Markets freak (a little)

Excerpt from Politico Morning Money

By BEN WHITE (bwhite@politico.com; @morningmoneyben) , AUBREE ELIZA WEAVER (aweaver@politico.com; @AubreeEWeaver)
05/08/2019 08:00 AM EDT

Markets freak (a little) — Wall Street finally gave a nod to the possibility that talks with China could fail and President Trump could follow through on his threat of full trade war. But it wasn’t much of a drop.

What happened — Cumberland’s David Kotok tells MM: “The trade war risk is now being confirmed. That is a healthy realization rather than a fantasy goldilocks scenario. It’s about time markets woke up to the reality that a trade war hurts everyone and that includes economic growth, earnings, profits and stock prices worldwide.”

Read the full Morning Money Newsletter at POLITICO.com .


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Golden Cross Materializes in S&P 500 Price Action

Golden Cross Materializes in S&P 500 Price Action

Bloomberg Daybreak: Americas

April 2nd, 2019, 9:38 AM EDT

Golden Cross Materializes in S&P 500 Price Action – David Kotok on Bloomberg TV

Philip Camporeale, investment specialist at JPMorgan Asset Management, and David Kotok, chairman and chief investment officer at Cumberland Advisors, discuss the sustained rally in equities. They speak on “Bloomberg Daybreak: Americas.” (Source: Bloomberg)

 

Watch at on Bloomberg.

 




1Q2019 Review: US Equity ETF

The US stock market staged a powerful recovery in the first two months of 2019. This upturn followed promptly on the heels of the Christmas Eve massacre at the end of 2018. We’ve written about the causes of that massacre and can share the discussion with anyone who missed it. Just email me for a copy of the discussion.

Cumberland Advisors - Quarterly Review - US ETF

Cumberland’s US ETF managed accounts were nearly fully invested at yearend. That position was sustained through the first two months of 2019 as the market recovered robustly. At the end of February, we started to realign portfolios and raise some cash reserves. That process has continued into March.

Weekly commentary on the market is available on Cumberland Advisors’ YouTube channel and usually includes Matt McAleer’s weekly summary. Email me if you want to be added to the weekly Cumberland Advisors YouTube channel list.

We are also pleased to be sending our new reporting format to clients and their referring consultants. We hope you find these reports comprehensive and valuable.

As March unfolds, we expect the US stock market to show bouts of increased volatility. We expect that to continue throughout all of 2019. The list of uncertainties includes Fed policy, foreign central banks, and the question of trade war or trade peace. Geopolitical issues rank high was on the list, specifically in Latin America, where developments in our hemisphere impact us directly.

David R. Kotok
Chairman of the Board & Chief Investment Officer
Email | Bio




Market check: talking interest rates and inflation

Market check: talking interest rates and inflation

Yahoo Finance - Market Check - talking interest rates and inflation [Video]

Yahoo Finance Video

Jensen Quality Growth Fund Portfolio Manager Allen Bond talks inflation and interest rates with Yahoo Finance’s Adam Shapiro and Julie Hyman and Cumberland Advisors Chairman & Chief Investment Officer David Kotok.

Watch at Yahoo Finance or in the embedded player below.




The Interview: David Kotok on GSIBs, Markets & Central Banks with Chris Whalen

My friend Chris Whalen was kind enough to use an interview he did with me in his weekly publication on financial and banking issues, The Institutional Risk Analyst. Chris has had a distinguished career, and it was a pleasure to interact with him again.

Market Commentary - Cumberland Advisors - The Interview David Kotok on GSIBs, Markets and Central Banks

This summer Chris and I are cohosting the June gathering at Leen’s Lodge in Maine. We’ve decided to invite some new participants and, for my part, to include readers who follow these conversations. If you are interested in joining us for the weekend after Father’s Day, email me your full contact information and we can see if a space is open. Spaces and guides are limited, so there are no guarantees.

I will insert the interview text below but want add a detail first. As I mention in the interview, we used SOFR to estimate a financial distortion that, we believe, exacerbated the December market selloff. We cited a 60-basis-point anomaly in pricing and a spike in certain interest rates that coincided with the stock market selloff and the widening of bond market spreads.

The direction of causality is never perfect. Coincidence isn’t proof of causation. But last December there were no other new elements that coincided. Also note how certain riskless rates were stable while others spiked. That oddity gives us high conviction in the view we articulated in our writings and in our interview with Chris.

