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Mike Gleason: It is my privilege now to welcome in Greg Weldon, CEO and president of Weldon Financial. Greg has over three decades of market research and trading experience, specializing in the metals and commodity markets, and his close connection with the metals led him to author a book back in 2006 titled Gold Trading Boot Camp, where he accurately predicted the implosion of the U.S. credit market and urged people to buy gold when it was only $550 an ounce. He is a regular presenter at financial conferences throughout the country and is a highly sought-after guest on many popular financial shows, and it's always great to have him on the Money Metals Podcast.

Greg, good to have you back and thanks for the time again today, welcome.

Greg Weldon: Always my pleasure, Mike.

Mike Gleason: Well, Greg, tariffs are back in the headlines this week. The optimism around an imminent trade deal with China has been supporting markets for a few months, but that blew up this week. The president is planning to raise tariffs and impose them on even more goods. It suddenly looks as if a deal is much farther away than people thought. So, I wanted to get your take on this week's news. Tariffs were first announced roughly a year ago. Do you think more tariffs are likely to succeed or are we learning here that the Chinese either can't or won't negotiate as much as Trump would like?

Greg Weldon: Well, gosh, I don't know, first of all. Will more tariffs succeed? I tend to doubt it. There's certainly one camp that believes that these are almost irreconcilable differences, that we could go on and on and on. If the Chinese have backed off, there's really no choice here. If they're reneging already before a deal's even made, that's not necessarily bargaining in good faith and there's a lot of people out there who would suggest that that's been their modus operandi the entire time. The modus operandi of Trump is to play hardball and that's what he's pulling here.

I think the bigger question, Mike, is twofold. Clearly, it's huge. If they don't reach a deal, that's devastating because, having reached a deal is priced into the markets to some degree, certainly in the U.S. I take it immediately to the stock market, where the stock market has had a 28%, from low to high, rally from Christmas Eve here through April. That is a lot of energy. That is a monster move. Extrapolate that out over a course of a 12-month period. That's just enormous. And that has been predicated upon what? Stimulus? No. Has it been predicated upon, all of a sudden, there's been this consumer resurgence? No, this happened at one of the same times we've seen some of the worst retail sales numbers we've seen in a decade.

It has been built on hope, hope for a resolution to the trade dynamic and hope that the Fed is going to switch to an easing bias and eventually cut rates by the end of this year. If those things don't happen, wow, look out, because they're priced to some degree. And expecting another big jump from here through new highs that's going to power another leg that's going to come with 25 billion 12-month growth in retail sales, I don't see that. I don't. It's almost imperative now that the U.S. gets a deal done, and I think that changes the dynamic a little bit that maybe Trump is not considering, because the thought process in the pop media is that, well, you got a nice GDP print, you got a record low on employment, the U.S. economy is booming, enough we're in a position of strength now and we can play harder ball.

I don't know because, frankly, I could slice and dice the employment number to shreds. I really could. I could make a very strong number case, statistical, factual evidence case that would suggest wage growth has peaked, that the employment dynamic's already rolling over. So, (we’re) playing a dangerous game. And it's still the same thing we talked about a year ago, Mike, you and I… this is basically Donald Trump willing to risk ... it's two guys dousing gasoline, holding matches, and the U.S. betting their match is longer and they're still right. The question becomes what is China’s end game here? Are they willing to risk it all? And the U.S. is betting that they're not, and we'll see what happens.

Mike Gleason: Trump is making maybe a bit of a silly claim that these tariffs are going to be paid by the Chinese. The reality is that much or all of the increased costs of exporting to the U.S. will be passed to the U.S. consumer in the form of higher prices. Chinese companies aren't going to simply absorb tariffs. So, you wouldn't think that this is going to be good for the U.S. economy. Trump thinks the Chinese will blink first, obviously, but we're pretty sure he is hyper-sensitive about maintaining GDP growth and higher stock prices as we enter the 2020 election cycle. Is this week's stock sell-off an indicator of more trouble ahead in the markets and, if so, do you think Trump has the fortitude to stay the course here?

Greg Weldon: Well, I'll backtrack one second because, in fact, Mike, if you look at really what happened with the first round of tariffs, the Chinese government paid it. They subsidized imports by paying the tariffs. So, that's interesting point number one. Number two, to the degree that you've seen an increase in consumer goods import prices from China, it hasn't been that significant at the data level. That's kind of interesting, and maybe that emboldens Trump to be more aggressive as well. The question is, will China continue to absorb those costs and that's, again, what Trump is ... that's why he's applying this pressure. Because, in round one, the Chinese government subsidized those costs, so he's putting the screws to the Chinese government here, in his mind, in doing this.

