The past week proved good for gold as actions around the world nudged Donald Trump ever closer to a complete melt-down. His on-again off-again trade war pronouncements have whipsawed both equity and bond markets during August ("I like to keep the other side off-balance"). Republicans with nothing to lose like Anthony Scaramucci, Trump's 11 day communications wonder, have switched from licking Trump's boots to spitting all over them. Trump does not like that sort of thing, nor does his adulatory Base. A few Republicans with even farther right wing views than Trump are making noises of a primary challenge. How long before a credible Republican with roots in the Bretton Woods global order crafted by the United States since World War II stands up to challenge Trump for the 2020 Republican presidential nomination? In one of his recent Tweets Trump even seemed to suggest that he no longer cares what the stock market does, which would be consistent with his Base which likely has little direct exposure to the equities. As Trump descends ever deeper into a maelstrom of his own creation, his sense of being "under siege" will blow away inhibitions about the stock market trend.
I just finished reading Michael Woolf's second book about the Trump presidency called "Siege" which ends with the redacted publication of Robert Mueller's two year fishing expedition that caught lots of scoundrels in Trump's orbit but effectively concluded that Trump's entourage was too incompetent to engage in a conspiracy with the Russians. They were perhaps dumb enough to explore the possibility, but why bother exposing oneself to potential Russian bungling when they were already deploying the much more sophisticated, big data based Cambridge Analytica strategy organized by Steve Bannon and bankrolled by the billionaire media titan Robert Mercer and his daughter Rebekah? The recent Netflix film The Great Hack which is an hour longer than it needs to be is opening the eyes of many people, including millennials who have been indifferent to the social media invasion of their privacy.
The millennial mindset has been one of, "who cares that they know everything about me and use that to show me stuff I might like to buy - I can benefit from that advertising or choose to ignore it". But what The Great Hack film is revealing is how easy it is to exploit personal information to manipulate the moral and political beliefs of individuals. Manipulation implies the absence of choice. When manipulated we do not experience the angst that comes with taking a path whose correctness is not definitive. We are guided along a path that feels very much right. For example, the algorithm that recommends other YouTube videos while you view one draws on both accumulated personal information about the viewer and fresh dynamic information generated by the act of clicking on one of the offerings. YouTube "learns" about your likes and dislikes through your choices, and serves up stuff to keep you on the platform watching videos as long as possible. When that is motivated by serving up advertising as part of the video smorgasbord, no big deal. But what if embedded in the algorithm is an agenda to guide your beliefs toward a particular outcome? And you are in fact on a similar Chinese platform controlled by the Communist Party? Or the new Russian Internet which is being constructed to close off Russians from the influences of the world wide web?
It is possible that millennials will prove perfectly OK with being sheep, but I do not think it will come to that because outside authoritarian systems such as China and Russia there is a looming war between manipulators for control of the sheep. In the early days of algorithmic hedge funds it was possible to make a lot of money as a surreptitious predator with little competition, but nowadays they are no longer systematically making money because they are all competing on roughly the same terms. The 2020 US election will be a battleground of perceptual manipulation that it will prove ineffectual, creating a condition of extreme chaos and uncertainty where nothing is real anymore nor makes sense.
I heard about the Cambridge Analytica story in early 2017 and understood its implications, but I was part of a very small minority. The Great Hack makes the concept comprehensible on a very broad basis. In a nutshell, about 270,000 Facebook users downloaded a non-Facebook app which tracked their digital lives. No big deal one would think, except through the "friends" networks of this handful of Facebook users the app was able to harvest data on 87 million users. Through this channel Cambridge Analytica was able to acquire a database of 87 million users, most of them Americans, for each of whom it boasted it had 5,000 data points. Again you might think, "what good is that"? The brilliance of the Cambridge Analytica strategy was to do big data analysis of voter registrations and the electoral college system of the United States. First they looked for districts that were not hopelessly one-sided, ideally ones where Democrat candidates had a modest majority such as Wisconsin. Then they used the Facebook data to identify voters in those districts whose Facebook profile indicated they were on the fence and "suggestible". And then they created marketing strategies that delivered content designed to guide those voters' thinking into pro-Trump narratives. Presumably that meant buying the right through social media platforms to serve "advertising" content to those voters, except that it was "news" and "opinion" which popped up on the screens of these voters. The key is to serve the content repeatedly while slowly increasing its "temperature", like you supposedly can boil a frog to death, except that no frog has ever suffered such a fate because its brain is not sophisticated enough to become trapped in a mindscape.
