May 2017 Investor Letter

Strategy Performance

performance table.jpg

Investment Philosophy and Approach

The Active Asset Allocator investment strategy is designed to deliver a consistent level of positive returns over time with a strong focus on capital preservation. I follow a multi-asset investment approach, actively allocating between global equities, bonds, precious metals, currencies and cash. I always invest with the primary trend of the market and do not follow a benchmark. Instead, I manage the market risk for clients. This strategy has returned +11% per annum net of fees since inception with a lower level of risk than the average multi-asset fund. My active asset allocation approach is best illustrated in the following chart.

 
AAA Asset Mix.jpg
 

Gold Trader focuses on capturing the strongest and weakest parts of gold's daily cycle, buying daily cycle lows, selling daily cycle highs and holding for 10-20 trading days, depending on the cycle count. This approach allows me to effectively manage risk. The strategy aims to capture +5%-6% profit per trade while risking 2%-3% each time and has a win rate in excess of 70%.

Executive Summary

Over the last couple of months, Facebook, Apple, Amazon, Netflix and Google together have added $260 billion in market capitalisation. Meanwhile, the other 495 companies in the S&P 500 have lost a similar amount. Market leadership is narrowing to just a handful of names, a trend that often occurs at the tail end of a bull market. Smart investors are taking note. Paul Singer recently raised $5 billion to take advantage of opportunities when investor confidence becomes impaired and volatility spikes. Warren Buffett is sitting on 22% cash in his investment company Berkshire Hathaway. We are getting close.

Bonds have had a quiet couple of months but as long as 3% on the 10-year US Treasury and 1% on the 10-year German Bund hold, I continue to believe that the final low in yields of this multi-decade bull market lies somewhere in our future. The price action in gold could provide the clue to the timing of the turn (lower in stocks, higher in bonds and gold). Gold Trader is looking to catch the top of gold's fourth daily cycle before the final descent into a medium-term low in June. Once next month's low is in place, I expect a powerful move higher over the Summer, possibly to $1,500, as the stock market finally rolls over.

Stock Market Update

Paul Singer's hedge fund Elliott Management raised $5 billion in 24 hours last week to take advantage of a potential major investment opportunity set that could emerge "when investor confidence is impaired, recent correlations and assumptions don't work and prices are changing rapidly". Singer, one of the most successful hedge fund managers of all time, is expecting a sharp rise in volatility and some unpleasant consequences for investors in the not too distant future. He is not the only one. Warren Buffett is currently holding 22% cash - nearly $100 billion - in his investment company Berkshire Hathaway. Two titans of the investment industry are on edge and concerned about the outlook for global markets.

Back in May 2013, Paul Singer penned an excellent article describing the moral hazard that has been created by the Federal Reserve. (The full article is available in the Research section of my website at the following link: In the Wilderness). In the article, Singer lambastes the Federal Reserve for the dangerous policies they have pursued and the unintended consequences that have yet to be felt from their reckless and irresponsible actions.

If you look at the history of Fed policy from Greenspan to Bernanke, you see two broad and destructive paths quite clearly. One path is the cult of central banking, in which the central bank gradually acquired the mantle of all-knowing guru and maestro, capable of fine-tuning the global economy and financial system, despite their infinite complexity. On this path traveled arrogance, carelessness and a rigid and narrow orthodoxy substituting for an open-minded quest to understand exactly what the modern financial system actually is and how it really works. The second path is one of lower and lower discipline, less and less conservative stewardship of the precious confidence that is all that stands between fiat currency and monetary ruin. Monetary debasement in its chronic form erodes people’s savings. In its acute and later stages, it can destroy the social cohesion of a society as wealth is stolen and/or created not by ideas, effort and leadership, but rather by the wild swings of asset prices engendered by the loss of any anchor to enduring value. In that phase, wealth and credit assets (debt) are confiscated or devalued by various means, including inflation and taxation, or by changes to laws relating to the rights of asset holders. Speculators win, savers are destroyed, and the ties that bind either fray or rip. We see no signs that our leaders possess the understanding, courage or discipline to avoid this.
— Paul Singer, Elliott Management, May 2013.