We’re happy to discuss more in Maine and elsewhere. Here’s the full interview text with some minor edits for compliance purposes.

-David R. KotokSan Francisco | In this issue of The Institutional Risk Analyst, we feature a conversation with David Kotok, Chairman and Chief Investment Officer of Cumberland Advisors in Sarasota, Fl. David is an investment advisor, an observer of the evolving American political economy and an experienced fly fisherman. He and his colleagues at Cumberland publish commentaries on the markets and the world which may be found at www.cumber.com.


The IRA: David in your commentary last week (“Jay Powell, GSIBs, Christmas Eve Massacre”) you refer to December as a “massacre.” We concur. In fact, we are gathering more and more data that suggests our friends on the Federal Open Market Committee almost ran the proverbial ship aground in December. New issuance in the bond market went close to zero for several weeks and the flow of new home mortgages also cratered and has not yet recovered. There seems to be a lot of collateral damage here. Tell us what you see.

Kotok: I am in agreement. What I did in the commentary last week was to go through the estimates of the “global systemically important banks” or “GSIBs,” some 29 banks, and looked at the capital cost of a rule which came together in a perfect storm in December. Under the radar, except for those who looked for it, was a multi-hundreds of billions or even trillions of dollars in liquidity contraction. Why? Because the big banks pulled back from the markets at year end in compliance with the GSIB rule. A mispricing of whole segments of the so-called riskless market was triggered and resulted in a massive cost to the markets that we can estimate. Trillions of dollars in meltdown of market value were triggered because of billions in reallocations. This occurred because of the cost of a rule regarding the 29 designated large banks or GSIBs. Note that this is a rule which is totally unnecessary. Fed Chairman Jay Powell has said that he is satisfied with the capital structure of the big banks. I agree with him.

The IRA: The tightening of the REPO markets was very visible in December, long before the end of the month. Customers with collateral were shunned by the big banks, benefiting the smaller desks.

Kotok: The GSIB rule caused the big banks to step back from the market. On December 31st, the SOFR rate which is supposed to reflect a risk free overnight rate for funds was 60bp over referenced Treasury yields. The cost came because the big banks were incented to shrink, to convert assets into cash and other risk-free exposures. You can see the spike in REPO rates and the change in holdings. Any Bloomberg terminal demonstrates the visual spike. People who have expertise in the money markets saw it. You saw it. We saw it. But 99% of investors had no idea why the money markets were seizing up. They didn’t see that this is a temporary liquidity crunch that has nothing to do with default risk or credit risk. The risk is derived from the imposition of a rule, a regulatory provision called GSIB. But investors did not see that. They saw markets shifting violently and volatility spiking. They saw the spread on the credit default swaps of the United States rise by 50%. They didn’t understand that the Credit Default Swap is a hedging device used when such spikes happen.

The IRA: To add another datapoint to your analysis, in Q4 2018 the securities holdings of all US banks fell modestly, but there was a huge surge in Treasury holdings roughly equal to the runoff of the Fed’s portfolio. And there was continued erosion in certain types of deposits. This may be why Chairman Powell had to back off on further shrinkage of the Fed’s balance sheet.

Kotok: Individual banks around the world were acting rationally to protect their institutions. Can’t blame them for that. Collectively the 29 GSIBs imposed a temporary liquidity crunch on the entire system. And the result was that at one point the Treasury REPO rate shifted to a five hundred basis point spike. If riskless paper spikes in one day by hundreds of basis points, what is the cost? I computed what one basis point costs per trillion of market move in SOFR. The 29 GSIB banks represent hundreds of trillions of dollars in balance sheet and derivatives. And they wonder why the equity markets almost melted down? By the way, that may explain the bizarre December phone call that Treasury Secretary Mnuchin made to the biggest US banks. He was just “checking in to see if they were okay” According to press reports. Since the reason for his call was never fully explained, the reports of the call only worsened the market sentiment which was already based on faulty understandings.

The IRA: Agreed David. We think that the accumulation of evidence suggests that the Fed and other prudential regulators came dangerously close to running the global economy aground. This is a terrible refutation of the whole idea of “macro-prudential regulation.” Monetary policy goes one way, prudential rules go another and none of the agencies involved have any idea as to the net effect on the markets.

Kotok: Well, they sure were focused on a lighthouse or what they thought was a lighthouse but it turned out to be a pile of rocks.

