Sean Brazney Interviews CPM Group's Jeff Christian - March 2019 Part I
Sean Brazney: Hello I'm Sean Brazney. I'm here with Jeffrey Christian from CPM Group. Thank you for joining us Jeffrey.
Jeffrey Christian: It's always a pleasure to be with Monex.
Sean Brazney: Thank you. Main topic today starting off is the trade talks with China causing quite a bit of uncertainty with on again off again. In your opinion, is there an end prognosis to this and do you have an opinion of how it might affect the precious metals market?
Jeffrey Christian: Yeah, we do think that there will probably be a trade agreement within two or three months. We think it will be beneficial to both sides in many ways. If you look at what's been happening over the last 8 or 9 months that we've had this trade war going, the Commerce Department has issued enormous numbers of waivers on the tariffs for aluminum, steel, and other assets. So, the trade war hasn't had as negative of an effect on the actual economy in the us, as you might think. What it has done is created a tremendous amount of uncertainty in the financial markets. That's been beneficial for gold and silver over the last three quarters and bad for the stock market. Our expectation is that when the trade agreement is reached, it will be good for the stock market, or big for the U.S. dollar, and then maybe some downward pressure on gold and silver at that time, because of the removal of the uncertainty related to the trade war. Although, depending on what's going on in other sectors of the economy, a political whirl, a downward pressure on gold and silver may be very not fine.
Sean Brazney: Second main topic for us leads us to next week and the Fed Open Market Committee Meeting, which I believe is the 19th and 20th. In your Gold Outlook, you mentioned a first half and second half prognosis for rates. Would you be willing to share more details on that?
Jeffrey Christian: Absolutely, as you said, it's in the Gold Outlook. Our view is that the Fed is looking at the economy pretty much the same way that we are and it sees a lot of short-term strength and a long-term problem in the economy and that it doesn't necessarily think that the economy is at a particularly bad place right now. We're seeing relatively strong growth. We see modest strength in inflation, but not runaway inflation. So, I think the Fed will continue to pause in March. We won't see an interest rate increase just yet, but that... if you get into the second half of the year and they're seeing stronger economic expectations, then you might see the Fed resume with interest rate increases, one or two times, but only in the second half this year, probably not in the first half.
Sean Brazney: The U.S. dollar has been trading at the top of its range for about, well at least it's hit to top of the range a few times over the last almost two years, do you have an opinion on both the short-term and the long-term direction of the dollar?
Jeffrey Christian: We had thought that the dollar would probably rise modestly over the course of this year and it has so far. It's at the top of this range that it's been in. We don't see it running away to the upside, but again even when you see some of the trade issues with China and perhaps some other cause of economic indicators. What you're going to see is increased demand for U.S. dollars on the part of foreign investors wanting to get back into the stock market and that will increase the upper pressure on the dollar. So, we think the dollar can rise a little bit on the next several months, but we don't necessarily see it running away on the upside.
Sean Brazney: You also mentioned in your outlook about gold being, at the end of 2018, at historically very high levels in spite of one of the strongest periods of stock market gains and economic growth. You mentioned that, it's occurred because of numerous underlying risks in the global economy. Would you be willing to share more of those risks with us?
Jeffrey Christian: Sure. Reality is that the gold price has fallen, it's $600 lower than GTAP, $300 lower than the annual average nine years ago, but It is far higher than it was any time prior to 2010, 2011. We think that that's part of a very solid base. This ties in with what we were saying about the Fed's views of the world and our views of the world and real growth. I think most people that we talk to are looking at the world and their saying there's a lot of strength in the U.S. economy, China's economy, and parts of Europe at this present. There are long-term problems that are on the horizon, but they may not come home to really have a negative impact on the economy for a while. We're seeing that in the Fed policy [inaudible], but also keeping an eye on a long-term outlook. The biggest imbalance that we're looking at is, of course, the growth of debt. U.S. Federal debt deficits and debt are skyrocketing, but U.S. Corporate, Consumers, and Non U.S. debt both government and private are also debts exceeding extended period of time where debt has been growing at 11-12% per annum on a global basis. That's long-term unsustainable and everyone knows it. It also has implications for the U.S. dollar. There are big imbalances in the currency market. You've got about 75% private wealth denominated dollars, about 62% government wealth denominating dollars. A lot of people would like to diversify away from the dollar if they could, but that has incredible inflationary consequences for other countries and also has implications for U.S. economy. So, and then you have political imbalances that have yet to be resolved both internally within countries, growing inequality and rise in the GDP index, as well as among... between countries and governments. So, you got a lot of long-term imbalances that have yet to be dealt with and it probably got worse since 2008 and 2009. So, a lot of people, including the Fed, the United States, and CPM group, look at this and we're cautious and we're worried about long-term implications, because sooner or later they have to be resolved. They haven't been resolved for 40 years, which has caused some people to be a little bit complacent about them, but over those 40 years they've grown worse and worse. Right now, you're seeing an acceleration in deficit and debt issues, which means that they're probably getting to a point where they're going to have to be dealt with and there doesn't seem to be a political backing to deal with them effectively. So, you're kind of looking at a repeat of 2008, 2011 at some point.