December 9, 2022
By Steve Blumenthal
“You cannot analyze the market solely as we did in the past 30 years, when we had accelerating globalization, when we had a free capital movement, when we had free movement of people everywhere.”
– Felix Zulauf, Zulauf Asset Management
I spent time in sunny Florida this week. It brought a welcome dose of warmth and wisdom from industry experts. Zoltan Pozsar, Ray Dalio, Peter Diamandis, Felix Zulauf, and Barry Habib.
With the impending recession, I figured it’d be a good time to take another look at Dalio’s Principles for Navigating Big Debt Crisis. I get into that more at the end of this newsletter. In some of the biggest international news of the week, the G7 agreed to a cap on Russian oil prices, specifically linked to the insurance of carriers. There are broad implications, of course. One of them, as Zoltan Pozsar wrote extensively about, has to do with how the oil cap affects the United States’ oil reserves and the valuation of gold. I share Pozsar’s main points and my key takeaways below.
Peter Diamandis also shared an exciting look at the future of connectivity, complete with satellite “mega-constellations,” and I share Barry Habib’s award-winning forecast of what the real estate market will do in the months to come. In his view, good news is on the horizon.
Grab your coffee and find your favorite chair and read on. The World Cup continues, despite USA’s ouster. I’m not discouraged, however. They’re a young team, and they managed well against seasoned and storied soccer vets from around the world. I have no doubt they’ll put up an even stronger showing in 2026. Ever onward!
(Reminder, this is not a recommendation to buy or sell any security. My views may change at any time. The information is for discussion purposes only).
Zoltan Pozsar – If Russia Accepts Gold for Oil, Gold Could Double
Zoltan Pozsar, a member of the Shadow Banking Colloquium of the Institute for New Economic Thinking (INET), is an expert on global macroeconomic affairs, central banking, and financial intermediation. Before joining Credit Suisse in February 2015, Mr. Pozsar was a senior adviser to the U.S. Department of the Treasury, advising the Offices of Debt Management and Financial Research and serving as the Treasury’s liaison to the FSB on matters of financial innovation. Mr. Pozsar was deeply involved in the response to the 2008 global financial crisis and the ensuing policy debate. He joined the Federal Reserve Bank of New York in August 2008 in charge of market intelligence for securitized credit markets and served as the point-person on market developments for senior Federal Reserve, U.S. Treasury, and White House officials throughout the crisis. He also played an instrumental role in building the TALF to backstop the ABS market and pioneered the mapping of the shadow banking system, which inspired the FSB’s effort to monitor and regulate shadow banking globally. Later at the IMF, he was involved in framing the Fund’s official position on shadow banking. He consulted G-20 working groups as well as G-7 policymakers, central banks, and finance ministries on global macro-financial developments. (Source: Credit Suisse)
Additionally, he writes for VoxEU in a personal capacity. Mr. Pozsar has published several ground-breaking papers on the financial eco-system and wrote extensively on the global economy, most recently with Paul McCulley (formerly of PIMCO) on fiscal and monetary policy in a liquidity trap.
Pozsar’s December 2022 letter to clients focuses on the United States’ Strategic Petroleum Reserve (SPR), Russian oil, and gold. Here are some of the key points:
- November 2021: President Joe Biden released 50 million barrels of oil from the SPR.
- March 2022: President Biden released 1 million barrels of oil per day for the next six months.
- October 2022: 15 million barrels released; White House says it will look to replenish the reserve.
- November-December 2022: SPR is now at a 40-year low of 400 million barrels.
Given OPEC+ production cuts, end of SPR releases, re-routing of Russian oil to Asia, etc., Pozsar weighs whether the U.S. should release more oil or if it’s time for the United States to refill the SPR.
- The release and sale of so many SPR reserves dampen hopes of managing increased energy prices and, by extension, inflation.
- The White House originally planned to replenish reserves when oil prices dropped below $80; now, the price target is $70.
Pozsar: “That plan [of refilling reserves when prices hit low] is hard to reconcile with OPEC+’s price target near $100 per barrel. Yes, we are headed toward a recession, but unlike in 2008 or during Paul Volcker’s reign, oil prices aren’t collapsing as production capacity hasn’t grown recently.”
