In my last Looking Forward -- A Year Of Resolution, posted in late December, 2015, I said that the year 2016 would likely be a year when we resolved the question of which direction the US economy and most of the rest of the world would head -- and I was betting on the end of the recessionary deflationary bias lingering at that time and the beginning of gradually higher growth and inflation rates. My investment strategy was as follows, from that artical:
I made my first buy of physical gold this month in the mid $1000 area. If gold continues to fall I plan to average down; and if it rises I will average up. And I am ending 2015 with the largest percentage holdings of precious metal stocks of the year, but with a tight stop to protect against further declines if this is just another false alarm. I think it's time to begin accumulating gold and silver once again both as an insurance policy and as an investment.
In real terms gold is selling today as cheap as it was in the year 2000. And gold and silver stocks are even cheaper. It's hard to believe that there is much more downside in the resource sector in general. In real terms we are already at historic lows in most commodities.
If we see another leg down, chances are it is telling us we will see deflation and recession world-wide. And if the reverse occurs we are likely headed for higher world growth and inflation rates. Either way, 2016 should be a year of resolution.
That's exactly what happened.
Don Luskin's testimony on my home page at paulnathan.biz states that Paul Nathan makes "big calls at big turning points in the markets". I earned my money doing just that this year, as I bought gold at it's low in December 2015.
And called for a reversal in inflation rates from lower to higher, and took profits on gold and silver stocks in late June...
It's Time to Start Worrying about Inflation
In July I sold most of my gold and silver stocks for huge profits and bet on a reversal in interest rates with a switch to TBT (Ultra-Short Bonds) which has risen dramatically since.
Since then, I have continued to short bonds and have sold down my gold stock position to the lowest of the year from 75% at the beginning of the year to about 25% today.
I think one of the main themes of 2017 will be a continuation of the world-wide anti-establishment movement. There will be a half dozen elections on new or old leadership by nations next year, and as such, people will be voting on immigration policies and globalization. This could transform the political world depending on which way those votes go.
There is a good chance that Italy, France, and several other countries will seriously consider splitting from the European Union, (EU). Further, they may decide whether or not to return to their previous national currencies. While it is impossible to predict the shape and direction of the US economy and market movements until new legislation is determined, this worldwide political movement is predictable and has huge economic and monetary consequences.
The very survival of the EU and the euro is at risk. If nations begin to leave the EU in 2017 and beyond, it will require major readjustment of currencies, trade agreements, immigration laws, and economies. It would be the most significant economic and monetary event of the decade. There is a very real possibility we could see the return of the lira, the franc, and the mark. This could have a major impact on the value of the dollar and gold.
In my article "Why Donald Trump Won", I laid out the reasons for this political upset as well as the Brexit upset and the nationalist-populism movement that pervades the word today. It has to do with mass immigration and countries losing their national identity, years of economic stagnation, a loss in confidence in political leaders and central bankers, and a desire to regain control over their economies through trade policy.
So it wasn't just Hillary losing, it was more fundamental than just Hillary.
The political elites that have been telling the working class what to do and what not to do for years are being ousted. People have had enough. The Democratic Party is now in control of only five states in America and hold less seats in Congress, less governorships, and less state legislators than since the 1920s. Both Brexit and the election of Donald Trump are upsets of historic proportions. It represents a backlash against the ruling class.
I've heard a lot of theories as to why Hillary lost -- from Comey to the Russians, but the reason is obvious to me. Month after month, year after year, polls showed that two-thirds of the population polled, said that this country was on the wrong track. That we were going the wrong way. And year after year, Obama ignored that sentiment and employed the same policies that failed to change those polls. For all Obama's and Hillary's excuses, the "right track -- wrong track" sentiment of voters continued -- and it was ignored.
We continued to hear how good things were from the Administration instead of how bad things were according to the polls. So, when the voters went to the voting polls they made it clear they wanted a change. It's that simple: ignore two-thirds of the opinions of the voting population at your own peril.
There are a lot of unknowns ahead as a result of the election, and lots of uncertainty about the votes yet to be made in countries around the world, but markets are speaking.
Gold fell over $200 dollars from its near recent high after the Trump victory. One reason that is not being talked about much when it comes to gold: Trump will likely appoint a new Federal Reserve Chairman and possibly five governors in his four-year term as President. This could change the nature and mission of the Fed.
