At Sprott, our investment thesis for gold is significantly long-term in scope. We believe gold’s methodical advance since 2000 has had more to do with the growing disconnect between productive output (GDP) and ever-inflating claims on that output (debt and equity valuations), than with short-term fluctuations in variables such as CPI-type inflation or interest rates. Because we view gold as a highly productive, portfolio-diversifying asset until such time as these gaping imbalances are finally resolved (through default or debasement or both), we are generally loath to focus on short-term projections for gold markets. However, the current alignment of fundamental, technical and quantitative factors underpinning gold markets has become so asymmetrical to the upside, we have developed high confidence for an imminent and potentially significant rally in precious-metal valuations.
No industry has been more disfigured by the Fed’s easy-money policies than the U.S. automobile industry. During the past eight years, cheap Fed credit has engrained zero-percent financing gimmicks at the very heart of U.S. automobile consumption. Contemporary auto-financing terms have evolved towards borderline ridiculous (record average principal balances, ever-lengthening loan periods, rising prevalence of negative-equity trade-ins). Lured by skinny “cost of money” calculations, lease penetration-rates roughly doubled in the five years through 2016. Even used-car pricing has remained remarkably buoyant amid such ample cheap credit.
Figure 1: Cumulative % Net Losses by Subprime ABS Vintage (2006,7,8,15,16Q1,16Q2) [S&P, UBS]
As the Fed collects interest on the enormous portfolio of Treasuries and MBS securities on its balance sheet, this cash is actually passed on to the U.S. Treasury. Logistically, the Fed credits interest payments (as they are received) to the Treasury’s “general account,” where they appear as a liability on the Fed’s weekly balance sheet (H.4.1). In essence, the Treasury’s Fed balances serve as a giant piggy bank which can be drawn upon whenever Treasury has short-term liquidity needs (or faces a looming debt ceiling such as is currently the case). As shown in Figure 2, below, the Treasury’s Fed balances have oscillated during the QE era, but have been in a sustained uptrend since late-2015.
For reasons that may never be entirely clear, the Treasury chose to draw down its Fed balances at a frenzied pace during the first quarter. Between 10/26/16 and 3/15/17, the Treasury’s general account balance at the Fed declined from $429 billion to $38 billion. Coupled with pro-rata earned-interest credits accruing to the Treasury’s account during the span ($150 billion annual run-rate), Treasury withdrawals from its Fed account totaled roughly $450 billion in little over a four-month period. Unlike excess commercial bank reserves held at the Fed, Treasury balances are essentially a dormant deposit, so when they are drawn down they amount to a direct liquidity injection into the U.S. financial system. As the Treasury drew down its Fed balances during the past four months, an amount of liquidity was injected into the commercial banking system equal to roughly 7% of GDP, or significantly greater than the rate of stimulus from QE3! Andy Lees (MacroStrategy Partnership) informs us that there is simply no historical precedent for such a concentrated drawdown of Fed balances by Treasury, the next closest having been drawdown of an amount half as large over a period twice as long, just prior to the market dislocation of August 2015. Over the next several months, we expect U.S. asset markets to feel a pronounced pinch from extinguishment of this unprecedented liquidity source.
Figure 2: U.S. Treasury Deposits on Federal Reserve Balance Sheet (2005-3/15/17) [Federal Reserve, MacroStrategy Partnership]
Figure 3: Trailing 12-mos. Percentage Change Total Federal Tax Receipts (1972-March 2017) [U.S. Treasury, Meridian Macro]
Figure 4: S&P 500 Index, Consensus Estimates S&P 500 2017 EPS, Atlanta Fed Q1 2017 GDPNow (1/1/17-4/13/17) [Bloomberg, Atlanta Fed, Zero Hedge]
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Senior Portfolio Manager
Mr. Reik has dedicated the past fourteen years to comprehensive analysis of publicly traded gold-mining companies, developing significant perspective on their intrinsic values under a wide range of market conditions. Additionally, Mr. Reik is a commentator on gold markets and monetary policy, including policies and actions of global central banks, global conditions for money and credit, and factors affecting supply/demand conditions for gold bullion.
Mr. Reik joined Sprott USA in March 2015 as lead portfolio manager of the Sprott Institutional Gold & Precious Metal Strategy. The Sprott Institutional strategy is composed of separately managed accounts and involves transparent investment in publicly-traded equities with no lock-up provisions of any kind. Sprott Institutional portfolios hold no illiquid or hard-to-value securities, no private placements and no derivatives or options of any sort.
For the six years prior to joining Sprott, Mr. Reik served as Managing Member of Bristol Investment Partners LLC, a registered investment advisor managing separate accounts composed exclusively of gold equities. Mr. Reik served as Chief Investment Officer and Portfolio Manager to all Bristol customer accounts. From January 2006 through November 2008, Mr. Reik served as Strategist to Apogee Gold Fund, LLC and Apogee International Gold Fund, Ltd. Before joining Apogee, Mr. Reik was Founder and Portfolio Manager of Clapboard Hill Partners, L.P., a long/short equity partnership focused primarily on precious metal equities and financials. Clapboard Hill Partners launched during February of 2002 and merged into Apogee Gold Fund during the first quarter of 2006.
Mr. Reik served as Senior Managing Director of Carret Securities, LLC (2000-2006) and held investment positions at Prudential Securities (1996-2000), Smith Barney, Inc. (1993-1996), William D. Witter, Inc. (1991-1993), Mitchell Hutchins Asset Management, Inc. (1984-1991), and Security Pacific National Bank (1982-1984).
Mr. Reik has 34 years of investment experience. Mr. Reik graduated from Pomona College in 1982 with a B.A. in Economics.
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