October 17, 2019
The Miles Franklin Newsletter
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From The Desk Of David Schectman
"It is no exaggeration to say that since the 1980s, much of the global financial sector has become criminalized, creating an industry culture that tolerates or even encourages systematic fraud. The behavior that caused the mortgage bubble and financial crisis of 2008 was a natural outcome and continuation of this pattern, rather than some kind of economic accident.
This behavior is criminal. We are talking about deliberate concealment of financial transactions that aided terrorism, nuclear weapons proliferation and large-scale tax evasion; assisting in major financial frauds and in concealment of criminal assets; and committing frauds that substantially worsened the worst financial bubbles and crises since the Depression.
And yet none of this conduct has been punished in any significant way."
 
As I and others have already said on numerous occasions, this is a monetary black hole from which there is now no escape...none. It can only end one way -- and that's destruction of the U.S. dollar's purchasing power, along with the purchasing power of the rest of the world's fiat currencies. The abandonment of a currency has another name...hyperinflation -- and the only thing not know is the speed of its arrival. But arrive it will...that's guaranteed...as night follows day. – Ed Steer
David's Commentary (In Blue):

It’s been a bad six days. Oh, I’m not talking about politics or economics or gold and silver. All of that is just “noise,” as nothing significant has changed. Sound bites and traders buying and selling on a headline or a tweet, you know, the usual nonsense.
 
No, I’m talking about losing my best friend of 16-years. I’m talking about the Shug. Let me start at the beginning. 
 
16-years ago, Zhanna, my son Andy’s wife, had a miscarriage. Andy decided to soften the loss by buying a Bichon puppy for his family. At the time, his son Josh was two years old and the dog was two or three months old. Shortly after Andy brought the adorable crazy puppy home Josh was walking naked, down the stairs from the second floor of Andy’s home, when the new puppy bounded up the stairs, jumped up and clamped her sharp puppy teeth on Josh’s weenie. That was the one and only time the Shug ever bit anyone. 
 
The puppy had to go. Every now and then I will ask Josh, “How’s the weenie doing?” He doesn’t laugh, but I do.
 
A year earlier, Susan and I had put down the last of our two Maltese dogs and we were enjoying our freedom and weren’t looking to own another dog. My son called and told me his sad tale and pleaded with me to take the puppy. Josh was terrified of the little ball of fur and I absolutely understand why. In fact it took years before he was comfortable in the dogs presence. He learned to love her, eventually. Reluctantly, I agreed, and Susan and I had a new wild, crazy puppy to deal with, but a very lovable and adorable one at that.
 
We decided to name her Shuggie, (Shuggie is short for mashugana, which in Hebrew means silly, or crazy.) My wife’s grandmother once called me the mashugana so in jest we took an offshoot of the name and named the puppy Shuggie. She was crazy and the name was appropriate. As an aside, one of my favorite rock guitar players is named Shuggie Otis – not that it has any bearing on this story. 
 
So that’s how we got the dog and that’s how the dog got her name. 
 
She had the most amazing deep, deep dark brown eyes that were the gateway to her soul. She was all love and kindness and she loved people. A watchdog she was not. Oh, she would bark when someone came to the door but she was just excited to greet them. 
 
She also drove me crazy since she was very strong-willed and stubborn, kind of like me.
 
She traveled with us and loved flying. She loved riding in the car. She loved people and just about everything - especially food.
 
In the last couple of years she began to show her age and our life became more difficult. It was like taking care of an aging parent who had dementia and should be in fulltime care in a nursing home, but we put up with it. She ruled the house and our life revolved around her and her needs. So much so, that last winter we could not leave the cold Minnesota winter for a warm weather vacation for the first time in our 55-year marriage. We had to be home to take care of the Shug.
 
Finally, last Thursday it came to a head. She was now unable to control her bladder and Susan said this can’t go on. I agreed. All she was doing was sleeping 20 hours a day and begging for food when she was awake. No matter how many times a day we took her outside to go “potty” she now preferred to use the house. I don’t know if she had completely forgotten her toilet training or just had to go when she got the urge.
 
So we reluctantly arranged for a doctor to come to the house and put her down. If you haven’t gone through something like this you can’t possibly understand how horrible it is and how long it takes to recover from the process. 
 
