Will Trump Nominate Gold Standard Advocate to Fed?

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Trump has already exerted more influence over one institution than any other president in over 100 years — the Federal Reserve.

That’s because Trump has had more control over Fed personnel than any president since the Fed was founded in 1913. As I’ve written before, Trump now “owns” the Fed.

When Trump was sworn in, he inherited two vacant seats on the seven-person board of governors of the Federal Reserve System. Holders of those two seats are also members of the Federal Open Market Committee (FOMC), the group that sets U.S. interest rates and monetary policies.

President Obama also had the same vacancies, but he did not nominate anyone to fill the seats because he doubted his chances of getting the nominees past the Republican-controlled Senate and he was sure “President Hillary” would do the right thing and appoint pro-Democratic nominees.

In the end, Trump beat Clinton and the vacancies fell to Trump. Then Trump got another windfall. Within 14 months of becoming president, three additional Fed governors resigned (Dan Tarullo, Stan Fischer and Janet Yellen), and Trump suddenly had five vacancies to fill, or 70% of the entire Fed board.

Trump promoted Jay Powell to chair and appointed Richard Clarida as vice chair, Randy Quarles as vice chair for regulation and Michelle Bowman to fill a seat reserved for community bankers.

All of those appointments were well regarded by Wall Street and the media. But that still left Trump with the two original vacancies.

Trump indicated he wanted to appoint Herman Cain and Steve Moore to fill those seats. Cain is a former presidential candidate, chair of the board of the Federal Reserve Bank of Kansas City and CEO of the Godfather’s Pizza chain. Moore is a think tank analyst, founder of the Club for Growth and a former member of the editorial board of The Wall Street Journal.

Cain has now withdrawn his nomination after running into opposition from Senate Republicans based in part on old allegations of sexual misconduct. Moore is also being opposed by those who fault him for not having a Ph.D. in economics.

Whatever the merits, the real reason they have been opposed by monetary elites is that they are “friends of Trump” and will hold Jay Powell’s feet to the fire to cut interest rates and keep the economic expansion going ahead of the 2020 election.

But if Moore withdraws next or if his nomination is defeated, no worries. There’s some indication that Trump’s next nominee will be Judy Shelton.

She does have a Ph.D. and is a well-known advocate of a new gold standard. Just this Sunday she wrote an article in The Wall Street Journal, “The Case for Monetary Regime Change,” that challenged the current system and defended the classical gold standard.

She has also defended Trump’s trade policies, arguing that those who embrace unfettered free trade dogma “disregard the fact that the ‘rules’ are not working for many American workers and companies.”

For those who want Moore to step aside next, the best advice may be “Be careful what you wish for.”

Regardless, the 2020 presidential election is already beginning to take shape.

A few weeks ago, I unveiled my first forecast on the outcome of the 2020 presidential race. My estimate was that Trump had a 60% chance of winning.

I was also careful to explain that my forecasting model includes constant updating and would no doubt change between now and Election Day on Nov. 3, 2020.

That’s normal. Politics is a highly volatile process and it’s foolish to put a stake in the ground this early. My model has quite a few factors, but the leading factor right now is that Trump’s chances are the inverse of the probability of a recession before the third quarter of 2020.

If recession odds by 2020 are 40%, then Trump’s chances are the inverse of that, or 60%. With the passage of time, Trump’s odds go up because the odds of a recession go down.

If a recession does hit, then Trump’s odds go way down. This dynamic can be used to explain and forecast Trump’s economic policies, including calls for interest rate cuts and efforts to place close friends on the Fed Board of Governors.

It’s all connected.

As usual, I found myself out on a limb with my forecast; the mainstream media are sure Trump will lose in 2020, if he’s not impeached sooner. So it was nice to get some company who sees things my way…

A new Goldman Sachs research report also projects that Trump will win in 2020. Goldman shows a narrower margin of victory than my model, but a win is a win.

Of course, their forecast will be updated (like mine) but we’re starting to see more signs from other professional analysts that Trump is a likely winner after all.

Regards,

Jim Rickards
for The Daily Reckoning

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Expect the Buyback Wave to Continue This Year

This post Expect the Buyback Wave to Continue This Year appeared first on Daily Reckoning.

A crucial theme from last year is continuing into this year — stock buybacks. Last year was a banner year for companies buying back their own shares. A month into 2019, it appears that Wall Street is set to continue that trend.

Last year, U.S. companies announced a whopping $1.1 trillion worth of buyback plans. Armed with extra cash from favorable corporate tax policy enacted in 2017, they enthusiastically bought back their own shares.

But as of mid-December, only about $800 billion of those buybacks had actually occurred. That means there could be another $300 billion of the total 2018 target still waiting to hit the market.

In fact, Wall Street is already gearing up for another banner buyback year. In a recent report, J.P. Morgan strategist Dubravko Lakos-Bujas wrote, “It’s expected that S&P 500 companies will execute some $800 billion in buybacks… in 2019.”

The Wall Street strategist also explained that the quality of 2018 buybacks were high. He revealed that companies were using their cash, rather than borrowed money, to fund buybacks. Using cash toward buybacks is expensive less than using debt.