One of the consequences of continuous central bank intervention in capital markets has been the emergence of the short volatility trade as investor confidence levels ratchet up once again. A tremendous amount of capital has been placed on bets that volatility will remain suppressed for the foreseeable future. This, at a time when the Vix Index (below) is trading at multi-decade lows. Over the past 13 trading days, the S&P 500 has traded within a range of 1.01%, the least volatile 13 days in history! Volatility spikes and rapid changes in price are what Paul Singer is preparing for.

 
The Vix Index is a measure of the volatility of S&P 500 index options and is considered a prescient gauge of investor confidence (when the Vix is low) and fear (when the Vix spikes higher).

The Vix Index is a measure of the volatility of S&P 500 index options and is considered a prescient gauge of investor confidence (when the Vix is low) and fear (when the Vix spikes higher).

 

Another direct consequence of continuous central bank intervention has been the reach for yield as investors are forced out of low risk cash and into higher risk investments in the search for income and a reasonable investment return. Total assets in Rydex Money Market Funds have now also fallen to multi-decade lows.....

 
 

.... at a time when stock market valuations and margin debt as a percentage of nominal GDP have rarely been higher.

There is also a potential negative divergence now appearing in the S&P 500 where price is breaking out to new all-time highs but relative strength and momentum indicators are failing to confirm the move. This signals that the rally could be nearing its final stages.

 
 

In his 1st May Weekly Market Comment, John Hussman showed a simple chart of the S&P 500, marking all days since 1960 where the opening level of the Index was 0.5% above the prior day's closing price and the Index was within 2% of an all-time high. On some occasions, these conditions occurred shortly before the final bull market high, while on others (August 1987 and October 2007), they occurred just a few days before or after the final market top. Food for thought.

 
 

Stock markets have enjoyed a very strong multi-year rally since 2009, and since bottoming versus gold in 2011. The S&P has handily outperformed precious metals over the last six years, following gold's strong relative performance versus US equities from 2000 until 2011.  I believe the trend is now turning once again in favour of gold. I think gold will put in a meaningful low over the next 4-6 weeks (see Gold Market Update for more information), which I expect will coincide with a top in the stock market. After that, things should start to get interesting.

 
 

European stocks (lower left chart) trade at a valuation discount relative to US stocks and the market is pricing in quite a depressed level of earnings growth for EU companies. So, there is a margin of safety priced in to EU stock markets. Chinese stocks (lower right chart) continue to face significant headwinds and the chart of the Shanghai Stock Exchange Composite Index suggests that the downward trend will persist for some time yet. I will be tilting the regional equity bias in the Active Asset Allocator towards Europe following the next meaningful correction, but for now, I continue to recommend caution and maintain a defensive position in the Active Asset Allocator of 20% equities / 40% bonds / 30% precious metals / 10% cash. 

Eurostoxx 600.jpg

For more information on my stock market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

Bond Market Update

The trend remains down for government bond yields across the world. Inflationary pressures are probably greatest in the United States and eventually that will be reflected in the US Treasury market. However, as long as the US 10-year yield remains below 3.0%, I think the final low in yields of this multi-decade bull market lies somewhere in our future. 

 
 

Debt, demographics and delusional central banks are combining to perpetuate this bull market in bonds. Despite the recent rise in yields, Eurozone government bond yields also remain in a multi-year downward trend. As long as 10-year German bund yields remain below 1.0%, the bond bull market remains intact.

 
 

It has been a quiet couple of months for inflation-linked bonds but the longer-term trend remains up for this under-owned asset class. Inflation-linked bonds offer attractive diversification benefits for multi-asset portfolios and perform well at times when equities and fixed interest rate bonds are struggling. I will likely increase the allocation to ILB's in the Active Asset Allocator over the course of the next 12 months.

 
 

For more information on my bond market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

Gold Market Update

I closed Trade 12 of the Gold Trader strategy last week for a 2% gain (+4.4%YTD). I am looking to place another short position for Gold Trader to catch the top of gold's fourth daily cycle before the final descent into a medium-term low in June. Once next month's low is in place, I am expecting a powerful move higher over the Summer, coinciding with a top and decline in the stock market.

