The Gladstone
Economic Newsletter
Volume 18, No. 11
September 10, 2023
The Fed is Very Close to Losing Control.
China: A Slow Motion Train Wreck.
DISCLAIMER: The following is not intended as investment advice, but is rather intended to promote your own analysis of markets and the economic climate. The author is not a registered investment professional. Any action taken as a result of this analysis carries a high degree of risk. This newsletter contains the personal opinion of the author.
Dear Readers-
I will start this newsletter with a joke:
A Ukrainian walks into a library and asks for a book on war.
The librarian refuses, saying "You'll only lose it".
Then he asks for a book on peace.
The librarian says, Oh, you want War AND Peace?
Sorry, that's a Russian book. We burned it!
I have not written an issue of this newsletter in a while. Part of the reason for this has been we have been in a trading range in the US markets. The intelligent part of the U.S. population is very cognizant of the danger of a catastrophic break in the markets and anticipate this happening. The U.S. Federal Reserve, for its part, has probably very much expanded its market manipulation operations. The Fed has of course managed market interest rates by buying bonds to suppress market rates. This has been very evident this summer. The Fed has manipulated gold and silver prices for many years, in order to avoid a runaway in prices for these monetary metals. Most intelligent market observers believe that the Fed actively manipulates the equity markets by selling S&P 500 futures. Now, market commentator Greg Mannarino has accused the Fed of being very active in trying to manage the world oil price. I believe this, for the reasons that the hubris of the Fed is very well known. Also, the Biden Administration decision to sell off a large part of the Strategic Petroleum Reserve stocks in order to keep oil prices low(er) for the 2022 election. The U.S. Government is effectively short the oil market. If the Fed is trying to control the upward rise of the oil market by selling futures, the U.S. Government is going even shorter oil. In the commodities markets, a market truism is that anyone who doubles or triples down on a losing position ultimately goes massively broke. In the last two weeks, the Fed almost lost control of the markets it has doubled or tripled down on. The Fed will ultimately lose control. In that event, that may be how the U.S. dollar finally fails, after decades of monetary and fiscal abuse.
Let’s dive into the charts. Bloomberg prepared the following chart showing the massive bubble valuation level of the Nasdaq 100 versus the Russell 2000:
The following chart shows the plunge of the Dallas Fed Manufacturing Index:
Doug Casey published the following chart showing that the price of real assets have formed a massive low versus the price of financial assets:
The above chart illustrates my investment philosophy going forward. I am only going to buy stock of companies that have real assets. By this, I mean factories, plant, equipment, etc. that produce real tangible products. I mean that I look at the value of their productive assets and the income stream that derives from them. Sounds simple and obvious, doesn’t it? Well, not so obvious in the market of the last 15 years. If you look at what the assets of a typical tech company bring in a bankruptcy action, those assets generally bring next to zero in reality. Some competitor may buy the intellectual property to remove the competition from the marketplace. In a market disaster, these buyers will disappear. Let’s look at a real asset heavy company: B2 Gold. B2 Gold is trading at $3.03 a share for a market cap of $3.95 billion. It has a P/E ratio of 11.22 and a dividend yield of 5.32% B2’s assets consist of a variety of gold deposits with property, plant and equipment that would cost more than $3.95 billion to replace. B2 has no debt, and a massive amount of cash on the balance sheet. The gold mining industry has several other examples of asset laden companies that will survive just about every economic event, with high dividend yields. As always, this is not investment advice! Do your own research and diligence.
As far as I can tell, the U.S. economy is circling the toilet at this point. Harry Dent published the following chart. Federal tax receipts are down about $450 billion on a year over year basis.