But why did the wave of buybacks slow down late last year?

The first reason is that companies involved had already purchased stock at a very rapid rate through last September. That was one major reason we saw the market peak around that time, and in fact, hit new records.

The second was that despite trade war fears and uncertainty, companies felt confident enough to go ahead with their buybacks initially. That’s why we saw market players largely shrug off warning signs through the first three quarters of 2018.

But sentiment shifted dramatically during the last quarter of the year, culminating in essentially a bear market by late December. And more reports around the world began to point to slowing economic growth ahead.

A key factor cited for this slowdown was the impact of prolonged trade wars, which could curb real economic activity and create more uncertainty. In turn, growing volatility would keep businesses from planning expansions, or using the cash originally set aside for buybacks.

A third reason for the drop off in buybacks late last year was a record amount of public corporate and consumer debt that had to be repaid or at least serviced regularly. This overhang of debt was weighing on growth expectations. That debt load would become even more expensive if the Fed kept up with its forecasted rate hike activity in December and throughout 2019.

Some analysts even warned that the Fed might go ahead with another four rate hikes this year. That triggered fears on Wall Street that the central bank stimulus game could truly be over.

The reason for the concern is simple: The higher the interest rates, the more expensive it is to borrow and repay existing debt. For more highly leveraged corporations and emerging market countries, this would be an even greater threat. A higher dollar, resulting from more Fed tightening, could cause other currencies to depreciate against the dollar. That would make it harder to repay debt taken out in dollars.

Finally, there was heightened tension in the financial markets due to political uncertainty. With U.S. election results ensuring added battles between Congress (with Democrats taking the majority in the House of Representatives) and the White House, doubt set in over the functionality of the U.S. government going forward.

Those reservations were justified. The government shutdown that kicked off 2019 had a lot to do with shifts in the political balance in Washington.

Geopolitical tensions also rose at the end of 2018, including Brexit in the United Kingdom, street revolts in France, potential recession fears in Italy and growing unrest in South America.

All these factors combined ensured that markets were extremely volatile during the last quarter of 2018, and why it was the worst one for the markets since the Great Depression. It was not conducive to buybacks. Buybacks are supposed to raise the stock price. But strong market headwinds could have largely canceled their effects.

The prudent approach for companies facing such a negative environment was to wait out the problems until the new year.

But Jerome Powell subsequently gave into Wall Street and took a much more dovish position on both rate hikes and balance sheet reductions. That means the coast is clear again to resume the buybacks.

Back in December, some major players announced plans for 2019 buybacks. These include Boeing, which announced an $18 billion repurchase program. It also includes tech giant Facebook, which plans to buy back $9 billion of its own shares, in addition to an existing $15 billion share repurchase program started in 2017.

Also in on the buyback wave is Johnson & Johnson, which announced a $5 billion stock buyback. Others include Lowe’s and Pfizer, which both announced a $10 billion stock buyback program.

These plans are now much more likely to go forward.

Furthermore, many large corporations like Microsoft, Procter & Gamble, Home Depot and Walmart didn’t even announce buybacks in 2018.

They could well announce them for 2019. Companies that did announce big buybacks last year, like Apple, could also engage in more, adding a potential $100 billion share repurchases this year to match 2018.

Another indicator for a sizeable 2019 buyback wave is that stock prices are lower now than they were going into the fourth quarter of 2018. That means companies can buy back their shares at cheaper prices. They could buy at a discount, in other words, or at least what they hope will be a discount.

My old Wall Street firm, Goldman Sachs, has already forecast $940 billion worth of buybacks for 2019. They previously had predicted over a trillion dollars’ worth of buybacks for 2018. The number of buybacks for 2018 even exceeded their predictions.

By mid-January, of the S&P 500 companies that reported their fourth-quarter earnings, nearly 70% of them have exceeded Wall Street’s profit expectations. It’s a favorable environment for buybacks.

Yet, it may still take some time for companies to move forward with this year’s buybacks. That’s because we are still in the “black-out” period that the Securities and Exchange Commission (SEC) has created.

The period covers the time just before and after companies post earnings results. The sell-off in October coincided with the third quarter earnings season’s “blackout period.” The combination of negative environmental factors plus fewer buybacks drove markets even lower.

Now, once earnings season and the current blackout period is over, Wall Street will be unleashed to buy large blocks of stock for their major corporate clients.

If the Federal Reserve truly holds back on its former interest rate and quantitative tightening plans, as it seems likely to do, expect central bank stimulus to continue to fuel markets.

Of course, buybacks do not come without negative implications. That’s because companies are not using their cash for expansion or to pay workers more, which would generate more buying power in the overall economy. But in the short run at least, they tend to raise the stock price.

Even if Wall Street comes up against headwinds of volatility, slowing economic growth, political strife and trade wars, they can now expect the Fed and other central banks to have their backs.

Buybacks could become a very powerful force once again this year, and keep the ball rolling a while longer.