The IRA: We have this strange confluence of monetary policy, where the FOMC is reversing past policy, and prudential rules. The Treasury is issuing and the Fed is now buying short-term paper again, essentially unwinding “Operation Twist.” And then, on the other hand, we see prudential policies that restrict liquidity. And nobody seems to understand what it all means for the markets or the economy. When they close the door of the Fed’s boardroom, are they focused on the markets or on the DSGE models? If we cannot rely on the numbers we see on the screens every morning to govern market risk allocations, isn’t the FOMC doing more harm than good?

Kotok: Yes. Those who are looking at DSGE models and those who are in the throes of the debate over whether the Philips curve is reliable need to answer a question. If we know that these tools are unreliable, then why are the dot plots used by the FOMC still measuring two of the main Philips Curve components? This reminds me of the General Eisenhower story about D-Day. In January 1944, Eisenhower was planning the invasion of Europe. And he asked his staff advisors for the long range weather forecast of weather for June, 1944. The experts replied that long range weather forecasts were notoriously inaccurate. But General Eisenhower’s staff insisted on a forecast because they needed it for planning purposes. We can put the Fed’s “dot plots” and long range Fed forecast models in the same category. The only thing we know about them is that they are wrong at the time they are created.

The IRA: Since we are talking about WWII history and General Eisenhower, our next book is tentatively titled “False Mandate” and goes back to the origins of the Humphrey-Hawkins law. Do you remember Rep Augustus Hawkins? He was the first African American from California in the United States Congress and co-authored the 1978 Humphrey-Hawkins Full Employment Act. Hawkins never lost an election in 58 years of public service. Rep. Maxine Waters (D-CA) inherited his seat in Congress. Speaking of long-term economic forecasts, can you tell us when the FOMC decided that zero and two are the same number when it comes to inflation? The Humphrey-Hawkins statute of 40 years ago says zero is the definition of price stability.

Kotok: Ha! May I invite a corollary? Two percent inflation means that the real value of your wealth will be cut in half in forty years. A person born today under the current Fed 2% policy who inherits $1 million at birth will have a quarter million worth of buying power remaining when they die, if they fulfill their current life expectancy. If the Fed is successful with their current policy objective, they will destroy three quarters of the real wealth of the average young person living today. Sounds rather harsh doesn’t it?

The IRA: No, you are quite right. The Humphrey-Hawkins statute says pursue full employment, then seek price stability which is defined as zero. Because of what has changed over the past forty years, the Fed staff in Washington has come up with this convoluted construction whereby zero = two. Two is really “price stability” because the system cannot tolerate deflation, which means that savers will never get a chance to buy a stock or distressed property and create future wealth. All of the bias of US monetary policy is on the side of the debtor (by using inflation as a hidden tax) and on transferring wealth from savers to debtors. Don’t we make a mockery of Thomas Piketty’s assertion that the return on wealth is greater than nominal growth?

Kotok: Precisely. Now if the Fed were to say listen, we are incapable of handling monetary policy affairs at zero. Let’s admit our frailty. And, by the way, I think this would be a fair statement. One needs only to look at the Bank of Japan and ECB to see the mess that can be created if you stay at zero long enough. And we are witnessing both the BOJ and the ECB at the point where there is zero probability of a policy change that leads to extraction. The BOJ balance sheet size is about equal to that nation’s GDP. And the assets are yielding near zero percent. Imagine a Fed balance sheet of $20 trillion size. That would be a similar metaphor. The ECB will soon roll €700 billion in TLTRO. What they must wrestle with is that if, they do not increase the amount to €900 billion or €1 trillion, then they will have done zero stimulus.

The IRA: Well, that is because they call QE stimulus. There are many people who see QE as an engine of market distortion and eventually deflation – unless it is made permanent and indefinite.

Kotok: Of course, but whatever the impact, it will be nothing if the amount is not increased. We will have neutralized an already neutered neutrality.

The IRA: Agreed. But what the FOMC has learned over the past few months is that you cannot withdraw the liquidity provided by QE without destroying the system. You can maintain neutral and have economic stagnation. But you cannot withdraw the liquidity once it is put into the system. In Europe, even the cessation of new asset purchases has put the EU economy into a tailspin. Without the constant heroin drip of QE, the enfeebled European economy has started to contract. And the US is not much better.