The Shug went peacefully, never knowing what was happening. She just laid there, snuggled up next to Susan on the couch, not even aware of the injection, just staring at me with her big brown eyes. And then she was gone.
 
Many of you will understand what I am talking about. Who cares what Trump said or what gold did or if the stock market was up or down. That is all meaningless. I lost my best friend of 16-years and I had to make the decision to end it. I barely was able to sleep for three nights, and had no appetite. Our house feels empty. The joy was sucked out of it. If you are not a dog owner, you will not understand, but if you do have a dog (or cat) you will.
 
There are things far more impactful than what happened in the market today, and this is one of them – for me. I feel sad, I feel guilty. I feel a tremendous sense of loss. Everywhere I turn in the house I expect to see the little devil, but she is gone. 
 
Here is a picture of the Shug taken a few years ago in Miami. This is my way of saying goodbye to my buddy, the Shug. I did love that dog so much.
O.K., now onto the normal newsletter content. Sorry, I just had to do this, for the Shug.
 
Steve Henningsen is a friend of ours and an outstanding financial advisor, one of the few who understand the role of gold and silver in a portfolio. Here is his latest newsletter, and we highly recommend that our readers check it out.
Commentary 
by Steve Henningsen October 2019

The $’s Not in Kansas Anymore
 
“The line in the sand was the financial crisis of 2008/2009. The world’s central banks entered the markets to save the financial system. They learned what they could do, as a result of this, and they have never left. What they learned is that they could dominate and control the markets, utilizing their “Crown of Creation” cash, which is exactly what they have been doing ever since.”


-Mark J. Grant, Chief Global Strategist, B. Riley FBR Inc. 7-05-19
“The deficiencies of the international monetary and financial system have become increasingly potent... Even a passing acquaintance with monetary history suggests that the center won’t hold.”


–Mark Carney, Mark Carney calls for global monetary system to replace the dollar
The Federal Reserve Bank of Kansas sponsors the annual Jackson Hole Economic Symposium each August, and this year was especially eventful, as Mark Carney gave a speech that reverberated across the monetary landscape. I have been expressing my opinion for years that the global monetary system is broken and in need of a “reset”/change from the current credit-based, dollar-centric system that has only led to increased global debt/leverage and financial stress. Mr. Carney’s speech was acknowledgment by the central banks that there is a problem and that a solution that seeks a better balance between various global economies and away from the U.S. dollar is needed.

Now, before any of you choke on the thought of a world without the dollar being the reserve currency, keep in mind that fiat currencies haven’t had a good track record. Of the 599 failed paper currencies, researchers found:

- 30 percent, or 184, ended with monetary unions, dissolution or other reforms, like the creation of the euro in 1999
- 15 percent, or 94, ended via acts of independence (such as former colonial states gaining their independence and renaming or issuing new currency)

- 27 percent, or 156, were devastated by hyper-inflation caused by over-issuance of paper money by governments and central banks; and
- 28 percent, or 165, were destroyed by war -- deemed invalid through military occupation and/or liberation (think Confederate dollars)

- 28 percent, or 165, were destroyed by war -- deemed invalid through military occupation and/or liberation (think Confederate dollars)

I am not saying that the dollar, Euro, Yen, or any of the other current currencies are going to disappear, just that historically, paper currencies don’t hang around forever and “change” is the real absolute. 
 
Anyway, Mr. Carney also hinted towards a global digital currency in his widely publicized speech, as he said, “The dollar’s influence on global financial conditions could similarly decline if a financial architecture developed around the new [digital currency] and it displaced the dollar’s dominance in credit markets. By reducing the influence of the US on the global financial cycle, this would help reduce the volatility of capital flows to emerging market economies.” Whether this involves the IMF’s SDR (Special Drawing Right) currency basket, which I have written about several times, or some new digital version, I’m not sure. What I am confident about is that change is coming, and the current highly-leveraged-to-the-dollar global financial system is wobbling and in need of realignment. (Not to mention other countries’ complaints haven’t stopped since the 2008 financial crisis, China being most recent .) Those who doubt central banks would love to abolish cash and create their own centralized digital currency need only read The Macroeconomics of De-Cashing or The Curse of Cash , both of which were written by central bankers. 
 
