Welcome to this week's Market Wrap Podcast, I'm Mike Gleason.
Coming up we'll hear a tremendous interview with Greg Weldon of Weldon Financial. Greg shares his insights about the U.S. dollar, the major correction in commodities, and what this all means for the global economy and ultimately for gold. Don't miss a must-hear interview with one of our favorite guests, Greg Weldon, coming up after this week's market update.
Precious metals markets took another beating this week as the Federal Reserve vowed additional interest rate increases. In testimony on Capitol Hill, Fed Chairman Jerome Powell touted low unemployment numbers and relatively strong economic growth as justifications for further monetary tightening.
Odds now favor two more rate hikes before the end of the year. But the Fed is now running into political resistance. In a CNBC interview, President Donald Trump vented his displeasure with Powell's rate hiking campaign.
President Trump: I put a very good man in the Fed. I don't necessarily agree with it because he's raising interest rates. I'm not saying that I agree with it and I don't necessarily agree with it. I must tell you, I don't. I'm not thrilled and our currency is going up. I have to tell you, it puts us at a disadvantage. Now, I'm just saying the same thing that I would have said as a private citizen. Somebody would say, "Oh, maybe you shouldn't say that as a president." I couldn't care less what they say because my views haven't changed. I don't like all of this work that we're putting into the economy, and then I see rates going up. I see China where they're ... I mean, look at what's happening with their currency. It's dropping like a rock.
President Trump is essentially calling for a weak dollar policy to undercut China and Europe in international trade. Trump's trade wars now threaten to bring about currency wars. Competitive currency devaluations won't make us or the world more prosperous long term. But they can create some near-term benefits for politically favored sectors of the economy.
The Treasury Department, and not the Federal Reserve, is officially charged with managing the dollar's exchange rate. However, more rate hikes by the Fed will tend to put upward pressure on the buck.
That's a big reason for the slump in precious metals markets. Gold prices hit one-year lows this week and are down 1.0% since last Friday's close to trade at $1,229 an ounce. Silver comes in at $15.51 per ounce after suffering a 2.1% weekly decline. Platinum is down a slight 0.4% now for the week, while palladium is getting smacked, down by 5.3% to $894 as of this Friday morning recording, and that's despite a nice rebound here today.
Metals markets are now deeply oversold and appear due for at least some kind of bounce. It could turn into a more sustained rally if rate hike expectations start to diminish. Gold and silver did come off their lows mid-day Thursday after President Trump sounded off on the Fed.
The bond market has been gradually sounding off in its own way over the past few weeks. Yields on the 30-year Treasury have fallen from three and a quarter percent in May to below 3% today. This has resulted in a flattening yield curve. The Fed jacks up short-term rates a couple more times, the yield curve could invert - meaning yields on short-term maturities exceed those of longer-term maturities.
You've heard Michael Pento warn previously on this podcast that an inverted yield curve could happen this fall. If the yield curve does invert, that would likely stop the Fed dead in its tracks. An inverted yield curve has historically been a warning sign of an impending recession.
We're not there yet, but other leading indicators are suggesting the economy isn't as hot as Fed Chair Powell seems to believe. Copper prices fell to a 1-year low this week. "Dr. Copper" is noted for being a more reliable forecaster than most PhD. economists. Right now the copper market seems to be anticipating a drop off in industrial demand.
That's in contrast to most of the backward looking data the Fed sees still coming in strong. Second-quarter GDP and the latest reports for industrial production and retail sales for June are all indicating strength in the economy. Yet, metals traders and bond traders are pricing in a slowdown in the near future.
Perhaps President Trump sees the writing on the wall. He surely doesn't want the Trump tariffs to get blamed for instigating the next downturn. He is already setting up the Federal Reserve as the foil if it goes one hike too far.
Rarely does a rate hiking campaign end with a soft landing. Before it's over, the Fed usually triggers some sort of adverse event in the economy or financial markets. Investors would be wise to position their portfolios defensively in case high-flying growth stories such as FANG stocks suffer a hard landing.
Well now, for more on the unfolding trade war, the selloff in commodities and gold, and much more, let's get right to this week's exclusive interview.
