The Dollar Decline

In late 2017, the investing legend Jeremy Grantham was officially on bubble watch.

That all changed in January when, as he describes it, stories of investor overconfidence became too numerous to ignore.He said as much in a quarterly letter he coauthored for his firm, Grantham, Mayo, & van Otterloo (GMO), back in December. It wasn't an extremely pressing concern quite yet but something in the back of his mind.

Grantham's favorite anecdote came courtesy of the bus one of his Boston-based colleagues would take to work from New Hampshire. Every morning, an elderly woman would see the GMO employee reading financial literature and ask questions.

One inquiry in particular stuck out to him: Should she sell her house worth about $300,000 and put it in the stock market?

"What do you expect to get?" the GMO employee recalled asking.

Her response stunned him. And when he relayed it to Grantham, the market guru was sure an unsustainable situation was afoot.

"Well, the market has been rising at 17% per year," she'd replied. "And I'd be hoping for 20%."

That, to Grantham, was stock market overexuberance personified - and a glaring warning sign of an impending financial bubble. He began to brace in earnest for an imminent bust.

This was significant, since predicting major asset bubbles is what has made Grantham such a world-renowned investor. His track record speaks for itself. He predicted the dot-com and housing bubbles that wound up crushing markets. In fact, his otherworldly prescience actually extends back to the late 1980s, when he called a bubble in Japanese equities and real estate.

But mere months after his January revelation, something happened that made him reconsider once again. And President Donald Trump was at the center of it.

"We were only a few months from being in ecstasy land," Grantham, the cofounder and chief investment strategist at GMO, which oversees $71 billion, told Business Insider by phone. "Then the trouble with trade, and the US proposals for tariffs that have now become more than proposals, came into play."

An outlook derailed by Trump's trade war

Grantham estimates that if the trade sanctions and tariffs announced and gradually implemented by Trump hadn't materialized, the market could be 10% higher than it is today.

Such a continuation of overstretched valuations would've perfectly met his definition of a "melt-up" in stocks - otherwise known as the period of steep increases that normally occurs at the end of a market cycle, before the bubble bursts.

"The effect on currencies and emerging markets has really made it difficult to maintain a super-high level of euphoria," Grantham said. "I consider this a melt-up nipped in the bud by you-know-who."

While many pundits have decried Trump's trade escalation as heavy-handed and potentially damaging to the global economy, in an ironic twist of fate it may have saved the US market from a painful explosion.

But to hear Grantham tell it, that may not have been such a good thing.

"It's a pity, because we know how great bull markets and great economies end," he said. "They traditionally end with a melt-up and a blowup. What about when that doesn't happen? Who knows? We have no experience of a decadelong bull market fizzling out. Here we are, in no-man's land."

That's not to say the market landscape is devoid of bubble-like behavior. A few years ago, Grantham said the latest cycle wouldn't reach peak bubble conditions until at least one of two things happened: a new high in deals or a new high in initial public offerings.

Well, as it now stands, merger-and-acquisition activity is, in fact, occurring at a record pace. And if you consider IPO equivalents - such as when a private company is acquired by what Grantham calls "the Googles of the world" - another record situation may be forming.

Grantham sees this, but he can't fully talk himself into a dangerous bubble - not since Trump's trade tensions injected a big dose of skepticism into the market. That's a far cry from his dot-com and housing bubble calls, in which his level of conviction was through the roof.

"There are decent indicators of the market being in a late stage," Grantham said. "But that still doesn't free us from the conundrum of - how can we end if we don't get a spectacular blowup and a collapse? Collapses in the past have needed that last adrenaline shock - that last 30% or so of complete speculation."

Grantham's new bull-market endgame

Just because Grantham's expectation for a sudden market crash has been muted doesn't mean stocks will continue climbing indefinitely. He says it simply means the inevitable downturn will be a protracted version of prior meltdowns.

