Washington, DC -- (ReleaseWire) -- 09/24/2015 --BENNETT: Michael Belkin is the publisher of the Belkin Report and the Belkin Gold Stock Forecast. He's here because I want his insight into last Thursday's meeting of the Fed, as well as Yellen's comments, or lack if comments. Michael, welcome to Financial Myth Busting.
BELKIN: Hey, thanks for having me, Dawn.
BENNETT: So last week's Fed meeting and lack of response continues to remind me that they don't seem to ever examine the data. It seems to me more of a shotgun scatter of uncorrelated points. The Fed is allowed, even encouraged to impose these massive distortions regarding the U.S. economy, which is why they don't seem to make decisions. Am I right about that?
BELKIN: Yeah. You know, Yellen has been warning us for years that she is gonna raise interest rates right?
BELKIN: She came out with this whole communication program. 'We've got to tell everybody what we're going to do way ahead of time. We're going to raise, we're going to raise, we're going to raise.' And then she doesn't raise. So you know I think the Fed totally shot themselves in the foot and the market has lost confidence in them. The way this affects markets is a lot of people will long the U.S. dollar on the assumption that the U.S. rates were going up compared to other places in the world and that whole scenario is kind of going down the tubes. What I have been talking about all year is weakness in China, feeding into emerging markets, and coming back into the U.S. in the form of lower corporate earnings and we go into a bear market and recession. And the Fed is finally beginning to figure that out after telling us that they're going to raise rates for two or three years now. So the Fed has basically no credibility and the market, the professional institutional portfolio managers are beginning to wake up to that fact and the fact that they have been sold a bill of goods, that they've been pushed and squeezed and herded into risky financial assets and they are headed for the door. Margin debt is down. It's declining, it peaked three months ago. The latest numbers just came out; margin debt is down $14 billion, $32 billion in the last two months.
BELKIN: So there is deleveraging going on beneath the surface in this incredible speculative bubble that Janet Yellen and the Fed have created.
BENNETT: Isn't the real problem not what the Fed may do but the unavoidable consequences of what the Fed has already done?
BELKIN: Absolutely. Hopefully most of your listeners are clued into this. I know you have been speaking the truth for a while here; this has all been sort of an emperor's new clothes experience. 'What a wonderful suit you have emperor. It's so great!' And then the little kid says, 'Hey wait a minute, emperor is naked'.
BELKIN: So the problem is that the Fed has deliberately squeezed investors through something called the portfolio balance channel, into equities and junk bonds right as the global economy is headed down the tubes. And so it is a very dangerous combination and I would advise people to be out of the stock market. One thing that's been happening all year, stocks have been going down, individual stocks, even before the market peaks. The Dow peaked in May, but during that time, I had a lot of success with short recommendations. For instance, things like Micron's down 50 something percent from its peak; Applied Material's major stock's down 36 percent from their peak; Ali Baba's down 40 per cent; Twitter down 25 percent. The Dow is down 7 or 8 percent year to date; the S&P is down 5 percent. So many stocks are getting blown up one after the other: cyclicals, tech stocks. So the equation in the market has changed. Now we have this big sell off since the last time I talked to you in August. On 20th and the 21st the Dow fell by 900 points. That was a big jolt, that made everybody wake up. We have kind of gone sideways since then in the indexes but I think the market is headed a lot lower. For the NASDAQ, that's down 49 percent. That's a lot. So the NASDAQ could, not overnight or tomorrow, but over 12 or 18 months, become a buy. You know, I was probably on your show back in 2009 when it did reach the 200 month average in the last recession and I was extremely bullish then. I'm extremely bearish now. I can look forward to turning bullish again when we get back down there.
BENNETT: Given the lack of response of stocks to the Federal Reserve, do you find the Federal Reserve deceptive and reckless? They seem to continually offer to heal our nation with precisely the same actions that they inflicted on us in the first place. I almost feel like the stock market is telling us we are already in a recession.
BELKIN: Yes. You know, the stock market is the best leading indicator of a recession: it generally peaks several months before recession starts and bottoms four months before the recession ends. And I do completely agree with you that Fed has let us down, led people down a false path of prosperity. I mean we know what they're going to do, right? They only have one or two weapons in their arsenal. They cut rates, which are already at zero, or they print money, quantitative easing.
BELKIN: You know what's coming, you can't close it down. There's no mystery here. This is Janet Yellen from UC Berkeley School of Business, Hass Scholl, which I am also from, and in her fuddy-duddy old Keynesian bathtub economics she will turn on the faucet and open the plug at the bottom. All she will try to do is stimulate this. Actually, that leads us into something that is a solution here for the investors which I believe is gold stocks. I have had great success in individual gold shares this year. As I said, so many major U.S. non-gold stocks are down significantly, they've been going down in stealth declines.
