Sean Brazney Interviews CPM Group's Jeff Christian - April 2019 Part I
Sean Brazney: Hello. My name is Sean Brazney. I'm here with Jeffrey Christian, Managing Partner of CPM Group. Thank you for being with us today, Jeffrey.
Jeffrey Christian: It's always a pleasure to be with Monex.
Sean Brazney: I want to circle back to the Federal Reserve the last time you and I had a chance to talk it was before the March 19th and 20th, Fed Open Market Committee Meeting. In that meeting, on March 19th and actually the announcement on the 20th, it seems that the Fed made almost an about face on their projections for interest rates for the rest of the year. The precious metals community, the people that we have a chance to talk to that call in, really thought that was going to be a fairly bullish setup for the precious metals market and a negative scenario for the dollar, but that didn't necessarily totally play out after the announcement. So, I'm wondering if you can give us some more insight into why?
Jeffrey Christian: Oh, yeah. First off, yes, the Fed reversed course. The Fed had been saying that it was going to consistently raise interest rates for a longer period of time. It's backed off. It backed off, it said because it was show..., seeing signs of weakness in the economy. I think that was probably a wise thing to do. Not only did they say that they were going to pause raising interest rates, but they also said they'd take a pause in reducing their balance sheet, in reducing a number of bonds that they hold, and I think that's a very important factor for the dollar and for gold going forward. The markets didn't really react strongly to it. I think there was a little bit of strength there, but I think that the view was that while this is positive for gold, it's not really strongly positive for gold, it's not the kind of development that's going to drive gold sharply higher. It's more of an indication of the sorry state and the problems that are facing the global economy and the U.S. economy, all of which have a long-term bullish implication for gold and gold ownership.
Sean Brazney: Also, in your April 4th advisory, I had a chance to get through that. Thank you very much for that report. You start off and really talk about inflation. We haven't really seen a lot of inflation in the markets. Can you give us a little bit of intel on what was in that report and shed some more light on that for us?
Jeffrey Christian: Right, we were talking about the relationship between inflation and gold prices and the point that we were making was that inflation is really most dynamic for gold when inflation is much higher than it is, and has been, and may have reasonably been expected over the near term. Today, we saw the CPI come out and in fact it showed a fair bit of weakness in the non-energy, non-food core inflation indicators. Inflation was relatively high in total on the headline basis, but if you look at it, most of the increase that we saw was in the energy market, specifically petroleum and gasoline. So, you're not necessarily seeing very high inflation, which factors into CPM Groups long-term view of where we are in the economy, both in the U.S. and globally, and the point that we were making in the April Precious Metals Advisory is that gold does very well when inflation is much higher... 6-7%... when their higher and then you see investors flocking into gold. But, if you're looking at one, two three percent inflation, it's not necessarily the kind of inflation levels that drive investors racing into gold, it's supportive of gold, it's supportive of investment demand for gold. Investors look at three percent inflation and they say, "I'm losing 3% of purchasing power per year. I should have some of my money in gold," but it's not the kind of reaction that you see in other periods of time, like for example, 1978, 1979, 1980, when you were looking at 12%, 13%, 14% inflation.
Sean Brazney: We also talk about debt and the overall risk to the global economy being debt. You and I have talked in the past about potential for some sort of a negative event out in the future. Some sort of a debt bomb, an event happening that causes potential for another financial crisis. Is there anything looking out over the maybe the short-term to the medium-term that we should be looking at... maybe looking for signals of any of those potential risks?
Jeffrey Christian: There are a lot of risks out there, and in our report that we produced for Monex in March, we actually pointed out we have a little graphic of the risks that the world is facing and their probability and their risk level. What we're seeing is that the risks are growing over time, but the probability of them occurring and causing a problem over the next 12 months are perhaps lower than... you want to see for investors to really buy. They're out there. They're getting bigger every year, every month, and debt is a really big issue. The problem is that you look for what's going to trigger the next debt bomb, and almost by definition you're not going to be able to tell what it is, because if you can tell what that problem was going to be monetary authorities may well be able to act in preempt that debt bomb blowing up. So, what you're going to be looking for is what we saw in 2007, some obscure aspect of the debt market causing problems. Now, one of the problems that we're looking at is BREXIT, with the British exit from Europe, which does look like it's going to occur at some point in some way. The debt market is extremely legalistic and there are a lot of regulations involved and laws relating to the debt. When you start saying well Britain will no longer be part of the EU, you have issues related to what is the legal status of a lot of that debt and how do people service that debt, how do they pay their debt, how do lenders get repaid, and the European and British governments are way behind the curve in figuring out how this is all going to work in a post British part of the EU. You have other problems too and one of the things we've seen over the last couple of years is a reduction in the U.S. government’s willingness to be cooperative on a global basis. So, you have China, Japan, Europe, and the U.K. wanting to try to tighten up and coordinate regulations in the debt market and the U.S. government has been hesitant to go along with a lot of that. When you have that kind of breakdown in international cooperation, what you're doing is you're raising the risks that something could go wrong legalistically or regulatorily, which could put a spanner in the debt market. That is hard to say what it's going to be, but we're probably seeing greater risks now, we're definitely seeing greater risks now, and the question is when does something go wrong? We really don't know, but it's out there.
Sean Brazney: Well, you heard it from Jeffrey Christian. Thank you very much for your time, Jeffrey today. It's always extremely valuable. We appreciate your input and your time. Give Monex a call today. Talk to our account representatives. Ask them for the CPM Group outlook on gold, silver, platinum, and palladium. We would love to get the reports in your hands to help you look for these opportunities.