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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