A potential backlash from consumers over the use of their personal data to manipulate their behaviour could endanger the business model of the technology giants, which ultimately is all based on micro-targeting consumers with advertising. There is already a movement afoot where people are literally "just saying no" to their social media addiction. Throw in a tariff induced pullback on consumer spending and you have the ingredients for a major economic downturn and major stock market pullback. Assuming that Trump does not get yanked off the stage or somehow incapacitate himself, and we do get a market meltdown, is that the end of the Trump story and our gold rally?
Trump still possesses a very important trump card, which is his 2016 election promise to help Make America Great Again through infrastructure renewal spending. During the Obama administration when fiscal stimulus aimed at infrastructure would have supplemented low interest rate monetary policy the Republicans through their control of the House blocked any such attempt at Keynesian policy. Quantitative easing bailed out the financial system and the economic elites, and while the US economy has been on a recovery track since 2009, the 50% of voters who support Trump are not angry and resentful because they are ungrateful louts. They genuinely do not feel good about where they and their children fit into the future. And I suspect most of the other half of the population feels the same way, which is why the United States is vulnerable to an authoritarian outcome at either end of the political spectrum.
If we get a major equity market correction, the Federal Reserve will have little choice but to lower interest rates. Since the wealth effect of a strong stock market created by the federal corporate tax cuts in 2017 is supposed to have a trickle down effect for the rest of the economy, the evaporation of market wealth should have the opposite effect. And because interest rates are already near historical lows, lowering them back to near zero may not stimulate the economy sufficiently to reverse a downturn. Under these conditions the only option is old-fashioned fiscal stimulus, and this time around there will be no political resistance to piling up new debt at low interest rates to rebuild America's infrastructure. Not only will this create a lot of physical jobs to replace those vacuous marketing jobs that currently employ milliennials which will disappear when big data based technology platforms experience a consumer backlash, but it will visually wipe away the appearance of decay and neglect that troubles so many voters and encourages them to embrace populist narratives. This year the annual US deficit has hit $1 trillion (the difference between tax revenues and outlays) and Trump is on track to beating Obama's record, without the handicap of the Great Recession as a starting point.
Germany, which introduced a "black zero" ("schwarze null") policy in 2009 which forces budgets at all levels to be balanced, and as a result never has a budget deficit and existing debt which is so popular it is now negative yielding, also has decaying infrastructure that is screaming for renewal. Right now the price of gold is rallying because of growing uncertainty about global geopolitics and the overall economy. Missing from the narrative is the yammering from the past two decades about the rising cumulative US debt. Trump is not incorrect in being cranky about the failure of business to reinvest its tax windfall on reshoring manufacturing capacity to the United States. What he has failed to do is give business a reason to believe in America again, to escape the end-times mentality that underpins Trump's support base. The dismemberment of globalized free trade that Trump has set in motion is likely irreversible in the short term, but if advanced nations get to work rebuilding their infrastructure as part of their national survival strategy, the search for cost efficiencies will eventually rebuild a rules based global trade system. That will reduce the uncertainty driving demand for gold, but at the same time we will see the concern about the ability to repay the infrastructure related debt become a talking point once more. And that will prevent gold from dropping below the $2,000-$3,000 trading range which the uncertainty associated with the rest of Trump's first term will deliver much faster than the audience that monitors the resource juniors is currently willing to believe.