Mike Gleason: It is my privilege now to welcome in Greg Weldon, CEO and president of Weldon Financial. Greg has over three decades of market research and trading experience, specializing in the metals and commodity markets, and his close connection with the metals led him to author a book back in 2006, titled Gold Trading Boot Camp, where he accurately predicted the implosion of the U.S. credit market and urged people to buy gold when it was only $550 an ounce.
He's a regular presenter at financial conferences throughout the country, and is a highly sought-after guest on many financial shows. And it's always great to have him on the Money Metals Podcast. Greg, good to talk to you again. Welcome back.
Greg Weldon: Thanks, Mike. My pleasure.
Mike Gleason: Well, Greg, we've been keeping a close eye on the dollar, as I know you have been as well. For metals investors, the rally in the dollar is providing some serious headwinds. When we last spoke in early May, the rally had begun. You weren't surprised, and thought it might run up to the vicinity of 96 on the DXY Index, and that's looking like a very good call. We're just a bit over 95 currently. But you thought the rally could fizzle out, and the dollar could be back on the slide somewhere in the second half of the year. So, what are your thoughts currently? Has anything changed your outlook for the greenback, Greg?
Greg Weldon: Yeah. I think the odds of the dollar continuing higher have expanded here, and I think it's a function of the Fed. I think we got information in the last week or so that is, frankly, pertinent, because if you kind of trace back to what we were talking about in May, we started to see signs of stagflation. We started to see signs of stress in the second derivatives of where the growth had been. A place like Germany, an export juggernaut. When you start to see some issues in places like the Czech Republic, Hungary, Poland, they provide semi-finished goods to Germany that finishes them and exports them. So, we had already kind of seen some cracks in the global macro dynamic globally.
And the question then was, "well, if inflation's going higher, will the Fed follow inflation even at the risk of potentially bringing the hammer down on the backend on the consumer who is extremely leveraged here, unprecedented borrowing." Same thing as 2006 and 2007. You're borrowing against unrealized paper profits. In that case it was mortgages, in your home, the value, all right?
In this case, it's the stock market. Like the case in 2006 and '07, home prices will never go down, right? Well, we learned that's not true. And then the case here it seems like stock prices will never go down, right? Passive investment, just pile in, and you'll be rich, and here's the American dream in a nutshell, no problem. Well, we can call into question that, of course, and if the stock market declines and consumers are on the hook, you're going to be facing a very similar situation where the consumer's kind of upside down.
Having said all of that, the question really puts the focus on the Fed, and what the Fed just told us in their monetary report, which is the basis for which Chairman Powell is using as his testimony here on Capitol Hill, The Humphrey-Hawkins semiannual report to Congress. The Fed was very specific. I was really surprised at the language in this report. It's 71 pages. I went to every single page. It took me six hours yesterday doing this, but it was really worth it because the Fed say in this report, not only do we want to get to a level where we're at the neutral rate, the kind of natural rate, the neutral rate of Fed policy which we've been saying all along. They want to get to neutral, which is somewhere between two and two and a half based on where inflation is.
Well, the Fed just told us, "We don't want to just get to neutral, we want to get a slight bit above neutral, i.e., we actually want to get tight here." All right? And if inflation's moving higher and the Fed wants to get tight, meaning above the rate of inflation, they're behind the curve and they're going to have to move more quickly and this was kind of the tone of this monetary report.
And the sense was, they're admitting, "Hey! Inflation is now above our target for the first time, that doesn't mean we're slowing down." So this is bothering commodity markets because it's lifting the dollar. The Fed is presumably going to be tighter, it's going to chase inflation, doesn't care about what the back end economic dynamic might be and that you throw in the trade dynamic, which is having a huge impact, i.e., look at the declining commodities. Look at the decline in China. Look at the decline in Canada in terms of some of the economic numbers, let alone the markets. Look at the pressure on emerging market currencies.
The other thing the Fed said in this report was the external risk is primarily seen in Argentina, Turkey, China, and emerging Asia. We run spreadsheets here where I have my own proprietary algorithms that I wrote back in the 1980s. I'm a math geek by heart, by history and we have algorithms that we use to track the ETFs out there, all of them. Well, I ran a full scan yesterday and the top 25 trends right now in the ETF world, including international ETFs, commodity ETFs, fixed income ETFs, all the sector ETFs in the U.S., 25 top trends, 24 were bearish and it was spread out among metals, commodities, China, and emerging Asia. All the things the Fed just cited as their risk factors.
