27
Apr
2017

Trump 100, Margin Debt Stock Bubble and Gold

– Stocks and the dollar look vulnerable due to Trump’s policies, America’s civil war politics and economic vulnerability
– Stock bubble on margin debt – ‘Powerful time bomb’
– “There is no alternative” to stock bubble? Gold?
– Bank Of America sets a date for the market’s “Great Fall”
– Even uber bull Cramer compares 2000 dotcom bubble bust to today
– Gold to stay elevated on safe haven demand – Economist
– Gold’s tempered climb makes gains more ‘sustainable’

Trump’s first 100 days in office have been a whirlwind but so far the ‘Trump Trade’ of being long stocks has worked for investors and speculators. Will markets continue to be so forgiving of the many foreign and domestic policy failures including the failure to repeal ‘Obamacare’?

It is possible but we think it unlikely as many stock and bond markets, particularly U.S. markets, are now priced for close to perfection – in a far from perfect, massively indebted, volatile financial world.

So far during his Presidency, markets have remained high on the cocaine of massive monetary stimulus and still near o%, ultra low interest rates and record margin debt.

There remain hopes of a further “Trump bump” from aggressive fiscal easing and deregulation and this and increasing “irrational exuberance” has seen the S&P 500 move back towards record territory, driven by increasingly bubble like technology stocks and a Nasdaq at all time record highs above 6,000.

The smart money continues to be be concerned about the bubbles that continue to inflate. Risk appetite is near record highs and even bearish news is greeted as a buying opportunity. The mantra is ‘TINA’ – ‘there is no alternative’ to stocks and bonds.

The obvious alternative in these uncertain and volatile times is a diversification into gold. A very similar mantra was heard in 1999 and 2007 and this is typical of bubbles. The obvious alternative in 1999 and 2007 was a diversification into gold.

Our advice is that, a la 1999 and 2007, it is time to become more risk averse and become more rigorous in your asset allocation. Our clients and more risk aware and averse investors are slowly and prudently placing themselves besides the fire exit and reducing allocations to stocks and bonds and increasing allocations to cash and gold.

Wolf Richter of the Wolf Street blog says the market “sits blithely on a powerful time bomb” and “no one knows the full magnitude, but it’s huge.” The time bomb he’s referring to is the explosive growth of margin debt (see chart above), a trend that usually eventually leads to a market crash or at the very least a severe market correction.

The question is when and from what levels.

Stock market margin debt, as reported by the NYSE, has now surged to a record high of $528 billion. That’s not including loads of unreported margin, or “shadow margin,” that Richter says could put the total figure somewhere near $800 billion.

“Margin debt is in an uncanny relationship with the stock market … It soars when stocks soar and crashes when stocks crash. They feed on each other.”

Clearly, the stock market has become crazy leveraged. And, also clearly, that often leads to big losses when it starts to fall apart.

“Margin debt … has the unnerving habit of peaking right around the time the bubble turns into a selloff … While it’s a terrible predictor of a crash — no one knows if February was the peak or just another stage on the way to an even more dazzling peak — it is associated with enormous risks.”

Quite.

In this context we believe, like Bank of America, that the stock market may be set for a “Great Fall” and that gold will begin to outperform and build on the 10% gain in 2016 and 10% gain YTD 2017 when this happens and risk aversion returns as it inevtiably does.

Even uber stock market and America bull, Jim Cramer of CNBC compares the 2000 dotcom bubble bust to today. Cramer has advocated diversifying into gold.

Gold’s 10% gain year to date in 2017 is a “tempered climb” which makes the gains very ‘sustainable’ according to State Street’s Milling-Stanley.

Gold is likely to stay elevated on safe haven demand according to most gold analysts including the economist Barnabas Gan of Singapore Bank OCBC, as reported by Frank Holmes.

It is hard to argue with Bank of America, Cramer, Milling-Stanley and Barnabas Gan on this one.

7RealRisksBlogBannerAvoid Digital & ETF Gold – Key Gold Storage Must Haves

 

News and Commentary

Gold off 2-week lows on Trump tax reform doubts; BOJ, ECB awaited (Reuters.com)

Gold takes back some lost ground after Trump tax plan outline (MarketWatch.com)

Stocks Slip, Dollar Pares Gain in Policy Whirlwind (Bloomberg.com)

London property prices drop by £10,000 in a year as high-end market slumps (CityAM.com)

May the ore be with you: Japan sells gold Darth Vader mask (DailyMail.co.uk)

Gold Likely to Stay Elevated on Safe Haven Demand – Economist (GoldSeek.com)

Gold Is 1% Shy of Ripping Higher (Menafn.com)

‘It’s the white-collar workers who are in trouble’ – ‘Rich Dad, Poor Dad’ (MarketWatch.com)

Cramer compares the 2000 dotcom bubble bust to today’s market moves (CNBC.com)

Darkening shadows over the UK commercial property market (Moneyweek.com)

Gold Prices (LBMA AM)

27 Apr: USD 1,264.30, GBP 980.21 & EUR 1,160.63 per ounce
26 Apr: USD 1,264.95, GBP 986.79 & EUR 1,160.21 per ounce
25 Apr: USD 1,270.50, GBP 990.48 & EUR 1,165.81 per ounce
24 Apr: USD 1,271.80, GBP 991.11 & EUR 1,169.42 per ounce
21 Apr: USD 1,281.50, GBP 1,000.85 & EUR 1,197.31 per ounce
20 Apr: USD 1,279.90, GBP 996.91 & EUR 1,188.00 per ounce
19 Apr: USD 1,282.05, GBP 999.74 & EUR 1,196.79 per ounce

Silver Prices (LBMA)

27 Apr: USD 17.46, GBP 13.53 & EUR 16.02 per ounce
26 Apr: USD 17.59, GBP 13.72 & EUR 16.15 per ounce
25 Apr: USD 17.84, GBP 13.92 & EUR 16.40 per ounce
24 Apr: USD 17.81, GBP 13.90 & EUR 16.40 per ounce
21 Apr: USD 17.98, GBP 14.05 & EUR 16.80 per ounce
20 Apr: USD 18.19, GBP 14.21 & EUR 16.91 per ounce
19 Apr: USD 18.22, GBP 14.19 & EUR 16.99 per ounce


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– Why Now Is The Time To Invest In Gold and Silver – Schroders

 

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Mark O'Byrne
Executive Director

  • Don McCabe

    How is gold going higher? Each time gold gets to breakout point someone drops several billion dollars of paper gold through naked shorts. That’s several BILLION dollars all within seconds to rapidly push the price down. This can go on indefinitely as authorities turn a blind eye so it must be government intervention involved to protect the financial system. Pretending that TA works in a rigged market is downright silly.