Ask The Expert - Lyn Alden - August 2021

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Craig: Welcome back to the August 2021 edition of the Sprott Money News "Ask the Expert" series. I'm your host, Craig Hemke. And joining us this month is a new guest. Her name is Lyn Alden. And if you are interested in the financial sector, if you follow things on Twitter, if you go on the internet and look for independent research and analysis, you probably know who Lyn Alden is. She runs a great website that is just simply lynalden.com. You can find her on Twitter @LynAldenContact. And her website and her service is Lyn Alden Investment Strategy which has been running since 2016. She is an independent, very independent analyst and investor, and it's great to have her join us. Lyn, thank you so much for your time.

Lyn: Thanks for having me. Happy to be here.

Craig: It's great to have you here. And why don't we start with this, Lyn? Before we get to the questions, tell everybody a little bit about your background and the services you provide at your site.

Lyn: Sure. So, my background is basically the intersection of engineering and finance. And so, I started out as an engineer, moved into engineering management and running the finances for an engineering facility. And then I eventually shifted more towards investment research and kind of applying that quantitative background. And so, my website has a free newsletter that's pretty in-depth, and then I also have a low-cost premium research service on the site as well. So, there's a big spectrum of things for people there.

Craig: And people just...it's just Lyn Alden, lynalden.com, correct?

Lyn: Yes, that's correct.

Craig: All right. Hey, let's have everybody check that out. And again, I wanna remind everybody, if you enjoy this type of content, please be sure to help us spread the word by giving us a like, a subscribe, a share on whichever channel you are listening to these "Ask the Expert" segments. Lyn, let's just dive right in. We've been collecting questions at Sprott Money all month long since we announced you were gonna be the guest. I've got six of them. The first one is quite timely as we record this on Monday, the 23rd. I think everything for this week and next month and maybe the rest of the year is gonna be centered around whatever it is that Chairman Powell has to say this coming Friday at Jackson Hole. And you've watched all of this in the last several months as this has played out. What do you expect from Chairman Powell in his Jackson Hole speech this coming Friday?

Lyn: So, the Fed has spent the last couple months kind of laying a foundation for eventually trying to taper their asset purchases, and so they've put out those two standing repo facilities and they've also had a number of Fed officials start remarking around, you know, tapering. Now they're starting to walk that back a little bit, you know, citing the Delta Variant. And even their Jackson Hole event is virtual now because of that. And so now they have some cover where they could, you know, potentially choose to delay that. And so, I would say that, you know, maybe two to four weeks ago my probability was more toward that they probably would announce tapering at this event. And that's still certainly possible but I think the odds are tilting a little bit more towards them probably defining the conditions that they might consider tapering. I'm not sure that they're going to commit to tapering at this particular event but it's certainly a big question that I'm watching because they're basically seeing that inflation's running hot and there is kind of pressure on them to start doing something about that.

Craig: Yeah, you know, that's one of the themes we've been discussing in some of the Sprott Money content this month is whether, like, the rally in the dollar that we're seeing since this first came up two months ago is actually kind of a buy the rumor, sell the news event. Is that kinda on your radar too?

Lyn: That's certainly one of the possibilities. So, gold has been under pressure. The dollar's been pretty strong. But yeah, if they were to, you know, shift back any sort of tapering or basically be more dovish than the market expects, that should theoretically be dollar bearish and gold bullish for example.

Craig: All right. Hey, let's go to question number two because you kinda gave us a little segue right into it just a second ago. And we're gonna use that T word, transitory. It's just simply this. Do you, Lyn, believe that all of this inflation pressure that we're seeing is in fact transitory as the Fed keeps repeating?

Lyn: For the most part no, but it depends on a couple variables. And so, you know, we've seen kind of rolling types of inflation. So we had relatively transitory inflation in things like lumber and then we've seen, you know, semiconductor shortages which are more long-lasting, more persistent. So they're driving up things like used car prices. So that was, like, the second wave of inflation. And the one that I'm really watching for, you know, towards the end of this year and into early 2022 is rent inflation. I think that's, you know, just heating up. Rent inflation and the way that they include shelter in CPI. And so that part's, you know, likely not going to be transitory.

