’s only with the benefit of hindsight that we can see a turning point has been realized.

    From today’s perspective, it’s clear that 2011–15 was a secular bear market and that a new bull market began in December 2015. It’s also typical that new bull markets surpass the previous highs, given enough time. For now, gold is solidly over $1,300 per ounce and poised to go to $1,400 per ounce by mid-2018.

    Beyond that, we expect gold to gradually take out the old high and push past the $2,000 per ounce psychological boundary. My intermediate-term price target for gold at $10,000 per ounce based on a coming monetary crisis is unchanged. But that won’t happen all at once.

    There’s a lot of daylight between $2,000 and $10,000 per ounce. No doubt the ride will be volatile with some peaks and valleys along the way. But as this article shows, the new bull market has begun, and investors who have not yet reached my recommended 10% allocation of gold still have time to jump on board and enjoy the ride.

  6. Ya Can’t Make It Up! Major Bitcoin Conference Refuses to Accept Bitcoin

    Sometimes an article is so funny there’s not a lot to say about it; the headline speaks for itself.

    I’ve warned readers for over a year that the bitcoin craze is unsustainable for a number of technical reasons. The limit on total bitcoin issuance makes it unsuitable for money; a useful form of money needs to have some elasticity in order to grow with an economy and support healthy bond and credit markets.

    Of course, too much elasticity is also bad as we can see with central bank money printing. That’s why I like gold as a form of money, because the above-ground supply grows naturally at about the rate of population and economic growth and is outside the control of central banks.

    The other problems with bitcoin have to do with high costs for transactions due to the clunky blockchain size and unsustainable electricity usage for mining and blockchain validation. The critics tell me I’m all wrong and continue to tout the virtues of bitcoin.

    As this article shows, reality has a way of catching up with bogus cheerleaders. A major bitcoin conference scheduled for Jan. 18–19 had planned to accept bitcoin in payment for conference attendance fees as a demonstration of the versatility of bitcoin. Guess what?

    The conference sponsors just announced they are stopping the acceptance of bitcoin. Why? Because of high costs and system congestion, exactly the limitations I have been pointing out.

    The conference is in Miami Beach, a lovely venue this time of year. I hope the conference attendees have a great time in Miami as they use MasterCard and Visa to pay in dollars to discuss the future of bitcoin.

  7. Even the Criminals Are Ditching Bitcoin. Soon the Pyramid Will Collapse

    My views on bitcoin are fairly well-known by now. It’s a fraud because proponents misrepresent the benefits by blurring the difference between the coin itself and the technology on which a blockchain is based.

    It’s a Ponzi because at least some of the unregulated exchanges that transact in bitcoin are pocketing investor dollars and crediting them with bitcoin that don’t actually exist in reliance on new buyers to provide liquidity to sellers. And it’s a bubble because there’s nothing to sustain the price except greater fools willing to pay more than the last fool, and because there are no bitcoin use cases other than criminal enterprise.

    All of this will be exposed for what it is sooner than later. But the wheels are already starting to come off the bitcoin bandwagon.

    Right now even the criminals are abandoning bitcoin. Because of the price explosion, regulators around the world are demanding records, closing exchanges and shutting down bitcoin mining operations.

    Criminals and terrorists don’t like that kind of heat. So as this article describes, they’re selling bitcoin and moving to monero, another overhyped cryptocurrency, and using monero to conduct transactions on the dark web.

    You know your bitcoin is in trouble when even the criminals won’t touch it!

  8. Top Fed Official Says Enjoy the Sugar High; Tax Law Stimulus Won’t Last

    Bill Dudley may be on his way out as president of the Federal Reserve Bank of New York, but he has a few parting shots before he goes.

    As this article reports, Dudley gave a speech last week in which he said that tax cuts in the new Trump tax law might give a short-term boost to growth, but that the boost would be small and the longer-term impact could be a drag on growth. Dudley based this conclusion on the huge deficits likely to result from the tax cut and the drag on growth produced by those deficits.

    Conventional thinking is that tax cuts will stimulate the economy. The view is that the additional growth resulting from the stimulus will generate added tax revenue, which will make up for the lost revenue from the tax cuts themselves. This result is the so-called “Laffer curve” effect.

    The problem is that empirical support for the theoretical Laffer curve is weak. The Laffer curve is especially likely to fail under present conditions in which we are already in the ninth year of an expansion and the U.S. debt-to-GDP ratio already exceeds 105%.

    In those conditions, added deficits resulting from a tax cut are more likely to slow growth or even produce a recession than they are to support growth. In short, the tax cut may produce a sugar high in 2018, but is likely to be a major drag on growth in 2019 and beyond.

    The tax cut will also push the U.S. debt-to-GDP ratio closer to 110%, at which point a crisis in confidence in the U.S. dollar could result. Dudley’s Fed is adding to the problems by raising rates at exactly the wrong time. But Dudley is probably spot on in terms of his critique of the tax bill.

    As 2018 stretches into 2019, these effects will become more prominent, growth will slow, stocks will retreat and U.S. citizens will be left with an even higher pile of unpayable debt.

  9. China Fires the First Shot in a New Financial War That Will Get Much Worse

    This article is about a shot heard round the world. On Wednesday, Jan. 10, 2018, Bloomberg reported that government officials in Beijing were reviewing the composition of Chinese reserves and considering reducing their allocation to U.S. Treasury securities. The news sent Treasury note prices plunging, and the yield to maturity of the 10-year Treasury note shot up past 2.5%.

    Pundits came out of the woodwork to declare that the 35-year-old bull market in bonds was over and a new secular bear market had begun. Judging from the tenor of so-called expert commentary, it seemed that the end of the world was nigh. Not so fast.

    It is true that China is the world’s largest foreign holder of U.S. Treasury debt and that its decisions on asset allocation can affect asset prices, especially in bonds and currencies. But there was less to this move than meets the eye.

    Chinese holdings of U.S. Treasuries have been nearly constant for about three years. China has been diversifying away from U.S. Treasuries for years, including increased allocations to gold, direct investments in private equity, hedge funds and high-quality, euro-denominated debt. China is not about to dump Treasuries in a big way, although it might buy fewer in the future.

    This news is of no particular concern to the U.S. Treasury, as U.S. banks stand ready to pick up the slack if needed as buyers of last resort. Yields on 10-year Treasuries may have increased for a few days, but they are still well below the levels of late 2013, the last time pundits declared the end of the bull market.

    The Chinese leak is best understood as a shot across the bow in what is shaping up as a new currency and trade war between the U.S. and China. The U.S. is preparing to slap tariffs and other trade sanctions on China, so China was warning Washington that such actions might be met with retaliation in the bond market. Still, the bond bull market is far from over.

    Disinflationary forces have the upper hand over inflation. The Fed is over-tightening with both its rate hikes and balance sheet reductions and won’t realize it until it’s too late. Treasury yields should decline from here just as they did in 2014. Inflation will arrive someday, but not yet.

    For now, what we’re seeing is bluster and the contours of a financial war rather than the end of the bull market in bonds.