“No central bank wants the currency to be something it doesn’t control.”
–Jeremy Stein, Economics Professor, The Coming Currency War: Digital Money vs. the Dollar
 
Word of a “digital currency” got the crypto world all excited, but as I’ve said previously, and, as Mr. Stein points out above, I doubt it will be a private digital currency like Bitcoin. Central banks aren’t willing to give up their current power over creating currency. Whatever it is, it should have the effect of gradually weakening the U.S. dollar as it eventually joins the past world reserve currencies, like the Pound Sterling, in a lesser role. (As shown in the chart, it’s already in decline.) I can hear B.B. King singing about the dollar in the distance…
 
What About the Debt?
 
“My thesis is that over the next decade we will endure increasingly damaging debt crises that culminate in a coordinated global default—“The Great Reset,” as I call it. There are limits in how much leverage the world can handle and I think we are already beyond them. And that is before we have a global recession. The only question now is how we will manage the collapse.”

~John Mauldin, founder of Mauldin Economics
 
“ The only question is whether we are able to look reality in the eye and face what is coming in an orderly fashion, or whether it will be disorderly. Debt jubilees have been going on for 5,000 years, as far back as the Sumerians.”

–William White, Former chief economist of the Bank for International Settlements, 1-19-16
 
So, what about all the debt others and I have been pointing out over the years; how is that problem erased? Well, there has been a growing chorus over the last several years regarding a “debt jubilee.” As Mr. White points out above, jubilees have been around for thousands of years and are an old Jewish tradition – the Book of Leviticus, Chapter 25 – whereby periodically there would be a time for total forgiveness of debt and the freeing of slaves. Years later, kings would proclaim debt jubilees as well, for it wasn’t good for longevity to have serfs grow over indebted and revolt against you. Even Pope Boniface VIII proclaimed the first Christian Jubilee in 1300. Lately, we’ve had several prominent economists and even central bankers come out in approval of some form of debt forgiveness. As far as sovereign debt, I’m not sure how this would be carried out, since for every borrower there is a lender who would be hurt. 
 
“The history of government loans is really a history of government defaults.”
–Max Winkler, author of “Foreign Bonds: An Autopsy”
 
Some have postulated that Japan could be the first country to proclaim a debt jubilee. Their government has been buying up the majority of their sovereign bonds over the past several years and could, at some point, just announce that those bonds are cancelled. Though it would weaken their currency in the short term, no one knows what the long-term effects would be. Could this happen in the United States? I doubt it currently, because much of the U.S.’s debt is owned by pensions and overseas investors. However, what would happen if the Fed begins QE again and starts building up their balance sheet by buying up Treasuries? The ECB already owns billions in European sovereign and corporate debt and is still purchasing via QE. Could the central banks eventually get to the point, like Japan, where they own most of the debt and then just “forgive it” via Jubilee?
 
I’m not sure we have the time needed to get to that point. With global tensions rising, mainly attributed to the growing wealth gap and anger against the “elite,” slowing economies and a loss of faith in institutions, one can sense the timeline shrinking for government action. Since much of the world is already awash in debt, with stagnating growth, I would think odds favor another financial crisis that leads to a “ Bretton Woods ” type of agreement where countries settle on a write down of much of their debt.   
 
Let’s not forget private debt, as the U.S. heads into the 2020 Presidential elections. Several Democratic candidates have come out for student-debt forgiveness. What college-loan-burdened millennial wouldn’t vote to be freed from their debt-shackles? Some candidates are also pushing for trillions in programs related to alternative energy infrastructure and free healthcare for all, which would only add to the government debt and budget deficit.
 
Sign of a Top?
 
The collapse of WeWork was big – really big. It marked the end of the “Age of Illusion.”
 
By “Age of Illusion,” I am talking about the fantastical “This Time is Different” thinking that brought together the hubris-filled worlds of Silicon Valley and Wall Street.
 
 
“The markets appear to be emerging from a psychotic break from reality.
           The ugly process of repricing risk has begun.”
 