Kotok: Yes. But we are not as bad off as the ECB or BOJ. There is still a chance in the US to get this right. The current FOMC, in my view, has ignored Chairman Ben Bernanke’s warning, which he repeated several times, that if we shrink the balance sheet we will only be taking it back up in due time. He very politely said “why shrink it?” And no one can answer that question. There is at least discussion now of a $3.5 trillion baseline for the Fed balance sheet as a target. We both have friends in the Fed System who believe that the balance sheet should be reduced back to the pre-crisis level, but that it not going to happen. In my view that would be a horrible mistake. I would size the balance sheet at close to $4trillion target to meet all upper thresholds for required reserves, survey-based (ask the banks what they want and need) desired excess reserves , Treasury operating balances, special items and currency. That mix today requires a balance sheet size of about $3.5 to $4 trillion and will require balance sheet growth of between $100 and $200 billion a year.

The IRA: Our friends represent a more tradition view of the world, a more prudent view. But when the Treasury, which is the dog in this story, is borrowing $100 billion per month, traditional views about taking the balance sheet down to required reserves and whatever is required to accommodate Treasury issuance misses the point. Once the FOMC under Bernanke made the decision to pursue QE, there was no way to take it back. The Fed cannot ignore the reaction of the markets that we saw in December. The markets have subsumed everything. So the FOMC must obviously allow the balance sheet to grow to keep pace with Treasury debt issuance. The alternative is political suicide. The Fed’s first priority is whether the Treasury issues debt tomorrow, correct?

Kotok: Yes. We cannot afford anything that introduces a risk perception about the US Treasury’s ability to finance itself. May I add a second priority? Can the Fed grow its balance sheet so that the Treasury may enjoy $100 billion addition each and every year in seigniorage? This keeps the US banking system stable and the lender of last resort status of the Fed intact. Can we maintain the status as the least worst major reserve currency in the world and thereby finance $1 trillion in deficits every year? That is the unspoken truth. My stump speech now has four charts that focus on what a $1 trillion deficit and a four percent unemployment rate means year after year. We are less than a decade away from a $1 trillion interest bill for the United States.

The IRA: Thank you David.


The original commentary that launched this conversation can be seen here: https://www.cumber.com/cumberland-advisors-market-commentary-jay-powell-gsibs-christmas-eve-massacre/

Cumberland Advisors, USF Sarasota-Manatee and the Global Interdependence Center are pleased to invite you to our third annual Financial Literacy Day, Financial Markets and the Economy event. The date this year is Thursday, April 11, 2019 and it runs from 8:00 A.M. – 5:00 P.M. It’s only 50 bucks and includes a full interactive day of talks, panels and Q&A, plus a catered lunch.

Panel discussions will include:
* Outlook for the US Stock Market & Global Economic Outlook
* Special Session: Health, Hunger and Philanthropy
* How the World Looks in Economics and Geopolitics
* Keynote Speaker: Gretchen Morgenson, The Wall Street Journal: Senior Special Writer, Investigations Unit
* A Conversation with Susan Harper, Canada’s Consul General in Miami

Full information and cost available at: http://USFSM.edu/FinancialLiteracy

Please join us.

-David


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.




Wells Fargo Hearing: ‘When Will the Scandals End?’

Wells Fargo Hearing: ‘When Will the Scandals End?’

David Kotok on Yahoo Finance - Wells Fargo Hearing: ‘When Will the Scandals End?’

Yahoo Finance Video

Wells Fargo grilled by the House today in hearings regarding the company’s alleged ‘consumer abuse.’ Yahoo Finance’s Adam Shapiro, Julie Hyman, and Jessica Smith join the King’s College Chair of the Program in Business & Finance Brian Brenberg and Cumberland Advisors Chairman & CIO David Kotok to discuss.

Watch at Yahoo Finance or in the embedded player below.




Cumberland CIO Kotok on Where to Invest in the Muni Market

Cumberland CIO Kotok on Where to Invest in the Muni Market

Watch on Bloomberg’s site or embedded below:

https://www.bloomberg.com

 



 


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

Sign up for our FREE Cumberland Market Commentaries Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.




Gold’s Surge Has Been Disguised by the Strong Dollar

Excerpt from Barron’s

“Gold’s Surge Has Been Disguised by the Strong Dollar”

By Evie Liu Feb. 12, 2019

Cumberland-Advisors-David-Kotok-In-The-News

Gold seems to be out of favor, but that’s only compared to the U.S. dollar.