In terms of the stock market decline being a sign of more trouble to come, I think it's absolutely a sign of the vulnerability of this market, because this market is up 27.9, so it's 28%, from low to high, from December. It has taken all that firepower to the degree that people are now more on the long side than they were at the peak. And if you look at the Nasdaq, each successive high is by significantly less and less. There is not a metric in terms of the rate of change on a 52-week basis that is even close to new highs here. So, there's a lot of inner weakness that's potentially exposed here if you don't get a trade a deal, if you don't get a Fed that shifts to a bias towards easing, because the fixed income market has priced this.

The two-year note, the five-year not, both below the effective Fed Funds rate of 2.40. We said watch for this back in September. When the five-year note was at 3%, I said specifically, you're not going to go above three because the inflation's not going to go above three and the Fed's not going to get to three. Even though that's where they thought they would get, they weren't going to get that far. The question then became how much could you de-price? Could you de-price down to 2.25, down to two? I was hoping they wouldn't hike in December because in so doing, they tacked on another bunch of billions of dollars to the bill that the consumer pays every month to float their debt, which is at a record high. All of a sudden, it's now 70% of retail sales on a monthly basis. That's not sustainable.

And what happened? The consumer choked. Look at the numbers. The retail sales numbers were horrible, and the market powered ahead anyway on the thought process that the Powell pivot was a shift in policy towards where they're saying we're going to ease. The Fed funds futures market prices in nearly 100% chance of a rate cut by the end of this year and another one by the end of next year. The Fed’s dot plot says hikes. Six of the governors would vote for a hike in 2020. When you listen to where the Shadow Fed and some of the Fed watchers are, they are saying that, "Hey, we're at neutral, but the Fed may still have to go a little further based on the labor market." Now I say that's a faulty reason and I don't see the Fed hiking. I do see the Fed cutting, but it's a question of how do you get there?

So, you've gone through this process where the fixed income markets wanted to try and force the action, which is what I said when you're at 3%. It's like the Fed's not going to turn unless fixed income turns and the bond market comes down towards where the effective Fed funds rate is and, after the December hike, that's at 2.40. I was even surprised it went below, but the five-year note led the way, the curve inverted, and both of the two and five-year note were below 2.40, while the Fed funds are pricing in an ease.

What did the dollar do? It did nothing. It stuck near its high. There's thought that maybe there's a dollar shortage out there. Look at Turkey. Look at a place like Venezuela. It's now almost spilling over into Colombia, Argentina. Chilean peso, Brazilian real, on the ropes. A number of Asian currencies are under pressure. A number of African currencies are under pressure. A number of the former Soviet Republic currencies are under pressure. And, all of a sudden, it's like, well, the dollar's not responding to the fixed income market, which is saying the Fed's going to ease. Part of that ease would be the dollar relief valve gets played. Well, it's also tough to see all this when you got a 3.2 GDP, a 3.4, 3.5 unemployment rate, and a stock market at new highs.

But all that, to me, belies the strength of the underlying economy and the risks that, if you don't get a trade deal and if the Fed doesn't shift sooner rather than later, then you're looking at the stock market being the one that theoretically could force the action in concert with potentially a dollar breakout, which would be more pressure on emerging markets to the point where it's a deflationary risk to the Fed and they have to go more in line with fixed income. A lot out there and a lot of different ways this could go, but it's not going to stay here. That's for sure.

Mike Gleason: Staying on the currency front, you've been hinting at some interesting developments in the foreign exchange markets. We keep an eye on your Twitter feed, and you're seeing some things that nobody is talking about just yet. We know the U.S. dollar has been drifting higher and that is making some headwinds for gold and silver, but we know there is a lot more going on in the currency markets than that. Can you share with our listeners some of what you're seeing there?

Greg Weldon: Well, the metical, the kwacha, the kwanza, the pula, we can throw all these currencies at you and you say, "Wow, what are those currencies and who the heck cares?" Well, when you take the case of Angola, they're an OPEC producer, 1.8, 1.9, something like that, I think, in terms of millions of barrels per day of oil output, their currency is getting just annihilated. It's just getting mauled, and you're talking about a 400% rise in dollar against the Angolan currency in the last 10 years. These are massive devaluations that are taking place in places where they're talking about you can't buy anything with the local currency anymore. So, now you need either digital or you need dollars or you need metal. And what happens, of course, is gold in these currencies is also at record highs and in big demand. Dollars are in demand, gold's in demand, and there are several tangents that are really important that come out of this story and, again, you say to yourself, who cares about these currencies?

