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    Gold's Next Big Bull Market May Be Upon Us

    This article by John Authers for Bloomberg may be of interest to subscribers. Here is a section:

    If gold’s implicit prediction is right, it has two implications. The first and most important one is a belief that inflation is at last due to return, after many false alarms. The second is that gold is now settled in a bull market. 

    So, is gold good value? The metal doesn’t throw off any income streams, and has very few industrial uses, so it is very hard to come up with a measure of fair value. But the following chart, using data drawn up by Charlie Morris of Catley, Lakewood and May in London, is a heroic attempt to arrive at one. Morris devised a formula for fair value using the consumer price index and the average of 10- and 30-year inflation expectations. This indicator briefly showed that gold was wildly overpriced during the worst of the 2008 crisis, a phenomenon that may have been driven by the illiquid markets of the time, that created an unrealistic inflation forecast. Exclude this incident, and we see a steady bull market for gold from 2005 to 2011, followed by a steady bear market, where it moved to a discount. In the last two years, it looks as though it may have started another bull market. By Morris’ calculations, gold is now about 11% over fair value. 

    Gold is still far from the confident prediction of runaway inflation that it briefly produced for a few years after the crisis, even though it is buoyed by safe haven demand at present, along with seasonal interest in gold jewelry, notably from China where the lunar new year is almost here, and by resumed interest from central banks.

    On the supply side, gold-mining groups are merging, creating a reasonable hope of avoiding over-supply in the near future. So, if this move in gold prices is confirmed by a move down in real yields, followed even by an increase in inflation, then this could be part of a bull market to match the one from 2005 to 2011. The critical question is whether the gold market proves to be right this time in its forecast of inflation.

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    Global Money Notes #26 Countdown to QE4

    Thanks to a subscriber for this edition of Zoltan Pozsar’s money market notes for Credit Suisse. Here is a section:

    U.S. Strike Ordered by Trump Kills Key Iranian Military Leader in Baghdad

    This article from the Wall Street Journal may be of interest to subscribers. Here is a section:

    Iraqi Prime Minister Adel Abdul-Mahdi condemned the targeted killing as a violation of the terms underpinning the U.S. troop presence in the country.

    Mr. Abdul-Mahdi said he had submitted a formal request for parliament to convene in order to adopt necessary measures “to protect Iraq’s dignity and sovereignty.” He didn’t say what those measures would be.

    The killing of the two men is likely to mark the beginning of a dangerous new chapter in the rivalry between the U.S. and Iran, which escalated after supporters of an Iran-backed Shiite militia attempted to storm the U.S. Embassy in Baghdad earlier this week. Mr. Mohandes was deputy leader of the Popular Mobilization Forces, an umbrella group that led the embassy attack.

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    Global Bonds Rally After Tensions Flare Between U.S., Iran

    This article by James Hirai and Vivien Lou Chen for Bloomberg may be of interest to subscribers. Here is a section:

    “The data will probably prove to be an anomaly, but the initial market reaction is that it’s bad enough to at least consider the possibility of a Fed rate cut,” said Chris Low, chief economist at FHN Financial. “The combination of geopolitical tensions on top of unexpectedly weak data increases the likelihood of a 2020 Fed rate cut.”

    Yields on 10-year Treasuries dropped as much as 8 basis points to 1.79% and remain within 2 basis points of that level. Rates on their German counterparts were down 6 basis points at minus 0.28%. Yields tumbled in most major markets around the world.

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    The Economy Is Getting Harder to Forecast

    This article by Gary Shilling for Bloomberg may be of interest to subscribers. Here is a section:

    Disinflation has reigned since 1980, but real interest rates were positive until the last decade.  But for 10 years now, real 10-year Treasury note yields have been flat at zero (see my Nov. 19, 2018 column, “Zero Real Yields Are Tripping Up Investors”).  This and the flat yield curve have pushed state pension funds and other investors far out on the risk curve in search of real returns, bidding up stocks to vulnerable levels.
     
    Earlier, the Fed was run by Ph.D. economists who clung to widely-held theories even though they didn’t work. Fed Chairman Jerome Powell is proving to be much more practical, backing away from rigid Fed policies such as the 2% inflation target and a zero-bound policy rate as well as unsuccessful forward guidance.

    In this different economic climate, it’s hard to time the end of the current recovery. Still, it will end, due either to Fed overtightening or a financial crisis, like the 2000 dot-com blow-off or the 2007-2009 subprime mortgage collapse. In the current excess supply-savings glut-deflationary world, it’s likely a recession will unfold due to a shock before the Fed overtightens.

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    Korean Won Surges to Become Asia's Best-Performing Currency

    This article by  David Finnerty for Bloomberg may be of interest to subscribers. Here is a section:

    South Korea’s won has surged through the pack to become the best-performing Asian currency for December after being the outright worst over the previous 11 months.

    The catalysts behind its revival: the agreement of an initial trade deal between the U.S. and China -- South Korea’s two largest trading partners -- and improving local data that suggest that economy is turning the corner following a series of interest-rate cuts.

    The won has jumped 1.7% this month after President Donald Trump said Dec. 13 the U.S. and China had reached a phase-one trade deal, helping to limit any further escalation of the dispute that has pummeled emerging-market assets this year.

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    Foreign Exchange Outlook for First Quarter 2020

     Thanks to subscriber for this report from Brown Brothers Harriman which may be of interest. Here is a section on the Dollar:

    Japan's Topix Advances, Set for Best Quarterly Gain Since 2016

    This article by Min Jeong Lee and Shingo Kawamoto for Bloomberg may be of interest to subscribers. Here is a section:

    Japan’s Topix index advanced, set for its best quarterly gain since 2016, after the latest economic data out of the U.S. indicated the labor market is solid.

    Banks contributed most to the benchmark measure’s Friday gains. The Nikkei 225 Stock Average slipped 0.4% to 23,837.72, as 30 of its components traded without rights to receive the next dividend, including Canon Inc. and Japan Tobacco Inc. Next Monday will be the last trading day of the year.

    The Topix extended its gain for the quarter to 9.2%, the biggest such increase in three years. Japanese equities have rallied since September, bolstered by signs of easing tensions between the U.S. and China.

    U.S. jobless claims fell to a three-week low of 222,000 in the week ended Dec. 21, in another sign of health in the U.S. economy. Major U.S. equity indexes climbed to fresh records Thursday in holiday-thinned trading.

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    Election Cycle Still Intact

    Thanks to a subscriber for this note by Kevin Muir for his MacroTourist blog. Here is a section:

    Before we examine the fourth year, remember back to the stat from the third year; since WWII there had never been a down year.  The fourth year is also tilted to the positive, but not quite as unblemished.  Bush vs. Gore at the turn of the century saw a 9.1% loss.  And then 2008 witnessed a blistering 37% decline with the Great Financial Crisis.

    Yet what's interesting about both dates is that they coincided with the end of a protracted bull market.  Will 2020 prove the same?  It certainly feels like that might be a possibility.  But I warn that before those two declines, there had also not been a post-WWII fourth year of the Presidential cycle that had fallen either.  From 1948 to 2000, the returns were all to the green side of the ledger.

    Perhaps both declines (2000 and 2008) were the result of a Federal Reserve bent on slowing down the economy. With Powell & Co. increasingly looking willing to let the economy run hot, the fiscal pumping from a President (and party) wanting to get re-elected might keep a bid to risk assets.

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