Now after, say, 2022, whether that inflation remains persistent or not will largely depend on whether or not they do more fiscal spending or if they pull back and kind of, you know, revert the trend. But I do think that this current round of inflation is probably stickier than the consensus expects. And I think that rent and shelter inflation is probably gonna catch people off-guard.

Craig: Yeah. Do you see the word transitory as kind of a jawboning form of yield curve control, trying to keep the bond market down or rates down?

Lyn: I think that's a good way to describe it. And so that's kind of...you know, one of my themes over the past couple years is that because of where we are in the long-term debt cycle, the Fed doesn't have much of a, you know...they're basically stuck, right. So, they raise rates. They crashed the debt markets. And if they, you know, keep doing what they're doing, then inflation runs hot and you get deeply negative real yields. And so, you know, they've kind of chosen that second option. And so, you have this environment where, you know, inflation's running pretty hot but they're emphasizing that it's transitory, you know, to make it so that the bond market doesn't freak out.

And we also see other factors like the treasury general account has been drawing down which means there's not a lot of new supply of treasuries even though the Fed's still buying $80 billion a month in treasuries. And so, I would consider this basically a form of soft yield curve control. They haven't formally locked the long end of the curve but they're holding the short end of the curve near zero and then they're buying large amounts of...you know, across the duration spectrum.

Craig: Yep. All right, hey, let's focus again on the central banks with question number three. It sure seems like the central bank digital currencies are on the way. You're getting more and more trial balloons on those, it seems, on a weekly basis. What role do you think gold might play in a world of central bank digital currencies?

Lyn: Well, for one is we still see banks buying gold, right, central banks. So, Russia's a big buyer but, you know, even countries like Thailand. There's multiple countries around the world that have been buying gold, especially since around 2008. That kind of long-term trend reversed around that point and hasn't really stopped. So, gold remains a reserve asset for central banks.

For people, you know, the thing about CBDCs is that they're surveillance tools, right. And there's also kind of been a general trend towards wanting to phase out cash, make it harder to remove yourself from the financial system. And so that's why, you know, independent bearer assets whether it's gold or Bitcoin, you know, whatever the person's persuasion is...silver as well. You know, there's certainly a value in having these alternative moneys that are basically outside of that system that you can transact in that are harder to surveil, that are harder to kinda lock into the system. So, I think they're valuable both from a central bank perspective and from a user perspective.

Craig: I like that term. I've not heard that before, individual bearer asset. I think that's great.

Lyn: Yeah. So cash is a bearer asset too but of course the problem is that, you know, deeply negative real rates means you can't realistically hold a lot of cash outside of that financial system because you get devalued.

Craig: Yeah.

Lyn: And so, you know, people can choose between cash, gold, Bitcoin, silver, and so, you know, whatever their preference is. But basically, those kind of more scarce inflation adjusting, you know, assets certainly have value in this type of environment with the combination of negative real yields and this push towards, you know, anti-privacy, pro-surveillance, you know, kind of these schemes to kinda, you know, maybe phase out cash and kinda lock people into this negative real rate environment. So, I still find them valuable.

Craig: Yep. No doubt. Well, we're having so darn much fun, and we're already half way done. So, let's move on to question four. This is something that came up last week. Peter Thiel's company at...is it Palantir? I don't quite know how to pronounce it. But his big company is buying...has bought maybe a metric ton of gold for about $50 million. Also, announced they're gonna accept gold as payment. Do you see any significance in that announcement?