 
 

I am pretty excited about the prospects for Gold Trader. The strategy looks to capture 5-6% per trade while risking just 2-3% each time and has a win rate in excess of 70% based on over 10 years of data. Profits are tax-free to the client and fees are performance based. No gain, no fee. Please get in touch if you are interested in learning more.

I expect gold to bottom next month near $1,170. The possibility remains for a fast and sharp drop below the December 2016 low of $1,124 to shake out the bulls, which would provide the fuel for the next rally. Either way, once gold gets going, I expect a strong move higher towards $1,500. Gold Trader will be searching for a long position next month to get on board the move. 

 
 

For more information on my gold market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

February 2017 Investor Letter

Strategy Performance

performance table.jpg

Investment Philosophy and Approach

The Active Asset Allocator investment strategy is designed to deliver a consistent level of positive returns over time with a strong focus on capital preservation. I follow a multi-asset investment approach, actively allocating between global equities, bonds, precious metals, currencies and cash. I always invest with the primary trend of the market and do not follow a benchmark. Instead, I manage the market risk for clients. This strategy has returned +11% per annum net of fees since inception with a lower level of risk than the average multi-asset fund. My active asset allocation approach is best illustrated in the following chart.

 
AAA Asset Mix.jpg
 

Gold Trader and Gold PowerTrader focus on capturing the strongest and weakest parts of gold's daily cycles, buying daily cycle lows, selling daily cycle highs and holding for 10-15 trading days, depending on the cycle count. This approach allows me to effectively manage risk. The strategy aims to capture +5% to 6% profit per trade while risking 2% each time and has a win rate in excess of 70%.

Executive Summary

Wishing all Secure Investments readers a healthy and prosperous 2017! The Active Asset Allocator returned +8.9% in 2016. A full two thirds of this performance came at the start of the year during a period of heightened volatility and declining stock prices. By the end of February 2016, the 30% allocation to bonds had contributed +1% to the strategy's performance while the 30% allocation to precious metals had contributed +5%. The 20% allocation to global equities impacted performance by -1%. So, the AAA was +5% by the end of February versus -4% for the average multi-asset fund.

From March through October 2016, the AAA added another +5% with +2% coming from the allocation to global equities and +3% from precious metals. By the end of October, the AAA was +10% YTD versus +2% YTD for the average multi-asset fund. Following Trump's election victory on 8th November, money flowed out of safe haven assets and into stocks, leading to a run higher in equities in the last two months of the year and a selloff in bonds,  gold and the Euro. All in all, I am satisfied with the performance of the strategy in what was quite a difficult year to navigate. Many hedge funds delivered negative or very modest positive returns in 2016.

For Gold Trader followers, the December 2016 low marked the end of the last Investor Cycle (IC) with a new IC starting on 16th December. The first daily cycle (DC1) of this new IC peaked at $1,219 on 17th January and then dropped into a low (DCL1) on 27th January 2017 at $1,190. DC2 is now underway and I think it could be quite powerful; a $50-$100 move could be on the cards over the next four weeks. Gold Trader entered a long position yesterday (1st February 2017) at $1,204 with a stop on a close below the recent low of $1,190.

Stock Market Update

2016 began with an -16% plunge in global equities. Over the course of the year, stocks recovered so that by the time the US Election rolled around, the FTSE All World Index had crept back into positive territory. Then along came the Donald.... Following Trump's election victory, money flowed out of safe haven assets and into stocks, leading to a run higher in equities in the last two months of 2016. The US dollar also rallied sharply versus the Euro (the euro fell from $1.12 to $1.04), thereby putting quite a gloss on global stock market returns for the year in euro terms.

 
 

Historically, post-election years have not been as kind to investors and I expect 2017 will be no different. The current bull market, 8 years old in March 2017, is already the third longest in history and twice as long as the average of the last 100 years. Still holding on to second place for now is the 1921-1929 stock market bubble, which ran a few days over 8 years; while in first position is the nine year and five month run from October 1990 to March 2000, culminating in the epic internet bubble. We are getting close to the apex of this multi-year run and I believe the next bear market is just around the corner. Stock valuations have returned to prior peaks, investor confidence is back, while short interest - those betting on falling stock prices - has fallen sharply. One of the most successful hedge funds in recent years, Horseman Capital, recently scaled back their significant short position on equities after losing -24% in 2016. The bears are throwing in the towel, potentially, just at the wrong time. When investors take short positions on the stock market, they become natural buyers during stock market declines (as they cover their positions). However, when short sellers cover their trades during a rising market, there are fewer buyers around when stocks eventually turn lower and the declines can become bumpier and much more violent.