Regards,

Nomi Prins

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Wall St. Doesn’t Care About 800,000 Workers

This post Wall St. Doesn’t Care About 800,000 Workers appeared first on Daily Reckoning.

Today marks the 27th day of the government shutdown.

In total, 800,000 Federal employees missed their first paychecks last week. And another 1.2 million government contractors are also estimated to be missing paychecks as well.

That’s 2 million Americans currently out of work and not collecting paychecks!

This boils down to a large portion of America’s middle class at risk of missing mortgage payments, student loan payments, and even spending less on necessities like food and clothing.

This is a big deal!

But for some reason, Wall Street seems not to care… So what gives???

Wall Street’s Eyes are Focused Elsewhere — Not on the Shutdown

The government shutdown is definitely a frustrating experience regardless of which side of the political arguments you find yourself on. The back and forth rhetoric from both parties is exhausting.

But while I don’t mean to dismiss the very real challenges that come with the government shutdown, one thing you need to realize is that as of now, Wall Street is NOT fazed by the current gridlock in Washington.

In fact, since the shutdown officially began at midnight on December 22nd, the S&P 500 is higher by 8.17%!

Seriously, this has been quite an impressive rebound with hardly any down days in the 15 trading days we’ve had since the market bottomed. That’s great news for investors — and hopefully you’ve been taking advantage of the sharp move higher.

But this begs the question — how can stocks go higher when 2 million people are potentially now struggling to pay their bills?

It’s simple.

The key issue that Wall Street is focusing on this week is not the government shutdown… It’s not the trade war with China… And it’s not even additional interest rate hikes from the Fed.

Don’t get me wrong, those things are important, but right now they’re taking a back seat to one driving force…

The REAL Reason Stocks are Moving Higher Despite 2 Million People Not Collecting Paychecks

Earnings season!

This week, we’re starting to see some of the biggest earnings reports come in — from big financial firms like the money center banks, from retail firms, from industrial companies with international customer bases, and of course from a myriad of smaller stocks that represent smaller businesses here in the U.S.

And so far they’ve been stronger than expected!

Take the big banks for example. Goldman Sachs (GS) generated $6.04 per share in profit for the fourth quarter of 2018 versus the $4.45 per share estimated by Refinitiv. While Bank of America (BAC) posted earnings of $0.73 per share vs $0.63 estimated.

This caused both stocks to spike after the reports were released.

In addition, major airlines like United Continental (UAL) and Delta Airlines (DAL) also reported blowout 4th quarters in the face of a stock market pullback. United’s revenue for each passenger it flies a mile, a key industry metric, rose 5 percent from 4Q 2017 and Delta’s revenue per mile rose by 3.2 percent.

This is the real reason why stocks are moving higher during such an unfortunate time.

Trust me, I feel for those 2 million employees that haven’t collected a paycheck since the government shutdown started.

But in the long run, stock prices are determined by earnings. And this strong first week of earnings season far outweighs any temporary negatives that come with a government shutdown.

That’s why even as this government shutdown rolls on, I recommend that if you have the extra funds to spare, you continue allocating money towards stocks. Plenty are still on sale after the volatile last few months. And as earnings season continues, the market should respond positively to strong and growing earnings from our healthy corporations.

Here’s to growing and protecting your wealth!

Zach Scheidt

Zach Scheidt
Editor, The Daily Edge
TwitterFacebook ❘ Email

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Fade Goldman’s bearish gold call

By Tim Iacono
Iacono Research

Tim Iacono

The latest research note on gold from investment bank Goldman Sachs — in which they see the gold bull market coming to an end in the months ahead — might be taken much more seriously if not for two factors:

1. The call is based on a vastly improved U.S. economy next year that leads to higher real interest rates and they haven’t exactly been knocking the ball out of the park lately in their economic forecasts.

2. The firm has a reputation for telling investors to do one thing and then betting against it, as many (some in Congress) believe was the case with subprime mortgages as the housing bubble peaked.

In a private note that was widely reported at various internet sites, Goldman commodity analyst Damien Courvalin cited the underperformance of gold this year despite a host of positive factors and then offered this forecast for next year:

Read the entire article . . .

West Africa junior gold opportunities

By Giles Gwinnett
Proactive Investors

Heavyweight broker Goldman Sachs has started coverage on a mix of West African gold firms, aiming to identify those which look set to outperform.

The region, which includes Nigeria, Ghana and Guinea, has seen a boom in gold mines over the last decade and a number of exploration plays have been funded as production in South Africa has waned and the price of the yellow metal has outperformed.

In an extensive note, Goldman analyst Eugene King begins coverage on five plays, with notably, a ‘buy’ stance on both Endeavour (TSE:EDV) and Amara Mining (LON:AMA, TSE:AMZ), formerly Cluff Gold. It also updates its coverage on Avocet Mining (LON:AVM).

At the root of Goldman’s coverage on these junior gold firms is its bullish outlook for the metal.

This is due to the fact it believes US interest rates will continue to be low; central banks will continue to buy the metal, and risk appetite among investors is muted so they continue to look for havens such as gold.

Read the full article . . .