Well, you take the case of a Mozambique and these currencies down there around the area around South Africa, sub-Saharan, the southern part of Africa, even you throw the Congo into the mix, for crying out loud, you get this dynamic around trying to peg the currencies, trying to save the value of the currencies in terms of purchasing power. And what was the currency, I forget now, the country's escaping my thought process right here. It's not Mozambique. Madagascar? No, it is Mozambique, whatever. There was one of those countries where they had big currency problem. They were going to link to a basket of local currencies, including the Angolan currency, and it just completely collapsed.

The bottom line is trying to maintain wealth and purchasing power of your domestic currency is becoming increasingly hard in a lengthening list of places, which runs the risk of imploding a dollar crisis, A, or really some kind of bigger picture crises, and the other important macro tangent out of this is to note the continued de-linking of gold from its normal relationship with the U.S. dollar, because gold is going up despite the fact that the dollar's hanging around at a level that's almost like a major breakout point. So, here's a lot going on in the world, if you look at some of these other currencies, that is kind of gold bullish because it all comes back to one big picture, and it all comes back to the Fed, it all comes back to what's their next move going to be, and it is a going mistrust with all paper, central banks, credibility, IOUs, currency, debt, whatever.

They're going to keep throwing paper on this raging bonfire and, at some point, you don't have enough paper to throw on it to keep it growing, and I think you've reached some kind of tipping point, and I think, when you look at the periphery of the periphery and the currencies I'm talking about, there's a story to be told there that is worth knowing because ... coming to a theater near you soon potentially.

Mike Gleason: Do see a lot of those currencies on the periphery or the economies on the periphery that seem to feel things first. Looking at things, the U.S. is a little further down the line when it comes to feeling the effects of some global economic slowdown.

Now turning back to metals here, Greg, what are you seeing there? Silver has been pretty disappointing as prices have dipped below $15 an ounce. Gold is hanging in there pretty well, actually, all things considered, especially given how the dollar's doing. We’re just below $1,300 here as we're talking Wednesday afternoon. What do you see ahead for the metals, Greg, and can they finally catch a bid and get some kind of a breakout going or is 2019 going to be another ho-hum/disappointing year in the PMs?

Greg Weldon: Well, I think you've really got to differentiate some things here too, because the dollar being where it is and the dollar with what I just talked about going on in a lot of peripheral markets, you're not even talking about the euro. We haven't talked about the Swedish krona breaking down at a time when the Swedish Central Bank has the most negative interest rates out there and so on and so forth. Man, the craziness in Europe in terms of interest rates is a whole other story. But how this then links back to gold is bullish, but maybe not so bullish for industrial metal, at least not in the near term. It really takes a shift from the Fed that impacts the dollar, I think, to be the be-all-end-all of the next phase of a rally that could be seen in the industrial metals.

We thought we were going to get there and we wanted to like them, but it's been a frustrating trade and it's breaking down here and that's because the dollar's sticking around 98 instead of taking out 95 on the downside, but that's because the Fed is standing fast. Why? Because you got a high GDP, you got low unemployment, and you have, until the last few days, a stock market that's up 28% and at the verge of being at record highs. So, of course, the process to get the Fed to where they're going to have to be because, frankly, none of what we're talking about in terms of equities, and even in terms of the GDP numbers in some of this stuff, is, to me, sustainable through the end of the year unless the Fed changes. So, it's going to take pain to get to the point where the Fed is even needed, and that pain is probably in the base metals, in the industrial metal.

In the meantime, gold continues to de-link, so you like gold over silver because silver needs to prove itself and it's still weighted down by its industrial anklets, so-to-speak. But I think the case for gold improves every day that it's not breaking below $1,266, while the dollar's up here at 98. Because even if the dollar breaks out, that's going to be a denouement and that's going to be a tipping point, and that will ultimately bring the Fed back into play, then alter the bigger picture move for me in the dollar is below 95.02, and that's when the metals gel. Having said all that, the bounce that we've seen off $1,266 here, if you look at the long-term charts, this thing could be sneaky and could come out of nowhere, where, if you get above $1,344 ... Who's invested in gold? It's still not a loved asset. People are scared to death of it. Why? Because the dollar's at 98, because it seems like the U.S. is in good shape.

From that perspective, if it gets above $1,344, Mike, you really are looking at real fireworks, potentially, on the upside. So, keeping in mind that, I think, from a fundamental Fed monetary perspective, it's patience. That's not to say that this thing couldn't sneak up on you, and don't get caught sleeping because above $1,344, you're going to want to be involved.

Mike Gleason: It seems somewhat interesting that the Fed is not still hiking rates given that fact that, yes, GDP numbers are looking good, unemployment is so low, the stock market's doing so well. It seems like they probably should be raising rates. The fact that they're not, is that just a matter of the debt bubble totally implodes if they continue to hike? Is that how you see it?

