DOW(n) another thousand

I bought my first stock in 1980. I had some sweat money and I bought shares of Texaco.  It was my first time. The broker gave me a long talk about world hunger and poverty. By 1987 I was holding some preferred shares in a small oil company, which paid a nice dividend. I listened to the market gurus, who predicted the crash; Joe Granville and Elaine Garzarelli. I got out, and when the markets fell I tried to buy back, but I was too early. Fortunately markets rebounded within a year due to government assistance with liquidity.

 

The market crashed again in the early 2000’s. That crash took several years and included a new high just before the final selloff. Despite the markets volatile behavior, there were higher highs and higher lows. In the long term the stock market was going up. Then in 2007 it crashed again, to even lower lows than the previous crash and that shook investor confidence. Market performance since the financial crisis has been nothing short of incredible. The worlds central banks have been printing trillions of dollars in excess liquidity, and that money has found its way into whatever market offered the best return.

The central banks announced plans to stop buying bonds and to shrink their balance sheets. The Federal Reserve started raising interest rates, a basic tool for constraining credit, and the markets responded negatively. At some point raising interest rates has the opposite of the desired effect which is to promote inflation, a  correlate to economic growth. However correlation does not imply causation, but in this media driven world the symptoms of recovery are as good as a cure. Consumer confidence is strong even if consumer credit is at new highs.

The technology of the 1930’s had the potential for the greatest improvement in the  standard of living at any time in history; electricity, the automobile, telephones. It was also the worst economic environment in the history of the nation.  Please ignore the fundamental promise of new technology and growth projections based on sound economic policies because there are none. This is where the next big thing meets the new Great Depression.

We should believe in the hope that new technology creates, while keeping an eye on its Doppleganger, the rapidly out of control debt machine that runs on financial engineering. When private debt runs ahead of public debt the train has already left the tracks. While the Federal Reserve allows bonds to mature, remember those bonds were printed to backstop shaky corporate debt during QE. Now corporate debt is losing value, rapidly, is the patient ready to get up and start walking, or did they just take them off life support? Tense times.

LIBOR is the interest European bankers set for themselves, London Inter-Bank Offered Rate. It has run ahead of the Federal Reserve Rate, and I suspect it will roll over first if rates reaffirm their date with gravity. libor

 

 

 

 

 

 

 

 

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The Fog of War, the Stock Market

This is the fog of war….

Gisele Bündchen, wife of Patriot Superbowl quarterback, Tom Brady, extended the back of her hand to the unwashed masses. Her Marie Antoinette moment, “You have to let them win sometimes..” And while the lumpen fret over this stock market decline, she knows she will always be rich… The girl has class.GB

There are no charts, no tables, no hedonically adjusted numbers, like stars in the financial night sky, you can find with your sextant to help navigate these waters. A sustained loss in the value of assets invested in the stock market will cause economic hardship, even while you remain entirely in cash.

I don’t consider this market speculative, in the psychological sense. The Central Banks of the world have printed trillions of dollars since the 2008 crisis, excess money trying to find suitable investments. Money which knows no borders as it moves about the international markets. The Swiss National Bank prints their own money and buys NYSE stocks. Someone said today “What’s the downside? The money cost them nothing in the first place…” And you, upon seeing the profits adding up in your account, (and not realizing the money was of dubious tender) and feeling pretty good about yourself, ordered the double latte.

McLuhan said “Money is the poor man’s credit card..” A dollar being of specious value, a pun on the word ‘specie’, or hard money. If you counted that Federal Reserve Note as the liability it really represents, you would burn it. No wonder people will pay an exorbitant premium for cryptocurrency. Credit will contract, and no one is certain quite how it will play out. I can make the case that owning credit is a good idea when interest rates are rising, however rates may not be rising for long.

As credit contracts the number of lenders shrinks, and loans are sold from one company to another (often under duress) and the new company has the legal right to redefine the terms to the borrower, (rate of interest) or simply call the loan.

Most pension funds, some mutual funds, annuities, have penalties for withdrawal, and it hardly seems worth it. Gold tends to follow the economy, up and down, which makes sense. The growth of global credit took a long time to build up to these levels and has the power of an approaching tsunami, which is never measured by its height but by the sheer volume of water behind it. A one foot wave can do a lot of damage.

If you have exposure you might want to use the rallies as an opportunity to hedge your gains (while you still have some). Suppose you bought in at five dollars, and you are now at ten dollars, you can hedge that ten dollar gain. The downside is you miss out if your investment goes to twenty.

To recap, the market is not behaving in an irrational manner, not when it was adding all those not nearly parabolic gains, and not now when it pares back on them. It was a wave of liquidity, which came flooding in, and now the water goes back out.  Now the mad scramble to keep your few belongings, before they wash back out to sea, and little or no idea of trying to invest in the future, which is unseeable for all this darn fog. A tsunami of money is being washed away, into a dense fog! That of course is when the real investing in our collective future begins.