Over the past two decades, the commodity has actually seen a widespread, strong, and sustained value appreciation around the globe against 72 currencies, according to Ross Norman, CEO of London-based bullion broker Sharps Pixley. That basket of currencies includes developed countries such as Canada, Australia, and Japan, as well as emerging markets including Brazil, India, and Iran. “Using the dollar gold price, as most of us do, has disguised what is actually quite a powerful bull market,” Norman wrote in a note last week.

Admittedly, the real return on gold over the past century has been much lower than other risk-free assets such as Treasury bills. But T-bills today may be less safe now, Fraser-Jenkins wrote.

Global government debt has risen to a near-record level since World War II, posing an increasing risk of inflation through additional capital in the market. The U.S., for example, has seen its national debt relative to gross domestic product grow 86% from 2000 to 2017, noted David Kotok of Cumberland Advisors. And that’s not the highest compared to developing countries such as China at 109%, Mexico at 135%, and Iran at 233%.

Read the full article at Barron’s (subscription required).




Shutdown #6

US agriculture was not well positioned to suffer a federal government shutdown in December and January. In an era of low commodity prices, many farms cannot afford trade-war shenanigans and cannot afford government shutdowns.

Market Commentary - Cumberland Advisors - Shutdown Hamilton Quote

Across the US, median farm income for 2018 was -$1548 (yes, a negative $1548), a fifteen-year low, despite record farm productivity (https://www.ajc.com/news/farmers-knife-edge-bad-weather-tariff-war-shutdown-exact-toll/BcQhMALKUmNBslXllcSjcL/). That data includes, of course, not only large corporate farms but also small farms where producers rely on off-farm jobs to make ends meet.

To top off the twin challenges of low prices and foreign markets evaporated by the trade war, weather-related losses have hit some farms hard, making assistance far more critical. Take the situation for South Georgia pecan growers, for example (https://www.ajc.com/news/farmers-knife-edge-bad-weather-tariff-war-shutdown-exact-toll/BcQhMALKUmNBslXllcSjcL), Justin Jones among them. Hurricane Michael destroyed many of Jones’ trees, trimming potential income for years to come. A significant portion of what was a bounty crop of nuts could not be harvested because of heavy rains. Jones’ crop losses weren’t mitigated by higher prices, either, despite a diminished supply, because the Chinese stopped buying US pecans. Meanwhile, South Georgia farmers found themselves waiting on federal relief and crop insurance payments because of the shutdown. Old debt, instead of being paid off by a generous harvest, had to be wrapped into new loans.

The shutdown was especially ill-timed, because farm bankruptcies are up, as the Wall Street Journal reports in an must-read article titled, “This One Here Is Going to Kick My Butt: Farm Belt Bankruptcies Are Soaring” (https://www.wsj.com/articles/this-one-here-is-gonna-kick-my-buttfarm-belt-bankruptcies-are-soaring-11549468759). Farmers must contend with low commodity prices, trade war impacts on exports, and higher costs for fertilizer and equipment. The WSJ report sizes up the unfolding damage:

“Bankruptcies in three regions covering major farm states last year rose to the highest level in at least 10 years. The Seventh Circuit Court of Appeals, which includes Illinois, Indiana and Wisconsin, had double the bankruptcies in 2018 compared with 2008. In the Eighth Circuit, which includes states from North Dakota to Arkansas, bankruptcies swelled 96%. The 10th Circuit, which covers Kansas and other states, last year had 59% more bankruptcies than a decade earlier.

“States in those circuits accounted for nearly half of all sales of U.S. farm products in 2017, according to U.S. Department of Agriculture data.”

The 35-day shutdown meant that many farmers faced delays in applying for and receiving Farm Service Agency loans that they use each year to buy seeds, feed, equipment, and fertilizer. Christopher Quinn, reporting for the Atlanta Journal-Constitution, explains, “Farmers plan crops, prepare fields and line up financing January to March. But most USDA functions and local Farm Service Agency offices closed in late December and most of January. That left farmers behind and prevented them from applying for loans, collecting federal disaster aid and crop insurance and trade mitigation payments which were given to offset a portion of tariff losses. In a financially pinched time, that money would be useful.” (https://www.ajc.com/news/farmers-knife-edge-bad-weather-tariff-war-shutdown-exact-toll/BcQhMALKUmNBslXllcSjcL)

The 35-day shutdown of the federal government also delayed crucial ag reports. Just as investors need those reports, farmers need them, too, particularly information on foreign production and demand, as they make critical decisions about when to sell their corn or soybeans, or how much of what to plant for 2019. How critical are delays and a dearth of data from the USDA? A UPI report, “Lacking USDA Crop Reports, Farmers Make Critical Decisions in the Dark,” laid out the situation during the shutdown:

“This is the time of year growers across the country take out loans, purchase machinery, decide what they will plant – and buy seed. The USDA’s data on price outlooks and international supply and demand for agricultural commodities can be crucial in making those decisions.