 
 

An interesting development that has occurred since the US election is the jump in confidence among CEO's and consumers, which hasn't yet, but may flow through to rising retail sales and economic growth in the months ahead. However, the key problem that trumps all others is that stocks are trading at 25 times reported earnings (which peaked in 2015) versus a long-term average of just 17 times. Stocks have traded at single digit P/E multiples in the 1940's, 1950's, 1970's and 1980's and could do so again when the next bear market arrives. In the meantime, stocks have only been this expensive on two occasions previously since 1860: the last few months of the roaring 1920's just prior to the Great Depression and at the tail end of the internet bubble in the late 1990's!

 
 

As frustrating as it has been to sit with a 20% allocation to cash (and as much as 30% for new Secure Investments clients), I continue to advise caution for now. The stock market has run 11 months without any meaningful pullback, which is very unusual. A 5% correction typically occurs every 7 months during a bull market. In the next few weeks I will outline some of the areas where I see opportunity in 2017 across equities, bonds and precious metals. 

For more information on my stock market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

Bond Market Update

 
 

I think the rise in global government bond yields has just about run its course for now. I am looking for a rally in Eurozone government bonds, which coincides with a decline in global stock markets over the next three to six months. German 10 year government bond yields have rallied 0.50% over the last 7 months and have now reached short-term overbought levels but remain in a multi-year downward trend. Technical indicators suggest that the rally is losing strength. 

 
 

More broadly, Eurozone government bonds have rallied over 60% in recent years, so a -21% pullback is healthy. The next chart suggests that the Euro bonds are now oversold and the next move higher is just around the corner. I will be paying close attention whether bonds can break out to new highs later this year (bullish) or not.

 
 

US 20-year Treasuries have also corrected sharply, falling -18% and have now also reached an extreme oversold position. The longer-term uptrend is still in place for US Treasuries.

 
 

Inflation-linked bonds continue to hold up better than fixed interest rate bonds and I expect ILB's to continue to price in a gradual increase in inflation expectations over the next couple of years. 

 
 

For more information on my bond market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

Gold Market Update

Gold is at quite an interesting juncture. For the first time in five years, gold has broken the trend of lower highs and lower lows. Gold bottomed at $1,045 in December 2015 and then rallied over $300 to a new 52-week high of $1,378 just seven months later. A sharp correction followed but gold managed to dig in and make a higher low in December 2016 at $1,124. 

For Gold Trader followers, the December 2016 low marked the end of the last Investor Cycle (IC) with a new IC starting on 16th December. The first daily cycle (DC1) of this new IC peaked at $1,219 on 17th January and then dropped into a low (DCL1) on 27th January 2017 at $1,190. DC2 is now underway and I think it could be quite powerful; a $50-$100 move could be on the cards over the next four weeks. Gold Trader entered a long position yesterday (1st February 2017) at $1,204 with a stop on a close below the recent low of $1,190.

 
 

Gold priced in euros has held up much better than USD gold, providing a natural hedge for euro-based investors. I expect USD will play catch up now so we could see gold and the US dollar rally together this Spring, which would be great news for our Active Asset Allocator strategy. There is not much to do for now but wait and see how this plays out. Sitting through a bull market is tough to do but I expect our patience will be handsomely rewarded over the next three years. 

 
 

Gold spent the majority of the time above the long-term 20-month moving average (20MMA) during the last major bull market (2001 to 2011). Gold broke below the 20MMA in 2012 and remained in a downtrend for the next four years but then turned higher once again in 2016. Gold closed below the 20MMA briefly on the recent correction but has now regained this bull market trend line. I am looking for an acceleration higher as this bull market gathers steam and broadens in popularity.

