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When Gresham’s Law Meets A Debt Ceiling, Gold Can Soar

For weekend reading, Gary Alexander, senior writer at Navellier & Associates, offers the following commentary: Raise The Debt Ceiling While … Read…

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For weekend reading, Gary Alexander, senior writer at Navellier & Associates, offers the following commentary:

Raise The Debt Ceiling

While S&P 500 corporations are completing the task of submitting the unforgiving facts of their first-quarter top-line sales revenues and bottom-line earnings and profits, governments know their shareholders are helpless to sell stock in their nation, so they routinely publish scarlet red ink while living in what last week’s Economist labels “Fiscal Fantasyland.” Their forward guidance, if any, is to raise the debt ceiling.

Every day, the federal deficit hits a new all-time high, now approaching $32 trillion. Treasury Secretary Janet Yellen has set a “drop dead” date of June 1 for when the U.S. may renege on its debt payments, if we don’t raise the debt ceiling, so prepare for a month of dramatic accusations and blame-mongering.

We could service that debt with consistent GDP growth of 4% or more, but the Biden Administration and Federal Reserve have done everything in their power to slow growth to an anemic 1% pace as far as the eye can see.

In an April 24, 2023 Wall Street Journal editorial, former chairman of the Senate Banking Committee Phil Gramm and former ranking member of the Senate Banking Committee Pat Toomey, said:

“In the short term, President Biden’s regulatory tsunami will fuel inflation and make a recession more likely. In the long term, it could smother America’s productivity, wages and living standards. If the U.S. puts on a European-style rules straitjacket, American economic exceptionalism will perish.”

We’ve seen this movie before, most notably the Gingrich vs. Clinton ‘High Noon’ moments of 1995, and Obama vs. Tea Party Republicans in 2011 and 2013. We can learn lessons from these past encounters.

  • 1995:

After the Republican Revolution of 1994, the new House Speaker Newt Gingrich cut funding for favorite Democratic spending programs, resulting in a government shutdown from November 14 to 19, 1995, then from December 16, 1995, to January 6, 1996.

The market took Doomsday in stride, rising 1.3% in the first 5-day span, and then +0.1% in the 21-day hiatus. In the longer run, the S&P 500 rose 34.1% for all of 1995 and another 20.3% in 1996. In the six years with President Clinton and a Republican Congress (1995-2000) the S&P 500 rose by 188%, including the dot-com bubble crash.

  • August 2011 and October 2013:

Since 1996, the only government shutdown lasting over three days was October 1-17, 2013, in the Obama era. In that instance, the S&P 500 almost rejoiced – rising by 3.1% in those 17 days – so it seems that these shutdowns do not spook the stock markets. 

But … any prolonged debt ceiling debate, or any downgrade of the U.S. credit rating is a different story. During August 2011, S&P downgraded the Treasury’s credit rating, which sent the S&P 500 into a tailspin.

S&P 500

In early August 2011, gold soared after S&P downgraded the credit rating of U.S. Treasury debt – all coming during the debt ceiling debate. From $1,495 on July 4, gold rose 27% to $1,895 on Labor Day.

In the first 10 days of August 2011, gold rose 8.3%, while the S&P 500 declined by nearly 13%.

S&P 500 Gold

This brings us to “Gresham’s Law” – or why gold tends to rise whenever the dollar or stocks fall.

How Gresham’s Law Works Today – Examples from 1965 and 2011

Gresham’s Law says that “bad money drives out good.” Thomas Gresham didn’t invent this law, but he was the monetary advisor in the early years of Queen Elizabeth I, so the principle is at least 450 years old.

In Gresham’s day, bad money usually meant a coin debased through clipping off some of its weight, or by using base metals. Over the last 20, 50, or 100 years, most currencies have lost most of their purchasing power to gold. Here is how the dollar, yuan, pound, yen, euro, and Australian dollar have fared since Y2K:

value in gold

A modern example of Gresham’s law was U.S. silver coinage in 1965 after President Johnson removed most of the silver content in favor of a copper sandwich in the 40% silver Kennedy Half-Dollar.

