The Fed’s big mistakes and their consequences

In our view Bill Bonner is one of the most interesting, and outspoken commentators out there so we are publishing one of his most recent commentaries here in full.  These are published on the Bonner & Partners website-  and also syndicated on a number of other associated sites.  Do take time to read this article and others off his website and you will understand why we rate him so highly.  Although the article reproduced below has a title relating to what Bill feels is the fraudulently reported American Oil Boom, none of this would be possible without the Fed’s policies which make borrowing so cheap which has fuelled the aforementioned oil boom as well as much of the tech boom -= all something of a house of cards!

America’s Oil Boom Is a Fraud

By Bill Bonner

PARIS – You’ll recall that Fed policy always consists of the same three mistakes

1) Keeping interest rates too low for too long, resulting in too much debt; 2) Raising interest rates to try to gently deflate the debt bubble; and 3) Cutting rates in a panic when stocks fall and the economy goes into recession.

Well, here comes the Big Bang: Mistake #4 – rarely seen, but always regretted.

Mistake #4 is what the feds do when their backs are to the wall… when they’ve run out of Mistakes 1 through 3.

It’s a typical political trade-off. The future is sacrificed for the present. And the welfare of the public is tossed aside to buy money, power, and influence for the elite.

Apocalypse Now!

Every debt expansion ends in a debt contraction. Stocks crash. Jobs are lost. The economy goes into reverse, correcting the mistakes of the previous boom.

Investors see their money entombed. Householders await foreclosures. The authorities scream: Apocalypse Now!

The more the feds falsify price signals in the boom, the more mistakes there are to correct. For example, this week, a report in The New York Times described the big mistake in the shale oil boom.

You’ll recall that it turned America from a big importer of oil to a major exporter… and revived much of the heartland with big fracking projects in woebegone regions of Texas and North Dakota.

The shale oil boom was even credited with having scuttled the oil market, which dropped from a high of around $130 a barrel in mid-2008 to under $30 in late 2016, thanks to so much new supply.

But guess what? The whole boom was fake. It didn’t add to wealth; it subtracted from it. Accumulated losses over the last five years tote to more than $200 billion, with $36 billion lost in the Bakken shale fields in North Dakota alone.

Had credit been priced properly, it never would have happened. From The New York Times:

The 60 biggest exploration and production firms are not generating enough cash from their operations to cover their operating and capital expenses. In aggregate, from mid-2012 to mid-2017, they had negative free cash flow of $9 billion per quarter.

These companies have survived because, despite the skeptics, plenty of people on Wall Street are willing to keep feeding them capital and taking their fees. From 2001 to 2012, Chesapeake Energy, a pioneering fracking firm, sold $16.4 billion of stock and $15.5 billion of debt, and paid Wall Street more than $1.1 billion in fees, according to Thomson Reuters Deals Intelligence. That’s what was public. In less obvious ways, Chesapeake raised at least another $30 billion by selling assets and doing Enron-esque deals in which the company got what were, in effect, loans repaid with future sales of natural gas.

But Chesapeake bled cash. From 2002 to the end of 2012, Chesapeake never managed to report positive free cash flow, before asset sales.

Turkeys Fly

Of course, the same thing could be said of the trillion-dollar companies, Amazon and Apple, whose market capitalizations are largely the result of cheap credit.

And it could be said of the whole tech sector – with its outrageous inputs of capital into companies that have never made a dime.

Or it could be said of emerging markets, which have managed to suck up the loose change spilling out of the financial industry. They promised slightly higher yields, and now, they owe far more than they can pay.

It could also be said of Silicon Valley carmaker Tesla, which now has an estimated $10.5 billion in debt – despite never having made a profit…

Or of the entire stock market, where trillions of dollars in cheap capital have produced very little real return.

“When the wind blows hard enough,” say the old-timers, “even turkeys fly.”

The wind never blew as hard as it did from 2009 to 2018. And overhead now are so many plump, money-losing birds that we suggest you take cover.

Mistake #4

But that’s just the beginning… As the turkeys fall to Earth, the Fed’s reputation is called into doubt. Its manhood is questioned. Congress and the Trump administration, too, are roused to action!

The feds will make the rational choice (for them). They will go for broke.

That is, they will do things that cause you to go broke… while the insiders continue to get rich, following the tried-and-true remedy of Mistake #4 – the refuge of scoundrels and the last resort of jackasses from Zimbabwe to Venezuela.

The essence of Mistake #4 is “printing” money – lots of it – to cover soaring deficits, prop up failing enterprises, reflate markets, rescue sinking households, save the bankers, reward the cronies, and keep the zombies from running wild in the streets.

All this money-printing will spark inflation… which will soon be blazing-hot.

The Fed, of course, is duty-bound to keep prices “stable.” But in the end-of-the-world hysteria, we predict the Fed will “print”… and worry about price stability later.