 
 

For more information on my gold market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

June 2016 Investor Letter

Strategy Performance

Investment Philosophy and Approach

The Active Asset Allocator investment strategy is designed to deliver a consistent level of positive returns over time with a strong focus on capital preservation. I follow a multi-asset investment approach, actively allocating between global equities, bonds, precious metals, currencies and cash. I always invest with the primary trend of the market and do not follow a benchmark. Instead, I manage the market risk for clients. This strategy has returned +11% per annum net of fees since inception with a lower level of risk than the average multi-asset fund. My active asset allocation approach is best illustrated in the following chart.

 
 

Gold Trader and Gold PowerTrader focus on capturing the strongest and weakest parts of gold's daily cycles, buying daily cycle lows, selling daily cycle highs and holding for 10-15 trading days, depending on the cycle count. This approach allows me to effectively manage risk. The strategy aims to capture +5% to 6% profit per trade while risking 2% each time and has a win rate in excess of 70%

Executive Summary

Chaotic trading overnight following the UK referendum decision to leave the EU is feeding through to US markets this afternoon. The Active Asset Allocator is earning its stripes today with an 80% allocation to bonds, cash and gold. Gold rallied +$100 overnight. For equities, buying the dip works in a bull market. However, we may now have transitioned from bull to bear, so I continue to advise caution here and avoid the temptation to catch a falling knife.

Stock Market Update

The results of the Brexit Referendum are in and the UK has voted to leave the European Union, leading to chaotic trading overnight. Equity and currency markets have experienced dramatic declines as investors scramble to re-position portfolios. A LOT of capital is invested in equity exchange traded funds (ETF's) that trade in Europe and in the United States and I expect additional waves of selling this afternoon once the NYSE opens for business. The Active Asset Allocator is earning its stripes today and benefiting from the heightened market turmoil with an 80% allocation to safe haven assets. Gold rallied +$100 overnight.

The FTSE All World Index, the global equity benchmark, fell -4% this morning. The decline is barely visible on the chart. Suffice to say, there is plenty of room for additional selling. Buying the dip works in a bull market. However, we may now have transitioned from bull to bear, so I continue to advise caution here. The relative strength of the stock market rally in recent weeks is now deteriorating as measured by the relative strength index (RSI) in the top section of the chart below, while price has been unable to break out to new highs. My own technical studies, which turned bullish in April 2016, have also deteriorated in recent weeks. If stocks turn lower from here, my Technical Trend Indicator (TTI) will trigger another 'Sell' signal shortly.

 
 

Volatility is accelerating higher just when the stock market appears to be running out of steam. The Vix Index jumped from 14 to 22 over the last four weeks (this chart does not include this morning's surge in volatility). Investors are getting nervous, tension is rising and speculators are starting to pay up for portfolio insurance. Volatility spikes go hand in hand with stock market corrections and another may be just around the corner.

 
 

Sterling rallied +4% versus the euro in the run up to the Brexit vote but has given it all back and more today. The longer-term trend remains down for GBP versus EUR and I expect we will see £0.90/€1.00 later this year.

 
 

I am more focused on the outlook for the US dollar than sterling over the next three to five years. The USD is the world's reserve currency and large moves in USD have significant implications for the performance of global equity, bond and commodity markets. I continue to believe that the trade-weighted USD Index has put in a medium-term top and will trend lower over time. 

 
 

For more information on my stock market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

Bond Market Update

 
 

Despite an increasing percentage trading at negative yields, government bonds continue to attract capital as part of the flight-to-safety trade. And why not? The ECB is buying EU government bonds at a rate of €80 billion per month and is actually set to run out of bonds to buy under the current programme in less than two years (and in one year's time for German bunds). As long as the ECB stands as the buyer of last resort, yields will continue to compress. Potential fractures to the Union will place increasing pressure on ECB President Mario Draghi and we my begin to see bond yields rise in the weaker Eurozone peripheral countries, but for now, the bull market lives on.

For more information on my bond market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or 086 821 5911.

Gold Market Update

It's a bull market folks. There is nothing to do but sit tight and avoid getting shaken out of your position. I received 20 different updates from investment managers this morning on Brexit, the potential risks and advice for investors. Not a single one mentions gold as a suitable investment. That will change, probably at much higher precious metals prices. In the meantime, the Active Asset Allocator is well positioned to take advantage of what I expect will be a very powerful bull market over the next 3-5 years.

 
gold.jpg
 

For more information on my gold market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or 086 821 5911.

