Mike Maroney Interviews CPM Group's Jeff Christian - February 2018
Mike Maroney: Good afternoon! It is February 15. My name is Mike Maroney and I am coming to you today from the Monex Precious Metals Studio. We're going to be talking with Jeffrey Christian, the Managing Director of the CPM Group, and we're going to do one of our monthly video sessions, "Prepare & Diversify with Gold & Silver."
Now Jeff, we've had some heavy volatility over the last few weeks in the stock market, in the bond market, and we've seen a move it looks like back into precious metals as a safe haven. How do you feel about the markets overall, right now, and do you see the precious metals market putting in a solid base this year from which major moves could sit out on the horizon?
Jeffrey Christian: Yes, the way we're looking at it, we've seen really sharp increases in volatility in the bond market, in stocks, and in precious metals and other commodities over the last few weeks. We're moving from a period of time of almost historically low volatility in these financial markets to greater volatility. I think what we're seeing is a transition away from a long period of low volatility relatively decent economic activity to a period of increased volatility and increased uncertainty-- politically, economically, and financially-- in terms of global financial markets. Our view is that the gold price and the silver price made their lows late 2015 to early 2016 and their going to be moving up. We expect much higher prices at some point in the future. Our view, right now, is that what we're seeing with this increased volatility is the change over from the that volatility period to a period of greater uncertainty. We think the markets will probably calm down a little bit in the second and third quarters, but that by the time you get into the fourth quarter for sure maybe even as early as the third quarter of this year, we think you're going to see stronger gold prices, stronger silver prices, and another round of investor insecurity about the state of the world.
Mike Maroney: Well, it's interesting, because we have the CPI numbers and they were a bit inflationary, a little higher than expected. Then, PPI came out today right in line with expectations. The bottom line right now is the 10-year yield is hitting that 2.83% level, which many people believe really tells the tale as far as potential inflation is concerned. What do you see this next month with the Fed? Do you see them continue on the path that they've been talking about-- three rate hikes in 2018?
Jeffrey Christian: I think that you'll see three, possibly even four, rate hikes in 2018. They'll be relatively modest. They'll be 25 basis points. I think the Fed will be increasingly cautious about raising interest rates. They're very much concerned as is the rest of the market with the fiscal policies being pursued in Washington and explosion of the federal deficits. What that means in terms of the U.S. Treasury's need to raise an extra trillion dollars in the bond market. So, I think that the Fed will probably be a little bit more cautious than they thought they would be a year ago, but I think that they will continue to be concerned about the bond market, and interest rates, and also inflation.
Mike Maroney: It's interesting, because you talked about the increase in uncertainty and I think last month we talked about the VIX being so low, but right now it looks like interest rates are headed higher, it looks like extreme volatility could be kicking into gear as far as stocks are concerned. So, diversifying into a safe haven investment that's been putting in a base for the last few years certainly makes sense, but I think what you pointed out a little bit ago was the fact that there's a lot of uncertainty as far as what's going to happen with the U.S. government. It seems as if the investment population just doesn't feel comfortable with the overall experience level of the President and where this thing is headed. Do you feel that that's why maybe even in the face of higher interest rates and a situation that normally maybe would strengthen the dollar--the dollar is still headed lower?
Jeffrey Christian: I think the dollar is going to be heading lower for a variety of reasons. One of which is, yes, there is concern about the level of professionalism and expertise in the U.S. government in the terms of fiscal management. There's also some concern about monetary management. We have a new Federal Reserve Board Chairman, it's probably the best we could have hoped for out of the group that they were choosing from, but I think there is greater uncertainty about the level of expertise both fiscally and monetarily. You also have the situation with the Fed moving away and reducing its portfolio, which means that there's going to be less demand for treasuries from the Fed and that's going to put a bigger onus on the private sector buying treasuries in order to keep interest rates down. Even as the Treasury is now talking about quadrupling the amount of money it's going to have to borrow over the next twelve months to pay for the tax cuts and the infrastructure.
Mike Maroney: We, obviously, have an interesting situation where we have quantitative tightening. We have a scenario where we're rolling over a lot of short-term debt. So, the government is going to have to continue to raise a lot of money and the bottom line is... it's a real scary thing when interest rates are going up, the dollar is going down, and we're not getting any real interest as far as our bond market is concerned. The rumors over the last few days has been the Asian community seems to be exiting out of U.S. bonds and U.S. dollar positions. Have you heard anything about that?
Jeffrey Christian: It's not just the Asians. I mean, on a global basis, there is less appetite for U.S. treasuries and U.S. equities than there used to be and that's another factor that ties in with the Treasury needing to borrow more money just as the Fed is stepping back from being the buyer of Treasury bills as last resort... is that in the rest of the market there's less appetite for U.S. treasuries securities there's greater confidence in European and emerging market debt. So, you're finding not only Asian investors, but Middle Eastern investors, European investors, diversifying their portfolio and that means reducing their interest in U.S. equities and in U.S. treasury securities. And that will, in and of itself, put some more downward pressure on the dollar, because one of the things you're going to see is that these investors don't need to buy as many dollars in order to buy U.S. equities and treasuries as they had been buying over the last few years.
Mike Maroney: So, we've had a massive bull market in bonds that seems to be coming to an end, interest rates are headed higher, and the stock market volatility is increasing, real estate, obviously, could be affected by the higher cost of borrowing money, and you're looking at 2019, 2020, as being explosive periods for precious metals. So, this may be the perfect time for investors to look at diversifying based on where the metals are today, and you just don't know, there could be an event that actually accelerates that overall timeline that you have in place. Wouldn't you think that would be possible?
Jeffrey Christian: That's absolutely true. I mean, it's very easy to look at the world and say there has to be a day of reckoning. It may not be the kind of financial collapse that some people say, but there has to be some sort of resolution to the ongoing borrowing and accumulation of debt on the part of the U.S. government, and state, and local governments, and private sectors in the U.S., there has to be a day of reckoning. The question is the timing. I mean, we have people who have been saying this can't be sustained, really since the late 1970's, and it has been sustained with a couple very nasty spasms there. We expect another nasty spasm at some point. Our best guess is probably in the period, 2021-2024, but it could come at any moment. It could come next week. That's one of the reasons why you want to have a diversified portfolio.
Mike Maroney: Yeah, I think the day of reckoning is probably one of the themes that many people are talking about. I know you're hard-pressed for time today. So, I guess we'll try to cut this a little bit short, but the bottom line right now, I guess maybe you shouldn't wait to buy precious metals, you should probably just buy and wait based on the current conditions. I guess, next month we'll focus in a little bit more on specific ranges as far as where the metals are trading, okay Jeff?
Jeffrey Christian: That sounds good.
Mike Maroney: Fantastic! Well, listen, you have a great month and we'll talk again in March. Thank you so much.
Jeffrey Christian: We'll be here.
Mike Maroney: Okay. Thank you!