Apology From Tokyo

Message From Tokyo: “We’re Sorry”

The word from the Bank of Japan: “We’re really sorry about screwing up global markets for three days.”

Of course, that’s a paraphrase on our part. But the subtext was unmistakable.

From this morning’s Wall Street Journal: “A week after Japan’s top central banker shook up global markets with comments about raising interest rates, one of his deputies walked them back Wednesday and promised not to raise rates when markets are unstable.”

With the benefit of a little hindsight — and the chance to take a breath — it’s now clear that Mr. Market’s early-August panic attack was less an “imminent U.S. recession” thing and more of a “domino effect from Japan” thing.

One week ago today, the Bank of Japan ordered a surprise interest rate increase. In his follow-up news conference, BoJ Governor Kazuo Ueda suggested he wanted to continue raising rates — even though consumer spending in Japan is in the doldrums.

The market’s freak-out commenced one week ago tomorrow.

Context: Japan has had near zero interest rates for the last quarter century — and negative interest rates for much of the last decade. (Imagine lending money to the government and getting less back than you started with.)

Thus, for the last quarter-century, deep-pocketed investors around the world borrowed yen at next to no cost and invested in a host of assets all over the world that could generate a respectable return. Recently, much of this “yen carry trade” went into U.S. Treasury bills (5% guaranteed!) and U.S. tech stocks (unlimited upside!).

So imagine you’re one of these deep-pocketed investors and you hear about what the Bank of Japan did last Wednesday. Suddenly, the money you borrowed for free is no longer free — and you’ve been put on notice that it could become even more costly.

Thus, you do the only logical thing. You sell all those assets you bought with the borrowed money and send your funds back to Japan.

This is the “unwinding” of the yen carry trade. And as we said on Monday, such a sudden and dramatic shift in money flows was bound to deliver a market shock.

Now the shock is over. Mr. Ueda sent one of his minions out to deliver the message: “The bank will not raise its policy interest rate when financial and capital markets are unstable.”

So there.

War Drums Beating, Oil Rallying

As the stock market calms down, the oil market is heating up amid… well, whatever’s going to happen next in the Middle East.

There’s been an eerie calm the last 24 hours — nothing really new since Israeli media reported that Israel might launch a “preemptive strike” on Iran, rather than wait for Iranian reprisals after Israel’s assassination of Hamas’ political chief in Iran.

The British shipping consultancy Dryad Global is telling its clients to expect “retaliatory attacks on Israeli territory and assets, affecting commercial shipping.”

Whoever’s calling the shots in the executive branch of the U.S. government continues to embrace the contradictory position of 1) urging “restraint” on Israel and 2) moving ships and planes to the region to defend Israel.

Seems like 2) trumps 1) and is guaranteed to blow up into something big sooner or later…

With that, a barrel of West Texas Intermediate is up 2.5% at last check — back over $75 for the first time since Friday. The dip below $72 sure didn’t last long.

Meanwhile the major U.S. stock indexes began the day in the green, only to turn flat as the day wears on.

At last check, the S&P 500 sits at 5,242 — up 1.2% from Monday’s “crashy” close but 7.4% below its record close on July 16.

“The progress we’re seeing is nice,” says Paradigm chart hound Greg Guenthner. “But this market still has a lot to prove going forward. I suspect we’re not completely out of the weeds just yet. For now, we need to assume we are somewhere in the middle of a relief rally until price proves otherwise.”

Gold is consolidating a few bucks below $2,400. Silver isn’t nearly as strong, slipping below $27. Copper remains mired under $4 a pound. Bitcoin is little moved over the last 24 hours at $55,787.

Costco Gold: Just the Beginning

If a new survey is any indication, Costco’s sales of gold bars can only zoom higher from here.

It was late September of last year that Costco confirmed it was selling one-ounce gold bars on its website. Not all the time — but when available, they typically sell out within a few hours.

That said, Costco has kept its gold sales figures close to the vest. Wells Fargo analysts deduced this spring that the warehouse chain is selling $100–200 million a month.

Now the World Gold Council has commissioned a survey in hopes of shedding further light on the phenomenon.

Out of nearly 4,400 Americans questioned, 55% said they’d shopped at Costco in the past 12 months — either on their own membership, or accompanying a member.