Someday soon people will buy things using points from their credit score. How many credit points for this car? Ways to enhance creditworthiness will be the primary financial advice. Equifax seems to be where Mastercard was once, MC merely handles the transactions, Equifax evaluates the transaction.

 

 

 

 

 

 

 

Lord Love a Duck (Bob Moriarty)

http://www.321gold.com/editorials/moriarty/moriarty011418.html

I am too much like Bob to disagree with much he says. I am not sure how BitCOIN works, but I do see that it allows money to be transferred without government (or banking) oversight, which means it is ideal for drug dealers, gamblers, tax cheats and terrorists, and those people will pay a premium in order to allow the fence to transport their (stolen, illegal, seditious) goods into real dollars. The US Federal Reserve is also a “fence” that washes bad corporate and mortgage bonds with good taxpayer owned Treasury Bonds, (the QE program – and the associated liquidity – which all the major central bankers are doing is the reason stock markets are going up in sync and the reason behind the rumor that the global economy is improving.)

The dollar (as are all currencies) is engaged in competitive devaluing, to bring jobs back to America. (That is our dollar policy anyway.) Once the demographic which elected Trump, the sixtyish crowd, (late Boomer, early Millennial) who were galvanized by the mandated Medical Care program they could not afford, once that group finds that a comfortable semi-retirement is no longer possible, (and that pension funds have cut benefits, and government guarantees are pennies on the dollar – see below) they will go back to work at the factory doing one of those recycled jobs from China, for ten dollars an hour, just to MAKE ENDS MEET. They will backtrack a bit on their populist fury.

This is no coincidence, and the Fed is raising interest rates to keep money flowing into the US bond market, but so far it has only juiced stocks, The natural course of things at this point is lower interest rates, much lower. The Fed is fighting itself to keep the dollar from nose diving and to keep stock market profits, and capital gains taxes rolling into the very thin coffers of government, made thinner yet by the tax cuts. Next year when the tax cuts are in place there is less incentive to protect tax revenue, that may be when Atlas Shrugs.

Stories of the Great Depression told by my mother, remind me that life is not fair, and the politics of resentment is not a reasonable solution. An anecdote about their neighbor who worked for the railroad and never missed a days work (and stole pies from my grandmother’s porch) . My grandparents were REPUBLICANS, my grandmother let hobos stay in the basement, and washed their clothes and fed them. They in turn marked the rock by the railroad tracks pointing the way to our house.

The sheer size of government today will overwhelm out resources, in the 30’s there was no SSN, Medicare, or DOD. There was no war (yet) and they called it the Department of War, and once we went to war full time they changed the name to the Department of Defense. My grandparents were able to save their home with an FHA loan. Their bank account was confiscated, ninety cents on the dollar. My mother served in the role of indentured servant, working at odd jobs and bringing the money home. She also played mother to three younger sisters.

Like Bob I feel I am perhaps too old to make these calls,  and if history is no guide, you should acquire all the debt you are allowed. You should eschew traditional forms of wealth like gold and silver and buy digitally stored shares of a new coinage which is ephemeral but promises meteoric profits, and has the promise anyway of bringing about an entirely egalitarian monetary system.  Bitcoin is populist anger at the deep state monetary system run by Central Bankers for the benefit of the 1%, (and their proto-nationalist, racist, ethnic and class conscious means of repression). It may cost you to play this game of storm the Bastille, and if any revolution could ever do what it promised how did we get here?

 

2018 A Year in Purview

The year 2018 has already written itself, all other prognostications are idle gestures. It’s a year when broken things have to be fixed. On the ledger side where we list things that already work which might get broken there isn’t much really. An EMP might prove destructive, a man-made event is possible, if the leader of North Korea is really a man and not a software hologram. He could do that, the button is on his desk, while Potus has his in a bag he has to chase after a young marine to obtain the codes to submit to the Chiefs of Staff and the White House psychologist, who is Oprah I think?

Kim One, The Donald Nothing.

Not all geniuses are stable, maybe very few of them, so we are incredulous.  In America we find that replacing things that are broken is often easier than fixing them. I like Snow of Maine, she manages to express her disgust with the system in a constructive manner. She’s my pick to head the office.

Money has been shattered, and while we scramble to pick up the pieces it looks like there is a lot more than there is. Be careful, something about dimes in front of a bulldozer?

It might be the year we head back to the 13 colonies. More shattering, but really the states were blowing up faster than a Hollywood film, long before this. Blame it on the Ganja weed. One thing we can agree on, pot is okay, as long as it’s done behind closed doors. Weed just wants to be free, to drink in the sunshine, grow strong and tall. Free your weed, the movement to open space weed will be a rallying call. People will smash their expensive grow lights and hydroponic systems in front of city hall. The colonists had their Whiskey and their Whiskey tax. Don’t tax my dope.