Lyn: Well, that's certainly significant and it's kind of...you know, it's interesting because you've seen a trend for a couple companies, a handful of companies actually, a pretty good number putting Bitcoin on the balance sheet. And so, this is an interesting move to see one of the companies put gold on their balance sheet. And it's one of those things where it's a small percentage of their cash position. So, it's not like they converted all of their cash to gold but they did use that as, you know, somewhat of a hedge. And so, I think it's interesting. Especially because they're pretty tied into intelligence communities and things like that. So, they actually...it's pretty interesting that from their perspective that they wanna own some gold. And I believe they already accept Bitcoin as payment. So basically, they're open to things that are just not cash, right. They want something that, you know, is scarce. And in gold's case, of course, it's resistant to cyber-attacks, it's resistant to power outages, it has these various, you know, kinda safeguards built into it. And from my understanding...I didn't look into that news as much as I probably should have but my understanding is they took physical delivery. So, they're not holding some, you know, like, ETF or something. They actually, you know, took possession of the bars last I heard.

Craig: Yep. They said they were gonna hold it, it looked like at a COMEX depository because they said they were holding it in the northeast U.S. in a vault somewhere. That sounded like COMEX delivery even. You know, and the other part about that, as you said, the connection of the company is deep. The government connections, and didn't they say something about worrying about a black swan event? Something like that.

Lyn: I believe they did, yeah. And so, you know, based on where we are in kinda the long-term debt cycle, you know, we're in one of those environments now where you could have, you know, what should otherwise be a low probability event happen on a random Sunday, some sort of currency announcement, some sort of...something like that. And so, it's...this is an environment where you wanna have some real assets. And people of course...some people like to trade around those positions but, you know, there are these things that could just happen on a Sunday where you don't get to trade around it. And so, establishing position ahead of time in some of the things that you consider to be defensive assets is, you know, in my view, worthwhile. And they're doing the classic thing, where I mean, you know, they're not making a giant bet on gold but they're using it as insurance. They're putting, you know, a portion of their assets into this so they have this as, like, a hedge or a safeguard.

Craig: Kinda like what a lot of us individuals have done over the years. That's for sure. All right, Lyn. Just drawing on your experience of kind of generally looking in all markets, let's tie this question in, has to do with the mining sector. I think it is value investing in general. It's so currently out of favor, the sector, but then just this notion of value versus growth. When and how might that bias change?

Lyn: I think it's largely tied to growth and rates. And so, we've been in this long-term environment. You can actually kinda separate it into a couple different epochs. So, if you look over the past, like, century, value has outperformed growth. But ever since the early '80s when we've been on this kind of, you know, this structural, you know, four-decade trend of lower and lower interest rates, growth has done very well compared to value. Now there have been individual decades, especially, like, the 2000s where value outperformed. But generally, we've been in a very strong growth environment where lower and lower interest rates allow these kind of high growth companies to be bid up to very, very high valuations because the discount rate is just so low.

Now, if we were to get, you know, a more persistent inflation, you know, potentially higher yields but, like, as we discussed earlier, there's basically, you know, types of yield curve control in place but when we get higher levels of inflation, that can put more pressure on some of those high valuations of equities. And another way to look at it too is that the fiscal stimulus is inflationary but it also in some ways ends up being pro-growth. At least in certain areas like, you know, demand for energy or demand for manufactured goods. And so that kind of, you know...that trend we've been in for a while I think is gonna reverse.

The other thing I'd point out is that, you know, the past...especially the past decade we've been in this commodity abundant environment, right. So, with the introduction of shale oil, with overproduction of copper, things like that, we've been in this period where we've been a long commodity bear market. You know, that puts downward pressure on prices. That's part of the value sector, you know, the energy and the mining sector.

And so, when we kind of shift more towards a period of scarcity which I think is where we're headed towards, those sectors in the value side probably should do pretty well. And that can, you know, put more pressure on the growth sectors, like consumer discretionary, right. So, if your rent is going up, if your gas bill is going up, you have less money to spend on discretionary goods. And so, I think that pendulum is probably shifting more towards...you know, not every...I still own some growth stocks but I do think it's shifting more towards some of those out of favor value types of areas.