Meanwhile, 26% said they’d invested in gold sometime over the previous five years. Of this gold-investing cohort, 76% said they’d shopped at Costco sometime in the previous 12 months.

So it might surprise you to learn that only 17% of survey respondents were aware that Costco sells gold bars. And even among active Costco members, that level of awareness rises to only 22%.

Sounds like an opportunity for Costco, no?

Indeed it is — once people are made aware. From a Kitco summary of the World Gold Council’s findings: “The knowledge that Costco sells gold appeared to increase respondents’ interest in gold bars as an investment, with 41% of respondents saying they were more interested in investing in gold bars in the future…”

Fascinating. To be sure, Paradigm has its own relationship with a precious metals dealer, Hard Assets Alliance — offering a wider selection of products and among the lowest premiums in the industry, we’ll add as a shameless plug.

But we take heart from these findings anyway — on the theory that a rising tide lifts all boats.

We stay with gold for our next item…

There’s Gold in Them Thar Circuit Boards

The price of gold is now high enough to make it worthwhile to recycle the minuscule amount of the metal found in electronic waste.

Or at least it is for the U.K.’s Royal Mint — which just added a new industrial plant at its site in Llantrisant, Wales that extracts gold from old circuit boards.

“The gold is initially being used to craft jewelry,” reports the BBC, “and later it will be made into commemorative coins.”

“Our aim is to process over 4,000 tonnes of e-waste annually,” says the Royal Mint’s operations director Leighton John. He expects that amount would generate up to nearly 14,500 ounces of gold worth $34.3 million at current prices.

In an age when there’s less demand for everyday coinage, the Royal Mint sees e-waste recycling as a way to stay relevant and avoid cutting the workforce. “We needed to diversify,” says CEO Anne Jessopp.

The next project is to figure out how to recycle the less-pricey materials that can be harvested from old circuit boards — aluminum, copper, tin and steel. “They’re also investigating whether ground-up boards could be used by the construction industry,” the Beeb reports.

The Mailbag… and a Policy Change

After calling a “reset” yesterday in our mailbag section, the feedback that came in overnight has restored your editor’s faith in humanity.

“Just a great set of comments about the market, the Fed and human foibles,” a reader writes after yesterday’s edition. “Keep up the honest opinion — since some of us can take it as just that — opinion.”

“I am on a cruise ship writing this,” says another — “and enjoying not having to listen to the candidates’ toxic, extreme advertising. Please do not allow either side to alter your insights. There is no perfect candidate running for any office. Both sides need to realize this. Keep up the good work. Now for a long cruise until after the general…”

“Hello, Dave and Emily — Having experienced nonpartisan news reporting (yes, I am a gen Xer), please know that I and others like me appreciate your efforts to report without bias,” writes a third.

“Please, please, please keep the faith that even with the major changes in the world it will be voices like yours that will be remembered. 

“Keep reminding those who didn't experience the ’80s and ’90s didn't always have everything we wanted delivered to us tout de suite, no matter the cost (money, emissions, etc.) and the price of that hubris may be the economic division a la Mockingjay (dystopia) that the elites hope for and may soon get.

“I think there are going to be hard times ahead, but with every major 'hit' (economic, social, etc.) an individual takes, more people are going to wake up to the bigger picture. The more times government (local, state or federal) is not there to 'save' them, the more they wake up. People are going (to try) to kill the messenger when it pushes them out of their comfort zone (and they will fight nasty to stay there).

“Both of you with your publication help us connect those dots. And for that I am grateful.”

Dave responds: Thanks.

Upon further reflection, for the duration of this election campaign I’m making it a policy to refrain from addressing any topic which entails bashing a single presidential or vice presidential candidate.

There’s just too much risk that a “drive-by reader” will encounter a single edition of these 5 Bullets and draw conclusions that aren’t warranted.

I resent that I feel the need to do this, but I do have to think about the best interests of the business and the fact it has an ideologically diverse customer base.

And to be clear, no one’s ordering me to implement this policy — I exercise great leeway when it comes to content selection for this e-letter.

Of course, we’ll never pass up an opportunity to bash both sides at the same time. In that vein, we’ll close today’s edition by noting that the national debt now stands at $35.14 trillion.

It is a dereliction of duty that no one is talking about it on the campaign trail…