Universal Healthcare has been shattered and lies in pieces. No inkling of how it will be fixed.  For years my job was killing me, now people are being freed from their labors they might live a good while longer. So eat healthy, think good thoughts, and if you see something that is broken fix it.

Ronnie Reagan said “if it ain’t broke don’t fix it..” He set about trying to fix a lot of things in the end we remember him for breaking down the Berlin Wall. Now some want a wall built with Mexico. What does it take to keep the “tired, huddle masses” out? The Atlantic ocean was no impediment to that generation which crossed under the watchful eye of the Statue of Liberty. You appreciate something more when you work for it. 

The spiritual state of Americans is also broken, why are churches shooting galleries? Religion in America is broken, what happened to the Evangelicals? The rapture? The end of days? When the Iraq war began that great sky pilot Billy Graham led a prayer from the White House. Ah you say, the faithful are still with us, it’s you who no longer feel the grace of god, which is I suppose my point. And you the reader?

To that the enmity between man and woman, or Harvey Weinstein. Darling I can make you a star. The casting couch seduction is a cliche’ retrieved by an archetype. It was said that Johnny Carson did quite a lot for the late night sex life of Americans in the 1970’s, that’s all gone as well. So we retrieve an endless stream of cliches and recall them from the past in a glory that the common cliche never deserved in the first place. 

And after the properly orchestrated stock market correction, [choreographed by the Federal Reserve to tamp down the animal spirits] much to their chagrin the orchestra will play “The Entrance of the Sound Money Gods into Valhalla”, and without leverage (or the consent of Congress) the shattered pieces of the global economy will be scattered to the four winds. Probably. Next week that rogue asteroid headed toward Earth is really made of gold, and we will all get rich.      

 

 

 

 

 

 

 

 

Stock market charts say Interest Rate set to flop.

 

The central banks are swimming upstream and the river is going dry. Allusions to a stream where Salmon go to lay their eggs and die. fedrates

This was included in an earlier post, a kid with a ruler might suppose the rate that will break the camels’ back is 3 1/2%, but I suspect the economies ability to tolerate a rate hike to those levels is dubious at best, using quarter rate increases it would take a couple years anyway.  Corporate High Yield bond “yields” are in danger of rising, and this is a tricky read, essentially the yield is constant and while the Fed rate increases, the value of those bonds goes up. It’s like moving the goal posts.

When the bond price goes up, the yield comes down.  Not all is sanguine, however, as the HYG has been more volatile and some chart action suggests a break, meaning the yield is going higher, or the Fed rate may be going lower, or fear is entering into the pricing of these things. I don’t believe that last one, by the way. Long shadows in candlestick charting are probes, the markets way of saying, “this is where I want to go.” Assuming all is well with the fundamentals of these corporate bonds, then maybe the interest rate hike cycle is showing some fractures.HYG

Why would rates collapse, isn’t the Federal Reserve in control of this, and last week when new Fed Chief Powell reassured markets that they were going to continue this policy, markets blasted off. The markets like the current rate hike policy.  Massaging the markets by staying the course may keep the markets going, or the markets may simply run of out new money, and the rush of hot foreign capital into US stocks may end or even reverse.  If the markets cannot keep up their end, then rates will start falling again.

My read on Gold here is a bit different. I am far less emotional than most.

gold1200

To my thinking support is in the middle of the range which has been containing the market for five years. The number of times the price touches the line, adds to the validity of that line. In this case the line is a sort of median price, 1200, and the hits have been mostly a matter of the gold price finding support at the number. You may say, ah, support is holding, but no, it means the price is testing the level, and that is where it wants to go. In strict definition it has broken the 1200 level before. The support line in this case is like a magnetic line which draws the price level toward itself, especially in periods of sideways action. So is 1200 an actionable number?

I would say so, and I see weakness to below 1000, which would set up a bottom and a new bull market. Another indicator is the Spot Gold to Miner ratio, and this is where the unknown really meets up with the unknowable. The rather long chart of this, will show that for a good long while the price of spot gold was at a ratio of about 5:1 to the mining index, and I always use the XAU because it has the history.goldvxau

Then in recent years the ratio expanded to 28:1, gold the commodity was more expensive than shares of the gold producers,  and now has settled into this range at around 15:1. No way of knowing if the recent high will be taken out, or if we will revert to more historical measures. The recent consolidation broke out to the high side, which implies a bullishness in the ratio, so you want to own the commodity not the producers of that commodity if you believe this.

However this reflects as much weakness in the XAU, where the shares of mining companies are slightly out of favor. Investors would rather own FAANG stocks, they go up faster in this kind of market. So its weakness in the miners which is driving the price of gold relative to the shares of mining companies.