May 2016 Investor Letter

Strategy Performance

 
 

Investment Philosophy and Approach

The Active Asset Allocator investment strategy is designed to deliver a consistent level of positive returns over time with a strong focus on capital preservation. I follow a multi-asset investment approach, actively allocating between global equities, bonds, precious metals, currencies and cash. I always invest with the primary trend of the market and do not follow a benchmark. Instead, I manage the market risk for clients. This strategy has returned +11% per annum net of fees since inception with a lower level of risk than the average multi-asset fund. My active asset allocation approach is best illustrated in the following chart.

 
AAA Asset Allocation.jpg
 

Gold Trader and Gold PowerTrader focus on capturing the strongest and weakest parts of gold's daily cycles, buying daily cycle lows, selling daily cycle highs and holding for 10-15 trading days, depending on the cycle count. This approach allows me to effectively manage risk. The strategy aims to capture +5% to 6% profit per trade while risking just 1.5% each time and has a win rate in excess of 70%.

Executive Summary

The Active Asset Allocator has returned +6.3% YTD versus +0.0% for the average multi-asset fund. My Technical Trend Indicator has triggered a buy signal, yet stocks have not made much progress since. I remain defensively positioned for now with 20% equities / 30% bonds / 30% precious metals / 20% cash. Over 40% of equities on the NYSE have already declined -20% or more, classic early bear market behaviour, though the large-cap indices appear unconcerned for now. This standoff should resolve itself shortly.

Meanwhile, bonds continue to rally while yields head towards zero or lower. This month I explain why I think we are finally approaching an inflection point in fixed income and the potential end to the 35+ year bull market in bonds. Calls for helicopter money are getting louder and investor confidence in central bank policy is about to be tested. I also discuss the World Gold Council's latest report on trends in the sector including a +122% increase in investment demand for gold year/year.

Stock Market Update

In 2016 year-to-date, global equities have returned -0.3%, EU government bonds +5.2%, EU corporate bonds +2.7%, gold +11.3% and silver +14.4% in euro terms. Over that period, the Active Asset Allocator has delivered a positive return of +6.3%, with just 20% invested in equities and 20% still held in cash, versus 0.0% for the average multi-asset fund. Last month, I noted that my technical studies triggered a buy signal for the stock market for the first time since September 2013 and that buy signal remains in place today. Price hasn't made much progress since the buy signal triggered and I continue to maintain a defensive position for now in the Active Asset Allocator

 
 

Today, over 40% of stocks trading on the NYSE are already down 20% or more (56% of small caps, 30% of mid-caps and 16% of large-caps) - classic early bear market behaviour. This fact has been disguised by the continued strong performance of a handful of names in the market-cap weighted S&P 500 and Dow Jones Industrials, which are driving those indices back towards their old 52-week highs. Volume has also been lacklustre on the recent rally in stocks. While the S&P 500 is not too far off breaking out to new highs, volume does not look like it will confirm the move higher. 

 
 

Last month, I highlighted the prior instances in 2000 and 2007 when the S&P 500 peaked and turned lower, followed shortly thereafter by a bearish cross of the 50WMA below the 100WMA. This coincided with the onset of a bear market in equities and a declining trend in US corporate earnings. At the time of writing my April Investor Letter, the 50WMA had not crossed below the 100WMA. That has changed with the bearish cross now in effect, though price is still holding above both long-term moving averages. A sustained break below 2,024 on the S&P 500 in the weeks ahead will increase the odds that a bear market in stocks has arrived. Conversely, if the stock market can consolidate recent gains despite the bearish cross, it should clear the way for higher prices later this year and I will adjust the Active Asset Allocator accordingly. For now, I remain patient.

 
 

Volatility is on the rise and there is no shortage of events this year that could drive equity volatility significantly higher including the Brexit vote next month, a potential hard landing in China, political and economic chaos in Brazil and Venezuela and of course the possibility of Donald Trump in the White House. The Vix Index below captures the trend in volatility of the stock market and this trend is on the rise. The multi-year basing pattern is similar to that experienced in the lead up to the last bear market in stocks and reinforces my belief that the stock market is in the process of topping.