– NYU professor Scott Galloway, 9-27-19
 
In case you haven’t been paying attention, the bloom seems to have come off the Silicon Valley rose. Many of their IPO darlings are now lower in price than their IPO date. It’s almost as though investors have lost interest in companies that lose money. The most egregious has been WeWork, which had to pull its IPO due to bad publicity mostly related to the antics of its CEO, Adam Neumann. The company tried to present itself as a “technology” company but were really an overleveraged commercial real estate firm. It was originally valued at $47 billion by the overly optimistic Wall Street banks but is now down to $20 billion. Don’t worry about Adam though, as he cashed in $700 million through equity-backed loans and share sales while everyone else suffers. As to whether or not the poorly acting IPO market transitions over to the regular equity markets, we’ll have to wait and see.  
Liquidity Problems Back?
 
“Negative rates are like the event horizon around a black hole. Once you cross the event horizon, all known mathematical models and descriptions of the universe change. Negative interest rates are creating the same chaos in the world as black holes do in space.”
 
–John Mauldin, Thoughts from the Frontline 9-7-19
 
The appearance of negative rates isn’t the only anomaly, as there has been a lot of discussion surrounding the bank Repo market lately. (Basically, a short-term borrowing market where banks can loan money between themselves.) Seems the banks didn’t want to step forward and loan each other money, so the Fed had to step in and inject $125 billion into the system to loosen things up. (You can learn more here .) As you can see, this added funds back onto their balance sheet, and we’ll have to wait to see if this is temporary or something they will need to maintain going forward. The main point is that this seemed to have caught the Fed off guard, while many in the investment world were expecting it. Just something to keep our eye on going forward.
Fed Returning to What Didn’t Work?
 
“Everyone now knows that everyone now knows that central banks are powerless to impact the real economy, but are the only thing that matters in the market economy. Everyone now knows that everyone now knows that the setting of the price of money is now a disembodied symbol of governmental will, all-important to the market economy and utterly … utterly! … Ignored and immaterial to the real economy.”
 
–Ben Hunt, Epsilon Theory, The Right Price of Money
With the U.S. economy slowing (something the bond market has been signaling for the past year), the Fed has begun lowering interest rates if for no other reason than the U.S. interest rate markets seem “tight” relative to the international markets – e.g. U.S. interest rates are much higher than the rest of the worlds. As Ben points out above, this doesn’t necessarily help out Main Street, but it does benefit Wall Street. Low interest rates allow corporate CEO’s to continue purchasing their stock through buybacks. As shown in this chart, corporations have been practically the only buyers of equities since the financial crisis. The takeaway is not to expect any large market corrections as long as the Fed keeps lowering rates: bad for retirees (savers), Millennials (high house prices), pension funds, insurance companies, but good for Wall Street. While there isn’t much room to lower rates, the Fed, with assistance from the Treasury,still has options to keep the monetary plates spinning.
 
“In a global system of failed monetary policies and a long and difficult path to fiscal policy, there is only one other tool left in the box for the global economy and that is lower the price of global money itself: the U.S. dollar.”
 
–Steen Jakobsen, Saxo Chief Economist, 10-03-19
 
Although the U.S. dollar has been strengthening recently, I’m with Steen in thinking that the government will try to weaken the dollar soon. The world can’t afford a strong dollar and with a growing U.S. deficit and an increasingly irritated Tweeting President, my guess is the dollar will begin to weaken soon. If not, then I would expect another “ Plaza Accord ” type of meeting to coordinate its weakening. Should democrats move up in the Presidential-election poles with their large spending plans, it would only help to weaken the dollar’s prospects.
 
GOLD
 
“Buy gold at any price. I’m talking about physical gold. If the idea goes mainstream and all investors go to a 10% gold allocation, the price will skyrocket.”
 
–Mark Mobius, Bloomberg, 8/20/19
  
I covered gold pretty well in last quarter’s commentary, but just wanted to point out that many respected investment managers have recently come out recommending it, with Mark above the latest. He joins a credible list that includes, Jeffrey Gunlach, Ray Dalio, Stanley Druckenmiller, Paul Tudor-Jones, David Einhorn, Paul Singer, and Thomas Kaplan. 
 