All of a sudden, customers would pocket the old 90% silver coin and spend the 40% silver coin, and that big old bully LBJ couldn’t stop them with his warning on the day of this Great Silver Swap, on July 23, 1965:

“If anybody has any idea of hoarding our silver coins, let me say this. Treasury has a lot of silver on hand, and it can be, and it will be, used to keep the price of silver in line with its value in our present silver coin. There will be no profit in holding them out of circulation for the value of their silver content.” – LBJ.

He was wrong. Silver gained 65% in three years, tripled in a decade, and gained 40-fold by 1980. Now, here is Gresham’s Law in action in 2011 as gold (blue line) soared when S&P downgraded dollar debt:

gold yen

However, there was a sunrise in September. The U.S. economy never suffered a recession throughout all this drama. We went without a recession for a record 11 years, until COVID hit in 2020, but Europe was not so lucky.

Due to their own bank problems and underperforming PIGS (Portugal, Italy, Greece, and Spain), the Euro-zone suffered negative growth in 2011, despite a weak dollar. Europe fell behind the U.S. in growth, stock market performance, employment statistics, and other metrics over the last decade.

shrink wrap

There is a parallel today. The U.S. may seem bad off in 2023, but not compared to other continents:

The Economist’s May 4 cover article says the debt crisis is global: “Those in Europe are locked in a silly debate about how to tweak debt rules, at a time when the European Central Bank is indirectly propping up the finances of its weakest members.’

Meanwhile, economist Ed Yardeni writes, “Parisian bakers report that their electric bills have quadrupled since Russia invaded Ukraine, while the costs of flour, butter, and eggs all are up about 50%.” Barron’s adds: “The headwinds facing boulangeries in France’s capital highlight why the European Central Bank is facing a tougher struggle than the Federal Reserve.”

China’s debt figures are hidden and harder to prove, but their centralized government has buried their bad decisions in a series of doubled-down bad bets in real estate, bad banks, overseas expansion, COVID shutdown protocols, and military saber-rattling in their region.

They also are trying to rescue their weakest provinces, just like Europe did with their “PIGS” a decade ago. The Economist wrote last week (in “China’s local-debt crisis is about to get nasty”) that Beijing is pouring lots of money into Guizhou, their poorest province – a place where 32 subscribers to one of my previous global newsletter affiliations visited back in 1996, when many of us commented on the many empty buildings popping up in Guiyang.

Now, the Economist writes: “Over the past decade Guizhou, the region in which Guiyang sits, has accrued enormous debts through its building efforts—ones which it can no longer repay. Many of the region’s roads and bridges went untraveled over the past three years as covid-19 stopped people moving about.

A local bridge-builder was recently forced to extend maturities on its bonds by up to 20 years. The region is also known for its shantytowns. Guiyang is scattered with skyscrapers and green hills poking out from between them, as well as old, crumbling buildings.”

So, when you see the debt ceiling debate escalate in the next month, keep your eyes above the fray and keep asking: Which nation looks best? The U.S. will likely be #1, and gold will still trump paper.

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Government

Turley: Four Biden Impeachment Articles & What The House Will Need To Prove

Turley: Four Biden Impeachment Articles & What The House Will Need To Prove

Authored by Jonathan Turley,

With the commencement of the…

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October 2, 2023

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Turley: Four Biden Impeachment Articles & What The House Will Need To Prove

Authored by Jonathan Turley,

With the commencement of the impeachment inquiry into the conduct of President Joe Biden, three House committees will now pursue key linkages between the president and the massive influence peddling operation run by his son Hunter and brother James.

The impeachment inquiry should allow the House to finally acquire long-sought records of Hunter, James, and Joe Biden, as well as to pursue witnesses involved in their dealings.

I testified this week at the first hearing of the impeachment inquiry on the constitutional standards and practices in moving forward in the investigation. In my view, there is ample justification for an impeachment inquiry. If these allegations are established, they would clearly constitute impeachable offenses. I listed ten of those facts in my testimony that alone were sufficient to move forward with this inquiry.

I was criticized by both the left and the right for the testimony. 

Steven Bannon and others were upset that I did not believe that the basis for impeachment had already been established in the first hearing of the inquiry.

Others were angry that I supported the House efforts to resolve these questions of public corruption.