 
 

It will be interesting to gauge the reaction of the Federal Reserve, ECB, Bank of England and Bank of Japan if a bear market in stocks gets going later this year. I believe they will panic and react by doing things that will appear increasingly crazy to many people, like helicopter money or some version of fiscal or monetary stimulation. I believe this will precipitate a crisis of confidence in paper currency, which is why the Active Asset Allocator continues to hold a 30% allocation to precious metals.

For more information on my stock market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

Bond Market Update

From 1952 to 2000, it took $1.70 of non-financial borrowing to generate a dollar of GDP growth. By 2015, that number had more than doubled to $3.46. At the margin, an additional dollar of borrowing is losing its impact. Total debt to GDP across much of the developed world has now reached mind-boggling levels: 370% in the United States, 615% in Japan, 350% in China and 457% in the Eurozone. Meanwhile, GDP growth is decelerating. 

Central banks, in their capacity as lenders of last resort (and buyers of last resort of government bonds), have supported the explosion higher in debt in recent years and central bank policy will be responsible for the eventual debt bust. It is just a question of timing. I believe we are approaching an inflection point, potentially in the next 12 months, where markets will call central bankers' collective bluff... and then central bankers will panic.

What could be the catalyst? Perhaps wide scale debt forgiveness by the Japanese Central Bank, the largest owner of Japanese government debt or the Federal Reserve swapping Treasuries for 100 or 200 year bonds paying a 0.05% or 0.10% coupon or perhaps the introduction of helicopter money by one or more central banks. 

In fact, calls for 'helicopter money' are already on the rise today. Former Fed Chair, Ben Bernanke and more recently Bill Gross, fixed income manager at Janus Capital, have both touted helicopter money as a legitimate monetary policy tool still available to central banks in times of crisis. A search for "helicopter money" on Google Trends also confirms a growing interest from the public in this most unorthodox form of central bank intervention.

 
 

Experiments with helicopter money do not end well. The risks are high and consequences severe if badly managed. James Grant of Grant's Interest Rate Observer sums it up best:

Does the deployment of helicopter money not entail some meaningful risk of the loss of confidence in a currency that is, after all, undefined, uncollateralized and infinitely replicable at exactly zero cost? Might trust be shattered by the visible act of infusing the government with invisible monetary pixels and by the subsequent exchange of those images for real goods and services? ......To us, it is the great question. Pondering it, as we say, we are bearish on the money of overextended governments. We are bullish on the alternatives enumerated in the Periodic table. It would be nice to know when the rest of the world will come around to the gold-friendly view that central bankers have lost their marbles. We have no such timetable. The road to confetti is long and winding.
— James Grant, Grant's Interest Rate Observer

For more information on my bond market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or 086 821 5911.

Gold Market Update

So long as gold and silver hold above their respective long-term 20 month moving averages, it is safe to assume the bull market in precious metals has returned. The key numbers today are $1,173 for gold and $15.60 for silver. YTD, gold is +11% and silver is +14% for euro investors.

I expect a declining US dollar will provide a nice tailwind for the next leg higher in the precious metals bull market. The US Dollar Index looks to have formed a multi-year top. The last time this occurred was in 2002 and coincided with the start of the gold bull market. I expect an equally powerful move higher in gold and lower in USD once the trends are set in motion.

 
 

The World Gold Council has published its first quarter 2016 report on demand trends in the industry and highlights some interesting developments in the sector this quarter. Overall, gold demand grew +21% in Q1 2016 to 1,290 tonnes, the strongest first quarter advance on record. While jewelry demand declined -19% due in large part to the recent surge in gold prices, investment demand more than doubled surging +122% year/year.

Inflows into precious metals ETF's accounted for 364 tonnes, the highest since Q1 2009. Also, of note, central banks continue to accumulate gold and added 109 tonnes during the most recent quarter. They are less vocal about their gold accumulation policy but are consistently one of the largest acquirers of gold each quarter.

The United States remains the top holder of gold bullion based on the World Gold Council's latest reported data with in excess of 8,000 tonnes, followed by Germany, the IMF, Italy and France. China reported 1,798 tonnes of gold reserves at 31st March 2016. 

 
 

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