So, my question then becomes, again, does the Fed pay attention? Is the Fed doing their normal puppeteering here where they're trying to be vocally tighter so they can use words to kind of ease some without actually having to totally shift policy and start cutting rates? I don't know, but I think right now, whereas maybe we might think that the dollar would soften when the Fed rhetoric softened, that's not happening because the Fed rhetoric is not softening. In fact, it's getting harder and this is becoming a problem. You see it in emerging markets, you see it in commodities, and you certainly see it in gold and silver.
Mike Gleason: Yeah, gasp at the thought that the Fed would say one thing and do another. Where have we heard that before? One of the things you mentioned in that last conversation we had is that you felt the dollar was breaking out more than gold was breaking down. But here we are now and we've seen the yellow metal take it on the chin these last few weeks. It's down to about $1,225 as we're talking here on Wednesday afternoon. So, part of the decline has to do with the dollar, we've hit on that. But part of it is just the lack of demand for safe-haven assets. The speculators and the futures markets need a reason to own precious metals and right now they don't seem to be finding many. Those who do have generally been punished for going long, so there isn't much encouragement to be found on the charts and it has been quite a while since the fundamental reasons to own gold and silver were reflected in the price. Nobody seems too worried about debt and deficits, for example.
That said, we know change is coming, even if we don't know when. So what are you saying to your clients, Greg, who are frustrated by the performance of the precious metals?
Greg Weldon: Well, we've found places to take advantage of it, frankly, so we don't trade just gold and silver, and frankly if we did, we'd have to be short here. I mean, it's almost a technical mandate to be short. I don't want to be short on metals because I still think, you have issues here that are going to cause the Fed to shift gears and when that happens you don't want to be caught short. This is a situation where you're talking about there doesn't seem to be a lot of fear around the macro things that we're talking about. You know, the budget in the U.S. which we're not even talking about. The debt. Italy and Spain as socialist countries. We're not talking about that. Merkel is probably going to lose the elections in September and could be out on her fanny, very quickly. Immigration could rip apart Europe. We're not even talking about that.
There's a lot of risk factors out there and to me, at some point, the biggest risk is the consumer. The biggest risk is the final demand situation in the U.S. And the biggest risk, Mike, that people talk about the growth. Gosh, the Fed is looking for nominal GDP growth this year and next of 4.5%! Where the heck is that going to come from, particularly in light of what's going on in trade, which is massive. Look at the shipping stocks. SEA is a shipping ETF. It's almost at a new low below the 2016 low. You look at Turkey... this is not a market that is collapsing and crumbling in everything, it's a very tight orderly decline in a bear market that is back to the 2008, 2009 lows. You saw what happened to Argentina peso… 40% interest rates. The Brazilian real has gotten loose, and all the sudden Latin America is under performing. You have those markets breaking down. You have those currencies breaking down which also adds to the dollar's strength.
So, I feel there's an inflection point here for the Fed and I wouldn't want to get caught short these metals, because there's going to be a great buying opportunity and the difference here than what we saw in 2007, 2008, gold got whacked when the stock market got whacked. Why? Because there were a lot of people long. You don't have that situation here, Mike. So this could be a situation where you don't have that deflationary down draft in gold when you get it in equities. So, this is why I don't want to be short.
So, we're looking at other places. We have completely caught this move in copper. We were just waiting to pounce on copper, because here's a market where the swaps have been at record lows this entire rally. It's an amply supplied market. There's no shortage of copper. It's been a speculative frenzy driven by thought that you're going to have future demand that's going to be stronger. That's demand's not materializing. It's not going to materialize. I've been saying that all along. So, we caught the move down in copper.