Greg Weldon: I think that's a fact of they actually see that the inflation risk is skewed to the downside. If you look at where CPI is, if you look at where energy is, you've had this big rise in energy, but it only brought you back to where you were a year ago. So, there's no inflation impetus. With the most recent decline over the last couple days, even gasoline is now back to a position where it's down double digits versus a year ago. There's no upside impetus in inflation.

Like I said before, I could slice and dice the employment number to shreds. What you see is 65% of industries posted a decline in average weekly earnings, an outright deflation, for the month. The year-over-year rate of change has dropped from 3.6 to 2.9. It's back below three. It's below the year-over-year change in average hourly earnings and weekly earnings lead. Part of the reason is because hours worked fell, but also that there wasn't enough juice in average hourly earnings to make up for that. So, you have what really looks like a trend change in earnings to the downside. A lot of the anecdotal evidence is there. You look at some of the surveys. You look at the ISM numbers. You're seeing softening there. You're seeing softening in some of the labor market dynamics.

The most recent employment number, Mike, it made no sense in the degree that you had 700,000 increase in the number of people not in the labor force, and you had your employment gain and, even in the household survey, it was a decline, but only 100,000 in employment, and the participation rate fell two-tenths. That's not a labor market that has tightened in capacity, that's tightened in terms of slack. The unemployment rate is not the number to look at. It's misleading. And when you look at the numbers you're producing in terms of job growth, that's great because you need it because you have growth in the population. So, there's a lot going on here, to me, that it's easy to look at the unemployment rate and say what Powell has said the entire time, this means we're going to get potential for an inflationary implosion to the upside here in terms of wages, that it's so tight that it implodes to the point where you have to drive wages up.

We've seen that happen, and we've seen the tightness in the pipeline in terms of delivery times and supply disruptions and all this stuff in trucking. All of that's gone. All of it's worked its way out. So, I don't see an inflation impetus and, to me, thinking that the Fed's going to raise the rate base because GDP is finally back above inflation and they want to, what, raise rates so they can, what, squelch that one? Inflation's really not a risk, so we'll see. And, again, I think the stock market's the key because the stock market is built on, to me, on things that haven't yet happened and may not.

And you can talk all you want about this GDP report. That's fine. I just don't see where the next engine of global growth is going to come from. It's not trade. It's not going to be a trade deal. It's less than 2% of GDP. It's not going to result in hundreds of billions of dollars of fresh money in the U.S. It's not going to equal the trade deficit. You're not going to reduce the trade deficit. You're not going to eliminate it, let's put it that way. And is it the Fed easing? Well, the Fed's a couple steps away. Why? Because everything looks so rosy.

Mike Gleason: We know that they want inflation eventually here and you got to think that they'll probably make sure that they get it at some point.

Greg Weldon: Well, you could make a case that, if they raise rates, they're working against themselves if they want inflation to get to and stick around too. Raising rates here would be counterproductive to their stated goal.

Mike Gleason: Yeah, yeah, absolutely. That's why I think that we're going to get inflation at some point, but we just haven't quite yet.

Well, good stuff as always, Greg. We appreciate the time and then love getting your commentary. Now, before we let you go, please fill people in on Weldon Financial and how they can find you and any other information that they should know about you and your firm.

Greg Weldon: Sure. You go to our website and sign up, WeldonOnline.com. Or email me directly, GregWeldon@WeldonOnline.com and I'd love to send you a copy of the report we did today. It's a special on the U.S. stock market and we call it the Nurse Ratched Market, and, if you remember, of course, Mike, the One Flew Over the Cuckoo's Nest. And the bottom line, to me, is just the market's up 30% on a lot of hope, and it's almost like, calm down here, man. I hear Nurse Ratched in the background saying, "It's medication time, gentleman. It's medication time," and that would mean maybe a correction in the stock market. But look at all the sectors, tech and the retail and the health care and semiconductors and so on and so forth and bond market, dollar, gold, and that's our special today, Nurse Ratched, and I'd be happy to send that to any of your listeners if they email me directly at GregWeldon@WeldonOnline.com.

Mike Gleason: Well, excellent. Thanks again, Greg. I hope you have a wonderful weekend and we look forward to speaking with you again before long. All the best and take care in the meantime.

Greg Weldon: Thanks, Mike. You too.

Mike Gleason: Well, that will do it for this week. Thanks again to Greg Weldon of Weldon Financial and WeldonLive. For more information, simply go to WeldonOnline.com where you can sign up for a free trial. Again, you can find all that information at WeldonOnline.com, be sure to check that out.

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