A few weeks back, I explained to you that Europe and Japan were the poster kids of monetary irresponsibility and that no matter how loud the dollar bears scream, it's Europe and Japan that will blow up first.
I also told you that "the December rate hike and the volatility a rising dollar will cause globally is the setup for an explosive 2019 as the Fed will blink and reverse course, leading to a sector rotation that finally acknowledges the deep value in the resource space."
It didn't take long. Recently, Federal Reserve Chairman Jerome Powell blinked and publicly stated that interest rates are close to neutral, meaning we will likely see a hike in December accompanied by dovish language.
2019 will be the year the mainstream media realizes just how fragile the system is and just how much opportunity exists in the resource space.
I do not envy Mr. Powell's dilemma. There's a pension crisis in the U.S. that needs higher rates to prevent an implosion.
Exhibit A: California.
California's public pension crisis has been called a ticking fiscal time bomb.
Governor Brown is quoted telling the Supreme Court that "California's pension plans are dangerously underfunded, the result of overly generous benefit promises, wishful thinking and an unwillingness to plan prudently. Unless aggressive reforms are implemented now, the problem will get far worse, forcing counties and cities to severely reduce services and lay off employees to meet pension obligations."
Meanwhile, Paris is burning. Hundreds have been injured and arrested in Paris's worst urban riot in nearly 13 years.
What's behind the riots?
People are upset about rising taxes and the high cost of living.
President Macron's fuel tax hike was the spark that lit fires across France. The citizenry was motivated by feeling as if the rich are getting richer at the expense of the 99% and a general feeling that only the 1% have an opportunity at upward mobility.
The dire situations in both California and France capture the predicament that the Fed is faced with.
Savers have been punished by accommodative policy around the world while pension funds and governments have misallocated capital entrusted to them by the citizenry for years.
On the one hand, Chairman Powell needs to raise rates to soft-land a pension crisis here in the U.S. On the other, Europe is on the verge of volatility not seen in over a decade and higher rates will only expedite the chaos to come.
A European banking crisis is in the cards. The contagion and the chaos to come in the bond markets will serve as a case study for decades.
Here in the U.S., every 1% rise in interest rates adds approximately $220 billion annually to America's deficit.
At the 5% level, the annual interest expenditures will rise by about $1 trillion per year.
To be clear, the Fed can posture about normalizing rates all it wants but the bottom line is it has very little wiggle room to do so.
QE 'til infinity is coming to a United States near you but not before a catalyst that justifies the about face. It'll likely come from, you guessed it, Europe.
Math is math and the status quo is not sustainable.
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You know what else isn't sustainable? The current valuations for the better companies in the resource space.
The most recent example comes from SilverCrest Metals.
On November 29, 2018, the company announced that SSR Mining had agreed to purchase approximately 8.2 million common shares of the company at a price of C$3.73 per share for a total investment of approximately $30.6 million in a non-brokered private placement.
9.9% of the company at $3.73/share. Pretty straightforward, right?
Shares the day before closed at $3.13, representing a nearly 20% premium. You would think the news would send shares rocketing higher near the $3.73/share price.
The company will have over $40 million after the warrants are exercised and a deep-pocketed strategic investor - and potential suitor - in SSR Mining. The shares reacted by appreciating a mere 4%, closing at $3.26/share.
Use the disconnect during this tax-loss selling season to your advantage. The mid-tiers and majors in lithium, gold, silver, copper etc. are all paying significant premiums to replace depleting reserves.
You don't have to. If you're going to speculate in this volatile space you have to know what you're buying and why. You also have to buy low to sell high (Cut to Captain Obvious).
Everything's on sale. Pick the best names and buy them or find another sandbox to play in because the best thing you can do for your 2019 if you're going to speculate in this space is buy the better names now.
To your wealth,
Gerardo Del RealEditor, Junior Mining Monthly and Junior Mining Trader.
For the past decade, Gerardo Del Real has worked behind-the-scenes providing research, due diligence and advice to large institutional players, fund managers, newsletter writers and some of the most active high net worth investors in the resource space. Now, he is bringing his extensive experience to the public through Outsider Club, Junior Mining Monthly, and Junior Mining Trader. For more about Gerardo, check out his editor page.