Craig: All right. All right, Lyn. I saved this one for last. This is one that I've been thinking about quite a bit and so I'm curious to hear your answer. And you kind of referenced this earlier with the Fed setting up their repo facilities and making them permanent, it seems. We now have over a trillion dollars in reverse repo volume. It seems that locked in and growing every single day. So does the U.S. risk negative short-term rates, nominal negative rates in the next crisis or slowdown?

Lyn: They do risk that. They've been pretty hesitant against that so far. They've taken measures to, you know, prevent that from happening. And so, they have that five basis point rate for example on reverse repos. And so, you know, if we have another downturn, it's possible to go there, but I think that they've...you know, the Fed at least I think has looked at Europe and saw that, you know, going negative interest rates doesn't really help, right. So, if you're in another type of regime, you know, lowering interest rates from 7% to 4% can help spur loan demand and things like that. But when debts are so high, you know, people are making a decision to take out credit or not based on, you know, if interest rates go down 1%. They're choosing to take that on, whether or not they think they'll be able to use that money effectively and pay it back. Banks are also...you know, they're more concerned about the possibility of that loan not being paid back rather than, you know, that specific...you know, how many basis point spread they can get on it.

And so, overall, I think that they might turn to that but I think they are starting to realize that they've kind of run out of monetary policy room, and lower and lower interest rates especially into negative territory doesn't give them the nominal GDP growth that they're looking for. I mean, if anything, you know, those negative rates...basically, that's withdrawing money from the system. And so that kind of, you know, runs counter to some of their goals. And so, I'm kind of hoping they don't go with that route but we'll see.

Craig: Right. Do you think unwittingly they'll be forced there just because there's so much...there's so many dollars laying around, just that reverse repo volume but yet, you know, not enough places to put it.

Lyn: So, I would describe it in two different ways. So basically in 2019 when we had the repo spike, there were too many treasuries compared to bank reserves. And in this environment, we're somewhat in the opposite problem now. The Fed has done so much QE and we've had the treasury general account drawdown. So, there's not a lot of treasuries being issued, and now they've actually gone deeper than they expected due to the debt ceiling issue which, you know, we're probably gonna see a resolution to that later this year. But for the moment that...you know, they're not really able to issue treasuries on that.

And so, we have essentially a collateral shortage. And so that can push rates into, you know, lower levels than the Fed expects. Now, as we go out a little longer and that TGA situation resolves and they issue treasuries again, I think that could reverse it to some extent and basically, you know, basically supply more collateral to the system. And when it comes down to the next economic downturn, kind of the separate point, the two levers they can pull are they can keep doing more and more monetary policies so they go negative rates, but we see that doesn't really work that effectively, or they can do what they did back in 2020 where they do the fiscal spending and they see that that's a lot more impactful. Of course, it comes with inflation, you know, in part because it's impactful.

So, my base case is that we're gonna see more of that where they're holding rates very low levels and doing these kind of rounds of fiscal spending to get nominal GDP growth, inflation levels well above the interest rates. And so, you're stuck in this long-term environment of negative grow yields and these round of fiscal. But, you know, basically the monetary policy is mostly a Fed decision whereas the fiscal policy is that complex mix of politics. And so, you can get gridlocked, you can get all sorts of things, and so the timing of that can be a lot more challenging to monitor. And I think, you know, a big question in the United States will be what happens with the 2022 elections.

Craig: Great stuff, Lyn. Again, we've been speaking with independent analyst and investor Lyn Alden of the Lyn Alden Investment Strategy newsletter. You can find that at lynalden.com. And again, just a reminder. All of this content is sponsored by Sprott Money. So, any time you're in the market for precious metals or precious metal storage, Sprott Money is, a reminder, a fully insured global precious metal storage service with some of the lowest storage fees in the industry. So, any time you're in the market for metal or storage, just go to sprottmoney.com/storage, or of course just give them a call at 888-861-0775. Lyn, thank you so much for your time. This has just been tremendous. I hope we can do it again sometime.

Lyn: Happy to. Thanks for having me.

Craig: From all of us here at Sprott Money News and sprottmoney.com, thank you for listening. We'll have another "Ask the Expert" segment next month.