Without prejudging that evidence, there are four obvious potential articles of impeachment that have been raised in recent disclosures and sworn statements:

  1. bribery,

  2. conspiracy,

  3. obstruction, and

  4. abuse of power.

Bribery is the second impeachable act listed under Article II. The allegation that the President received a bribe worth millions was documented on a FD-1023 form by a trusted FBI source who was paid a significant amount of money by the government. There remain many details that would have to be confirmed in order to turn such an allegation into an article of impeachment.

Yet three facts are now unassailable.

First, Biden has lied about key facts related to these foreign dealings, including false statements flagged by the Washington Post.

Second, the president was indeed the focus of a corrupt multimillion-dollar influence peddling scheme.

Third, Biden may have benefitted from this corruption through millions of dollars sent to his family as well as more direct benefit to Joe and Jill Biden.

What must be established is the President’s knowledge of or participation in this corrupt scheme. The House now has confirmed over 20 calls made to meetings and dinners with these foreign clients. It has confirmation of visits to the White House and dinners and events attended by Joe Biden. It also has confirmation of trips on Air Force II by Hunter to facilitate these deals, as well as payments where the President’s Delaware home address was used as late as 2019 for transfers from China.

The most serious allegations concern reported Washington calls or meetings by Hunter at the behest of these foreign figures. At least one of those calls concerned the removal or isolation of a Ukrainian prosecutor investigating Burisma, an energy company paying Hunter as a board member. A few days later, Biden withheld a billion dollars in an approved loan to Ukrainian in order to force the firing of the prosecutor.

The House will need to strengthen the nexus with the president in seeking firsthand accounts of these meetings, calls, and transfers.

However, there is one thing that the House does not have to do. While there are references to Joe Biden receiving money from Hunter and other benefits (including a proposed ten percent from one of these foreign deals), he has already been shown to have benefited from these transfers.

There is a false narrative being pushed by both politicians and pundits that there is no basis for an inquiry, let alone an impeachment, unless a direct payment or gift can be shown to Joe Biden. That would certainly strengthen the case politically, but it is not essential legally. Even in criminal cases subject to the highest standard, payments to family members can be treated as benefits to a principal actor. Direct benefits can further strengthen articles of impeachment, but they would not be a prerequisite for such an action.

For example, in Ryan v. United States, the Seventh Circuit U.S. Court of Appeals upheld the conviction of George Ryan, formerly Secretary of State and then governor of Illinois, partly on account of benefits paid to his family, including the hiring of a band at his daughter’s wedding and other “undisclosed financial benefits to him and his family and to his friends.” Criminal cases can indeed be built on a “stream of benefits” running to the politician in question, his family, or his friends.

That is also true of past impeachments. I served as lead counsel in the last judicial impeachment tried before the Senate. My client, Judge G. Thomas Porteous, had been impeached by the House for, among other things, benefits received by his children, including gifts related to a wedding.

One of the jurors in the trial was Sen. Robert Menendez (D-N.J.), who voted to convict and remove Porteous. Menendez is now charged with accepting gifts of vastly greater value in the recent corruption indictment.

The similarities between the Menendez and Biden controversies are noteworthy, in everything from the types of gifts to the counsel representing the accused.  The Menendez indictment includes conspiracy charges for honest services fraud, the use of office to serve personal rather the public interests. It also includes extortion under color of official right under 18 U.S.C. 1951. (The Hobbs Act allows for a charge of extortion without a threat of violence but rather the use of official authority.)

Courts have held that conspiracy charges do not require the defendant to be involved in all (or even most) aspects of the planning for a bribe or denial of honest services. Thus, a conspirator does not have to participate “in every overt act or know all the details to be charged as a member of the conspiracy.”

Menendez’s case shows that the Biden Administration is prosecuting individuals under the same type of public corruption that this impeachment inquiry is supposed to prove. The U.S. has long declared influence peddling to be a form of public corruption and signed international conventions to combat precisely this type of corruption around the world.

This impeachment inquiry is going forward. The House just issued subpoenas on Friday for the financial records of both Hunter and James Biden. The public could soon have answers to some of these questions. Madison called impeachment “indispensable…for defending the community” against such corruption. The inquiry itself is an assurance that, wherever this evidence may lead, the House can now follow.