The next one is crude oil. We've caught this movement moving crude oil. You know, you can talk all you want about crude being tight, and guess what, if you look at the swaps in the U.S., it looks very tight. But that's because the Cushing, Oklahoma supplies are 56% below two year ago levels, 53% below a year ago. I mean, you don't have supply for delivery at the delivery point for the WTI contract. So that skews the swaps to make this market look tighter and more bullish than maybe it is, when you consider you had a huge decline in inventories. I get that. You're still have 417 million barrels. That's not a tiny amount of crude! There's plenty of crude around and you look at OPEC increasing. You look at the U.S. numbers, I mean, my gosh, 11 million barrels a day almost.
So, this is a market that was maybe already overcooked a little bit. You throw the dollar into the mix and the thought process that trade's going to draw from GDP growth and you're going to have lower demand globally, because demand's been a big part of the rally in crude. Everyone's under estimated demand growth. If now they're over estimating demand growth, it's a flip side. So, we've caught this move in crude and we think it has lower to go. We think you're going to see 60 bucks, maybe even dip to 58 in crude.
Our newest one is palladium. Look at the one metal that hasn't cracked yet. It's palladium and it's right there on the verge. And I'll tell you what, when you want to talk about these kinds of things, look at another one. Look at lumber prices. They had a limit down day today. They're on the verge of a major breakdown after a massive bull move. You are seeing all kinds of signs of concern around global GDP growth, and I think a lot that relates back to trade which is the big elephant in the room where you haven't talked about is the big wild card. How do you handicap that. It's not easy, so man, there's a lot to talk about. In terms of gold and silver, I think it's still longer term bullish. It's more patience, it's waiting, it's keeping your gunpowder dry for right now. So, there's a lot going on. There's always a lot of opportunities and we're obviously in constant touch with that as it relates to our clients.
Mike Gleason: Looking at trade and trade policy, it's getting a lot attention these days. As you mentioned, the markets seem to be signaling that a trade war is good for the dollar or maybe the markets aren't taking the possibility of a prolonged and serious confrontation with our trading partners too seriously. Our take is that a trade war is almost certainly very bad news for the dollar long term. The U.S. may not export nearly as much as it imports in goods, but we do export boat loads of dollars. If demand for dollars falls overseas because we have fewer imports to pay for, the dollar should weaken in our estimation. On top of that, we're likely to see price inflation as cheaper imported goods disappear from the marketplace. But, what are your thoughts? Is a serious trade war coming, and what do you think it will mean for the dollar?
Greg Weldon: Well, I think you're there. I mean, to some degree. We have tariffs, we have retaliation, we're involving everyone. I go back to the interviews I did in 2016. One in particular in January, 10 months before the election, when it seemed an oddity that Donald Trump was even running, let alone that he might have a chance to win. Well, we gave him a chance to win, but we said, "The thing you got to be careful with Donald Trump is, he's not the most diplomatic guy." And you need some level of diplomacy to deal on an international relations basis. So, our fear was always that he might overstep his bounds and really protectionism. Always the fear! Do we have to look at history to understand that protectionism could be the worst possible thing to have happen right now, and it's happening.
So, I say we're in a trade war. People talk about skirmishes and tariffs and are we going to have a trade war? We're in a trade war! This is a trade war! Now, we've also discussed that, on many levels, the U.S. is totally justified in the way they feel and in their point of this is not fair trade. It isn't. It's not with Canada. It's not with Germany. But then you have a political divide in the U.S. where you actually have people in the U.S. and you see this on the social media, on Facebook, on Twitter, they're rooting for Angela Merkel, like "kick Donald's ass on trade." But they don't understand the situation. They're not free traders. They are socialist countries and the fact that people are now backing socialist leaders without knowing the facts and wanting them to "kick our asses" at the expense of the U.S. business man, is mind boggling.
But having said all that, we've talked about this before, Mike. I mean, this is a situation where the strategy is simple. We can take the pain for longer than you can take the pain. Everyone is going to feel the pain. The risk is that this is akin to being doused in gasoline and sitting there holding a lit match, and hoping you don't basically immerse yourself in flames. That could happen. And the longer this goes on, the more likely that is to happen, because what it's doing is, and you're already starting to see, even today, comments around the world where the rest of the world is now becoming more cohesive in an anti-U.S. stance. China's making waves now with threats... I haven't heard the kind of threats that I heard today that don't specifically speak to any type of action, but this is the first veiled threat of, "You continue to take this to the next level, understand. Watch what you ask for. You just might get it." And, of course, the nuclear bomb, the mutually assured destruction dynamic in all of this is China selling U.S. assets and bombing the bond market.