“‘Here, we’ve been a month with no information,’ said Tim Bardole, a corn and soy grower in Iowa. ‘As far as planting goes, we’ve got our seed bought. We kind of took a shot in the dark. When the reports come out, we’ll find out how far off we were.’” (https://www.upi.com/Lacking-USDA-crop-reports-farmers-make-critical-decisions-in-the-dark/6301548967114/)

As it braces for a possible second shutdown, the USDA has been scrambling to produce those reports that couldn’t happen in January. The long-awaited World Agricultural Supply and Demand Estimate, or WASDE, was finally released on February 8. Fortunately for investors and for farmers, it held no big surprises. US soybean production, corn production, and projected exports were down, while wheat, sorghum, and rice were up.But nothing in the report spurred the price volatility many had feared.

The shutdown interfered, too, with the timely implementation of the 2018 Farm Bill, which the USDA is scrambling to implement. Among its other “farm-friendly” provisions, the 2018 Farm Bill includes much-needed aid to struggling dairy farmers and a provision for insurance against low milk prices under the Margin Protection Program (http://www.thedailynewsonline.com/bdn01/kirsten-gillibrand-calls-for-rapid-implementation-of-farm-bill-post-shutdown-20190206).

The USDA has obviously done its level best to forestall damaging impacts on farmers. During the first shutdown it temporarily reopened almost half of its Farm Service Agency offices on a part-time basis to help with existing loans and to produce 1099s needed for 2018 taxes. The Washington Post reports that some USDA employees who worked through the shutdown did not see their back pay until more than two weeks after the shutdown ended, basically because the computer system used to issue payments choked with the overload. When accounts are finally settled, the federal government will have footed the bill not only for back pay but also for the overtime pay that is unavoidably the price of catching up. (https://www.washingtonpost.com/national/health-science/after-the-shutdown-federal-workers-are-coping-with-a-rocky-restart/2019/02/07/34494bea-2a41-11e9-b011-d8500644dc98_story.html)

One can only speculate on how the situation will worsen if another shutdown unfolds as US farmers prepare for planting season. Will FSA payments, Market Facilitation Program payments, and farm subsidy payments be made in time, or will some farmers be unable to obtain the money they need to bring a crop to harvest or livestock to market? Will crop loss insurance payments reach those wiped out by a hurricane? Will dairy farmers get insurance payments long overdue? A second shutdown has further potential implications not only for farmers and the Agriculture sector as a whole, but perhaps also for consumers who have to put dinner on the table on a budget.

The many roles of the USDA – from the administration of SNAP to food safety inspections to the complex programs that help farmers plant their crops and feed their livestock and bring them to market so that America eats – cannot be adequately fulfilled during a shutdown, even a partial one. Some politicians grasp this. House Agriculture Committee Chairman Collin Peterson has proposed a bill to keep Farm Service Agency offices running during a shutdown. (https://www.rfdtv.com/story/39871614/house-ag-committee-chairman-collin-peterson-proposes-to-keep-farm-service-agency-offices-open-if-another-shutdown-occurs#.XFsK2dF7nFQ)

But all industrial sectors and all consumers sectors and all services of government and all impacts on our lives are better served if there is no second shutdown. The discussion in Congress is to avoid this type of punishment of our citizens by changing the legal structure so that shutdowns don’t repeat themselves. Nine Republican Senators have sponsored legislation called the End Government Shutdowns Act (S. 104), to ensure an automatic continuing resolution at current spending levels to be triggered when any budget appropriations deadline passes without a budget agreement. (https://www.govexec.com/management/2019/01/senate-republicans-hatch-plan-prevent-future-shutdowns/154160/)

As matters stand, President Trump, the House and the Senate, the Democrats and the Republicans, are all guilty of creating the shutdown that imperiled the finances of federal workers and many farmers alike. They are ignoring the citizens who do not want it. Congress, however, can stop shutdowns permanently, and should. Politicians, whether in Congress or in the White House, should not have a tool to waterboard the federal government, its employees, and those who are served by its programs as a means to strong-arming political outcomes.