Weaving gold into this commentary, I still believe it will be involved in some manner in a newly developed global monetary system. (There’s a reason central banks have been and are still buying gold bullion –651 metric tonnes in 2018 alone.) I will simply share with you this quote from Columbia University’s Robert Mundell, who later went on to win the Nobel Prize for economics. In 1997, in a speech at Latrobe College, Mundell outlined his theories with respect to the use of gold in central bank reserves:
 
“I do not think that we will see the time when either of those two great economic powers, the United States and the European Union, will ever again fix their respective currencies to gold as they have in the past. More likely, gold will be used at some point, maybe in 10 or 15 years when it has been banalized among central bankers, and they are not so timid to speak about its use as an asset that can circulate between central banks. Not necessarily at a fixed price, but a market price. . .Gold is going to be a part of the structure of the international monetary system for the 21st century, but not in the way it has been in the past. We can look upon the period of the gold standard, the free coinage gold standard, as being a period that was unique in history, when there was a balance among the powers and no single superpower dominated.”
 
I believe he will prove to be clairvoyant.
 
Portfolio Ponderings
 
“Negative rate policies distort the economic and financial market systems. The unintended consequences from these policies will be significant and harmful…I truly worry that the Fed has trained a new generation of politicians that debt and deficits don’t matter. We even have a new name for this absurdity, “modern monetary theory (MMT).” We can have debt and deficits without tears. And now we have a new cadre of potential political leaders who promise free stuff. Should these policies become more likely to be implemented, watch out, since their implementation will produce far worse economic and social outcomes.”
 
-Bob Rodriguez, retired investment manager, “ The Fed is Clueless ”
 
Markets were a mixed bag this quarter. In the U.S. equity markets large-cap stocks eked out a small gain, while small-cap stocks were down. Most international stock markets were down, as the slowing economies of Europe and a “tariff-struck” Asia took effect. The real stars this quarter were U.S. Treasury bonds and precious metals, both of which gained nicely. While I would expect both to pull back in the 4 th quarter after such as fast rise (gold, up 14.8% YTD, has already begun to retrace some of its gains falling 5.2% from peak levels in late August), I expect both to continue to gain into next year as the economy slows and anxiety builds into the Presidential elections. 
 
As Mr. Rodriguez pointed out, should some of the candidates touting “free stuff” gain in the poles, markets could reel in revolt; how many CEO’s will be making capital improvements in an uncertain legislative environment? While a tariff agreement with China may get markets excited in the short-term, I doubt it will introduce any sustainable long-term growth, especially given the administration is now going after Europe with tariffs. On the positive side, any weakening of the dollar should help international markets rebound. Regardless, 2020 is lining up to be a volatile election year.
 
I’d like to end with a quote from one of the larger-than-life business magnates who we recently lost, T. Boone Pickens:
 
“Be humble. I always believed the higher a monkey climbs in the tree,
the more people below can see his ass. You don’t have to be that monkey.”
 
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Increasingly, articles are appearing that discuss the potential collapse of the dollar and the roll that gold will play in those circumstances.
Zero Hedge
 

"Gold is … the trust anchor for the financial system. If the entire system collapses, the gold stock provides a collateral to start over."
 

“We have a very good currency, it’s stable. Why not use it for global transactions?”    —Russian Economy Minister Maxim Oreshkin
Ed asks, who are the buyers? For every seller there is a buyer. Mining shares and physical metals are moving to “strong hands” and they will not be sold – until prices are much, much higher.
ED STEER
 
With the general equity markets blasting higher in New York, it seems obvious that a large group of traders headed for what they considered greener pastures yesterday. But I suspect that a lot of precious metal shares were sold because they were previously bought on margin -- and the margin calls certainly would have been going out yesterday -- and that price action 
started to feed on itself.
 
There can be no other reason, because this mindless selling was out of all proportion to the engineered price declines in their underlying precious metals. Even the rallies off their mid morning lows barely made a difference in how the equities performed -- and that was particularly true towards the end of the trading day, when the rallies off the lows in the precious metals became far more pronounced. Nothing made any difference.
 
But the question that's never asked on days like Friday is...who were the buyers? There has to be one for every seller -- and they weren't weak hands...but the strongest hands of all.

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Miles Franklin was founded in January, 1990 by David MILES Schectman. David's son, Andy Schectman, our CEO, joined Miles Franklin in 1991. Miles Franklin's primary focus from 1990 through 1998 was the Swiss Annuity and we were one of the two top firms in the industry. In November, 2000, we decided to de-emphasize our focus on off-shore investing and moved primarily into gold and silver, which we felt were about to enter into a long-term bull market cycle. Our timing and our new direction proved to be the right thing to do.

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