It's All One Big Shell Game

Written by Gerardo Del Real
Posted December 2, 2019

The past month has provided a glimpse into the future.

We got a 25 basis point rate cut from the Fed on October 30, 2019, the third such cut since late July.

It’s my opinion that the market — never satisfied with historically low interest rates or the complete about face from the Fed — will force the Fed into another rate cut sooner rather than later.

When it happens isn’t as important as why it will happen: China.

For years, the smartest people in the room have explained — correctly — that geopolitical events only lead to short-term moves in the market.

This time is different because geopolitical events are now directly affecting policy, both legislatively and monetarily. It’s all connected.

Reuters reported that the phase one trade deal between China and the U.S. may not be completed by the end of 2019.

Though trade wars are not sustainable, I’m starting to doubt whether a trade deal ever gets done.

What is getting done is a bill supporting the Hong Kong protestors.

The U.S. Senate, in a unanimous vote, passed legislation aimed at protecting human rights in Hong Kong amid a crackdown on a pro-democracy protest movement that has now lasted for months.

The House of Representatives already approved its own version of the measure before that. The President signed the bills into law at the end of November.

China responded sternly by saying that the bills amount to the U.S. “meddling” in domestic affairs.

This follows Fed chair Jerome Powell’s statement after the quarter point rate cut where he stated that the Fed would not cut interest rates — or raise them — unless something significant changed in its outlook.

A breakdown in talks on the trade deal with China would give the Fed enough cover to cut further as global trade continues on a deflationary course.

Here’s how I see things playing out: The trade deal stalls, the major U.S. indices pull back, allowing Harry Dent to tell everyone that the U.S. stock market is about to crash.

The Fed will step in, cut rates, juice the market some more, and then we’re off to the races again.

What that creates is the volatility needed for gold to continue its resilient pose and ultimately break out.

I continue to believe that gold pulls back one last time. Gold broke below $1,465 on a monthly level and I believe we could pull back to the $1,400 level, which would be just fine for my bullish thesis.

Meanwhile, in Europe — I keep bringing the Eurozone up because it’s important — Bloomberg is reporting that the ECB is now warning of potential side effects from its loose monetary policy, highlighting how years of unprecedented stimulus designed to bolster the economy is contributing to what it is now calling an erosion of financial stability.

Who would’ve thunk it?

Here are some more captain obvious insights from the ECB.

It noted that low interest rates have encouraged excessive risk-taking by investment funds and insurers as well as in some real estate markets.

Think about this: over 70% of bonds held by insurers and pension funds now yield less than 1%, and non-bank investments in debt with negative yield have more than doubled since December.

The Financial Times reported that nearly 60% of German banks are charging negative interest rates on the deposits of corporate clients and more than 20% are doing the same for retail customers, according to new data published recently.

Berliner Volksbank said recently that it would start applying a -0.5% rate on any deposits above €100,000 at the country’s biggest co-operative lender.

It’s a shell game. Major institutions are running out of willing participants. Tick tock.

To your wealth,

gerardo-sig

Gerardo Del Real
Editor, Junior Mining Monthly and Junior Mining Trader.

For the past decade, Gerardo Del Real has worked behind-the-scenes providing research, due diligence and advice to large institutional players, fund managers, newsletter writers and some of the most active high net worth investors in the resource space. Now, he is bringing his extensive experience to the public through Outsider Club, Junior Mining Monthly, and Junior Mining Trader. For more about Gerardo, check out his editor page.

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