Tyler Durden Mon, 10/02/2023 - 15:00

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International

How the Polen Capital Global Small and Mid Cap Fund finds under-explored high quality companies

In this video insight, I am joined by Rob Forker, the portfolio manager of the Polen Capital Global Small and Mid Cap Fund. We discuss Polen Capital’s…

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October 2, 2023

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In this video insight, I am joined by Rob Forker, the portfolio manager of the Polen Capital Global Small and Mid Cap Fund. We discuss Polen Capital’s strategy of selecting elite companies from a pool of 8000 global stocks based on their five guide rails. Rob also highlights Polen’s approach to investing across the growth spectrum, balancing slower-growing, stable companies like Cochlear with high-growth firms like Globant. Despite the challenging market conditions, Rob remains confident in their strategy, believing that earnings growth will ultimately drive long-term stock price appreciation.

Transcript:

David:

Hi I’m David Buckland, and welcome to this week’s video insight. Today, I’m being accompanied by Rob Forker. For those who don’t know, Rob is the portfolio manager of Polen Capital’s global small and mid-cap fund.

Rob, you have about 8000 stocks to choose from in the global space in the small to mid-cap area, and you have to go all the way down to try and get the best 35 stocks or approximately 35 stocks in the world. How do you do it?

Rob:

It’s a hard task, but one we enjoy doing. So, finding the best of the best is what we’re all about. We want to find the most elite companies we can find globally wherever they reside, Australia, continental Europe, America, Japan, wherever. The way we do it is we apply our proven five guardrails that we’ve been executing at Polen Capital for almost 35 years. Those are:

  1. Real organic revenue growth,
  2. High end or improving margins,
  3. High returns,
  4. Abundant cash flow,
  5. And a strong balance sheet.

And at the end of the day, what we’re looking for is companies that have strong earnings, have strong cash flow, and a fortress like balance sheet because those are quality companies that can be durable over the long term.

David:

And it’s interesting that out of your portfolio of, I think it’s 33 stocks at the moment, the average market capitalization is about 8.5 billion Australian dollars, which actually would put it in the top 60 on the ASX and be similar sized to something like Qantas (ASX: QAN) or Mirvac (ASX: MGR) so it’s interesting that, for Australians, that seems quite big, but by global standards, they’re still categorized as a small or medium sized type businesses.

Rob:

Yeah, no question, so we find companies of course globally, and small cap, mid cap is a bit of an art as to how you define it but what we believe is that the inefficiency of the asset class is clear. So, a typical company that we’re looking at in our class has 7 to 8 analysts. For reference, Apple has 55. And so, the beauty of what we do is that we’re looking at under explored companies that we believe have a secret sauce. Now it’s our job to figure out what that secret sauce is, but what we do, as an example, is look at the companies that have no self-side coverage. So, this is an opportunity and one that we relish in.

David:

That’s good. Now, one of the interesting graphs we get from Polen Capital is investing across the growth spectrum. On one side of the spectrum. You’ve got these very sexy, very high growth companies, but are earning money. And on the other side of the spectrum, a little bit more ballast in the portfolio. Can you just explain for the small mid cap global audience? Investing across the growth spectrum and how you think about it.

Rob:

Yeah, so on the safety side, these are to consumer staples companies or healthcare companies where they’re a lit little bit slower growing, low double digit earning. So, it’s still great, but slower going. Cochlear (ASX: COH) would be a great example, a fortress in market share and their constant research and development (R&D), typically grows earnings at 12-14 per cent.

On the far end, we call these growth companies, they typically grow earnings 30 – 40 per cent. An example would be Globant, which is an IT consulting firm at the forefront, of what they do. They’re basically a mini-Accenture. And so those type of companies are growing faster.

We want both because we appreciate the safety and the growth elements that can help you in bad times and give you outsized returns in good times.

David:

So, if we look at the fundamentals of the total portfolio let’s just sort of spend a minute or two on that.

Rob:

Absolutely so, when you put it all together, this is a portfolio that trades at roughly 25 times earnings on a 12-month basis.

We believe earnings growth is nearly 20 per cent per annum.

David:

For some years?