On the role of Russian oil in refilling the SPR, he says:
- Russian crude trades at a $30 discount to Brent Oil, which helps buyers like China and India make significant profit margins by turning Russian oil into diesel fuel (sold at around $140).
- Brent Oil is trading at ~$77 dollars per barrel today. Take $30 off that price, you get $47. Buy for $47, convert into diesel, and sell for $140.
- This spread makes big money for India and China.
- Pozsar quoted Treasury Secretary Janet Yellen to show that the United States changed its stance on purchasers of Russian oil. Yellen said, “The United States is happy for India to continue buying as much Russian oil as it wants, including at prices above a G7-imposed price cap mechanism, if it steers clear of Western insurance, finance, and maritime services bound by the cap.”
- Pozsar says this could be one “backdoor mechanism” to refill the SPR within President Biden’s target price.
Here’s the state of play: If the U.S. values Russian crude at $60 and Russia values its oil at a price for a gram of gold, then “the U.S. dollar effectively gets ‘revalued’ versus Russian oil.”
- Pozsar: “The cap of $60 per barrel for Russian oil equals the price of a gram of gold.”
- Hypothetically, Poszar explains that “if the West is looking for a bargain, Russia can give a bargain the West can’t refuse: ‘a gram for more [oil]’. If Russia countered the price peg of $60 with offering two barrels of oil at the peg for a gram of gold, gold prices double.”
- Pozsar doesn’t believe Russia will increase production to these levels, but “gold going from $1,800 to close to $3,600 would increase the value of Russia’s gold reserves and its gold output at home and in a range of countries in Africa. Crazy? Yes. Improbable? No.”
- If Russia opts to link its oil to gold, it could bring gold back as a medium of settlement, and its intrinsic value would sharply increase.
- The big issue, however, is this presents a liquidity risk for banks involved in the paper gold market.
The key thing here is that gold doubling would be an issue for banks involved with futures markets for hedging and speculative purposes. Should governments pay for oil with gold, this would create an overnight liquidity crisis at the banks.
- “Banks active in the paper gold market would face a liquidity shortfall, as all banks active in commodities tend to be long OTC derivative receivables hedged with futures (an asymmetric liquidity position). That’s a risk we don’t think enough about and a risk that could complicate the coming year-end turn, as a sharp move in gold prices could force an unexpected mobilization of reserves (from the o/n RRP facility to banks) and expansions in balance sheets (SLR) and risk-weighted assets. That’s the last thing we need around year-end.”
Conclusion: The U.S. needs to re-fill the SPR. It’s been releasing inventory, attempting to hold down the price of oil. The SPR inventory now stands at a 40-year low and may be depleted by April 2023. Inventory will have to be rebuilt. If Russia doesn’t want India to export diesel to the U.S., Russia can ask for payment in gold instead of rupees. If Russia countered the price peg of $60 by offering two barrels of oil at the peg for a gram of gold, gold prices would double. More oil would go to Europe than to the U.S. through India. And strategically for Russia, gold going from $1,800 to close to $3,600 would increase the value of Russia’s gold reserves. Not likely, but not impossible. If this were to happen, banks active in the paper gold market would face a liquidity shortfall. Banks have been managing their paper gold books with the assumption that states would ensure gold wouldn’t come back as a settlement medium. If Russia makes this move, the U.S. dollar may be “revalued” versus Russian oil, and a liquidity crunch would follow.
The point is, the system is complex and ripe for disruption. Keep your eye on this issue. Some allocation to gold is a good idea in an investment portfolio.
In case you were wondering, as I was… Following from Investopedia
Not a recommendation for you to buy or sell any security. Talk with your advisor.
Earnings recession up next.
Here is a close-up of the above chart:
Supply chain shift… Did you see the Apple news this week making plans to move manufacturing out of China?