Within the gold space there are so many stocks, you know, I have started doing this thing called the Belkin Gold Stock Forecast, covering all the major gold stocks in U.S., Australia, Canada and the U.K. And while the XAU is down 29 percent year-to-date, GDX down 21 percent year-to-date, I have stocks up 100 percent all over the place year-to-date. In Australia, Perseus Mining up 130 percent, Millennium up 100 percent, Rumelia is up 155 percent, Northern Star up 146 percent, Saint Barbara up 719 percent. In Canada, Kirkland Lake plus 124 percent, Quandex plus 72 percent, Highland Gold in the U.K. plus 110 percent. So these have all been stocks that have been on my recommended long list in the Belkin Gold Stock Forecast, and I think that the gold mining bull market is just starting. So I think that there is a real opportunity there. Not all stocks are up 100 percent so far and they are coming off a deeply depressed basis. You know, these stocks were just slammed down from their peaks in 2011. Some of them were down 80, 90 percent.
BENNETT: Do you think that GDX and XAU, which are U.S. based, do you think that they are depressed because of what's going on here in our economy? Your Australian mine, according to your report, is up 72 percent. That's amazing year-to-date.
BELKIN: It's partly a currency thing. The Australian Dollar has been weakening and so they get higher revenues for selling gold. But I think that the gold price and gold mining shares have been artificially depressed in the U.S. by concerted selling, by hedge funds who are basically—by the way getting the major hedge fund consensus is getting most things wrong this year. You know, they are down on the year, they hate gold, they love tech stocks which are going down, and they have been squeezed into a smaller and smaller handful of names, you know, Facebook, Amazon, Netflix, Google, Apple, things like that. Those are the last soldiers left standing so people who are bubble people, momentum players, that's what they're in. And they're slamming gold, they think that gold is a basic material. It's not. It's a monetary metal, and so I think that there's incredible opportunity there. You know, by the way I would like to offer your listeners a free sample of our report. If you Google Belkin Gold Stock Forecast you get a contact form on Hyperpyron Partners, just say I would like to request a free copy on that form and we would be delighted to let you have one.
BENNETT: What about the demand for physical gold and silver, because it went up in August and September? It's just been exceptionally strong. My opinion is that investors are seeking a safe haven from not only the turmoil that we have had but what we are going to be entering into. What do you think about that?
BELKIN: Absolutely. So if you look at the world, we are having a monetary problem. The Chinese stock market is down 40 percent from its peak, the Shanghai Composite Index and that is rippling through emerging markets so something else is happening. I have been seeing these short emerging markets all year and so what do we have? We have Greece, the Morgan Stanley Index is in U.S. dollars, Greece is down 45 percent, Brazil down 37 percent year-to-date. Turkey down 32 percent, Indonesia down 29 percent. The list goes on and on. The emerging market currencies are melting down, the dollar is rising versus emerging market currencies, I think that trend is going to continue. Not the dollar versus majors, not dollar versus Japanese yen or the euro. So with the Dollar turning down, strengthening versus emerging market currencies but turning down versus majors, then I think we've got a crisis scenario, where money tends to look for safety, everything is inflated, bonds are inflated, so I tell institutional investors to overweight defensive groups like utilities, consumer staples, things like that, and be short on tech. Actually one very interesting thing that just changed in the last few weeks is financials. Financials have risen to the top of my sell list. Things like too-big-to-fail banks, JP Morgan, Citibank, Bank of America. Also brokers: Goldman Sachs, Morgan Stanley, things like that. This is a crisis scenario. This is like 2008 when Lehman failed or something. I'm not saying Goldman Sachs is going to fail but these guys are at the epicentre of all the leverage and all the bubble stuff extending leverage to hedge funds, to their prime brokerage. So I think the markets trade down and the leverage players get hit. And it feeds into the gold market because gold is a form of monetary safety, and then these gold stocks are leveraged to the gold price and you could have an incredible rally in the gold shares over the next 18 months.
BENNETT: Speaking of difficulty in China, or finding safety, the U.S. finally this week acknowledged that China is dumping our debt. We have talked about it for the last couple of months, even years, and I am just wondering, does this rule out the possibility that China will, when they get rid of the last part of it, do it in one fell swoop? That could effectively sink America's economy, don't you think?
BELKIN: Yeah, I think they'll more dribble away at it. And also it's not just China. When in a leveraged cycle, we had the upswing from 2009 until a year or so ago—foreign currency reserves increase and they accumulate dollars and they accumulate treasuries, so that's not just China, although China is the biggest holder. It's also Japan and particularly the Mid-East. So now with the price of oil crashing, you've got all these places actually liquidating, you know, going into foreign exchange reserve liquidation, and that means they are all selling treasuries. So I think it's more of a steady thing and it scared me. I had a long position on bonds until last week, so my long positions are closed out on U.S. treasury bonds, so I think that you have really touched on something that could be a major issue going forward, not so much in a big plunge, but in a kind of dribble away, a constant selling of U.S. treasuries as foreign exchange reserves are drawn down in a crisis, you know, a global financial crisis.
BENNETT: If other nations start to do this, are you expecting the Federal Reserve to just simply take their place and start buying every bond that the treasury issues?