So, you've got to play it careful here and I fear that the longer this goes on and the longer it's an ego type of thing and the longer it's, no one wants to be seen as losing or backing down, that this could become even way worse, and how that affects the dollar, I think initially it's the same thing. It's like, okay, the U.S. stance is, and mathematically they're correct. If you don't include the bond market, the U.S. is absolutely correct to say, "We can withstand the pain longer than you can." The math is on our side in terms of imports and exports, what's being imported and exported, what's the price dynamics and specifically and what's the impact on domestic GDP for a place like Canada versus the U.S. For a place like Germany versus the U.S. Even China. We are in the stronger position mathematically, economically speaking. But that's not to say we don't get hurt. Consumer prices go up, like you say. It's inflation. The consumer cocoons! I mean, is that good for anybody? No! Of course not! But that's also not good for the other countries.
So, in the first phase of this, this is why you're seeing the pressure coming to bear on these emerging market currencies in particular, because that is the first wave of pain. Will that mutate back into a U.S. dynamic? I think it will, and that's part of why we think the dollar will eventually turn. But we're thinking now that our timeline might be a little too early, and that the upside for the dollar might be a little greater than we had originally thought. And it's not like we're revising our goals upward because the dollar's already higher, it's not. It's not even surpassed our original estimate of 9,600. It's right there. We're actually revising these things up here. We're actually taking. You can be short to the British pound. You can be short to Japanese yen. So, that's a different tack. And I think the next phase is that this is going to put more pressure on other currencies than the dollar, first.
Mike Gleason: Certainly a very fluid situation and you always have to be adapting and moving, and you do that very well and that's one reason why we like having you on and getting your insights. I wanted to get back to the PGMs. You spoke about palladium there briefly, but I wanted to ask you about platinum here, because it just keeps getting cheaper and cheaper. Are we in a deeply over sold situation now, or will we continue to see a fall here? And then what's behind this platinum correction that's getting pretty long in the tooth now? What has been the key driver in all of this, Greg?
Greg Weldon: Yeah. I'll tell you what, it's a slight bit mystifying even to me on this end. Not so much in terms of platinum itself, but really platinum-gold. I mean, holy mackerel. How much of a discount are you going to take platinum relative to gold before you have value there? So, I think you're kind of there. We thought that once before and we were wrong. So, frankly, I don't have a really good answer for you as to where is the selling coming from. Frankly, I would suggest that this is a market where it doesn't take a lot volume to move it right now, because you don't have a speculative interest behind it.
It's not like precious metals are doing well and people are buying platinum because they think it's an alternative to gold. I also, on the flip side think, you have been down here in the 750 area a number of times and you've held. So, yeah, there probably is some level of value here. But I think when you get this situation you have now, zinc is down, aluminum is down, nickel's down, platinum's down. Silver's down, it's an industrial metal. It's getting whacked under that label. But I tell you what, at some point I think I'm going to be salivating to what to buy platinum against gold.
Mike Gleason: Yeah. It does look like a very good value proposition. Over a $400 discount right now as we're speaking, which is just unfathomable. Well, Greg, as we begin to close, any final comments on what you're watching most closely here as we progress through the summer months? Maybe a potential black swan that people may not be accounting for perhaps, or anything else that you want to hit on before we wrap up?
Greg Weldon: Yeah, I think the consumer is the black swan. I think it's the most important thing and I think making the correlations, understanding things are much different, but the similarities with 2006 and '07 to me are just striking! It's deja vu all over again. Let's pull out some Yogi Berra quotes. I mean, the consumer is as leveraged as they've ever been. And I think had it not been for the tax cuts, you would have already seen the impact, because tax cuts have provided a cushion that have allowed consumers to pay more for gasoline without having to cut spending in other areas. You know that we watched these dollars, dollar for dollar, and you can make a direct correlation between spending at gas stations and spending at eating and drinking establishments.