Courtesy The DailyShot. Source: @BBGVisualData Read full article
Amen to this:
We’ll take a deeper dive into the impact of Government Debt next week. Until then… let this sink in:
More Random Tweets next week. Please follow me on Twitter, where I do my best to tweet, retweet, and like what I feel is most important… @SBlumenthalCMG
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Trade Signals: Felix Zulauf
December 9, 2022
S&P 500 Index — 3,959
Markets move in cycles, and cycles will always exist. Trade Signals is a weekly snapshot of current stock, bond, currency, gold, and investor sentiment trends. It is a concise summary of indicators to help you identify where we sit in a cycle, manage risk, and position accordingly. Skillful investors have a sense of the presence of risk and the best investment opportunities present when investor fear is extreme. It is wise for investors to be “Fearful when others are greedy, and greedy when others are fearful,” as Warren Buffett often reminds us. Stay on top of the current trends with “Trade Signals.”
Notable this week: Felix Zulauf!
Good friend Ed D’Agostino from Mauldin Economics interviewed Felix Zulauf this week. Ed is a partner and publisher at Mauldin Economics, which he helped launch in 2012. John Mauldin is CMG’s Chief Economist and Co-Portfolio manager. Maudlin Economics is a newsletter/research business and is not affiliated with CMG; however, we are big fans. You can sign up here to receive Mauldin’s free weekly, Thoughts From the Frontline e-letter.
CMG is a long-time subscriber to Felix’s newsletter. When I can, I like to share his insights with you. I hope you find his macro thinking as valuable as I do. You can learn more about Zulauf Consulting services here.
Find 35 minutes, plug your earbuds in and listen to one of the grand masters in the investment business.
The Dashboard of Indicators follows next. This week, the S&P 500 Daily MACD Indicator moved back to a sell signal. Investor sentiment is neutral.
Click HERE to see the Dashboard of Indicators and all the updated charts in this week’s Trade Signals post.
Not a recommendation for you to buy or sell any security. For information purposes only. Please talk with your advisor about needs, goals, time horizons, and risk tolerances. TRADE SIGNALS SUBSCRIPTION ACKNOWLEDGEMENT / IMPORTANT DISCLOSURES
Personal Note: Get Ready for Warp Speed
First, some good news.
Named as one of the World’s 50 Greatest Leaders by Fortune Magazine in 2014, Peter Diamandis is a man on fire. He is the Founder and Executive Chairman of the XPRIZE Foundation, which leads the world in designing and operating large-scale incentive competitions. He is also the Executive Founder and Director of Singularity University, a global learning and innovation community using exponential technologies to tackle the world’s biggest challenges and build a better future for all. He publishes a weekly blog (which you can subscribe to here) and writes with unending optimism, which I quite enjoy.
One of his latest pieces caught my eye, and I saved it to Evernote so I could share it with you. Titled “Metatrend #8: Global Gigabit Connectivity—Connecting Everyone & Everything, Everywhere, All the Time,” it begins…
We are blanketing the planet in digital connectivity at an accelerating rate.
In the realm of ground-based cellular networks, by 2025, there will be 2.8 billion humans connected on ubiquitous 5G (both licensed and unlicensed). At the same time, 6G is also under development, which will be 100x faster.
In Earth’s orbit, a number of multi-thousand-satellite networks (Starlink, E-Space, Kuiper, etc.) are being deployed that will ultimately cover every square meter of the Earth. Thus far, Starlink is the largest orbiting network with 3,000+ operational satellites, heading towards a goal of tens of thousands.
Starlink today offers speeds over 100 megabits/second. Terrestrial and space-based global connectivity will add an additional 2 billion new minds into the global economy and spur conversations representative of new consumers and creators, who will drive tens of trillions of dollars into the global economy.
In today’s blog, we’ll look at how “mega-constellations” of satellites and the rollout of 5G and 6G networks will usher in a new era of abundance and innovation.
Here’s how he describes what this future world of connectivity and satellite mega-constellations looks like:
With 5G and eventually 6G on the ground and satellite mega-constellations blanketing the Earth from space, we are on the verge of connecting every person on the planet with gigabit connection speeds at de minimis cost.
These systems will connect 8 billion humans and trillions of sensors. In this world, a decade from now, you’ll be able to connect to anyone and anything, anytime, anywhere… We are heading towards a world of ubiquitous and abundant knowledge.
And because innovation is a function of the number of humans connected to each other, enabled by tools and powered by knowledge, as these numbers all steadily increase, we’re about to witness perhaps the most historic acceleration of technological innovation ever experienced by humanity.
Get ready for warp speed. Click on the “42,000 satellites” tweet to read the full article.
On Tuesday, John Mauldin and I hosted a dinner in Palm Beach, Florida, for approximately 25 guests, complete with great food and fantastic dialogue. John shared his thoughts on what he calls the “Great Reset.” Not the World Economic Forum’s crazy vision of a new world order but the “reset” in which sovereign debts, pension promises, and entitlement systems get restructured. John says we’ll all be OK—but brace yourself. The reset will come in crisis, and it won’t be pleasant.
A guest pointed out the extreme political divide between the two parties and much of the nation, asking, “How do we bridge this divide to get something done?” John likened it to then-Treasury Secretary Hank Paulson kneeling before House Speaker Nancy Pelosi in 2008 in a bid to keep the Democratic caucus on board with the Great Financial Crisis bailout package so it could get through Congress and onto the president’s desk before the credit markets seized up. Like in 2008, we’ll bridge the divide when we come to the edge of the cliff and realize we have to restructure the system. We believe we’ll reach that point sometime in the second half of this decade.
On the plane to Florida, I reread Dalio’s book Principles for Navigating Big Debt Crisis. It’s a study of more than 500 years of history and human behavior. Essentially, we’ve been here before. Most countries have chosen to print their way out of mess of debt, but that hasn’t always been the case. When it gets too large, debt is a growth headwind; at some point, it needs to be paid back. Thus, it’s also a deflationary inhibitor. Governments and central banks have levers they can pull to help navigate various challenges: raising and lowering interest rates, asset purchases, QE, QT, protecting systemically important companies, lettering others’ defaults, helicoptering cash to the people, etc. We’ve seen the Fed implement some creative tools since 2008, including buying junk bond ETFs in 2022. Are these outside of the Fed’s mandate? Yes. Is that going to stop them? No. The point is, we have choices.
Dalio believes there’s the potential for what he calls “a beautiful deleveraging.” But it comes down to our collective dependence on elected officials, the Fed, other countries, and their central banks. For one thing, we don’t yet know who the elected officials will be. John and I believe deleveraging will come from a combination of debt restructuring, debt monetization, saving some big companies, letting others default, as well as more QE, helicopter money, higher taxes (John argues for a Value-Added Tax), asset purchases to stop the bleeding, and who knows what else.
“Beautiful” is possible but getting there is complex and far from certain. The ride along the way will be bumpy. You’ll have to remember: It was a painful financial experience for most, but many people made a lot of money. That’s our point.
Our good friend and real estate expert Barry Habib joined us for the dinner, and I asked him to give everyone his take on the housing and mortgage markets. (He is a three-time Zillow Crystal Ball Award winner—an award given to the most accurate real estate and mortgage forecaster in the U.S.) Barry painted a very bullish view of single-family and multi-family housing, citing the demographics around household formations and the lack of housing inventory. He believes inflation peaked in early November and that the descent will be apparent to all in January. When I spoke with him three weeks ago, mortgage rates were at 7%. They’re now at 6%, and he believes they’ll be down to 5% in January. His advice? “Buy, don’t sell!” For more from Barry, look out for a podcast episode I’ll be doing with him soon.
Our dinner guests asked excellent questions. The food and wine were fantastic, as was the 80-degree weather. We plan to host a number of dinners around the country in the months to come. Stay tuned for future dates—we hope you’ll be able to join us.
While writing today, I watched the Brazil vs. Croatia quarterfinal World Cup game, and the end came down to a penalty kick shootout. Argentina vs. Netherlands finished tied at the end of 90 minutes, and as I’m about to hit send, Messe just made the first PK in the penalty kick shootout. In case you’re planning to watch the games later, I’ll not share the results. But I will say: Wow…exciting games. Morroco vs. Portugal and England vs. France are on deck for tomorrow. So much fun.
Best of luck to your favorite team.
Wishing you a great week,
Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
Forbes Book – On My Radar, Navigating Stock Market Cycles. Stephen Blumenthal gives investors a game plan and the advice they need to develop a risk-minded and opportunity-based investment approach. It is about how to grow and defend your wealth. You can learn more here.
Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management.
Follow Steve on Twitter @SBlumenthalCMG and LinkedIn.
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