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.

 

 

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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.

More Uncommon Fallacies: WOAR!

Every president deserves at least one discretionary military expedition (WOAR) although president Obama had to satisfy himself with continuing the two that he acquired from the previous administration. He did sanction the Syrian regime change policy, and his Secretary of State advocated a No-Fly Zone over that country, but she was defeated when she ran as his successor, and president Trump ordered the CIA (architect of the ISIS movement) to stand down.

Now all manner of Fire and Fury, awaits the regime of North Korea. According to some like CIA insider Jim Rickards, the US and North Korea are on a collision course.  That is uncommon fallacy ninety nine, there will be war but the war will be between China and North Korea, much like the punitive war between China and Vietnam in 1979. Complicated reasons, limited objectives, dubious results.

What war will do for China, is boost GDP and help to verticalize their economy, and perhaps cool off their overheated debt market. What war will do for North Korea is make them a nuclear legacy state of China. North Korea would never consider using nuclear weapons on China, and the terms of this war are implied and well understood by both countries.

They keep their weapons, but under strict Chinese control. The war should be brief, and may or may not entail regime change, and should solve the problem of refugees entering China if the US launches their war first.

Another uncommon fallacy is the way crypto-currency works, which is antithetical to financial markets, or rather the way we assume a digital currency functions. There is no reasonable way to consider a digital currency as a store of value, these currencies only exist to move your assets from one investment to another.  Where it gets interesting is when we consider digital transactions between credit based operations rather than assets. Can I use digital currency to move credit units from a HELIOC to a consumer account to a gold broker and back again? It may take some pondering.

The refugee problem in the Korean war may well be North Koreans crossing into the South. That will set up a new era of tensions over reunification, which is the passive-aggressive foreign policy preferred by the Chinese. Refugees become seeds spread by the wind, and grow up strong and true to their roots.

 

Uncommon Fallacies: Financial Armageddon

Source: Gold And The Coming Collapse: Are We Close To A Major Monetary Event?

Debt is poorly understood. There is the axiom that debt must be repaid, other than bankruptcy or death, this is the case. Government debt never dies, it just gets rolled over. Donald Trump imagined that the rules of bankruptcy as they apply to him could be applied to government debt, which is not possible.  He now represents the issuer of the debt.

There’s also the axiom that market crashes never come when you expect them. A watched pot does boil. Then of course Janet Yellen does not expect a market crash in her lifetime, which if you enjoy the notion of paradox is the perfect indicator that the crash is imminent.

In homage to Machievelli, private debt equals public good. So much seems obvious, whether that debt is for consumption or production. Government debt can do very little for either, and what’s more those debts are never settled. A soldier needs a rifle certainly, but he didn’t need one before, and he won’t need one later and it’s likely he won’t use it anyway.

The notion of an ad hoc economic policy, making personal deals between the executive office, and corporate businesses, reflects some fulfillment of the prophecy, without any of the enlightenment.

recourse debt holds the borrower personally liable. All other debt is considered nonrecourse. In general, recourse debt (loans) allows lenders to collect what is owed for the debt even after they’ve taken collateral (home, credit cards).

Should there be a government default, there will be no distributing of the collateral, or reading of the will, because government debt is allowed to extend itself in perpetuity.  It’s a bit like saying “God is Dead!”, it doesn’t change anything. Have we lost confidence in God, or the Central Bankers? Money is a public utility. We never lose faith in electricity, we do sometimes demand a change in management.

In the event of default there is the possibility of payment in kind, mentioned by Bob Prechter at Elliott Wave. If for instance the 30yr Treasury bond defaulted you might get shares in a closed up Chinese factory, since China holds trillions notionally, of these bonds in their reserves.

I know what you are thinking, shouldn’t China be making a claim against US assets in the event of default, closed up U.S. factories? The laws on these things are written in such a way that your deposits in a bank are categorized as a loan. China did not pay for those bonds in currency, they were issued in lieu of the balance of trade payments, to effectively “sterilize” the effect that putting all that buying power, in US dollars, into the hands of Chinese consumers.