BELKIN: Maybe ultimately. Now, so Janet Yellen's great idea with QE was to buy all this debt, and that ended a while back a year or so ago. What that did was, banks are swimming in reserves, so excess reserves have never been like this whereas banks have so much money they don't know what to do with it, so they mostly park it at the Fed. So the fact that financials are turning down when they are swimming in reserves tells me that something is going on beneath the surface here. But generally when banks have too much money to play around with, they get into trouble just like they did with CDOs and sub-prime debt and everything in the last cycle. I think the leveraged financial system is up to its eyeballs, and I think that things will surface like depth charges. And yes, the Fed will do what do they do. They cut interest rates and print money, that's all they know how to do. Will it affect the markets? I think we are at the point in the cycle where it doesn't matter anymore because we're into a deleveraging and the banks are already so completely swimming in reserves that adding more reserves does absolutely nothing to the equation.
BENNETT: Do you think that the financials are plummeting because the inter-bank credit risk is now so high? You said something was going on beneath the surface. Do you think that could be it?
BELKIN: Yes, I do, and it also has to do with European banks. This is a global thing with financial selling down. I do this asset allocation sector rotation analysis in the U.S. and Europe and Japan, so I have the financials as my top underperform short recommendation in all 3 regions. The European banks are also like the walking wounded. They never got rid of all their bad loans.
BENNETT: Can you elaborate further on some of your short positions?
BELKIN: European banks have risen to the top of my sell list. Spanish banks, Bank of Santander, BBPA, Standard Chartered is an emerging market bank listed in London. The Greek banks I still think are zeros, they're down huge on the year, something like 70, 80 percent. The problem is they never really solved their problems so the same kind of thing that Janet Yellen is doing here, Mario Draghi the former chairman of Goldman Sachs International who is head of the ECB, now has been trying to paper over the problems in the European banking system, and it just doesn't work. When you go into an economic downturn, everything kind of rises to the surface. The old saying is that you find out who is not wearing a bathing suit when the tide goes out. That's what they say in the markets. So I think the banks, you know, they're not wearing bathing suits.
BENNETT: I agree. In my view the most urgent action the Federal Reserve should take is actually to cease reinvestment of principal, as the holdings on their balance sheet mature, so that they can start to reduce these massive pools of idle base money. Because that is the money that is actually causing the speculation that therefore causing the bubble. Do you agree with that?
BELKIN: Yes, but it will never happen. The problem is that they are so far behind, they are out of the cycle. The time to have done that was back in 2012 when this idiot Yellen did QE3 for no reason, right? So now they are trying to pick up the pieces from that. The Fed, you know, there's a great article in The New York Times about how the Fed has been doing these simulations about how they are going to mop up all the excess reserves in the banking system. You know, they have been doing this for a year but now they have missed the boat. The time for doing that was 3 years ago. They are totally out of touch with the cycle. They have this absolute certainty that they control the economic cycle and I don't think they do. They made this economic cycle go longer than it naturally would have but when you do that, from an Austrian economics perspective, all you do is create excesses and malinvestment. And I look out there and that's what I see, malinvestment. So will they be able to drain reserves and raise interest rates now? Very unlikely and I think that's a very low probability event. They will be doing the other thing, which is basically getting back to doing more of the same thing that got us into this mess in the first place. Which by the way should turn out to be incredibly bullish for gold and gold mining assets in the long term.
BENNETT: How much longer do you think the U.S. Treasury can expect to sell its debt at current interest rates?
BELKIN: Good question. We have these artificially low rates. Just in the last week or so they have been putting out feelers about making negative interest rates and eliminating cash so the chief economist, I believe his name is Haldane, of the Bank of England is all of a sudden saying just in the last few days, not only are we not going to raise rates, which we have been saying just like Yellen has been saying, but the next move is we are probably going to be cutting rates. And by the way that could be to negative interest rates. And in the Fed meeting they had a little scatter chart of the what people on the FLMC thought the Fed funds rate would be out a year or 2 and one of those was negative. So these people, they are crazy PhD academics and they just think that they can pull the levers and turn the dials and make the economy do what they want, and when it doesn't do what it's supposed to do, what will they do? Just more of the same. So I think we can look forward to crazy unorthodox monetary policy in the future as these guys lose control and just grasp vainly at anything they can to try to control a situation that they are losing control of.
BENNETT: Do you really see us going to negative interest rates like in Europe?
BELKIN: I think I would rephrase that question as, 'Michael, do you think that the Fed is crazy enough to do that?' And I would say yes, absolutely.
BENNETT: They can't reverse any of this. None of this can be reversed and we are going to be paying for it.
BELKIN: Absolutely. So, in the meantime, think about how this will play out. And I think that as an investor you want to try to not be hurt by the market forces that are larger than what the Fed can possibly do and of which they have lost control of. Which will probably cause a recession and a bear market over the next 12 to 18 months. So you don't want to be in stocks and you do want to be in gold shares. And as I said, I would like to invite your listeners to get a free report from the Belkin Gold Stock Forecast if you Google that you will see a contact form.
BENNETT: I agree with you about owning gold and silver. Is it just gold stocks or is it bullion too?
BELKIN: Absolutely. The gold stocks are leveraged to the price of gold so they could go up many, you know, 5 or 10 times when the gold price goes up.
BENNETT: Thank you Michael.
All data sourced through Bloomberg
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About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett.