Title : Read Trey Reik on Gold
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Read Trey Reik on Gold
Trey Reik has recently moved house from Sprott to Bristol Group and is doing fine there as well, for what it's worth. He's still one of the sharpest brains in the gold sphere and his grasp on the interaction between gold and the US market is second to none. Anyway, he's let me paste out the whole of his July 2020 letter to clients, which went out just a few days ago. Enjoy:
Bristol Gold Group July 2020
In our early-July report, we shared perspective on daunting implications for U.S. capital markets of recent Fed liquidity facilities. We have taken issue with the Fed’s gross manipulation of asset prices to the benefit of investment banks, sophisticated investment vehicles and market speculators. Blow-off Q2 earnings at Wall Street banks only served to prosecute our indictment. We believe the Covid pandemic provided the perfect opportunity for the Fed finally to address suffocating U.S. debt levels—by simply letting impaired credits and zombie enterprises fail and by beginning to rationalize malinvestment fostered by a decade of QE and ZIRP. Instead, the Fed flooded U.S. capital markets with an absurd amount of artificial liquidity which has (once again) suspended rational price discovery and further distanced the dysfunctional U.S. economy from any semblance of free markets.
Fiscal Cliff
In this report, we shift our attention to the fiscal side of U.S. Covid response. In the case of federal fiscal programs, it is fair to say that at least the intentions of Congress and Treasury have been more honorable than those of their Fed counterparts. Right or wrong, our nation’s broad imposition of lockdowns actively deprived tens-of-millions of Americans of their ability to earn a paycheck. Worse still, government lockdowns inflicted the sharpest economic pain on those most vulnerable to loss of income. By common account, some 40% of Americans earning less than $40,000 lost their jobs during April and May.
On March 23, the U.S. Census Bureau launched the Household Pulse Survey, a comprehensive effort to quantify nationwide impacts of Covid-19 on employment, food availability, medical care, housing solvency and educational experience. In its 10th week of reporting (7/7/20), the survey estimated https://www.census.gov/data-tools/demo/hhp/#/table?measures=HIRthat 49.9% of American households had lost employment income since 3/13/20; 34.9% of households expected additional lost income during the next month; 40.1% of households had delayed medical care in the prior four weeks; and 25.3% of adults (or 45,373,346 individuals) had either missed their household’s prior month rent payment or held “slight or no confidence that their household could pay the next month’s rent or mortgage payment on time.” Unbelievably, the percentage of American households with children in private or public school where “classes were taught in a distance learning format or changed in some other way” totaled a mind-numbing 99.2%.
Unfortunately, the well-intentioned nature of U.S. fiscal policy in no way diminishes its catastrophic impact on already shaky U.S. finances. As recently as this past March, we were fretting about a trailing 12-month federal budget deficit exceeding $1 trillion for the first time since the GFC. Now, the Q2 2020 deficit alone measured $2.0 trillion (including June’s all-time monthly record $864 billion—a 102-fold increase over June 2019’s $8.5 billion), vaulting the trailing 12-month deficit to $2.982 trillion. Current CBO estimates project a fiscal 2020 (September) federal deficit of $3.7 trillion. To lend some perspective to runaway Treasury borrowing, as shown in Figure 1, on the following page, after exceeding net tax receipts for the first time in history this past May, trailing 12-month Treasury issuance ($4.347 trillion) absolutely toweredabove 12-month tax receipts ($3.113 trillion) in the period ended June.
Figure 1: Net Tax Receipts vs. U.S. Treasury Issuance [12-month sum] (2006-June 2020) [Meridian Macro]
As demonstrated in Figure 2, below, the rough mix of $1 trillion-worth of stimulus checks and Paycheck Protection Program (PPP) loans has delayed for a few months the inevitable reckoning of post-Covid employment realities. In quick succession, the federal ban on eviction of (nonpaying) renters expired on 7/24; the $600 supplemental federal unemployment insurance program expires on 7/31; and the PPP expires on 8/8. The bid/offer spread on the next round of federal stimulus currently stands at $1-to-$3 trillion. Trillion! White House economic adviser Larry Kudlow has even floated the concept of a “back to work bonus” to somehow encourage unemployed workers back into the workforce. How and when will fiscal safety nets stop? How will they ever be paid back?
Figure 2: Weekly Disbursements of Unemployment Insurance, Stimulus Checks and Paycheck Protection Program Loans (3/6/20-7/10/20) [U.S. Treasury, U.S. Census, Small Business Administration Evercore ISI]
Traditional inefficiency of governmental spending has reached new heights of fraud and folly in the Covid era. The Government Accountability Office acknowledged that a legal barrier prevented Treasury and the IRS from consulting federal death records in mailing April’s 159 million stimulus checks (totaling $267 billion). Consequently, 1.1 million checks totaling $1.4 billion were distributed to deceased citizens.
The PPP program will long stand as the most random and capricious federal handout in our nation’s history. Totaling some $669 billion (yes, that’s two-thirds of $1 trillion), the primary goal of the PPP was to help entrepreneurs retain payroll employees so businesses and workers might “ride out” what was anticipated to be a relatively short Covid downturn. PPP was all about keeping businesses afloat and protecting jobs. Through mid-July, roughly 4.9 million PPP loans had been processed, totaling some $518 billion. While we have chuckled at federal prosecutions related to Lamborghini purchases and cryptocurrency trading with PPP proceeds, the single best example of the lunacy of such a federal endeavor has been the fact that neither the PPP application nor the Small Business Administration’s electronic system (used by lenders to submit applications)included a simple input field for “jobs retained.” To us, that seems like an important box for the government to have checked!
Of course, these details hold limited significance in context of Treasury Secretary Mnuchin’s recent trial balloon to forgive completely the 87% of PPP loans measuring less than $150,000. As Secretary Mnuchin testified to the House Small Business Committee on 7/17/20, “We should consider forgiving all small loans, but would need fraud protection.” Where is this money coming from? What has it accomplished? When will the U.S. dollar begin to reflect eroding U.S. creditworthiness?
As shown in Figure 3, on the prior page, ever since the launch of QE3 in September 2012, the spot gold price has demonstrated tight (inverse) correlation to the trailing 12-month federal budget deficit. Through March 2020, every $350B delta in the budget deficit (in either direction) had accompanied a $300 (inverse) delta in the gold price. Should correlations of the past eight years hold vaguely true, the $1.944 trillion Q2 deficit blowout would project to a $3,200 gold price in short order. Further, the CBO’s 4/24/20 estimate for a fiscal (Sept) 2020 deficit of $3.7 trillion projects a spot gold price in the vicinity of $3,860 by year-end 2020. Even discounting this implied correlation by 50% (under the assumption pandemic conditions and related fiscal response are merely temporary phenomena) the CBO’s 2020 deficit estimate would still project a year-end 2020 gold price of $2,700.
Stay tuned and enjoy the final weeks of summer!
Sincerely,
Trey Reik
Managing Member
Bristol Gold Group LLC
(508) 775 7056
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