I have been following the China economic situation on Youtube quite extensively. There are many videos showing the scope of factory closings throughout the export sector. These closing are very, very numerous. “China Fact Chasers” on Youtube (two fellows who go by the name Serpentza and Laowhy 86) have some amazing footage of large fields full of EV vehicles produced in China and then just parked to rot. Ditto fields and lots of electric motor scooters confiscated by Chinese urban authorities, and again left to rot. Between these two phenomena, The Chinese managed to ignite a bubble in lithium demand for batteries that drove the lithium price up to three times the normal price. Because of the lithium price increase (which has now reversed), Chinese battery manufacturers evidently cheated on the amount of lithium in their products. About four years ago, I purchased Chinese made replacement batteries for a 20 volt handheld power tool system. These batteries were the nearly full equivalent of the name brand batteries that came with the units. Fast forward four years, and I attempted to do the same again. I ended up buying three different brands of Chinese made batteries from Amazon, with all three brands having very limited output or outright failures. I ended up returning these batteries and spending the money for a name brand replacement that actually ran my power tools.
I would also recommend that you watch Youtube footage on the flooding in China this year. China has had numerous floods this year. In late July/early August typhoons hit northern China extensively, causing massive flooding. Chinese cities may have numerous skyscrapers, but, like many things in China, it is what can’t be seen that proves to be the Achilles Heel. In this case, Chinese cities have primitive drainage systems. There is memorable footage of the US$1 billion+ Shanghai Convention Center basically being destroyed by flooding due to lack of drainage. The footage was epic. In the August typhoon event, the Chinese Government decreed that, in order to save Beijing and Xi Jinping’s dream project of Xiangong New City (built on a massive dry lake bed and destined to be the new center of the national government), flood waters were diverted at night with no notice to the surrounding inhabitants of Hebei Province. No one knows the death toll from this. Some areas of Hebei Province are still inundated.
In the last week, a very strong typhoon hit Hong Kong, Shenzhen and Dongguan, and then moved inland. The footage of flooding in Hong Kong was incredible, but at least Hong Kong has drainage systems and was engineered to drain. Shenzhen was not, and the center district suffered catastrophic flooding. Shenzhen has a lot of underground shopping malls, parking garages, and a large metro system. All flooded. One shopping mall had five underground levels with miles of shopping galleries, These flooded, with water levels on the surface streets requiring boats to get around. I can’t even begin to estimate the tens of billions of dollars of damage in Shenzhen and Dongguan. Between the destruction of China’s export manufacturing industries and the natural catastrophes, China is in a very serious downturn.
Now, I know people will blame the flooding in China on global warming. Not so fast, I say. China has always flooded through the millennia of its civilization. We have two factors in play for why we have seen the Atlantic Ocean achieving record warmth this summer and the other weather events. A few newsletter issues ago, I published a map showing the rapid progression of the North Pole towards Siberia. This is unprecedented in historical times. Ocean currents have to change when the North Pole experiences such a large movement, and the world weather changes. I believe an even larger factor is the explosion of the Hunga Tonga Volcano (HTHH) in Dec. 2021-Jan 2022, which pumped a massive amount of water vapor into the stratosphere. Most major volcanoes put a lot of ash and sulfur dioxide into the atmosphere, which causes global cooling effects. The eruption of Mount Tambora in 1815 resulted in “The Year Without Summer” in 1816. Hunga Tonga did not put out such ash and sulfur dioxide. The massive amount of water vapor introduced into the stratosphere works as a massive magnifying glass, really raising surface temperatures in the northern hemisphere:
"The amount of water vapor injected into the stratosphere after the eruption of HTHH was unprecedented, and it is, therefore, unclear what it might mean for surface climate. We use climate model simulations to assess the long-term surface impacts of stratospheric water vapor (SWV) anomalies caused by volcanic eruptions. The simulations show that the SWV anomalies lead to strong and persistent warming of Northern Hemisphere landmasses in boreal winter, and austral winter cooling over Australia," wrote Martin Jucker, the leader researcher on the study from the University of New South Wales Climate Change Research Centre.”
Here is a link to good article on this effect:
https://www.zerohedge.com/weather/tonga-volcano-eruption-set-warm-earth
It’s been a while since I have had williambanzai7 graphics. Here are three, to close this newsletter.