Trump believes in hard money and a rule-based monetary policy. He's open to pegging the dollar to gold or a basket of currencies; or as a preliminary move, base monetary policy on something like the Taylor Rule. It is very possible that John Taylor could be tapped to replace Janet Yellen when her term ends January 2018. That would be a mistake in my judgemnet. From the following article:
Monetary Rules versus Fiscal Madness
The problem with any rule-based monetary policy, including fixing the dollar to gold, is that we are not able to maintain a fixed monetary system in a world of irresponsible and undisciplined fiscal policies. Any attempt would fail and the free market and sound money would get the blame.
If this is the direction Trump takes us, monetary policy will become tighter and interest rates will be artificially pushed higher. That's what the hard money school is now advocating. This would be deflationary and negative for the price of gold. I'm a hard money guy. I have always advocated returning to such a standard but not until the fiscal condition of the US improves. The budget deficit continues to add to the national debt, and this needs to be reversed before any attempt at retuning to the discipline of hard money.
Also, a nation needs free trade and the free movement of money and goods between borders for there to be a true gold standard, not to mention that "only gold and silver" should be used as money (as the Constitution suggests) under a gold standard. Trump wants to do exactly the reverse and limit trade in the form of imports and the flow of funds between nations, the exact opposite of the requirements of a gold standard. Yet there are calls for a return to a Bretton Woods-like system, which failed miserably due to the very contradictions pointed out in the above article and others posted on my site.
Now all of this is premature so early in a Trump administration, but it is very possible that gold is beginning to discount a future trade war, tighter money, artificially higher interest rates, and a potential recession and deflation because of them. If this is the case, gold can linger in the 1050 to 1250 area until actual Fed appointments are made indicating where monetary policy will change and to what degree. And any move toward a real trade war will lead to a hard fall in commodities and most markets.
At the very least, monetary policy will likely change under a Trump presidency, and this is what gold could be responding to. In my view it is not fixing the dollar to gold that is the first step we should be looking at. That's the last step. The direction we need to go first, is to convince Congress to change the Feds' mandate to being the bank of last resort in times of financial crises and insuring price stability -- and that's all the mandates we need.
At the same time the Congress needs to control the budget and move toward balance. Unfunded liabilities and many other out of control programs need to be reigned in.
Then I would ask the Fed to allow interest rates to float freely devoid of price controls. This would eliminate the need for regular Fed metings and would take all the drama out of Fed monetary policy. The market would be in control -- not bureaucrats.
Also, the Fed as a regulatory agency and policeman is way outside the Fed’s abilities and should be separated from the Fed’s responsibilities entirely. The existing laws against fraud are all that is needed to discourage criminal behavior, if enforced vigorously. The Fed is an agency of academics -- not policemen.
But I doubt that this is what Trump has in mind. Until we know what he does have in mind, gold may remain range bound. However, that range can be traded. In fact, I would say the same about all markets in 2017. Between Trumponomics and Tweetonomics, Trump should provide us with many trading opportunities.
Certainly, visibility into 2017 is murky at best.
For how can we know what the world will look like going forward? Will we have a world where China and the US are in a trade war, where Russia is moving on Eastern Europe, where Korea and Iran are becoming more aggressive, where Obamacare has been repealed but in chaos if the Republicans blow the transition to a market-based healthcare system, and where Congress and the Administration are banging heads over debt and deficits and how to finance all the new infrastructure planned?
Or will we have a world where aggression falls in the world in the face of an assertive US; where tax reform and deregulation are passed quickly, where there is an orderly transition from Obamacare to a market-based health system, where money held abroad is coming home and prosperity breaks out for the first time in nearly a decade?
I submit unlike any other year in memory, we cannot predict with any clarity whatsoever, what the world will look like going forward. For that reason economic and monetary predictions are impossible. That's why I, as an investor, will take things one day at a time, looking to trade what the world gives me. Going into 2017 I will proceed trading with caution, but looking for the next big turn and another profitable year in a very volatile world.
Whereas going into 2016 I was leveraged to the hilt, buying up depressed gold and silver stocks, this year I enter 2017 defensively with cash on the sidelines looking for the next big move.