So the US Treasury cannot confiscate their deposits, there is no money, and what money there is, we owe to them. In theory anyway that deferred obligation is a deposit, and they do have a claim on the assets those bonds represent, money they were not allowed to spend on US goods, because there were none, and we would not sell them what they really want, sensitive technology. While you as a depositor would lose money, they have real skin in the game.

As a bond holder you are no different in regards to taking less money on your principle in the event of default than any sovereign government who also bought the same bonds. It seems reasonable that we would pay the Chinese in freshly printed dollars at some fraction of the face value of those bonds, but first the depositors have to be bailed in, as it was, and their assets made part of the distribution. To return to the principle of deposits as loans, the Chinese owe us a whole lot in the event of a default in our 30yr Treasury bond.

To get to the notion of the price of Gold relative to the stock market, remember that in any ratio measure, you can get an upward, or favorable outcome, and still lose money nominally. So Gold may outperform the stock market, while both Gold and stocks lose value.

 

 

Gold And The Coming Collapse: Are We Close To A Major Monetary Event?

A few caveats. Whenever you measure a ratio, its always possible to predict a positive outcome and get tagged with a nominal loss. Gold is up relative to the stock market, and both go down.

Hubert Moolman on SILVER and GOLD

Gold And The Coming Collapse: Are We Close To A Major Monetary Event?

By Hubert Moolman

It really should be clear that a major international banking crisis is inevitable, and likely to occur fairly soon. Due to the extreme debt levels, many banks are close to that point of failure.

An event like a stock market crash is likely to push many banks to that point of failure, since the pressure it would create (on cash resources), would expose their inability to fulfill their obligations.

Cash (not bank credits/digits) is still the means by which banks have to settle liabilities and obligations (especially amongst each other). If a bank goes down, it will be due to the lack of cash (not bank credits/digits). It is for this reason that there is a campaign to ban cash (for the general public) or limit the use of it.

The banks are in…

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The Common Complaint

How is it that summer in Southern California is more like April? The shivering dog days of summer are a huge disappointment. First someone hit the state Superlotto Jackpot, and then someone hit the Powerball, (MA). The President seems to have exhausted all of the fun that he gets doing his job, a bit early in the season as well. So he does what all bored grown up children do, he went out to play golf.

The path of the totality, reminds me of the line from the Carly Simon song, “You’re So Vain..”

Then you flew your Learjet up to Nova Scotia
To see the total eclipse of the sun
Well, you’re where you should be all the time
And when you’re not, you’re with some underworld spy
Or the wife of a close friend,
Wife of a close friend, and

You’re so vain

Read more: Carly Simon – You’re So Vain Lyrics | MetroLyrics
Narcissism is a collective mania. Trump is only the cheerleader.
What is Narcissism, what is Vanity? I do see that Americans tend to believe it’s all about them. They refuse to consider that the internet is an open connection, for people of all persuasions. People who dislike America for entirely different reasons. The stock market is a global market,  money comes from geographically disparate sources, but we call it the Trump rally.
So the clouds today look a lot like a minor eclipse. I think something really important is about to happen, in economics and finance, politics, society. I am where I should be all the time.
It does occur to me sometimes that we might have a thousand years of nothing. Or as Bernie Schaeffer refers to the likely economic collapse, ” A cold day to last the rest of your life..,” in reference to Ground Hog Day, the movie.
We are certain the eclipse heralds  some  protean changes, at least metaphorically. While it’s merely a cloud over the sun, we call the moon. Something important is about to happen. There is no premise to the situation of the characters in the movie Groundhog Day without the notion that something important is about to happen.
groundhogday
You raise up your head and you ask, “Is this where it is?”
And somebody points to you and says, “It’s his”
And you say, “What’s mine?” and somebody else says, “Well, what is?”
And you say, “Oh my God, am I here all alone?”
But something is happening and you don’t know what it is
Do you, Mr. Jones?
Bob Dylan recently won the Nobel prize for literature, and he remarked that he had to go study that.  Maybe we all become characters in our own books? The process of our own imaginations. Be sure you imagine the right things.