“When someone is trapped in a house fire… you try to get them out,” the feds will say. “We’ll worry about the fire insurance later.”

Two-trillion-dollar deficits?

Maybe more.

A breathtaking infrastructure boondoggle. A “space force” so far out that it is quickly lost somewhere beyond Mars.

New trade wars to protect U.S. industries from fair competition. A “guaranteed income” for everyone.

Bailouts… Subsidies… Grants… Contracts… Spend, spend, spend. “It’s good for the economy!”

Oh… and new controls on banking and cash… and perhaps gold and even bitcoin… closing the doors to prevent people from escaping the burning building.

Our advice: Run, don’t walk, to the nearest exit now.

Will the Apple gold watch move the market – probably not

Will the Apple gold watch move the market – probably not

But it should have an impact on consumption.  Given that it is being made in China perhaps that’s where all that missing SGE gold is going!

Apple has announced that its new smart watch will be going on sale next month, and the pricing, which will run from $349 for a bottom of the range 32mm case version up to $17,000 for its top of the range 42mm gold cased Edition version.  But nowhere has it stated how much gold will be utilised in its top end model.

What we can, perhaps, compare it with is the solid gold Rolex President – a chunky piece of mechanical watch kit, but where a complete breakdown of its gold content was published back in 2006.  That article is nowadays downloadable off the UK eBay site – click here to view.  This article suggests that the watch casing, bezel etc. only contains around two-thirds of a troy ounce of pure gold, but the whole package something over two ounces, that balance being provided by the strap which contains over one and a half ounces of pure gold.  The article does not mention the case diameter but we would assume around 40mm which is comparable with the top end Apple watch, but rather larger than the 32mm version.

However the actual weight in an Apple watch would also be dependent on case thickness and it is not being offered with a gold strap as yet.  Until someone buys one, takes it apart and weighs the components we probably won’t know, but we would guess at between 0.5 and 0.75 ounces.  Assuming the innards are the same as the base model, Apple would be making a very significant mark-up on the component cost given the $17,000 price tag and an assumed gold content cost of say $900.  But even if Apple surprises us with a far heavier version containing say an ounce or more, it would still be making a huge mark-up on the gold content, which strikes us as a pretty smart profit ploy if it can sell the gold versions in quantity.

But of course sales volume is the other key element here.  Can it sell its gold Editions in volume?  On the face of things one would think that would be a difficult task, but its probably not aiming its watch at a value oriented high end jewellery buyer per se, but for younger techies, often with really good disposable incomes, who are happy to queue in line overnight and swamp the Apple store on launch dates for the latest piece of gear – or the generation falling over itself in China (which Apple sees as its likely main market) to buy gold plated cellphones at exorbitant costs.  Apple’s marketing expertise (hype) will undoubtedly stand it in good stead here.  But to sell, as some have suggested, one million gold Apple Edition watches a month – that strikes one as marketing hype of the highest order.  But then Apple has delivered on many of at-the-time seemingly optimistic targets in the past, although whether it can still do so in the post-Steve Jobs management generation perhaps remains to be seen.  And, it has to be said, has also had its failures too.

But, let us assume that perhaps Apple has ordered one million such watches, each containing say half an ounce of gold for its launch, then that would require 500,000 troy ounces of gold or around 15.6 tonnes.  That certainly wouldn’t be enough to move the gold market, although it could already well have accounted for a small proportion of the gold volumes we’ve seen move through the Shanghai Gold Exchange in recent months given that Apple’s Chinese suppliers will have needed to build inventory.

Now it is possible that at some future stage a gold strap may be offered, but at a price, which could further boost the gold content.  It is also possible that, if sales of the gold Edition watch are looking successful then it may encourage other manufacturers also to offer gold versions of their products too and tap into the techno-bling generation.  Who knows where it will all lead.

But, the big question facing gold investors is will this have any real impact on the gold price – even if Apple does sell its gold watches in huge numbers?  The gold price seems to be being so micro-managed these days by ‘trades’ on the paper futures markets that actual supply and demand fundamentals seem to have only a relatively minor bearing on the metal price – at least for the moment.  It is an interesting development for sure, if only to see if Apple can market such a high value product in volume – but as a game changer for the gold price, we don’t think so, but would love to be proved wrong!

Could Apple Buy a Third of the World’s Gold? – Frank Holmes

Frank Holmes picks up on Apple’s new watch for which the top end model may contain as much as two ounces of gold and for which Apple reckons it may sell as many as 1 million units a month!  That’s an awful lot of gold.  Seems a huge amount for a single watch too and market size may not be realistic for such a high cost watch – so read with caution

Is there anything Apple can’t do?Thing gold. Apple

First it revolutionized the personal computing business. Then, with the launch of the iPod in 2001, it forced the music industry to change its tune. Against initial market reservations, the company succeeded at making Star Trek-like tablets hip when it released the iPad in 2010. And in Q1 2015, a record 75 million units of its now-ubiquitous iPhone were sold around the globe. The smartphone’s operating system, iOS, currently controls a jaw-dropping 89-percent share of all systems worldwide, pushing the second-place OS, Google’s Android, down to 11 percent from 30 percent just a year ago.

As you might already know, the company that Steve Jobs built—which we own in our All American Equity Fund (GBTFX) and Holmes Macro Trends Fund (MEGAX)—is history’s largest by net capitalization. In its last quarterly report, Apple posted a record $75 billion in revenue and is now sitting pretty on a mind-boggling $180 billion in cash. Many analysts believe the company will reach a jaw-dropping $1 trillion in market cap.

So what’s Apple’s next trick?

How about moving the world’s gold market?


Apple Watch Edition sporting a 18-karat gold caseThis April, Apple will be venturing into the latest wearable gadget market, the smartwatch, joining competitors such as Samsung, Garmin and Sony. All of the models in Apple’s stable of watches look  sleek and beautifully designed—just what you’d expect from Apple—and will no doubt be capable of performing all sorts of high-tech functions such as receiving text messages, monitoring the wearer’s vitals and, of course, telling time.

But the real story here is that the company’s high-end luxury model, referred to simply as the Apple Watch Edition, will come encased in 18-karat gold.

What should make this news even more exciting to gold investors is that the company expects to produce 1 million units of this particular model per month in the second quarter of 2015 alone, according to the Wall Street Journal.

That’s a lot of gold, if true. It also proves that the Love Trade is alive and well. Apple chose to use gold in its most expensive new model because the metal is revered for its beauty and rarity.

To produce such a great quantity of units, how much of the yellow metal might be needed?

For a ballpark estimate, I turn to Apple news forum TidBITS, which begins with the assumption that each Apple Watch Edition contains two troy ounces of gold. From there:

If Apple makes 1 million Apple Watch Edition units every month, that equals 24 million troy ounces of gold used per year, or roughly 746 metric tons [or tonnes].

That’s enough gold to make even a Bond villain blush, but just how much is it? About 2,500 metric tons of gold are mined per year. If Apple uses 746 metric tons every year, we’re talking about 30 percent of the world’s annual gold production.

India's Sripuram Golden Temple, the world's largest golden structure, is made out of 1.5 tonnes of goldTo put things in perspective, the Sripuram Golden Temple in India, the world’s largest golden structure, is made from “only” 1.5 tonnes of the metal.

TidBITS acknowledges that the amount of gold is speculative at this point. Two troy ounces does seem pretty hyperbolic. But even if each luxury watch contains only a quarter of that, it’s still an unfathomable—perhaps even unprecedented—amount of gold for a single company, even one so large as Apple, to consume.

Ralph Aldis, portfolio manager of our Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX), likens the idea of Apple buying a third of the world’s gold to China’s voracious consumption of the metal. As I mentioned last week, China is buying more goldright now than the total amount mined worldwide.

“If the estimates of how much gold each watch contains are close to reality, and if Apple’s able to sell as many units as it claims, it really ought to help gold prices move higher,” Ralph says.

But Can Expectations Be Met?

Here’s where this whole discussion could unravel. Although we don’t yet know what the Apple Watch Edition will retail at, it’s safe to predict that it will fall somewhere between $4,000 and $10,000, placing it in the same company as a low-end Rolex.

With that in mind, are Apple’s sales expectations too optimistic?

Possibly. But remember, this is Apple we’re talking about here. Over the years, it has sufficiently proven itself as a company that more-than-delivers on the “if you build it, they will come” philosophy. Steve Jobs aggressively cultivated a business environment that not only encourages but insists on “thinking different”—to use the company’s old slogan—risk-taking and developing must-have gadgets.

“Our whole role in life is to give you something you didn’t know you wanted,” says current Apple CEO Tim Cook. “And then once you get it, you can’t imagine your life without it.”

A perfect case study is the iPhone. When it launched in June 2007, the cell phone market was decidedly crowded. Consumers seemed content with the choices that were already available. Why did we need another phone?

Yet here we are more than eight years later, and as I pointed out earlier, 75 million iPhones were sold in the last quarter alone.

Apple iPhone Sales Reach Record Number in Q1 2015
click to enlarge

So it’s not entirely out of the realm of possibility for Apple to move 1 million $10,000 Apple Watch Editions per month.

Early in January I shared the following chart, which shows various analysts’ Apple Watch shipment forecasts for 2015, ranging from 10 million to 60 million units. Of course, all models are included here, not just the luxury model.

Estimated 2015 Apple Watch Shipments
click to enlarge

Looking at it now, many of the predictions seem a little understated. After all, Apple hasn’t released a dud product in at least two decades (remember the Newton?). Come April, we’ll see for sure what the demand really is—for the Apple Watch as well as gold.

Frank Holmes is CEO and Chief Investment officer for U.S. Global Investors –