So, I think there is a veiled weakness in the consumer that we just don't see yet, that will show up soon. It's not a coincidence, all right, that May retail sales were as strong as they were, when you had the ninth largest single month growth in consumer credit in history. It's not a coincidence when in November, when you had the huge black Friday, huge cyber Monday sales. November retail sales were enormous, to the point where December was nothing because everyone bought everything in November because the word was out. You're going to get a tax cut. It was also the second largest single month increase in consumer credit ever, including the largest single week of credit card borrowing ever. When you overlay consumer credit with retail sales on a 12-month growth basis in dollar terms, consumer credit grew over $70 billion in May. U.S retail sales were $30 billion. This is just not sustainable.
And it is again, doing the same thing. Borrowing against the unrealized paper profits on a paper asset. I'd say the mortgages and housing market in 2006 and '07 is a paper asset. You borrowed on the appreciation in your home. It was mortgage equity withdrawal. The second home prices went down. You're upside down. Stock prices go down, the consumer's going to be upside down again, and you're going to see a viscous contraction in the consumer that people are not prepared for. There may be a time out here in the not too distant future, where the bond market is going to offer a tremendous amount of value, and I don't think you're that far away from it, frankly. So, that's kind of one of my outliers to kind of keep an eye on because I think that that's a situation that people are not looking for. When you listen to the pop media, the consumer's in great shape, income is up, and so on and so forth. Spending is still greater than income.
And I love in the Fed's report from yesterday where they did no mention of consumer credit. Nothing. They talked about everything in this report. There wasn't a single sentence about the unprecedented increase in consumer credit, and I'm talking about $200 billion a month on a 12-month rolling basis for 39 consecutive months. We've never seen that. It's unbelievable. Not one word about any of that. What they did say was that the consumer's healthy because income is higher than spending, and then mentioned that the savings rate had bounced. It bounced from an historic low. It bounced from levels that in the past have been major warning signs. The consumer has no savings. The consumer is borrowing like crazy. The consumer is going to be strapped, here at some point, and that's going to be a real problem.
Mike Gleason: And we know what a rising interest rate environment might mean for all those borrowers.
Greg Weldon: Can I make one quick point about that.
Mike Gleason: Yes, go ahead.
Greg Weldon: What's interesting there is that the interest rate on credit cards, the actual balances that get charged just went to new highs. 15.54 is the average interest rate on credit cards. So, you can say interest rates are near record lows and this is helping consumers, that's not actually true, and in fact, the amount of money the consumer pays to service their credit, their debt, household debt, is at a new record high as of the most recent month, which I believe is May, at just shy of 325 billion dollars a month. That is not a heck of a lot less than total retail sales, including food and gasoline. So, you're right on to talk about that. The debt burden, and this is why the delinquency rate is rising, this is why the set aside at banks are rising. This is happening all over again, you just got to look for it if you want to see it.
Mike Gleason: Yeah. So many things going on around there. It's going to be a very interesting end of the year, I think, and look forward to catching up with you later as we see it unfold. Well, Greg, great stuff once again. We really value your insights and appreciate your time today. Before we let you go, as we always do, please tell people about Weldon Financial, how they can find you, and other information that should know about you and your firm.
Greg Weldon: Great. Thanks Mike, sure. It's at WeldonOnline.com. If you have never had a free trial with us, you can come sign up for one. We're actually kind of running a summer special before we kick off the new pricing dynamic for next year as well. And we're working on building a new website, but it's a daily service and we provide daily briefings. We provide full blown macro coverage and we provide specific trading recommendations that we follow every single day. You get alerts. You get stops. Everything. We really help you navigate these markets with a specific strategy, because this is all about helping our customers make money and helping them insulate themselves from being passive investors in the S&P ETF index that is at risk of getting sliced and diced in the next downturn. You're welcome to email me directly to email@example.com.
Mike Gleason: About the most thorough and detailed analysis you can find anywhere, as you just heard in our conversation with Greg here today. Well, excellent stuff. Thanks again. Hope you enjoy the rest of your summer and we'll catch up with you before long. Take care Greg.
Greg Weldon: Sure. Thanks Mike.
Mike Gleason: Well, that will do it for this week. Thanks again to Greg Weldon of Weldon Financial and WeldonLive.