Gold’s intrinsic is set to rise according to the expansion of the global monetary base, the printing of money on a global basis tends to dilute the value of gold, which is a fixed commodity. That’s all. The price of spot does better in a low interest rate environment, (since Gold has a carry charge, and does not pay interest) should Gold actually move higher from here, that might be one more tell on the future of interest rates. In an interest rate collapse, you might expect everything to lose value, and selling in the GLD, the ETF on Gold,  would be the tail that wags the dog,  and send spot prices (sorry about that one) lower. That would set up a nice buying opportunity, though I suspect supplies will vanish. Do not expect an immediate counter reaction in Gold in the event the stock market drops.

 

While the analysts fret over how many rate hikes the economy can take, the current Fed chief is worried about tepid inflation numbers, another reason to consider backing off on rate hikes. A low interest rate policy created a supply surplus in energy, causing a massive selloff in the energy sector a bit over a year ago, and so counter-intuitively raising interest rates causes energy prices to rise. Janet Yellen knows this you might suppose, and in the absence of meeting their 2% inflation goals, which is another word for “pricing power”, or the ability of business to pass on these costs to consumers, the rate hike march might be an about face. I tend to view the reversal as more of a climactic turn, when the rate hike lever is ripped out of her hands, by angry Congressmen, and they use it to pillory her, and all who would follow in her path. Heads will roll in all directions.

 

December 5th

https://www.themaven.net/mishtalk/economics/yield-curve-conundrum-blame-japan-for-flat-treasury-curve-Hv5uiIW_30mem-eQO-uTbg

Is it possible the Japanese are going to do for our bond market what the Swiss National Bank did for the NYSE, drive it to dizzying heights using “printed” money?

Bitcoin is only a minor shadow of the global counterfeiting game, and we are helpless to do much about it, other than print our own money and beggar thy neighbor.

 

 

The Final Stock Market Indicator

This stock market indicator was revealed to me accidentally during the Thanksgiving holiday. My grand daughter wanted a cake, she is 13, and at that age they get pretty much what they want, including the promise that she will get her own smartphone for Christmas.

The cake is a pure sugar cake, white cake with about 1/2 inch of frosting. That leads me to the name of the indicator, the Dow Jones Industrials Sugar Cake High. As long as this cake keeps up appearances, the stock market should register new highs. So far the cake is showing no signs that anything has gone wrong. Sugar is a powerful preservative you know. I even zoomed in on the inner workings of the cake to make sure there was nothing funny going on.

This cake was bought and consumed, what little of it was consumed, on November 23rd, and the number on the top of the sign is where the average closed on Nov. 22, the market was closed on the 23rd. Since then the average has gained over 500 points and the cake looks flawless. Disclosure:  I have not touched or moved the cake since the 23rd, the cake remains exactly as it was, and will remain so until something unforseen, mold or fungus of some kind begin to grow, or vermin  penetrate the clear plastic shell. So far not even the ants have taken an interest.

The question is which one, the stock average, or the cake, will see the infallible patina sullied by some outside (and empirical!) forces. Will Janet Yellen ship me a fresh cake to keep the rally going? And the most compelling question of all, would you like a slice?

1130 001
Do you feel lucky?

The Path to Normalization

I thought the Federal Reserve would raise rates in the aftermath of the market crash of 2008. you can see here that they didn’t. The LIBOR rate is often dismissed as a self serving mechanism for bankers to set rates where they would prefer to see them. The LIBOR rate was the more accurate gauge of where the market thought rates should be. Now the Fed Funds Rate has been consistently lower than what the banks think they should be. That seems to be changing.

The players keep changing roles.  

All that hip role playing drove James Dean crazy.  The real question how much damage was done to the economy by going against the market? One thing you can surmise, is that in the event of another crisis everyone will change roles again. Is the Fed ready to push rates higher than what banks think they should be? Does a policy of rate hikes through financial repression (Reverse Repurchase Agreements) signal they are serious about pushing rates higher through 2019? In the next crisis will the Fed raise rates to properly price risk, and maintain stability?

Is the Fed’s problem it keeps getting too far ahead of the curve? Each time since 1999 that the Fed raised interest rates, the markets crashed.  So it might seem that by 2008 they had learned their lesson, never never raise rates again.

fedrates If Greenspan had only dropped rates sharply to zero in 1999 we might have had prosperity. The question is why do rates have to be zero,  to prevent the economy crashing?

historical fed rates

This is the larger chart, so you see that even though the rate hike in the 1994 Bond Massacre resulted in a stock market rally, that was because those rates were still far below their recent levels. Rates in the short term weren’t rising as fast as rates in the long term were dropping.  Looking at this you may surmise that rates are already too high to prevent the markets from folding up.