The problem is, there's no real precedent for a bull market ending in such fashion. But Grantham still ventures to offer a grand prediction - one characterized by regular bouts of moderate turbulence that he says will wear on the psyches of investors.

"My guess is - you have an extended, very psychologically painful, long, drawn-out series of stumbles and starts, where you go up 10% and down 15%, up 12% and down 14%," he said.

"You have this series of nonspectacular, ordinary mini-bear markets that wear away at the P/E, and eventually the economy weakens, and eventually the profit margins go down," Grantham continued. "It helps drip, drip, drip the market back down. Not with a bang - more with a whimper."

Grantham does note that blockbuster earnings growth has already eroded traditional measures of P/E in recent quarters, as profits have outpaced share gains; however, that would be more encouraging if US profit margins weren't already at an all-time peak and thereby primed to drop.

Ultimately, when it comes to Grantham's forecast "drip" down in stocks, Trump's trade war still takes center stage. He says now that the market was deprived of one last bout of speculative fervor, the eventual market meltdown will be less immediately severe. Rather than being spring-loaded to quickly drop, say, 50%, he says it will instead fall 20% to 25% over multiple years.

Still, Grantham isn't ruling out a continuation of January's dangerous "melt-up." He says that if the trade war gets resolved or turns out to be less punishing for investors than initially advertised, speculative behavior could come roaring back.

But judging by how things have gone in recent months, that seems like a stretch.

"Back last December, I said there was a 50% chance that we'd have a traditional melt-up and blowup," Grantham said. "That's gradually come down every week these trade and currency war things go on, and as we come closer to the end of this economic cycle."

 Courtesy -- Joe Ciolli | Business Insider

Ok, let's really take the time to think about this. Over the last few years, both Bitcoin and Gold have gained more ground as stores of value. As of 2017, Bitcoin value got as high as 20,000 times the value of the dollar--while gold hovered around $1,300 or so an ounce.

,

If both are stores of value and both are considered to be worth investing in-- wouldn't you expect the price of Gold to skyrocket to be worth at least $5,000 an ounce?

With news of many institutions and corporations looking to make Bitcoin ETF a reality-- we could see Bitcoin reach $32,000 USD in value--and with that rise, I believe gold could shoot well past $2,500 an ounce.

Do you see a correlation in Bitcoin and Gold ascension?

Since the International Monetary Fund (IMF) lowered its estimation for global growth for 2015, the equity markets have seen a sizeable correction. Last week, before the correction in stock indices was reversed, over $3.2 trillion was momentarily wiped out from the value of the global stock market. In addition to this, various worries ranging from the spread of the Ebola virus to the Federal Reserve (Fed) tightening its monetary policy, added to the general feel of the investment world as we’ve known it over the last four to five years, coming, if not to and end, at least close to it. This translated into strength in Gold which is often viewed as a safe haven when global threats arise or when the Fed expands its balance sheet. It is clear from the charts that when things got jittery, money flowed out of the other markets, but not from gold. Instead, gold gained after it touched a long term support level. According to the Financial Times, flows into gold investment funds hit an eight week high in the week to October 15^th. At the same time the comments from the St. Louis Fed president Mr. Bullard have left the door open for further expansion of the Fed’s balance sheet. Based on all of the above, it is safe to assume that gold prices will be either sustained above the latest weekly low (support level at 1183) or trend higher over the coming months.

In this video Mike Maloney tries explaining why and how the US Government is creating a false sense of economic security to the nation. If you work hard for your money and you want it to matter, I suggest you watch this. If you have further questions about how you can protect yourself against the pending wealth transfer, visit my site here.   

Alasdair Macleod writes the blog FinanceAndEconomics.Org. His research aims to explain the relationship between the dollar and gold, and to warn investors about the biggest threats to their wealth from macro-economic events.

Besides what the Fed is doing by printing money, there is another big threat to the dollar, said Alasdair. Countries in Asia are banding together in order to rid themselves of using the dollar in international trade.

He also warned that credible allegation of misconduct at the London bullion exchange could accelerate the trend of Shanghai becoming the world’s trading hub for gold.

“There is a thing called the Shanghai Cooperation Organization, an agreement principally between China and Russia, whereby they tie up the whole of Asia as their backyard. Other members are the countries north of Tibet, Tajikistan, Kyrgyzstan, Uzbekistan, and so on. In or soon after September, four new members will join – India, Pakistan, Iran, and Mongolia. That’s almost half the world’s population. The objective of the SCO is basically to settle international trades between these countries without using the dollar. I’m not saying they will necessarily achieve that, but that’s what they want to do. They don’t want to see trade settlements reflected in bank accounts in New York.

“It’s not just members of the SCO, either, that could eschew the dollar. The Middle East, for example, now principally sends exports to China and India, so there’s no pressing reason to use the dollar there.

“You can see that, if they succeed, the whole Asian continent, at some point in the future, will be off the dollar. They’ll use their own currencies, gold, or something else. That’s a very big change, and I don’t think people fully appreciate what that means for the dollar.

“Apart from everything the Fed is doing, there’s an awful lot of dollars held in foreign corporate accounts, principally because they’re required for trade. If the world stopped using the dollar, then those dollars will need to find their way back home.

“What that’s likely to do for the dollar relative to other currencies, I don’t know, but I do think it’s likely to affect the relationship between the dollar and gold.

“While the value of the dollar depends on confidence, gold is different, because gold is accepted everywhere. They might no longer accept dollars in some parts of the world – just like they wouldn’t accept my British Pounds in California – but they’ll accept gold. In Asia, that’s particularly true. People might place a different value on gold depending on the geographic region, but gold is more or less accepted as a form of payment anywhere.”

What do you make of allegations of manipulation within the London Bullion Market?

“It’s an interesting question. The problem with the London Bullion Market is that it’s an over-the-counter market, which means people are free to behave as they like in terms of interacting with the market. That’s not to say people automatically behave dishonestly, but there’s no way to disprove an allegation that someone is behaving dishonestly, and that’s very bad.

“In the 1980s’, during the ‘big bang,’ when they decided to regulate certain types of investments in London, stocks, bonds, futures, and options were all designated as regulated investments. Physical bullion, however, was not considered a regulated investment. You could trade these without regulatory supervision, any way you liked.

“Today, in the LBMA over-the-counter market, nobody knows what’s going on. We have a fix twice a day, which is fairly opaque – you don’t see how it’s carried out. So there is reason to doubt the integrity of the London market, and that’s not good for London. It especially isn’t good for London when other bullion markets have now evolved, such as the physical market in China, which is doing a very large amount of business and is transparent. You can see turnover, and you can see the ten largest traders in each commodity – whether it’s gold, silver, or platinum, for instance. It’s all out there.

“So you can see what goes on in those markets, but you can’t see that in London. It’s even been suggested, based on mathematical analysis of the bullion market, that the London gold fixing process is rigged about 10 to 30 percent of the time. That’s quite an indictment.

“The regulators in London have been told by the politicians to clean up the gold market. I would really be surprised if they don’t institute some major changes. I doubt they’d make it a regulated market, but I can see that they would put pressure on the member banks – which they do regulate. I think they will try to make the London bullion market a lot more transparent. I think the members might scream and kick against it, but there really is no other way.

“If it doesn’t, we’re not going to retain the business that places like China, Dubai, and Singapore want to develop. I’d say that changing the fix is the first step to a long road of reform that London needs to undertake.

“So much gold has already gone from Western vaults to the Far East – China, India – and the Middle East going back to the 1970s’. We probably don’t understand that this is one of the greatest wealth transfers in history. Relative to the amount of fiat currency in circulation, gold is probably as cheap as it was in 2000 or 2001 – incredibly cheap.”

- Henry Bonner