David R. Kotok
Chairman and Chief Investment Officer
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.




Gold

What do 72 countries – including developed nations such as Canada, Australia, Japan, and Sweden; emerging giants such as Argentina, Brazil, Mexico, Nigeria, India, Iran, and Russia; and small countries such as Burundi, Haiti, Myanmar, Syria, and Tonga – all have in common?

Market Commentary - Cumberland Advisors - Gold

Not much, you might say; they differ vastly in such metrics as population, GDP per capita, inflation rate, income inequality, and political stability. Yet these 72 nations do share one surprising feature: The price of gold is at an all-time high in the currencies of all these countries. Furthermore, the price is not far from its historical zenith in terms of the British pound, the Chinese yuan, the Swiss franc, the euro, and even the US dollar.

This phenomenon was pointed out to us by Ross Norman, CEO of Sharps Pixley, a London bullion broker, who wrote an article titled “Gold hits an all-time high in 72 currencies” (Jan. 15, 2019; available at https://www.sharpspixley.com/articles/gold-hits-an-all-time-high-in-72-currencies_288506.html).

So what’s going on here? We can certainly point to the drastic appreciation of gold over the last 20 years. Since 1999, gold has risen by the following percentages relative to these nations’ currencies (some figures are approximate):

Australian dollar 298%
Brazilian real 699%
British pound 470%
Canadian dollar 290%
Egyptian pound 2231%
Indian rupee 644%
Iranian real 6103%
Japanese yen 329%
Mexican peso 861%
Nigerian naira 1720%
Russian ruble 612%
S African rand 914%
Swedish krona 419%
Turkish lira 1648%
US dollar 345%

(Data source: https://goldprice.org/gold-price-history.html)

In the span of these two decades we have seen the dot-com bubble and crash (followed by recession), the US housing crash and Great Financial Crisis (and recession), and then the longest bull market in US history. Gold has tended to tread water in most major currencies in the latter period, from March 2009 to present, but it’s clear that a post-millennial flight from risk and into gold has been a powerful and globally consistent pattern. There has simply been more financial, economic, and geopolitical turbulence over the last two decades than there was in the period 1945–2000.

Sovereign debt must be a factor in gold’s ascendance, too. Around the world, nations have responded to the challenges of our era by taking on ever greater debt. From 2000 to 2017, these nations experienced the following percentage growth in debt to GDP:

Argentina 24%
Brazil 33%
China 109%
France 67%
Germany 10%
India -7%
Italy 26%
Iran 233%
Japan 93%
Mexico 135%
S  Africa 23%
Spain 72%
Russia -74%
Turkey -43%
US 86%

(Source for US and other data: https://tradingeconomics.com/united-states/government-debt-to-gdp)

Interestingly, the biggest increases in central bank gold holdings from 2000 to 2018 are found among both nations with the greatest debt growth and those with the least.

Country Gold holdings in tonnes
(Debt/GDP change) Q1 2000 Q3 2018 Percent change
China (109%) 395 1843 367
India (-7%) 358 586 63
Mexico (135%) 7 120 1614
Russia (-74%) 423 2036 381
Turkey (-43%) 116 259 123
US (86%) 8139 8133 -0.1

(Source: https://www.gold.org/goldhub/data/monthly-central-bank-statistics)

Apparently, gold purchases are driven more by central bank policy than by economic factors per se. Gold can, however, be a geopolitical force. Bloomberg reported on Jan. 25, 2019, that the Bank of England – at the urging of US officials – had blocked an effort by the embattled Maduro regime in Venezuela to repatriate $1.2 billion in gold. (See https://www.bloomberg.com/news/articles/2019-01-25/u-k-said-to-deny-maduro-s-bid-to-pull-1-2-billion-of-gold.)

In conclusion we can certainly say that gold has retained its global significance as a store of value, and indeed there has been a widespread, strong, and sustained “flight to gold” in this century.

Cumberland’s US ETF managed accounts hold a position in GDX, a gold miner ETF.

David R. Kotok
Chairman and Chief Investment Officer
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