Lawrence Lepard, managing partner with Equity Management Associates, just published a quarterly report in which he explains — among many other things — why current US policy has created a “doom loop” and “a gold opportunity.”
Here’s the summary page. For a PDF copy of the full 36-page report, email Lawrence at llepard@ema2.com
FIRST QUARTER REPORT — KEY TAKEAWAYS
• Q1 2020, Global margin call for a leveraged world.
• Credit bubble burst and is unwinding.
• Reason bubble occurred was ZIRP policy (2008-2015) which led to capital misallocation.
• Fed (monetary) and US Government (fiscal) response was massive and aggressive.
Monetary Policy
• Aggressive monetary expansion began (again). QE open-ended.
• All categories: Treasuries, Agencies, Corporates, Munis, Money Market Funds, Auto Loans, Student Loans. Basically everything.
• Fed purchase of equities also a future possibility.
• Financial Repression: yield curve control is in the Fed’s back pocket.
• Emergence of currency debasement and yield curve control may cause the Fed to lose control of the bond market.
• Fed purchases of bonds could lead to a doom loop. Or at least be a big problem.
Fiscal Policy
• Rubicon crossed. US Government “Goes Direct” with Helicopter money.
• Safety net is needed during this difficult period; however, Helicopter money and Federal deficits are a slippery slope.
• US fiscal condition just deteriorated. Much larger Federal deficits are ahead.
• Inflation. Recently considered not a risk. Just became a very real medium-term risk.
Inflation-Two kinds
• Demand pull, cost push; and “CSIP” (currency substitution inflation psychology).
• Deflation is a risk in the short-run given the likely recession and lack of velocity of money.
Gold Opportunity is Here
• Gold is a natural “store of value” alternative currency. No counterparty risk. BK impossible.
• Gold has performed well (11% pa) since December 2015 but still early days. 1st or 2nd inning.
• Gold investment supply is only 0.06% of worldwide financial assets (cash, stocks, bonds).
• Gold stocks remain very cheap and provide leverage and growth versus the metal.
For a PDF copy of the full 36-page report, email Lawrence at llepard@ema2.com