Rob:

Yeah, where we forecast out 5 years in our investment time horizon. We want to think and act like owners when looking at these great companies, and what they can do over the long term.

The balance sheet is nearly net cash, so no balance sheet risk to speak of. As I mentioned, strong cash flows. We want companies that self-fund, which is quite unique in this space. Many small cap managers own unprofitable companies where they’re betting that things will get great.

David:

Have to go back to the market for equity, on a regular basis.

Rob:

We don’t want to do that. We don’t want to buy what will be quality. We buy what’s proven to be quality today. And this is the beauty of the menu that we have of nearly 8000 companies. We can be choosy. We want to own elite companies.

David:

And I guess the elephant in the room Rob, we launched this in Australia although the fund out of America is actually, well, Boston where Rob’s based is actually a bit older than that, but we actually pick the timing to perfection in terms of the bigger the market, so October 2021. So, it’s coming around for its, it’s two year anniversary. It’s been a very, very rough ride for the early investors.

Yours truly as one of them.

Let’s just give it give it some context. It’s obviously been a very rough 24 months. Do you want to sort of just spend a few minutes on that?

Rob:

Yeah, and yours truly as well. So, I eat my own pudding, I’m an investor and my children are investors you know, I am betting on the success of this strategy as many of you are. The elephant in the room is that 2022 was bruising, just literally awful.

We weren’t certainly the only ones that had the bruising. This was a global phenomenon, particularly in small to mid caps. This year, what’s been surprising is the bounce back has not been there. The strategy is certainly not doing poorly, but it hasn’t had the type of returns that that many of the large cap strategies have had, small cap in general has been toward left behind. What we focus on is the fundamentals of the business.

We believe that earnings growth for our companies was 12 per cent last year. We believe that earnings growth will also be very strong closer to that 15 to 20 per cent level that I was talking about. And that’s what we are focused on. Price to earnings (P/E) multiples as Roger and many astute investors talk about, P/E multiples are confidence, they go up and down. But we believe over the long term that stock prices follow earnings growth, and that’s what we think will happen over the long term. But certainly, are, we didn’t want to start this way. And it would have been better had we not, but this is where we are in there in lies the opportunity.

David:

Alright. Ladies and gentlemen, that’s all we have time for this week. As many of you know, we’ve had a very, very good relationship with Polen Capital for about 2 and a half years now. Rob, Damon, and many members of the team come out pretty much on a 6 monthly basis. And, we have been blessed to partner with an organization of such great quality.

The Polen Capital Global Small and Mid-Cap Fund owns shares in Globant. This article was prepared 25 September 2023 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Globant, you should seek financial advice.

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International

EUR/CHF: Swiss franc looking like a key safe-haven trade for Europe

European stocks drop to their lowest level in more than six months Swiss franc stronger against most European counterparts (NOK and SEK firmer) Overnight…

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October 2, 2023

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  • European stocks drop to their lowest level in more than six months
  • Swiss franc stronger against most European counterparts (NOK and SEK firmer)
  • Overnight index swaps still not

A global bond market selloff European equities sharply lower and triggered some safe-haven flows towards the Swiss franc.  The EUR/CHF daily chart shows prices have tentatively fallen towards the lowest levels since September 21st.  Risk aversion is clearly in place given US lawmakers were able to tentatively avoid a shutdown but stocks are still selling off.

Earlier in London, the final PMI readings showed Germany and France heavily remain in contraction territory.  German manufacturing activity posted its 15 straight contraction, but did deliver a 3-month high.  France manufacturing PMI posted its 8th straight contraction and worst reading since May 2020.

The global growth outlook seems poised to deteriorate and that should lead to gloomier prospects for Europe.  As soft landing hopes disappear in the US, the chances of a de-risking moment grow.  If European bond yields continue to rise, the Swiss franc should outperform in the short-term.

EUR/CHF Daily Chart

As financial conditions continue to get uglier across Europe and that is starting to lead to more safe-haven flows towards the franc.  Short-term downside seems like it could target the 0.9500 region.  If bearish momentum remains in place, price action could fall towards the 0.9265 level which is the 78.6% Fibonacci retracement of the 2015 low to 2018 high move.

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